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Sunday, March 7. 2010
There is a rather useful article in the NYT about how New York is starting to pop up as a startup hub again, after Silicon Alley shut down in 2002. But what really struck me is how much of it could equally be said about London. The following are to my mind the key arguments:
Firstly, a thriving scene of mutual assistance:
The London scene has been quite vibrant for about 3 years now, but I think what is missing is the emergence of some real category killer companies. New York has already given birth to a few, such as Etsy and DoubleClick. London doesn't really have this - yet.
As to where the London category killers may come from, London is more like New York than Silicon Valley - it's a hotbed of the more traditional Media industries which are helping drive New York startups:
And somewhere to work is key - there is a rise of incubators and workspaces again:
Another critical factor is the input of the Universities in the area:
London has some of the best universities on the planet, so no excuses there - but more co-ordination and collaboration is required, for Cambridge to still be ahead of London is extraordinary given the assets at London's disposal. The reason for this is the main London scene-killer - funding. There is still a bigger (or at least more active) VC scene in Cambridge. New York is getting that right again, and the meltdown in teh financial sector (another thing it shares with London) is helping:
To my mind this is still London's main weakness. All the other areas coild be done better, but are not on the critical path. But nearly every London startup I know of in the new mesia/web 2.0 space that has found funding has had to go Stateside to get it, or fairly soon after an initial round. That (and I know some of my London VC friends will disagree) to my mind is the main thing holding London back. Its not that there isn't any money here, its just that there is not enough of it, and I am concerned its not going to the right places. I think there is still too much of a tendency to give money to the "right" sort of people, rather than the sort of people who are right.
Wednesday, August 20. 2008
Many industries try to move from a "one - off" structure to a more mass produced model, usually driven by a desire of one of the players to to reduce costs and thus increase penetration and volume (the argument is of course circular - to increase penetration costs, must be reduced, and with reduced costs volume must be increased to make money). Mass production tends to work very well with commodity items, but is generally less successful when tried with more complex products, and much more difficult to do well when dealing with services - hence the reason we all love our utilities' customer service systems.
Thus it was with some interest I note there is increasing evidence that this move to mass production is being applied to technology startups - this post by Fred Wilson caught my eye:
Once upon a time a startup was something that was initiated by an entrepreneur seeing a gap in the market, and crafting a business to address that gap, and seeking friends and funding - a "one - off" industry structure. This structure implies startup mass production. The question is whether startups are actually natural commodity goods. In other words, do we believe this process will:
(a) accelerate the formation of great new companies that bring exciting new products to market
(b) throw me-too sh*t at the wall to see what will stick
In the dying days of Web 1.0 (aka the dotcom era), a large number of "Incubators" sprang up. The reason too often was that there was just too much dumb money being left on the table, as there were just not enough dotcom startups to sponge it all up. Enter incubator plus stable of startups, exit money from table - and then exit the whole panjandrum when the industry collapsed. In other words, incubation was a manifestation of bubblenomics.
Having been peripherally involved with these incubators at the time, I would like to say that they followed the Type (a) scenario above - quality of the startups were high as they were carefully picked - both as people and ideas - for great potential. And I think in the early days they were. The issue was, that as more of them arose, the temptation was to build stuff that had "buzz" - ie was fundable by dumb money - rather than had intrinsic value. And - in my view - quality of teams also declined as volumes went up.
So, what makes us think that This Time Is Truly Different, that we have learned our lessons? Has anything else changed this time round. Are there any factors that will change the game?
Firstly, it is true that it is probably an order of magnitude less costly to get the technology built now, at least to a "beta" stage. This allows a startup to start to capture customers early. However, because of this low setup cost, in any sector there are typically a larger number of competitors (which incubation will only exacerbate). Thus they all have to use FreeConomic business models where the product is given away (if one does, all must) so they are not self sustaining until there has been a shakeout. Most of the "Incubators 2.0" want to sell the startup to deeper pockets long before that, of course.
Secondly, it is possibly true that this generation of young 'Net natives are sharper, cannier and more plugged in to their social media so that good ideas travel faster and poor stuff dies quicker. Possibly.
Thirdly, one could argue that funders' are more experienced this time round and are better able to predict where real niches are rather than follow the buzz and the herd. On the other hand, word on the street is that there are still shifting fashions in the funding community so there is clearly a residual of the old me-too behaviour.
Fred also makes the point that many of the teams are young and inexperienced, by design. Why by design, I hear you ask? Well, the Good Side of this is, as Fred notes, that these people are 'Net natives, and don't know they will fail. There is however - if Web 1.0 lessons are anything to go by - a Bad Side:
Firstly, many (most?) Incubators' business models had a few "interesting" characteristics around contract formation - by and large they were strongly structured in favour of the incubator, a bit like the model for signing new bands. This is a far easier sell to young, inexperienced people than those who have been around the block a bit.
In other words it may be more a funders' economics thing than anything else. The other thing I must note about the "youth" thing is this - Fred writes that:
A wry smile at this point and a bit of disclosure here - we too are a tech startup, but we are not in the first flush of youth. It would appear that many of these programs are actually closed to people like us, despite (a) knowing our stuff technically and (b) having actually been senior managers, walked the talk etc. (Update - an (old codger) friend has noted that this youth focus is rational, as given the high attrition rate at this stage, throwing lots of cheap bodies at the wall is optimal for an incubation model)
We did go on a startup program last year, but one that was funded by the LDA, NESTA etc - we beat 700 applicants to get to the last 10 - but it was one of the few programs that did not actively discriminate on founder's age. Most of the other entrepreneurs on that program were also experienced. By the way, one of the elements of that experience is a deep interest in funding terms and contractual obligations to funders
Now it would be interesting to see how much better or worse the dotcom incubators' success rates were than the overall funded startup population. Sadly I don't have that data, but my hypothesis would be the fared no better, in fact my empirical observation was worse overall as by and large they were more prone to being in late, with me too stuff, and below average calibre teams. I do recall a McKinsey study soon after the crash showing that pretty much every VC in the dotcom game after 1998 lost money.
So I would make a few predictions here on the Next Generation of Incubators 2.0 (I'll call them hothouses as its more part of the zeitgeist):
(i) There will be little difference in average outcome between hothoused startups and organic ones, but later hothouses will underperform on average, as.....
Fundamentally, this is not a type of industry that lends itself to mass production as it stands, and treating it as such is probably the wrong approach. But I'm sure everybody told Henry Ford that too.....
Funnily enough, I think the Boy-band model alluded to above is closer to optimum - if the infrastructure can be standardised (knowing where to find funders, advisers, facilities etc) and contracts standardised then there would be no need to aggregate in hothouses. Perhaps this is what Silicon Valley is closest to in reality ?
(Update II - good note from Nic Brisbourne re differences between Incubation 1.0 and 2.0 in the comments section)
Update III - saw this on Forbes - pertinent somehow as to the Incubation Endgame I predict:
Its an interesting read......
Wednesday, July 30. 2008
TechCrunch's Mike Butcher is calling for a London TechHub after visiting the Dublin one:
The Digital Hub is a community of people – artists, researchers, educators, technologists, entrepreneurs and consumers, all working together to create innovative and successful digital media products and services which support their future. The Digital Hub is an Irish Government initiative to create an international centre of excellence for knowledge, innovation and creativity focused on digital content and technology enterprises. The core development of nine acres is located a ten minute walk from the city centre within the historic Liberties area of Ireland’s capital city, Dublin.
Now, I actually think its a very good idea - but keep your eye on those words "Government Initiative" though - we looked at a plan for a "Virtual Incubator" for London about 3 years ago, but the economics required subsidies or else the prices look the same as any of the other for-profit managed drop in locations in London - which is of course why nearly all the action is happening ad-hoc in pubs and cafes with free WiFi, or in institutions such as the New Media Knowledge centre which is a University property.
In fact, in this virtual age, isn't there an argument that this industry should drink (or at least log into) its own Kool-aid? Ian Forrester certainly thinks so.
Anyway, one of the issues raised is Location - which tallies with another post showing the Old St area is becoming a Digital Roundabout, according to the FT (thanks to Drew Benvie for the link):
Previously known as the busy junction where London’s Old Street meets City Road, Silicon Roundabout is not the most salubrious of locations for budding entrepreneurs. But a coalescence of young web and tech companies in EC1 dates back to dotcom days. Alongside cheaper rents and a surfeit of bars, tapping into that experience is part of the area’s appeal for many of its newer residents.
As with all overnight successes, its been true a long time - Web Hoster Globix built a major presence there in 2001 (because of the rents and nearby customer base), and yours truly ran a software company 2 blocks away in the tech doldrum days of the early 'Noughties.
Nonetheless, rents are lower there than in more salubrious places in London, and it is becoming a bit of a cool tech cluster again (though the meedje creatives still tend to be in Soho) so if one was to set up a TechHub, thats not a bad place to be.
Just preferably not on the Roundabout
Update - very good piece here on the complexities by Matt Locke, I never had time to put all this down...but here it is!
Update 2 - the zeitgeist in Internet Time - now the Evening Standard is at it. I wasn't this fashionable in 2005....
Saturday, March 22. 2008
Ronald Coase was an economist working in the 1930's and as far as I know was the first to wonder why organisations were the size they were - and he came to the conclusion it was due to transaction costs. If it is more expensive (hassle, price etc) to do a transaction with a 3rd party than supply X in house, then a ompany will do that. If not, it will outsource. This is encapsulated in Coase's Law:
" As transaction costs decrease, the complexity of the firm diminishes. A firm tends to expand till the cost of organizing
I first re-visited this law about 15 years ago, when it became clear that the emerging internet was going to change the transaction costs of business (and much else) by at least one, if not several, orders of magnitude. At that time corporates were large (probably on average larger than today, conglomerates were still unwinding) and the "startup / SoHo" scene was minimal. Articles on electronic cottages, the hollow / shrinking / transparent company etc duly appeared with the zeitgeist of the time, and then suddenly it seemed that everyone was a startup, and the dotcom bubble began.
However, the dotcom bubble popped, but while everyone was watching that a far more rudimentary execution of Coase's law took place - offshoring stuff from high labour to low labour cost countries, as the transaction costs of managing something halfway across the world started to fall. Then from about 2004, ubiquitous broadband and falling hardware costs led to the rise of many Small Office / Home Office (or increasingly No Office) businesses (and I use the term increasingly loosely as increasingly we see ad-hoc collaborations rather than companies doing things), and websites, blogs and organisations sprang up to represent them - Web Workers Daily being a typical example.
What was happening was that broadband penetration and the ability to communicate via the 'Web was massively reducing transaction costs, and I think we are in a situation today where Coase's Law suggests that many organisations are far too large for the new costs of doing business. Things don't all fall apart at once of course, I would argue that Coase's Law works at the edges initially "in the Wild" - as transaction costs go down, various parts of organisations loosen their ties - some secede, some are seceded, not all succeed etc etc.
This was all under the radar of course, people just got on and did what was economically and technically rational - but all things go in cycles, and I have noticed the re-emergence and resurgence, in the last year or so in the academic literature of the "small and independent is beautiful" zeitgeist. Recent books on Starfishes and Spiders and books by Clay Shirky, Charles Leadbeater et al are all signs of this meme climbing back over the parapet.
(Maybe some economist can explain the 10-year cycle in Zeitgeists )
I was discussing this the other day with Nico MacDonald (who hosted the recent lecture by Clay Shirky at the Royal Society of Arts in London) expressing my concern that the "pop-academic-media complex" tends to then grab these things and then charge down a typically (simplified) channel, often not taking into account difficult nuances (or those that are unsupporting of the zeitgeist), and you then wind up with the "Flat Earth News" effect (to bring another recent zeitgeist to my aid), ie a whole lot of self interested parties start bailing onto the zeitgeist and transforming it into a fully blown Bandwagon, and it becomes impossible to have a reasoned discussion about it if you in any way oppose the idea.
(Read the Flat Earth News section on how the Millenium bug was pushed, or the note that in the UK there are about as many PR people as there are journalists providing news, and you start to get the picture)
That this may be happening here, now occurred to met when I say this essay today by Paul Graham, titled “you weren’t meant to have a Boss”
Now don’t get me wrong – I thought Paul’s book “Hackers & Painters” was excellent, and I’m a great fan of his essays, but he has an agenda in this game – he runs an incubator, so the aim of the writer is not so much to explore the issues of working in small vs large organisations, but to persuade as many technical people as possible to become startups despite the evidence. As he notes towards the end:
In an essay I wrote a couple years ago I advised graduating seniors to work for a couple years for another company before starting their own. I'd modify that now. Work for another company if you want to, but only for a small one, and if you want to start your own startup, go ahead.
Now we already noted last year that what research has been done suggests they will not be better off financially, there is a considerable Founders Discount in fact – but the problem is that the Zeitgeist is ramping up, so inconvenient data like that will increasingly be buried.
And back to my original conversation with Nico…elsewhere Paul notes that:
What's so unnatural about working for a big company? The root of the problem is that humans weren't meant to work in such large groups….
There are a whole bunch of things that are being mixed together here, and a promised land is being painted largely by ignoring uncomfortable facts, in true Flat Earth News style. So lets go through the issues raised:
I'm not saying that big corporates are not sometimes soul destroying, nor that their structure doesn't make them potentially psychopathic, nor even that working in a startup isn't great fun What I am saying is beware of the opposite pendulum pushers, and be aware that the new new thing won't solve all the problems - and that uncomfortable counterfacts will be buried.
Coasian theory will have its way, the evidence is all around us - companies shedding labour and recruiting contractors, the rise of So/Ho/No, co-working etc are all evidence of this. Large companies will (are) restructuring, but the near anarchic opposite is not therefore the logical solution - as the Starfish guys (implicitly) concede, these sort of structures tend to be best as protest movements, and are usually unable to stay stable in their utopian "all equals" state for long.
And I say this with a slightly heavy heart - I love the idea of small, happy, equal systems pulling down The System. But any quick reading of history tells you that Animal Farm is probably a better model for all Utopii than any other.
I'd also like to bring in something that has worried me for a while - the concept that the DNA of existing businesses is all bad and wrong and crap. If Bizgurus are going to use biological analogies, I'd like to make sure its done correctly and differentiate between the genotype - the blueprint of the organism via its DNA - and the phenotype, which is how it evolves in any specific environment. I think too often the two are confused. As the environment changes, the "DNA" will drive changes in the phenotype, while the DNA stays the same, becaus ethe DNA is from us. As Pogo once said, I have seen the enemy, and he is us".
So net-net the story as it stands now is this:
- Yes, Coasian theory implies that organisations today are probably too large for the emerging transaction costs, and they will start to dis-integrate and re-integrate in new ways. To me this is a more coherent explanation than the argument that the DNA of large companies is inherently wrong, or that the "edge economy" is where its all at. Its more a continuum as transaction costs force structural changes in how and where logical subunits are bonded together across the economy.
In other words, take a good hard look at where the Proposer of any New Utopia is coming from - if they get to drive the Rolls Royces, then its probably you that's doing the polishing.....
On the Rolls Royce point, I have to mention the irascible Nick Carr's note on Bebo here - kit's too good to ignore :
A little over a week ago, the Birches sold Bebo, the third largest social network, to AOL for $850 million, about $600 million of which will reportedly go into the pockets of their jeans. As for the millions of members who have happily served as sharecroppers on the Birches' plantation, they'll get the satisfaction of knowing that all the labor they donated to their "community" did indeed create something of tangible value.
Now good on the Birch's is my view, but its a good lesson in Rolls Royce spotting!
Update - interesting thought on Zoho blog, ie that transaction costs also define the lifecycle of an organisation.
Monday, April 30. 2007
This is a thought we have been mulling over ever since we attended the BBC Innovation Labs, and after reading Sam Sethi's post on Incubation in Vecosys we thought it was time to put some thoughts down.
Since we set up Broadsight we've worked with quite a few cutting edge startup companies, some more established technology companies, and people doing cutting edge work in larger companies. We've also chatted to many startups in the various UK events like FOWA 07, Open Coffee, Beers & Innovation etc.
The stories we hear have a number of very common threads:
- The propositions and their business models, albeit often in different sectors, are usually fairly similar, there are definitely comman "groups" of models.
- The platform requirements are also fairly similar (Web / CMS / Social net / Ad Server / Analytics)
- The attempts to get early stage funding are all depressingly similar - its very hard and time consuming - Angel Aggregation alone is hard, never mind getting the cash.
- By and large their requirements are fairly similar (even of the stuff they don't know that they need such as design for scaling) - space, support, senior management, service platforms etc
This would all suggest that an Incubation model has real benefits - centralised resources and support, an ability to aggregate those flighty Angels.
However, all (are there any left?) the UK Incubators in Web 1.0 imploded after the popping of Bubble 1.0, yet startups continued to start up - so what is wrong with the Incubator model? Now (and this marks us as fogeys I guess ) we were all around in Web 1.0, and knew of many of the Incubators in Web 1.0 in the UK, and some in the US.
Off the top of the head, the 4 things about UK incubators that (in our opinion anyway) doomed them were:
- In Too Late - most UK Incubators started far too late in the cycle, and this drove their behaviour - the other 3 failures I note below were largely driven by being in too late, and most were caught with their eggs largely unhatched. In fact the "in too late" seems to be a fairly standard occurrence in UK tech ventureland......it is impossible to get funding when the new markets are in early stage, and then there is "follow the pack" funding once markets are "validated" - ie everyone else is doing it already. There was a McKinsey study c 2002 that showed that even in the USA, the VCs / Incubators etc that entered after c 1998 all lost money (I can't lay hands on it right now, will link as soon as it is found).
- Excessive overheads - they were spending way too much - this is probably because too often the Incubation business models were predicated on taking companies off for an IPO pop too early (due to late entry). Endeth the Bubble, endeth the business model.
- Trying to pick winners. The big difference I noticed between the US and the UK was pithily put by Esther Dyson - in the US, they fund a lot of crazy ideas early. The role of the Incubator is to incubate and let the market pick. (Esther did note that in Europe, because funding is so hard, if you get it there is a more open road - a good reason to get in early in Incubation 2.0! )
- Poor risk / reward for the entrepreneur - in general the combination of valuation, ownership, interference by wishing to "add value" and justify the fees, foisting unsuitable senior execs on the companies too early (to get the IPO pop accelerated) etc etc made many entrepreneurs extremely wary eventually.
In the "post incubation" era we've taken a few startups to funding and also worked with a few companies left picking up the pieces from their "Web 1.0" startup hangovers, and the impression I am left with from Funding UK is (no doubt deeply unfairly) almost a dual mode behaviour:
Mode 1 (early days) - If its new tech, don't fund it - its too risky and hard. Would fail Flickr test (ie would these guys have funded Flickr). Result is that the Technology does not get out early enough
Mode 2 (bubble mode, when every other Funder is chasing the same stuff) - Fund anything that moves, including the nth Iteration of Flickr, and overfund it in the hope it will grow to be No 1.
To be fair, the funders we have worked with have in our view now taken these early risks, but it was sometime painful going - everyone wants a level of analytic certainty that just does not occur in the early days of products just (or in process of being) invented, for markets that do not exist.
These thoughts above were put down as a quick lunch starter , further thoughts/ comments were:
- On Incubator 1.0 from an old friend who was there - essentially his view was that it was inextricably linked with Bubble 1.0 - many of the people who were setting up Incubators were more interested in the bandwagon than actually creating great businesses.
- From Mike Butcher's tbites - noting the Channel 4 program on Bubble 2.0. Though it was over the top, the raw material was definitely there!
Two further comments by people who were there first time around:
- Many of the people running the Incubators had never set up a start-up in their lives, they were typically financiers of some description or another who were fairly recently into internet technology. When things got tough, the only solution they seemed to have to any problem was to fire the supposed (ir)responsible party - even the CEO, and put in a new one of their choosing - often at exorbitant cost.
- The UK incubators couldn't provide the quality of advice and access that US players like Idealab could, and never really solved the access to funding problem, and in fact many of the other benefits of incubation could be fairly easily self provisioned once it became clearer what an early startup needed to do.
Nonetheless, there are some definite benefits to incubation environments. Our experience at the BBC Innovation labs and at various Mashup type events is that if there is a level of camaraderie and collegiate behaviour, and good facilitation, then ideas and plans can be accelerated fairly rapidly and blind alleys avoided.
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