venture capital | Paul Wallbank - Communications Professional

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.

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.

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.

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.

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.

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

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.

Silicon Valley and the virtues of going private

Is the technology industry swinging back to investing in private businesses with solid cash flows?

Last week there were a pair of interesting stories about the tech industry’s investment models.

The biggest story was the rumours that PC manufacturer Dell may go back to being a private company and the other was Survey Monkey’s raising of $800 million through debt and private capital.

Not your usual VC play

Polling company Survey Monkey’s capital raising is notable because it’s very different to the standard VC equity models used by Silicon Valley companies of this size.

Adding to the unusual nature of Survey Monkey’s behaviour is the declaration that they have no intention of becoming a public company. By ruling out an obvious way for investors to cash out of the business, they are making a clear statement that those putting money into the venture are doing so for the long term.

That Survey Monkey is also taking on debt indicates management believe they are going to have the cash flow to service payments. Not playing to the Greater Fool business model makes the online polling company very different to most of its contemporaries in Silicon Valley.

Dell going private

Survey Monkey’s $800 million is dwarfed by Dell’s market cap of 22 billion dollars so the talk of the PC manufacturer buying out its stock market shareholders and becoming a private company is big news indeed.

The New York Times Dealbook has a close look at the of the idea of taking Dell private and comes to the conclusion it’s not likely to happen.

While there are challenges, there is merit to the idea. Richard Branson delisted Virgin from the London Stock Market in 1988 after becoming frustrated with the short term objectives of his shareholders and there’s a possibility of Michael Dell may feel the same way.

For Dell, the challenge lies in moving away from the commodity PC sector. The Dell Hell debacle showed the company’s management has struggled with the realities of the low margin computer market and things aren’t getting better.

Dell themselves are steadily moving away from PCs with bigger investments in services and other computer hardware sectors.

Project Ophelia, a USB stick sized computer running Google’s Android operating system was one of Dell’s announcements at the Consumer Electronics Show and could mark where the company is going in the post-PC environment.

Given portable and desktop PCs represent over half of Dell’s income moving away from those markets is going to be a major change in direction for the company.

A change is though what the company needs with revenues down 11% on last year which saw profits nearly halved.

Whether going private or staying public will allow Dell to recover its profitability remains to been seen, but management could probably do without the distraction of answering to stock markets while dealing with a complex, challenging task.

Both Dell and Survey Monkey are showing that there isn’t one path to raising funds for technology companies, in fact there’s plenty of businesses raising money privately without the razzamatazz of high profile venture capital investments.

It may well be though that we’re seeing private companies coming back into fashion as individual investors see the advantages in businesses with good cash flows rather then the hyped loss leaders which have dominated Silicon Valley’s headlines.

Image of Wall Street courtesy of Linder6580 on SXC.HU

Disrupting the disrupters

Silicon Valley’s investment models are changing as attention moves from the consumer to the enterprise.

Two days ago, iconic venture capital investor Fred Wilson, wrote about the changing nature of the tech industry’s VC investments.

Fred puts the changes down to three factors; maturing markets where big players increasingly dominate, the move to mobile which Cristina Cordova examines in more detail and the shift in focus from the consumer market to the enterprise sector.

The last factor bears more examination as consumer and enterprise are very different and there’s no guarantee that businesses built around thousands of people downloading apps or accessing websites can pivot into selling into corporations and government agencies.

Probably the biggest problem is the consumer or small business freemium model doesn’t cut it in the enterprises who are prepared to pay big sums for highly reliable and secure services.

Similarly the enterprise model of fat sales commissions paid for by big implementation costs and expensive support contracts doesn’t quite fly either for these start up business. There’s also a good argument that high margin enterprise model is doomed anyway as cloud services displace costly in-house installations.

In the transition from consumer to enterprise is difficult and most companies have struggled to make the jump, even Google Docs has been a hard sell into the corporate sector.

At the enterprise end, cloud services are cutting margins as IBM and Oracle are finding. Both companies are moving across to cloud products and now a lot of salespeople and consultants in those organisations are looking at a substantial drop in their standards of living.

More importantly for the startup and VC communities, the “greater fool” model doesn’t work in the enterprise space. Hyping a business which has barely made a cent in revenue but does have a million users is very different to building a stable corporate platform.

It may well be the move to the enterprise by Silicon Valley is because the consumer model has run out of “greater fools” who’ll buy overhyped photo sharing apps or social media platforms of dubious value.

This change in investment behaviour also has lessons for governments trying to copy Silicon Valley. The puck moves fast in the investment community while governments, by definition, are slow.

By the time governments have setup their programs, the markets have moved on and many of the hot technologies of two years prior are now old hat. This is exactly what we’re seeing in the apps world.

We often hear about technology causing disruption, often though we forget that those disruptive technologies can be ephemeral as they are disrupted themselves.

As these industries evolve, we’ll see how well the disrupters deal with being disrupted.

Billion Dollar Babes

Is every successful startup worth a ten figure sum?

“It changed everything. It changed the game for a lot of us and you know it made a lot of people feel very anxious and sort of compare their own success.”

Lisa Bettany, the founder of Camera Plus lamented how Facebook’s billion dollar purchase of photo app Instagram purchase changed the start up community on Australian current affairs program Foreign Correspondent.

In the program Foreign Correspondent also spoke to Australian and Italian startup founders looking to make it in Silicon Valley. On being asked what they hoped their business was worth they all had the same answer – a billion dollars.

There’s no doubt Jindou Lee’s Happy Inspector home inspection app or the Timbuktu kids’ story website are great products and should be successful business. But is business success only measured by a billion dollar exit?

In Garrison Keillor’s Lake Wobegon every child is above average, it seems in Silicon Valley every successful business is worth a billion dollars.

Every founder in the current app or web 2.0 craze says “it’s not about the money, it’s about changing the world” yet scratch them and they are all on the lookout for the greater fool buying them out for an improbable sum.

One could say that a billion dollar cheque does change the world of the person cashing the thing although exactly how a iPhone photo app changes the world may escape some of us.

At the same time the Foreign Correspondent story was being aired the founder of Y Combinator – Silicon Valley’s most successful accelerator ‘s founder – warned the heat is now out of the market after Facebook’s market flop.

Paul Graham was elaborating on a letter he wrote three months earlier where he said, “If you haven’t raised money yet, lower your expectations for fundraising.”

If the billion dollar valuations are going out of the startup mentality then it might be better for all of us. It might mean our youngest, best and brightest really are focused more on building things that will change the world rather than buying mega-yachts for themselves and their VC investors.

Can Singapore become a global VC centre?

Singapore’s SingTel has an interesting way of dealing with competitive threats in a new market.

While Silicon Valley grabs most of the headlines about cool new businesses Singapore has been quietly building its own position in the global venture capital industry.

SingTel, the city state’s main telco operator, setup their own venture capital fund in 2010 with Singtel Innovate investing between S$100,000 and thirty million in various ventures.

The strategy from SingTel, which is closely aligned with Singapore’s government, is a very canny one – it allows the telco to move beyond being a “dumb pipe” just providing the phone network and fits into the nation state’s aim to be one of the centres in an increasingly Asian centred global finance system.

Yesterday SingTel launched a new Australian startup venture, the Optus Innov8 Seed fund which offers investments of up to A$250,000 in new start up businesses in return for equity or other stakes.

To identify the right investments SingTel are partnering with various start up groups and incubators in Sydney and Melbourne which is an interesting way to filter out unsuitable businesses.

Being funded by a telco, the Optus Innov8 program is naturally focused on the technologies that are going to help their business in an evolving market, the areas they are currently looking at are mobility solutions and digital convergence.

For Singtel and Optus this is a long term investment as equity stakes in new technologies will position the business well as their industry evolves and margins come under pressure in their core telco market.

To businesses looking for investments, the Innov8 program is a welcome addition to the funding landscape but Singtel also offer access to Asian markets with operations in India, Indonesia, the Philippines, Thailand, Pakistan and Bangladesh.

Edgar Hardless, the CEO of SingTel Innov8 says “if you’re looking at going into the Indian market, we can help with introductions. Same with any of our other markets”.

Those introductions are useful but probably more important is the market intelligence that a partner like SingTel can bring on board. Understanding foreign business conditions is a great advantage for a foreign venture.

Asian markets can be tough, particularly for Australians who have been bought up with a US centric view of the world, but there are plenty of success stories. There is a successful group of entrepreneurs catering to the massive Indonesian market while companies like Dealize have moved their head office to Hong Kong.

Dealize was part of the Pollenizer incubator which is one of Innov8’s partners. At the launch, Phil Morle of Pollenizer pointed out that his business has set up a Singapore office to take advantage of the favorable investment conditions there.

While Innov8’s program is relatively small, it’s a much needed addition to Australia’s start up and venture capital scene and will help some new businesses in the app and mobile space.

Hopefully a few other corporations are looking at SingTel’s lead and thinking how they can tap into these new industries that may disrupt their own.

For Singapore, the city state has always had a number of advantages for the finance industry. By expending into new financing new sectors they are securing their own future in the 21st Century.

Raising venture capital is not the measure of success

Bringing investors on board is an important part of a business’ growth, not the end game.

“Those guys are successful, they’ve raised half a million from investors,” one startup commentator recently said about a business.

Is raising money the benchmark of business success? Surely getting investors on board is part of the journey, not the destination.

Having some investors coming on board means others share the founders’ belief their idea is a viable business and it’s a great ego boost for those working hard to bring the product to market.

That cash also exponentially improves the survival chances of the business – too many promising ventures fail because the founders haven’t enough capital.

While it’s an important milestone in the growth of a business, raising capital is not the end game. Only minds addled by the Silicon Valley kool-aide believe that.

In fact, if you’ve set up a business because you hated working for a boss, you might find your new investors are the toughest task masters you’ve ever worked for.

Good luck.