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.

How "recession-proof" is your business?

The most popular boast now from entrepreneurs seeking funding is that their business is, to some degree, "recession proof". Whilst it will be some time before we know the magnitude and implications of the economic situation, we can attempt to help our portfolio companies understand how vulnerable they may be. Fred Wilson had an excellent post on the strength of his portfolio using something he dubbed The Survival Matrix. I thought I'd extend this a little by putting together a kind of recession-proofness-test that draws in some of the other issues. Please take the precise numbers with a big "pinch of salt": I am not planning on defending any of the weightings or rankings. I'd welcome any debate about what's included, but my purpose is to highlight issues and help give people a feel for where they stand. When I tried this test on a few portfolio companies it certainly showed a wide disparity. At the lowest 45 points and the highest 109 points out of a theoretical maximum of around 220. My view is that companies upto perhaps 50/60 points really need to think hard and urgently about making what might be quite big departures from plan. Whereas around "100 points" perhaps a slightly more considered view makes more sense even if the actions taken are still pretty firm. I can't imagine many VC-backed companies will get anywhere close to 200! I hope this test helps a little for companies to focus on just how much and how urgently their plans need to adapt. I'm doing a presentation around this stuff at our portfolio seminar this morning which I'll post up too. You can find the calculator here.

Choosing an Entry Market Sector

A common issue I see with early-stage companies is over their selection of entry market sector. Obviously, all investors love their portfolio companies to have a huge vision to change large markets in a big way, and on occasion the best way to plan to reach that is to go straight to the big opportunity head-on. However, often that's going to be slow and hard, perhaps credibility is crucial, in which case it's really helpful to find a launch "beach-head" in the lines advocated by "Crossing The Chasm".
So where companies have chosen to use a beach-head, the next question is which one? If you just pick the "largest sector", or the one you're "most familiar with, you face a danger- the best entry sector is not always the obvious one. I think there's a different set of thinking about launch markets, where you highlight a slightly different set of factors as important.

Criterion	Ultimate market	Launch market
Scale	Ideally as large as possible	Manageable, but low priority in selection process
Differentiation of offering against competition	Important	Critical
Focus on customer problems	Can be more general- boxed product is easier to scale	May be helpful to have solution type sales initially
Unit sale	Very large or small is good- scalability is crucial	Ideally ~1 months burn- large enough to be useful, but small enough to avoid lengthy approvals
Mission criticality	Mission critical to the customer provides extra value	Ideally not too critical- hard to buy from a startup
Length of buy cycle	May be long	Short is incredibly helpful
Easy customer identification	Useful	Vital

I bet there are some great suggestions for improvements to this table- please let me know!

Startup 2.0

Manoj threw another great event tonight with interesting speakers and audience alike. Stuart Scott-Goldstone of Aaron and Partners gave a thorough introduction to the range of legal issues that startups face on raising their first round of venture capital. the long list or issues seemed seems like it must be scary to any startup listening! Doug Stellman of YFM Private Equity started his presentation with a disclaimer of small print lest any of us fancied investing. Interestingly the proportion of Software and IT deals had shrunk from around 35% in 2006 to 20% in 2007, apparently due to concerns about the ease with which software companies could be established. His presentation focused on the management team as a key driver for their investment decisions. He cited that he sees applicants with a management team with a prior record of success "more often than you'd think". Paul Barraclough of TecMentor praised the Crossing the Chasm approach to getting to early sales momentum in startups. For me, Pam Holland gave the star presentation- starting off with a video (link to follow if I can persuade Pam to let me upload it) portraying how rapidly Telecity had grown pre-dotcom crash. She explained how they'd managed the spectacular growth in staff numbers and the attendant HR issues. I loved the story about how she had to persuade the founder to go home for his meal in the evening to encourage the staff to go home at night- even if he returned later each night! She explained the "competency based" recruitment approach she used, biased towards the attitude and raw capabilities of the individual rather than solely their technical skill-set. She also related that it was a "little bit disappointing" when the share price slumped from £23.00 to 2.3p, and she had to handle a new set of challenges!

NW Startup 2.0 Demo & Mashup Manchester Events

Manoj doesn't look too happy in this picture, and he didn't look too happy tonight after a string of mishaps hit these events tonight. But they weren't significant problems, and the event was a great success. The audience was full of interesting people and the presentations punchy and clear. I'm looking forward to the next one!

Connecting Yorkshire

I very much enjoyed spending most of yesterday at the Connect Yorkshire investment forum. Over the years I think I’ve been to nearly all these conferences; they’re a great way of seeing some of the companies that are around, and in bringing the technology community into one place too.

I suspect that Nick Butler and Glen Hopkinson who lead the team at Connect Yorkshire don’t have the easiest of tasks; but they do a great job of making it look easy! They have to screen lots of potential companies to select and coach/cajoale/coax those who present towards the best way of pitching their proposals. Today the companies represented ranged from a device to detect leaks, to a cancer drug targeting technology.

As usual you could rely on the Connect process to have helped the presenters make their proposals clear and reasonably thought out, whatever one thinks of their individual commercial prospects.

I tried to talk to as many of the presenting companies as I could; whether or not I was interested in them as a potential investee. This is really important to me; I find I can learn so much from these people and their intimate knowledge of either technology or market niche, and I think that in return I owe it to them to be as frank as possible about what I think lies ahead for them. As usual, the reaction to the feedback varied from the heatedly defensive, to the open and constructive, which tells you something else about how that team would be post-investment!

The format of all these kinds of events still doesn’t seem quite right to me; somehow the idea that someone stands at the front for half and hour and tells you about their business and its plans is a very one-way process, and there is a tendency for the candidates to want to talk far more about their plans, which after all are pretty fluid, than they do about their product and market opportunity/competition. I’ve suggested to Glen that something like a IRC backchannel might be the way to go, but you might need some house rules about only asking questions. Given the UK hasn’t adopted the laptops-in-sessions culture to the extent that the US has, you might need some kind of SMS based thing…?

P.S. I found this interesting commentary about backchannels on Techcrunch

Nick and Glen were also busy promoting www.mydealmaker.co.uk: their initiative to bring the community together between their events. Those involved in forming, managing and funding technology companies always benefit from becoming more of a community and learning from each other. Bringing people together on the internet has proved to be an amazingly powerful way of breathing life into specialist communities elsewhere and I really hope that Glen’s initiative can do the same for this group.

Over the years I suspect we’ve backed more teams that we first met at Connect than anyone. On this occasion I had the opportunity to meet again a company I was introduced to a little while ago, which I think has some of the characteristics to develop really well. Hopefully I’ll learn over the next few weeks if we can work with the team to develop a really exciting business with them.

Project Sahara

shadow train
Originally uploaded by bendylan

Lee Strafford and friends have established project Sahara and thenetstart with the aim of establishing a community of internet companies across the North of England. It meshes with initiatives such as dotnorth.org which have compatible aims in this area.

What Lee evangelises, and rightly so, is that the most successful internet companies in the UK were those that sprung up in the North of England: he's therefore brought together some of the leading players in those companies to build a repeatable model around this opportunity.

I admire Lee's energy, and am hopeful that his experience and track record will help bring the various parties together to create a set of really exciting new enterprises; this may be challenging but it's surely a challenge worth serious pursuit.

In our own small way I think we could claim to have been the most active investor in this sector across the North in recent years, and we're looking to do more in future. I think we'd suggest that the problems Lee is addressing are important and prevalent. Most start-ups in this sector do have the feeling of being "on their own", and they'd benefit greatly from being part of a community in many different ways. The powerpoint embedded below gives more detail on the problems the project is addressing and what is being built.

I'm keen to see the project grow and succeed. There seems to be a growing momentum behind the initiative and I'll be keen to contribute where I can. In recent months Mashup, GeekUp, Opencoffee and now Project Sahara and DotNorth have exposed the size of the pool of both entrepreneurs and technical experts interested in this area of activity, and I'm looking forward to seeing us play our role as an active early-stage investor to help nurture the companies that will surely emerge.

Startup 2.0 in Manchester

Manoj has again done a great job of preparing the next Startup 2.0 event in Manchester on Wednesday night. Annoyingly I have to be in Glasgow, but otherwise I'd be looking forward to hearing from Lee Strafford, CEO of PlusNet which was recently sold to BT for lots of money. He's got some really interesting plans to help web startups: I'm sorry I can't be there to heckle ;-)
Manoj has lined up a VC, Peter Leather, and Billa Bhandari who runs a biometrics company and has lots of tech startup experience, to complete his line-up.
It's great that KPMG continue to support this event, I'm looking forward to the next one!

What type of web startup are you?

Rail Mail Sorting Slots
Originally uploaded by Potjie

I had a very thought provoking conversation yesterday with Lee Strafford the former CEO of Plusnet about web companies. One part of the conversation I think might be interesting was around classifying the different types of such companies by the way in which they build competitive barriers:

Class of barrier	Characteristics
Tech Heavy	Some piece of technology is strikingly difficult to do, perhaps requiring realtime communication or tricky client software to make it work. These companies can take a little longer and can raise money earlier in the adoption lifecycle due to the inherent IP. We've got a couple of these in the works, but they're in no hurry to tell the world what they're up to!
Execution orientated	In these cases the company is not doing anything that technically that groundbreaking, but they're getting the business model, user experience, pricing etc. right in a way incumbents with more inertia would struggle to do. Here the key is about speed and quality of execution. I think I'd probably put Yuuguu in this category at the moment...
Critical mass orientated	Lots of web1.0 gravestones here! This is where you have to find ways to get the kind of critical mass of users which means that the service can gain a strong lead. This is more like the Facebook model. To be honest we've only tried this once and we ran out of capital before we reached critical mass. You can't sell these early and the key is probably to find ways to reach that early audience cheaply. I believe that Facebook did this early by getting links with US colleges.

Perhaps it's interesting to think which model fits your company best, and then what that implies for strategy?

The "Lucky 13"- Managing cash gaps in technology companies

Back from hols :-)
Over the years a number of useful tips about how to manage cash in early stage tech companies. It's really commonplace for such companies to have sticky moments waiting for cash to come in from customers, investors etc. and it can be very handy to know some of these hints....

CAVEAT!! If you're this close to being out-of-cash then knowing the solvency situation of the company at any time becomes important, and as a board it should be considered carefully and frequently. I can't endorse the use of any or all of these in any situation on a blanket basis- it's more complicated than that!

Please let me know any improvements or changes to this list via the comments- I'll update it accordingly. Thanks.

Area	Tool	Comments
Managing Ordinary Creditors	Paying late	Careful, you mustn't favour some creditors over others, but generally you should look to the timing of each creditor payment to see what really needs to be paid when. (OK that one was obvious!)
	Paying erratically	One FD I know favours paying erratically from the outset, but paying reliably. So, if sometimes you pay at 10 days, sometimes at 30, other times at 50, then your creditor may get used to the fact that you're inconsistent but reliable. this could give you a bit more slack when you need it most. Contrast this with the company who always pays bang on 30 days. If you don't pay by 31 the credit controller will be on the phone!
	Early payment terms	I've found that many start ups are so keen to impress their customers, and so keen not to draw attention to their small size that their reluctant to go for strong payment discounts. Likewise they tend to favour rental models over upfront models in the face of the economics (see below and here.)
Salaries etc.	Transferring cash	If the new cash is very close, but is going to miss the BACS payment deadline for the salary, it's handy to know that you can usually pay your staff using a same-day payment mechanism from the bank (for a fee). The extra few days saved can occasionally be a lifesaver.
	Staff late payments	If some of your staff are willing to work on the promise that they'll be paid shortly after the transaction that can be great. Watch out though, because there's a chance that you'll still have to pay the PAYE and NI. It can be helpful to get a formal waiver from the staff of some kind- so the company accrues the cost but doesn't necessarily trigger the tax.
	Payment date	During the early optimistic days companies often like to offer their staff a relatively early payment date in the month. Pushing that back as a matter of routine early can make sense and saves you having to ask the staff for the concession at a key time.
	Cost of directors	If things are tight the directors may be willing to work for nothing- make sure you keep accruing the costs otherwise the next round investor may get shirty if you want to pay them the back fees post transaction.
Banks and investors etc.	Bank	Banks need attention well in advance of the cash demand if you expect them to be sympathetic. Especially important if you've a loan already as bad news can give them the jitters.
	Investor bridge	Keeping your investors fully up-to-speed and informed is the key to this one, but if there's real evidence of close cash from either customers or investors it's useful, if unlikely to be cheap!
	Director's loan	Not really where anyone wants to be!
Other etc.	R&D Tax Credit	I'm no expert on R&D tax credit, but it's proved a godsend to companies on tight cash on several occasions (thanks Gordon!). Two caveats- you can only claim as cash up to the limit of the previous years PAYE+NI, so if you've been mean and lean and had no full-timers then it's not going to help much. Second, you CAN do a short financial year to claim early, but remember that you can't keep doing short years from a Companies House PoV- hence never change year end for convenience reasons, keep it up your sleeve for rainy days. It takes a couple of months minimum to go through the process of closing your year and making the claim, but handy none-the-less.
	Grants	Frankly, unless you saw it coming months earlier this is only likely to help around the edges.
	Customers (my favourite!)	The ingenious amongst you will probably have a whole set of crafty ways to extract cash from your customers wallets. One particularly appealing idea is to offer to convert existing rental customers to perpetual licenses for a tempting once-off price.(see this post.

When VC's Say No- Management Issues

There's a great post over at Marc Andreesson's blog. It tries to help entrepreneurs understand why VC's say no, and how to interpret their responses. Marc points out that it's not uncommon to be being turned down due to the investor's view of the management team- but pretty exceptional, if they ever, that they tell you!

Why VC's wont tell you about a management "issue"

The analogy used by Marc and others is that telling someone their startup is no good is like telling the founder that their "baby is ugly". I'm not quite sure what the analogy is for when we have to let them know that we don't think they themselves are not right for their role! I've certainly always tried to find ways to be as honest as possible, but frankly it's tough, in particular because when you do tell them:

• They just put it down to the the VC being an idiot anyway and carry on regardless.
• After the first few words, no matter how you dress it up, they stop listening and you never get a second chance to explain.
• It gets translated into all sorts of random reasons when the entrepreneur relays the story to others- when I gave the bad news to one entrepreneur he relayed it to everyone as we "weren't interested in high risk ventures"- I've no idea where that had come from!

An anecdote about giving honest feedback

I remember early in my investing meeting an interesting firm run by a very bright and young software guy and his mate. The team was supplemented by a the father of one of the founders who had a successful track record in an early stage company. We visited and explored the possibilities with them, but somewhat awkwardly we rated the two young founders highly, but had lots of issues with the dad! Being a somewhat blunt northern type, I had the cheek to suggest that maybe the company would be better off without the dad, but with a new CEO instead (the dad was pushing his son to be CEO when the body language suggested he was much happier as CTO). We heard from them again about 4 years later, looking again to raise money!

How to tell what the VC really thinks...

Here's a few tips (please add any more in the comments)

• Benchmark first
  Ask around to find out what experience/track record other management who did raise funding had already. If it's your first time in a startup, or first time in a C-level post then it'll need checking especially hard.
• Aim low
  This is the hardest perhaps, but if you're in any doubt put the person in as interim CEO for instance, if the VC's happy they might still suggest there's no need for a change.
• Look for indirect feedback
  Perhaps your chairman, non-exec, existing investor etc. could make a phone call, maybe a few days later. We're only human and it's a lot easier to give honest feedback indirectly!
• Look for consistency
  If you get inconsistent responses from the VC then maybe there's something else behind their decision.
• Ask!
  Something about human nature perhaps, but a question is a great way to find out!

Any other suggestions?

Inaugural Opencoffee Leeds

Open coffee Leeds was buzzing today- about 20 people I think. Starbucks had kindly provided a "meeting room", which turned out to be a small formal meeting room with board table and chairs- about right for 6 people- but not very "opencoffee". Very interesting conversations with a few startups, technology folk and entrepreneurs. I'll be doing my best to go again to this one- well done to Imran Ali for organising it!

Beware the "Investor No-brainer CV"

I really like Marc Andreessen's recent post: How to hire the best people you've ever worked with- it should be essential reading for everyone involved in startups.
In particular Marc's comment: "beware in particular people who have been at highly successful companies", rings very true:
Our portfolio companies are always looking to raise new cash, and in the UK in particular, management with a track-record is a key attraction for much of this follow-on money. So we can be very tempted by someone who has a CV which shouts "prior blue-chip success" and helps drive a positive fundraising round.
But, we've learnt in practice that such candidates must be approached with caution:

• No-brainer CV's usually involve larger companies- and in some of these the main attribute for success can be the person's ability to manage "work politics"- something we'd hope to avoid in our tiny investee companies
• Attribution of success can be very unreliable- the number of people who claim responsibility for successes, strangely, seems to be somewhat larger than those who'll admit to the mistakes!
• Serendipity matters! It's dangerous to assume that someone who was lucky once will, NECESSARILY be lucky in the startup.

This doesn't even stratch the differences in terms of culture or working practices which may be rather alien to the first-time corporate drop-out!
Our biggest (avoidable!) hiring mistakes have been when we've been tempted to bring in management who had "no-brainer" CV's to help raise follow-on funding, but where we harboured doubts ourselves.

FAQ- how to value a web 2.0 company

I answered a question recently from a linkedin connection, to see if it sparks any debate I thought I'd repeat it here:
How should Web 2.0 companies value their businesses when looking for investment?
For what it's worth my answer was...

This is really crude but really meant to be a framework for you to do your own numbers... Take an exit that has happened that looks in the same ballpark as where you'd realistically hope to end up..... e.g. Feedburner sold for (I believe around) $100m Assume you'll need at least one more round of finance that currently planned (that's just the way it usually seems to work out!) and that the next round VC's will therefore demand 40% now to have 25% of the final exit- i.e. $25m from the proceeds. The next round VC's need a 10x markup in that scenario, so that sort-of works. i.e. they might give you $2.5m for that 40% Therefore your company is maybe worth $3-4m. I'd suggest that If you take this model and then factor some differences for your own deal you'll not be a million miles out! Bear in mind strange things can happen when there has been a massive exit but there are zillions of competing early-stage companies ;-) Best of luck with the round! Ed

Any views?

"Applications Engineering" or Platform

Early stage investors like backing "platform" technologies, but everyone knows these are rather rare beasts. On the other hand customers buy solutions to their problems- especially if they're looking at using a cutting edge technology. This can put an early stage technology company in a bind that's particularly frustrating for company and potential investors alike.
Without naming-names, obviously, I've seen quite a few companies who are falling into this gap. A particular example I saw a few years ago, but with huge parallels to a much more recent applicant for funding, was looking at a sensor technology. This company had a technology with a particular set of USPs which took it well beyond the existing sensors. It also had some early customers keen to use their technology. So, the company believed, we should've been keen to pursue the investment. However, the problem was that the early customers had applications which didn't really use the USPs of the sensor. Indeed the main reason that the customers were so enthusiastic was that their inventor was willing to explore doing a relatively small volume sensor with a specification a little different from the off-the-shelf sensors from the big manufacturers. In essence then, although pitching as a "platform" they were addressing early customers who were buying because of the "application engineering" they could obtain from the hungry start-up.
Still, revenue is a good thing, so surely this "application engineering" model should've made the proposition more investable not less? Well, for us at least, it wasn't that simple. The company was tooling up in terms of management, team and core-competencies to match the "applications engineering" model, and that made us at least a little nervous that they'd be able to point the company towards the platform opportunity in a reasonable timescale.
I don't think there's an easy solution to this conundrum- at least I've not come across it yet- but I still believe it is a problem worth recognising when it makes itself known.

Some pitfalls of chosing a company name

In setting up this blog I was reminded of a regular issue for our investees: choosing a suitable company name (and no I don't think that TechGain is a great name!). Over the years I've helped quite a few companies with this process, and it usually starts being fun, then gets increasingly frustrating. As an aide memoir as much as anything else, I thought I'd tabulate some of the issues that need checking, but more importantly the order that I think eliminates them most quickly:

1. Won't degenerate into a TLA*
   In the UK we have a particularly insidious problem that results from the way we stick "Limited" on the end of (most) of our company names. If you decided to call yourself, for the sake of argument "Blue Prism" you're very likely to find it degenerates into becoming "BPL" in lieu of "Blue Prism Limited" unless you work hard to avoid it (as this company has!). Not only does that kind of invalidate your careful efforts to select those two names, but it also tends to mean that you can't register a meaningful domain name. *TLA is an ironic term for a Three Letter Acronym
2. It's Google-able
   Doing a web-search on the name is vital, if you've chosen something with loads of existing close company names, brand names, websites, blogs etc. it'll be a real struggle for anyone who remembers your company name but not the URL to find your site. A good example of this is the great guys at First Capital, I really struggled to "Google" their website- I should've just guessed (www.firstcapital.co.uk)
3. You can get the domain name
   Goes without saying that it's much better to be able to get the obvious domain name, less obvious are that names such as aardvarkuk.com are potentially a big problem if the "aardvark" bit is not easily google-able (see 2 above). I've heard stories that some less domain name registrars look through the queries people make of potential domain names and bag the good ones first, maybe I've just never come up with a good name but it hasn't happened to me yet, does anyone know if this is just an urban myth? I've used uk2.net to search for availability, and recently used GoDaddy.com as they seemed a bit cheaper.
4. It doesn't catch the zeitgeist
   Poking a little fun at the great guys at GP Bullhound, the original name of the UK incubator from which it in part sprung was Gorilla Park, 'nuf said! More recently I suspect that companies that have copied flickr.com's style of domain name might look a little dated before long.
5. Not someone else's
   If you've got this far the chances are you're not going to bump up against any really meaty issues with someone else having rights over the name- after all it makes no sense at all to register or claim a trademark and to fail to register the equivalent domain name.However you should check:
   
   • UK Trademark here
   • US Trademark here
   • UK Company Name here
6. No bad history
   One of our investees considered a company name, which I shall not mention for now, which turned out to have been previously used by a company which met an "unfortunate" end. Again google searches should help show this up.
7. Unambiguous Spelling
   Some great names you could choose don't work so well when spoken, or have multiple possible spellings. nCapsa suffers from this problem, with enCapsa being a different company entirely, and there are plenty of worse examples!
8. Not too Anglo-saxon!
   It was pointed out to me recently that English words that have their roots in Anglo-Saxon/Germanic can be more problematic, than latin-based words which are much more likely to travel well.

From our portfolio, personally I like best: Provexis and Femeda. I wont tell you the ones I really don't like, but I'd be interested in your views via the comments!