Robert Scoble on the
Scale of two (startup) Entities - First he notes that Andrew Mobbs, managing director of the Hatchery, has a big dream. He wants to move the world off of credit cards and onto using their cell phones to pay for things. Sez Scoble:
What I found really interesting was his dilemma as an entrepreneur. What is it?
1. His product is too difficult to use, so it needs some more work. That takes capital, but he’s not able to land Silicon Valley capital (at least not yet).
2. Because he’s chosen a “boil the ocean” strategy (getting, say, Starbucks or Amazon to adopt his technology) he’s finding it hard to get adoption.
3. Because he doesn’t have adoption, investors aren’t interested.
4. Plus he’s going against big companies (PayPal, Visa, MC, American Express) which makes investors nervous, unless you have a clear differentiator that’ll be defendable for some time.
Second, Omar Hamoui’s story of Admob, a mobile advertising network. He walked into Sequoia Capital and had a term sheet in his hands in about 24 hours.
How did Admob land the capital it needed?
1. They had customers and rapid growth BEFORE they walked onto Sand Hill Road.
2. They didn’t try to boil the ocean, nor did they try to go up against entrenched competitors.
As Robert notes, both picked the rapidly-growing world of mobile. So, what gives?
First, the grauitous advice - Mobile phones as credit cards is at least 10 years old, (I know because we were looking at such projects 10 years ago), and the Hatchery guys need to understand why all the previous big scale plays failed, and what has worked instead. The general case for “web 1.0″ is that the “ocean boil” Big Exchange plans failed usually because they needed to use a lot of Other People's Money to break into an existing industry, often in a scale and manner that guaranteed the existing incumbents would fight them tooth and nail and deny them the access they needed. The risk/reward of that profile is appalling, so what has tended to work is niche plays, either too small initailly to attract resistance, or quite frequently in collaboration with one of the industry players. Its not that big, supply-chain spanning play's don't work, just that its far harder - and longer - to execute. In fact there is an excellent summary of this on Simon Wardley's blog today, talking about
innovation of new services:
To show this in action, consider the three little piggies building a house. Let's say each house requires 100,000 bricks and whilst the big bad wolf can blow down an unfinished item, any stable component is too strong to be blown apart. Our three little piggies will follow different strategies:-
Piggy 1 : Build the house in one go.
Piggy 2: Build stable components, each component containing 10 sub-components. i.e. 10 bricks = a line. 10 lines = a section of wall etc.
Piggy 3: Build stable components, each component contain 100 sub-components.
OK, let's say on average you can put together 1,000 components before the big bad wolf returns. Then :-
Piggy 1 : will never be completed.
Piggy 2 : will be completed by the 12th visit of the wolf.
Piggy 3 : will be completed by the 2nd visit of the wolf.
It sounds obvious, but knowing the lifecycle stage of an activity and componentising those activities which can be componentised is essential for innovation.
Schumacher's Law of Startups - Small is Beautiful !
Second, a point that is pertinent to both companies' experiences - Go West, young man. Quite simply, and despite a few notable exceptions, getting money in Europe to do anything relatively radical is harder than in the USA. (We blogged on this a few days ago re
Peter Nixey's experience, which is the far more common - and less reported - countercase to Skype et al). It's getting better, but as
Andrew Scott notes on Scoble's comments section, the Equity Gap is very real to anyone who has looked at getting funding. To those who argue that if you want to build a billion dollar software tech company in Europe by using European VC money, it’s perfectly possible to do it - just look at Skype - Andrew writes:
I’d challenge you to give me 5 companies in this category who have grown to a billion dollar company, purely on European VC money (let alone UK), other than rolling out the usual suspects such as Skype et al. In contrast, I can probably name you 20 U.S. in the consumer internet sector, without breaking a sweat.
There is problem in Europe - its the equity gap. And its big. There are of course always exceptions to the rule, but in general U.S. seed investment is larger, and VC investment is earlier. In contrast, seed investment in the UK/Europe is smaller and VCs invest much later. That leaves a gaping hole between around £250,000 and £2m ($500k and $4m U.S.)
Everyone knows this, everyone will discuss it private, but nobody wants to spoil the party at European conferences by saying it. Which is a pity, as it needs to be said; because there is so much good stuff going on in Europe in the startup scene, thats its a disgrace that more support and more risk capital is not made available early enough.
Europeans (of which I am one) sometimes ask why there is no Yahoo, Google, Flickr, YouTube, MySpace etc etc of Europe; I believe the reason is what I have just described. Sadly, the same fate awaits us again in 4 years time when the consumer mobile internet services mature, and the same conversation will be had again.
Now I would argue that there are some structural reasons - smaller overall markets, setup cost of deal vs size - that mitigate against this in Europe, but its clear its still an issue at this scale, this is not the funding that is going for the Big Event - and even with the UK government for example offering to co-fund 50:50 in many new areas, prising money out of the private funding sector remains non trivial.
Whereas buying a plane ticket to sunny Santa Clara is very easy........ in fact, in this globalising world I'd argue it behooves any would be entrepreneur to look at global funding.
