Paul Wallbank – Brilliant Communications

Tag: VC

  • Fred Wilson on the future of Venture Capital

    Fred Wilson on the future of Venture Capital

    Business Insider has a wide ranging  interview with prominent New York VC Fred Wilson on investment, tech and business succession planning.

    I can’t help but think reading it though that Wilson’s career was a product of the times and his successors might find the economic environment very different.

    The current Silicon Valley business model, which Wilson successful applied to the New York business scene, may be just another transition effect that made plenty of money for those involved at the the time but is just an historical oddity in the long run.

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  • Hyping start ups for pleasure and profit

    Hyping start ups for pleasure and profit

    Monday’s announcement that Facebook would buy photo sharing website Instagram shows the power of Silicon Valley investor networks and how they operate, we should be careful about trying to emulate that model too closely.

    Intagram has been operating for 18 months, has 13 employees, has no prospects of making a profit and is worth a billion dollars to the social media giant. Pretty impressive.

    A look at the employees and investors in Instagram shows the pedigree of the founders and their connections; all the regular Silicon Valley names appear – people connected with Google, Sequoia Capital, Twitter, Andreessen Horowitz.

    The network is the key to the sale, just as groups of entrepreneurs, investors, workers and innovators came together to build manufacturing hubs like the English Midlands in the 18th Century, the US midwest in the 19th Century and the Pearl River Delta at the end of the 20th Century, so too have they come together in Silicon Valley for the internet economy.

    It’s tempting for governments to try to ape the perceived successes of Silicon Valley through subsidies and industry support programs but real success is to build networks around the strengths of the local economy, this is what drove those manufacturing hubs and today’s successful technology centres.

    What’s dangerous in the current dot com mania in Silicon Valley is the rest of the world is learning the wrong lessons; we’re glamourising a specific, narrow business model that’s built around a small group of insiders.

    The Greater Fool business model is only applicable to a tiny sub set of well connected entrepreneurs in a very narrow ecosystem.

    For most businesses the Greater Fool business model isn’t valid.

    Even in Silicon Valley the great, successful business like Apple, Google and Facebook – and those not in Silicon Valley like Microsoft and Amazon – built real revenues and profits and didn’t grow by selling out to the dominant corporations of the day.

    The Instagrams and other high profile startup buy outs are the exception, not the rule.

    If we define “success” by finding someone willing to spend shareholders’ equity on a business without profits then these businesses are insanely successful.

    Should we define business success by creating profits, jobs or shareholder value then the Silicon Valley VC model isn’t the one we want to follow.

    We need to also keep in mind that Silicon Valley is a historical accident that owes as much to government spending on military technology as it does to entrepreneurs and well connected venture capital funds.

    It’s unlikely any country – even the United States – could today replicate the Cold War defense spending that drove Silicon Valley’s development and much of California’s post World War II growth.

    One thing the United States government has done is pump the world economy full of money to avoid a global depression after the crisis of 2008.

    Some of that money has bubbled up in Silicon Valley and that’s where the money comes to buy companies like Instagram.

    Rather than try to replicate the historical good fortune of others, we need to make our own luck by building the structures that work for our strengths and advantages.

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  • Insanely profitable

    Insanely profitable

    Apple’s announcement that they will start paying dividends to shareholders changes a number of things in Apple’s business model and those of many other businesses.

    The sheer size of Apple’s cash reserves also illustrate how profitable the outsourced manufacturing model is as well the contradictary nature of special pleading by affluent corporations.

    Moving a cash mountain

    Not only is Apple’s business insanely profitable, but sales are growing exponentially. In the company’s conference call, CEO Tim Cook reported that 37 million iPhones sold last quarter and 55 million iPads sold in the last two years.

    Apple’s CFO Peter Oppenheimer pointed out the company’s cash reserves increased $31 billion in 2011 and 2012 is on track for a similar result in 2012, leaving them plenty of money for investment along with a “warchest for strategic opportunities”.

    Paying a dividend

    The reluctance to pay dividends has been a feature of the US corporate for the last few decades and Apple are certainly not alone in not distributing their profits to shareholders.

    Companies like Microsoft, Google and Oracle -even Yahoo! once upon a time – have been just as profitable as Apple and their efforts to shrink their cash mountains has had some perverse effect.

    Many of these companies have squandered suprpluses on poorly thoughtout and badly executed buyouts of smaller businesses, this urge to avoid returning money to owner has been one of the drivers of the Silicon Valley VC Greater Fool model.

    Another result of fat profits is the rise of flabby, overstaffed management ranks at some of these companies. Although this certainly isn’t the case at Apple where Steve Jobs ran a very lean machine.

    The retail model

    Unlike their major tech competitors Apple is a manufacturing and retail business as well. In 2012, 40 new stores are planned around the world.

    This vertical control of their markets, from the beginings of the supply chain  to “owning” the end customer is anathema to modern MBA thinking and probably the area that gives them the greatest competitive advantage over their hardware competitors.

    Justifying Mike Daisy

    In some ways this announcement justfies Mike Dasy’s discredited criticisms about Apple’s Chinese suppliers.

    The reason for manufacturing these goods in places like China, India or Vietnam is the vastly cheaper cost of doing business, not just in labour rates but in reduced environmental and safety standards.

    Plenty of brand name clothing, footware and fashion accessory companies make similar massive profits to Apple with their ten, twenty and sometimes hundred fold markups on their products.

    Repatriating profits

    One of the big changes of Apple repatriating money is that is undercuts the special pleading by these extremely profitable companies that they should have a US tax holiday so they can repatriate their riches.

    It’s now clear these companies can easily afford to pay the taxes of their home countries and it’s time they started to, along with returning dividends to their shareholders.

    Once again Apple have changed the way others do business, how these changes affect the way we invest and governments treat companies is going to be one of the most interesting developments over the next decade.

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  • The pros and cons of bootstrapping

    The pros and cons of bootstrapping

    There are plenty of ways of raising money for a business; venture capital, bank loans, private equity and – by the far the most common – bootstrapping, where a company finances it’s growth through its own cashflow.

    An article in Tech Crunch by Ashkan Karbasfrooshan looked at the reasons why bootstrapping doesn’t work, his views are understandable Ashkan given his own business has raised $1.5 million in venture capital (VC) funding over the past four years.

    Outside the Silicon Valley bubble, it’s worthwhile considering the real benefits and disadvantages to bootstrapping your business. As with any business tool there’s real pros and cons with all financing methods.

    Benefits

    There are a number of benefits with bootstrapping, in that it forces the business’ management to focus on the product and customers while giving founders full control of the business.

    Total control

    A bootstrapping business has total control over its destiny – the business owners answer to no VC, bank or outside imposed board of directors.

    Those outside investors may also have different business objectives to the founders. Often a venture capital or private equity investor has a three to five year time frame while a founder may be looking further.

    Also a mis-match between the founders’ and investors’ exit strategies will almost certainly be a problem should the opportunity to sell the business arise.

    One of the biggest risks for a smaller business is banks can call in loans or ask for additional security – something that crippled many smaller businesses during 2009.

    For those who’ve raised equity funding, founders can find their shareholdings diluted or even be fired from the business they created.

    Customer focus

    The business that is focused on funding itself pays close attention to the needs of its customers. The distraction of raising, and then managing, investors or lenders can distract from building the business.

    Validating the business model

    A successful business that has grown through funding itself is has, by definition, a valid and profitable business model. This is not necessarily true of VC or debt funded enterprises.

    Overcapitalisition

    In his Tech Crunch article,  Ashkan quotes Marc Andreessen and Jason Calacanis as saying “raise as much money as you can.”

    This may well be conventional wisdom in Silicon Valley though the reality is a business can have too much money, as we saw in the original dot com boom with businesses such as Boo.com lavishing money on founders and expensive frills.

    A business can be crippled by having too much investment money that distorts the founders’ objectives and allows the company to lose focus on helping customers and getting the product right.

    Generally with bootstrapping this isn’t a problem unless the founders have an insanely profitable business, which renders the need for outside investors largely irrelevant.

    Disadvantages

    For all of bootstrapping’s advantages there are real downsides as well including the risk of being undercapitalised and the difficulty in attracting diverse management.

    Undercapitalisation

    One of the main reasons for business failures is under capitalisation; simply not enough money to grow the enterprise or to put it on a sustainable footing. This is a constant risk for bootstrapped businesses.

    Inability to focus

    Many owners or managers of bootstrapped businessese focused on making sales so they can pay the rent and make payroll; this distracts management from executing the longer term aims of the business.

    Expertise

    In taking an equity partner – either in private equity, venture capital or angel investor – the founders get the benefit of the investors’ expertise.

    A good investor who has similar objectives to the founders can add real value and complement the original team’s strengths and weaknesses.

    No one size fits all businesses

    Overall there’s no black and white to bootstrapping versus borrowing money or finding an equity partner; all of them have their risks and benefits.

    As entrepreneur Steve Blank points out, there are six types of startup and only two of them; the scalable and buyable (born to flip) are suited to the Silicon Valley venture capital model.

    The real risk in business is assuming one way or another is the only way to fund an enterprise, for many it’s a combination of some or all of the methods to raise funds.

    It’s quite possible to see a business first bootstrap to get established, then get a bank loan to finance growth, followed by a VC or seed investment that finally sells out to a private equity fund.

    For many business owners though, funding the business out of cashflow is the most sustainable way to grow and profit. If you’re happy with what you’re doing, there’s no reason to be hassling for equity or begging at the bank.

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