Tag: venture capital

Snapchat and the curse of Big Money

Snapchat shows that too much investment money is not always good for a growing business

Goldman Sachs fesses up to making a huge mistake about Snapchat, telling investors in an analyst note how they over-estimated the company’s potential and ability to execute on advertising opportunities.

There’s much to be said about Wall Street’s role in supporting Silicon Valley’s greater fool model and Business Insider has certainly been across how Goldman Sachs and its fellow bankers have been less than honest in their public dealings over the Snap float.

While the ethics and behaviour of Wall Street bankers and venture capital investors is a worthy topic for discussion, one of the notable things about Snap’s float is that it was too expensive.

The initial IPO valued the company, which at the time was reporting $500 million a year in losses, at $28 billion dollars. It’s not incidental the float incurred $85 million in advisors’ fees to Goldman Sachs and their friends.

A high valuation might be good for the early investors and employers – particularly those who sold in the initial ‘stag’ that saw the stock jump 60% on its first day – but for the company itself, and the later shareholders, it’s a disaster as the business’ management frantically struggles to find revenue streams to justify the market price.

This is the same problem that has crippled Twitter, instead of focusing on long term value to customers, users and shareholders, the company has desperately flailed around looking for quick hits to its revenue numbers.

While Twitter and Snapchat are outliers, the same problem faces smaller businesses which have attracted huge investments. The pressure to justify the money at stake becomes crippling and almost always damages the long term prospects of the company.

Too much investor money is rarely a good thing. As with much in life, quality and not quantity is what really matters for companies looking for capital.

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Reverse financing a manufacturing revolution

3D electronics printing startup Nano Dimensions illustrates some fundamental changes in finance, business and manufacturing

Nano Dimensions may not have shipped a product since it was founded in 2012 but is worth $49 million dollars and was Israel’s best performing tech stock last year reports Bloomberg Business.

It’s not surprising that Nano Dimensions has caught the imagination of investors, the company was founded in 2012 to develop advanced 3D printed electronics, including printers for multilayer PCBs (printed circuit boards) and the nanotechnology-based inks those machines rely upon.

Should the technology prove successful, the application of those printers in fields like rapid prototyping is immense. The company speculates their devices may even get RFID tags down to the magical one cent figure which opens may opportunities in industries like logistics and retail.

In a GeekMe profile of the company last June, the writer even speculated Nano Dimensions could be heralding a disruption to the electronics industry similar to that the music industry faced when home users could burn their own CDs and stream music.

While that – and the speculation that 3D printing of electronic devices will kill Chinese manufacturing – may be some way off, it isn’t hard to see the potential of this technology.

The Israeli aspect of the Nano Dimensions story is interesting as well, with the company receiving a $1.25 million investment from the country’s office of the chief scientist after it was reverse listed onto the local stock market by taking over a moribund company.

For countries like Australia, Canada and the United States which are likely to have many moribund small mining and energy on their stock markets in coming years, such reverse listings may be an opportunity to spark their tech sectors with fresh capital and talent.

 

While Nano Dimensions is still very a speculative venture, the company illustrates a number of possibilities for 3D printing, electronics, the Israeli tech industry and the future of fund raising at a time when the Silicon Valley venture capital model seems to be under stress.

Another fascinating aspect of Nano Dimensions is that it’s one of the new breed of hardware startups, a field that until recently was dismissed as ‘too hard’ by most tech investors. Overall, the Israeli businesses an interesting company to watch for many of the aspects it touches upon.

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When startup growth pains prove fatal

The startup investment model can work against building a sustainable business

One of the most dangerous things for a startup business is trying to grow too quickly.  In his blog, Jun Loayza describes how RewardMe, one of the startups he was involved in, failed after it tried to scale to fast.

In his list of factors that led to RewardMe’s demise Loayza cites an undue focus on customer acquisition, however this is a fundamental part of the current Silicon Valley greater fool model.

As the exit strategy is to sell the business, whether it’s to a trade buyer or through an IPO,  the aim is to maximise the value of the operation ahead of that sale. Boosting the numbers of users is a key task for management.

Loayza says in retrospect he would have liked to focus on product development rather than user acquisition, but that’s a luxury not available when you’ve taken venture capital funding.

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Getting fat on venture capital

Going for big investment dollars could backfire on the founders of startup businesses

“Raising money is like ordering dinner,” says startup founder Geoff McQueen about attracting investors. “If you’re only a little bit hungry, you should only buy an appetizer.”

McQueen was writing about his company, professional services platform Affinity Live, achieving its first round of funding. While the amount raised is a relatively modest two million dollars, the main gain for the company is getting some experienced business people on board.

Unlike many of the high profile billion dollar ‘unicorns’, cash flow positive businesses like Affinity don’t need large swags of cash to grow. As McQueen points out, big investment rounds put pressures on management and risks the company’s culture changing “from one of discipline and taking on the world to one of comfort and entitlement”.

Pushing out the owners

Another risk for founders is they could end up diluting themselves out of the business they’ve built, as venture capital investor Heidi Roizen points out it’s possible for the creators of a billion dollar startup to find themselves broke.

Roizen observes “venture capital is not free money. It’s debt. And then some”, something that’s overlooked by many commentators who think a fund raising – and the resultant valuation  – goes straight into the pockets of a company’s founders.

Unless it’s Google Ventures doing the investment, it’s unlikely the founders will be buying Porsches after a VC round and usually the funding goes into growing the business. For many big name startups those capital needs can be huge as we see with Uber where reports indicate the company is currently losing two dollars for every dollar it earns.

Beating the burn rates

Most businesses though can only dream of burn rates in the hundreds of millions a year and their needs are far more modest illustrating McQueen’s point about excess capital.

As we saw in the dot com bust it was the lean and focused companies that survived the downturn, there’s little to think the next industry shake it will be different. That’s why companies like Affinity Live and founders like Geoff McQueen will probably still be around when the dust and hype settles.

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Rewriting the Silicon Valley playbook

Each region needs its own playbook to create an industrial hub warns veteran entrepreneur Steve Blank

Silicon Valley’s lean startup model may not be relevant to most regions warns writer and entrepreneur Steve Blank.

The lean startup model is based on getting the minimum viable product into the marketplace and should users be enthusiastic seeking investor funding to develop the business further.

Guy Kawasaki described this in an interview last year where he described the minimum viable valuable product idea of getting the most basic service to market at the lowest cost and then getting users and investors on board.

However it might be that model only works where “startup entrepreneurs have full access to eager and intelligent business customers, hosts of industry angels and venture capitalists with money to burn,” reports Canada’s Financial Post.

Blank came to that conclusion on a trip to Australia where he met with sports tech startups: “Meeting with a coalition of entrepreneurs in the tech and sports space, he realized the lean startup framework didn’t account for the vagaries of local economies. Australia sports-tech entrepreneurs trying to scale their businesses would find that their major customers are in the U.S., halfway around the world. And unlike most Valley startups, the Aussies would need to source manufacturing expertise — which means budgeting for several trips to China.

The problems facing Australia’s entrepreneurs probably extend further as the nation’s investors are notorious risk averse and the high cost of doing living means the burn rates for startups are much harder.

Blank’s recommendation is any region looking at establishing a startup community should identify its own strengths and advantages then build its own playbook.

That it’s difficult for other regions to copy Silicon Valley shouldn’t be surprising, since the start of civilisation each industrial or trade hub has risen and fallen on its own strengths and weaknesses.

We can be sure the next Silicon Valley – be it in the US, China, Europe or anywhere else in the world – will have different strengths than the Bay Area today.

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Venture capital’s false jackpot

Thinking that raising capital is a jackpot prize misses the point of a much bigger business journey.

When a business run by a 22 year old raises 25 million dollars it certainly gets attention and Crinkle’s successful seed funding has provoked plenty of commentary.

Particularly notable are stories like the gush piece from the New Yorker magazine calling the fund raising “a $25 million jackpot.” Reading those, those, you’d think Crinkle’s Lucas Duplan had won the lottery.

The truth is, getting a fat cheque from investors is only the beginning of the business journey; the real work starts when you have a board and shareholders to answer to.

Where the real jackpot lies is in selling the business to a greater fool and the story of Bebo founder Michael Birch is a good example.

Bebo was bought by AOL, probably the greatest greater idiot buyer of all, in 2008 for $850 million. Five yearrs later Birch has bought it back for one million and promises to ‘reinvent” the social media service.

While Birch didn’t get all the $850 million AOL spent on Bebo, he and his investors did hit the jackpot. Whether Lucas Duplan and the backers of Crinkle do is for history to tell us.

Image courtesy of sgman through sxc.hu

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Are Australians too risk adverse for startups?

Does a culture of property speculation hinder new businesses and startups?

Last week I had coffee with Clive Mayhew who chairs the board of Sky Software, a Geelong based student management cloud service.

Clive covered a lot of interesting aspects about Sky’s business; including the opportunities for regional startups, government support and his experiences in Silicon Valley during the dot com boom. All of which I’ll write up in more detail soon.

One notable point Clive raised was how he struggles to get Australian staff to take equity in the business – people want cash, not shares.

The question Clive raises is why and that question is worth exploring in more depth.

My feeling is that it’s a cultural thing related to property – four generations of Australians have been bought up believing housing is the safest way and surest way to build wealth.

As a consequence young Australians are steered into getting a ‘safe’ job and plunging as much money into accumulating property equity as early as possible. Just as mum and granddad did.

Even those who don’t want to play the property game are affected as property speculation pushes up prices and rents; the landlord or bank won’t accept startup stock to pay the bills so employees need cold, hard cash to keep a roof over their heads.

The other angle is tax and social security policies, through the 1970s and 80s various business figures used share option schemes to minimise their taxes and successive Australian governments have passed laws making it harder for businesses to offer these incentives.

Interestingly this not only affects the Silicon Valley tech startup business model but also hurts the aspirations of Australia’s political classes to establish the country, or at least Sydney, as a global financial centre.

Putting aside the fantasies of Australia’s suburban apparatchiks – which if successful would see the country being more like Iceland or Cyprus than Wall Street or the City Of London – it’s clear that the existing government and community attitudes toward risk are reducing the diversity of the nation’s economy.

That the bulk of the nation’s mining and agricultural investment, let along startup funds, comes from offshore despite the trillion dollars in compulsory domestic superannuation savings is a stark example of risk aversion at all levels of Aussie society, government and business.

For those Australian entrepreneurs prepared to take risks, the risk adverse nature of most people becomes an opportunity as it means there’s local markets which aren’t being filled.

The problem for those local entrepreneurs is accessing capital and that remains the biggest barrier for all small Australian businesses.

How this works out in the next few decades will be interesting, it’s hard not to think though that Australians are going to have to be weaned off their property addiction – whether this takes a harsh recession, retired baby boomers selling down their holdings or government action remains to be seen.

In the meantime, don’t base your business plan on staff taking equity as part of their employment package.

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