Tag: startups

Maintaining an organisation’s values

Creating real wealth and value while staying true to a company’s founding principles are what Zendesk founder Mikkel Svanes finds important in business

“I always compare it to moving out of your family’s basement,” says Zendesk founder Mikkel Svane about his company’s going public last year.

Svane was talking to Decoding The New Economy after 18 eventful months that have seen the company go public and his publishing of a book on the journey of taking a startup to the market.

“There’s a lot of things you have to do different,” says Svane on becoming a listed company. “You’re on your own in many ways and you have to explain how things make sense. I think we’ve really embraced it and we enjoy it.”

Relaxed about the unicorns

While Zendesk was never classified as ‘unicorn’, having never been valued a billion dollars while private,  Svane is relaxed about the stratospheric valuations of the current group of tech unicorns.

“Most of these unicorn companies are amazing, they are changing the world and the lives of people,” he says. “Even if there is a correction most of these companies will do fine.”

“The thing about the private market is you don’t have pessimism build in, you only have optimism,” Svane explains. “But in the public markets there are people shorting your stock because they have a different view, you don’t have that when you’re private. That’s why valuations can get a little out of control.”

Taming the enterprise

For Svane, his optimistic view comes partly from Zendesk’s entry into the enterprise market, “in the last couple of years we’ve had some incredible momentum. We’ve done that while we’ve stayed true to our roots, to the small businesses and the startups.”

“Enterprises have a different set of needs and issues, the bigger you get as a company the harder it is to be agile and nimble.”

“Companies have hundreds of thousands of customers, they have millions of interactions and have all these data points. Managing these data points is hard. They also have to deal with compliance and have to figure out all these different things.”

Understanding one’s values

Figuring out many different things is one of the themes touched on Svane’s book Startup Land which he sees as being important in helping both he and the company understand their values, “I thought it was important to be honest about our roots and where we come from.”

“We haven’t sorted everything out,” he says. “Things are still complicated for us and we’re still in the early stages of building the company we want to build.”

“I think it’s important when you’re a fast growing company, doubling in size every year, having an anchor point about what you are is important. If you have a good clear idea of where you come from and why you do what you do it’s easier.”

Creating business value

“The process of writing this book helped me understand a lot better why we’re doing this. Not that I found the answers but now I have a much better understanding.”

For Svane one of the things he’s proudest of over the past two years is how many people that Zendesk’s success has helped, “it’s important to create wealth for every one. One of the things I’m proud of is how we’ve created wealth for regular employees, we complete changed their lives.”

“As long as you’re creating real wealth, not just for shareholder and investors, then that’s something to be proud of.”

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Unicorns and railways

Today”s unicorn boom is reminiscent of the 19 Century railway boom

In the nineteenth century investors gambled and lost millions on railways being built around the world, particularly in South America.

Today we’re seeing a similar frenzy with tech startups, as Zero Hedge points out the combined valuation of the US unicorns is $486 billion with a combined profit of zero.

For some of those unicorns that measure is unfair as they will eventually be profitable although, as Twitter has shown, they may struggle to justify their fat valuations.

Many however will vanish, just as the South American railways did 150 years ago.

Of the railways lines that were built, many bought great change and prosperity to the communities they connected but even there many of the investors did their money.

It’s not hard to think we’re living in similar times today.

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Controlling the unicorns

Times could be getting tough for the tech unicorns as money starts getting tight

Last week Salesforce founder Marc Benioff warned the tech unicorns – companies valued at over a billion dollars based on investor funding – were leaving their stock market debuts too late.

The initial public offering of payments platform Square bears Benioff’s warning out, with the company’s IPO market value being less than the company’s implied value at its last private fundraising.

What’s notable about the unicorns’ reluctance to go public and the limited nature of the stock market floats – Square is only making 8% of its equity available – is the desire from founders and key investors not to relinquish control.

For the moment that desire not to cede control is tolerated by investors but in a declining market, shareholders may not be so tolerant.

Times could be about to get tough for the unicorns as the downside of massive valuations becomes apparent.

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Getting crowdfunding right

The success of Flow Hives in raising money for its beehive project is a good case study on getting a hardware startup right.

Crowdfunding is not for every business or project, however the great story on the success of Flow Hives shows how it can be done right.

Flow Hives, based on the North Coast of the Australian state of New South Wales, is a father and son business that has cracked the way for consumers to raise bees and get fresh honey from the hives without having to suit up.

There’s a few notable points in Flow Hives’ story  that challenges a lot of the basic wisdom about starts ups and funding we’re hearing at the moment.

Taking the long path

Flow Hives’ founders,Stu and Cedar Anderson, spent ten years getting the basics right. That’s a long time to get a Minimum Viable Product to the market.

On top of that, they were experienced bee keepers, not keen young outsiders looking to ‘disrupt’ what they saw as a staid industry.

Carefully choosing support

Like all good Australian businesses, the Andersons’ first stop was at the government where they found the support programs were too cumbersome and onerous. Another problem they’d have encountered with that path would have been the funds available are trivial compared to the time spent on compliance.

They found a similar thing with the courting of investors being too much of a distraction and, rightly, saw that VC and seed money is actually quite expensive. This made crowdfunding a viable options.

Selecting production methods

While 3D printing worked for prototypes it didn’t scale for production runs. Knowing they’d need injection moulding for their plastic parts, the Andersons chose a local supplier rather than dealing with the lowest cost operator in China so they would have better control over their supply chain.

Coupled with choosing a local supplier for their plastic components the Andersons’ also chose a US supplier for the wooden enclosures based upon the service they received.

Going with trusted suppliers meant they were able to get a good product to market quickly. When a Chinese company attempted a cheap imitation it failed because of the shoddy quality.

The Flow Hive story is a good reminder that the principles of the today’s tech startup culture are only applicable to small group of the businesses in specific sectors.

In a diverse economy, there’s many different other business principles and models that might apply. Trying to shoehorn one type of business into a different model may well be a mistake.

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Building a digital hub – and why governments shouldn’t try.

The experience of the Sydney Digital Hub shows why Australian governments struggle to create industrial centres.

“I’m not sure what to do with this,” frowned the public service executive to a group of blank faced departmental staffers. “I’ll take it,” I said to break the silence.

With that, I was on a journey into exactly what Sydney’s startup and digital media communities looked like and learning why governments struggle to build technology hubs.

I’d been working for the state government for two months after a specularly unsuccessful exit from a business and in the shadow of the 2008 financial crisis getting a public service job seemed like a good idea.

Vague ideas

The project being discussed by Bob, my then director, was a single line in the recommendations from the then Premier’s Jobs Summit which was convened in the panicky dark days of the 2008 global financial crisis – “A digital hub will be setup around the Australian Technology Park.”

Bob, and the management of the New South Wales Department of Trade and Investment had little idea of what a ‘digital hub’ was and my position of ‘Manager, Creative Industries” – with a staff of precisely zero – was vague given the state’s support to the creative industries was, and remains, based on throwing big buckets of money at the Hollywood movie studios.

So the Sydney Digital Hub was born and the quest to find out exactly was was needed, or at least would keep the Premier’s office happy, was on.

It immediately became apparent the Australian Technology Park wasn’t going to be the centre of anything as far as Sydney’s startup community was concerned. The complex was too far away from the city and too expensive for most of the businesses.

Replacing what’s existing

“We already have a digital hub,” was the other response. “It’s Surry Hills.” Which was a far call as a large part of the Sydney startup and digital media communities were based in the suburb on the edge of the city’s centre.

This actually worked well as the exact wording of the committee’s recommendation was “create a digital hub around the Australian Technology Park.” In this case, Surry Hills was ‘around’ the ATP.

Eventually the project became Digital Sydney and by the time it was launched, the state had gone through two Premiers, elected another party into government and I was long gone from the department, having lasted just 19 months.

Before leaving, I had managed to steer through a million dollars in funding for the project from the then Labor minister – since caught up on corruption charges surrounding coal mine leases – which, to their credit, was honoured by the incoming Liberal government that took power shortly after.

Dying a slow, unfunded death

That funding was renewed and the project died a slow death, which didn’t really matter as Sydney’s startup and digital media communities had developed despite of, not because of, any government policies. Indeed, the New South Wales’ government’s economic development policies were, and remain, focused on property development and coal mining.

Which brings us to the present day, where the Sydney startup community is upset at the Sydstart conference being poached by the Victorian government and moving to Melbourne on the promise of a million dollars in support as part of the state’s startup program.

The promoters of the now relocated and renamed conference are adamant it matters, but the truth is it doesn’t. In fact the biggest ticket item of NSW government support to the IT sector is the annual CeBIT conference that in truth has added little to the state’s technology industry and many similar initiatives in Victoria have had a similar lack success.

A lack of long term vision

Part of the reason for that lack of success is a lack of consistency and long term strategies, in fact the Australian Technology Park itself is under threat as the state government looks at selling the site to apartment developers despite the protests of the tech community.

Another aspect is state sponsored conferences, hubs and initiatives are not enough to create an industrial centre. There has to be an organic, or business, reason for a hub to develop.

For industry hubs, be they tech startups or anything else, the core need is a critical mass of investors and skilled workers with easy access to markets. For internet based businesses, the latter isn’t an issue which is why Wellington in New Zealand has done better than either Sydney or Melbourne in recent years.

Providing stable frameworks

The role of governments in this is to provide a stable framework for businesses to work within, something that hasn’t been a feature of state or Federal Australian politics in recent years with leadership instability and the increasing prevalence of policy by thought bubble, a good example being the latest scheme to create a new technology hub even further out of downtown Sydney on the site of disused power station.

While the talk of government sponsored initiatives is nice and keeps my former colleagues at the state government occupied writing ministerial briefings on pink paper, building the tech hubs of the future needs motivated entrepreneurs, investors and skilled workers. The best thing governments can do is make sure they encourage all three groups and leave the community building to the community.

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The new one percent

In many ways the backlash against AirBnB and the tech community in San Francisco is of their own making.

Today San Francisco goes to the polls and one of the many questions being put to voters is Proposition F, an initiative to put restrictions on short term rentals.

Also known as the AirBnB initiative, Proposition F is also being seen as part of San Francisco residents’ push against the tech community’s takeover of the city.

In countering the Proposition F supporters, AirBnB hasn’t helped its case with a clumsy public campaign and an aggressive $8 million war chest to support the initiatives opponents, but the real problems for the service lie in the hostility towards the tech and startup community in general.

A notable thing about the new tech community is how their staff are isolated from the community around them. Probably the worst example of this in Southern California where Google has been accused of harassing homeless people on the public footpaths around its Venice Beach complex.

While having onsite facilities may make sense in remote Silicon Valley business parks, in city areas like San Francisco this only creates hostility from those who feel displaced by the new elite.

The remoteness of the new tech elite is also shown in their companies’ attitudes towards customer support. Services like AirBnB, Facebook and Google consistently try to reduce their support overheads by pushing responsibility onto users and contractors by making it difficult, if not impossible for the public to contact them.

Inevitably that remoteness from the general community breeds distrust and hostility. Which is what we’re seeing now being directed towards AirBnB.

Paradoxically, despite the hostility towards the tech community and AirBnB, they are probably not the reason for San Francisco’s soaring property prices as around the world the price of homes is soaring as the effects of cheap money filter through investment markets.

As long as those prices keep soaring beyond the reach of working and middle class residents, AirBnB and the tech community can expect to continue feeling the pressure. Although it’s not hard to think though that a bit of humility might help their case.

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Crowdfunding future businesses

The SECs rules on crowdfunding are welcome, but more needs to be done to spark investment in the businesses of the future.

Three years after the Jobs Act was signed into law by President Obama, the US Securities and Investment commission has proposed the rules for crowdfunding business capital.

Behind the Jobs Act was the idea that new ways of funding businesses are needed in an era when banks, thanks to the flawed Basel Accords, have stepped away from what could be argued is one of the key functions of a financial systems – funding the wheels of commerce.

So the new regulations are needed and the idea that funding can be raised quickly from crowds of supporters is one that ties well with the current ideas of crowdfunding products.

Crowdfunding a business, particularly where equity is involved, is a very different matter than asking supporters for a few hundred dollars to manufacture a smartwatch, produce a music album or write a book. Modern securities law is based upon three centuries of charlatans defrauding investors.

The SEC’s caution is clear in the guidelines that restrict crowdfunding to a small group of businesses seeking funding through Federally approved services and drastically limit the amounts that can be raised.

  • A company can raise a total of $1 million through crowdfunding in a 12-month period
  • In any 12-month period, individual cannot stake more than $100,000.
  • Individuals earning less than $100,00o per year can invest either $2,000 or 5% of their annual income.
  • People with greater than $100,0000 can stake 10 percent of the lesser of their annual income or net worth

For companies the eligibility for crowdfunding even tighter with the following prohibited;

  • non-U.S. companies
  • securities trading companies registered under the Exchange Act
  • certain investment companies
  • companies the SEC has disqualified
  • companies that have failed to comply submit annual reporting requirements
  • companies that have no specific business plan
  • Companies that have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.

That latter provision presents a problem for the tech startup based upon the current Silicon Valley ‘greater fool’ business plan however luckily for them, crowdfunding equity won’t be countered for companies worth under $25 million for other securities reporting requirements.

What will be interesting is how savvy startup founders can use these rules – perhaps use this system to create a company structure and then use product specific crowdfunding projects to raise working capital.

Just like project based crowdfunding, it’s likely these schemes will be used as a market test to measure community interest in a business. This may well also be a way to attract investors hungry for hot new startups to invest it.

What is likely though is the current insider driven model of startup funding will remain. While there’ll be many worthy businesses seeking capital through crowdfunding, we can be sure the bulk of startup money will come through the insular world of VCs and tech investors.

The main criticism though of these proposals are the low limits. This will make crowdfunding unworkable for all but the earliest and smallest of new ventures. The money will be handy for those who qualify, but more needs to be done to spark investment in the businesses of the future.

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