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Tuesday, December 11. 2012
Evidence that the Incubator/Accelerator bubble is close to bursting - Forbes:
Nike is the latest to jump into tech incubation with its Nike+ Accelerator, for helping the latest health-related startups. The program, organized by TechStars, focuses on startups in areas such as training, coaching, gaming, data visualization and the quantified self.
When companies that know next to nothing of technology jump into it, while people who know a lot are scaling back (eg Y Combinator) or pulling their money out at the same time, you know you are getting close to the "pop" moment.
"Just do it" is one saying, but "look before you leap" is another.....
Update - my friend James Cooper totally disagrees with me in the comments.
Friday, August 31. 2012
I was on holiday at the time so I'm a bit late onto it, but this piece in The Economist chimes a lot with my experience:
Firstly, "market research" for new technology startups is nothing like what usually works for more tradtional start up businesses:
Anyone who has tried a hand at starting a high-tech business—seeking to turn a clever research idea into something customers will pay good money for—quickly learns that everything taught in business school is next to useless. The mistake is to think of start-ups as just smaller versions of established businesses. They are nothing of the sort.
Our experience is its far more about modelling scenarios, what-ifs, probabilities etc and laying down "marker stones" to know where you are, so you can tell which scenarios are probably playing out. For this reason I was very interested that Silicon Valley Entrepreneur Steve Blank has come to similar conclusions, but with a lot more data and experience, and has set up his own accelerator - i-Corps - to do this (I know, I know re Accelerators* - but read on, there is some interesting stuff here):
What distinguishes an I-Corps start-up from a typical university spin-out is the way it forces researchers to stop fixating on the technology they have developed. New ventures, they are taught, are all about finding customers, what distribution channels to adopt, how to price the product, who to partner with, and more. From day one, the mantra is “get out of the lab”. Participating academics have to make countless cold calls to potential customers—something few research scientists and engineers have ever done in their professional lives and most initially find awkward.
Stopping Technology Fixation is IMO one of the absolutely critical issues for Technology startups, the problem is its virtually impossible for techies who are in love with their technology to do - so the second bit, on treating the startup dispassionately as a live project, seems like a very clever way of forcing that dissociation. Anyone who has studied innovation and startups will know that which technology/company/method succeeds is highly unpredictable in the initial stages, and all sorts of factors come into play - exactly because all sorts of factors are untested.
But I was also impressed with the following, because in my experience turning around tech companies, these are usually the most critical issues - making sales and making profits:
There are other methodologies than those suggested here of course, but in my experience the "80/20" impact is the act of focussing on the business model (how you will make money) and the customer model (who will buy). Its damned hard to do, especially for the techies who are struggling with making the new wotsits work, but absolutely critical. You don't have to have the "right" business model initially (just look at Google) but you have to know what a "wrong" one looks like, and what the envelope of success looks like.
Also, they emphasise that there will be significant twists and turns in the business (or "pivots", as the fashion is to call it these days), its a given not a failure
The I-Corps curriculum emphasises that failures which force participants to pivot and change their assumptions are an integral part of the learning process. That can mean rethinking the market, changing the price, even altering the product itself. During the eight-week programme, I-Corps teams repaint their business-model canvases literally dozens of times. The average team confronts 100 or more potential customers while honing its business plan and tweaking its product.
Re: pivoting, I increasingly think of a startup as a bit like a new genetic algorithm, so it has to go through a number of self winnowing cycles before it can navigate the ecosystem its launched into. Another analogy may be a new species that has emerged blinking onto the landscape and has to adapt to its niche.
Its too early to say whether this particular program will work, after all execution is 9/10 ths of the lore, but I think the proposed areas of focus are in the right direction. The one thing this piece does not say, of course, is that for any startup taking money from an accellerator, incubator, seed investors etc - Cave Contract! Get a lawyer to look it over.
*Yes, in the Bubbletime we are also sceptical of any New New Accelerator story, but this piece has some interesting points.
Wednesday, August 8. 2012
Comparing outcomes so far of Y Combinators v "The Rest" - c 119 US Accelerators that came after (Source Konczal et al)
In Dotcom 1.0 there were Incubators. These businesses typically rented space, facilities, admin and backoffice support to startups for some cash and a share in the success (or failure) of the business, typically back to backing it against investment from others who hoped to get into startup portfolio investment. Cometh the Dot Bomb, goeth the Incubators, and they got a bit of a bad name, a recent study by Jared Konczal of the Kaufmann Foundation, showing what everyone suspected empirically - Forbes:
The findings reveal that the effects of incubation are potentially deleterious to the long-term survival and performance of new ventures. Incubated firms outperform their peers in terms of employment and sales growth but fail sooner. These are important findings for policymakers who support incubation as a strategy to increase employment locally and for entrepreneurs who risk their livelihoods in order to earn a decent living.
Cometh Bubble 2.0, cometh Incubator 2.0 - only they have been rebranded, "Combinator" was tried but never took off, the New New Word is an Accelerator. The business models has also changed a bit- Forbes again:
In other words they are Incubators with a more direct funding link (and often without the benefit of any facilities to help startup companies with). But are they any more effective?
Claims are made by their proponents that they are more effective (eg Grasshopper, here). As Konczal notes, the major criticism of such assertions is there is no "blind test" vs other startups that did not use Accelerators. In essence though, from the data, the main issue that emerges is that you have a huge differences in impact between the Very Early In to any trend (like Y Combinator) that work out very well, and the following horde of me-toos that don't (as was true for Incubators, and the VC game in general). One piece of research is noted by Konczal. Based on the c 120 Acceleraror programs in the seed-db.com database, it shows that by 2012 Accelerators are a massive wealth reduction agents to the end-of-the-line funders. As the chart at the top shows, splitting Y combinator out from The Rest, Y Combinator is profitable whereas The Rest, on aggregate, are massively loss making - $300,000 lost for every startup job created is all you need to know. (The author points out his data is not accurate, but has some sound reasons to suppose it is indicative - ie the non reported costs are probably larger owing to many types of investments being below the radar).
Interestingly, Konczal notes a NESTA (UK) study from last year that I read just after we were developng the Bubble-O-Meter, the NESTA research noted the rapid growth (see graph below), said that early evidence was that they were a positive influence, but noted 4 main risks:
NESTA Graph of Accelerator Growth in USA. Perish the thought its a Bubble....
We've been following the Accelerator trend since 2007, here was what the state of our research c 2008 was:
By 2011, when NESTA was writing their report, we had seen the latest bubble in Accelerators and listed it as No 4 in our Bubble-O-Meter trends.
Looking at the huge growth in Accelerators since c 2006 again now, and juxtaposing the Kauffman data, we'd propose that bubble-like behaviour has indeed emerged here, and the me-too startup count is rising (empirical observation sure, but a lot of them do look similar). If the dotcom era is anything to go by, this implies that anything founded since the "bubbly bit" began in the graph - about 2007/8 looking at the graph, soon after Y Combinator according to the chart - is probably not going to make any money for its funders.
Wednesday, June 6. 2012
Just when we were despairing that the Social Media bubble had fully deflated, thanks to Facebook, we find it may just have moved, to Crowdsourcing - Liz Gannes:
Kickstarter may be the best-known brand in crowdfunding, but Indiegogo now has the biggest war chest. In a new round announced today, Indiegogo now has the backing of Insight Venture Partners and Khosla Ventures. Along with previous investors, the firms provided $15 million in Series A funding for Indiegogo, adding to $1.5 million raised last year. (Kickstarter raised $10 million in 2011.)
The site levies a 4% fee for successful campaigns, for campaigns that fail to raise their target amount, users have the option of either refunding all money to their contributors at no charge or keeping all money raised but with a 9% fee. Assuming an average 5% fee, and say that it has 33% net margins ongoing, that means that just to get the $16.5m investment cash back assumes that it has to make nearly $1bn in total turnover, in the VC exit timescale of say c 5 years. No pressure there then*.....
That, and the low barriers to entry (think Incubator 2.0) plus (we will bet) other VC or offset-funded "me toos" coming in with lower fee % rakes, will make this an "interesting" sector going forward. To the winner the (increasing returns) spoils clearly, but what will the margins look like longer term?
Incidentally, take a look at this excellent satire on the current Bubbleicious Social IPO craze - Ponzify.com. Truly the "undertaking of great advantage; but nobody to know what it is" 2.0
*I agree that a breakeven analysis is not the best way to value a startup, but it is always a decent sanity check as to "what you have to believe"....
Wednesday, May 9. 2012
Fred Wilson on the changing nature of Venture Capitalism - GigaOm:
Firstly, it doesn't make money any more:
Secondly, new money is coming in from new sources (I suspect this may be the cause of the above problem):
Fred's view of where VC is going are:
(i) Given all the new pools of funding, he said, it doesn’t make sense for VCs to continue aggregating capital. And considering the industry’s inability to generate returns on more than half of the current investment in venture capital, he added that the allocation aspect is another area ripe for rethinking.
Only those that were in it before 2000 can retire comfortably by the looks of it though
In his own blog, Fred notes his talk was picked up wrongly as the "death of VC"
I can assure you I never said anything about the "death of the venture capital business" in my talk. The venture capital business is not dying.
Defitely not the death. More the circle of life....seems to me that rather than a paradigm shift in VC, another very plausible explanation is that too much new money is flooding in chasing too few opportunities - in other words what we are seeing is good old Bubble behaviour as people start to become irrationaly exuberant again. Then we will have a bubble, then a burst, then it will all flood out again.
That new startups do not need the same funding as the olde style ones is a truism - but all that has done in the last few years is increase the number of boot-strapping startups in the primordial soup. You can't seem to move these days without tripping over another newly set up incubator (more shades of 1997....).
Update - just saw this from Fred Destin on Kernel - Europe is playing out differently:
European venture capital is out of favour with LPs. Even the word seems toxic: I know of one fund who dropped “venture” entirely from its pitch, focusing its messaging on “growth capital for technology companies”. Struggling venture capitalists have to first convince hesitant investors that Europe is a good place to put their cash before they can talk about the relative merits of their particular fund. It’s tough when you have to evangelise your region before you can even get into your own story.
In this case it's governments rushing in while Angels fear to tread
Wednesday, September 21. 2011
News today that Ning managed a $200m all-stock sale to Glam Media - AllThingsD:
Glam Media, a social content platform for sites primarily targeting women, said it’s buying Ning, the custom social-platform start-up co-founded by Marc Andreessen. The purchase price wasn’t disclosed, but sources close to the deal said the sale price was $200 million, mostly in stock. Glam has been eyeing an initial public offering, so shares being part of the deal is not a surprise. I had reported in August that Ning was on the block and had been talking to a number of companies, including Google and Groupon. The sale price is well below previous loftier valuations for Ning, which topped $750 million several years ago. Its venture funders have put close to $120 million into the company since it was founded in 2004.
Timing is everything, Ning was an early-generation SocNet that didn't sell at the time its contemporaries like Bebo, MySpace et al did, and has been superseded by next-generation ones. This is a face saving sale for the Ning founders and a part of Glam's "pump up the volume" of traffic pre IPO.
But this capitulation by the Ning founders also points to early signs of a deflation in The Bubble - Groupon has pulled its IPO (to be seen when it has another shot), and Facebook has now been pushed back for another year. Be interesting to see what Zynga does, given it is another of the recent Tech darlings that has recently filed a $1bn IPO.
If the last Tech Bubble is anything to go by, there will be a series of deflations like this followed by increased inflations in this one. Too early to all this deflation, but definitely a reduction in inflation.
Update - contra indications to a still infalting bubbleworld - an Incubator's Incubator! (hat tip @bobbiejohnson)
Monday, May 9. 2011
Incubators are Force 4 on the Bubble - O - Meter
Those who recall the Dotcom era will recall the Incubators, the idea being that if you gave tech startup companies a home port, power and publicity for preference shares, then hopefully a few of your incubatees would strike it rich and you'd cash in your shares.
Well, today separate stories in TechCrunch and GigaOm both featured Incubators - TechCrunch first, although today they are called Accelerators:
...today the movement is joined by the Oxygen Accelerator a UK-based investment programme designed to intensively mentor super-early stage startups. The 13-week programme will take applications from around the world, so long as the startup sets up a UK limited company.
Then GigaOm, also saying that Incubators were already passe this time round it's a MetaCompany:
As the dot-com boom progressed, “incubator” became a much-maligned term. Thus, the idea of a metacompany was born.............. I wrote about it in the November 2000 issue of Red Herring magazine:
GigaOm notes that the last time round the number of startup incubators went from a few to c350 in about 3 years. Whatever you call it, the role of the Incubator in a Bubble is to manufacture startups, in order to have sufficient volume there for the Dumb Money* to buy - (or else the silly sausages just go and spend it all pushing the value of a few favourites up to stratospheric heights. Oh ,wait.... )
Anyway, this is all in our 10 steps of Bubblemania prediction, a strong Force 4 (see chart above). What incubators then drive is the increase of companies funded off the slide deck (in Froth Time, quantity not quality is the watchword) which of course attracts The MBAs from The Banks.
Update - Original Incubator Y-Combinator has accepted a record number of entries this year
The Summer 2010 batch was “just” 36 companies, although that felt like a lot at the time. But with the continued success of a lot of these startups, more applications come in (Y Combinator hightlights Loopt, Reddit, Clustrix, Wufoo, Scribd, Xobni, Weebly, Songkick, Disqus, Dropbox, ZumoDrive, Justin.tv, Heroku, Posterous, Airbnb, Heyzap, Cloudkick, DailyBooth, WePay, and Bump on their home page). And the $150,000 convertible debt offerings to every Y Combinator startup from Start Fund in the last class don’t hurt, either. None of Y Combinators competitors have anything like that to offer new entrepreneurs.
(Clearly quality is rising, as they only accept a minimum quality...... discuss)
* The Dumb Money is your money, spent by the Pension Funds etc that you give it to, near the top of the market. You have been warned.....
Tuesday, April 19. 2011
The Broadstuff Bubble-O-Meter - starting to see real inflation
Some time ago (in mid February) we released the Bubble-O-Meter, which stated that the 10 signs of a Bubble (in roughly increasing order) were:
1. There is a New New Thing that trancends the Old Economics, and you cannot value It the Old Way. This Time It will Be Different. Dumb Money companies start paying over the odds for New Thing acquisitions.
At the time we estimated we were seeing Stage 3 behaviours in the main, with the start pf a few incubator types. Since then, in just 2 months, incubators have ramped up and now we are seeing signs of stage 5 froth, on receipt of this from the WSJ:
Several major venture-capital firms were vying to fund Uber, his fledgling company. While presenting his business plan at the offices of Benchmark Capital, Mr. Kalanick briefly excused himself to phone three other potential investors. His message: They needed to move fast.
Tuesday, February 1. 2011
The Silicon Valley Angel industry is all a-flurry with news that Ron Conway and Yuri Milner have bought the entire Y-Combinator incubator's "Class of 2011" for $150k Convertible notes each (That is, $150k of money, and that buys whatever stake of the company they can get at first valuation - so if next investment valuation is $1.5m, then they get 10%. I read that the current Silicon Valley community is incensed - launch.com:
1. Founder: "Dumb money investing in a dumb way."
Not a happy bunch of bunnies all in all, then. And here is a detailed discussion on Many Niches of their unhappiness. But doing the maths, you sort of wonder why this hasn't been done before. At $150k each, take say 100 companies that have gone through some form of screening (Y Combinator), thats $15m outlay with zero search costs, dealmaking costs etc (Heck, doing deals with 100 startups individually would probably cost $5m!). Stats say that c 66% of these will die or zombify, but c 33% will be sold at a profit - say 10x exit ($1.5m each) on average (80/20 skew, natch), so thats's about $50m - So Ron n' Yuri have to be in for about 30% on average at exit. Of course, what they are really betting on is a tiny % - say 1% - is a real home run and sells for a few billion or so, in which case dropping 10 million for a potential billion return is a no brainer, especially if you have hundreds of millions in your warchest.
And even more especially as we are entering The Time of Bubbles (Insane...sorry "irrationally Exuberant" valuations, Incubators re-emergent (Young, Idealistic and commercially naive Founders - perfect*...), more dumb money than you can shake a a sh*tty stick at, enough "This Time It Will Be Different With Social Media" hoopla for a megavat of Kool-Aid )..... get in early, buy the best of the crop, (in the sense that Y Combinator is a simple one stop shop that does some form of due diligence and has a track record) and wait for the thundering herd of Bigger Fools.
As for the Entrepreneur, its a no-brainer:
(i) This is a very, very simple deal - everybody understands exactly how it works, no last minute crumbs-on-table grabbing
Yes there are worries - it sets a valuation bar for next level funding, but then you have 10x more money than before, to build a bigger business before you need the next round. I'd like to think it will buck up the current business practice of all too many Angels, for the benefit of all entrepreneurs, but what you will probably see emerging is a 2-level market - "well connected" founders can get onto the big valuation merry-go-round (cue a lot of cr*p being funded in the next few copycat deals) as that was what happened in the dotcom era, while really skilled but poor entrepreneurs carry on struggling for Fools, Friends and Founders money and carry on being scraped in the traditional way by the disparate Groups of Angels. Cue the rise of Z-Combinator to aggregate them.....
Until the bubble pops again of course....
*An addenda - there was this fascinating thought on older, more experienced people being tempted to start up on Many Niches - as they have higher costs, $150k is enough to tempt them whereas $15k is not:
So imagine a world in which you have early to mid 30 somethings with solid work experience but perhaps just come from a different education background, socio-economic situation, whatever, and have never started their own thing. You could potentially have a team that knows how to execute, could potentially have been working together for years, and they can now afford the risk associated with a Y!Combinator summer. The more I think about it, the more that sounds like a slightly more risk averse Carwoo management team. That management team is executing quite well. Experience for entrepreneurs matters. Kids have balls because they don’t know any better, but I bet on experience every time. Sometimes the startup CEO inside of us just needs a little kick, and $150K extra is a hell of a kick. Just because you haven’t been an entrepreneur CEO by the time you are 25 doesn’t mean you will never, or aren’t suited.
Given that Funding Guys always go on about how "it's the team that does it" you'd have thought that getting experienced, proven people would be a Good Thing, shirley?
Sunday, August 29. 2010
The WSJ had a go at the dearth of women in Tech (by which I think they mean ICT, as in my experience there are loads of women chemists and biologists) and asked why:
Only about 11% of U.S. firms with venture-capital backing in 2009 had current or former female CEOs or female founders, according to data from Dow Jones VentureSource. The prestigious start-up incubator Y Combinator has had just 14 female founders among the 208 firms it has funded.
Various Tech worthies stepped in, none so much as TechCrunch, who points to quite a well known problem for conference organisers:
Unfortunately this is one of those areas where a lot of very "sensitive" people live, so it is virtually impossible to have a rational, fact based conversation (just try and imply that the science continually implies that male and female brains are different for example. ).
Also, people tend to neglect the simple maths. I did a BSc and an MSc in Engineering, and men outnumbered women at least 10:1 in both degrees. It starts there, with the basic ratios skewed like that. It won't get better until that ratio changes.
Also - for what its worth, my own experience from managing, working with and being managed by women is that:
And here is the rub - when it comes to the wire, and it's your *ss on the line too, you give the task to someone who has enough confidence and enough competence.
So the question is threefold:
Until these issues can be honestly addressed, there will always be a problem with women entrepreneurs in IT.
Update - Following a few Twitter exchanges, Shefaly Yogenrda has written a very thoughtful piece in response and JP Rangaswami takes an interesting viewpoint about exclusio.
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