RisingStars Portfolio Seminar

I really enjoy the RisingStars Portfolio Seminars: it's always great to see gathered together the portfolio company directors and to see the value they get from talking to each other. Jonathan opened proceedings pointing out that there are differences between some of the doom-and-gloom in the current Private Equity market compared to some of the solid progress recently in the RisingStars portfolio. In particular pointing out that the increase in valuations for RSGF1 over the last 6 months is unusual in the market. Second up was Julie Meyer, famous for founding First Tuesday, and now CEO of Ariadne Capital spoke about entrepreneurs with some really interesting quotes. Some key trends she highlighted included:

• A move to smaller A-rounds due to the lower cost of getting started- e.g. £1m.
• Changes in the way early-stage companies align to their ecosystem. In particular startups are taking advantage of "largeco's" inability to take advantage of the changes from social networking generally.
• There are categories left to be built- not all done
• Speed of innovation becoming ever more important

On market entry Julie pointed to Spinvox as pioneering an increasingly important approach. She described the way that they had engaged directly with consumers, building 100,000 users, before then engaging seriously with the mobile operators. A particular observation that resonated with me was about exits, where, despite the general downturn in deals, she sees that "M&A is the new R&D". That where many larger companies have been decreasing in-house R&D, they are now looking to get a faster competitive advantage by looking at acquisition of technology companies as a potential solution. An idea that was new to me entirely, was to wrap up the ideas of increasing consumer power, citizen participation, individual entrepreneurship can be wrapped up in an idea of "Individual Capitalism". She suggested that this had some implications for the need for companies to think a little differently about their key employees. She described the audience as "Super-glossy VC backed stars"- um! Finally, Julie highlighted some of their recent work. In particular:

• bview as their local directory play
• gnuTrade- a blend of gaming and financial market trading
• Monetise, a mobile payment play.
• Near, virtual world retail.
• Qire, a Liverpool based enterprise voice messaging play
• SliceThePie, an unsigned artist music site.

Julian Viggars, our Head of Technology opened up by cheering us up with some economic facts of life- thanks Julian! But within the data were some interesting gems:

• UK companies are cheap to acquire at the momement due to the exchange rate
• Tech acquisitions have dropped less than others (17%)

Whilst last seminar we were largely speculating over the effect of the market changes on our portfolio, Julian observed that we'd seen some of those effects come through in practice. In particular, the increasing importance of cash, on extending cash runway, and on making solid product progress had been anticipated and were now observed. Julian provided some detailed numbers on the fund progress, which obviously are private so can't be repeated here, suffice it to say that it was great to see the collected progress in terms of fund-raising and commercial traction for the portfolio generally. Julian showed his conviction in believing that now was a good time to invest in technology companies. Some years ago, Alison Kibble the CEO of Femeda, introduced what was then an early-stage investment, so it was great for her to come back and explain the progress that the company had made with their disposable home treatment for one of the most prevalent medical conditions; female urinary incontinence. She was able to report a staggeringly positive response to their medical trial, although I wouldn't have minded if she'd found a better example of the support she's had from investors than posting adverts for the trial in our office toilets! She was able to illustrate well the way in which the large FMCG companies are interested in the way that Femeda, and companies that ilk, can move much faster towards new products being on the market, and hinted at the potential for a corporate transaction to take the product to a global market. Finally, Alison finished up by describing the desperate stories from the comments on the company's blog which illustrated just how far the product can go to improve people's lives. Ben Hookway is one of our "serial entrepreneurs". He provided some war stories from NextDevice, the issues they faced with selling their mobile UI software company into the handset value chain. In particular the difficulties of taking the decision to sell at that time. He pointed out how important some key aspects of the exit process had been:

• It's vital to have clearly documented any reliance and usage of opensource code.
• Mentor had purchased as a third option, after playing with software deal, or investment.
• Ben admitted to being a bit seduced by the earn-out on the table from the acquisitor. Although as part was pre-paid it worked out OK, he'd be much more wary another time.
• Ben counselled to watch for the way the options appear to narrow as the deal proceeds. The people he had to deal with changed and increasingly it can become the only deal in town- very tense. One way of mitigating this Ben suggested was vital was to make friends with the person tasked to do the deal on the corporate acquisition team, don't rely on your existing internal champion.
• It felt like they were approaching a finish-line, but "you gotta take a holiday" because this is the start of an intense process of trying to make the product work for the corporate. You find out just how un-bought-in the vast bulk of the company is going to be- they've not been involved. It's political and tough to get things moving in the largeco. It took 3 months to get a part number, without which the sales guys couldn't actually get any of the sales people to work on it.
• Ben provided plentiful advice on how to deal with some of the internal politics- expectations you have no knowledge about have been set internally- "a tough world".
• Finally, with a knowing grin, Ben advised not to try and change the company culture to be more like the start-up. You've got to embrace the experience. He's really enjoyed it, but now...

Ben described his next role, as CEO of Vidiactive- more of this later... In the question and answer session, Stuart McKnight observed the gradual return of some of the top tier investors during Q2 who had been quiet in Q1. Julian responded that we've seen an increased level of interest, but still a little shaky and uncertain. Jonathan observed that he'd seen an institutional realisation that technology had been a bit neglected in the rush to increase Private Equity funding. "Attitudes have changed", he observed.

First,ten BUT...

Seth Godin's latest post "First, ten" highlights a classic start-up mistake, but for me misses an important step.
He suggests that you find ten people to use your service who "trust you/respect you/need you/listen to you...", that, " if they love it, you win. If they love it, they'll each find you ten more people (or a hundred or a thousand or, perhaps, just three). Repeat."
Seth Godin makes a key point here which we've seen many start-ups, large and small, all miss: if you require that your business grows virally, then all that spend on launch and PR is wasted if you do so when the product is not yet good enough to be viral by itself. That's not to say that PR etc. can't be great when you want to pour some petrol on that fire, but you're better saving up that fuel for when the fire is already spreading by itself.
However, I'd have to suggest some qualifiers. The test is not those "first ten", but whether those first ten start to "spread the virus" by themselves. That might well mean that they need to be considerably more than ten so that you can measure and understand them, but it certainly doesn't have to be ten thousand. Key to that viral spread is the communication from an existing user to a new one, and that's a tough barrier because the user chooses it, not you (how many different ways have you heard Twitter described?). My view is that Seth Godin's definition of the "first ten" might prove a little unrepresentative- they're clearly going to listen, and therefore give you the chance to communicate much more sophisticated and subtle ideas, you can "teach" new things, or even "un-teach" perceived wisdom. You could also get those first ten to think about what the service could mean to their lives and how they might use it, and it will be much more memorable. So I would suggest that the "first ten" test is necessary but not sufficient.
My suggestion, based on our portfolio, would be to aim for a larger group of people, grown gradually, and iterate the product, messaging and experience to the point that you start to see that demand is spreading "all by itself". Then go and get the petrol can!

Guardian interview with Mike Wheatley CEO of Ensembli at SxSW

Jemima Kiss' inteview with Mike explaining Ensembli:

SXSWiMichaelWheatley16Mar2009 by jemimakiss

A business plan checklist for VC funding

This post will doubtless expand as people make suggestions, but I have meant for some time to get round to posting a checklist I can refer people to look over.

Checked	Item
	Have you removed as many superlatives as possible and replaced them with numbers/facts (e.g. changing "Joe has been a leader in user-interaction design for many years" with "Joe has lead user-interaction design projects for BigCorp, and SmallHouse for 10 years and produced the interaction for the WebThingy service used by 200,000 people a month.")
	How would your customer describe the problem that your service/product solves?
	How do your customers solve that problem now, and how will they solve it in the future without you?
	What do your customers pay to solve that problem today, what will they pay for your solution?
	How will you to teach each of your customers about your solution to the point they will buy and how much will that cost (don't forget to allow for those that never get round to ordering/paying)?
	How will your competitors react to your early success? How much will it cost them and how long will it take them to catch up?
	How long has it taken other companies entering this space to build up customers?
	Have you identified a clear route to market, is there a beachhead market segment you have in mind, in what way is this different from the mainstream?
	What more must be done, what will it cost, and how long will it take before the product/service is ready to generate revenue?
	What have the team done before (illustrated with numbers where possible)?
	What other businesses have made good money and/or exits working in the same problem space? What steps have you taken to learn from the people who did that?

Please suggest some more!

Ensembli launch at Demo

We now have the proper video of Ensembli's launch at Demo. They've had great feedback and I'm delighted with progress (although there's always lots more to do!). Well Done Mike, Ian and everyone behind the scenes.

Portfolio company Ensembli launches today

I'm delighted with the early reception for Ensembli's launch- the team are out at Demo at the moment. Ensembli provide an equivalent for RSS for people who are a little more time-poor and a little less technically savvy. Ensembli's beta is open now here. You can find out more about the company and its funding here.. If you're on the web at 16:40 GMT today you can watch it live here: http://www.demo.com/live. Good luck Mike and Ian!

An 11th Reason why startups fail

Tim Draper the legendary (Rhino riding!) founder of DJF has an excellent blog post on the reasons startups fail. I'd like to suggest an 11th reason though, which we see frequently:
"The average cost of selling is too high."
In particular, we see many companies where the need to communicate complicated messages, over a succession of meetings, and maybe customer trials too, is itself expensive. This is then compounded because the proportion of those customers that convert is not too great, and they take a long time to decide to start paying. Finally when a proportion place orders it doesn't cover the cost of all that customer engagement.
It's a shame that 11 reasons isn't such a tidy number!

Founder Dilution - How Much Is "Normal"?

Fred Wilson has a post up urging entrepreneurs to record their dilution at exit in a survey being done by Simeon Simeonov. Please can I urge anyone reading this who has experience of exiting to take part. My experience of exits would suggest that Fred's experience is typical when he suggests that: "it will generally take three to four rounds of equity capital to finance the business and 20-25% of the company to recruit and retain a management team. That will typically leave the founder/founder team with 10-20% of the business when it's all said and done."

Founders wanted to help founders

Every now and then we come across founders who are rather sore. They started a business with a partner and shared the equity 50:50 using an off-the-shelf company only to find that things didn't work out (see the post on Boomerang Founder). We thought we might commission some standard legal docs which we could then give away to anyone starting a business which might set things up a little more fairly. Obviously people would be wise to take legal advice, but often they don't at that stage. What I'd really like to find is some people willing to be quoted on an announcement about these legals to explain their experiences of falling out with founders and why they'd want to use something more robust another time. If you know anyone who fits the bill perhaps you'd ask them to get in touch.

Why we don’t sign Confidentiality Agreements

As a rule we don’t sign confidentiality agreements (CDA’s). As it’s something that comes up regularly with new funding applicants, I wanted to make this reference post on why we don’t sign them:

1. We get asked to sign hundreds of them a year. It isn’t practical to be party to so very many contracts just in order to find out what a company has in mind.
2. Managing the commitments would be a due-diligence and compliance nightmare- imagine being asked to “check” the legal status of hundreds of CDA’s, never mind the time negotiating and signing them up.
3. We’re looking to back companies which can build protectable positions. In our view a business idea can’t be protected and expecting to do so is probably unwise. That protection could be patents, or could be customer relationships the company will build, it could be a database, or designs, knowhow or copyright. However, without any such protection we couldn’t expect to sell our interest in the investee at the end of the investment life. So if a CDA is needed to protect the idea, we probably wouldn’t back it anyway.
4. Our experience has been that, the more closed and nervous the management team is about their idea, the less unique and special that idea is in practice. When we did sign CDA’s at the start of the fund life we found that where the team was most insistent was exactly when there was least to be protected.
5. We commonly see the same idea repeated many times, despite the management’s insistence that they are uniquely pursuing the opportunity (after all if they are in “stealth mode” then it follows that their competitors may be too!). We don’t want to have to defend ourselves against an aggrieved founder who thinks we broke a CDA when in reality we just backed someone else with the same idea.
6. Although advisors will often suggest that you need a CDA to protect the patentability of a technology, on a first meeting we may well not need to know “how” the idea is achieved, merely to understand “what” it achieves. If the step from “what” to “how” is obvious then it is not, by definition, patentable. Even if a company chooses to disclose to us, I would be stunned if a direct private disclosure to a professional FSA Authorised fund manager could ever count as a “disclosure” for the purposes of prior-art.

We are therefore confident that, despite having the “no CDA” rule for more than four years, we haven’t missed anything significant because founders couldn’t get comfortable with our reasoning, after all I’m not sure any US VC’s now sign CDAs routinely. At the end of the day we DO sign a confidentiality clause as part of any term sheet we issue. We also sign a slight variant of the BVCA standard CDA “IF AND ONLY IF” we are looking at a more detailed technical disclosures around second meeting stage. However, this is always our BVCA type agreement which you can find here. Update Mark Peter Davies puts a related post on his blog that's worth reading.

The Boomerang Founder: read this before founding a company

David Cohen, and entrepreneur investor and technologist from Colorado has a post on his blog about the perils of co-founder relationships. I would recommend that anyone contemplating forming a company takes a look not just at the article, but equally at the comments of the people on his blog. It describes a problem very well that we see in a significant proportion of the companies that come to us for funding.