Getting to "yes" in a world of "no"…

Archive for April, 2011

11 Big Things Not To Say When Pitching…

As an entrepreneur, you’ve probably noticed that the Internet is crammed full of bodacious startup advice, mostly blogged by VCs and angels masquerading as normal (even altruistic!) human beings. Yes, they simply ‘want the best for you’, and they have no hidden agenda at all. And almost all of them are in the US.

Now… something (if not actually everything) about that preceding paragraph tells me that this whole American-startup-advice-from-on-high genre may not in fact be a particularly valuable resource for us over in the UK.

So here’s my own set of pitching lessons for you, all of which I’ve basically learned the hard way this side of the Atlantic (i.e. it’s a smorgasbord of my own mistakes and those of other entrepreneurs I’ve seen pitching). They may not be perfect, but at least they’re from the right side of the table.

(1) “I value my company at X”. Don’t do this! The ‘realpolitik’ of UK startup valuation is that angels rarely look for seed rounds with less than 20% equity on sale (if the entrepreneur is credible and everything’s all pretty much sorted). Any sniff of development risk and they’ll be looking for 30%+ (because most treat ‘risk’ as a binary function, i.e. risk is either trivial or non-trivial, never in the middle). No credible customers and they’ll look for 40%+. So, whatever you’re looking to raise in equity, you can divide by these percentages  to get a valuation: i.e. £200K / 20% = £1m (best case). What I’m saying is that the size of the raise combined with the quality of your proposition already implicitly values your company. But can your turnover and margin forecasts back this valuation up? And can you achieve this as a competitive valuation? Things to think about!

(2) “My company has no competition”. Hilarious, and especially so when delivered with sincerity, as if customers have some fairy money in their budgets / wallets that they are only allowed to spend on your company’s new & untried products and services.

(3) “Competition is a good thing“. Well… yes, competition is a good thing for customers but actually only mediocre competition is a good thing for you. And if better resourced, more experienced companies than yours just happen to compete really well in your particular marketplace, your company is basically toast.

(4) “If we build it, they will come“. Well… it’s quite true that a handful of angels are so stuck in the mid-1990s that they respond positively to ‘Planet VC’ nonsense like this. But relying on networking through to oddly nostalgic angels to fund your company would be a bit like betting that a 2011 “Happy Days” movie would be a dead cert at the box office: sadly, times have changed, Mr Fonzarelli. So don’t do it, please.

(5) “As a child, my interests were…“. Sorry, but nobody cares. Angels want to punt their money on propositions that are (a) intriguingly valuable and (b) very much in the here and now, so that’s the time-frame upon which you should focus your efforts. Construct a short-term present-tense narrative about how your proposition is just about to make them rich, not about your personal redemption: leave all that for film-makers when your company is insanely successful. And no, Keanu won’t be playing you, OK?

(6) “Right now, it’s just me“. Unless you have a PhD in Renaissance Manitude from Harvard and a so-good-it-can-only-be-forged real-world reputation to back your claims up, admitting you’re doing it all on your own is pretty much a kiss of death turnoff to about 75% of angels. Really. Remember that it’s not about ideas, it’s about execution, rapid growth and scaling… and unless you have some weird octopus-like genetic mutation, you can’t do all that alone.

(7) “Exits are hard right now“. You don’t say. By which I mean “you don’t say this“. My understanding is that since ~2006 (when Euro VCs collectively decided that almost all risk was a bad thing), angels have seen their average length of time to a positive liquidation event roughly double. This lack of exits has long been one of the gnarliest nails in the UK angel investment coffin lid: hence there’s a strong case that a ten minute angel pitch should instead have roughly seven minutes’ worth of discussion devoted to exits – who’s in the market, what startups they have already bought, and what’s the likelihood they’d buy yet another marginal startup to add to their collection.

(8) “That’s the end of my presentation“. Factually true, but it needs to feel like it’s just the start of a beautiful thing you’re getting on with your angels.

(9) “I can’t show you anything today“. Don’t worry, that means they can’t be interested today either. Or tomorrow, come to think of it. Have you heard the old MIT slogan “demo or die”? You just died.

(10) “What we’re trying to do is…“. (A phrase-to-avoid I stole from this nice post here). Soft, ‘hedged’ language like this may technically be more accurate, but you’re in a sales meeting, remember? Find ways to harden up your prose. You’ll be grateful for this later, really you will.

(11) “Bla bla bla bla“. Bad. And exceptionally bad when the slide behind you says exactly the same thing. They’re looking to invest in bright people, not dull slides. Your slides should be provocations to get you to come across as your sparkling wonderful self, not a set of crutches to allow you to look your lamest.


Throw away that startup script…

OK, let’s imagine you just happen to bump into someone on the street you know slightly, and they ask the drainingly obvious question: how’s your startup going? What should you say?

Just as with newlyweds being asked how’s married life?, there’s a huge temptation to stay bang on script by giving a TechCrunch-style answer, with every notable keyword stressed in just the right way:-

  • “It’s going brilliantly”
  • “We had a great meeting with customers last week”
  • “The prototype’s looking fantastic”
  • “We’re starting to get mentions in the press”
  • etc

All of which may well be true, but reeling such stuff out doesn’t move your thinking beyond startup clichés. You see, the way you talk about your company in general helps shape your instincts when presenting with investors (and, indeed, with suppliers, clients, customers, and end users) in particular. So, think of every random conversation not as a rehearsal for drafting your next breathlessly progressivist Wired-style press release, but as an opportunity to better connect with the people connected to you who would like to support you.

I think that if you want to cultivate long-term, rewarding, sustainable relationships with these people, you need to write your own script. If you stopped to think about it, your startup probably has twenty or thirty angles on what it’s doing (and its own unique struggle to move forward) that other people would find pretty fascinating. Few people are genuinely exposed to the realities of entrepreneurship, preferring instead to loosely fantasize about ‘working for themselves‘ (hint: however you’re employed, you always work for other people, specifically your customers), so even the simplest insight into what you’re doing can be quite an eye-opener.

For example, my own startup (Nanodome)’s list of twenty or thirty such things would include:

  • lessons to learn from James Dyson’s mistakes
  • what’s so cool about Henry vacuum cleaners
  • why Taiwanese engineers are so great
  • why Coalition entrepreneurship rhetoric annoys me so much
  • the politics of global electronics
  • what it feels like working in a financial vacuum
  • the wobbly future of security cameras
  • business schools and the missing decades
  • Silicon Roundabout roustabouts
  • why OpenCoffee rocks, etc.

All of which is simply stuff on my mind every day that affects how I do what I do, and that alters where I’m trying to get to: really, the locked doors, compromises, mismatches and ‘life hacks’ that you won’t find on the business pages.

Yet these things are the very ones you need  to teach yourself to talk about – the network of insights and angles that make you and your startup unique. Practise doing this, and very quickly you’ll find that presentations and pitches become a pleasure – people will approach you after your timeslot has finished to hear the rest of the story. Take pleasure and joy in communicating these, and you’ll find that everyone will find it much easier to “tune in” to your world. Throw away that startup PR script, write your own!

Besides, who’s to say that the person you meet in the street might not secretly be looking to invest in your company? You honestly never know!

Business Plans v2.0… what would they look like?

As I blogged here a while back, there’s broad agreement amongst the startup chatterati that traditional business plans are dead. MBA thinking is (allegedly) useless for entrepreneurs, bootstrapping (and low-end funded) companies are stuck at the front end of the [necessity—–strategy] spectrum, everyone is talking about Eric Ries’ “Lean Startups” (even if nobody yet knows how to fund them, grow them, or exit them) while Steve Blank’s customer development allegedly beats out old-school product development, etc etc. So far so loosely consensual.

Yet the problem with this is that nobody has stepped forward with an alternative – really, what should Business Plans V2.0 look like? As per normal, pointing out that something doesn’t work is a pathetically easy game to play: coming up with a viable alternative is much, much harder.

All the same, this isn’t just some temporary post-credit-crunch glitchette. At heart, a business plan should be designed as a precursor to substantive investment discussion between the parties – so even if you chortle knowingly at its hockey stick graphs and its optimistic market presumptions, it is an object designed to help channel the raw collaborative urge to form a relationship, to ‘get it on‘ (whatever ‘it’ is).

The problem with this is that, though always somewhat wobbly, the arrangement between angels, banks, and entrepreneurs has been pulled so taut of late that it has now has more holes than substance: the parties’ interests have diverged. What kind of business contract could ever equitably cover the post-sales angle of bank finance, the post-traction obsession of UK angels, and the late-prototype focus of UK entrepreneurs all at the same time? And what kind of business plan could possibly lay down a set of guidelines to bring such parties to any kind of agreement, when right now they don’t even seem to be in the same building as each other?

Putting startup theatre to one side, I’ll be honest: this is a difficult question to which I haven’t (yet) got a proper answer. Though I despair of the sub-MBA grandstanding most business plan templates are built on, these remain the de facto standard for the simple reason that they give you a pragmatically dull way of presenting loads of genuinely useful information. The reason I’m thinking about this right now is that I’ve been asked for an up-to-date business plan by some interested investors, but frankly I’m struggling to bring it all together in any kind of traditional format.

However, what I want to say is quite different from what all the templates seem to suppose – what kind of generic template has the cojones to say “if angels don’t invest in the next couple of months, I’ll negotiate a customer-funded deal within my industry instead, because that’s basically how damn close to market my startup is”? It’s all gone so far beyond the “here’s a nice little idea, will you fund it?” stage (you know, the one that government advisors think that all startups are at) that it’s just not funny any more.

So how can a pitch document ever communicate this urgency – how can it manage to get the core message across that “this is your last chance“? Though I’ve met so many great individual angels over the last 18 months, perpetually coming in second (as almost all of them habitually do) is perhaps the most effective procrastination tool yet devised – for with nobody to come in first while EIS is so heavily stacked against other ways of investing, ‘nobody leads‘ means ‘nobody invests‘, period. The single reason angels can even conceive of a 10x ‘home run’ on any startup investment is that they have to come in early – that’s the deal, that’s how it works. It’s not exactly an ISA, is it?

So, how best to present this? As always, I’ve got plenty of ideas: but even so, it’s a tough nut to crack. And yes, I’ve already had a trawl through various “business plan v2.0” sites (such as this one, PlanHQ, and even the rather laconic icon-based business plan summarizer from Rotterdam), but haven’t yet found anything that comes particularly close. Have I missed something really important? Leave a comment below, tell me what to look at!

UK banks and startups, revisited…

While having a quick (social) chat with a City commercial bank manager a few days ago, I mentioned something I’d heard at the (far too oxymoronic) ‘Access to Finance’ breakout session at the recent B.I.S. Advanced Manufacturing conference: that most new bank lending to startups was in the form of factoring rather than (for example) working capital facilities. Is this true?, I asked him.

Absolutely, he said. Moreover, he went on, what had happened post-credit-crunch was that UK commercial lenders’ various departments had looked afresh at the risk implications of commercial failure / collapse in order to analyze their true cost of business lending. What they discovered was that because invoice factoring (which implicitly has a mixed basket of risk factors) offers a lower effective risk exposure to banks than working capital lending (which is almost by definition built around exposure to a single binary succeed/fail event), it came at a lower effective cost to them.

So, the banks’ logical next step was to withdraw just about every UK company’s working capital facility where practical, in many cases (though definitely not all) replacing it with similar-looking invoice factoring arrangements. I don’t know the figures, but can easily imagine that this comprises many billions of pounds‘ worth. Any lending figure produced by banks to the government relating to their activity since 2007/2008 should be read with this in mind – for this has been their #1 tool in restructuring the risk in their commercial lending portfolios.

Why should anyone particularly care about this? Well… I suspect that this transition will prove to be the biggest shift in UK commercial banking practice in many decades – effectively, the UK banks have collectively moved their default lending position from pre-manufacturing all the way downstream to post-sales. But this isn’t just the end of manufacturing finance, it’s also largely the end of bank involvement with anything involving using money prior to sales, most notably intellectual property creation: in short, this new banking worldview is only really compatible with ‘pure service’ startups (and even then only those who just happen to bill clients right from Day One).

On the one hand, angels (who as a group made their own money through financial services) give every impression that they are mainly looking to invest in other sneaky-ass low-cost financial service plays, so you can’t really blame the banks for being on-trend here. Yet on the other, these two key financing groups seem oblivious to the entreaties of government and entrepreneurs alike, that UK plc simply has to invest in pragmatic intellectual property – by which I mean “knowing useful things that other countries’ companies don’t” – if the whole Square Mile is not to turn to that-which-hits-the-fan.

The takeaway from all this is that if you’re an entrepreneur currently looking for working capital, bear in mind that umpteen billion pounds of the stuff has just been squeezed out of the UK economy: the banks have basically decided it’s icky stuff that they don’t particularly want to lend. And if you’re a banker reading this, ask yourself whether UK plc needs your bank’s money to back yet more services – i.e. more hairdressers, sandwich shops, coffee bars, web design houses etc (hint: it doesn’t) – and whether it needs your bank to enter into a productive dialogue about working capital with startups who are trying to change the world beyond these shores (hint: it does). Where’s the middle ground?

Technology Strategy Board’s “Tech City Launchpad 1” launch…

Ohhhhhh dear: Monday evening saw a group from the Technology Strategy Board (TSB) come to TechHub in Old Town Street with a £1m grant giveaway, fully expecting to have rose petals strewn in their path by hordes of grateful self-funded digital entrepreneurs (à la #StartupBritain launch). Unfortunately, they were not so much “egged on” as “rotten-egged on” by a crowd of digerati who can sniff a bad ‘un at a hundred paces. How did something so good go so badly wrong?

Firstly, in this TV age of Dragons Den and The Apprentice, everyone knows the anatomy of a bad pitch: the inability to make properly coherent points, not being on top of your brief, not really knowing your location or understanding your audience, responding to specific questions with the same over-general simplifications… and I’m sorry to say that checking these boxes was merely the start of the evening’s pain. For the audience, it was a lot like watching a slow-motion car crash: and it must have been close to torture for the other TSB people in the audience.

Secondly, it became increasingly clear as the presentation continued that they hadn’t thought through the implications of what they were proposing. The TSB’s “Tech City Launchpad 1” grant is designed to back sub-12-month explicitly collaborative projects (though they fudged the issues of who would own what, and what exactly was being funded) “between small, medium-sized enterprises and micro firms” (though they fudged the issue of how these are defined) in or around Silicon Roundabout (though they fudged the issue of exactly where qualifies) “to develop a digital product or service to proof-of-concept and/or a user-facing trial” (though… you get the idea). The problem with all this? The vast majority of Silicon Roundabout startups are self-funded single-digital-project vehicles, not R&D labs with ample spare capacity to try something new. Digital startups’ key challenges are (a) surviving while prototyping their existing single digital project, and (b) customer development in a vast, largely hostile online world, while (c) trying to build critical mass to gain [supposed] angel funding. So… where in this landscape does the TSB think starting an entirely new project explicitly in collaboration with an SME would fit? Where’s the ‘product/market fit’?

Thirdly, the whole application format they’ve chosen – 2 minute video pitch, followed by a traditional business pitch round for the best 20, with the best ten getting a promissory note and access to VC / angel workshops to help them build a full funding round – would seem sensible in the hands of (say) Dave McClure, but seems somewhat misplaced for the TSB. A bit like asking your granddad to judge a street dance competition, I have to say. Oh well.

Overall, the paradox here is that the TSB seems to have assumed that the community of digital startups is a vibrant, static body of micro firms that are already making money consistently, but who need funding in order to take it to the next level. The reality is that it’s a dynamic (i.e. fast churn) community of hot desking mayflies trying to bootstrap their small companies to the first level – nobody’s funded right now, that’s just the way it is. Really, the minute I heard them quote Wired magazine’s statistics on Silicon Roundabout I knew that they had inhaled the fumes of the Tech City mythology – that they had built their proposal on the back of an acutely Cameronesque (i.e. optimistically distorted) view, that High Growth Digital Startups Can Turn The UK Economy Around.

Errrr… riiiiiiiiight.

Though it was good to see David Willetts (the current Minister of State for Universities and Science) at the launch too, I can’t help wondering whether the TSB and indeed the Government are currently outreaching to the wrong people. As I said to him afterwards, we clearly have no shortage of entrepreneurs, no shortage of ideas: what we’re missing is active angels, and indeed any kind of culture of investment. In fact, I have to note that, despite his fabled ‘Two Brains’, Willetts did leave me wondering whether any of the Powers That Be grasp the gratingly sharp differentiation between VCs and angels (hint: VC funding typically has one or more extra zeroes on the end). Does the TSB already have much in the way of dialogue with UK angels? If so, did they think to run this proposal past any of them before launch? (I guess not).

In summary, then…

On the one hand, I have long thought that the TSB’s quaintly anachronistic view of the way external funding works has meant that their competitions have only been applicable to SMEs with (say) £1m+/year turnover – I suspect that checking past applicants’ profiles would quickly bear this out. So let me be at the front of the queue applauding the fact that – following the repeated prodding of Glenn Shoosmith, it would seem – the TSB has at long last constructed a funding scheme based not around private pre-funding (which rules out the vast majority of self-funded tech startups) but around a 12-month promissory note to gain external funding.

At the same time, however, there is often a vanishingly small distance between ‘pilot’ and ‘pivot’: and what the TSB presented on Monday night was most definitely a pilot scheme in need of some pivoting if it is to make a real impact. In the context of European funding rules, I fully understand that it is hard for a body such as the TSB to construct a grant that isn’t perceived as distorting some market in some way. But sometimes these kinds of constraints lead grant-making bodies to put together grant packages that are highly impractical (e.g. the way European FP7 grants implicitly insist on cross-border collaboration is good in an idealistic way, but horrible expensive to arrange and manage). Like this one. 😦

Some voguey startup things I just don’t get…

A few quick thoughts before I head off to the TechHub seed funding meetup this evening. Note that the following list is neither definitive, ironic, sarcastic, nor even grumpy: it’s just a whole bunch of contemporary startup things I genuinely don’t get, however much in vogue they may be.

(1) Whatever Sweary Dave McClure says, 500startups seems exactly like mentored spray-and-pray to me. Given that Dave’s a self-professed metric fan, talking up the merits of a proposed 85% fail rate before barely any investees have got round to failing seems somewhat, errrm, anti-metric. Perhaps I’m missing Something Really Important here, and bless the Sainted Dave for trying, but… nope, I don’t get it.

(2) Eric Ries’ “Lean Startup” movement. Look, I do truly understand why customer development and iterative engagement are hugely important – if not indeed utterly central – to effective product development. However, as a way of presenting startups to the investment community, I think it is an abject failure, a weighty conceptual millstone placed around entrepreneurs’ necks at the precise moment they’re starting to swim against the external economic tide. Maybe in ten years’ time (when a handful of self-funded lean startups have somehow managed to go big) angels will see it as some kind of “contrarian bandwagon” to jump on and it’ll make sense: but not now, not even slightly.

(3) The UK Government’s bipolar attitude to technology. On the one hand, you have Vince Cable who seems to want to singlehandedly bootstrap a manufacturing technology revolution in the UK (oh, as long as it’s nowhere near the South-East: ta for that, Mr C) – while on the other hand, you have most of the rest of the government for whom “technology” now seems operationally synonymous with “web technology” *sigh*. Either way, I can’t honestly say this makes any real sense to me.

(4) Old Street / Shoreditch / Tech Cities / Silicon Back Alley. Why is anyone seriously suggesting that the UK needs more office space for startups? The UK is full of empty offices – that’s what happens when an entire generation of businesses gets suddenly squeezed by the banks and is forced to downsize just to retain sufficient day-to-day liquidity. What’s so wrong with home offices, shared offices, garages, etc?

(5) Super-angels. To my ears, this phrase always has echoes of Terry Jones saying “He’s not the Messiah, he’s a very naughty boy“: for most so-called super-angels are neither “super” nor even “angels”, but just naughty boys micro-VCs. Can a super-angel represent a group of other angels and still manage to make a £20K investment? Or even a £50K investment? I suspect probably not.

(6) Early stage VCs. Come on – how’s that going to work, then? To make a minority investment of £2m+, an early stage VC would need to find a whole set of early stage startups that it could sensibly value at £4m-£5m. But outside of pharma and energy, startups just don’t work at that scale any more. I don’t get it.

Startups vs Startdowns – and why this matters…

Whilst scattergun blogging about various angel funding myths a few days ago, I pointed out that – though it’s entirely true there aren’t any statistics on the subject I’ve ever seen – my best guess is that roughly 75% of recent angel funding has been into working companies typically suffering [thanks to the UK banks] from dysfunctional liquidity. Basically, a young-ish company hits a liquidity wall, can’t meet its short-term financial obligations, angel steps in, buys half the company for a song, company gets its growth mojo back (albeit in a limited kind way), everyone is happy(-ish).

As you can imagine, this is gun-to-the-head fire-sale economics: opportunistic stuff, and in many ways is as far from what is normally thought of as “startup” investing as you can get. Yet the two categories sit side by side in angels’ portfolios, contributing to the same aggregate statistics. Is an investor who only ever takes such sharky positions really an ‘angel’ in any useful sense?

Following the “business pattern” literature, I think the two are such polar extremes of investment behaviour that they deserve different names: specifically I think they should be called startups and startdowns. VCs already have the concept of a “down round” (where an investment comes in at a lower valuation than the previous investment round), so this is an equivalent version but where the first external investment comes in at a fire sale valuation – starting down, hence “startdown“.

So, when you next discuss your business with angels, why not ask them how many startdowns there are in their portfolio? Or what their portfolios’ startup-to-startdown ratios are?

Be prepared for an explosion in shiftiness.