Getting to "yes" in a world of "no"…

Archive for May, 2011

Tech City Launchpad 1 – round one has now closed…

Two-minute video pitches, as with most things in life, surely tend to get done either cheaply or well, but rarely both: and seeing past the inevitable imperfections is one of the key problems facing the Technology Strategy Board’s Tech City Launchpad 1 judges. What should they look for?

  • production values (rewarding ‘pre-funded well-preparedness’ over substance)
  • bureaucratic savvy (rewarding the applicant’s ability to sequentially tick checkboxes)
  • personality (rewarding charisma over substance)
  • business savvy (rewarding credibility over substance)
  • etc

Given that the TSB is a government agency, there will always be a suspicion that a demonstrable ability to surf the tide of bureaucratic checkboxes will win the day: but one of the interesting aspects of this competition is that once the votes are in, it will be clear exactly what pressed the judges’ buttons… because we can simply play the winning videos and see for ourselves.

According to the competition’s member page, 439 people joined the Launchpad 1 group, including lots of names that may be familiar to you from OpenCoffee, Flagon’s Den, etc. What isn’t yet clear is how many people actually entered, when I’ve only managed to find 37 entries actually on YouTube. Incidentally, if you want to see them all, here’s a Tech City Launchpad 1 YouTube playlist I put together. My best guess is that there probably as many again from people who have not made their videos public: so I’m guessing 75 or so entries, but we shall presumably see soon enough.

As to my own competition entry: a few weeks ago, I discussed here how startups are tiny social revolutions, and suggested that a properly informative pitch might well involve presenting a dialogue between startup and early customer. Well… for my own two-minute video pitch, I basically took that idea and ran with it as far as I could, by presenting a fictional dialogue between myself and a mythical person from the TSB, in the form of an animated “text-to-movie” Xtranormal film. Total production cost: $3.33 (the equivalent of 400 ‘xp’, Xtranormal Points).

Nick Pelling's Tech City Launchpad 1 application

OK, in real life I don’t have as much hair as that, nor do I wear implausibly tight trousers or comedy ties (yes, my avatar is indeed the one on the left). But it was a lot of fun getting a whole load of business information across in dialogue form, and including a fair few laughs along the way, mainly at the expense of social media startups. (But not your social media startup, oooh no, you’re much better than that, so you are).

I know, I know, classical entrepreneurial wisdom has it you should “never tell jokes in a pitch”. But this isn’t a live pitch, it’s a video pitch: so do the same rules hold true? Personally, I don’t think they do, but please watch it (clicking on the picture should take you to YouTube) and let me know what you think! Enjoy! 🙂

Pitching: 99% rejection, 1% redemption…

Anyone pitching startups in London must have something of a deathwish (though if it’s any consolation, Surrey seems even worse), because the process is so inherently biased towards rejection – yes, the 99:1 ratio of the post title is a low estimate – that you can be pretty certain of which way the wind will blow long before the weather vane starts to turn.

Yet we keep on doing it. How does that old adage go – that repeating something but expecting a different outcome is a sign of madness?

Anyhoo, right now the biggest deal of the day is the Technology Strategy Board’s Tech City Launchpad 1 £100K funding competition (and not a whiff of equity, though you have to find matching funding soon afterwards). Round One (which closes in just a few days’ time) involves startups / SMEs submitting a two minute video pitch for a digital tech project to be executed somewhere near Silicon Roundabout. From the TSB’s point of view, this is intended as an efficient way of winnowing away the chaff thousands of high-quality entries they presumably expect: as I understand the process, at the round’s closing date it then hands the task of judging these over to a set of independent arbiters to score them, allowing it to start round two with only twenty companies in play – a far more manageable number.

The TSB also says that it will also take note of public opinion, by which it presumably means comments left on each video submission’s YouTube page during the assessment period (i.e. until the end of June 2011), if you choose to let it have public visibility. Is that a good thing or a bad thing? As with all things Internetty, it’s hard to tell: probably safest to say that YouTube commentry will always be somewhat problematic as a class of supporting evidence. Or perhaps it simply means that if a video goes viral but the judges all hated it, then the TSB reserves the right to advance the application to round two regardless. 🙂

So far, I’ve only managed to find two submitted applications: Robin Young and one another I can’t now find (but it was for an energy efficient internal combustion engine). Note that there are also quite a few other two-minute TSB video pitches all submitted in September 2010 (clicking on the stats button just below the video shows you when it first went live), so it’s clearly a first-round competition format the TSB has been toying with for a while.

I’m surprised that there aren’t more entries already, but perhaps the other 9,998 entrepreneurs are busy preparing their videos this weekend, and will all submit them microseconds before the deadline (noon on 26 May 2011, just so you know). Perhaps the combined video upload spike will bring YouTube to its knees, who knows? We shall see!

Pitching ‘foreplay’…

When pitching to potential investors, conventional wisdom says that you should focus on clearly describing the company, the market, and the proposal’s financials while doing your best to come across as the personable, brilliant, credible marketing-and-technical-genius you are (because otherwise you probably would never have got to make the pitch), and all preferably without having to use a distractingly fancy presentation backdrop as a crutch. Perhaps “clear financials, smart presenter, dumb slides” would be an oversimplification, but I’m sure you get the basic point.

All of which is plausible-sounding advice, for sure: but I’m not sure any of this helps you choose the right starting point for telling a startup sales story. You see, it may well be that you have a whole extra level of work to do in your pitch before you so much as mention your company.

For example: when presenting my own startup Nanodome, I inevitably have to spend a minute or two (or indeed three) warming the audience up to the general idea that security cameras are in fact extraordinarily sexy – specifically, that the kind of “intelligent camera” (or ‘LSL’ – lens, sensor, Linux) that will without doubt centrally define the security industry over the next 20 years is a ‘Cinderella technology’ just about to get its invitation to the Ball. And then I have to put yet more pitching time into explaining why small electronic device manufacturing circa 2011 is also extremely sexy, and nothing at all like, say, British Leyland circa 1970. *sigh*

In some ways, I don’t mind if some of the people to whom I’m pitching then go out and invest in a completely different LSL camera startup – ultimately, not everybody you present to will be perfectly attuned to the precise details of where you’re going, what you’re doing and the way you’re trying to scale your chosen business mountain(s). But if everybody in the audience leaves the room without understanding exactly why you think the whole market you’re aiming at is so utterly awesome, no amount of financial finessing will ever gain you investment.

There’s a similarity with novelists here, in that crafting the first page of a novel is often a challenge quite unlike writing the rest of the book: so it goes with pitches, too. Really, the key presentation problem with real-world business opportunities is that they rarely fall right in the middle of a ‘hot’ investment area (geolocation, etc), and so need a level of introduction: which is why I think you often need pitching ‘foreplay’, to pre-sell your industry.

There’s also a larger picture to consider here, insofar as I believe entrepreneurs are often guilty of being too preoccupied with ‘pure’ money financing, when the realpolitik of angel investing is typically about other issues entirely:-

  • self-image – “am I the kind of angel who would want to be associated with this industry?
  • self-validation – “if this startup succeeds, would it make the rest of my business life look even better?
  • mirroring – “does entrepreneur X remind me of myself earlier in my wildly successful career?
  • exploitation/plasticity – “how coachable / malleable is entrepreneur X?
  • controllability – “is entrepreneur X a pussy cat, a wild horse, or a loose cannon? And am I comfortable with that?
  • …and so on.

Naturally, the influence that such interpersonal dimensions have on investment decisions will always be completely subjective, but I remain convinced that it is these kinds of things that contribute most to angels’ first-fifteen-seconds gut reactions. And so as an entrepreneur, you have a yet further aspect to think about: that the way you present yourself in the first minute of your pitch is also crucially important.

For me, the three keywords are normally passion (for a market), drive (to satisfy that market’s needs) and credibility (that you have the right experience and skills to make things happen): but you have to accept that if you find yourself presenting to a room full of cashed-out actuaries, you would probably need to dress these up differently.

“WFIO”…

Part of the baptism of fire for entrepreneurs and CEOs is the “WFIO” moment, when the metaphoric trapdoor you’re standing on suddenly swings open to reveal the yawning black vacuum of space beneath your feet and you realize – it’s all gone wrong, everything I valued at ($X) is now worth -($X), next stop oblivion, We’re F<whatever>ed, It’s Over.

Actually, I’m having a bit of a WFIO moment right now, staring blankly at a PCB where a single BGA ball seems to have failed to be soldered OK, frustratingly causing its key camera functionality not to work. Glass half full: wowza, we got 99.99% of the board working first time. Glass half empty: hey, nice little green doorstop you got there, Nick.

Don’t worry, I’ll get over it. Probably. 😉

Just so you know, I first heard about WFIOs from this hugely informative post by Ben Horowitz. He makes a whole load of great points about coping with (and indeed surviving) the pain of leadership: for example, I know I shouldn’t smile whenever I hear the old story about racing drivers (i.e. advising you to focus on the road rather than the wall) that Ben quotes, but it works for me.

Of course, running a startup is somewhat like building a boat from driftwood while in the middle of the sea. On the one hand, you’re perilously close to drowning every single day: but on the other hand, there’s an awful lot of driftwood out there, and lots of people want you to stay afloat. Sink, or swim!

Triage for startups…

It’s been a strange few days here at the hub of Nanodome’s Evil Empire (I wanted to call it the “NanoPlex”, but our lawyers advised that another evil empire had got that basic meme pretty much locked down already, so best leave it alone).

Firstly, out of a clear blue external sky came (mostly by coincidence) a succession of opportunities to pitch… for which I didn’t immediately feel ready. Don’t get me wrong, I love pitching – show me an entrepreneur who doesn’t relish a platform to talk about his/her world-dominating money-making obsession and I’ll show you someone who’s probably not quite there yet. Basically, eating up the stage is one of the things we do best.

Secondly, out of an equally clear blue internal sky came an epiphany, a succession of ideas inviting me to pivot – new security camera-related devices to design and build, each offering new sales angles and opportunities in my core market. Basically, makeing what seems to many a very staid, dull-as-ditchwater industrial technology and (with a bit of luck) make it contemporary and almost hip (if you squint a bit).

Of course, while all this is going on I’m wading through the perpetual treacle of late project development – trying to fix up non-working prototype boards, fill all the empty gaps in the codebase, etc. So I’m basically being pulled hard in three different directions: big-picture finance changes, big-picture product epiphanies, and gritty small-picture stuff.

In many ways, this is the eternal startup ‘triage’ debate: to which of these three should entrepreneurs give priority? Getting the backing right, getting the intended product right, or executing what you’re already doing right? And I’m going to say straight away that trying for any kind of “doing all three” answer is just a cop-out: that option is very likely equivalent to saying “doing all three badly” – unless you just happened to have arrived here on a small craft from Krypton, you have an all-too-human amount of energy and attention.

One thing funded entrepreneurs often advise is to “take the money (in fact, take as much as you can), stay in the game“, which would seem to be a strong argument for making polishing the pitch the top priority. However, my strategy mentors would advise me to “aim for the sexiest, biggest marketplace“, which would seem to point to working on the product epiphany. Similarly, my sales mentors would advise me to “make the existing product work, make it shine“, because as a hardware company, getting your product demo working well changes everything (in particular valuation, as well as negotiating any kind of customer funding).

Naturally, the longer you spend caught in analysis paralysis about what to focus upon, the less of all three options you end up doing. As with hospital ERs, every situation is different, but for me right here right now, I’ve decided to think about adding a teaser slide on alternative products (to buy me time for getting that angle really right), and to continue working on my camera, hopefully to get the last few development issues ironed out in time for (Lord strike me down for even considering such foolishness) a live demo to investors.

Perhaps I’m crazy to choose that particular path, but to sell equity in my camera company, I ultimately don’t need Powerpoint even half as much I need a working camera.

The problematic wisdom of angels…

As a UK entrepreneur looking for finance, I’ve managed to meet a good number of angel investors (130+), encompassing the good, the bad, and (indeed) the ugly faces of capitalism.

For all their differences, many have strikingly similar attributes:-

  • the Home Counties mini-mansion;
  • the trophy wife (yes, to surely nobody’s surprise most UK angels are male);
  • the small ‘Me Plc’ working office;
  • the constantly beeping Blackberry;
  • the enthusiastically overachieving hobby/-ies;
  • …all paid for by having cashed out their interest in some financial services variant right at the top.

When you meet them, they’re almost all relaxed, powerful, lovely blokes: and I’m not just saying that to kiss their virtual <whatever>s, they really are – basically because they can afford to be. That easy state of being is precisely what their success has bought them.

Yet the burning drive that pushed them to wherever they got to still smoulders not far beneath the now-comfortable surface, and they typically look to startups for a kind of surrogate adrenaline rush (which is perhaps a bit of a paradox, given that startups normally take several years to succeed or fail). All the same, I can’t help thinking that most of them will lose money from angel investing. And the reason for that comes down to what I call “the problematic wisdom of angels”.

You see, there are – broadly speaking – only five main investing paths UK angels tend to follow:-

1. Confetti mode – “Invest in almost everything that comes your way

Many angels start out like this, throwing small (£10K-£20K) lumps at a fair few of the entrepreneurs resourceful enough to network through to them. Investing like this can give angels a great buzz. However… they soon find themselves with a scraggy portfolio they simply don’t have the time or attention to follow. How would you track twenty £15K punts, particularly when they might be on your books for 5/6/7 years? It’s a tough one.

2. Goldilocks mode –Not too big, not too small, but juuuuust right

Many angels end up here: they still look at (OK, ‘skim the first page of’) every proposal that comes past, but are aiming to invest in £25K to £40K (occasionally £50K) tranches – their “house rules”. ‘Too small’ can’t justify the amount of effort needed to get on board (even if most do expect entrepreneurs to buy them lunch, ha!), while ‘too large’ is just too dangerous in what will always be a volatile asset class (which, of course, is why the returns from successful startups are so high). The problem is that, for most angels, this is still too small to warrant leading a round, but it’s still a large enough tranche that they can frequently feel the urge to micromanage the entrepreneur (which, incidentally, has been shown to cause startups to underperform). Should £25K buy an angel a seat on your startup’s board?

3. Go big or go home – “Small investments are for wimps

At the other end of the scale to ‘confetti mode’, some angels take a high-risk, bet-the-farm approach by placing large amounts (say, £100K+) into startups so as (presumably) to get all the upside of a single investment winning big… to multiply yet further the proverbial “home run” of VC speak. Even though the downside – one angel told me rather ruefully how he had lost £235K on a single investment – is almost too bad to consider, I can easily see how the stars of future wealth could firmly fix themselves into an angel’s eyes. Once you’ve convinced yourself how unbelievably good startup X is, why not take the whole round all for yourself?

4. Stick to the knitting – “Invest in what you know

Rather than trying to finesse the size of the investment (as per 1/2/3 above), many angels instead buy into the much-vaunted “smart angel” mindset: the notion that their deep experience and extensive contacts in industry X and/or market segment Y and/or business structure Z dramatically increases the effective value of their investment. (To be honest, this frequently comes across as a negotiating tool to help them argue for a better price: I’m not aware of any research supporting the suggestion that such “smart angels” are significantly more successful than so-called “dumb angels”.) In fact, sharply limiting the number of proposals to areas in which they have ‘history’ probably makes their portfolios more fragile (i.e. more susceptible to market shocks), as well as forcing them to invest in lower-quality investments to scale up their portfolios to a reasonable size. This narrow focus can then lead them to make sizeable single-startup investments (‘go big or go home’-style), which is normally a fairly bad idea.

5. Hydra mode – “Pool or syndicate investments with other angels

In many ways, this is an optimal approach because angels somehow always manage to completely fill their available time, so ‘sharing the load’ in some way would seem sensible. However, syndication comes at a high transaction cost – much higher levels of due diligence and raw contractuality are needed in order for angels to work in a group, because it’s essentially a mutual mini-VC fund. What doesn’t gel so well is that most angels paint a heroic mental picture of themselves as solo hunter-gatherers – yes, although angels like to preach the virtues of teamplay to entrepreneurs, they’re rarely keen on applying it to their own investment practice. How can they reconcile the self-justifying notion that they got rich as a result of their own personal merits (whether or not this is actually true) with the idea of surrendering control to a group of their peers?

* * * * * *

Effectively, each of the above five patterns of behaviour represents a ‘strategic decision’ – yes, a business school “strategy” – about how to invest: small size only, mid size only, big size only, close to (business) home, or syndication. All of these (even #3!) are totally rational… and yet they all largely miss the point, which is that startups are not West End musicals.

You see, startups pretty much all share a basic set of building blocks – products/services, markets, customers, development, promotion, uptake, overheads, runways, distribution, etc – which every half-decent exec summary should cover. So when they’re all built from the same conceptual Lego, why should angels even need an investment strategy? Why not treat each proposal on its own merits?

I believe the reason for this perceived need for a strategy lies in bookshops. On their Business Section shelves, you can find countless titles claiming to teach entrepreneurs how to perform an angel-attracting ‘waggle dance’: they baldly assert that anyone with half a brain and a book token should be able to use their templates to knock together a “killer business plan” without great trouble.

And many do.

I suspect that the resulting deluge of plausible-looking (but ultimately content-free) ‘killer business plans’ has gamed the whole system: it has caused angels to disbelieve that whole class of document – in fact, cynicism and doubt have become the default position. Business plans have been relegated to the fiction department, while few angels or entrepreneurs have any tangible idea of what Business Plans V2.0 should look like (in whatever brief gap that lasts before they too start being gamed).

For me, ‘wisdom’ – which I define as explicitly knowing less to try to implicitly know more – is far too often used as a cosy theoretical retreat from the difficulties and political compromises of the world: which is, of course, why business school platitudes usually fail when applied to real-world situations. Hence to me these angel “strategies” come across as typical of B-school high concept investing wisdom – they look great on paper but fail miserably when applied to real startups and real portfolios. Yes, there are things angels should aim to avoid (unbalanced portfolios, too many board seats, unmanageable portfolios, etc), but none of these should be considered so overwhelming that they should be allowed to dominate their overall thinking.

My point is that, contrary to the five investment behaviour patterns described above, there is probably no universal answer to the challenges of angel investing. In fact, there is precious little “investment by walking around” (i.e. actually meeting entrepreneurs) going on these days – and despite the moves to disintermediation everywhere else in the digital economy, it is puzzling why UK angels and UK entrepreneurs now seems further apart than ever. To be brutally honest, I would expect that more UK entrepreneurs are now connected to Dave McClure (yes, the D-man even follows my tweets, bless his sweary heart) than to UK angels, which I think speaks volumes about the structural problems this side of the Pond.

Hence the key contradictions of UK angels are that (a) for all their rejection of business school / templated business plans, they still rely on business school / templated ways of thinking when judging proposals; and (b) for all their espousal of disintermediated business models, they still (for the greatest part) fall in with pay-to-pitch angel networks. Sorry, but from where I’m sitting, if that is what currently passes for “angel wisdom”, it seems to me a very problematic kind of wisdom indeed.