Jul 012015
bonuses, commissions and other incentives can distort a business

“Raising money is like ordering dinner,” says startup founder Geoff McQueen about attracting investors. “If you’re only a little bit hungry, you should only buy an appetizer.”

McQueen was writing about his company, professional services platform Affinity Live, achieving its first round of funding. While the amount raised is a relatively modest two million dollars, the main gain for the company is getting some experienced business people on board.

Unlike many of the high profile billion dollar ‘unicorns’, cash flow positive businesses like Affinity don’t need large swags of cash to grow. As McQueen points out, big investment rounds put pressures on management and risks the company’s culture changing “from one of discipline and taking on the world to one of comfort and entitlement”.

Pushing out the owners

Another risk for founders is they could end up diluting themselves out of the business they’ve built, as venture capital investor Heidi Roizen points out it’s possible for the creators of a billion dollar startup to find themselves broke.

Roizen observes “venture capital is not free money. It’s debt. And then some”, something that’s overlooked by many commentators who think a fund raising – and the resultant valuation  – goes straight into the pockets of a company’s founders.

Unless it’s Google Ventures doing the investment, it’s unlikely the founders will be buying Porsches after a VC round and usually the funding goes into growing the business. For many big name startups those capital needs can be huge as we see with Uber where reports indicate the company is currently losing two dollars for every dollar it earns.

Beating the burn rates

Most businesses though can only dream of burn rates in the hundreds of millions a year and their needs are far more modest illustrating McQueen’s point about excess capital.

As we saw in the dot com bust it was the lean and focused companies that survived the downturn, there’s little to think the next industry shake it will be different. That’s why companies like Affinity Live and founders like Geoff McQueen will probably still be around when the dust and hype settles.

Jun 292015

Every few years the tech community goes through a mania for a type of business. Five years ago it was deal of the day sites led by Groupon where around the world copycats firms gleefully accepted the money of eager investors.

Today it’s food delivery services and industry analysts CB Insights have mapped the investments of US Venture Capital firms in the sector.

Recent years have shown that tech investors like to flock in packs and the current focus on delivery apps is just another example. So right now if you want to pick up some VC money, setup something that delivers food to people.

If you’re lucky, the greater fool model might deliver a nice pay off as larger companies suffering from Fear Of Missing Out (FOMO) desperately grab some of the more higher profile players.

Be quick though as the mania tends to dissipate quickly as the hundreds of Groupon copycats eventually discovered. When the hordes move on, they don’t leave much for those left behind.

Jun 272015
business return on assets is falling away

One of the features of the current tech investment mania is the ‘greater fool’ business model of building a startup with the aim of flipping it to a larger company.

That model is based upon gaining as much publicity and users as possible to justify a high price for further investme, a buy out or stock market listing.

In that environment making money is irrelevant, in fact to many Silicon Valley investors a profitable startup is less attractive to one burning investors’ capital.

Now New York’s top tech investor, Fred Wilson, says he’s sick of that model.

But I’m a bit sick and tired of the objective of every operating plan I see is to get the business to a point where it can raise money at a much higher price. That’s nice and it’s how the VC/startup game is played. But at some point I’d prefer to see an operating plan that has the objective of getting to sustainable profitability. And I do mean sustainable.

When the froth comes off the current investment market it will be the profitable businesses, or those with a prospect of making a return, with the best prospects of survival.

Fred Wilson’s pint is a warning for the many of today’s investors; profits matter and startups need to be able to show how and where they are going to eventually a return.

Jun 252015

The United States has only half the publicly listed companies of twenty years ago, writes Barry Ritholtz in Bloomberg View.

While the Initial Public Offering still remains one way for startup businesses to release  wealth to founders and early investors, the number of mergers and acquisitions has seen the total number of public companies fall over the last two decades.

Most of the fall has been due to existing companies being bought out through mergers and acquisitions while there have been fewer new businesses listing to replenish the stocks.

Last year we interviewed Don Katz, the founder of talking book service Audible which was listed in 2000 and acquired by Amazon in 2008.

Katz found the running of a listed company was onerous and more value, and investment funds, was added by being part of a larger organisation.

The view of Katz and Audible’s shareholders that there is better access to markets and capital through larger companies probably drives much of the enthusiasm for M&As along with serving to increase the economic concentration of large corporations.

Ritzholtz speculates another reason could be the deepening pools of private equity and venture capital which mean newer businesses don’t have to rush into a listing to raise funds or give founders and early investors an exit.

Another reason could be that companies have become more profitable with US corporations being more profitable than any time since before the 1929 stock crash. More money coming in means it’s easier to fund the business using cash flow and investors can make a good return on dividends rather than share sales.

The cost of money could also be affecting listings, with debt so cheap companies can raise bonds cost effectively without diluting their equity or having the hassle of running a listed corporation.

Finally, it may be the ease of setting up a business makes listing not so necessary. A software company needs nowhere the capital required by a manufacturing venture so going to the market just isn’t necessary.

Should the lack of listing be a permanent thing then again we may see another force changing management and business cultures.

Jun 202015
happy guy with lots of money

Silicon Valley’s lean startup model may not be relevant to most regions warns writer and entrepreneur Steve Blank.

The lean startup model is based on getting the minimum viable product into the marketplace and should users be enthusiastic seeking investor funding to develop the business further.

Guy Kawasaki described this in an interview last year where he described the minimum viable valuable product idea of getting the most basic service to market at the lowest cost and then getting users and investors on board.

However it might be that model only works where “startup entrepreneurs have full access to eager and intelligent business customers, hosts of industry angels and venture capitalists with money to burn,” reports Canada’s Financial Post.

Blank came to that conclusion on a trip to Australia where he met with sports tech startups: “Meeting with a coalition of entrepreneurs in the tech and sports space, he realized the lean startup framework didn’t account for the vagaries of local economies. Australia sports-tech entrepreneurs trying to scale their businesses would find that their major customers are in the U.S., halfway around the world. And unlike most Valley startups, the Aussies would need to source manufacturing expertise — which means budgeting for several trips to China.

The problems facing Australia’s entrepreneurs probably extend further as the nation’s investors are notorious risk averse and the high cost of doing living means the burn rates for startups are much harder.

Blank’s recommendation is any region looking at establishing a startup community should identify its own strengths and advantages then build its own playbook.

That it’s difficult for other regions to copy Silicon Valley shouldn’t be surprising, since the start of civilisation each industrial or trade hub has risen and fallen on its own strengths and weaknesses.

We can be sure the next Silicon Valley – be it in the US, China, Europe or anywhere else in the world – will have different strengths than the Bay Area today.

Jun 192015
Accountants and bookkeeping ledger

Investment advisers could be the next occupation to face automation reports Bloomberg Business with the prediction two trillion dollars worth of investment funds could be managed by computers by the end of the decade.

An important aspect of the change to computerised investment advice is the reduced fees that makes professional knowledge far cheaper and more accessible.

The downside, as Bloomberg points out, is that there may be fewer investment advisers enjoying corporate hospitality and conventions in future so there may be other industries feeling the job losses too.