Apr 242016

In the face of a volatile oil price and falling reserves, Saudi Arabia’s new Crown Prince is looking at pivoting the economy to knowledge based industries.

That is a hard task in the face of Saudi Arabia’s religious, cultural and work cultures. This is not a society easily dragged into the 21st Century.

Crown Prince Mohammed bin Salman’s plans seem even more daunting when Richard Florida’s 3Ts of the Creative Class are considered – Talent, Technology and Tolerance.

It may well be easy to buy in the technology, but attracting the right talent to Saudi Arabia is going to be hard particularly given it is one of the most intolerant societies on the planet.

Saudi Arabia though has plenty of challenges, so a few big bets may be in order. Tolerance though might be the deal breaker.

Apr 152016

What happens in Silicon Valley when your startup doesn’t fit into the current hot ‘unicorn’ categories?

I recently spoke to one female founder about her business and why she chose to setup on the US East Coast rather than follow the popular path of establishing a San Francisco base. Her answer shows the obsessions Silicon Valley investors have and why the Bay Area model may not be right for all companies.

Originally we planned to set up in the Bay area. That’s what you do right? So our company’s registered office was in Palo Alto and then I started plans to have three of my staff and myself relocate to San Francisco. I took onboard some Silicon Valley Advisors and this was a pretty horrific experience that taught me a lot. Here is my experience of trying to set up in the Bay Area then not. This is my cautionary tale to other Aussie Start Ups.

The Valley comes with a certain formula that gets beaten into you. Here’s how it goes:

A Start Up must:

  • Be in the Bay Area
  • Have had an MVP in market
  • Be an incorporated US company, preferably a Delaware company if you want US VC investment
  • Have a Run Rate (annual revenue) of $3-5million dollars in order to attract investment
  • Not be enterprise software
  • Be a SaaS company like Atlassian with a similar business model
  • Have a product that is inexpensive where clients can self-install and there is no professional services or servicing required

I found the Silicon Valley Advisors I dealt with to be arrogant, formulaic and could not see potential outside of the standard Unicorn-creating formula. So I realized the Bay Area was not going to be a good fit for My business. Additionally I figured that none of our clients were actually based in the Bay Area and I needed to be near them. As a FinTech company the logical thing was for us to go to where our clients were so that we could constantly listen to them. Listen to their problems, understand their business, build relationships, have them help us figure out what our product should be and pay us

So we moved to NYC and set up on office in Chelsea. From NYC it takes only a couple of hours to get to Boston, Baltimore, Philadelphia, Columbus, Chicago, even Texas to be with clients.

Also the investment discussions are much more ‘normal’ and investors are respectful of me as the CEO and Founder and my background and potential to build a significant, revenue led and profitable large software company. They are backing me and value that I am experienced. Not once has age or gender come up. In fact to be fair, probably the opposite. Being a woman over 40 seems to be appealing to East Coast clients and investors.

The founder’s experience also betrays a herd mentality among the Silicon Valley investors, something that may be a weakness for the industry and the region. It certainly indicates the dominant business model may be very fragile as markets turn against tech unicorns.

Apr 102016
walking the shop floor is important to business management

Being a startup in an unsexy industry can have its advantages believes one founder, particularly when your only competitors are sales and marketing focused corporates that struggle to innovate or execute on new ideas.

“There are some advantages of being in a non-sexy industry,” says Ziv Kedem, co-founder and CEO of Israeli company Zerto, “It means there are not too many people doing it and not too many can convince VCs this is a multi billion dollar market.”

Kedem was speaking to Decoding the New Economy during his recent visit to Sydney about Zerto, a disaster recovery software company – a distinctly unsexy business – which is his second startup following the sale of his first, Kashya, to storage giant EMC in 2006.

The advantage with being non-sexy is often the only competitors are large corporations, a prospect that doesn’t phase Kedem. “If the competition is only coming from the large vendors then there won’t be any innovation there,” he smiles.

Sales and marketing focus

Kedem’s view is many large companies are focused on sales and marketing, which means they don’t have the skills or the motivation to execute business plans in new sectors.

In many respects this echoes the experience of Seth Godin who expected Google becoming a competitor to his Knol business would be the fledgling company’s death knell. Instead Knol survived and Google’s notoriously poor attention settle upon another shiny, sexy industry to disrupt.

The problem for those non-sexy industries is raising investor money as the presence of a Google, Microsoft or Amazon in the market tends to scare VCs, private equity firms or retail investors away.

Crowdfunding downsides

Unlike his compatriot, John Medved, Kedem doesn’t see crowdfunding as a way around an investment drought as smaller investors are attracted to the ‘sexier’ businesses as well and raising the substantial amounts necessary for enterprise ventures is difficult on those platforms.

When a startup can find an investor, Kedem recommends not being shy about raising funds. “It’s rare to meet someone who raised too much,” he states.

Kedem also recommends investing in the team and looking for skills that the company will need in the future, not just today. Talking, to everyone from investors to customers to peers, is also important and he believes this is why Silicon Valley and Israel are so successful as technology hubs.

Believing in yourself

The most important aspect for an entrepreneur is self belief says Kedem, particularly when raising funds. “You’re doing the investor a favour when you go to them,” he says.

Ultimately that self belief is probably what everyone in business needs, particularly when facing a huge competitor.

Regardless of how unsexy your business is, believing it addresses a problem that people will pay to solve, may well be its greatest asset.

Mar 182016

Just over two years ago Google acquired high profile robot developer Boston Robotics, at the time it appeared a major step both the search engine giant  and the industry.

Today, Bloomberg reports Google are looking at divesting Boston Robotics as the company is not proving to be fit into the company’s other divisions while management sees better revenue prospects in other ventures.

If the latter is true then the sale marks a shift in Google’s attitude towards long term investments. That may mark a turning point in the company’s development.

Mar 112016

One of the group of businesses most affected by the downturn in Silicon Valley investments are the home delivery services.

For the last three years services such as Instacart and Doordash have attracted billions of investor dollars on the promise of become the “Ubers of home delivery.”

Like all Silicon Valley VC plays, the investors in these delivery services were prepared to throw vast amounts of cash at the businesses in the hope they could achieve a monopoly position.

“All these companies are massively subsidized to support growth and restrain growth of competitors.” Quartz magazine quotes Tim Young of San Francisco’s Eniac Ventures, “there’s a point at which the music stops, and investors are no longer willing to see their money go to those subsidies.”

That point seems to have been reached as it becomes apparent none of these businesses will dominate the industry which appears not to be so big after all.

History shows what happens when the money runs out as not being pretty. Already with cash problems looming, the companies are looking at ways to slow their cash burn through reducing contractor rates and slashing overheads.

Instacart is unlikely to survive and if the company does it will be as far smaller business than its investors hoped. Those are the risks when staking money in a tech mania.

Mar 052016

Four months ago, the Australian government launched its innovation agenda with the noble ambition to put the nation “on the right track to becoming a leading innovator.”

The keenly awaited innovation statement was seen as a defining the new Prime Minister’s agenda after two decades of complacent political leadership. At the launch of the paper Malcolm Turnbull said “our vision is for Australians to be confident, embrace risk, pursue ideas and learn from mistakes, and for investors to back these ideas at an early-stage.”

One of the early stage investors currently investing in Australia’s startup sector is Brisbane based entrepreneur, and Australian Shark Tank judge, Steve Baxter who spoke to Decoding the New Economy last week about where he sees the strengths and weaknesses in the proposals.

Beating the rhetoric

“Competitive threats are far more effective than rhetoric from a Prime Minister,” says Baxter in observing what really drives adoption and change while emphasizing that the announcement is a welcome shift,  “the change in messaging from the government has been very important. It’s having an impact and a future looking message has been fantastic.”

While Baxter is positive about much of the incentives on offer and the importance of changes to regulations around bankruptcy and treatment of business losses, he flags the the delay in implementing the tax incentives as being a problem.

Too focused on commercialisation

Baxter though has been a long standing critic of Australia’s research sector and the emphasis on commercialisation of academic work is in his view one of the Innovation Statement’s major weaknesses, “commercialisation is a concept that we’ve failed at. It’s dead. We’ve put so much money into it, it’s actually embarrassing. We need a new mindset towards it.”

“there are seven hundred million dollars of a billion going to the research sector. That’s not entrepreneurship. In fact universities and research institutes are the least entrepreneurial organisations you’ll ever come across.”

“We need more business model innovation, we’re seeing too many people in lab coats with synchrotrons, square kilometre arrays which we have to do,” Baxter states. “What we’re not seeing the Dropboxes and the Instagrams and the Facebooks and the Wayze’s, the cool stuff that doesn’t need a two hundred million dollar building.”

Thin pipelines

As an early stage invest Baxter sees the real challenge for Australia lies in encouraging individuals to launch their own ventures, “I don’t think we’ve done enough yet to prove we have an investment problem when it comes to early stage companies,” he says. “I don’t believe we have a lack of capital”.

For those starting their own ventures, Baxter sees the word ‘innovation’ as being a barrier in itself.
“The entrepreneurs I back aren’t those who say ‘I’m going to innovate’ but those who say ‘I can see a problem’.”

While Baxter doesn’t say this, the real challenge lies weaning Australians off property speculation and encouraging investment and risk taking, something that requires major tax and social security reform.

Sadly, the Turnbull government has abandoned the prospect of any immediate taxation reform and even the Innovation Statement’s more modest agenda is now in doubt as the nation’s febrile Parliament prepares itself for an early election.

Baxter’s views, and his optimistic but guarded outlook towards the Innovation Statement reflect the opinion of many of those in the Australian investment community, it would be a shame for the country if the current opportunities are lost for short term political maneuvering.

Feb 262016
which investment choices right for your business

UK e-commerce service Powa Technologies, once valued at £1.8 billion went into receivership after the lead US investor called in the £200 million loans it had made to the business.

It turns out most of 1200 corporate clients the company had claimed as clients were actually expressions of interest in the service rather than firm orders.

Powa now has the distinction of being the first of the tech unicorns to go broke – although it’s almost certain 2016 will see many of the companies with private billion dollar valuations join them.

While the focus on Powa’s demise will be the deceased unicorn aspect, the company’s story illustrates some business basics.

The key one is that sales only count when the money is banked, all too often cashflows, profits and valuations are inflated by booking income long before it’s received – if ever.

Another aspect is valuations are not cash in the bank, Powa may have been valued at £1.8 billion but it only had raised £250 million in capital along with a similar amount in loans. This was not enough to keep the business going at what must have been a spectacular burn rate.

While tech startups have unique aspects, the basics of business remain constant; Cashflow is king and adequate capital is essential. These are aspects managers, investors and employees need to watch closely.