Getting to "yes" in a world of "no"…

Archive for September, 2011

Thoughts on Flagon’s Den demo evening…

Congratulations to Jay Nguyen and Chris Maddern for another well-run Flagon’s Den evening last night, with copious free pizza and beer (though… Budweiser? Try a local microbrewery next time, guys!) to feed and water the decent-sized turnout. They held the event at Innovation Warehouse right in the middle of Smithfield Market, though sadly a little too early in the evening to get some decent sirloin. 🙂

Why run such an event? Well, spending too long hunched over your workbench can send you a little crazy, so it’s always good to get out and about. Which is why I took the excuse opportunity to wheel out my slightly knackered (but still hi-tech & shiny) prototype camera to Flagon’s Den, basically to get back in the swing of just plain talking about it to people.

Feel free to read all the top 10 pitching tips lists you can find, but the only real way to become good at pitching and demoing is by, errrmpitching and demoing, and then working out how to do it better. When I first started discussing my company’s security camera (don’t ask me how many years ago, I’d get all maudlin), it generally took me about an hour to get across how it was different, and why it had the potential to change an industry. But now, thanks to this hugely scientific method of trying it out on loads of people, I can get to the end line in about 30 seconds:-

(“Nanodome makes a new type of Pan-Tilt-Zoom camera, one designed from the ground up for reliability, the #1 buy feature for security cameras. To do this, it uses image-processing software to replace unreliable hardware components. Its cameras get manufactured in Taiwan, and then sold to mid-size security distributors.“)

Hence I’d thoroughly recommend demo evenings (the Flagon’s Den one is very good, but I’d expect TechHubTuesday to be pretty good too) to startups as a way not just of getting the basic message out that you’re alive and pivoting kicking, but as a way of actively working out how to tell your story better, faster, and stronger.

As for the attendees last night, they were a right old diverse mash-up of the London tech startup ‘scene’.  Not only were quite a few OpenCoffee Mailing List people (Iqbal Gandham, Phillip Hofmeyr, Johnathan Agnès, etc) there, but also bloggers, networking obsessives, and even a sprinkling of top-end VCs. Though given that Balderton doesn’t seem to have made any UK investments since, Stan Boland’s Icera, and The Hut Group back in 2010, perhaps it wasn’t too surprising to see Rob Moffat slumming it with the Flagons. A good VC can find a needle in any haystack, right? 🙂

For me, though, the only real downside of the evening wasn’t that I didn’t win a prize (probably because I don’t have the kind of needy puppy-dog eyes people feel compelled to Tweet votes for, but I’m OK with that), but that as the only hardware startup in the social/digital/enclouded village, I did feel somewhat like Little Britain’s Daffyd Thomas. And as far as funding goes, my startup’s not gettin’ a lot of action either, thanks for askin’. 😉

Sorry, I don’t need your fabulous startup service…

It’s a line that just about every entrepreneur should have printed on his/her business card and/or forehead, to help fend off the waves of startup service company representatives that assail you at pretty much every public event you go to:

  • patent agents / IP lawyers
  • hotdesk / virtual office / virtual fax / virtual phone answering / virtual address
  • PR / marketing / social media / SEO / community engineers
  • design / web / creative services
  • equipment hire / car hire
  • crowdfunding / network introduction / pay-to-prepare / pay-to-pitch / pay-to-be-funded
  • cloud accounting / invoicing / factoring / statementing
  • business card printing / headed paper design
  • rich cynics / pitch clinics / mentors / centaurs

Have I missed anything? Yes! If I take my inbox at face value, it seems that just about every day a brand new, subtly differentiated startup service niche opens up (often in Tech City, curiously enough). How I wish for a [service company spam] filter on my inbox! But until such a dream comes true, all I can sensibly say is…

Sorry, I don’t need your fabulous startup service. [Errrm… now piss off].

Major UK startup finance change (“BASIS”) is looming…

Here’s something pretty much every UK entrepreneur and business angel needs to be thinking about right now!

In July 2011, HM Treasury put out a request for consultation on proposals to change the way EIS (“Enterprise Investment Scheme”) works (download the 679K PDF linked about a page down from the top). Even though the government upgraded EIS relief in its April 2011 budget, it’s hard not to notice that TechCrunch Europe has still not been swamped by anything approaching an avalanche of angel backed UK tech startups. Hence HM Treasury’s diligent search has moved on to find other ways to, let’s say, ‘modernize’ the way the whole EIS system works.

Simplifying very slightly, the existing EIS works like this. If an individual business angel puts more than £500 into an eligible startup’s funding round solely as ordinary shares (but not more than 30% in a single company, and not more than £1m of EIS investments in a single year), then:-

  • He/she can reduce their income tax bill by 30% of the amount they’ve invested
  • If he/she then holds onto those shares for 36 months or more, they can be sold at a profit without incurring Capital Gains Tax
  • If they are sold at a loss at any time, then the loss can be set off against other capital gains

This is all very sensible in a shiny-black-shoe kind of way, insofar as it uses the tax regime to encourage business angels to do The Right Thing – i.e. to invest in startups for the reasonably long term (3 years). Specifically, this doesn’t cover investments made using the kind of liquidity-preferential share equity clauses VCs like to put in place to multiply cover their investments, or in the kind of tricksy hybrid (part-debt, part-equity) security instruments that have infested the City since Moody’s opened the door to them back in February 2005.

So… what’s the problem? Well, I suspect HM Treasury is looking enviously over at the (frankly unbelievable) US startup bubble, where quite literally biiiillions of angel dollars routinely get poured into frothy startups at unsupportable valuations. Really, for all the (quite different) problems that entails, it makes for a stark comparison with the near-moribund state of angel investing back in Blighty.

It has been argued by some UK angel group representatives (who I suspect are the “stakeholders” mentioned in the consultation paper) that one of the key differences is that many US startup investment rounds use a hybrid instrument known as convertible notes, which (according to this page) started to gain popularity around 2004. A convertible note is a debt instrument (basically, a loan to the startup) that gets priced in terms of a discount relative to the next funding round, even though that has yet to even begin to happen (and there’s no agreed idea of when it would happen). The paperwork is cheap (because it’s not a ‘proper’ round as such, just a precursor to a later proper round), and so using convertible notes incurs – proponents argue – less negotiation hassle and lower legal costs. One key variant of this structure is “capped convertible notes”, which have a little recent controversy of their own.

Circa 2011, however, the big problem with using convertible notes in the UK is that Euro VCs are simply not doing anything like the number of early-ish deals they were. For all the talk of the upswing in Euro VCs’ funds as an asset class, the deals being done are getting ever bigger and ever later. This is the second equity gap – between £2m and £10m – mentioned in the consultation paper, and there’s no obvious evidence that it is reducing. So rather than having to hold onto your convertible notes for a paltry 12-18 months before the fabled big VC round happens, UK angels are instead facing the prospect of a 3-6 year wait, if it ever happens at all. How on earth are they supposed to price in that kind of wait?

Other people (mainly Basil Peters) have suggested exchangeable shares, which are equity instruments priced as normal but which automatically upgrade with whatever arcane conditions get imposed by VCs for their shareholding in a subsequent round. This is designed to prevent angel investors getting their shareholding turned to dust by VCs (which, sad as it is, does happen). But unless I’ve misunderstood the descriptions, this seems to be a double disaster for entrepreneurs, in that whatever bad-ass terms the VCs negotiate immediately get propagated to everyone else bar the entrepreneurs.

Back in the UK, other variants of this class of hybrid instruments have been proposed. Brad Rosser’s “magical pitch” (chapter 5 of his book “Better Stronger Faster”) revolves around taking a loan (debt) from an angel investor in tranches but giving a chunk of equity with each draw-down. The example he gives (pp.123-124) is a £200K loan delivered as 4 x £50K tranches, each one tied to delivery of milestones, and giving 10%, 7%, 5% and 3% equity with each respective draw-down. It’s a pretty neat arrangement… apart from the fact that it probably wouldn’t currently qualify for the EIS, making it tax inefficient if you’re an angel paying higher rate taxes (and no downside protection beyond the fact that the company needs to be hitting its milestones to get the next tranche). It also runs the risk of the startup trading insolvently (because of the loans on the books from Day One). All the same, might this kind of scheme be able to qualify for the new-look EIS being discussed?

Alternatively, one angel investor I’ve had many conversations with argues quite persuasively that what angel investors most want to avoid is losing their stake: and so what they would like most of all is some arrangement whereby they get their original stake (but no more) back as early as possible, leaving a certain amount of equity in place (at zero effective downside risk to themselves), allowing them to go off and invest it in something else. One way of doing this might be to allow the entrepreneur to buy back shares from the angel up to the principal amount, perhaps on a sliding scale. For example: a £200K investment for 25% of the company, but where the entrepreneur can buy back 12.5% for £200K in Y1, or 10% for £200K in Y2, or 8% for £200K in Y3 (or perhaps up to those amounts pro rata). This tries to align the benefits of a mini-MBO and an early repayment loan all at the same time. But could such an arrangement be shoehorned into the new-look EIS?

The key problem is that we’ve only scratched the surface and already we’re lodged headfirst in the quicksand of financial engineering – securitization, SWORD-financing, SPEs / SPVs, etc – which is what the original EIS expressly set out to avoid. It seems we will have to all become experts in differentiating the nuances of equity and quasi-equity in order to proceed: and that if EIS becomes too loosely inclusive, doubtless an entire (under)class of specialist financial advisors will spring up to offer us all custom-built clever-as-you-like angel-friendly EIS vehicles.

Ultimately, should “BASIS” (HM Treasury’s term for the next revision of EIS) be laissez-faire (e.g. as long as 70% of an investment is equity or quasi-equity, you can make up the rest as you like) to try to let the tier of financial engineers make it angel-friendly; or should it it largely retain its shape to protect entrepreneurs from being exploited by unfair contractual shenanigans? You have until 28th September 2011 to give the Treasury your comments – basically, what should the future of UK angel investment look like? You can help decide!

Fred Destin miniseedcamp lecture, ohhhhh dear… :-(

As recommended yesterday by Ben Markland on the London OpenCoffee meetup forum, here’s a video from July 2011 you might enjoy: a 50-minute lecture + Q&A session by Fred Destin at Miniseedcamp Ljubljana. Fred’s a smart guy, and manages to squeeze in the whole lifecycle of startups: founders (the magic number is two), funding, launch, build, the Chasm, scaling, all the way to maturity. As a rapid precis of currently accepted startup wisdom presented by a communicative ex-Euro VC (now in Boston), you’d think it would be hard to beat.

Except that, as a unified body of knowledge, it really sucks – basically, the pieces don’t fit together .

Here’s the paradox: even though Fred really likes lean startups (he lauds Steve Blank’s Customer Development Cycle and Eric Ries’ Lean Startup Movement), he clearly doesn’t believe that lean scales up – at some point, you have to put your lean ways behind you and go “fat”, he says. So do you think smart, well-connected VCs who are anything like him would make VC-scale investments in lean startups while they are still lean? No chance.

So, the lesson to be learned from that would seem to be: Lean Is Good, Except If You’re Pitching To VCs.

But that’s only half the paradox. Here we have a top-flight VC exhorting a roomful of startup people to go lean, even though he personally wouldn’t invest in them while they’re still lean. Clearly, he must be expecting other investors – specifically business angels – to step in and fund lean startups, to build them to the point where they can sensibly exit and pass the equity baton onwards to eager VCs.

But those seed funding rounds are clearly problematic, and Fred is well aware of the problems of getting funding going: he discusses (in the Q&A) the initial “funding no-man’s land” many startups get stuck in , and advises entrepreneurs to “always move the company forward”, and not to get caught in a waiting-for-funding-rather-than-actually-doing-stuff “death trap”.

Yet the problem is that by endorsing Lean as the best startup methodology of the day, I’d say he’s making that initial funding no-man’s land wider. I like lean, but it comes with an implicit set of values, pretty much all of which are antithetical to angel investing principles:-

  • We don’t initially know what to do, but we plan to keep failing fast until the market teaches us
    (Angels want to put their money into building something, not funding your education)
  • We don’t have a business plan, just a set of vague market opportunities we’re trying to incrementally build into
    (Angels want a business plan and cash flow forecast to negotiate the equity value of their investment)
  • We don’t see any division between customer development and product development: we constantly (micro-)pivot
    (Angels like to work with people who put their money to a specific use, not changing their mind all the time)
  • We wear many hats simultaneously, and the business side is tightly interwoven with the development side
    (Angels prefer dealing with non-business-savvy entrepreneurs, who are more ‘coachable’ and ‘malleable’)

How on earth can angels price investment into Lean Startups? In fact, “are there any ‘Lean Angels’ out there?I asked Eric Ries a while back, “And since engineers already ‘get’ Lean so readily [probably because it’s so much like mechatronics development], why are you lecturing them rather than angels?” He didn’t really have an answer then (beyond “well, there are a few… in the US”), and sadly I don’t think he’s got one now. There is no Lean Funding Movement. Unless someone can explain to me otherwise, I assert that Lean is basically unfundable by the current generation of angels (and I’ve met more than 130), unless you dress it up as something that it ain’t.

Fred is right about the importance of the pre-funding quagmire: I suspect this has got worse of late because angels’ and entrepreneurs’ focuses have progressively diverged – angels want more certainty before putting their money in (though still with a 10x return, ha!), while entrepreneurs are trying to find cost-effective ways of managing product/market uncertainties (e.g. Lean). There is – at least in the UK – less shared conceptual ground between these two camps than ever.

Right now, the only lean path to huge growth seems to be patient bootstrapping over an extended period – basically, to self-fund beyond the point that lean is a central part of the business mix. (Sure, feel free to set lean sweat teams in motion later, but that’s the icing on a cake you’ll have already baked by then.) And where do angels and VCs fit into that business landscape? Angels and VCs love evangelists, customers, traction, metrics, virality: but the kind of patient, bootstrapped, self-reliant, compact development that’s at the heart of Lean is a terrible fit for their explosive, percussive business models.

Ultimately, a lean business is not an angel business, nor is it a VC business. What a mess! 😦

Reverse gamification and the future of everything…

Even when I first started going about “gamification” back in 2002 or so, I had a clear vision of what I was talking about. As you can see from my (long defunct) Conundra web site, I was basically reaching out to “manufacturers (to help) evolve their electronic devices into entertainment platforms“; and, as part of this process, to “help them design, build and run industry partner programmes around new collaborational business models.” I’d convinced myself that the combination of a semi-closed platform (in the style of the console games developer programmes set up by Nintendo, Sony, etc) and high-intensity “game-like” user interface design was a killer ‘meta-app’ (i.e. a way of making and selling all applications) that would soon sweep all before it.

Of course, fast forward to 2011 and we don’t even bother to call this “gamification”, because we’re far too busy obsessing about the platforms rapidly spawned by the process over the last few years: Apple’s App Store, Google’s Android Marketplace, Windows Phone Marketplace, Blackberry App World, Nokia Ovi Store, and so on. These semi-closed games-console-like platforms are just the kind of high-intensity, game-like-UI thing I was so obsessed with helping bring to life way back then (if a few years too early to be useful).

For me, then, “gamification” boiled down to the process of turning mere electronic devices into owner-controlled software platforms with a games aesthetic to their user interface: “console-game-ification”, if you like. But what, then, does that make apps?

For the most part, I see apps as jumped-up games: small pieces of entertain-ing/-ment software living on an owner-controlled ecosystem and sold through an owner-controlled channel, trying to perform their functions within the channel-owners’ propagandistic lie that that tiny single channel in your hand is broad enough to satisfy all your core human needs (and a few more besides). Yes, there are useful apps, insightful apps, devious apps, funny apps, curious apps, stupid apps and tragic apps, for sure: but how many of them actually manage to redeem themselves from the mere entertainment-ware-ness of their base platform’s meta-app template, thereby elevating themselves (and the user) to some genuinely higher plane or better place? And is there even a name for what I’m reaching towards?

If ‘gamification’ (as I understand it) is the process of turning electronics devices into aspirational games consoles tied to owner-controlled sales channels, then what I’m talking about here is turning an aspirational games-like console back into a useful (but quite different) electronic device. As this basically has all the same elements as gamification but arranged somewhat back-to-front, let’s call it reverse gamification (for want of a better name). This, then, is the real heart of what just about any given app is trying to do: somehow transcending the innate ‘gaminess’ of the platform by marshalling all its games-world tricks against it, to produce the illusion not of an arcade game or 3d movie, but of an entirely different device insouciantly trapped inside the platform – an Aladdinesque genie railing against its imprisoning lamp, yet summoning sufficient ancient Persian trickery to make its magical prison resemble something else completely.

All of which means that ‘forward gamification’ – much as I wish all the academics busy running their conferences and MBA modules around it well – is now essentially dead: though doubtless the future will see many more similarly gamified platforms, this is pretty much just a matter of social engineering and technical optimization. By way of contrast, I’d point out that the development world has moved en masse onwards to reverse gamification, which is a far harder Act III “Return With The Prize” stage in the Developer’s Journey.

Yet even so, I still think the kind of pure apps we see now are 10% or less of the whole story: for all their trickery, they nearly all remain virtual, floating, untethered, insubstantial, conceptual, temporary. To my eyes, they’re no more than shadowy forerunners of the real thing, which will (I think) come when the platforms themselves migrate sideways into customized devices, which I believe will be the point when software yields to rapid hardware and the Electronics Revolution 3.0 begins.

Hence right now, I think that the kind of apps you see now are merely virtual reverse gamification, a mere taster of what is to come when the real reverse gamification process begins. Which – if I’m just as early this time round – should start in about seven years’ time. So, set your alarm clock apps for 2018, here comes the future of everything! 😉