Tag: investment

The challenges of an open organisation

Social media management service Buffer has been open about its management journey. Their latest story illustrates a common business challenge.

“We moved into a house we couldn’t afford” writes Buffer founder and CEO Joel Gascoigne on his company’s decision to fire ten of their 94 staff as revenues miss targets and the venture’s cash burn accelerates.

A few years ago we wrote about Gascoigne’s commitment to being an open company and his post today is a brutal, but honest, reflection of that.

Buffer’s problem is one familiar to many business owners when revenue projections aren’t being met and the tough reality of making unexpected cuts becomes apparent.

Making Buffer even more unusual among tech and social media startups is how the company doesn’t depend up venture capital funding – an advantage for its owners but also a downside in situations like this where being able to raise more money for equity would give the business room to move.

At present however companies following the VC model are in trouble as they are finding investors aren’t so willing to write cheques to loss making ventures unless there’s a clear path to profits.

That reluctance to fund businesses is going to see more layoffs for companies dependent upon VC funding, some startups will fail because of it. The really fascinating part is how many of the tech unicorns will be amongst the failed business.

One hopes though Buffer won’t be among the casualties, Gascoigne and his team deserve to be rewarded for their candour.

Don’t follow the normal route

It’s a good time to startup a business says Technology One’s Adrian DiMarco, just don’t follow the normal route.

Two years ago I interviewed Technology One founder and CEO Adrian DiMarco about his company’s pivot to the cloud and the gold rush among consultants and services providers looking at making money out of cloud computing services.

DiMarco’s founded Technology One in 1987 to compete in the enterprise software space with the likes of SAS and Oracle. At the peak of the dot com boom in 1999, DiMarco listed the company on the Australian stock exchange where it is one of the few genuine tech stocks on the nation’s finance and mining dominated bourse.

Given the focus on listed companies at the moment, DiMarco’s views are worth noting. “if I were to do it again, I’d don’t think I’d go that path,” he says about listing the business. “I have a real issue with how public companies run in Australia.”

DiMarco’s view is at odds with Netsuite’s Zach Nelson who told Decoding the New Economy last month how being on the stock exchange forces management to focus. “Managing a public company is a great discipline and in some ways gives us an advantage over non-public company who don’t have to have discipline and make good investments,” Nelson said.

In DiMarco’s opinion, the regulatory and ‘box ticketing’ requirements of a listed company don’t reflect the true performance of a corporation’s management. “There are mediocre CEOs walking away with millions,” he says.

While listing made sense for Technology One in 1999 those looking at starting a business today shouldn’t necessarily follow his path warns DiMarco, “tor startups these days, don’t follow up normal route.,” he says.

“I think the world’s your oyster to do want you want. Don’t let anyone talk you out of anything,” DiMarco says. “When we started out we were told ‘don’t build enterprise software’. We did and we succeeded.”

“Don’t be scared,” he advices. “It really is a great time to startup a business. The technology is redefining business. It’s a good time.”

Equity crowdfunding arrives late to the party

Equity crowdsourcing comes late to the Silicon Valley party but could it help the capital starved small business sector?

Equity crowdsourcing comes late to the Silicon Valley party but could it help the capital starved small business sector?

As of today, equity crowdfunding is now legal in the United States.

The interesting thing is it appears Silicon Valley is shifting away from the VC model that this initiative was intended to promote among smaller investors.

Whether equity crowdfunding can be applied to ventures outside the tech startup industry remains to be seen, it may be in a world where banks have stepped away from their traditional role of providing capital to business that this is the way for proprietors to raise essential funds.

Diversity and startup success

One investment company believes they have found four factors that predict the success of a startup business – being in Silicon Valley isn’t one of them.

There are four factors that seem to be key to the success of startup business and one that doesn’t reports the Harvard Business Review.

A survey of six hundred investments over the past decade by First Round Capital found the best predictors for success were that at least one of the founding team was a woman, one had been to an elite university, some had worked at a top tech firm and the average age of the team was under 42.

Interestingly First Round’s successful investments weren’t dependent upon the businesses being based in the Bay Area or New York.

Those factors may have something to do with the focus of First Capital’s investment managers but the results are food for thought.

Bootstrapping becomes fashionable for startups

As VC money becomes scarce for startups, bootstrapped businesses could come into their own

“The sincerest form of flattery is that customers will pay,” says Alex Bard, the San Francisco based CEO of Campaign Monitor, an email marketing platform originally out of Australia.

Two years ago we spoke to Bard who at the time was Salesforce’s Vice President for Service Cloud and Desk.com. Since then he left the cloud CRM giant to run the global of expansion of Campaign Monitor. We caught up with him again today at the company’s San Francisco offices.

Campaign Monitor is an interesting company in that unlike most tech startups it has been cashflow positive from its early days and when it did take investor money, half the funds were raised from private equity rather than venture capital funds.

“Because the financing climate in Australia wasn’t as fertile here in the United States – and  San Francisco specifically – until recently, you have a whole crop of tech companies that have been built differently. From day one they’ve been focused on economics and business fundamentals.”

Bard sees this focus on bootstrapping and cashflow as being an advantage in the current funding climate where suddenly unlimited amounts of VC money can no longer be assumed.

It could turn out more conservative companies are better fixed to weather the coming investment drought than today’s unicorns.

Tech’s tightening times

Dropbox’s warning about staff benefits is an indication of tougher times in the Bay Area

Despite having spent a hundred thousand dollars on a chrome panda for their office lobby, Dropbox are warning staff that benefits are about to tighten, Business Insider reports.

The warnings from Dropbox’s management are a clear indication that tougher times are approaching for tech companies. For those wanting to imitate the Silicon Valley greater fool model or get a slice of it, that opportunity may have passed.

Silicon Valley’s unicorn monoculture

Silicon Valley’s obsession with finding the next tech unicorns could be its weakness.

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.

Google focuses on the short term

Google’s reported divestment of Boston Robotics could mark a fundamental change in the business’ culture.

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.

Cutting through Australia’s innovation rhetoric

Investor Steve Baxter talks about some of the strengths and weaknesses in Australia’s innovation statement

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.

Collapsing unicorns and business basics

The first tech unicorn to collapse, Britain’s Powa technologies, reinforces business basics for tech startups

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.

Tough times for startup staffers

Times are getting tough for Silicon Valley’s low level workers

One of the frequently reported things about tech startups is how well they treat their staff. The truth is not always so rosy.

At Yelp staff get free meals, drinks and snacks but many of them barely earn enough to pay the rent. A now fired staffer wrote an open letter to the company’s CEO describing how tough she found working their call centre on a wage that left her destitute.

Similarly Buzzfeed reports working conditions at Zenefits, last year’s hottest startup, are more akin to a boiler room than the nice, relaxed offices of places like Google.

 

While we often portray tech companies as being enlightened workplaces, the truth is they can be as harsh as any other employer. The big question for those working for tech startups though is how long their benefits and jobs will survive as the current funding crunch bites.

Legislating for innovation

Can bureaucrats define innovation? It seems Australia is about to find out as the country’s regulators struggle to decide what businesses will be eligible for taxation concessions under the government’s Innovation Statement.

That bureaucrats are tasked to identify what businesses are worthy ‘innovators’ is worrying for those of us who hoped the new Australian Prime Minister would end two decades of managerial complacency.

Adding to the ‘business as usual’ under the revamped government was a speech by the Minister for Mineral Resources yesterday describing the glowing future of the nation’s resource industry in face of continuing Chinese demand.

While Josh Frydenberg was delivering that speech to Canberra’s National Press Club, the world’s biggest shipping line, Maersk, reported an 83% drop in profits in the face of slowing global trade and collapsing Chinese commodity demand.

Australia’s long term economic policy of riding on the back of a never ending Chinese resources boom is looking shaky, and the luxury of a tax system that favours property speculation over productive investment is increasingly looking unsustainable.

Rather than looking at ways to define ‘innovative’ companies, Australian governments would be better served levelling the playing field to attract investment into new businesses, inventions and productive infrastructure.

Just as a narrow group of tech startups are important so is investment into new plant and equipment for agriculture, manufacturing and tourism. Encouraging workers to attain new skills should also be an objective of the tax system, instead of disallowing school fees and book costs.

The treatment of taxpayers’ education costs versus that of property speculation expenses speaks volumes about the current priorities of the Australian tax system.

For a government wanting to encourage productive, employment generating investment and building a first world economy that’s competitive in the 21st Century, the first priority should be to put all forms of investments on the same footing.

Asking a committee of well meaning bureaucrats to create an artificial group of ‘innovative businesses’ seems unlikely to help Australian workers and businesses meet the challenges of a digital century.