Getting to "yes" in a world of "no"…

Archive for June, 2011

The TSB and baby elephants…

Well, there’s something that doesn’t happen to me every day – a fairly impromptu 1-hour meeting in a Starbucks on Piccadilly with David Bott, Director of Innovation Programmes at the Technology Strategy Board. Despite having gained his business experience at ICI and National Starch (which you might think would be enough to suck the marrow out of anyone’s bones), he turned out to actually be an interesting and surprisingly passionate guy. Incidentally, he claims that his blood boils if you ever call him the B-word (‘bureaucrat‘), so probably best avoid that if you happen to meet him, OK?

First off, he gave me a whistlestop tour of the secret political history of the TSB – basically, it started off as a fairly small advisory board to the old DTI (hence its name), but then got fashionably spun out into a Swindon-based quango, at which point most of the civil servants jumped ship. (What’s wrong with Swindon? I fondly remember the map of it inside XTC’s second album “Go 2“.) Anyway, when the music stopped, the TSB business people were left holding the baby a portfolio full of ‘tech fairy godmother’-esque give-away-money-for-collaboration-but-glacially-slowly programmes to administer: an unwitting reverse takeover, if you like. Yes, things were definitely more ‘calendar’ than ‘timetable’ back then, but they’ve generally managed to tighten The Process up so that a typical grant application is faster than your pet elephant’s pregnancy, which is without doubt A Good Thing (the improvement, I mean, not the pregnancy).

Continuing its kaizen, the TSB’s next stretch targets are clearly (a) aiming more at startups than established SMEs, and (b) trying to get to final grant insanely fast, both trends well exemplified in the recently-mislaunched Tech City Launchpad1 competition. But, of course, now that Round 1 of that is over (and my somewhat outrageous pitch got through successfully, thanks for asking), his group has embarked on an as-yet-not-quite-fully-focussed ‘hearts and minds’ short-term offensive aimed largely at business angels – for without angelic buy-in, the TSB’s promissory note Tech City prizes would amount to basically zero. As part of all that, Monsieur Bott will be talking at the BBAA’s big yearly shindig / summit tomorrow, so it’ll be interesting to see what reaction he gets there.

What next? Well, at this point in the blog ‘meta-script’, I’m supposed to run the gauntlet a bit: be a bit vituperative, prick a few bubbles, Tell It Like It Really Is – you know, the whole ‘Bite The Hand’ pattern. Or else I’m supposed to roll over in gratitude and relief at getting through the first round. But back in the real world, things are much more complicated than either of those comedy blogging extrema. I’m sure you can guess what I’d like the TSB to achieve at the angel pitch day in August: a barnstormer of an event, a televised tech evangelical hoedown, crackling with genuine investment fervour and (why not say it?) people signing standard contracts and writing cheques. But (though I’ll stress that David Bott didn’t explicitly say this, it’s just me reading between the lines a little) the TSB people seem to me to be in something close to awe of the angel community (and in particular the angel networks), which makes me wonder how on earth they’re going to pull that whole trick off while treading on eggshells.

What it all comes down to is this: I don’t honestly believe that UK entrepreneurs collectively lost the plot over the last four years, that en masse they all suddenly decided to pitch unfundable propositions. Rather, the real problem was that a lot of lead angels left the arena (wings seared by a down external market), at just the same time that banks were restructuring both working capital and early stage startups right out of their portfolios. All that’s left standing is a new generation of so-called ‘latent’ (i.e. wannabe) angels, enticed by the tax breaks but appalled by the increasing time to exit (which in turn has largely been caused by Euro VCs moving their portfolios downstream to ever later-stage businesses). As I discussed a while back, all the trends are headed in the wrong direction.

Hence from my perspective, the situation right now is that the TSB people have only just started engaging with the real startup finance disaster movie that’s been unfolding over recent years: so this is where their collective challenge suddenly morphs into something subtler, darker and trickier. Finding ways to give money to techies to help them build interesting, market challenge-driven stuff is essentially a fairly easy gig: but understanding, influencing and steering investment psychology is very much harder. Welcome to my world of pain, David! Enjoy!

TSB, grants, funding… where now?

In the run-up to the results of Round 1 of the Tech City Launchpad1 competition being announced, I’ve been thinking about the Technology Strategy Board, idly wondering to myself if its whole organizational remit actually makes sense any more. What exactly am I talking about here? Well…

“The vision of the Technology Strategy Board is for the UK to be a global leader in innovation and a magnet for innovative businesses, where technology is applied rapidly, effectively and sustainably to create wealth and enhance quality of life”

Already I can feel the keyboard sagging beneath my CTRL-V fingers under the weight of heavily unrealistic expectations. For a start, innovation isn’t primarily about creating wealth: sure, 10% of the mix is product invention, and 10% is product execution, but the other 80% revolves around engineering a social revolution amongst your customers that works in your favour. Hence, the “create wealth” bit is no more than a byproduct of getting all the other stuff basically right. In my experience, it’s exceptionally rare that raw aspirational greed alone carries entrepreneurs to any kind of positive finishing line (though if you’re looking for qualities that do, I’d expect genuine customer empathy and ruthless tightfistedness to sit atop a rather short list).

Quality of life” is also a particularly value-laden phrase, when the much-used template to service-based wealth creation has been to find an ingenious way of replacing full-time human intermediaries with cyber intermediaries or with (and I feel nauseous at having to type the dread words) some social media equivalent. Really, what tangible quality of life improvements do such ingenious margin optimizations ever bring? This strikes me as a rather tragic legacy of the MBA financial engineering toolbox: personally, I’d rather employ all that ingenuity and heroic development effort to create something new of universal value than just to eliminate somebody’s scraggy 15% margin, but there you go. (And please don’t get me started on the policy of attracting overseas startups to the UK, or on the whole centres-of-excellence nonsense, or I’ll be typing all day.)

So far, so quibbly: but the reason I’m dissecting a single sentence here is so that you don’t have to go to the trouble (as I did) of trawling through the TSB’s entire May 2011 “Concept to Commercialization” document, because that basically comprises this same sentence repeated many times over. In all of that, the real “dog that didn’t bark” is for me the thorny topic of business angels: would you be surprised if I said that the word ‘angel’ was mentioned just once in its 27 pages?

What has happened is that the TSB seems not to have noticed that the world has changed… really changed. Even though funding startups has always (even in boom years) been difficult, a combination of unhelpful trends has now scaled this challenge up to, well, extraordinarily difficult. At the same time, funding is coming in ever later and lower, with less and less assistance from banks and VCs, and with ever-later exits: while many formerly active angels have, like Elvis, left the arena for the last time, leaving behind them a thin layer of relatively unskilled, so-called “latent” angels, few of which I expect ever to bite the bullet and invest (let alone lead a round) in startups.

All of which is to say that the territory the TSB’s remit would have it cover has moved beneath its feet, because there is precious little risk capital of any colour available to companies looking to commercialize new things – to turn technical invention into social innovation. In fact, I’d go so far as to say that right now there is no effective startup equity investment community in Britain: the deals I get told about tend to be ever later (say, post-revenue), on ever worsening terms, and/or under shamefully one-sided contracts.

So it is against this overall sectoral backdrop that I measure the TSB’s effectiveness: because its traditionally slow-to-start, strategy-heavy, project-based commercialization competitions have largely been targeted almost entirely at non-startups (for these are the only companies who can meet the accounting and (crucially) pre-funding criteria the TSB has listed as prerequisites for grant funding), I don’t believe that (what I would call) startups have to date participated in them to any significant degree.

What, then, are we to make of the Tech City Launchpad1 competition? On the one hand, it seems like a rational response to these same investment macro-economic trends, in that it is aimed squarely at startups; has a relatively brisk funding timetable (as opposed to what could only sensibly be described as a ‘calendar’); is structured around post-funding; while using (shock horror) two-minute YouTube pitch videos as a zeitgeisty prequalification mechanism.

Yet on the other hand, the TSB doesn’t yet seem to have engaged with those same angels it’s ultimately relying on to match funds against the grants they’re proposing; talk of “Tech City” / “Silicon Roundabout” reeks of Cool Britannia-esque political sloganeering, 2011-stylee; the competition seems to have an implicit focus on social media / digital media service company startups, which is a long-deflated VC bubble (in the UK, at least); the level of grant on offer is a-fall-between-two-stools type, in that it is big enough to prototype with but probably too small to scale; and so on. It’s progress, sure: but there are lots of other things in the same balance, too.

Part of me really wants Tech City Launchpad1 to be a success for the TSB: but I have to point out that the ten grants on offer are arguably just a small splash in its overall funding ocean, and I’m far from sure that it’s a programme that currently has sufficient local community virtues to roll out across the UK (as seems to be the intention). Is Tech City a genuine, runaway viral-like success story, or merely an attempted self-fulfilling prophecy that has sufficient short-term politically expediency for the TSB’s masters to want it to throw money at? I don’t think it’s being overly cynical to see the latter position as being more likely to be true.

On reflection, what do I think about all this? Well, I don’t for a picosecond believe that the structural problems of the UK investment community can be solved (or even really be assuaged) by grant competitions like this, however well-meaning. Further, I strongly doubt that the underlying trends causing these structural problems are going to improve: if anything, I suspect they are going to get worse over the next 5-10 years.

So, if the TSB genuinely wanted to make a positive difference for startups, are grant competitions the answer? I think not: instead, I think that it’s money should be put into radicalizing and liberalizing the whole angel network concept. A capped 1% success fee on funding, set up regular free meetings throughout the country (5/6-minute pitches, no pay-to-pitch, what kind of foolishness is that?), and devise ways of incentivising angels not only to attend these but to invest in startups presenting there. How? Say, by supplying TSB-approved investment documents (AKA “reducing friction”) and giving bonuses contingent upon investment within specified time periods. It could also use low-ish tech (say, Skype videoconferencing?) to open the process up to overseas investors – as an entrepreneur, I’d say we don’t actually want their startups here (we surely have plenty of those already), but we do want their inward investment, right?

That is, I think the TSB’s most effective role in enabling invention to be turned into innovation would be to reposition itself as a social investment enabler on a truly grand scale. For only the act of doing this on an epic social scale would stand any chance of making a real positive difference to society. And ultimately that’s the whole point of the enterprise… isn’t it?