Getting to "yes" in a world of "no"…

Archive for January, 2011

Look at your world…

Look at your world…

What can you see?

What do you think?

What can you conceive?

What do your mentors think?

What can you design?

What do your customers think?

What can you build?

What do your suppliers think?

What can you fund?

What do your competitors think?

How far can you scale?

What does your market think?

 

Meeting your peers…

For a startup guy, it’s a bit of an odd experience the first time you properly meet your peer group – by which I don’t mean other entrepreneurs, but rather people travelling parallel to you but just that little bit further ahead.

You see, when you first start out on the whole startup path, an almost inevitable part of your constructed self-image is that of the rebel, l’étranger: seeing the entirety of an industry’s collective mistakes (quite literally) from the outside is liberating, as it gives you carte blanche to fix its key problems in an entirely new way. Before long (if you’ve got any sense) you start learning from potential customers (occasionally pivoting when you realize what a pig’s ear you’ve made of things), while trying hard to keep clear water between the real customer pain points and those that are merely industry mythology: but even so, you’re still essentially an outsider.

Then you start talking to your competitors, and to your surprise discover that they’d like to change the industry too, but can’t see how to do it: and that in fact they look to people like you to make a difference. This is where you begin to understand that the status quo was not foisted upon that industry by cabal-like conspiratorial interests, but was instead the end-result of a semi-random series of incremental evolutionary steps.

Finally, you grasp that evolution itself is a double-edged sword, and that the purpose of startups is to forcefully evolve an industry to a new state specifically by killing off the twisted state into which it has incrementally evolved. Really, the role of the entrepreneur is to call an industry’s bluff, to argue that the way it has become is not fit for purpose, to prove this by constructing a radical alternative that is significantly better, and to monetize this.

(In metaheuristics terms, this is somewhat like simulated annealing: markets tend to cool to local minima, so needs startups to add high-energy ‘kicks’ to help them reach better states.)

Hence when you happen to meet people who have followed this path all the way through, I think there’s a certain kinship at play, particularly when (as happened today at the Advanced Manufacturing Growth Summit in London) their path shares many other industry similarities with yours (“advanced manufacturing” is just a fancy way of saying “not-entirely-off-shore manufacturing”, for the most part). These are your peers: they are you, but viewed through a mirror in time. Do you like them? Do they like you? How comfortable are you with your future self?

Why I disagree with Vince Cable & BIS about “growth”…

In November 2010, BIS introduced the Government’s Growth Strategy by publishing “The path to strong, sustainable and balanced growth“: to my great surprise, I found myself disagreeing with a very great deal of it. The report began:

“The Government’s economic policy objective is to achieve strong, sustainable and balanced growth that is more evenly shared across the country and between industries.”

Is it just me, or is there is a Centrally Planned Economy shadow hanging heavily over this very first paragraph? We don’t live in an ideal world, and there will always be imbalances between different parts of the country and different industries. Surely trying to equalize these macro-social issues as a primary policy measure (particularly at such a difficult time) is simply old-fashioned left-wing positive discrimination? The only time for righteous policies is once you have already delivered growth policies that work. And as for “balanced growth”…

“The UK needs to move away from an unbalanced growth model reliant on a narrow range of sectors and ever-increasing government spending. We can no longer have an unsustainable accumulation of private debt that inflated property bubbles and ultimately caused a banking crisis and sharp falls in output. The UK needs to grow sustainably – both economically and environmentally. We need to grow, but we need to grow differently.”

As far as industry goes, I think it’s fair to say we haven’t really had anything like a “growth model” of any sort for a fair while. (In fact, have we even really had any real growth either?) What drove the property bubble was that banks were happy to lend money to anyone for property: offering 100%+ buy-to-let mortgages to anybody that walks in off the street was unsustainable bull-market nonsense. Bizarrely, even that was pretty much sound compared to the sub-prime mortgage fiscal foolishness going on in the US that really sank the system.

As for the UK commercial banking sector over the same period, its equivalent insanity was the vast number of coffee shops it happily helped to fund, all with basically the same designer-cookie-cutter business plan template. Didn’t government ministers walking down High Streets ever pause to think “Hmmm… I wonder which banks financed all these shiny new coffee shops?” [Hint: they all did] And guess what – that same money wasn’t going into the scalable home-grown export-driven IP-owning industries Mr Cable is now, ummm, banking on to rebalance the economy.

So as to the aspiration to “grow differently”, we firstly need to grow at all – new products, services, products-as-services, services-as-products, and IP, but definitely not coffee bars – and to find ways of getting capital to those things with the best chance of multiplying it on a world stage. Coincidentally, my business bank manager told me last week about the barbers and the coffee shop whose EFG loans he had not long ago approved. *sigh* It remains basically business-as-usual for the banks, it would seem.

“A new approach to growth requires a new attitude in Government. Government on its own cannot create growth. It is the decisions of business leaders, entrepreneurs and individual workers which build our economy. […]

Access to finance is a real concern for many small businesses and we have set out a package of Government and industry-led measures to work towards addressing this.”

Here, I think, are the two key concepts which BIS doesn’t seem to grasp are so tightly interwoven. Growth is a multiplier, and its final amount is always relative to the amount you are trying to multiply: while at the same time the lower the amount you start with, the more pressure you come under to exit early (if your curve is pegged low, low puts yield low gets). Hence without realistic access to finance, growth simply goes nowhere – with nothing much going in to the growth multiplier, you get nothing much coming out at the end.

It’s perfectly true that the UK has always had a decent enough supply of brainiacs: but few have the skills to simultaneously execute the kind of financial and technological alchemy needed to summon sufficient risk capital from the ether and to build a whizz-bang growth engine to multiply it up. Yet that is pretty much the kind of Renaissance Man or Woman you’d need to be to swim against the financial tide currently prevailing. You need to find workable answers to both parts of the equation, solving just one isn’t enough.

That is why today we are launching the Growth Review, a rolling programme […] a fundamental assessment of what each part of Government is doing to provide the conditions for private sector success and address the barriers faced by industry.

People with good ideas that are plugged into their particular markets will always see opportunities for growth: but what’s the point of building a jet engine if you’ve only got wood to burn? Hence, all the while that UK angels continue to under-invest slowly at uncompetitive, low valuations, UK startups – however world-beatingly clever and far-sightedly visionary their special sauce may be – will continue to go nowhere. BIS don’t seem to see that there is no private equity cavalry coming to the sector’s rescue, and that their efforts to tweak the taxation system to encourage UK angels just a little bit more are almost certainly not going to have the desired effect. Most angels I’ve talked with are not some notional 5% short of investing but 50% short.

So paradoxically, I think the biggest on-trend thing BIS could do in the interests of UK plc would be to promote ways of (and mechanisms for) helping non-UK angels to invest in UK startups. Of course, UK angel networks (ably represented by the BBAA) would almost certainly lobby BIS hard to argue an opposite position: but then again, they’re still missing all the sweet central government funding they used to get not so long ago, while the way that the majority of UK angel networks now charge entrepreneurs three times over (pay-to-prepare, pay-to-pitch, pay-to-succeed) is nothing short of scandalous, and probably contributes strongly to the current startup funding crisis. Would it really be so bad if the pendulum swung away from them for a change?

PS: note that the report does briefly mention inward investment, saying (p.14) that…

“…the Government will look to boost the stocks and flows of investment to and from the UK. The UK remains a hugely attractive market for inward investors. At the end of 2009, the stock of foreign direct investment in the UK was worth £672 billion while UK direct investment abroad was worth about £1,046 billion.”

…and that…

“The Government will start by focusing on the priorities for action identified in the previous Chapter:
* Planning
* Trade and inward investment
* Competition
* Regulation
* Access to finance
* Corporate governance”

However, my best guess is that BIS is still casting around for good ideas from industry as to how its efforts can stimulate inward investment. I’ll ask Andy Rose at the Advanced Manufacturing Growth Summit this Tuesday, see what he says…

Advanced Manufacturing Growth Summit in London…

This Tuesday (25th January 2011), I’ll be off to rub cheeks [*] with the great and the good of UK manufacturing at a BIS-chaired summit in London. That ultra-lean micro-manufacturers (such as my startup Nanodome) can sensibly share governmental mindspace with über-politicized macro-manufacturers (such as Land Rover, Jaguar, etc) may at first seem paradoxical, but then again we’re all waist-deep in the same financial quagmire, so what the hey. The rationale for the summit is that there’s a government manufacturing review due in time for the coming Budget, hence the question Vince Cable, Mark Prisk et al would like attendees to help answer is simply: what can government reasonably do to assist, preferably without spending any money?

Unlike most mainstream media pundits, I’m a big fan of coalition governments, because they frequently have to iterate and compromise their way towards workable policies, a process which I happen to believe yields better results than traditional high-level, opaque, ideology-driven politics. This oddly mirrors Steve Blank’s “Customer Development” loop, for the ‘customer’ of governmental manufacturing policy is indeed manufacturers: so let’s all raise a glass (not half-empty but half-full) to plenty of positive half-steps forward, rather than the full-steps backwards and sideways we’ve seen for so long.

But, you may say, UK manufacturing, really? Well, few people realize that the UK still produces lots of stuff, with (perhaps surprisingly) global pharma players such as AstraZeneca and GlaxoSmithKline now massive contributors to the manufacturing sector. Even though UK manufacturing has been declining for decades, its position in the world manufacturing tables has slipped from #1 only to #6 (last time I looked). Hence two of the biggest issues are of low national self-esteem (yes, the UK really is a major manufacturer, so why do investors cough politely when I say that’s what my company does?) and lack of skills support (no, a liberal arts degree doesn’t really tick any industrial hiring checkbox, why on earth would anyone think it might?).

Yet over the same period, the UK’s per-worker productivity vastly increased, largely (and unsurprisingly) due to a combination of automation and outsourcing. However, the boom in Far East outsourcing rode on the back of import-favourable currency shifts and a soft bank financing regime at home, both of which are now long gone: to my eyes, the future of manufacturing lies in ‘IDFLA’ (“industrial design for late assembly”, i.e. a middle position between “pure” in-house manufacturing and “pure” outsourced contract manufacturing) and in new ways of financing working capital, because the collapse in access to finance has squeezed most of the inventory out of distribution channels.

People often think of manufacturing as somehow dull: but actually it’s an area that’s full of design challenges, problem-driven innovation and product iteration. Design-driven manufacturers (i.e. with their own Intellectual Property) face the challenge of financing both high-risk technological R&D and low-risk working capital simultaneously, at a time when the European appetite for any kind of funding is extraordinarily limited. Which is why at the summit I’ll be heading for the 3pm breakout session on Access To Finance with Andy Rose, Head of the Infrastructure Finance Unit.

Which is, errrm, where exactly? Well… if you didn’t know, the IFU is the part of HM Treasury in charge of handling Private Finance Initiative (PFI) contracts, such as the (‘achromatic elephantine’) £10bn Future Strategic Tanker Aircraft project: yet quite how governments can lecture businesses about off-balance-sheet financial engineering when PFI has become such an active part of their post-Maastricht funding activities I don’t know, even if the Coalition rightly doesn’t like PFI solutions much. At the same time, the IFU has (in Andy Rose’s words) an infrastructure-funding-related mandate “to get involved where private sector capital is not available”, so seems to cover both sides of this particular funding coin.

Personally, I think funding manufacturing has indeed become an infrastructure issue: for with the disappearance of supply chain inventory, who now funds building things? What all the Just-In-Time supply chain optimization MBAs never really thought through was that in the end, the clunkiest part of the chain becomes the manufacturer – and because nobody else ever needs to hold stock, distribution effectively becomes virtual. And if you then join this up with a fully disintermediated worldview, distribution disappears and the manufacturer then becomes the chain, all the way from banker to retailer.

The long-term trend, then, is surely for manufacturers to become micro-banks: in which case their funding suppliers should be major infrastructural bodies such as the European Investment Bank. (Incidentally, I worked on-site for a week at the EIB a few years ago – it had the best canteen I’ve ever been to, highly recommended!) Nobody now really believes that high street banks will have any serious interest in funding manufacturing companies for the next decade, so where’s it all coming from?

The challenge with policy formulation is, in the words of Wayne Gretzky, to “[play] where the puck is going to be” – that is, to anticipate rather than to Band-Aid, while at the same time not anticipating too far ahead (i.e. to run way ahead of the puck). Trend-wise, my opinion is that macro-manufacturing is dead in the water, and that the big trend is the growth of micro-manufacturing and late assembly: but despite countless quotes from Vince Cable that superficially seem to align with this way of seeing the world, I’m struggling to see how what I do even remotely fits the practicalities of government policy.

My guess is that, for once, the government’s instincts for emerging trends may well be spot-on, but that it has little practical idea how to evolve its current line-up of industrial support into something that will genuinely support advanced manufacturers with their growth plans. Let’s see how the summit plays out!

I hope to see at least some of you there – please feel free to introduce yourself, and/or to leave a comment here.

[*] errm… depending on how spacious the networking area is, I suppose

Customer development and “Blank cheques”…

I’m confused and angry: for heaven’s sake, what’s a startup guy supposed to do?

On the one hand you’ve got Steve Blank proposing his Customer Development startup loop, Eric Ries proposing his Lean Startup development loop, and (one you may not have read about) Alex Osterwalder’s Business Model Generation loop. These three dovetail neatly into a kind of ‘zeitgeisty’ continuously-pivoting startup worldview that says: hey, business plans are for MBA robots, building stuff without a business model and customers is a bozo recipe for failure, so just keep looping and eventually you’ll have learned enough to be pretty sure of not failing.

On the other hand you’ve got 99.9% of angel investors and VCs in the world, who say: why on earth do you think I would open-endedly fund your startup when you tell me right from the start that you have no idea what your market is, who your customers are & what your product will be, and that you have no solid plan moving forward, just a deeply-felt desire to iterate and pivot repeatedly until such time as the process of bouncing ideas/demos/prototypes off your customers helps reveal one to you, at which time you’ll need to raise yet more money from me to actually execute things based on what you’ve already spent so long learning at my expense? Do you honestly expect me to fund your University of Me while you “get real”? Since when was I your parent?

There’s a bit of a conflict here.

Why, then, is it only me that seems to see this kind of funding request for (let’s call it) a “Blank cheque” as somehow genuinely unreasonable from an investor’s point of view? It’s not that I’m an apologist for MBAs, business schools and accountants (far from it!), it’s just that I can’t honestly see how focusing on iterative customer development to the exclusion of everything else helps build any kind of workable middle ground between entrepreneurs and financiers, between (in Blank’s slightly pejorative terminology) the worlds of Billy Durant and Alfred Sloan.

Note that it’s really not that I don’t understand the Blank / Ries / Osterwalder weltanschauung: on the contrary, I think I probably understand it better than most, in that their ideas closely match the ways I’ve actively developed my own company over the last three years. However, there’s a hugely strong case to be made that almost all lean startups may well be intrinsically unfundable. Though making a strength out of a weakness is a great rhetorical exercise (often used in job interviews, of course), I don’t think it translates well into the higher-level arena of funding persuasion – for how is a financier supposed to tell the difference between a “learning startup” and a “know-nothing startup”?

Can somebody please tell me why it only seems to be me who has taken the red pill?

The secret history of bootstrapping…

It has become über-fashionable to talk about ‘bootstrapped business’: but… what is this, exactly?

The inspiration for the term “bootstrapping” seems to have been a 19th century tall tale in which somebody supposedly defied the laws of physics “to pull themselves up by the bootstraps” (the leather loops on the back of your boots) right up into the air and over to the other side of a fence. So, when used in its original manner the phrase properly brings with it a sense of ‘getting going in an impossible sort of way’.

And then in the 20th century, computer people appropriated the same term – with a fond sense of irony, I happen to think – to describe the quasi-magical processes by which computers spring to life when switched on. Even today, we still “boot” computers using “boot loaders” such as (the justly famous) Das U-Boot, which some might surely put forward as a powerful argument why clever German programmers should not be allowed to construct puns. 🙂

However… the problem is that the way people now talk about “bootstrapping startups” seems to have lost any of this gentle irony. Rather, this more modern concept of “bootstrapping” paints a starkly linear picture of computer pioneers carefully engineering a tricky technical solution to solve a long series of deterministic logical puzzles to get to an end line. So, if you view starting your own business as basically the same kind of activity as Steve Wozniak doggedly squeezing his Apple II disk drive loader into 256 bytes of PROM, then you’re probably happy with the whole concept.

Of course, I don’t happen to see it like that at all. How can you view winning the battle for people’s minds as a series of technical challenges? How can you build things without money? How can you build a Minimum Viable Product without its ending up the Least Attractive Thing In The Market? Honestly, buying into the whole bootstrapped credo falls not far short of wondering how many impossible things you can believe before breakfast.

Even at the best of times, starting up your own company is a hard, hard thing to do; and bootstrapping arguably makes it even harder and significantly slower. For what even the best bootstrapping proponents typically forget to mention is that while it’s true that your unfunded quest to build your own company on a ramen noodle burn rate will consume only a little bit of money, it will also take an awful lot of time.

Yet if you peer outside the blinkers of the fiercely competitive world of TechCrunchicon Valley me-too social media startups, you’ll see countless small companies slowly eking their way into existence, one hard-won customer or product  at a time. This isn’t because bootstrapping is fashionable, but simply because it’s the only practical funding path most entrepreneurs have – funding is a million moths and a few dim lights, all else is darkness.

Now, perhaps, you’ll understand why full-on entrepreneurs have to be at least five years ahead of everyone else: because if they’re not, then by the time – say, two or three years – they’ve managed to get whatever they’re doing to market they’ll be too darn late. In a nutshell: vision buffers bootstrapping.

The recession sales formula: 2 x 2 x 2 = 8

One thing that can be annoying about Internet startup people is the way some of them act as though they themselves invented the whole idea of using metrics to improve their business. These people seem to extend Dave McClure’s well-known AARRR model all the way to AARRRGH (“Acquisition – Activation – Retention – Referral – Revenue… Grandeur… Hubris“), which I’m sure wasn’t Dave’s intention at all. Well… mostly, anyway. 😉

Putting a historical perspective on it, even today few companies are as raving metric-mad as the British catering company J. Lyons & Co. was in the first half of the 20th century. Rapid feedback was so central to its business mission that it not only extensively promoted the idea of decimal currency (from 1928 onwards, its back offices converted £ s d to decimal to get maximum use from their mechanical calculators) but also designed and built the world’s first business computer just after the second world war (in fact, here’s a short paper I wrote on LEO-1 back in 2002). Now that’s what I call an obsession with real-time metrics!

Anyhoo, I was chewing the fat lean with my developer friend Martin a few days ago when he suddenly began regaling me with recession sales stories from many years ago. What was a little unusual was that the company he worked for back then kept a particularly close eye on sales metrics, and so was able to compare almost every aspect of its business before and during that long-ago (but now oddly resonant) recession period.

What my friend learned from these comparisons was a little unexpected, and yet somewhat depressing: that there would appear to be a recession sales formula, and it looks like this:-

“2 x 2 x 2 = 8”

What this means is that, during a recession…

  • It is twice as hard to get a good quality sales lead;
  • It is twice as hard to close any individual sale; and
  • You typically end up working for half the margins.

That is, their comparative figures suggested that selling during a recession is roughly eight times harder than normal. Moreover, it was clear that if you hand over any of the individual sales stages (i.e. opening, negotiating, closing) to people who aren’t absolute sales monsters, pretty much nothing gets through at all, leading your overall pipeline to empty within a matter of days.

As far as startups go, the biggest single early sale most entrepreneurs have to make is (of course) equity to angels. So perhaps the current entrepreneurial world of pain here in the UK (where everything to do with startup finance seems ~10x harder than you’d expect) is just a straightforward expression of this same recession sales formula. After all, raising equity is just a sale like any other, right? And you are a sales monster, right?

(Well… strictly speaking, it’s not quite the same. Here in the UK, my understanding of the Financial Services Marketing Act (2000) is [*] that entrepreneurs aren’t allowed to promote any single investment proposal to more than 99 sophisticated investors (etc) at a time: yet I suspect that they now probably need to pitch to 200+ in order to stand a statistically reasonable chance of closing a round. Just so you know that both the odds and the law are against you right now!)

[*] I’m not a lawyer, none of this is legal advice, so make your own judgment call on this, etc.