Category: startups

Creating a false divide between startups and small businesses

Tech startups shouldn’t be treated differently from other businesses

“We aren’t small businesses” cries Tank Stream Ventures’ Managing Partner Rui Rodrigues in Business Spectator yesterday.

Rodrigues’ point was tech startups have a very different set of needs to the local small business. “Bob down at the corner shops has been there for 10 years, and he’ll be there for another, he might sell milk, or office chairs, or even fix your watch,” he writes.

Technology startups on the other hand “have ambitions to become big companies, global empires. They are high-growth technology businesses and they are working on goods and services that you might not yet know you need.”

Silicon Valley’s greater fool model

Rodrigues’ comments come from the Silicon Valley Greater Fool mindset where the end game for investors is to flip the business to a bigger company or make out like bandits in a stock market listing. Under that model profitability doesn’t matter, “too early is considered a deterrent for investors looking at a business.”

Not making a profit is fine for a company promising unlimited future growth to the market or a flipper based on finding a greater fool but for most startups those lack of returns see all but a few spectacularly successful ones shrivel away as the company’s funds exhaust before the founders achieve their objective. For Bob the locksmith who doesn’t have a fall back option of returning to a management consulting job, he needs the income.

What’s more fallacious in Rodrigues’ piece is the idea today’s tech startups themselves will be great employers themselves. Even the successful ones haven’t proved to be job generators in the way traditional business have been.

For the traditional small business sector the risks aren’t insubstantial either as the majority of proprietors will barely make a living while risking their assets, time and often health – something understated by the motivational writers urging people to quit their jobs and prove themselves.

A lack of capital

For both the startup community and the small business sector the real challenges lie in being undercapitalised. Most startups will fail because of insufficient capital while the majority of small businesses never quite reach their potential because they lack the funds required to invest in the proper tools.

Much of this comes down to banks retreating from small business lending thanks to the ill thought out Basel rules that treat home mortgages as almost risk free which has discouraged any form of finance not backed by residential property.

In fact many of the challenges facing traditional small businesses such as high rents, unnecessary regulation and high labour costs are as much a problem for the thirty something renting a desk in a tech incubator as they are for 55 year old Bob who’s been running the local locksmiths for the last twenty years.

Misdirected government

Silly schemes like the Australian government’s depreciation scheme aren’t addressing this problem, indeed the Abbott administration’s intention is to provide a brief sugar hit to the nation’s GDP as small business owners buy new laptop computers and toolboxes. It does nothing to address the uncompetitiveness of Australian business or its attractiveness to local investors.

That Rodrigues wants to create a schism between the tech startup community and the small business sector is regrettable, it only confirms in many people’s minds that technology is for geeks and not ‘ordinary people’.

In truth a nation’s business community needs a level playing field, one that doesn’t give preferential treatment to one form of activity over others – be it property speculation, tech startups or dog walking franchises.

While there are genuine differences between the startup sector and the small businesses community – in the same way there are differences between Bob’s locksmiths, Jane’s cafe or Sarah’s dog walking franchise – there is need for businesses divided in asking for equal and fair treatment from government, banks and large corporations.

Having a united voice for all entrepreneurs, however modest their ambitions, is far more important than single groups pleading for special treatment.

Crowdfunding a successful project

Crowdfunding is increasingly becoming a legitimate way to fund a project

How successful can crowdfunding be for IoT hard? We looked at some of the downsides of campaigns recently and story in Smart Company on some of the IoT gadgets at the recent Internet of Things World exhibition showed how many of projects are being funded by the crowd. 

The notable thing about the projects at the conference was how many had not only been successful crowdfunding projects but had also smashed  their targets.

The lesson from that is a successful campaign has to catch the imagination and excitement of the crowd, not just be a worthy idea.

How many if these products end up being successful remains to be seen, the test will be how accurately the founders have estimated their costs.

If it were just the enthusiasm of the funders, then the projects are almost certain to succeed.

A great time to raise funds

For the right startups there’s plenty of investor money available right now

“There’s great availability of capital for young companies,” says Doron Kempel, the CEO of software defined data center company SimpliVity.

Since being founded in 2009, the company has had five rounds of funding and raised $276 million dollars in equity and debt.

The notable thing is Kempel says the banks are keen to lend money to his business, something that probably underscores how difficult it is for banks to find suitable places to place funds.

As one of the unicorns – Simplivity’s last fund raising gave the company a valuation of over a billion dollars – it shouldn’t be surprising that banks are comfortable lending money to the business but it also underscores just how much money is available to startups with the right investors.

For those investors the paper returns are good as well, with Kempel observing each round of funding sees the company’s valuation triple.

So for companies with good ideas and unique stories it seems right now is a good time to be raising money, particularly if the founders can get one of the pedigree venture capital firms to invest.

The question now though is how many coffee apps and delivery services can the also ran VCs support?

The tough world of IoT hardware startups

Starting a business making IoT hardware is a tough challenge

Yesterday Internet of Things startup Ninja Blocks announced it was shuttering its doors after three years of operations, two successful Kickstarter campaigns and three successful fundraising campaigns that netted $2.4 million.

Ninja blocks aimed to become the centre of the smarthome with its simple controllable device but, as many other startups have found out, the costs and complexities of designing, manufacturing and shipping hardware are not trivial.

Last year I spoke to Ninja Blocks and a similar IoT startup which also failed, Moore’s Cloud, about their opportunities and challenges. In the light of both companies failing they are worth watching again.

Daniel Friedman, CEO of Ninja Blocks outlined the company’s plans along with the limits of crowdfunding.

The CEO of Moore’s Cloud, Mark Pesce, had much stronger views on crowdfunding and its limits.

From the Moore’s Cloud and Ninja Blocks story it would be tempting to conclude that pure IoT hardware startup plays are doomed to failure, however the lessons of companies like Fitbit and the Pebble watch show otherwise.

A very good example of success is Spanish IoT company Libelium whose founder and CEO Alicia Asin told Decoding The New Economy two years ago how the company had started under the shadow of the 2009 economic crisis and thrived since.

The failure of Ninja Blocks and Moore’s Cloud really tell us we’re in the early days of the IoT and the business models and technologies are not certain. It’s also a commentary on the risks involved in startup businesses, as investor Dave McClure says, “not every one will be a unicorn.”

As the markets grow and the technologies evolve we’ll be seeing many more IoT startups, few will become billion dollar unicorns and many will fail. That’s the nature of new industries.

Twitter’s discordant note

Twitter’s decision to restrict access to its data has cost them dearly

It’s been a bad week for the social media service Twitter with its stock pounded after the leak of poorer than expected results.

Writer Matthew Ingham says Twitter lost its way five years ago when it started closing down access to third party developers, a move that hurt the service’s growth and user adoption.

Twitter’s move was greeted with disappointment at the time and many developers gave up working on the company’s APIs.

With the growth of third party applications stunted, there was little reason for new users to come on board and so Twitter is now disappointing the market with its results.

Basically Twitter CEO Dick Costolo and his team reaped what they sowed in restricting access; they kept control of their data but it’s cost them users and hurt their share value.

Twitter’s woes show that the economics of  cloud and social media services reward business that share data. While there may be some commercial and legal limits to what information can be shared, the default position should be to make data available.

In an information rich society, those who contribute the most get the rewards. This is the point Twitter’s management missed.

Telstra adds Singapore to its Muru-D startup network

Telstra opens its Muru-D incubator program into Singapore as the company expands its Asian ambitions

Today Aussie incumbent telco Muru-D opening in Singapore.

Muru-D is loosely based on Telefonica’s Wayra incubators that the Spanish telco has set up across Europe and Latin America.

Wayra’s fortunes have been mixed recently with the incubators coming off badly in the company’s restructure last year and it’s interesting that Telstra are copying the model of opening in strategic neighbouring markets.

Complicating matters is Telstra’s Singapore based rival Singtel has its own chain of incubators Singtel Innov8. Singtel’s model is different in that they sponsor incubators, Sydney’s Fishburners for example, rather than set up their own Wayra or Muru-D style operations.

So Telstra’s moving into Singapore could be seen as another move by the Aussie incumbent to take on Singtel on it’s own home ground, something that will be assisted by the recent acquisition of PacNet.

Also notable is the Singaporean government’s support for Telstra’s with Kiren Kumar, Director of Infocomms & Media at the Singapore Economic Development Board, welcoming the launch as enhancing the city’s repuation as “the innovation capital of Asia”.

Telstra’s move is another showing how telcos are trying to move out of being utilities along with Telstra’s need to grow out of the domestic Australian market it now dominates.

For Telstra both moves are well outside the company’s historical expertise, it will be interesting to see how successful they are.

Wandering around Wellington

How New Zealand’s capital is becoming a centre of the new economy

It bills itself as ‘the coolest little capital in the world’ however something is going on in Wellington, New Zealand’s capital city, as its technology sector takes off.

Last week I was in Wellington, partly to attend the Open Source, Open Society conference and also to have a look at how the city is doing so well as one of the leading startup cities.

While I’ll have a number of posts about the city, startup scene and conference over the next couple of weeks, it’s worthwhile noting some basic impressions that came from the visit.

The size of the city, Wellington is a small town with a population of 200,000, brings both advantages and negatives for the business and startup communities.

Small is sweet

One of the advantages of being so small is the business community is relatively accessible, a number of entrepreneurs told me how easy it is for them to find the specialists they need given there’s usually two degrees or less separation between everyone.

Normally having a small business community means it gets insular, particularly in a capital city where the business of government can create a bubble effect. What’s notable about Wellington is most of the businesses are looking outward towards the US, Australia and East Asia.

The city’s intimate business environment also improves trust within the community as one Aussie expat told me, “if you rip off anyone in this town pretty well everyone knows about it by the end of the weekend. It keeps everyone honest.”

Being small, the city makes it easy to walk around which compounds the business networking opportunities. A businesswoman, who is also a lifelong Wellingtonian, observed how she allows an extra 15 minutes to walk anywhere as she finds herself stopping for conversations.

Three dominant businesses

Having three successful businesses in the city – TradeMe, Xero and Weta – has both its upsides and disadvantages with the bigger players tending to dominate the employment market and funding opportunities.

Of the three businesses, TradeMe is the most domestically focused while Xero is growing in the tech sector and Weta is the most diverse with its range of special effects and movie production services.

With Weta, the business is exposed to the vagaries of the global film industry as Statistic New Zealand survey of movie production shows.

The film industry is one of Wellington’s important employers with the sector supporting around two thousand businesses in the city, although I didn’t get time to explore how much of an overlap there is between the tech and film industries.

TradeMe is largely a domestic focused business that provides a steady work and skills base for the local workforce. While it’s the least internationally exposed business of the three, it’s probably also the most consistent.

Xero, like Weta, is a globally expanding business and its success is attracting investors and expats from North America and Australia. While its the smallest of the three it’s probably the business that has done the most raise Wellington’s profile in the tech industry.

Community spaces

What’s particularly notable are the number of coworking spaces in Wellington ranging from the straightforward Bizdojo startup space and Creative HQ through to the quirky Enspiral coworking space.

The availability of shared spaces makes the city attractive to startups and adds to the vibrancy of the local tech community which links into hipster pursuits such as craft beer.

Communities like Enspiral also add another dimension to the local startup and creative industries environment by connecting entrepreneurs with their peers and service providers.

Partnerships with government

One aspect I didn’t get to explore while in Wellington was the relationship between the city’s business community and educational institutions, particularly Victoria University.

Similarly I didn’t get the opportunity to discover how much of a role local and national governments have had in the development of Wellington’s tech scene. It seems to be relatively hands off although some government agencies have supported Weta with co-investment funds.

What I did meet though were plenty of immigrants; from Croatia, Denmark, Holland, the US and, most of all, Australia.

Talking to some of the US and Australian expats it was clear that lifestyle combined with opportunity with lifestyle, as one Aussie emigre told me “I couldn’t get the water views, access to the city and be able to walk to work back home like I can here.”

While these are superficial thoughts that I’ll expand on over the next week as I decipher notes and listen to interviews, there’s no doubt that Wellington is carving a position as one of the global centres of the new economy. How big it becomes will depend on how many other businesses grow to the size of Xero or Weta.

Panning for digital gold

A new breed of social media analytics is finding gold in online data.

Today social media analytics startup Vintank announced their acquisition by the W2O Group, a network of data driven marketing and communications firms.

W2O’s acquisition shows how data analytics and visualisation is increasingly an important tool for management in a world where businesses are drowning in information.

Last year Vintank co-founder Paul Mabray spoke to Decoding the New Economy about the company and how social media data is a valuable tool for the wine industry.

“The wine industry is last industry to have been changed by internet,” Mabray says. One reason for this in his view is how that the sector hasn’t had a disruptive startup like Yelp or Open Table to drive change and upset incumbents.

Despite the wine industry’s reluctance to adopt digital technologies, social media and the disruption of established media channels is having a profound effect on the sector’s marketing and sales.

“In the old days there was a playbook originating with Robert Mondavi in the 1970s which is create amazing wine, you get amazing reviews and you go find wholesalers who bring this wine to the market,” Mabray told Decoding the New Economy during a visit to Australia in 2014.

Dealing with global proliferation

Mabray also flags the massive growth in the wine industry as being one of Vintank’s driving forces, “the global proliferation of brands the increase of awareness and consumption patterns where people like wine more, those playbooks didn’t work in 2009 when the crisis started.”

A proliferation of new competitors coupled with disrupted communications channels isn’t unique to the wine industry, the attraction Vintank has to the w2O Group’s president Bob Pearson; “VinTank provides us with a way to create agile audience engines for a brand, where we can learn what an audience is doing online, understand what content they like.”

For many businesses social media is a both an opportunity and a mystery; while customers are telling the world what they’re buying through services like Facebook and Twitter capturing, managing and using that information remains a challenge.

Panning for digital gold

As Robyn Lewis of Visit Vineyards whose database holds details on over 30,000 Australian wineries and associated tourism business says, “the gold is in the data.”

Panning for that gold is Emma LoRusso of Sydney social analytics startup Digivizer who told Decoding The New Economy two years ago “the truth is in data”. Services like Vintank, Salesforce’s Radian6, Klout and startups like Digivizer attempt to add context to that data.

Another aspect of Vintank’s technology is the ‘geofencing’ of information, creating a virtual geographic perimeter so only data relevant in that region is flagged. As well as reducing noise, this increases the value to local wineries and tourist operations.

In some respects the geofencing is possibly the most powerful part of services like Vintank as it allows regional operators to focus on visitors and customers to their districts rather than worrying about national or global activity.

W2O’s acquisition gives Vintank access to a broader market outside the wine industry as well as deeper data analytics capabilities. For W20 the purchase adds to the social media tools the company can offer.

Data driven business

The Vintank deal with W2O shows how the marketing and advertising industries are increasingly becoming data driven. For other business functions this is true as well.

For businesses of all types, understanding the data pouring into their companies is going to be the difference between success and failure in an increasingly digital world. Providing those tools to do so is one of the great opportunities in today’s economy.

The curse of too much money

Having too much money is as bad for a new business as having too little warns a Silicon Valley VC

One of the biggest days in the startup calendar is Y Combinators’s pitch event. This year, the incubator’s president Sam Altman, put a downer on the day by criticising the overly high valuations on new tech business.

“I don’t think founders have to take lesser valuations — their valuations are very, very high,” Business Insider reports Altman as saying.

“I don’t think it’s necessarily good when companies are able to raise money at very high valuations, or raise lots and lots of money” continues Altman.

It’s said a Chinese curse is ‘may you live in interesting times’, for new businesses ‘may you have too much money’ could be equally bad news.

Seizing the agricultural technology opportunity

Can a regional city like Fresno become a centre of agricultural technology?

Does the real opportunity for tech entrepreneurs lie in the agriculture sector? An article by James Fallows looking at Fresno’s startup community for the Atlantic Magazine suggests that might be the case.

Fresno, in California’s agricultural Central Valley, doesn’t have the glamor of the global startup centres but offers a focus on neglected sectors as Fallows quotes Jake Soberal of Bitwise Industries.

“My guess is that 5 to 10 percent of the tech need of the farming industry is now being met,” Fallows quotes Soberal as saying. “You could build a technology industry in Fresno based on that alone, not to mention the worldwide need in agriculture.”

While there isn’t a great need for another coffee app, pizza delivery service or online store, there are far more opportunities in other sectors to address unmet needs.

This is probably where the opportunity lies for cities like Fresno that are trying to create their own mini Silicon Valley – build a technology sector to address the needs of your existing industrial base.

In agriculture there’s a plethora of Internet of Things, Big Data, analytics and other technological applications that addresses issues in the industry. Farming is not the only sector which presents these opportunities.

Fresno’s ambitions aren’t unique but as Fallows points out this is not a zero sum game and there’s no reason why dozens of cities shouldn’t be able to build their own niches with new technologies.

Picture of Fresno from David Jordan via WikiPedia

Copying the Silicon Valley Bubble

Is the Silicon Valley funding model creating a bubble in tech investments

Staying private sucks if you’re a tech company writes Felix Salmon in Fusion magazine.

If you’re giving away stock in lieu of wages to employees or taking early stage funding for equity, then listing, or selling to a larger business, makes sense as staff and investors need to see a return. It’s the unspoken truth of the Silicon Valley funding model.

The Silicon Valley model though doesn’t come without risks, investor Mark Cuban warns a valuation bubble greater than that of the Dot Com Boom has developed as angel investors and early stage venture capital firms have thrown money at startups after Facebook’s massive buyouts of Instagram and WhatsApp.

While Silicon Valley and the US tech market might have plenty of opportunities for buyouts and IPOs, most other places around the world don’t have the deep financial markets and the cashed up software companies to make similar exits possible for local startup businesses.

Again that difficulty in successfully funding exits shows that simply trying to copy the US tech industry model is probably not going to work for most places tying to building their own Silicon Valleys, although it seems China is about to try.

The other message is that the IPO or buyout route is not necessarily the right path for every business, as Salmon says: “Maybe the best solution is not to take any outside funding at all, and not to try to grow too fast.”

“Some family companies have been around for hundreds of years: if you own your own business, and you don’t get greedy, you can build a very pleasant life for yourself. You just won’t end up on any list of young billionaires.”

Can the tech industry’s unicorns escape extinction?

How will Silicon Valley’s billion dollar startups survive their valuations?

“Today we have herds of unicorns,” Fortune Magazine quotes Jason Green, a partner at venture capital firm Emergence Capital Partners, in its story about startups that have achieved billion dollar capitalisations.

When the ‘unicorn’ label was coined by Aileen Lee in November 2013 it was to highlight the rarity of the beasts – on 39 existed at the time.

Today, just on a year later, there are eighty unicorns and the growth doesn’t seem to be slowing as more companies are raising funds or looking at trade sales or IPOs that will value their business at over a billion dollars.

Betting on the unicorns

Some of the business on the Fortune 80 unicorns list – like Elon Musk’s SpaceX and medical testing venture Theranos – are big, brave bets on future technologies which could prove incredibly profitable if successful. These are to today’s market was Google was at the turn of the Century.

Others, such as Xiaomi, Meituan and Flipkart, are betting on massive growth in emerging markets which China’s AliBaba has shown to be huge opportunity.

Some are already profitable and showing great potential to deliver the multibillion dollar valuations; companies like data analytics firm Palantir, developer tools vendor Atlassian and Uber are in this camp.

Many though are platform based, transaction plays that hope to clip the tickets on fields such as rental accommodation, payment systems and e-commerce. Some will be insanely successful but most have a distinct whiff of irrational exuberance about them.

Frothy exuberance

Driving that irrational exuberance is the money tsunami which has overwhelmed the financial sector since the Global Financial Crisis. As Quantitive Easing has fattened the banks’ and corporate America’s coffers, managers have sought to get their lazy dollars doing some work and the startup sector is an attractive, and sexy, place.

That influx of money has in turn has driven a spiral; as companies like Facebook have found themselves cashed up, they’ve bought more companies – Instagram and WhatsApp are the best examples of this – which in turn has increased valuations and expectations across the board.

Some of the risks in this current mania are obvious, but the question of survival when your business is valued so high becomes a pressing issue as Twitter have found with the company flailing around looking for a revenue stream to justify its fifty billion dollar valuation.

Probably the best, or worst example, of struggling to justify massive valuations is found in one of the original unicorns; Google and its YouTube division.

Monetizing YouTube

Right now YouTube is trying to screw musicians with onerous terms in return for, in the case of most artists, will be a pittance. It’s necessary for YouTube to do this so the service can capture as much value as possible to justify the rates of return demanded from its management, particularly as it’s appearing the online display advertising market is beginning to plateau.

That dash to generate revenue may become more common when investor finance starts to dry up; faced with the need to generate cashflow and satisfy the needs of impatient investors who’ve been denied a profitable exit, many of today’s unicorns could find themselves in a difficult position in a tighter VC climate.

Unicorns were once mythical creatures; now they’re real, at least in Silicon Valley, they’re going to have to learn how to fight for survival.