Will Governments Ever Get Startups?

Posted on September 6, 2011. Filed under: Advice, Companies, Funding, Government, Startup | Tags: , , , |

In two words: Not likely. I could end the post there but this is a blog, not Twitter.

Now there two reasons for this post right now:

  • Flickr image courtsey of johnsnape

    My employment on a government entrepreneurship programme finished on August 31, so only now can I blog about my experience: My contract of employment effectively disabled me from blogging about it in depth and honestly. I could have taken the risk of “mouthing off” but that would have helped neither me, my colleagues or more importantly clients. So I copped out of saying what I think online although I did take the risk of using Twitter where the only civil servant types you will find engaging on there are similar mavericks and forward thinkers.

  • Steve Blank, an extremely influential entrepreneurial thinker and teacher, made this post on September 1st: Why Governments Don’t Get Startups.
Steve has made some interesting points, detailed below, but I think he has missed some other crucial ones, as follows:
  • Government programmes are policy driven and furthermore policies change every five years, or more often
  • Few civil servants, or people in quangos running government programmes, have ever run a business, let alone a scalable startup
  • Governments think locally, regionally and nationally. A scalable startup has too think globally and at some stage connect sell globally.
  • Governments make little effort to speak with businesses about their real challenges: Sure, politicians visit businesses in their local area but that’s almost invariably a PR exercise for both parties. So there is a disconnect between policy makers and those who deliver the interpreted policies and interact directly with businesses
  • Government bodies and programmes tend to attract individuals and organisations that fit several of the following characteristics:
    1. They are risk averse
    2. They are very keen on procedures
    3. They have political aspirations
    4. They like talking more than doing
    5. They are experts in doing funding bids and spending money on overheads
Why should I have an opinion on this? Well for the last 4 years I have been working in three different government funded business growth and startup roles:
  • As a business development manager in a University (mentoring, pre-seed funding programmes, commercialisation, spin-outs). A large part of this role was working with ten other universities
  • As a Portfolio Manager in a scalable startup programme funded by a UK regional development agency
  • As a Portfolio Director in a business innovation and growth programme funded by the same UK regional development agency (for the South East of England)
Before that I sold a software company, in wihich I was a co-founder, to a NASDAQ listed company.  This was very much a scalable (albeit bootstrapped) startup. More details are, of course, on my LinkedIn profile.

So in total I’ve spent 22 years in business (small and large) and 4 years in the public sector or a private contractor that was publicly funded. Also as of 1st September 2011, I’m focussed on my new startup, StackBlaze whilst continuing to help a few other select startups.

So what about Steve Blank’s post? He concludes that:

Unless the people who actually make policy understand the difference between the types of startups and the ecosystem necessary to support their growth, the chance that any government policies will have a substantive effect on innovation, jobs or the gross domestic product is low.

Flickr image courtsey of northdevonfarmerHowever my experience is that the people making policy did understand something of the difference between different types of businesses and even startups. The primary problem is actually in the execution of their programmes. Indeed it seems to me there has been to much government money spent on analysis and policy making, which is all well and good for consultants, but little use to the rest of us.

But I do agree that there is a lack of understanding of how to develop an ecosystem. I’m talking here about the UK, of course. Don’t get me started on Europe! It’s no joke that the vast millions spent on cross-country innovation networking got coined as “Euro-jollies”.

Steve talks about the (only) success of the Israeli incubator programme and there is an emerging trend for incubators here and elsewhere. A UK government funded incubator may well come about. But I shudder to think about how much hands will be tied for the managers of that through inappropriate reporting requirements, audits, changes in policy and any other top down suffocation.

Steve states six lessons that need to be learnt:
  1. Each of these six very different startups requires very different ecosystems, unique educational tools, economic incentives (tax breaks, paperwork/regulation reduction, incentives), incubators and risk capital.
  2. Regions building a cluster around scalable startups fail to understand that a government agency simply giving money to entrepreneurs who want it is an exercise in failure. It is not a “jobs program” for the local populace. Any attempt to make it so dooms it to failure.
  3. A scalable startup ecosystem is the ultimate capitalist exercise. It is not an exercise in “fairness” or patronage. While it’s a meritocracy, it takes equal parts of risk, greed, vision and obscene financial returns. And those can only thrive in a regional or national culture that supports an equal mix of all those.
  4. Building a scalable startup innovation cluster requires an ecosystem of private not government-run incubators and venture capital firms, outward-facing universities, and a rigorous startup selection process.
  5. Any government that starts publicly financing entrepreneurship better have a plan to get out of it by building a private VC industry. If they’re still publicly funding startups after five to ten years they’ve failed.

Im my view the regional  programmes, that I have worked with recently, had taken on the lessons of 1, 2, 3 above but not 4 and 5. Will the UK learn these two lessons next time? I doubt it. In fact the signs are that lessons 1, 2 and 3 will end up having to be relearned. This might be funny, if it were not so serious.

Having said all this I don’t think the main problem with government is them knowing and learning these lessons: The main element in success lies in the execution of any programmes that are set-up. Sadly, I’m not optimistic.

When a start-up executes badly it goes to the deadpool. Those startups that execute well flourish. When the government executes badly we get another one in five years. When the civil service, and many others dependent upon them execute badly, too many just hang around for the next programme to work on or a nice pension plan. I am sorry of you feel this is rather insensitive at this time of cutbacks and please don’t think that the majority of these folks don’t have good intentions.

Plus don’t get me wrong, I loved my recent jobs:  When I was working with the entrepreneurs, that is. It’s been a honour, a privilege and great experience working with so many fantastic entrepreneurs. But you can see why I’m happy to be back, properly, in start-up land!

What is your experience of government business startup support? Do you think these programmes spend money effectively? Should government leave it to the private sector? And, if not, what types and stages of companies should they support?
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Beware Mentors Who Aren’t

Posted on July 23, 2011. Filed under: Advice, Mentor, Recruitment | Tags: , , , , , |

Have you ever sought a mentor to help you with your business? If so, you will have asked yourself how you find a good one.

Mentors can provide a lot of help but some can do a lot of damage. Just as there is a lot of damage that can be done if you get involved with the wrong investors.

Now it’s relatively easy to tell an angel by just asking questions about what investments they have made. But how do you verify a mentor? After all we can all claim to be mentors. Far fewer can claim and prove to be angel investors. An angel investment is not one unless it involves a concrete monetary transaction.

Anyway what defines a mentor-mentee transaction?

  • A conversation in a corridor?
  • An in-depth frank conversation between you and a critical friend?
  • A constructive exchange between a junior executive and experienced senior colleague?

It’s not so clear is it?  Mentoring is a fuzzy topic.

So how do you tell if somebody is going to be a good business mentor for you?

Here are some things you can do:

  1. Ask who they have mentored before? When was that? For how long did the relationship last?
  2. Ask for references and even better ask to speak with previous mentees
  3. You might also ask other mentors what they think your prospective mentor.

Now you can do that yourself but I am glad to say that a new organisation has recently been set-up that does that for you. The Association of Business Mentors does that for members before they join. Quite astonishingly no such organisation like this existed, in the UK, until now. So I am delighted that is no longer the case and I am flattered to have been asked to be an inaugural member.

More importantly the aim of this not-for-profit Association is to link you with credible, successful mentors so that business owners can feel confident when seeking a business mentor. All members of the association have been carefully screened, ensuring that you will receive a professional service and that your chosen mentor has a proven record of successful mentoring. All members are required to sign up to a code of ethics, are encouraged to undertake regular training and share best practice. The entire emphasis for members is on their client’s success.

This is a great service to our business community but it should not stop you from doing your own due diligence too. Nowadays it’s easy using LinkedIn and other online profiles. Remember too that gaps and non-disclosure on a LinkedIn profile can be as bad a sign as they are on a CV.

If the mentor is not on LinkedIn, or their profile is thin, then you have to question how much they can help you anyway. Embracing social media is nowadays, or soon wil be, vital for every business. Do you really want a mentor who does not get it?

Good mentors won’t feel you are bothering them if you ask them questions. Indeed they will be impressed with your professionalism.

So ask yourself questions like:

  • Does he listen? Or does he/she interrupt or talk over you? How much of the time does he/she spend talking and how much do you?
  • At what stage do they start asking about money?
  • Ask yourself if this person feels more like a consultant than a mentor.
  • Do you really think this person cares about you?
  • Do you trust this person?

Last but not least: Trust your gut instincts.

Do you have experiences of mentors you are willing to share here, for the benefit of other readers?

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Are you made of the right stuff?

Posted on May 31, 2011. Filed under: Companies, Customers, Funding, Investors, Startup | Tags: , , , , |

Endless Forms Most Beautiful

An ambitious and interesting project aimed at discovering the patterns at successful internet startups was announced on Saturday and is called Startup Genome. Over 650 businesses have been surveyed in quite some detail, so the results should be telling. The concluding reports will, I predict, turn out to be some of most influential pieces of research ever done on internet startups.

If you are a passionate internet entrepreneur you will have either already read the report or will do so soon. So, I’m not going to summarise the whole piece of work; not only is it substantial, but it is also a work in progress. Rather I’ll focus on parts that are of particular interest and make some interpretations of my own.

It’s important to state that this study is about internet startups specifically. There are lessons that other businesses can take from the report but one needs to be careful not to generalise. Also it’s important to remember that, as far as I know, the results are largely based on startups in Silicon Valley. As we all know, things don’t happen the same elsewhere: Availability of risk capital is much scarcer, for one thing. Also much of the initial report relates to companies that raised investment funding in seed and VC rounds. We can learn as much, if not more, from failures, of course. Some interesting findings, about that, have now been published here.

Six stages of company evolution are proposed as follows (personally I like this model), which I’ve paired with my personal take as shown in italics  :

1) Discovery: Create something useful and listen or die

2) Validation: Find ways to get customers to part with cash

3) Efficiency: Get more customers whilst burning cash effectively

4) Scale: Growing pains of every type

5) Profit Maximization: Milk your customers, oops sorry: Reward your shareholders

6) Renewal: Start your next venture

The authors propose four classes of startups, as follows, with some well known examples:

These classes are provided without a clear explanation of what they constitute, although helpfully, they have provided a list of example companies and typical characteristics. So, what the hell, let’s have a go at trying to clarify this thinking.

OK, I contend that all the classes of startups are aiming to provide:

  • More efficient & effective ways….
  • to do stuff….
  • for different classes of users

I would then propose to define the four classes as being focussed, on different users, as follows:

  • Automizer: Individuals and small groups
  • Social Transformer: Individuals, in a network, who interact and transact
  • Integrator: SMEs
  • Challenger: Enterprises in complex & rigid markets

OK, I’ve over simplified. But I think their classification of startups is interesting and insightful. I find it helps when thinking about my past experience and current activities.

At Century Dynamics (sold to NASDAQ: ANSS) where I was a co-founding technical director then managing director, we were definitely a “Challenger”. OK, we were largely pre-interweb but we were a software company selling globally, so the model still works. Also we were never funded by anybody outside the company. That’s one of the reasons it was a long road of bootstrapping and 14 years from startup to exit. It did not seem much of an achievement at the time but reading this post makes me question whether we actually did extremely well, particularly since we were selling to some glacially slow engineering sectors.

With the current startups that I am closely involved in, we are an “Automizer” (Pitchie) and a “Social transformer” (Tripbod).

Actually with Pitchie we are in our first month, at the Discovery stage, so it’s quite possible we will end up positioning differently: But to talk about that further would be revealing our plans for world domination, which we are keeping quiet about for now 😉

Tripbod is very much a social transformer. We are driven by our desire to cut out economic leakage in the tourism industry, where much of the money is taken by middlemen. We are all about connecting travellers directly with local travel providers making us a bona fide network business.

Part of the report findings were that Automizers and Social transformers have as their primary motivation a desire to change the world. Similarly the desire to build a great product was found to be the main drive for Integrators and Challengers. Tellingly only 8% of entrepreneurs surveyed said they care more about money than impact (68%) or experience (27%).

One of the main hypotheses, that the authors set out to test, is that success correlates with founders who are open to learning. Their initial findings are, they say, strongly suggestive of that and cite the following evidence, which is interesting but hardly conclusive:

  • Companies that track metrics effectively, and thus learn, achieved 3 to 4 times better growth rates of users
  • They considered that following thought leaders was a proxy for willingness to learn. Those companies that did so were 80% more likely the raise funding
  • Companies with helpful mentors were significantly more successful and raised around 7 times as much investment capital

The average funding received by company stage is shown below:

  • Discovery = $150,000
  • Validation = $600,000
  • Efficiency = $900,000
  • Scale = $3,000,000

The authors recommendations on what they think should be raised are $10,000 to $50,000 at Discovery and $100,000 to $1,500,000 at Validation. They further propose that nothing more is raised at the Efficiency stage. They suggest that the stark differences in the funding raised and what the authors recommend is due to angels over investing in startups. But remember this is in Silicon Valley: I don’t see that problem in the UK and neither does Scott Allison of Teamly.

Surely a difference today is that it costs a lot less to build an internet business than it did even two years ago. Many of the companies surveyed must have started out before that time.

Apparently there was no difference in whether investors were helpful or not on a daily basis. They conclude “We think this may be because investors’ main value add is their ability to increase the valuation in future rounds, and get larger exit sizes. Their help on a daily basis, which consists mostly of introductions and help with recruiting is not that significant because great entrepreneurs will find a way to get introduced to the people they want to hire and build a great team even if their investors don’t help.”

The most telling finding, in my opinion, is buried in the Miscellaneous section. They found a dramatic difference in the market size estimates made by the companies for their target markets, as shown here.

For companies that did not raise funding:

  • Discovery: $200Bn
  • Validation: $120Bn
  • Efficiency: $50Bn
  • Scale: $8Bn

For companies that did raise funding:

  • Discovery: $0.16Bn
  • Validation: $1.3Bn
  • Efficiency: $20Bn
  • Scale: $9Bn

Enormous differences you will agree at the first two stages! One is tempted to conclude that if you have failed to raise early funding then it’s very likely you are deluded.

Finally here is an interesting statistic that is reported without explanation or context: 81% of entrepreneurs don’t care about rules.

What do you think, fellow troublemakers?

  • How would you classify your startup? Do you like the classification used? Is it helpful?
  • Are mentors important for your learning? Or are they just good for contacts, so raising funding becomes easier?
  • What are you going to do differently having read this blog post or the report?
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If you want money, ask for advice

Posted on November 22, 2010. Filed under: Investors | Tags: , , , , , , , |

For the last 3 years I have been helping start-ups and early stage companies raise investment finance in the equity gap.

Having been through a successful trade exit (Century Dynamics, sold in 2005 to ANSYS (NASDAQ: ANSS)), I am often asked: “Why have you not made investments in the companies that your are helping?”. The short answer, for most cases, is that I cannot: As a Portfolio Director, with the Innovation & Growth Teams, I am paid to be a impartial supporter to companies and to sit on their side of the table.

Now, I have helped in my spare time, other entrepreneurs and companies who fall outside the remit of my day job with the Innovation & Growth Team which has a geographical boundary. So there is a longer answer and angel investing was something I considered. However back in 2006 my personal enquiries into angel investing led me to the apparent collective wisdom that:

  1. You need to make at least 10 investments to hedge your bets
  2. One should expect only one of those 10 investments to do very well and compensate for complete losses on 6 or more of the others
  3. Investing as part of a syndicate (group of angels) is likely to be more successful
  4. Only invest money which you would not lose sleep over losing

So on balance the priorities of investing in my young kids or making 10 investments and not worrying about losing all the money were clear.

More recent research in a report “Siding with the Angels” by NESTA backs up what I learnt a few years before: “In the UK, 9 per cent of the exits produced 80 per cent of the cash returned. In the US, 10 per cent of the exits produced 90 per cent of all the cash returned”. Other conclusions from that report are:

  • Angels with entrepreneurial expertise outperformed those without it, especially in earlier-stage opportunities
  • Those who invested in opportunities where they have specific industry expertise failed significantly less
  • Those who perform at least some due diligence, even just 20 hours, experienced fewer failed investments
  • Post investment some involvement with the venture was related to improved investment outcomes

Over time, I have come to regard the “collective wisdom” in numbered points 1 to 3 above as being rather pessimistic in outlook. Wise perhaps but it rather comes across to me as being all about risk management rather than opportunity creation. After all, there are other ways to balance your investment portfolio which I won’t go into here. Some other aspects of some angel investor behaviour also irritate me:

  • Lack of interest in meeting with the entrepreneurs face-to-face early on. Why assess a business plan when the business is run by people. Business models and plans can and do change. People don’t change much! If I want to hear about an investment proposition I would rather hear a pitch by a CEO than receive a business plan.
  • Lack of politeness: Many angels do not even bother to send any response to propositions unless they are interested and currently investing. Nobody is too busy to write a short email of response simply saying: “Thanks for sharing this short investment proposition with me. It’s not really for me this time but I wish you well in your efforts”. I can understand sending no response to unsolicited, dreadfully prepared and presented, propositions. But is this wise, on the part of the angel, to a well prepared solicited proposition?
  • Middle men: Those who will take an upfront fee to introduce you to their network of investors and then take a success fee (typically 5%) of the money raised. If you are good enough at this why do you need an upfront fee? Some of these people are great but many are a waste of space. I could do a whole rant on this topic alone but it’s been done by others notably Jason Calacanis here.

So what would interest me enough to invest? You may ask, and my answer is, in rough order of importance:

  1. A great CEO and/or founding team
  2. An idea , technology or business model with disruptive potential
  3. A business where I can contribute with much more than money
  4. A business that through success makes the world a better place
  5. A new interesting challenge where there is an opportunity to learn and grow

And, of course, since it’s an investment a big potential upside and good return.

Well after four years of mentoring entrepreneurs, working closely with around 100 early stage businesses and interacting with angel investors, I have now made an investment for an exceptional case.

Three months ago at a TWiST (This Week in Startups) London event I saw 4 great pitches by @Teamly, @opentwit, @campingninja and @Tripbod. You can read more about this great little event organised by all action Steve Schofield of  @Fidgetstick here.  The video for the winning pitch by Sally Broom, founder and CEO of Tripbod is here. To say, I was impressed would be an understatement and afterwards in conversation with Sally she enquired as to whether I was an investor and I replied that I wasn’t, explaining some of the reasons why. Shortly afterwards she asked me if I could provide some advice. Naturally, I was delighted to be of help to enthusiastic entrepreneur with a interesting business. In short, this led onto much interaction over several weeks. It was clear that advice and guidance was helpful to them but some financial support was required too. I really did want to help and by this time had got to know Sally and the business well. It just goes to show that the old adage “If you need money, ask for advice” does work!

This whole process has reinforced my contention that you should invest in people first. Sally has many great attributes but perhaps most of all she is relentlessly resourceful. The same  applies to her co-founder Liz.  So what is  Tripbod?

  • A Tripbod is a trusted local person, with local knowledge, who can help you plan your trip before you go
  • Tripbod provides on-line personalised bespoke trip planning across the globe
  • The one-to-one service includes unlimited on-line contact with your Tripbod through a private trip planning page and personal calendar before you go

Some of you may be wondering whether I have any relevant industry experience to contribute to Tripbod. Well, I don’t. I can certainly claim to have a lot of experience of international travel both as an independent tourist and businessman. However, no worries there, as I am being delighted to be joining as an investor and active board member with Martin Dunford, who was a co-founder of Rough Guides, and who stayed with them through acquisitions by Penguin and Pearson until last year.

No doubt, I’ll be blogging about progress with Tripbod in future posts, so I’ll leave it there. If you’ve read this far, thank you for your interest. We would love your feedback on what you think of Tripbod. Would you use it? Do you think a local travel expert can enhance your next trip? Let us know here.

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    About

    I help entrepreneurs and small high growth potential companies in Sussex, Surrey, London & sometimes further afield. Flexible to your needs but typically help in raising investment finance and mentoring. Previously I was co-founder, CTO then CEO of a software company which we sold to a NASDAQ listed company

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