Hacks and Startups

Article in the FT today about issues in the VC industry:

The US venture capital industry, which has become an important source of capital for technology start-ups around the world, is facing a severe shake-out that will lead to a contraction in future investments, according to some of Silicon Valley’s leading financiers.

These warnings follow one of the weakest years ever seen for profit-taking by start-up investors, and come amid predictions of an even worse period ahead. Only six companies that were backed by venture capital went public last year, the lowest numbers since the 1970s.

The other main way for start-up investors to realise gains – selling out to other companies – also hit a low point in 2008. Only 325 were sold, the lowest number since 2003, according to Dow Jones VentureSource. This lack of profitable “exits” for investors has come just as venture capital firms were hoping finally to recover from the dotcom hang-over – since many of the companies funded at the peak of the boom are now mature enough to be sold or floated publicly.

Add to this the point that many tech startups right now don't need a lot of capital to get going. A rare (in the history of tech evolution) combination in the last 3-4 years of of many defined/de facto standards, open source software building blocks and powerful new broadband pipes used by large numbers of people has created a rare opportunity to build services on powerful and as yet scarcely exploited platforms.

Prediction for 2009 - the VC industry is going to have to apply many of those "synergy" activities it uses on its investments - but to itself.

Article in the FT today about the UK startup industry asking the government to provide more support to help young companies survive the recession:

Among the suggestions to aid start-ups are: a one-off financial stimulus package; a reduction in red tape; improvements in employment law; easier access to government loans; and the fostering of a more entrepreneurial culture.

Recently NESTA (National Endowment for Science, Technology and the Arts) called for the government to create a £1bn fund for “innovative technology ventures”.

But if I am honest, I think the word "innovative" is key. There has been (in the past anyway) a tendency for UK pork to often go to the well connected rather than the deserving. Any "bailout" money should not - in my view anyway - be used for companies that are doing me-too stuff, or are merely e-retailers, online consumer media plays etc.

What the government can do for all small companies is to reduce the friction in:

- Overall red tape - I still, after 4 years of running a small tech company, cannot believe all the arcane, irrelevant regulatory crap that one has to take on board as a director of a small company.

- Employment law - you could almost believe that UK employment law is designed to halt small companies forming. By the time every Health & Safety, Equal Opportunity, Protection of Workers etc special interest groups has had its say you wind up in a situation where the hassle of employing.
people is extremely high for small companies, and you need to take (expensive) HR people on board early to de-risk

- Getting Angel/Early Stage funding - as NESTA notes, withdrawal of venture capitalists from early-stage invest­ment has put pressure on business angel investors, making it “critical” government funding helps fill the gap. There are already 50:50 loans available, but many UK startups' experience of UK Angels is enough to make them want to get on a plane to San Francisco (and many do out of sheer exasperation)

- Equality of access to large corporate (and government) budgets - we went through a bidding process to supply to a large UK company last year, the time it took was the equivalent to a moderate project - in the £10-20k region - that sort of resource outlay hurts a small company much more than a large on (and yes, we got it thank you )

- More flexibility - last year we were selected as one of the promising startups for the CBA program, but in speaking to investors they hated the fact that we built innovative technology but also funded ourselves via consulting - they only wanted to fund us if we stopped consulting, which we are not prepared to do. In which sort of world is building a sustainable company model seen as a Bad Thing by investors?

- Make the grants system more realistic for Tech startups' needs - for example, there are lots of grants that are there to increase prospects for depressed areas, but the covenants are often too restrictive for Tech companies that need access to skilled people, high levels of connectivity etc etc

- Very simple and cheap ability to make companies pay on time - late (and increasingly non payment) is rife in the UK and still too hard to enforce for a small company

The trick in my view is to differentiate between the requirements of very small companies (less than 5 employees, c 80% of all UK companies), small companies (less than say 20 employees) and larger ones - currently far too much UK company/employment/regulatory policy is drafted with the assumption that all companies are at least medium sized.

I thought these two passages from the article articulated the key issue however, in that both are right:

Reshma Sohoni, chief executive of Seedcamp, an event held in London and across Europe for young tech entrepreneurs, said backers of start-ups that would in recent years have been allowed 18 months to start generating revenues are now being pushed to do so in two or three months.

Saul Klein, a partner at Index Ventures, said recently: “The best place to get money is from customers, that is the bottom line.”

Getting the balance between having a sufficient runway to actually build a business, but ensuring that the companies are actually viable (and what better way than real customers) is key.

Interesting article on Techmeme from Brad Ward of Butler College in the US, about how a ring of people are setting up phoney "Class of 2013" Facebook groups for new 2009 students. He found c 500 colleges with these groups, all run by a small group of people. At first he was nonplussed - what is the point of cybersquatting like this, when the incoming students will do what they will anyway - then he realised what the game is:

Sure, not for one school. Not for tiny little Butler, with 900 incoming students.

But for 500+ schools? Owning the admin rights to groups equaling easily 1,000,000+ freshman college students?

That’s huge.

Think of it: Sitting back for 8-10 months, (even a few years), maybe friending everyone and posing as an incoming student. Think of the data collection. The opportunities down the road to push affiliate links. The opportunity to appear to be an ‘Admin’ of Your School Class of 2013. The chance to message alumni down the road. The list of possibilities goes on and on and on.

The company doing it apparently goes by the unbelievable name of "College Prowler"! (Though they claimed it was an un-named contractor doing a lot of these phoney groups - their comment on the original blog post is, um, "interesting".

From a big picture perspective, having a marketing strategy using social networking sites (like Facebook) is something that is necessary to be effective in our business. We do pride ourselves on being forward thinking and aggressive. In this instance, in its current form, we have crossed the line and to reiterate, we will be removing our administrator privileges from all of these 2013 groups immediately.

I.e. they were caught at it. The thing that immediately occurs is how many more of these rings are there going on, its unlikely to be limited just to college (university) students - and how would one even find out? Unlike say Twitter where you can find the Twerps, its far harder to analyse Facebook to get this data.

But to an extent maybe this is just a fractal effect of Facebook culture - starting with Facebook's dodgy Terms & Conditions, taken on through the sleazy play that was (is) Beacon, can one expect any better?

Update - Larry Dignan argues that this may be an argument for verification, but it is very hard to see how that would work - determined scamsters will fudge it anyway, and it just increases friction for the average teenage college user (do they need credit cards or what for example?)

....is a song by Green Day, a US post punk band beloved of my kids (listen below) - more about them later!



This post is in response to a brilliant post by TechCrunch's Mike Arrington - brilliant because it is both totally right, horribly wrong, and manages to offend everyone else not yet offended by the Bra-less Valkyries - except for the Americans. It doesn't offend any Americans - so I have set out to do that missing piece of the man's ouvre here

(Besides, its the weekend, and what is Le Weekend without Le Bitchmeme)

Firstly, he notes that:

The last session at Le Web was a live Gillmor Gang It will be posted soon but you can watch it below, care of Ustream. At about the 14 minute mark a discussion of Europe v. Silicon Valley erupts.

Don't watch it - I did, so you don't have to. The Gillmor Gang episode was a process that took a bunch of bright, articulate, (mostly) Americans and then produced a rambling, incoherent, no-clue trainwreck of a show. The smartest guy onstage there was Gabe Riveira because he basically STFU.

So there is hope for us Europeans - we can do that sort of thing all on our own, we don't need US help

Secondly, the reason that Europe is a bunch of no hopers in the Startup stakes is that:

Conference organizer Loic Le Meur (a French entrepreneur who moved to Silicon Valley for his most recent startup Seesmic) says that Silicon Valley moves too fast, and that Europeans enjoy a good two hour lunch just to experience the joy of life.

My response... .....the joy of life is great, but all these two hour lunches over a bottle or two of great wine and general unwillingness to do whatever it takes to compete and win is the reason why all the big public Internet companies are U.S. based. And those European startups that do manage to break through cultural and tax hurdles and find success are quickly gobbled up by those U.S. companies. Skype (acquired by eBay) and MySQL (acquired by Sun) are recent examples.

Most of the Euro-entrepreneurs I know who have gone to Silicon Valley have by and large only done it for one reason - access to money. I don't know many who would willingly choose to live there if the VC's didn't make it a pre-requisite of funding (I believe that is true in non SV USA as well, by the way). The Euro-failure is not the courage to innovate or start businesses, it is the cohones to invest in them. Also, having a (semi) homogenous market of c 300m people gives a certain advantage. And besides, if you can sell Skype for $$$$ then those Yanks can't be all that smart

Thirdly, Mike notes that:

The panelists would have better served the audience by urging them to help shift European culture to be more supportive of their entrepreneurs. These people need a fighting chance to survive, and just telling them what they want to hear isn’t helpful. Joie de vivre is fine once you’ve sold that startup and have a summer house in the south of France. In the meantime, get to work. Le Web needs more Europeans on stage next year, and it just may be you up there telling the world how you overcame European culture and grew a successful company.

You know he's right of course - on both counts:

- We do need to encourage the entrepreneurs, but its not a shift of culture they need - its a f*cking great boot up the *rse of the financial value chain to make it attractive to fund risky startups. The UK government spends millions a year setting up 50:50 co funding schemes but still the funding community (excepting a few brave souls) won't fund anything vaguely risky.

- We do need more Europeans on stage - lets be honest here - did any of the US people tell you anything you didn't know? (excepting product announcements that is, and Dr Helen Fisher's excellent talk about how drugs maketh man). Today, news flashes across that Atlantic at the speed of a blog's send button. And as our resident grumpy man, Dennis Howlett noted ( our Grumpy Men are Grumpier than Your Grumpy Men so there ) wrote about David Weinberger's talk:

....Cluetrain Manifesto co-author David Weinberger’s dream of crowdsourced leadership. If it was anyone else delivering this message it would be considered risible. As it is, I can only hope that someone takes David aside and gives him a gentle lesson in leadership principles.

(there is a comment to put in here, but I'll leave it to you, dear reader.....)

And what about Green Day, I hear you ask - well, they are American, make great music using a format (3 chords and sharp lyrics) they basically pinched from the Brit Punks, and provide me with a brilliant title for this post

(Update - Loic Le Meur, Le Web organiser, asks if Mike Arringon should be invited back next year - I think so, its too good a show to miss. You?

Two articles in the last few days about the woes of recently funded startups - the NYT today made this comment, quoting David Weiden of Khosla Ventures:

Businesses that were strong a year ago are still strong today, even if they depend on advertising, Mr. Weiden said. Facebook, for example, which depends on advertising for much of its revenue, might have a harder time selling ad space, and revenue will likely decrease, but it will still sell ads, he said. But the social network, which is rumored to be seeking funds, will have a harder time raising money.

“What’s changed more than the ability to make money from ads is the ability to raise money at the same valuation it had six months ago,” he said.

In other words, the next tranche of funding is going to be a cramdown round (where the existing staff, founders and investors get their shares "crammed down" into a little corner as new money comes in at far lower valuation. If the same funders put the dough in then its just the hard working staff and founders who get scraped. And this won't just be for Facebook - pretty much anyone who saw funding in the last 18 months or so is probably going to find this happening if they need more money (hence the Sequoia Doom Speech) - which of course will be great for morale!

Just as well there ain't noplace else to go......

The other was Nic Brisbourne on Facebook's volte face re allowing (and now not) some of its employees to cash in on the business. Unfortunately, Mr Zuckerberg still seems to be able to cash himself in. Apart from being wonderful for staff morale, the other risk is the "Miami Factor" - why do all this hard work with discontented people when Cash in Pocket + Miami in Sun = Babe in Hand & Booze in Cooler.....

It was a dotcom truism that it was time to head for the exits/hills when the CEO cashed in....will it repeat for 2.0 we wonder?

Update - more speculation on Facebook (de)valuation over here on Valleywag. $1.3bn anyone?

By the way, this post has gathered the most negative karma of any written in the last month or so - clearly a message people do not want to hear!

Extraordinary - NESTA is talking about a £1bn Government backed fund to invest in early stage UK startups, according to the Grauniad:

The plan, conceived by the National Endowment for Science, Technology and the Arts (Nesta), was fleshed out in discussions at Downing Street last Thursday morning between Gordon Brown, Drayson and Lord Sainsbury.

Many 'pre-revenue firms' are facing a battle for survival as they struggle to get finance. There are fears that the doubling of government funding for scientific research at universities, which has led to an increased number of spin-outs in IT, biotech, nanotech and green technologies, will count for nothing if money is not quickly distributed to them.

There are hopes that the plan will be formalised early in the new year. It could be the most significant direct investment in new technology firms since the post-war Labour government created 3i to provide risk capital to growing businesses

That's 3i who have now exited from funding the small startups they were set up to help, of course....hence the New 3i. And this time it will be different - or will it?

The venture fund will seek to draw in cash from the private sector including private equity, universities and mainstream business. In recent years, private equity, a traditional supporter of early stage firms, has all but pulled out of the sector.

The question of course being that if this lot have been, by and large, fairly unenthusiastic at startup investing in the good times even with all the Government backed 50:50 risk sharing schemes around today, what motivation would there be to invest in the bad times?

The answer, we humbly submit, is to do 3 things:

(i) Make it financially attractive to invest in risky, early stage companies - and this means tipping the tables towards them or Private Equity will sit back and buy nice safe biscuit companies.

(ii) Don't go down the channels that are not working today - pumping more money down these sclerotic pipes is a waste of time, money and hope. Easier said than done, but a New 3i needs to be formed.

(iii) Let 4 million flowers bloom - cover the yawning "equity gap" area between £ 1/4 and £ 1/2m where all the bright, innovative companies struggle. Investing £1/4 m in 4 million startups to get them to a level of Round 1 VC funding will be far more Darwinian in the end than trying to pick far fewer deserving companies for the £2.5m tranches

Also, look wider than the universities for entrepreneurs and ideas. It is sheer intellectual arrogance to think that this is where all creativity stems from.

We shall watch this space with interest....

From the NYT:

Serious talks between the Facebook social network and the Twitter microblogging service started soon after Mr. Williams took over as chief executive on Oct. 16. Twitter reportedly rejected Facebook’s $500 million, mostly stock offer several weeks ago.

“We explored it, as we should. We took it seriously,” Mr. Williams said. “It definitely made sense — the strategy we talked about with them — but it wasn’t the right time.”

At $500 in $15bn valued stock....no definitely not the right time, because Facebook isn't likely to be worth much more than $3bn in our view, so thats $100bn in Real Money for Facebook which is about what it was valued at last round (and its still in stock, not even cash). (Nic Brisbourne did a good analysis last week).

When is the right time - well, after Facebook has been devalued of course - But we reckon in 2 years time Twitter may well be buying Facebook - they could have a real revenue model

Nice post by Broadcom's Rags Gupta on surviving dot.bomb 2.0 from experience of dot.bomb 1.0 (props Deirdre Molloy for link). Its also on GigaOm over here. I was on a panel on the Chinwag Web TV Takeover event with him a few months ago, very sensible chap)

1. Be as transparent with your employees and other stakeholders as you can be. At one point, we had to tell everyone in the company that coming to work was optional and that the next payroll was in doubt because of our cash issues. Even though it was bad news, they appreciated the transparency. In hindsight, I would have been much more communicative than I had been.

2. Cultivate a trusted adviser or mentor outside of the workplace. I think people should do this anyway but it helped me a great deal to have someone I could talk to about the issues I was facing and dispassionately help me evaluate the scenarios and available options.

3. Remember whom you work for and where your fiduciary duties lie. Yes, you ultimately work for yourself. But, as a founder or management team member, you may have fiduciary duties to shareholders, both common and preferred, to employees, creditors and customers. Their interests can diverge even in the best of times and especially so when things start going pear-shaped. I made some painful decisions that ruined a friendship but were for the ultimate good of the company and satisfied my fiduciary and ethical obligations — and, to reiterate No. 2 above, I’m glad I had a trusted adviser to help me make sense of things during such an emotionally fraught period.

4. Accelerate non-advertising revenue models. This is a more practical recommendation. Even if your usage and advertising metrics are growing nicely, now is the time to accelerate development of non ad-based models and prioritize the other revenue streams more highly. Your investors and potential investors and acquirers will appreciate this. Not only that but they are likely to discount your ad-based revenues anyway, so any momentum you can show outside of ads will bolster your story.

5. What doesn’t kill you will only make you stronger. Easy to say, hard to live through. But just keep telling yourself this when things really, really suck.

6. Pray! Seriously, luck plays a big role. Do whatever you can to make your own luck.

Point 3 is a biggie in turbulent times. See his note on Ad revenues as well.

If only the young 'uns had listened when the old hands said here comes another Bubble, eh

Bunch of interesting posts on Techmeme today with respect to startup funding, and a few comments:

VC's not wanting to put more money into areas they funded but perceive as now doomed, as reported on ExpertCEO, a new anonymous online community cum Exec agony aunt :

The first post: We are a Series A funded company with tranched financing based in a milestone. The investors want to shut down the company and not provide the second tranche even though the milestone has been met!! They simply do not want to invest in the consumer segment in this economic environment. . .

The second: I am on the board of a company that had signed term sheets from Tier 1 VC's, had one VC back out after the term sheet was signed and then after all the final docs were drawn and signed, had another Tier 1 VC say they want to do more diligence at the very last minute. Has anyone else had experiences like this?

Its a sad fact of life, but its now far better for VC's to hold onto cash to invest in newer businesses once the current situation becomes clearer, rather than put more into companies formed pre-paradigm shift (and to be fair, they have upstream funders reneging as well). It happened in 2001, so expect more of the same, methinks. Big difference this time is they will be named and shamed on these various anonymous sites, which will be an interesting dynamic.

And of course what they really really want are safe bets, as Don Dodge notes:

VCs are still investing but only in high quality companies, with proven revenue models, focused on a growing market segment.

In 2001, biscuit companies were the rage . And if you have an Ad funded Biz model, beware...:

Startups with advertising driven revenue models are being pressed to prove the numbers, show comparables, and really drill down on CPM rates and CPC click through rates. The reality is that there are very few web sites or services that can build a large enough audience to generate $1M in monthly advertising revenues. CPM rates are falling across the board, especially in the social networking area.

Which is picked up on another post there, about traffic on SocNets going up while Ad revenues "fall flat".

As an aside, Techmeme reports that Mapquest (remember them) is firing on all cylinders!

Despite perceptions, MapQuest is actually a more popular mapping destination than Google or Yahoo’s map sites, and the company continues to innovate and push out new features and services

Strewth, I thought they were dead! I stopped using them because they didn't put Tube stations on London maps which makes their maps effectively useless. Just looked again, they still don't - few more cylinders clearly needed on the old 2-stroke methinks.

Who could resist? From NASA.....beats programming throwaway sheep, Tim O'Reilly would be proud

We are looking for a full-time developer to help NASA send robots to the Moon.
If you want to make a difference in space exploration, come join us!

Ideal candidates will have a solid history of implementing and deploying
complex software systems that integrate multiple languages and libraries on
multiple platforms.

Responsibilities:

- Develop software tools for remotely controlling a rolling-walking robot.
This project includes interactive 3D graphics, GUI design, middleware, and
working with multi-language/multi-platform components.

- Develop software sysetms for processing satellite imagery of the Moon
into maps and 3D models. This work involves creating very high-performance
processing pipelines and innovative geospatial user interfaces.

Dusting off all those notes from my BSc final year Robotics stuff ......

(link hat tip Ariel Waldmann)