Getting to "yes" in a world of "no"…

Archive for the ‘Angels’ Category

Fake pitches and real startups…

I had a nice coffee today with an old friend from my schooldays who sold his decent-sized company not so long ago: it didn’t take long for the conversation to turn to business angels and pitch meetings, something which we both have had a lot of exposure to (though largely on opposite sides of the same wonky-legged table).

On the one hand, in order for startups to get past angel gatekeepers to pitch, they have to kid both themselves and others that in 3-5 years’ time they will multiply an given investor’s stake by at least 10x: this is the modern pitch template, the model that startups are required to replicate in order to be considered “credible” (But of course nobody has that kind of control over the future, however smart you are).

Yet on the other hand, my experience of rapidly growing companies is that they are structured in an open way to allow external serendipity to play a very significant (if not actually a near-majority) part. In fact, I suspect the real growth of such companies would best be charted in a bar graph with “Years” along the bottom and “Lucky Breaks” up the side. (Note that I don’t believe anyone has ever put such a graph up in front of potential investors, except perhaps with some kind of satirical point in mind.)

What struck me most forcefully was the sharp contrast between these two startup “models” – between the PowerPointy pretence of control and the (actual) near-total absence of control. The whole startup discourse has become a slave to the MBA-ified cult of the jut-jawed CEO hero making dramatic bets against the market’s groupthink, all the while the realpolitik of business has grown more diffuse and collaborative, where opportunities more often arrive as partnership outcomes than as snatched moments of solo market brio.

I don’t know: as I’m typing this, I’m feeling the hopelessness of the whole situation – as though angel investors and their groups have, by steering the ‘model’ to such foolish extremes, become 10x more of a hindrance than a genuine help to the whole sector. Add in the triple-whammy cargo cults of the ‘killer deck’, ‘elevator pitch’, and ‘executive summary’, and you have a pervasively dysfunctional setup to deal with.

Right now, I have this huge urge to stand in front of a room of business angels and just, I don’t know, tell them the goddamn truth. You know, that business is hard, arbitrary, strange, but collaborative; that what genuinely differentiates proper startups from, say, window cleaners is they take a certain combination of ambition, drive and scalability and aim it all at a fat (but wobbly) market; and that if I could tell the future as well as angels apparently need me to, I’d be betting on Lucky Boy in the 2.30 at Haydock Park, not standing in front of them.

But most importantly I want to tell them that it is their shared model that is killing startups: that if they had the guts to invest in startups without having them go through that stupid ritual of pretending to have sufficient omniscience, omnipotence, and precognition to guarantee insanely good ROI, then maybe they’d get the kind of returns on their investment they wanted.

Really, do I honestly think there’s even a 1% chance many will stop punting their miserable pin-money stakes into social me2dia shutdowns (i.e. the opposite of startups) anytime soon? No, of course not, not a hope. But that’s the view I get from here, make of it all what you will.

Hot news: relatively speaking, VCs don’t actually suck…

I just read a clip-quotes-together-and-number-them article supposedly on why the VC model sucks. It annoyed me enough to want to answer my own question: right now, what in Startup Land really sucks?


Well… Venture Captal as an asset class does indeed currently suck, it’s quite true.

But the way that wannabe entrepreneurs flood VCs with pathetic app-centric slideware designed more to wrap around the VC business model than around real customer needs, that also sucks.

And the ridiculous way that journalists and bloggers write about VCs and startups sucks too. I mean, what is the point of reading an article in TechCrunch about how insanely clever startup X’s founder is to have got VC funding, when the odds are at least 9:1 that it’ll all turn brown and runny inside 12 months?

Oh, and the way that business angels claim to be liquid (when nearly all their actual worth is tied up in a whole myriad of tax avoidance schemes): and so spend most of their time wasting entrepreneurs’ time doing meetings when they have an actual business to run: that sucks as well.

And really, don’t get me started on how ridiculous cargo cults such as The Lean Startup waste startups’, angels’, and VCs’ time by encouraging entrepreneurs to design their companies around processes that can almost never be funded or scaled. Because that sucks.

Even so, despite all that pathetic sucking, right now the maximal suckage in the whole train-wreck startup ecosystem is simply this: 95 or more out of every 100 people who currently want to be an entrepreneur are just f^&king kidding themselves.

Jeeez, so you lost your job as a mid-ranking software project manager at Acme Corp: does that automatically make you an entrepreneur? No. So you think you’d like to write a cool app, does that make you an entrepreneur either? No. In fact, do just about any of the half-baked excuses people put about for being an entrepreneur actually make you an entrepreneur? No, they don’t. They really, honestly don’t. And the more I hear them, the sadder it makes me.

Back here on Planet F^&king Earth, being an entrepreneur actually involves two things: (1) not spending money while still moving forward, and (2) selling like the biggest sales monster ever seen. Almost all of the current demented crop of entrepreneurs act as if these are two skills they can somehow get by without having to acquire or use: but they’re wrong, ridiculously and riotously wrong.

In fact, anyone can knock together a business plan based around spending someone else’s money (a Fantasy Startup game a child could play), but the real world is the cruel antithesis to such self-indulgent reveries. It is the immovable rock on which all such plywood dream ships get brutally shattered. You don’t like this? Well, sorry, but welcome to my world.

So… you want to be an entrepreneur, do you? Ever wondered whether you might actually be part of the problem?

Starting up in 2013…



Through 2012, you may well have seen a fair number of examples of UK entrepreneurs ably demonstrating two key skills they apparently have in abundance:-

  1. Moaning how US startups are plainly in a vast unsustainable funding bubble (but can we have some of that here, please?)
  2. Moaning how UK startups are plainly in a vast unsustainable non-funding lull (and why-oh-why can’t the government fix it?)

Yet as we move into 2013, both of these are ringing quite hollow. Unless you’re trying to get a refund on an unflattering top from a department store, moaning does not give you any kind of competitive advantage. Moreover, moaning about something that isn’t actually a problem is just pathetic.

For example, the real reason US startups are in a funding bubble is because (a) an unbelievable number of startups try to start up every year in the US, (b) US entrepreneurs are actually quite good at getting startups going, and (c) they genuinely try to create A+ startups with a real possibility of scale, for which ambitious VC-class investment is a sensible path. Contrastall  that with UK startups’ business plans, most of which seem to be based around C-grade social media hacks. Somewhat unpopularly, I would argue that it is UK entrepreneurs’ collective lack of ambition and vision that has made an effective seed-level VC sector pretty much untenable in the UK.

If you want to change this whole game, aim higher, go bigger, and astound the world.

But it is the non-funding lull moaning that makes me even more annoyed. Too many entrepreneurs assume that their only possible way to make a workable company is via a financial leg-up from someone else’s money. Yet the entire business landscape has changed: have they not noticed eBay, Amazon Marketplace, and a hundred other diverse routes to market that have opened up in every crack?

In fact, I would go so far as to say that a 2013 business plan that specifically relies on someone else’s money to make things happen is nothing short of dead in the water. Rather, a workable 2013 business plan says:

  1. Here’s how my company is making money right now in niche sector A
  2. Here’s the size of the much, much larger market B it can address if you come on board with £300K
  3. Let’s get to it…

The most damaging thing about seeking funding is when it absorbs so much of your time and effort that it ends up costing you your company. So don’t do that: the sexiest thing you can put on a whiteboard is ongoing sales. Prove that you can both sell and deliver, and people will want in, big-time. Make that your goal in 2013, OK? :-)

Building a startup is like building a boat…

out of flotsam, while swimming alone in the middle of a vast ocean. By the way, it’s cold out there, really cold.

So, how are you going to do it? Well… government grants are leaky lifebelts that help keep you afloat (but only for a short while). Oh, I should mention that to get them, you have to swim 50 miles and back, leaving your part-constructed boat behind you to sink ignominiously beneath the waves. EU grants are the same, except that you need to swim 1000 miles while also collaborating with people building their own sinking boats in different countries. then you’ll probably be turned down anyway.

You’re not swimming completely alone out there, though. Business angels enjoy motoring past in their speedboats to see how your funny little tech construction project is going. Even so, they rarely bring along anything of use with them: most are content to have a chat with you over a cup of (salt watery) tea, and to share their reminiscences about how difficult they found it to build their own first boat way back when (at a time when, curiously enough, banks were happy to lend to boat-builders). Then off they motor, leaving you freezing in the water, scavenging nails to fix passing planks together.

Occasionally a VC cruise liner will sashay past you, sending bloggy ripples that confuse and annoy. Their captains wave, but never actually stop: though you can see all the waste food being chucked over the side, seagulls get it all before you can reach it. And although it’s sometimes nice to dream about building your boat in a shipyard (the way that VCs claim to do), sadly that’s not an option for you either.

Coaches tell you how to dive deeper to find the nails you need: while mentors tell you which planks they’d choose to build with. But even with all their “help”, your best case startup scenario will almost always be a leaking,hacked-together contraption that is barely sound enough to keep itself afloat, never mind keep you afloat as well.

Errr…. do you still want to be an entrepreneur?

* * * * * * * * * *

OK, I completely accept that all human endeavour is, to a very large degree, no more than an attempt to create small bubbles of order in a vast ocean of entropy and doubt: and that in those terms, starting up a company is no different to any other exercise. But all the same, what is the sense of having such a complicated network of non-funding funders, inept financial gatekeepers and pointless service providers when so few young tech companies ever manage to start up both successfully and scalably?

Has nobody actually noticed how unbelievably cold it is out there? Even if you are an experienced ice diver, you may not arrive in port…

Securitization, patent lien, and startups…

In these post credit-crunch days, there is a lot of pressure on banks not to lend – not just to startups, but to anyone at all. That includes lending to business angels, many (if not indeed most) of whom are both wealthy and illiquid.

Yet at the same time, the innate growth logic of young business itself has not managed to magically sidestep the need for capital through some kind of hitherto-unknown financial engineering trickery. (Oh, and you can shout “Lean Startup” at me here until you’re blue in the face, tell it to the hand coz the wallet ain’t buyin’ it).

So, what kind of security could a startup offer a bank? This is something I’ve long thought about, ever since I first heard about “Bowie bonds”. Love or hate his music, you have to admire the former Ziggy Stardust’s timing, in that his financial advisors found a way to sell future revenue from Bowie’s back catalogue, all packaged up in the form of bonds. Which, given that CD sales tend to spike when rockstars die, would seem to be a neat way of profiting now from your own future death (whensoever that may arrive).

And so I wondered whether a startup could effectively secure loans against their patent portfolio – in other words, securitize their IP. As I understand it, the only UK bank that ever did this to any appreciable degree was Lloyds TSB, which for a while had a London office specializing in IP securitization. It was never really for startups, though: and my understanding is that the cost of performing an external valuation on a patent via a specialist patent valuation house is somewhere between £25K to £50K. Even then, most of what such companies do seems to involve looking at the financial inflows directly arising from patents, which isn’t exactly financial rocket science.

The short answer, then, would seem to be that startups can’t obviously securitize their patents.

Yet just now I read an American case from Massachusetts, where patent agents were owed $109,000 by an advertising agency that had gone bust. They believed that they had a lien on the patents that were gained through their work, but the liquidators handling the bankruptcy subsequently backtracked (having sold off the patents). The patent agents pursued their claim to the SJC, which in 2009 found fairly comprehensively in their favour.

The moral of the story (if anything to do with American attorneys can be said to have a moral) is simply that the outstanding money owed to the patent agents by the bankrupt agency was effectively implicitly secured against its patent portfolio, even from before they were sold.

The even bigger macroeconomic picture is that the shadow banking sector – where such securitization is now utterly commonplace – was worth $60 trillion as of late 2011. Yet it is not clear to me that even a cent of that is going to non-traditional funds trying to support startups. All of which strikes me as a massive market inefficiency – the part of the economy that has arguably the greatest capacity for rapid growth in the economy is being run in a way that consciously reduces its access to finance, just in case that kind of funding accidentally proves to be an inflationary bubble. And the one thing that they genuinely have – IP – is excluded from the whole game. It makes no sense.

At the same time, the whole shadow banking sector is coming under increasing scrutiny from lawmakers and economists. It is now widely believed (with plenty of justification, I think) that the way that shadow banking is largely unregulated may well have been the root cause of much of the credit crunch (and don’t even start me on rehypthecation churn, I’ll be typing here all night).

But securitization against patent assets would go against this trend, in that it would be adding assets to the world’s trade balance sheets rather than simply trading against multiply leveraged existing collateral. (And we all know where that led to not so long ago).

I therefore wonder whether groups of startups specifically with patent IP could pool them into securitized funds that were somehow partially liquid, for them to loan against from the fund.

But if they could, they would almost certainly need patent administration removed from each startup’s day-to-day running to prevent it accidentally messing the application up (and thus trashing the fund’s collateral). Yet the requirements for this kind of arrangement would probably run counter to the ownership requirements of the new Patent Box tax regime coming in. So it could be that the Patent Box works as an effective mechanism to prevent companies from looking for ways to securitize their patents. All very confusing!

Overprediction, the entrepreneurial curse…


Over the last few days, I’ve started to think about writing a book for entrepreneurs – a proper, meaty, practical book that helps you see through the fog of the business world around you (and believe me, there’s a whole lot of fog out there). It’s early days just yet, so we’ll all have to see how (or indeed if) this book takes shape. (As with all such projects, the only sure thing is that holding your breath waiting for it would be A Very Bad Idea Indeed.)

All the same, big books need to address big questions: and hence the big question I’ve been banging my head against is… why is it that nearly all startups fail? Or rather, what’s the big problem with starting up? It struck me that if I were to assemble, arrange & present all my thoughts in such a way as to answer that near-universal question in a pragmatic & accessible way, I’d have a book that would literally be worth its weight in gold (at today’s gold price, errrm, round about £15K for the weight of a 250 page softback).

Now, even though the following is only a part of a much larger picture, I think it’s fair to say that one of the biggest curses that plague entrepreneurs is overprediction – that is, not only predicting how people (whom you haven’t met or fully researched) currently behave, but also predicting how ecstatically & differently (in your favour) they’ll respond when presented with your game-changing Android-powered CyberFruitBowl 3000. Oh, and predicting how potential funders will evaluate what you’re doing, too.

You think that’s a reasonable ask? Oh, come off it! The world is a complicated place, and people have wildly varied & complex reactions to even simple things (yes, even to your lovely CyberFruitBowl 3000). Yet at the same time, there is an enormous pressure on entrepreneurs to present what they do with utter certainty (and using TechCrunch-style hyperbole), not only when pitching to angels but also when talking to everybody else.

In just about every useful sense, this yields an abysmal disparity – the ever-widening gap between (a) the way the world really works and (b) the overwhelming social compulsion to misrepresent that in order to paint a picture of your company as a credible tech startup. Being brutally realistic, this disparity will either crush your moral spirit in the short term or come back to financially bite your hairy yellow arse in the medium term (startups don’t do long term, of course).

Regardless, this means that what entrepreneurs pretty much have to do is to overpredict how things will work out for their development & product/service rollout, to a degree that wouldn’t even be realistic for a company that was already a market leader. If Apple / Samsung / Vodafone / Virgin wouldn’t put it on a slide, why would you?

In a way, the one good thing about the kind of discourse espoused by Lean Startup evangelists is that it focuses on genuinely not knowing anything (which is true for most entrepreneurs), rather than pretending to know everything. Of course, reality always lies squarely between these two extrema: but what would a Streaky Startup – i.e. neither excessively Lean nor foolishly Fatty - business plan look like?

Why ‘Until’-scripts lead to startup death…

Unless you have heard of Transactional Analysis (‘TA’), you probably don’t know that an “until script” is a behaviour (anti-)pattern with the (somewhat damaged) subtext “I can’t be happy until [insert unrealistic condition here]“. Basically, this is a fake justification people use on themselves to try to avoid taking responsibility for their own happiness, e.g.

  • “I can’t be happy until I get some kind of parental approval” – just about every child ever
  • “I can’t be happy until I get to the end of my degree course” – just about every student ever
  • “I can’t be happy until this project has finished” – just about every programmer ever
  • “I can’t get a proper contract until my probation period ends” – just about every employee ever
  • “We cannot prosper without an extended period of austerity first” – just about every government in 2012

Of course, you don’t have to dig very deep to find the entrepreneur version of all this…

  • My startup can’t prosper until it gets funding

I suspect that this points to something deeply broken in the contemporary entrepreneurial psyche. For at heart, the damaged emotional neediness of pitching for angel funding is nothing less than a über-until-script, i.e. Entrepreneur X can’t be happy until he/she has put together a funding round.

At its most excruciatingly awful, then, entrepreneurs pitching to business angels are pretty much on a par with unhappy children trying increasingly desperate measures to get attention from grossly neglectful parents. Realistically, in neither case is there a strong likelihood of a heart-warming outcome: however hopeful or optimistic you may be, positive thinking ain’t going to shift that particular mountain.

So… if “until scripts” (such as pitching for funding) aren’t any good, what’s the alternative?

Well, I think all of this points to one simple (yet brutally unfashionable and no less hard to swallow) truth: that any business plan that involves raising funding as a necessary step to operating success is inherently broken. Bust. Cracked. Dead In The Water. NBG.

Rather, the best paths to business success all steer their primary routes through self-reliance and customer-focused organic growth – your primary focus should be on building modestly self-sustaining businesses, yet ones that also have the capacity and vision to grow and scale rapidly in a best-case scenario. Is this do-able? Gosh, yes! But you’ll first need to unlearn the business school “lesson” that external funding is the only way to build a successful business – when in fact, it may well be the worst.

Startups 3.0, The Lean Startup, and business angels…

OK, as with nearly all blog posts, the following is an outrageously reductionist simplification. But for all that, it remains a genuine and honestly held point of view that might just change the way you look at things…

Essentially, I believe that the modern financing history of “startups” divides into three overlapping generations or waves:-

  • “Startups 1.0″ were bank-funded, back in the days when banks had money to lend.
  • “Startups 2.0″ were angel-funded, back in the days when angels had both wealth and liquidity.
  • “Startups 3.0″ are self-funded, trying hard to move to customer-funded at high velocity.

Right now, I think that most startups are stuck in a limbo between 2.0 and 3.0 – we’re smart enough to see lots of practical problems with angel funding, but not self-confidently ambitious enough to honestly believe that we can bootstrap what we do from basically nothing all the way to a billion dollar company without angels’ alleged assistance. My advice? Have faith – you can do it, honestly you can. All you need to do is to devise a way of making it happen. Given that you solve every other problem you run into, why not try to solve that one too?

Interestingly, one common reaction to my popular post Lean Startups suck. Here are 10 reasons why… is that I must be some kind of Lean Hater. In fact, the single biggest thing I hate is seeing clever, ingenious and otherwise well-informed people suckered into following a course of action that will suck every last penny out of their pockets (and often out of their friends’ and families’ pockets too).

Unfortunately, I believe that this is what Lean will do to you if you trust it for financing. Angels don’t ‘get’ Lean, simply because Lean startups are encouraged not to make claims or promises that might have value, whereas angels are fundamentally looking for things of value to invest in. So the core issue I have with Lean is simply that we’re living in the decade before angels find a way – a ‘contract of mutual expectation’, if you like – of coping with Lean. In short, we don’t (and indeed we may never) have Lean Angels. That would be “Startups 4.0″, but we’re a long way from there just yet. :-(

Overlaying Lean onto the three startup financing generations described above, my argument would be that Lean conflates the two very different dynamics of Startups 2.0 and Startups 3.0, but ends up with the worst features of both. That is, Lean promotes the emerging incremental self-funded-to-customer-funded mindset (of Startups 3.0) but tied up with the need to expensively surrender control of most of your company to angels in order to scale (of Startups 2.0). It’s not a good mix at all.

But… “what’s so wrong with angels?“, you may ask. The awful truth is that here in 2012 we’re living at the tail end of the angel funding revolution: over the last decade, angels’ thinking has become so polluted by the “10x home-run” nonsense spouted by VCs (who have since moved en masse to far later-stage investments anyway) that angels’ overall level of ambition, expectation and – let’s face it - raw greed have all been inflated beyond the ability of any genuine startup to meet them, except purely on a vapourware or slideware level.

Lean does not fix this: in fact, Lean promotes angel funding at a time when the gap between startups and mainstream angels is widening year on year. I dramatized all that here back in 2010 as the Venn diagrams of death (and the world is still waiting for virtual angels), so it’s not exactly shocking news… but it seems to me that very few entrepreneurs get any of this at all. Don’t mind me, though, please feel free to carry on drinking that angel Koolaid all you like. As I said when I got cut up by a hearse the other day, “whatever, it’s your funeral“.

I know that bookshop shelves are filled with zippily-titled easy ways to start up your company (of which Eric’s book is merely one of many), but the reality is that these simply don’t work any more. In business terms, they’re all as outdated as 18th century encyclopaedias. They promote a gospel of financing harmony and collaborational positivity that simply doesn’t match the East End barrow-boy hustle that actually passes for angel investment.

Ultimately, I believe that the only genuine way that people can deliver the kind of low-risk-yet-hockey-stick-shaped returns angels demand is through armed robbery or Enron-scale fraud. So go ahead, pitch all you like, knock yourselves out: your so-called best case endgame scenario is that you’ll end up grinding out one ridiculous, abusively one-sided offer from a ragtag set of barely-liquid angels who will then be more interested in finding tricky ways of mitigating their downsides at your personal expense than in growing your splendid company together.

Alternatively, you can start small and find ways of getting to customers and growing fast. You know which option I recommend! ;-)

The Unfundable Mountain…

The normal or Gaussian distribution has a bell-curve shape, one that should be familiar to nearly anyone who has been exposed to a little practical maths along the way: given that this is where ideas such as standard deviation ultimately come from, it’s a pretty crucial bit of conceptual kit to have access to (even bearing in mind its many limitations).

When I think about tech startups pitching for funding, I see this curve playing out its binomial magic in a painfully visual way:-

On the right-hand side here, what I am claiming is that only about 2% of tech startups are externally fundable – i.e. that it would genuinely make good business sense for angels to fund them. Which is not to say that 2% of startups get funded (they plainly don’t), or even that all the startups that get funded fall on the right side of that line (they plainly don’t)… in both cases, life isn’t that simple.

Similarly, on the left-hand side here what I am claiming is that only about 2% of tech startups can self-fund themselves – that they can reach their market and be self-sustainable without needing significant external funding to get them there. Which is not to say that this happens to all those companies, but rather that it could if their principals saw it as their best option, rather than putting all their money into chasing funding.

What this leaves in the middle is something terribly depressing – the unfundable mountain, the pile of startup proposals which don’t stand any real chance of working. Nearly every business school pitch you’ll see falls here, along with almost all high-concept business plans from any source. Some would also argue that anything with the word “virality” (or indeed “synergy“) probably deserves to go here too, and to be perfectly honest I’d find it quite hard to disagree with them.

So far, so depressingly pragmatic: but I think the curve has many more stories to tell. For example, I strongly suspect that a lot of UK business angels now spend their time looking for businesses that are on the wrong end of the curve – i.e. innately self-sustaining businesses that don’t need external cash, but whose principals have convinced themselves that they can only function with angel funding. The huge problem there is that the practical costs – in time, money, and just plain hassle – involved in getting funding can very well cause such companies to go bust in the short-to-medium term. Really, how can you call needing lots of money in order to get over the shock of being funded anything apart from disastrous?

Also: I suspect that many people don’t satisfactorily understand the implicit difference in strategy between the two ends. I think that the left-hand end is all about increasing the (reward/risk) ratio by reducing the risk part to nearly zero, while the right-hand end is all about increasing it by increasing the reward part hugely, making the perceived outcome too mouthwatering for angels to turn down.

What, then, does bootstrapping actually achieve? And how can you square this curve with the entire Lean Startup thing? And is “pivoting” anything but upgrading your startup’s ambition to a level so stratospheric that it makes angels nearly choke on their own saliva?

With my own startup, I used to think that the whole point of bootstrapping was to reduce the risks to the point that there wasn’t any good reason not to invest: and this is essentially what I spent five years doing. However, in retrospect it seems as though all this achieved was to inch my company closer to the left (unsexy) end of the curve, though never actually close enough to be self-sustaining. If I had wanted it to be externally funded, I perhaps should instead have focused on finding ways of upping its reward factor, making the proposition more aligned with the right (sexy) end of the curve.

Hence it could reasonably be said that the biggest lesson to be learned here is simply that startup funding is more about amplifying greed than assuaging fear, i.e. that when it comes to investing, greed trumps fear. Personally, I don’t know for sure that this is true: the hundreds of UK angels I’ve met over the past few years have such a wide variety of motivations and issues to do with money (not all of them good, and not all of them bad) that generalizing is always going to be problematic. But… maybe there is a seed of truth there. You decide!

The Colour of Money…

I think there’s something fundamentally wrong with the way we in the UK tend to talk about investment. And it’s all to do with what I call “the colour of money”: but no, that’s not the 1986 sequel to “The Hustler” with Paul Newman and Tom Cruise. It’s about the relative risk profile of individual investments relative to a market – or in economics terms, the beta.

You see, beta is (according to its Wikipedia page) “the volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to“. Whatever form capital is held in, its owner holds it there relative to an external market benchmark - and if it fails to meet the expectations of that benchmark, its owner is likely to find a way to convert it into something more suitable.

Ultimately, each asset class (bonds, shares, property, gold, wines, commodities, tech startups, etc) has its own risk/reward profile – generally speaking, the greater the class’s beta (i.e. the greater the volatility of the class relative to, say, UK government bonds), the less predictable the outcome of holding it would be, and hence the higher the level of overall return an investor in that class would expect to receive in order to compensate it for the risk of holding its money in that particular form.

The absolute volatility of a given asset is called its sigma: what’s important here is that beta is a measure of relative volatility, which is a way of saying that your rational view of any given asset is strongly coloured by whatever benchmark you’re using to reckon it against.

Yet it’s rare (in my experience) for investors to radically change the asset class they invest in – that is, to change the colour of their money – because that also means radically changing the benchmark they measure success or failure against. And in some cases (e.g. pension funds) there are indeed rules that explicitly prevent them making riskier investments.

Hence the first big problem I’m flagging here is that we don’t really have anything like a credible benchmark for investing in startups. Which means that we can’t practically apply high-level rational investment strategies (such as beta) to investing in startups – pretty much everything you’ve learnt about investing in stocks is of only marginal value in the startup world. There are plenty of things wrong with beta (e.g. upside gains and downside risk are only ever equally accountable in academics’ graphs – everyone else has to worry about cashflow), but not having any kind of access to it makes startup investing practically problematic.

Moreover, the second big problem is that without any kind of benchmark, people can’t rationally move sideways from a different benchmark. This, I believe, is why we now have so many “latent angels” – people who like the idea of investing in startups and who would dearly like to, but whose cheque-writing hand remains somehow paralyzed by fear. No matter how many angel group meetings these latent angels attend, I suspect that the lack of credible industry benchmarks is a major factor in keeping their level of investment at zero.

The third big problem is that investment in startups isn’t even remotely scientific – it’s wide-boy, sharky territory (and here I’m specifically talking about the many cut-throat dealmakers masquerading as angels out there). Sure, angel gatekeepers and academics like to talk startup valuation up as a rationally priced deal based on opportunity and negotiation: but you need at least two bidders to make a market, and in practice I suspect few UK startups ever get more than a single offer on the table, particularly at seed stage.

For the tech entrepreneur, then, the UK (particularly London!) is a place where you’re surrounded by the wrong colour money. How likely is it that a self-described “business angel” who has made significant money out of some kind of financial services scam play will look to invest in a startup unless that startup closely matches his/her pre-existing money colour? Not likely at all, I think.


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