Tuesday, 24 February 2009

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!

Saturday, 21 February 2009

Founder Dilution - How Much Is "Normal"?

tropical tricolour cakeFred 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."

Thursday, 19 February 2009

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

Shh!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.