Tag: investment

Knocking at Silicon Valley’s door

Chasing the Silicon Valley model may be a mistake for cities trying to become modern industrial hubs

In opening Salesforce’s new London office yesterday, former BT CEO Lord Livingston described the city as “knocking at the door of Silicon Valley.”

Judging from the Computing UK article that description hasn’t impressed the rest of the British tech community as it confirms in their minds there is, as usual, too much focus on the capital and Livingston’s view also raises the question of whether London really wants to be another Silicon Valley.

Like all global industrial hubs Silicon Valley the result of a series of happy coincidences; massive defense spending, determined educators, clever inventors and savvy entrepreneurs all finding themselves in the same place at the same time.

Trying to replicate the factors that turned the region into the late Twentieth Century’s centre of technology is almost impossible – even the United States couldn’t afford the massive defense spending over the fifty years from 1941 that underpinned the Valley’s development.

Apart from the spending; the culture, economy, geography, markets and workforce of Silicon Valley are very different to that of London’s.

This not to say London doesn’t have advantages over Silicon Valley; access to Europe and relatively easy immigration policies make Britain a very attractive location for tech businesses. If the local startup community can tap The City’s banking resources then London could well be the next global hub.

If London is the next global tech centre – history will tell – it will almost certainly be very different to Silicon Valley.

Strangely, the event Lord Livingston was speaking at reflects how the Californian tech sector is evolving; Salesforce is a San Francisco company and represents a shift in the last five years from the suburbia of San Jose and Palo Alto to the quirky city life of SoMa and the Tenderloin.

At the same time Silicon Valley itself is evolving into something different, just as it did in the 1990s with the switch from microprocessor manufacturing to software development.

That shift illustrates the risks of trying to imitate one industrial hub; by the time you’ve build your replica, the original has moved on.

If you spent your life trying to knock on the door of heroes you want to imitate, it would be shame to finally make it only to find they’ve moved.

Reinventing venture capital

How Google Ventures James Temple wants to reinvent venture capital

James Temple writing in on tech website Re/Code has an excellent profile of Google Ventures founder Bill Maris and his quest to re-invent the venture capital industry.

Certainly the Silicon Valley venture capital industry is ripe for disruption; Maris is not alone in pointing out that most investors in the sector and focused on short term incremental gains like shopping apps and online stores.

Probably the biggest thing that Temple points out in the story is the importance of Big Data to the Google Ventures model, although Maris seems to be acutely conscious of the limitations of relying on algorithms to make decisions;

Because you can 100 percent use data and statistics in exactly the wrong way. That’s a trap some fall into, one that we really try hard to avoid. But I think it’s important to use that as a tool.

The data is a support. It’s just like having your other partners there.

Being skeptical about the infallibility of  Big Data and algorithms seems a very un-Google thing, but it may work well for Bill Maris and his team.

Whether Maris and Google Ventures can upend the Silicon Valley investment culture remains to be seen; the real message though is that the venture capital industry is just as vulnerable to disruption as any other.

Uber’s Travis Kalanick on the highly valued business of disruption

Uber’s Travis Kalanick speaks on his company’s $17 billion valuation

For a four year old business, hire car service Uber is certainly causing a lot of trouble.

Bloomberg Businessweek’s Brad Stone has an interview with the company’s founder and CEO Travis Kalanick on his plans after announcing a 1.2 billion dollar fundraising that values the venture at $17 billion.

Seventeen billion dollars is a hefty valuation for the business and many believe it marks the peak of the current tech bubble, although many of us though Facebook’s billion dollar purchase of Instagram two years ago was that marker.

Kalanick’s views are interesting in his take on that valuation – as he points out the San Francisco taxi market alone turns over $22 billion each year, so Uber’s valuation isn’t beyond the bounds of possibility.

Uber and Logistics

Also notable is Kalanick’s view on the logistics market, something that this blog has maintained is the real business of Uber. In that field, Fedex’s stock market value is $44 billion although Kalanick is discounting the company’s potential in that field.

Right now Uber is on a high, and regardless of any set backs they may get with their ride sharing services, it’s hard to see how the company isn’t going to grab a healthy slice of the global taxi industry and possibly disrupt the logistics industry as well.

Even should Uber end up being the poster child for today’s tech sector irrational exuberance, the company is a stunning example of how businesses we once thought were immune from global disruption are now being shaken up.

Business as a commodity

Becoming a commodity business is not part of the Silicon Valley business model, but it’s the best most startups can hope to become.

What happens when your hot startup turns out to be in a commodity market?

According to Danny Crichton at TechCrunch two of the hottest startups of the last five years, Box and Square may be finding out.

You can make good profits out of a commodity operation – supermarkets around the world have shown you can earn good money from 2c profit on every can of baked beans you sell – but it’s hard work and it’s definitely not glamorous.

It’s also not particularly attractive for investors looking for the next big thing and commodity businesses struggle to justify the massive burn rates

The truth for most startup businesses is this is as good as it gets; no billion dollar buyout, no adulation from the tech press and no buying a yacht to rival Larry Ellison’s. Just a decent return from hard work.

While many of us blinded by the billion dollar success stories of Facebook, Google and Amazon, it’s worthwhile considering that most successful businesses are far more modest ventures.

Counting the cost of investors

Israeli startup Waze illustrates some harsh truths for business owners who lose control of their company.

Israeli tech startup Waze was always an interesting business; the idea of combining crowdsourcing and social media to provide traffic reports was fascinating concept that seemed to work well.

When Google bought the company two years ago, it was seen as one of the success stories for Israel’s vibrant tech startup scene, but a LinkedIn post by Waze’s founder Noam Bardin suggests the acquisition was not what the founders wanted.

One of Waze’s mistakes was the valuation of its A round which significantly diluted the founders. Perhaps, had we held control of the company, as the Founders of Facebook, Google, Oracle or Microsoft had, Waze might still be an independent company today.

Not being an independent company is also a weakness for Waze, as Google have shown in the past they are ruthless in shutting down businesses they’ve acquired and there’s no guarantee that Bardin’s creation won’t meet the same fate.

Google though are not alone in this, Yahoo! is notorious for neglecting companies they’ve acquired and today Microsoft announced it’s closing the Farecast travel price prediction service it bought for $115 million six years ago.

Oren Etzioni who founded Farecast in 2004 isn’t happy about this according to Geekwire, however that’s the downside of selling your baby to another business – its destiny is now in the buyer’s hands and their vision may not be the same as the founders’.

A good example of a company controlling its destiny is Atlassian, the Australian founded collaboration tool service, which the Wall Street Journal describes as being “one of the world’s most valuable venture-backed companies.”

In many respects Atlassian is the opposite of the Silicon Valley business model with an emphasis on engineering and product development over sales and marketing. Atlassian’s founders aren’t focused on hyping the business with the aim of selling to a deep pocketed greater fool.

For founders, the tricky balance in raising enough money to achieve their objectives while not giving away a controlling interest. Get it wrong and a founder ends up being forced into a course of action they didn’t want to do, as Noam Bardin found.

Bardin’s post on the Israeli business community and startup scene is an interesting perspective into the strengths and weaknesses of the country’s entrepreneurial culture, much of which would be familiar to many outside of Silicon Valley.

One big lesson though for founders, Israeli or otherwise, is don’t give away too much equity too early, or the investors make take you to places you didn’t want to got to.

Context and the digital divide

Paul Mabray, founder of US online monitoring service Vintek, sees a digital divide developing as businesses struggle with social media big data and Facebook.

“This is the most difficult time in history to be a wine maker, declares Paul Mabray, Chief Strategy Office and founder of Vintank.

“Never has the wine industry been as competitive as it is today.”

Update: The Wine Communicators of Australia, who sponsored Mabray’s visit, have posted Paul’s presentation that covers this post’s theme in more detail.

Mabray’s business monitors social media for wineries and collects information on wine enthusiasts. Since Vintank’s founding in 2008 the service has collected information on over thirteen million people and their tastes in wine.

Rewriting the rule book

Social media, or social Customer Relationship Management (sCRM), is what Mabray sees as being part of the future of the wine industry that’s evolving from a model developed in the 1970s which started to break down with the financial crisis of 2009.

“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.”

“As a result of 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.”

With the old marketing playbook not working, wineries had to find other methods to connect to their markets and social media has become one of the key channels.

Now the challenge in the wine industry, like all sectors, is dealing with the massive amount of data coming in though social media and other channels.

The cacophony of data

“If you rewind to when social media came out, everyone had these stream based things and the noise factor was so heavy,” says Mabray.

“For small businesses this creates an ‘analysis to paralysis’ where they’d rather not do anything.”

Mabray sees paralysis as a problem for all organisations, particularly for big brands who are being overwhelmed by data.

“The cacophony of data at a brand level is just too much,” he says.

“It’s as noisy as all get go and I think the transition is to break Big Data down into small bite size pieces for businesses to digest is the future, it shouldn’t be the businesses problem, it should be the software companies’.”

A growing digital divide

Mabray sees a divide developing between the producers who are embracing technology and those who aren’t, “the efficiencies attributed to technology are obvious whether they’re using CRM, business intelligence or other components.”

“The people who are doing this are recognising the growth and saying ‘hey, this stuff actually works! If I feed the horse it runs.”

While Mabray is focused on digital media and the wine industry, similar factors are work in other industries and technology sectors; whether it’s data collected by farm sensors to posts on Instagram or Facebook.

Facebook blues

Mabray is less than impressed with Facebook and sees businesses concentrating on the social media service as making a mistake.

“I think that every social media platform that’s been developed had such a strong emphasis on consumer to consumer interaction that they’ve left the business behind, despite thinking that business will pay the bills.”

“As a result almost every single business application that’s come from these social media companies has met with hiccups. That’s because it wasn’t part of the original plan.”

Facebook in particular is problematic in his view, “it’s like setting up a kiosk in the supermall of the world.”

The business anger towards Facebook’s recent changes is due to the effort companies have put into the platform, Mabray believes; “everyone’s angry about Facebook because we put so much into getting the data there.”

“We said ‘go meet us on Facebook’, we spent money collecting the items and manufacturing the content to attract people and now we have to spend money to get the attention of the people we attracted to the service in the first place.”

Despite the downsides of social media Mabray sees customer support as one of the key areas the services. “It’s easy to do in 140 characters.”

Context is king

“Everything come back to context. There’s this phrase that ‘content is king’,” Mabray says. “Context is king.”

“Anyone can produce content. It’s a bull market for free content. We have content pollution – there’s so much junk to wade through.

Mabray’s advice to business is to listen to the market: “Customers are in control more than they have ever been in human history: Google flattens the world and social media amplifies it.”

For wineries, like most other industries, the opportunity is to deal with that flat, amplified world.

Kickstarter and ownership

Has Kickstarter funded startup Oculus discredited crowdfunding with its sale to Facebook?

The purchase of virtual reality headset designer Oculus by Facebook has raised some interesting questions about crowdfunding sites.

As the Wall Street Journal reports, many of those who contributed to the Kickstarter campaign that Oculus ran now feel betrayed by the company selling out to the social media giant.

Founder Palmer Luckey explained the companies sale to the WSJ as a quest for more funds; “a lot of people don’t understand how much money it takes to build things — especially to build hardware.”

Crowdfunding is tough

That ties into what founders have told Decoding the New Economy about crowdfunding startups; it’s tough and it easy to underestimate the capital required to launch a project.

Ninja Blocks’ Daniel Friedman told Decoding the New Economy last February that the main thing the company had learned from its successful Kickstarter campaign is that crowdfunding is a good way to raise funds for specific projects but a lousy way to fund a business.

Moore’s Cloud wasn’t as successful as Ninja Blocks and in his Decoding the New Economy interview, founder Mark Pesce described how he’d “rather eat bullets” than crowdfund a hardware startup again.

Startups are always hard, but it’s difficult not see how the high moral purpose often citing from Kickstarter project founders clashes with the ruthless moneymaking of Silicon Valley.

Discrediting crowdfunding

The criticism of Oculus also illustrates how crowdfunding lies between traditional investment and sales; those contributing to crowdfunding projects are true believers, not just customers and certainly not investors in a legal sense.

In recent times Kickstarter has been discouraging hardware startups from using their service; mainly because of the high risk of failure and disaffected contributors. The unhappiness with Oculus vindicates that move.

Oculus’ sale to Facebook may make many Kickstarter contributors doubly wary of Silicon Valley style startups trying to raise funds through crowdsourcing campaigns.

Lords of the Digital Manor

Looking at Oculus’ move, it’s hard not to conclude we’re seeing another cynical version of the Lords of the Digital Manor business model where enthusiasts are exploited by entrepreneurs looking for the big Silicon Valley pay off.

For Kickstarter and the other crowdfunding platforms, this is a problem as cynicism about the motives of those posting projects is probably a greater risk than the fear of being ripped off.

It may well be that Oculus marks a big change in the types of projects that get successfully funded, certainly the next hot hardware startup that tries crowdfunding is going to find things much harder.

David Cameron and the Internet of Things

Britain’s Prime Minister backs the nation’s move into the Internet of Things

Last year I interviewed the CEO of London and Partners, Gordon Innes, on how Britain’s capital is making a bid to become Europe’s Silicon Valley.

At the opening of CeBIT last night, UK Prime Minister David Cameron increased the country’s bid with a plan on building Britain’s capability in the digital industries.

Cameron portrayed the moves as being a partnership with Germany. This may be partly because he was being gracious towards his host and also because the Brits might not see Germany as being a competitor in these fields.

The fields that Cameron highlighted are deploying 5G networks, more efficient use of spectrum and increasing research into the Internet of Things.

A research boost is a notable as it may give the Brits a foothold in an area that’s evolving rapidly as the Internet of Things raises a whole range of security, privacy and governance issues.

While there’s still a sniff of Harold Wilson’s 1963 White Heat of Technology speech in the Cameron government’s policies, at least the British government is articulating policies for the 21st Century.

It may well be that Cameron’s digital revolution will be no more successful than Wilson’s technological revolution fifty years ago, but at least it will be a brave attempt.

On looking foolish

Looking foolish is one of the biggest risks when taking chances in business. It’s something every innovator and entrepreneur has to consider.

Looking foolish is one of the biggest risks when taking chances in business. It’s something every innovator and entrepreneur has to consider.

Venture Capital investor Mark Suster explains why he doesn’t mind looking foolish with his choice of investors on his blog today.

One of the toughest things in life is taking the risk of looking foolish in front of your peers yet that’s what the real high risk inventors, innovators and entrepreneurs do with their ventures.

Light bulbs and the telephone looked ridiculous to many at the time they were invented and no doubt the inventor of the wheel or the Neanderthal who came up with the idea of cooking meat in a fire both probably received a far bit of scorn when they told the others in their tribe about their idea.

While Suster is talking about ‘moonshot investments’, even the most modest venture is going to attract scorn.

There would be few people who decided to buy a doughnut franchise, establish a cafe or set up a lawn mowing service who weren’t told by some of their relatives, friends or colleagues that they are doing the wrong thing and they should stick to their safe job in their cosy cubicle.

Should someone want to change the way doughnuts are made or lawns mowed, then they can expect even more naysayers laughing at them.

In this current craze about ‘entrepreneurship’ it’s easy to overlook the real costs and risks of running any sort of business. Looking foolish is another of those risks.

Having a thick hide is another useful attribute when you’re investing, running a business or changing an industry.

Startup economics

The failure of Everpix is a good lesson for any business founder.

Business advisor Ivan Plenty’s in-depth study of the viability of failed photo sharing startup Everpix with some useful lessons for business owners in any industry.

Everpix shut down last November having run out of money despite getting favourable reviews from the tech press and in an unusual move, the founders put the company’s financials up on GitHub.

As Plenty points out in his analysis of Everpix’s finances, the company was unlikely to ever break even and it’s a lesson to every business owner on the importance of keeping an eye on cashflow and understanding where the venture’s break eve points are.

One of the key take-aways from Plenty’s analysis was that the base costs of the business were too high and even in the best circumstances it was unlikely that venture would have succeeded.

A good business plan would have helped the founders understand this problem and it illustrates why rigorously developed cashflow forecast is a great tool for a manager or proprietor.

The Silicon Valley investment model

The ultimate objectives of a company’s management are always important when considering the success or failure of a business; what objective is the business working towards?

In Everpix’s case, it may well have been the Silicon Valley Greater Fool model was a likely end, with good software and a growing customer base the company could have been attractive to a buyer.

Were that the objective of Everpix’s founders, the company was under-capitalised as management couldn’t afford either the burn out or the PR and marketing team essential for raising the venture’s profile with key investors.

Under-capitalisation is one of the greatest problems for any new business and its clear that Everpix didn’t have the equity to scale the way it needed.

Capital on its own though isn’t a panacea, from Ivan Plenty’s analysis the indications are that Everpix’s fate would have been the same, but more drawn out.

Everpix’s failure and the numbers behind it are a good lesson for anybody thinking about starting a business — numbers matter and businesses live and die by them.

What do startup founders really earn?

A global survey of salaries drawn by startup founders illustrates some truths about being a business enterpreneur

One of the myths of the current cult of the entrepreneur is that everyone will be a winner as their startup gets bought out by Google for a billion dollars. The reality is life for a startup founder is a grind.

Startup Compass looked at 11,000 startups across the world to discover what founders really earn and the results show the reality of life when you’re starting up a business is that the wages are pretty poor.

In San Francisco, London and New York, the wages are piddling compared to the cost of living in those cities.

Low pay and business success

This is good news for investors though, as there’s a clear correlation between the success of a startup business and the salaries its key staff members draw – successful businesses are built on the back of founders ploughing everything into the venture.

It’s also high risk as a failed business can leave the founder with nothing to show for several years of hard work, something that’s overlooked by the ‘liberate yourself from your cubicle’ gurus advocating everyone starts up their own venture.

Australia’s high cost economy

Notable in the stats is the high rates demanded by Australian founders, more than 25% higher than their Silicon Valley counterparts and a gob-smacking 60% more than London or Canadian equivalents.

Australia’s high cost of doing business was emphasised last year where a comparison by Staff.com found Sydney was the second to Zurich as a place to base a tech startup. Worryingly, that survey didn’t consider owners’ drawings.

Part of Australia’s high wage requirements are no doubt due to the country’s lousy tax treatment of options and share plans but a bigger problem is property ownership – an Australian who hasn’t bought a home by 35 is destined to be one of the nation’s underclass.

So an Aussie entrepreneur has to earn enough to qualify for or service a mortgage, it also discourages Australians from starting even moderate risk ventures.

The consequence of the need to draw a high salary is that the proportion of investor funds that goes into founders’ wages is almost three times higher in Australia than it is in Silicon Valley. That’s a big disincentive for foreign investors to put money into Aussie startups.

If you wanted an example of how uncompetitive the Australian economy has become, this is a good start.

Regardless of where a startup is based though, the message remains that the road to a billion dollar buyout from Google or Facebook is not paved with gold.

Dangerous liaisons – the risks in government support

Government investment money isn’t free or easy as a UK entrepreneur found.

“I coulda bin a contender” is the first thing that comes to mind when reading The Register’s story on how the iPhone could have been a British invention.

However the tale of British engineer Andrew Fentem and his struggles with the UK investment bureaucracy is a warning to all of those who think that government support programs are an easily solution for getting ideas to market.

Fentem’s story is a common one around the world – an inventor approaches a government agency which agrees to support the project and then bogs the entire venture down in paperwork and bureaucracy.

In some respects this is understandable as bureaucrats and politicians are deeply risk averse, which is fair when taxpayers money is involved, with the result that justifying an investment is going to be more about ticking boxes and meeting criteria rather than genuinely helping projects succeed.

During my short stint in working for a government agency every week would see at least three people contacting me about taxpayer support for their businesses.

Most of the time there was no godly reason for the government to give these folk a penny and it took the few diplomatic skills I have to politely break the news they had little prospect of getting a grant or subsidy.

Some approaches though were very good projects but usually I’d warn the inventor or entrepreneur that any support the state government would give them would come at the cost of spending hours completing irritating paper work.

My advice was that driving a cab and living on noodles for six months to raise the capital would be a better investment of their time than dealing with grey suited bureaucrats like me.

This advice didn’t always go down well, but it was better for both the taxpayer and the entrepreneur in the long run.

Well thought out government programs can do a lot of good for businesses or inventions that might not otherwise come to fruition, although many of the success stories probably have as much to do with the calibre of the public servants running the scheme as they do with the programs themselves.

In the case of Andrew Fentem and his touchscreen technology it’s almost certain that the folk at NESTA were out of their depth and far more comfortable with subsidising trips to Las Vegas for circus clowns, which in itself is a valuable lesson for governments on defining programs and supervising agencies.

Raising funds for any business or invention is a tough game anywhere in the world and assuming governments are an easy way to find money is as flawed as any other misconception about building a startup.

The moral is government money in neither free nor easy if you’re an inventor or an entrepreneur.