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This post is part of my my Bad for Business Series, where I share the lessons learned working at my startup Comseal Systems back in 2003/2004.
In the past couple of days I’ve read a few articles (like this one) or blog posts regarding business failure and participated in a discussion at my Software Engineering Alumni forum on LinkedIn. This inspired me to write a few words on my particular view on business failure and its impact on entrepreneurship.
As most of you are aware, I started the Bad for Business Series precisely to share a few lessons learned at Comseal Systems, the bootstrapped startup I founded in 2003 together with 4 classmates. As I’ve often mentioned, the lessons I learned at this short, yet rich experience were invaluable and I’m still learning from them. To be clear: I’m glad this business went down – Otherwise I wouldn’t be where I am today.
People often associate business failure with a feeling of impending doom that casts darkness over their lives, and I’ve experienced it myself: I’ve seen many friends, including co-founders, walking away; Larger businesses took advantage of me thanks to high indemnification clauses in their contracts; I topped all of my credit cards trying to survive, paying tons of interest on the way; had legal issues that took a long time to be settled; received threatening calls from former friends who also tried to destroy my reputation; doors previously open to me were now closed.
While this happened to me in Portugal, I’m pretty sure it could happen in the UK as well. A finger-pointing culture that is scared of failure is deeply ingrained in each of us, who are constantly bombarded from birth with the mantra “you must succeed, otherwise you will fail”. Fear, shame, guilt. As if your entire life would fell apart if your business failed while in reality that’s a self-fulfilling prophecy brought on by social stigma.
“Failure is not an option”. That’s right, it’s not an option as you’ll never aim towards it – but it’s always a possibility – regardless of who you are and who you’re surrounded with, the market you’re addressing, the product/tech you have. It can always happen and it’s something you should consider when making any decision. I consistently tell people to manage their downside, to have mechanisms in place to mitigate the impact of any unforeseen events.
I will never place my trust on an entrepreneur who doesn’t seriously consider the possibility of a business going bust, and the same goes for any manager who believes he would get everything right – or make it right by putting more and more effort into it. I’ve consistently seen deluded people trying to feed a dead horse instead of stepping back and finding a more efficient way of doing things. Everyone these days talks about pivoting but in order for pivoting to work, founders need to develop an iterative mindset which allows them to execute but listen at the same time: are we getting the market feedback we thought we would? Why not? What do we need to change in our product/marketing/sales approach? All along they are filtering out the noise but using relevant feedback, which is often negative, to drive change and get them closer to where they need to be. You can’t develop this mindset unless you understand that failure is a fundamental piece of doing business.
I have never worked in/with a company that consistently succeeded and thank God for that, otherwise I would have learned nothing. I’ve worked with some of the most successful companies in my industry and still there we consistently made imperfect decisions who didn’t provide the results we were looking for. We raised questions, we stopped and listened and we would come up with a new, improved plan. In some instances we would get it right almost immediately, in others we keep on iterating and never actually get it right, meaning we needed to step back even further and focus on fundamentals.
All too often we personify failure and spend our time identifying the culprits. True, sometimes the best solution for a given problem is to replace someone, particularly if their attitude isn’t constructive. Often, however, that’s not the issue at all. Businesses and specific projects fail due to a multitude of reasons, ranging from timing, a much smaller opportunity than originally anticipated, higher cost structures needed, poorly made assumptions – the list goes on and on.
When selecting an investment, VCs minimise their downside in two ways: first, they take a long time making sure the business ticks the right boxes in terms of team, market opportunity, product/tech, growth assumptions/financials and exit opportunities; second, they use a series of mechanisms in the social contract/term sheet to make sure their investment is as protected as it can be should the business drop in value. VCs see business failure as something intrinsic to business and so they carefully consider it in their decisions. That said, no VC has any interest in seeing one of their businesses failing. In what concerns business failure, entrepreneurs should develop exactly the same mindset. This should be their longer, but more realistic mantra: “Failure can happen, I’ve considered it and prepared for it so I can now focus my energies on aiming towards success. If a minor setback occurs, we’ll adjust our strategy in order to work around it. If we really need to close down, then everyone did their best, this comes with the territory and we’ll do better next time.”
Entrepreneurs need to gain experience and as we, as humans, should know, we do need to make mistakes in order to learn something. Business is no exception.
EDITD, a startup I’ve been working with for the past few months, is hosting the “Clerkenwell Startup Crits” event this Friday. This is what they’re saying:
Phil Jones posted a fantastic idea to the OpenCoffee list – he said: “A few weeks ago I met a woman from art-college and she told me about the idea of crits.
A crit is effectively an event where an artist presents their work-in-progress to a group of peers who give their response (criticism, feelings etc.)”
This Friday the 23rd, from 6pm to 8pm at our offices, we’ll be holding a free Crits event. We’ll pitch and demo our business (EDITD), and we’ll invite 3 other startups.
Rules are:
Maximum of 2 members of your team.
You MUST have a launched (or late beta) tech startup
Your company must be for-profit, and anyone attending MUST work 100% full time on the business.
The only attendees are the startups themselves (any VCs are welcome, although they will likely be at the pub in this timeslot).
There will be 15 minutes to pitch and demo, and another 15 minutes to critically discuss your product and market (if it’s appropriate). If we can get enough people interested, I’ll update the list, and send invitations out Thursday.
Fill in this form to apply to take part!
We’re offering places on merit (as judged by us).
It’ll take place at 6pm-8pm on the 23rd of July.
Fell free to join in, whether you’re a startup or a VC. You can register here: http://bit.ly/9SD6U3
This post is part of my Startup Review series of posts, where I provide a review on seed/early-stage companies based on publicly available information and following a predetermined structure.
Introduction
 garmz is an Austrian-based startup that allows fashion designers to post their designs on their website, where users will vote for the best designs. Best designs will be produced at low cost using the designer’s brand and sold via the garmz website, with a fraction of each garment sold reverting to the garment’s designer. In essence it uses the crowdsourcing concept you can find at iStockPhoto applied to the fashion industry, but with a higher degree of designer ownership/freedom.
Product/Technology
garmz has put some effort into creating an easy to use website. As a designer you can upload your designs using the garmz-provided kit and create your fashion label in three easy steps. At this stage you can’t really understand how the user experience will be for voting and browsing through the garmz shop, but I would expect a lean website you’d enjoy using.
garmz’s tech infrastructure should be straightforward, with no particularly heavy data processing and very much akin to that of an online fashion retailer with additional requirements for voting and uploading. The technology should be easy enough to adapt to new requirements with little effort, but difficult to apply in other contexts.
garmz’s technology isn’t particularly innovative, with disruption efforts focusing on the business model instead.
Market Opportunity
The fashion industry supplies to a huge market and garmz wants to play in this field. garmz aims to be an online fashion retailer with access to a huge pool of fashion designers so it can have original garments that are found nowhere else. Instead of garmz’s team selecting which designs should be manufactured and added to their store, their reasoning is to allow users to vote and provide feedback, as votes/interaction would be a good proxy for future purchases.
Is this a good reasoning though? Brands, department stores and other large retailers dominate the fashion industry and all have an online presence as well. Necessarily, garmz should aim for a niche market and leverage long-tail effects to make revenues from original designs that have little resemblance to what else may be on the market. However, niche markets require tightly segmented customers: if you ask users to vote for designs, you should expect the most voted designs to actually be closer to mainstream, where garmz is less competitive. The niches that would actually do more in differentiating garmz’s selection from other online fashion retailers get the fewer votes and aren’t produced. Who are garmz’s real customers after all?
Even though, from a top-down view, the market opportunity is huge, I’m not really sure, from a bottom-up view, whether garmz can truly innovate and come up with a value proposition that attracts a sufficiently high number of customers for them to make any decent money. Scaling up garmz, meaning increasing the number of active designers+users using it, can be done through viral marketing, social networks, online advertising, etc. – but only if the products are interesting enough to keep customers coming in, otherwise it’s hard to sell anything and advertising costs escalate. Given all of this, I’m not sure there is a clear need on the market for garmz’s offering and I’m not sure there is a business opportunity here.
Business Model and Value Chain
After voting, garmz produce up to 150 pieces of a given garment. Designers get to choose their profit over the product’s cost (where, I’m assuming, garmz gets somewhere between 25-50% gross margin, which is their sole revenue stream), which is then sold (B2C) on their store. The example they have on their website (where they recommend 5-10 EUR margin for the designer) is the following:
Fixed costs: 68 EUR
Designer’s decision on his/her profit margin: 7 EUR
Final price in webshop: 75 EUR
Batch size: 100 pieces
Designer earns (when sold out): 700 EUR
Let’s imagine that garmz have a 25% margin on the product’s fixed cost, meaning, in this example, 17EUR per piece sold for garmz. For a batch size of 100 pieces, they make 1,700EUR gross margin and 7,500EUR revenue. This means that, in order to get 1M in revenue, they need to produce – and sell the entire 100 pieces of – 133 different designs (or additional batches of the same designs) at an average retail price of 75EUR+shipping. This seems difficult without having an established brand, products who strongly resonate with currently poorly served (yet sufficiently large) customer segments, a well-oiled distribution channel and adequate pricing.
There may be potential, however, for garmz to drop their online shop altogether and focus on partnering with established online retailers, either through their own garmz brand or through a co-branding garmz+designer label. They would position themselves on the design section of the value chain, where they seem to be more comfortable with, and leverage on existing distribution channels (at a cost, of course) to sell faster and grow faster. Otherwise I don’t see any alternative other than garmz to focus on a set of customer niches and make sure submitted designs strongly resonate with these customers.
Market Traction
garmz is pre-revenue, so still has no market traction. Marketing efforts will focus on increasing the number of active designers + users through the means we already know. How can garmz gain market traction? They will likely need to focus their efforts on attracting trendsetters and opinion leaders to their website, include them in their social networks and leverage all free PR they can get. They shouldn’t have the budget for anything more massive than that and so a lean, sophisticated marketing strategy needs to be implemented.
Competition
garmz has tons of competitors. While it may be true that there aren’t any crowdsourced fashion design online stores out there, there are plenty of fashion labels, online, in department stores, high streets, shopping malls spending their dollars in attracting more and more customers. garmz’s industry, as they are currently positioned, is fashion retail, which is a dangerous place to be. Should they focus instead on fashion design they may not be much better off, but they will have more room to add value and differentiate themselves.
Team
There are 11 people working at garmz. Given that they have Angel funding “in the low six figures range”, this seems a heavy cost structure to have when you’re still pre-revenue. While the team may have complementary skills, I find it hard to understand why would they need such a large team in the first place: tech infrastructure seems simple enough, business/marketing should also be relatively straightforward (as long as you manage supplier relationships appropriately). I would expect a team 30-50% of the current size for this particular business.
Financials
Again, let’s go back to the team. 11 people working at garmz, funding “in the low six figures range”. Assuming conservative salaries of 25K/person/year that’s 275K/year in personnel costs alone – which should be close to the funding they’ve already received. Let’s imagine, very optimistically, 20K/year more for any additional costs (including marketing!). This means they will break-even at 173 batches of 100 pieces @75EUR, or roughly 1.3M revenue. Still, at 10M revenue, assuming their fixed costs stay as they are, they would make near 2M EBITDA, which is not too bad, yet not overly exciting. As in reality their cost structure doesn’t seem very scalable, it should be less, making it a less interesting investment for IRR-hungry VCs.
Working capital will be an issue, as they might have to tie down capital to produce their designs – taking months to recover. A close partnership with manufacturers and ideally risk-sharing will be helpful. Necessarily, with short funding available, cash flow will be an issue as well. They will need to keep close eyes on financials until the company takes off.
There is no way garmz can stay in business too long without closing another funding round, ideally near the millions range. They have a heavy cost structure, need a great, somewhat expensive advertising strategy (typical of B2C) and need to finance working capital. Doing so at a pre-revenue stage might be difficult, however, particularly from VCs – so they might be looking for another angel round.
garmz’s exit strategy, should they make enough revenue, should be a strategic trade sale to a well-established online fashion retailer. That seems their best fit and, should they play their cards right, might not be too difficult to come by. There should only be a handful of fashion retailers who are a good fit (i.e. multi-brand), so relationships can be built early on.
Conclusions and Challenges Ahead
I don’t think garmz is VC-backable unless they do the following:
- Make sure their designs actually serve specific niches of the market that are currently poorly served (e.g. a sufficient number of votes would get them produced, instead of only top voted designs)
- Secure a high number of active designers/users using as little financing as possible
- Focus on partnering with other multi-brand online retailers to sell garmz-branded/co-branded designs, instead of using solely their own shop
- Optimise team and focus on having a leaner structure
garmz aims to tend to frustrated fashion design customers, but needs to do so carefully and making sure they are adding as much value as possible. They need a clear understanding of which segments are really “frustrated” with current fashion offerings and attract to their website designers who can tend to these customers. As it stands, garmz’s value proposition isn’t clear, isn’t game-changing or disruptive and so it’s difficult to believe they will become the fast-growing profitable business that can deliver on VC’s IRR expectations. garmz’s team, however, will certainly execute on their strategy and have a couple of surprises up their sleeves that might make me think otherwise – let’s see!
After little over a month of complete silence and irregular posts, I can now return to posting more regularly. I’ve finished all of my MBA electives, as well as our IED project – all that remains to be done is my final project and some coursework.
This also means I’m actively looking for an Investment Management/Associate role in seed/early-stage/growth capital finance, particularly in the technology sector. I believe I’m well-positioned for a role here as:
- I am a Software Engineer by background and so can easily grasp and perform due diligence on technology concepts
- I have over 7 years of experience working in or with technology startups, including one of the fastest growing companies in Europe
- I have always performed on management roles, focusing on business development and marketing strategy, as well as more operational roles when the need arose, and so can perform market due diligence
- I have a good network with VCs, startups and leading entrepreneurs and technology-focused academia, having deal-sourcing abilities
- I’ve focused my MBA electives on finance, particularly Venture Capital Finance, Private Equity Finance, Advanced Company Valuation and Advanced Corporate Finance, and so am comfortable with VC/PE legal terms, deal structure and financial modelling
- I’ve done financial modelling and valuation professionally and have been/am involved in M&A transactions in both the sell-side and buy-side
- I’ve developed or been involved with developing several business plans, including some who have received venture capital finance
- I’m an experienced consultant, having worked for leading IT companies in several business development projects
- I’ve worked consistently in small teams and interacted daily with CxO/VP level senior managers, having high levels of responsibility
- I’m developing my final project in the Venture Capital industry, namely in VC fundraising, where I’m interacting with VCs and (potential) investors, and so am familiar with the inner workings of VC firms
In the coming months I’ll continue searching for such an opportunity.
This said, I believe I also need to better use my blog to complement any job application. Starting today I’m adding two new blog series:
- Business Trends – Where I’ll describe what I believe are emerging trends (usually tech) where high-growth opportunities (and hence potential successful VC-backed startups) may lie in the next 10 years
- Startup Review – Where I’ll perform an analysis on a given startup from the point of view of a potential VC investor, based on publicly available information
Hopefully this will also contribute to making the blog even more interesting – my thanks to everyone who has sent their support!
This post is part of my my weekly Bad for Business Series, where I share the lessons learned working at my startup Comseal Systems back in 2003/2004.
We never had an advisory board at Comseal Systems and, looking back, having one could have resulted in completely different outcomes.
Our approach to obtaining advice was generally to schedule one-off meetings with university professors, where we obtained generic advice and introductions. You ask generic questions, you get generic feedback. That’s a lazy approach leading to you receiving little constructive criticism, contributing to the idea that you should be right.
Only on rare occasions did we resort to expert advice, such as for the shareholder agreement, through one of our partners’ family members. We did continue to receive value later on when we needed legal contracts for an employee dismissal.
Our main obstacle to sourcing proper, constructive advice were ourselves: our optimism shrouded us with overconfidence and, necessarily, a bias against having external advisers on board. This was reinforced by our assumption that our contacts (mainly at university and family) would be readily willing to provide advice when needed. The issue is, most of the time, you don’t know that you actually do need advice, much less when that advice is needed. You may think things are going smoothly (or even if they’re not, that they will soon improve) and, if so, why would you bother seeking advice? Yet, being inexperienced as we were, you fail to spot problems when they’re still able to be corrected.
We only had a slightly more formal approach to advisers when we signed up an agreement with a government-supported incubator (even though we were located elsewhere) in order to have support, among other things, in developing our business plan. This was important to make sure our business plan was consistent, but they failed to spot the underlying issues with it. In fact, so did the panel of highly experienced judges in the business plan competition where we received an award of merit – although I know our business plan was very robust in some areas, consistent and logical, it never approached the key issues we as a company truly faced: lack of cash flow, how valuable our offering was to our customers and how the sales process would be organised. This comes to strengthen the fact that a business plan is still, in essence, a marketing tool. One which we developed quite successfully: we managed to effectively create a smoke screen between our plan and reality.
Looking back we received little value from external advisers and any solutions to the problems we were facing had to come from within the company, which did no good to having different, varied points of view in a given discussion. In particular, we were too focused on obtaining lead referrals and introductions than to actually get any business or strategy advice. Limited in scope, so limited in return.
Here are some thoughts on successfully leveraging external advisers:
1 – Formalise an advisory board
If you invite someone to join your company as a member of your advisory board, they will necessarily establish a commitment towards yourself and your company. You will have regular meetings and, on occasion, you will reach out to them with specific questions or requests for help (e.g. introductions). If you don’t have an advisory board you will never receive the feedback you really need closer to when you need it. In addition, you don’t need to worry about confidentiality issues, as advisers should sign a proper NDA agreement.
2 – Choose your advisers carefully
Only invite to your advisory board those people who can consistently provide useful advice on strategy, technology, marketing/sales or introductions. Ideally you would be looking at people with industry expertise who have been entrepreneurs themselves in order to better understand the road ahead of you – but don’t forget complementarity. Their personality is of prime importance; find advisers who will not be affraid of questioning you, but are sufficiently detached from their opinions to support you if you decide to go in another direction.
Note that you don’t necessarily need “celebrity” advisers, who are much more likely to ask for money/equity. If you have a good enough network, you might very well source advisers for free. All you need to understand is their motivations and see whether they are well aligned with yours.
3 – Get the advice you need, not the advice you want
I’ve mentioned it above and I’ll mention it again: having someone agreeing with you is nowhere near as valuable as having someone disagreeing with you. The difference is in what lies within and you’ll be happy in avoiding costly mistake by having someone making you reconsider an approach. The same goes for just everyone involved in your business, of course, but don’t forget that, in the end, decisions need to be made and people will need to support you.
Ask open ended questions, lead your advisers into digging into your business plan and assumptions. Learn to question yourself in front of your advisers, to share your doubts and uncertainties. Be truthful, leave no stones unturned and you’ll get honest advice. If you simply ask for confirmation, they might not bother in double-checking what you’re saying. Remember that it is your duty to lead conversations in order to extract maximum value.
4 – Don’t be afraid to ask
There’s a great blog post from Brad Feld titled “Give Your VCs Assignments“. I entirely subscribe and believe much of the same can apply to advisory board members as well. If you provide people with a given problem you’d like them to solve, they will be focused and, if capable, will help you out more easily and faster. The clearer you are, the more efficiency you’ll get.
In a few weeks I’ll start working on my MBA Final Project. Initially, and after considering the feedback from roughly 6 VCs, I had a project in mind that would:
- Analyse successful venture-backed companies and understand which factors contributed towards their success
- Analyse the “ripple effects” of that same success, in the form of founders joining VC funds or starting new, successful businesses
- Use the conclusions from the above together with a standard financial analysis of a specific case-study of a startup currently seeking funding
Still, after speaking with my MBA Director, I’ve come to reconsider this theme. Truth is that many studies have been carried out already in what concerns success factors for startups and VCs are well aware of them already; even if they aren’t consciously, they are certainly taking those factors into account when analysing a potential investment.
On the other hand, not much has been done on how VC funds themselves source funding and whether there are alternative sources of funding they can resort to. Given than in the last couple of years funding to VCs has significantly reduced (although it’s recovering now), an interesting project would be to understand how (potential) limited partners perceive VC investment and compare it with VC GPs perceptions. Such a project would add the value I’m looking to add to the VC industry through this project.
Still, one would assume that limited partners would be more willing to invest in a given fund assuming it has had a good track record – And getting a good track record implies making the right investment choices and providing appropriate support to management, which would take me back to my original theme.
Yet life is made of ambiguous decisions. So I’ve decided to focus my project on limited partners and VCs. It’s a completely unknown area for me so there’s the highest potential for growth. At the same time, I will keep my involvement in the entrepreneurial community as I’ve already been doing in the last few months.
Above all my goal is personal growth and, unknown as the future might be when you’re aiming towards a job that is hard to get, passion and motivation allow me to absorb every little bit of knowledge along the way. I’m confident this knowledge will make things smoother when the time comes.
Today Index Ventures and TAG announced the creation of a new Seed fund (Index Seed) – you can read more about it here (Index Blog), here and here (TechCrunch). Don’t forget to follow Index Seed on Twitter at @indexseed as well.
Here’s a quick catch up of key features of the fund:
- Partnership between Index Ventures and TAG
- Fund source is Index’s existing $400M fund
- Investment size will be from 50K – 1M
- Around 20 investments will take place in the next 24 months in Europe and US
- Managed by Robin Klein, Saul Klein, Danny Rimer, Mike Volpi and Neil Rimer
- Simplified investment process
- Open to syndication
- Board seat not required
All in all a leaner investment process, as one would expect from a fund targeting seed-stage companies. I find these news to be excellent for the entrepreneurial community at large. For the London and other European tech hub, it increases the number of VCs already committed to early-stage financing, such as Octopus Ventures, it reinforces Index’s (and Saul Klein’s, in particular) positioning towards Seed financing – which is a great complement to SeedCamp, by the way – and, above all, comes at a time when VC funding is being held in check by the European Union.
Index Seed is exactly what was needed at the very best possible time to be launched, so congratulations to everyone involved with it and to the entrepreneurs that will certainly benefit from it!
Yesterday I had the chance of attending GeeknRolla 2010, organised by TechCrunch Europe, and thought it was excellent. Due to my MBA student’s shoestring budget, I wasn’t quite ready to shell out the £130, so instead I contacted the event organisers and managed to attend the event for free in exchange of helping out in a couple of tasks (mainly delegate registration and handing out the microphone for Q&A). I didn’t lose out a bit.
I arrived at the venue early at around 7:45 and helped the team finalise the registration desks. At around 8:30 the first delegates started arriving and, with slight delays, the conference began.
Mike Butcher was the man of the show and, after a short introduction by him, we were off to a quick intro on exit markets by Tommy Ahlers and a short discussion on exits with Saul Klein and Anil Hansjee from Google. A good point to take from this is to remember, as always, the value of an early strategic trade sale to enhance the company’s ability to make its vision come true, which can be more effective than VC investment alone and aspiring for a later trade sale or IPO.
Jason Trost, from Smarkets, gave a really good introduction on the London Tech scene. Given that so many people come from abroad to take advantage of London’s thriving VC community and the overall entrepreneurship scene when creating/expanding their company, it was pretty valuable. The more so when, even being a local, you’re starting a company for the first time and need some referrals. Some notes here include:
- Make sure legal costs do not exceed 5% of each funding round
- Consider convertible notes as an alternative to equity
- Use the british library and other tech hubs in London for getting together
- Take advantage of the many networking events in the entrepreneurial scene
- Make sure you have a 1-sentence pitch for your company
- hang out with other founders, share and receive insights
Pete Smith from Songkick have a talk on hiring and recruiting for startups. Having done it myself in the past, I can definitely say this is probably one of the most important topics for startups. You can find some of my thoughts on finding co-founders here. Some of my notes from Pete’s talk:
- Always be hiring (i.e. open to considering people to join your company, on the lookout for great talent)
- Using your network for recruiting is the most efficient method. Make sure you’re constantly expanding your network.
- Use innovative company perks to create culture and attract talent
- Don’t compromise on early hires
- Plan recruitment needs ahead of time
The first startup pitches then took place. I’ll review all startup pitches after going through the rest of the day’s agenda and make my remarks then.
The morning break provided the first opportunity for people to network with a bit of spare time in their hands. Entrepreneurs and VCs networked casually and the overall mood was energetic, yet relaxed. Background noise didn’t interfere with conversations, something which I very much appreciated, not being a fan of chatting in noisy environments.
A panel discussion on early stage investing right now with EU and US perspectives followed the morning break. I didn’t take many notes, except for a remark that most VCs invest when there’s an actual business there. While this tends to be true, it’s not always the case: if VCs believe there’s a clear market opportunity and that the best strategy is to roll out immediately, they will seriously consider investing.
The second launch pitches took place just before lunch and we were soon trying to get small pots of food. I didn’t manage to grab what appeared to be noodles and had to make do with a salad and dessert. I got logistically impaired while trying to save my food cache from being scavenged by hungry delegates but a VC came by and handed me a fork so I could then proceed with eating my meal while chatting.
Katy Turner (@KatyT) and Andy Chung (@AndyChung) from Eden Ventures gave a talk on “How not to pitch to a VC”, something all entrepreneurs should really be aware of. My notes on this:
- Understanding what VCs are looking for (industries, business models, etc.) is half the battle
- VCs want long-term relationships (“long and happy marriage”)
- $1B or above market opportunity
- VCs expect a x5 multiple return on their portfolio and this return comes mostly from 3/4 companies on a given fund
- Don’t pitch technology, but instead:
- Who is/isn’t your customer
- What problem are you solving? What is the pain? (I’d add “measure the pain”)
- Few sentences to explain value proposition
- VCs invest in teams, not in sole individuals
- Don’t say to a VC that you have no competitors and don’t diss your competition
- Finally, don’t give up when sourcing funding
Ewan Macleod from Mobile Industry Review gave a very insightful presentation, which can be found here, on why app developers should look beyond the iPhone. Some notes:
- Far more mobile phones than TVs or credit cards in the world (4.6B compared to 1.6B and 1.7B, respectively)
- Nokia, with Ovi store, is trying to replicate the iPhone’s App Store
- Huge number of Symbian-powered Nokias are still being sold and can run apps, particularly on the lower-priced segments
- Stakeholders interested in App development include operators, manufacturers and existing media conglomerates
Andrew Scott, from Rummble, proceeded with what I thought was one of the best talks at the conference, filled with precious advice for startups. Do read the article at TechCrunch for more details, but here are some notes:
- Don’t choose a crap name for your company
- Pick the right co-founders or have none instead (My thoughts: VCs will not like having no co-founders, so put the effort into finding them)
- Choose the best location for your company and be where the action is
- Take your time hiring, but be fast in firing
- Delegate tasks if people can do them 70% as well as you, but don’t delegate pitching and hiring
- Have a 1-line pitch (he recommends this book)
- Talk with people outside of the entrepreneurial community, make sure everyone understands what your company is about
- Measure things that matter
- Time flies – everything takes longer than you thought
- Practice pitches until you are comfortable
- Help others, give and receive honest criticism
- Make sure you take time off
The third set of pitches followed and, after the afternoon break, we listened to Cedric Giorgi on how to best approach the French market. I didn’t take many notes as it wasn’t relevant for me. Afterwards Chris Fallic, from First Round Capital, gave a talk on how to make e-mail introductions. Some notes on this:
- Constantly make introductions
- Act as a firewall and do not make introductions if they wouldn’t add value to the target:
- What’s in it for me?
- Why should they care?
- What do they do?
- Be open to being the connector in the Subject – Connector – Target chain
- Specify who is making the introduction and parties involved in the e-mail subject
- Make sure, when requesting introductions, that you know something about the target
- When requesting intros send a single e-mail to the connector that can easily be forwarded to the target
- Make it easy for people to get back to you – always include phone and e-mail in your e-mail signature
- Don’t create an obligation for the target to reply
- When replying to a positive introduction, “lean forward” and create commitment, showing you are properly engaged
- Don’t create endless e-mail loops and keep only the relevant parties in communication (use BCC if required)
Given that Chris was in the UK due to the volcano ash cloud, it was a unique opportunity of getting feedback from an american VC during Q&A. Still, no people actually asked a question and Mike had to come up with a few of his own as I waited to run to the first people who raised their hands to give them the microphone. I wonder if people were affraid of asking stupid questions?
Afterwards Alicia Navarro from Skimlinks spoke about receiving US or UK VC funding. Here are a few of my notes:
- US investment is interesting if you want to enter US market
- Big US VCs have big expectations
- US VCs avoid Europe due to requiring high interaction with portfolio companies
- US VCs are good for credibility, press coverage, prestige… and pride
- If you want US VC investment:
- Sell them a realistic BIG vision
- Let them get to know you
- Do your research on their less public stories
- Be prepared to prove your market size
Finally Morten Lund, Skype investor and serial entrepreneur, gave an amazing speech on keeping your focus. He also lightened the mood by having me and an organiser deliver flutes to VCs so they could learn how to play it from a woman who barely spoke English. It was really good and here are my notes:
- Turn doubts into wins
- People and vision matter, not money
- Network and timing are key
- All odds are against you, but keep focused
- Be surrounded by smart people
- Startups need help from smart people
- If you pay bananas, you get monkeys
- Don’t over strategise
- Branding 101: if you think about a flute, you’ll think about me
And that was it for the day. Soon afterwards some startups received awards for their pitches, with Cortexica being voted the best by the judges.
Most of my notes were, however, taken from the startup pitches, as it helps me focus down on my MBA project – something I will be writing here about very soon.
Here are my thoughts on all 14 startups. I’ve opted for giving my feedback in a scorecard format, to make it easier to pinpoint where I thought they were lacking the most and which places I thought they were quite good at, from an investment point of view:
Where the numbers represent the following:
I won’t comment too much on those. Do note that these scores are based solely on my first impression and would likely change if I had more data or chatted with the founders. The most important of all scores – team – to which I’m giving equal weight here, is particularly difficult to gauge in a 3-min pitch and I wouldn’t want to demotivate anyone by scoring low. I’ve scored 4 when I thought they needed further mentoring to successfully overcome their challenges. Gigaboxx, Cortexica and DriveK were definitely companies I kept on my mind. Let’s see how they perform in the coming years.
That’s it – I will definitely be attending GeeknRolla 2011 unless there is a serious impediment to me doing so.
This post is part of my my weekly Bad for Business Series, where I share the lessons learned working at my startup Comseal Systems back in 2003/2004.
This is a quick post. I’m quite busy so hopefully I’ll follow up with another post in the coming weeks.
Off-balance sheet liabilities can be full of surprises. Being an IT company that required reliable internet access, we investigated which broadband, fixed IP solutions were out there in the market. We stayed away from mainstream broadband (e.g. cable, ADSL) as we perceived it as being unreliable at the time and offering low upload speeds.
After shopping around, we ended up with a frame relay connection that would cost us something like €700/month (different times!). The contract was quickly signed, the sales guy was happy and he never actually sent us a copy. We were, however, dealing with a tier-2 ISP and so we didn’t worry – priorities got in the way anyway and we had other concerns.
When we suddenly got strapped for cash, though, paying €700/month suddenly seemed too much. Since we could take advantage of a cheaper, plain residential broadband connection for free (by sacrificing our e-mail addresses and website – we were that desperate), we opted for cancelling the current contract with our ISP.
What we didn’t know, however, was that our contract had clauses that would force us to financially compensate them should we cancel it before it was due in a few years time. The compensation was 100% of the remaining amount in the contract – a very low risk game for them. We moved forward anyway and cancelled the contract. We would deal with this later.
I handed our router (property of the ISP) back to them and – sure thing – in a couple of months they had their lawyers calling in, trying to force us to pay up something like 16K. We owed them 3 months worth of bills, so you do the math: 2,100 is vastly inferior to 16K. I tried to negotiate with them in order to reduce the amount, but they were adamant that the full amount should be paid for. I did this several times, with different people, and in all occasions they refused.
Life went on and, in 2008, I finally got a letter from the court saying they were suing us. I sent the files to my lawyer and asked him to renegotiate. He managed to cut down the amount by roughly 40% and that was it. Still, they ended up representing roughly 40% of the total amount I had to pay to creditors before liquidating the company and, subsequently, closing it down. 40% for what would represent, on a monthly basis, less than 5% of operating expenses. Since this came out of my own pocket, it’s a mistake I won’t be repeating anytime soon.
That’s why due diligence is so relevant for investors. Companies that have this kind of off-balance sheet skeletons in the closet need to be aware that investors do not like liabilities that add little or no value to a company and are only benefiting a third party. And neither should you.
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The tables above show the same 3 different growth scenarios (1, 2 and 3) under different underlying assumptions on the revenue model. The more optimistic model assumes an higher revenue income derived from online ads, which in reality can be higher (or even much higher), depending on how well GroupSpaces leverage their user base. In terms of growth the best scenario stops at 10M users – I don’t know enough about this particular market to understand whether 25-50M is more realistic, or even if 10M is pushing the limits, but it seemed reasonable.
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