UCL “Entrepreneurship Guest Lecture” update…

Before I say anything else, a great big (actual, non-ironic) *** thank you! *** to all the kind London OpenCoffee’ers who so generously gave me their feedback on the first (extremely rough) draft of my presentation for next month’s UCL Entrepreneurship Guest Lecture that I posted here a few days ago. Yes, it definitely needed more structure (thanks Larry), more clarity of purpose and less negativity (thanks Johnathan), less unnecessary stridency (thanks Elina), and plenty of other faults corrected (thanks everyone else). Of course, version two is still essentially a list (sorry Iqbal), but fictionalizing all the strands into an ur-narrative continues to be beyond my meagre abilities. 😦

So anyway, here’s version 2 of my presentation, now (loosely following Johnathan’s suggestion) called “Dangerous Reasons: What convinces entrepreneurs to start up?”, because that’s ultimately the problem: that entrepreneurs try to convince themselves that there are countless good reasons for starting up. Of course, in reality here in the UK there are lots of non-reasons to startup (which I classify as “Mythologies” and “Misconceptions“), quite a few good reasons not to startup (all classified under “Grim Realism”), but sadly almost no genuine reasons to start up. Hopefully the revised presentation will make the differences between the various groups a lot clearer than before: essentially, ‘mythologies’ are where other people try to fool you, while ‘misconceptions’ are where you try to fool yourself.

Note that even though the slides are now structured reasonably well, they’re still not yet “dressed for success” (they all definitely need a bit of eye candy). In the first section, I’ve included in brackets some asides I’d chat over the slides: if you’ve met me, you can probably imagine me saying them – please don’t conclude that I’m negative, I’m honestly just the messenger here, so try not to shoot! Really, if you have good news on starting up in the UK, please tell me, I’ll be the first to cheer! 🙂

Please let me know what you think… again, your comments are very much appreciated!

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Upcoming UCL “Entrepreneurship Guest Lecture”… please help!

In a few weeks’ time, I’ll be giving a lecture at University College London as part of their Entrepreneurship Guest Lecture series. Between you and me, my guess is that the organizers asked me because I’m specifically not one of the numerous “startup success theatre” aren’t-I-clever-for-getting-funded-don’t-you-wish-you-were-as-clever-as-me types you typically find putting themselves forward for lectures. Rather, what seems to have attracted their attention is simply that my whole funding startups blog tends to come across as a bit combative and controversial, and everyone loves a bit of a fight. 🙂

Naturally, I’d be a tad disappointed if my lecture didn’t actually run into some kind of stand-up disagreement. Given that just about everything I’ve written here runs counter to how startups are generally (you would think, from the toxic blather usually passed off as startup wisdom) supposed to work, I would probably be somewhat sad to discover that I had become the voice of the mainstream. 🙂

Anyway, to prepare for the lecture I’ve put together a minimalistic set of slides on the theme of “40 Reasons Not To Start Up” This quickly runs through forty distinct single-line reasons that you shouldn’t start up a company (and, as a punchline, the one half-reason why you should).  Yes, it has more than a passing similarity to Dave McClure’s well-known “Why Not To Do A Startup” 2010 talk (slides here, video here), but I like to think I’m talking from the right other side of the fence. 😉

Right now, I have no idea if this presentation is overly sensible, overly negative or overly antagonistic: should it be even stronger (have I missed some really big reasons?) or dramatically toned down? I’d really appreciate your comments, thanks!

Innovate11, VCs, Lean Startups and design…

Willkommen!

Earlier this week, the Technology Strategy Board’s held its “Innovate11” conference at the Business Design Centre in Islington: but rather than traipse into town and lose a day’s work, I decided to stay working at my PC with the TSB’s live web stream burbling in the background. As you’d hope/expect, there were plenty of familiar faces on show:-

• The TSB’s Iain “Old Town” Gray as the cabaret host (or am I thinking of Joel Grey?)
• Amadeus’ Hermann Hauser and my old pal Alex van Someren
• Deyan Sudjic (director of London’s funky Design Museum)
• Will Hutton (who was plainly annoyed by the indifferent reception he received)
• Coalition business ministers David Willetts and Vince Cable.
• etc

Pretty much everyone on the stage stayed in character, with the notable exception of the wirily energetic Hermann Hauser, who I thought was on particularly fine form talking about the slightly surprising business logic behind Solexa’s success.

I must admit that while Alex van S was going through a fairly sweeping summary of contemporary VC pitching wisdom (e.g. Guy Kawasaki’s famous 10/20/30 maxim, i.e. 10 slides / 20 minutes / 30 point font minimum, la-la-la), I kind of zoned out for a while, musing about the whole challenge of investing in startups.

You see, the whole VC model is to invest in high growth companies early in their curve, so that you stand a chance of getting a few 10x “home runs” in your portfolio, to balance out the (sadly almost inevitable) duds that you’ll also pick up. In the overall business landscape, such high-performing startups are without any shadow of a doubt statistical outliers – so to my eyes, the VC challenge is surely to use nous and experience to search out exceptions to the rule, not companies who slavishly follow the rules. For all the adulatory press that has followed Steve Jobs’ recent death, for me the most telling stories have been the ones that point out how mainstream investment criteria would exclude him rather than reach him.

My point here is really that if VCs need to find exceptions to the rule, why do they now seem to invest so much time in building yet more rules for potential investees to follow? For example, Alex stressed that Amadeus never invests in one-man-bands, while other VCs love to talk about the shamelessly brutal “truck count” metric (= ‘the number of individuals in an organization that could be killed by a truck before that company becomes unable to function’) to emphasize the same point – that small is fragile. Yet I think a typical entrepreneur (a) has to do ten different jobs simultaneously just to get by (and I suspect that’s pretty much always been true), and (b) builds up a network of partners, suppliers, mentors, advisors and indeed customers all helping him/her to get the job done. OK, there’s only one of me, but my network is an army sans frontieres, so what’s the metric for that? Set the [number of employees] field to [1] in Amadeus’ pre-funding application form and you’ll no doubt get filtered out straight away: ‘computer says no‘ *cough*.

Perhaps the bigger issue is whether VCs spend too much effort filtering for excellence when they should be looking for brilliance – there’s a big difference between the two, as my old school housemaster Mr Tarrant used to say.

Anyway, going back to Innovate11, while listening in to the design panel’s protracted noodlings I was struck by how very similar the kind of design-led approach the participants described (customer-focused, iterative, uncertainty-based, etc) was to the whole Lean Startup thing. And the more I’ve thought about it since, the less I can see any obvious differences.

So here’s what I now think: that for Lean Startups, treating everything as if it were a design process is claimed to be the best way of doing business. Furthermore, below this top-level approach there lies an implicit set of (what I personally think are actually fairly corrosive) claims:

• that design-driven iteration is vastly superior to principle-driven architecture;
• that what other people (particularly customers) know is vastly more important than what you know;
• that it is more practical to fix what didn’t work than to predict what should have worked; and
• ultimately, that it is better to cope fast than to manage well.

For me, the biggest irony of all is that for all Lean’s claims of being a scientific “methodology”, it is built around an inherently anti-science design loop, predicated on what looks eerily like a postmodernist dismissal of Enlightenment knowledge. Why would a Lean Startup need any PhDs or even (*spit*) MBAs, if its development starting point is always going to be one of ignorance?

Pointing this out doesn’t make me a Lean “hater”, it just means that I think I can see Lean for what it really is. Which is to say that, contrary to what is normally claimed, Lean is not about saving money, avoiding process waste or even about learning-focused development, it’s simply the claim that strongly iterative design-based development is the best strategic choice best for all startups. Which isn’t really supportable, IMHO.

As such, I see Lean as arguably just an overreaction to the long-discredited “if you build it they will come” business strategy, which I think overbiased startup discourse in quite the opposite direction (i.e. towards PhDs and MBAs, and towards big science over iterative design). Personally, I try to follow a more blended approach, fusing big science and iterative design within the constraints of a shoestring budget – it may not be fashionable, but it works for me. 🙂

The Startup Knowledge/Funding Landscape…

Here’s a diagram which explains clearly my view of the current UK startup financing landscape:-

Am I right? Am I wrong? Please let me know what you think by leaving a comment below! Thanks!

If Lean Startups went to the movies…

…how would they make films?

First of all, they wouldn’t do anything so consciously planned as write a script – oh no, that would be far too deterministic and control freakish. Only an MBA trapped in the early 1970s would start with a plot treatment, let alone a shooting script, right?

No, the #1 thing Lean Startups would do is to “get out of the building” to meet lots of film-goers (customers), form tentative hypotheses (themes), and try them out – excuse me sir/madam, we’re planning a remake of George Méliès’ iconic (1902) “Le Voyage Dans La Lune“, does that sound great to you? No… well how about “Thelma & Louise 2“? Yes, we do know they both died at the end, but… oh, OK, then. Finally, what about “Cats Wearing Dresses Beat Dogs With Sticks“? It’s just a working title, but… sorry? You do like the sound of that? Oh, OK… thanks for your feedback!

Oh, and we’re thinking of casting Colin Firth? Keanu Reeves? Paris Hilton? Oh, you really like her, do you? That’s great. Thanks again!

So, having pivoted and iterated several more times for good measure, they’d then take their well-researched title to film production companies, who would say – OK, but how are you going to write the script? You can’t get filmgoers to write it for you, that would be just plain idiotic. Aha, they’d reply, but we’re Lean and customer responsive, and our customers are always right, so we are indeed going to ask them to write all the best lines which we’ll then stitch together, iterating in the edit suite until it works. Having A/B tested our home page three hundred and fifty eight times, we’re now certain that this will end up with the biggest viral coefficient since Jaws. Everyone’s going to talk about it, it can’t fail!

There’s a pause, as a sudden cold draught ripples across the room (even though it’s in Malibu): the film production guys look warily at the Lean Startup film schmucks and say – even though you’re even bigger schlemiels than we first thought, maybe-just-maybe you’re on the money here. And that’s not because of but in spite of this so-called ‘Lean’ bass-ackwards way you’re going about this. So, just this once, we’ll put the money in, see if you can make a big success of “Cats Wearing Dresses Beat Dogs With Sticks” starring Paris Hilton as a psychopathic catwoman leather fetishist going on a bullet-time Hong Kong martial arts quest to revenge the death of her pet mouse Iggy…

* * * * * * *

…of course, you probably already know that the above isn’t entirely fictional . The 2006 film “Snakes on a Plane“, despite having languished in production limbo for over a decade, got built up into an Internet sensation with many lines of (often foul-mouthed) dialogue suggested by enthusiastic pre-release fans actually added to the film. Samuel Jackson’s most famously quotable line was subsequently ‘dubbed-down’ for US TV into the hilariously Puritan “Enough is enough! I have had it with these <monkey fighting> snakes on this <Monday to Friday> plane!”

But none of this is actually a tribute to Customer Development, Lean Startups, or indeed Lean in any way. It was all basically an Internet marketing stunt by New Line Cinema, to see if they could get film-goers to ‘pre-cult-ify’ what was no more than a B-movie – they had already wrapped the shooting, but then came back to add five more days of the (largely potty-mouthed) dialogue suggested online.

However, despite all that hype and fuss, the film still “only” grossed $62m worldwide, which for New Line made it a bit of a disappointment. In fact, it turns out that the key demographic who really, really wanted to watch the film was young teenage boys, who found themselves unable to get into the now-“R”-certificate movie (restricted because of all the, ummm, boisterous language added). So the whole exercise may have actually served to lose New Line Cinema money overall.

To be honest, the Non-Lean lessons I learned from this whole story are very much like the ones I learned from my own startup. Pre-adopters may be vocal and loud, but they’ll happily encourage you to overfocus your efforts on their particular corner of the world, rather than on your real customers. If you take Lean too literally, don’t be surprised if your startups end up as a Web 2.0 version of “Cats Wearing Dresses Beat Dogs With Sticks“.

Like searching for a ring swallowed by an elephant, you’re likely to hit a glint of gold eventually, but don’t be so sure that every bit of feedback that passes your way is of immense value… 😉

VCs and Lean, probably the last words on the subject…

If you run into blogging VCs,
Be wary of their expertise!
They’ll tell you how Lean
Makes your balance sheet clean
(Though they treat it just like a disease).

Hesperus, Phosphorus, and latent angels…

Sometimes, the verb ‘is’ surprises you, by introducing a link between two things you didn’t previously know were the same.For example, philosophy students typically get fed Gottlob Frege’s example of Hesperus (“der Abendstern”, the evening star) and Phosphorus (“der Morgenstern”, the morning star): though a shepherd may have noticed both stars, he/she may be surprised to be told that Hesperus is Phosphorus, and in fact both of them are Venus, which always appears relatively close to the Sun in the sky (because its planetary orbit lies within the Earth’s orbit).

Back in the world of startup funding, and I have a different possibly-slightly-surprising is-based link for you.

One paradox that has vexed UK startup market observers over the last few years is the fact that even though there has been a big rise in the number of business angels (for example, the number of people attending angel network meetings), the number of deals being funded appears to have gone down, while also the size of deals has gone up. What’s going on?

One partial explanation is the dramatic increase in the number of what are called latent angels, typically people who attend angel network meetings and would dearly like to invest in startups but don’t… quite… have… the… nerve… just… yet. This might be a labelling issue, in that historically it’s likely a certain number of angels have always resolutely passed on all investment opportunities, but until recently nobody thought to call them “latent angels”. Yet from recent research, the number of latent angels does indeed appear to have shot up of late, both in the US and the UK: so this seems to be a real phenomenon. All the same, pointing out the rise in latent angel numbers doesn’t usefully address the issues of (a) who these latent angels are, (b) why they’re not investing, and (c) what the reason for that bulge in total angel numbers might be.

As far as (c) goes, I have long suspected that the recent growth in UK angel numbers has come about from mainstream stock market investors collectively wondering if the grass groweth greener on the entrepreneurial side of the fence. Certainly, a substantial number of the London-based business angels I’ve met appear to have made (and are still making) their money from some variant of financial services.

And so my is-based surprise for you today shouldn’t be too shocking: that these two groups are largely one and the same thing. That is, a typical latent angel is a typical disenchanted stock market investor, sniffing around for substantially better (and arguably more reliable) returns than the FTSE 100 etc (which, let’s face it, has been going through a pretty troubled time of late).

The key problem for people trying to make this transition is that conventional stock portfolio management techniques (build up a mixed basket of unconnected small investments) don’t satisfactorily fit startup investment practice. Even though the latter has excellent government support (EIS), you end up with illiquid, long-term investments with large up-front investment costs (due diligence, time, effort, etc). It’s a bit like asking roulette players to move over to the poker tables: yes, they’re both broadly similar types of gambling, but it should be pretty obvious that there’s a world of difference between the two. This chasm is the basic reason that those investors often end up as latent angels: they’d love to start playing (startup) poker, but all the books on their bookshelves are on (stock market) roulette. Sure, they go along to angel network meetings and talks to try to educate themselves into the whole angel mindset, but… they’re still roulette players at heart. And so it never really happens for them.

A staggeringly huge amount has been written on investing in the various stock markets, and entire industries – economics, investment banks, pension funds, etc – are built on the back of it all. Yet I think (and please tell me if you think I’m wrong!) there is almost nothing useful written about investing in startups. Worse still, almost all the books I’ve seen are heavily biased towards US angel investment practice (arguably the most realistic is Scott Shane’s (2009) “Fools Gold?”), which is an entirely different kettle of eels to UK / Euro angel investment.

Are there any good books on angel investment you’d recommend? Please leave a comment here, I’d like to be able to recommend some when asked. 🙂

Lean Startups suck. Here are 10 reasons why…

Eric Ries’ 2011 book “The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses” has garnered lots of attention, and indeed plenty of favourable reviews. He’s a thoughtful guy, who has been gradually building up interest in his “Lean Startup” ideas over the last few years: if you haven’t really heard of it, it’s basically an abstract conceptual toolkit aimed at very young companies that offers plenty of sensible-sounding advice, with very little to obviously disagree with.

But even so, I think that Lean Startups still suck. And here are ten big reasons why:-

(1) The “Lean Startup” approach is not a science. In fact, even though much of it is couched in terms such as “empirical” and “hypothesis”, it’s not even properly scientific. What it offers is a load of consulting-style models mixed in with contemporary truisms about business presented as hypotheses, which Ries hopes you will then go out and test for yourself. Why? Because despite all his evangelism, so few businesses have actually tried being lean startups that he hasn’t yet got enough data points to construct convincing arguments for his book. Which is why he so wants you to go test his ideas for him with your money and your business on your customers. If his ideas were scientific, they would have been tested already: but because they’re not, they’re merely hypothetical, which is a different thing altogether.

(2) “Lean Startup” is not a Scientific Management theory. I’ve seen Eric Ries talk, and he likes to claim Scientific Management as a (retrospectively adopted?) parent of Lean Startups, but in practice that’s simply not so. True, he likes metrics (and Frederick Taylor’s ghost would surely approve of that): but metrics and dashboards have been in high management theory vogue for well over a decade, so they are merely things that Ries has appropriated rather than devised in any useful way.

(3) “Lean Startup” is not a Quality System for R&D. The core of Ries’s claims is that his Lean Startup ideas provide a more productive way of getting to “product/market fit”. However, in its current state it is not even remotely close to an ISO-9001 approach for systematizing R&D: as a general rule, I’d say quality systems are a poor fit for R&D companies. Rather, the key test Ries applies to everything is relentlessly Darwinian: is your product a good market fit yet? (If not, iterate and try again). But as far as I know, there is as yet no substantive academic research on whether relying so utterly on customer feedback is in fact a good way to design new things: it could be argued just as strongly that it’s merely an effective way of making incremental design changes.

(4) Lean Startups are unfundable by angels. I estimate that 95%+ of current business angels (oh, and 99%+ of VCs, too) would not currently invest in any lean startup. This is because the Lean Startup toolkit has a single operating model: a Zen state of sustained-yet-aggressive ignorance while you intuitively develop some kind of tentative product-market fit by repeatedly bouncing things off enthusiastic early customers. Even though this may be in some ways inevitable if you’re trying to build a startup using your own savings, it is anathema to almost everyone looking to back a startup. I’ve talked with 130+ business angels, and almost without exception I would say that they want to put money into small, highly productive teams who have the self-belief that they already know what they are doing, so that those people can get on with executing their plans and making them work. Angels don’t want to fund your industrial education, they want to fund your market-focused business.

(5) Lean Startups are not lean. That is, as far as I can tell the ‘lean’ part of the title was merely appropriated from “Lean Manufacturing”, which – I would argue – bears almost no relationship to Eric Ries’s customer development ideas (which were instead built to a very large degree on Steve Blank’s Customer Development ideas). In fact, Ries’s idea’s correct title should probably be “The Learn Startup” because it is 100x more to do with learning than with reducing process waste and quality management: it’s certainly not to do with doing things cheaply or even fast, because educating yourself into a constantly changing market via progressive iteration can take an entire lifetime, and can happily absorb every penny you care to throw at it.

(6) Lean Startups makes little sense outside Web 2.0 startups. If you are considering setting out as a “lean startup” manufacturer, I’d urge you to think again. Iterate with your customers all you like, but you still need to pony up heavy-duty capital when setting up a manufacturing process, and the Lean Startup consulting toolkit is of little use when funding or developing this kind of thing. Regardless, you’d probably be better off reading up on mechatronics development, because this covers an awful lot of the same area (did I mention that it’s not new?) without telling you that you need to iterate in order to build worthwhile things.

(7) “Lean Startup” ideas have not yet been tested. Look, anyone – and I do mean anyone – can assemble a set of contemporary-sounding statements about how best to run a business, and then claim that the multiple similarities between those statements and carefully-selected details of the runaway success of { Google | Facebook | whatever } form cast-iron proof that your overall theory works universally. Eric Ries knows (and indeed points out) that this does not amount to any kind of real wisdom: however, because he has as yet amassed no real data, I think this is exactly what his ‘Methodology’ reduces to.

(8) Lean lacks cojones. Or “bravery”, if you wish. By delegating design decisions purely to the result of customer iterations, it encourages startups to produce incremental me-too wannabe products that appeal only superficially to customers, and to make design decisions based more on incrementalism than disruption. As such, it is a way of developing things that is intrinsically anti-engineering. Yet I would argue that to build company value and have lasting societal impact, startups need to be (quite literally) revolting.

(9) Lean is not a movement. It is not even a popular revolution. It’s one guy touring the world telling developers telling them how smart they are, and selling them an unsustainable dream – that it is in their power to build their own company cheaply and effectively by iteratively running prototype product versions past early adopter customers. It’s a tempting notion – after all, it’s the same basic dream that fills hot desk seats in Old Street and all the other tech hotspots worldwide. But ‘ought’ doesn’t make it ‘true’, no matter how many times you say it to audiences who would like it to be true.

(10) It would be nice if Lean was truly as good as Ries claims. But it’s not. In some idealized parallel universe, it might well possibly be true. But in this particular universe, it is at best no more than a technical hack for trying to avoid really big customer-facing design mistakes. So, unless you (and your optimistic co-founders) can entirely self-fund your killer startup through a (probably very prolonged) lean development phase, I would strongly advise taking your Lean Startup noodle soup with a large pinch of salt.

Update: you might also consider what a disaster it would be if you applied Lean Startup principles to your Real Life…

Here’s how all the UK banks are going to die…

I had a perfectly lovely conversation with my commercial bank manager this afternoon, though what moved me most was his nostalgic wistfulness (mainly about cupcakes) rather than anything remotely approaching business common sense.

However, it was enough to help me put a load of disparate pieces together into a single reasonably coherent picture: so here’s your cut-out-and-keep guide to how UK banks are all going to die.

Regardless of what their PR departments may like to insist, I’m pretty sure they’re all starting from the same economic Ground Zero: a balance sheet stuffed full of mis-sold loans and misvalued mortgages, together with a load of other speculative toxic stuff they bought in as bundles along the way but now can’t get rid of.

At the same time, UK banks look at startups like mine with horror: such companies are clearly battling a whole army of unknowns, all the while “we [the banks] don’t do risk“, as they say (or at least mine did today). Which – if you look at the recent history of the banking sector from the outside – is a statement that should give more or less any onlooker something of a sourly hollow laugh.

To be precise, if you are a startup, pretty much all you now have access to (apart from a maximum £25K unsecured loan, that smallest of mercies) is factoring, which – if you think about it – is simply a mechanism you use to lend money to your customers for 60+ days while you pay the interest on it. That is, as long as you can build up a suitably large basket of customers within a short period of time, it’s a short term loan facility from the bank to you based on your customer’s creditworthiness, not on yours. Small wonder that banks are using factoring to replace working capital facilities they used to offer to companies.

So what’s happening here is that banks are rebuilding their balance sheets not by fixing or revaluing their oversold loans and mortgages (oh no, they couldn’t possibly have made mistakes that big), but by trying to rig ‘de-risk’ every other facility away from anything remotely close to a risk position. By doing this, they can continue claiming to shareholders that their net risk position is improving.

But, errrrrm… hang on a minute? The essence of economic theory is that all capital is risked (whether property, bonds, gold, currency, startup shares, etc), so this approach is both anti-economic and naive: and at the end of the whole process, the banks will surely end up with a hugely polarized portfolio, comprising both the unshiftably toxic and the unfeasibly good-as-gold, but nothing much in between.

Just as with the definition of a statistician (someone with their head in an oven and their feet in a fridge who feels that, on average, they’re doing OK), two polarized wrongs don’t make a right. And SMEs – whose financial positions are neither toxic nor gold-plated fall squarely between the two poles.

So, I’m certain that the banks’ polarizing flight to improve their net risk position on paper can only have the effect of forcibly ejecting most SMEs from this peculiarly short-term worldview. And sadly, I suspect that this will prove to be the end of the line for UK banks: with no credibility or usefulness to SMEs, UK commercial banking will wither on the vine. Bank staff are now judged more on their ability to upsell insurance (PPI, anyone?) than to evaluate business plans (don’t bother, the computer says no anyway), and the quantity of proposals fundable according to their de-risked business model must only be 10% or less of what they need to remain in business.

With Project Merlin, top-tier UK banks have made big promises to the government to lend to SMEs (£76bn in 2011, as I recall). However, I was recently told by a (different) bank manager that more or less all of the lending that the banks have placed under this banner is the ‘gold-plated’ risk-free stuff at the top pole. So, if ministers honestly believe that Project Merlin means UK SMEs will see even a sniff of that £76bn, I think they are utterly, utterly deluding themselves. Just so you know!