Getting to "yes" in a world of "no"…

Archive for November, 2011

The Chancellor’s 2011 Autumn Statement, a view from the trenches…

From my dusty startup garret, I have to say that there’s something Just Plain Wrong with the way the Chancellor of the Exchequer George Osborne sees the world of small business. On the one hand, his 2011 Autumn Statement announces the Great Big Match-Funding Angel Bribe formerly known as BASIS (which even the BVCA now openly calls a “liberalisation” rather than a “simplification”):-

[p.7] The Government will: […]

launch a new Seed Enterprise Investment Scheme (SEIS) from April 2012, offering 50 per cent income tax relief on investments, and will offer a capital gains tax exemption on gains realised in 2012–13 and then invested through SEIS in the same year;

Now, unless I’ve missed something really obvious this surely means that UK angels now have an exceptionally good reason not to invest in anything between now and April 2012 when the scheme goes live (subject to subsequent European ratification, which is by no means certain). But then again, it already takes such a ridiculously long time to close an investment round these days (9 months? 12 months?), the entrepreneurs most likely to be inconvenienced are those who are trying to close a round right here right now. So, even though it’s a great bribe, nobody should expect to see a tsunami of UK startup investment on TechCrunch in the next six months, OK? *sigh*

On the other hand, the Government really, really wants to find a way to encourage banks to lend to SMEs, though apparently with neither a carrot nor a stick…

[p.7] The Government will: […]

introduce a National Loan Guarantee Scheme. Up to £20 billion of guarantees for bank funding will be made available over two years. This will allow banks to offer lower cost lending to smaller businesses, subject to state aid approval;

Hilariously dismal! As my business bank manager patiently explained to me last month, UK banks don’t want to lend to small businesses for the simple reason that they are now measured by their balance sheet. So, unless that startup happens to have any kind of collateral to put up (and no, intangible stuff such as IP and patents doesn’t count, but thank you for asking), the answer is basically going to be a no at any price – reducing the potential spread by 1% will make no difference if the lending decision pointer remains rusted on [NO].

So it would seem the government has painstakingly constructed a microeconomic lending lever to pull that isn’t connected to any actual banking machinery. On the bright side, if no bank takes up the offer, this could be the cheapest policy announcement ever (if admittedly also one of the least effective).

Plainly, the Government knows that SME lending is just plain broken: the level of lending done under the Enterprise Finance Guarantee scheme has continued to collapse over the last couple of years, for the simple reason that the banks now have no incentive to lend to startups at any price. Moreover, surely the way that Project Merlin has manifestly failed to deliver any real lending to SMEs (i.e. not converting overdrafts to factored lending at gunpoint) is as big a red warning flag as the Government could ever require? Why is nobody talking about why Project Merlin has failed? The most relevant commentary I could find on this seemed to amount to a big shrug, that maybe this revised scheme somehow replaces Project Merlin?

Oddly, the macro shift in bank lending strategy from working capital to invoice factoring came at the moment when invoice factoring become (sort of) democratized via independent platforms such as MarketInvoice. So if working capital & lending is history, and even factoring is better done elsewhere, what really are UK business banks now for? With the High Street in freefall, the poor dears haven’t even got coffee shop franchise presentations to lend against now. It’s tough being a bank when you don’t actually want any customers, right?

And finally… on the third hand (there’s always a Third Way with modern government, thanks Tony),

[p.7] The Government will: […]

make available an initial £1 billion through a Business Finance Partnership, which will invest in smaller and mid-sized businesses in the UK through non‑bank channels.

If you’re a startup looking at this, all you basically need to know is that the chance of any of this money arriving in your direction is zero. No, by “smaller” they don’t mean you at all, they mean established companies that aren’t quite as big as they’d like. Just so you know!

What a load of pitiful rubbish. 😦

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Minimum Buyable Products and economic agency…

First off, a great big thank you! to all the people who came along to my entrepreneur guest lecture at UCL last week. Apparently one attendee was spotted IMing something along the lines of “came here expecting to be cynical, but this guy’s more than cynical enough already“. Well… bruised: yes, cynical: not really. And a special thank you to Johnathan Agnes, who managed to round off the evening with some hugely supportive comments from the back. Well worth the pint I bought him afterwards (though I’d have bought him it anyway). 🙂

The thing I recommended at the end – but failed to put in the slides – was my (definitely non-cynical) Startup Handbook, so here’s a link to it in case you haven’t already found it. What’s relevant here is that since I posted it, I’ve been thinking a bit more deeply about what it’s actually all about: really, what exactly am I proposing with the Minimum Buyable Product concept? Am I saying we should all emulate Alan Sugar and sell reconditioned car aerials in Romford Market?

The answer is: sort of, but not really. For once, economics has a diffuse term which usefully touches on this issue – the “economic agent“. Roughly speaking, this is an abstraction of embodied human behaviour embedded within an overall economic system: you model a system of people as a set of economic agents, each doing his/her thing. However, whereas many economics papers (particularly in behavioural economics) obsess about the countless ways how economic agents differ from real people, what I’ve been thinking about is the degree to which many entrepreneurs apparently try to avoid displaying economic agency.

What I’m saying is that if you invest all your efforts on specifically non-economic behaviours (e.g. planning, modelling, forecasting, graphing, pitching, presenting, meeting), that you’re largely avoiding the burden of economic agency has to be a valid criticism. I’d say this is largely a byproduct of MBA careerist thinking, where you try to promote yourself beyond the niggly twistiness of actual transactions and actual data to the point that you need only think about optimizing an entire process that’s already working. Really, an entrepreneur wearing an MBA hat circa 2011 could easily look quite foolish.

Similarly, I would say that Eric Ries’ whole Lean Startup model (proper book review to come soon) is built upon a model of pure microeconomic agency, in that unless your business is able to do continual B2C microeconomic experiments, I don’t think it can properly be run as the kind of lean startup he envisages.

Hence with the Lean Startup people espousing pure economic agency, and the MBA people espousing zero economic agency, it seems that the two groups have us surrounded, though not in an entirely useful way. I think what startups need to develop is limited economic agency, somewhere in the vast practical gulf yawning between the two extrema: which is where my concept of Minimum Buyable Product comes in, to be used as a developmental focus for something that gives your startup a moderate amount of self-determination within an external market. Selling stuff, however small that stuff happens to be.

This division may well highlight the biggest difference between the UK and US angel funding ecosystems: a complete lack of economic agency seem to be no handicap when it comes to getting funding in the US, whereas in the UK it seems as though only startups with full economic agency get even a sniff of interest from angels. Something to think about, eh?

Nick’s “Startup Handbook”, version 0.1…

For a while I’ve been putting together my “Startup Handbook”, a realistic and practical guide to funding startups in the UK. In it, I introduce the idea of Minimum Buyable Product: whereas a ‘Minimum Viable Product’ has come to mean a stripped-down late prototype you hope you can get away with selling, a Minimum Buyable Product is instead an alternative (typically much smaller) way of building into your target market. Basically, it’s a small ‘stepping-stone’ product you use to get your company self-sustaining, so that you can internally fund your real world-beater without needing external funding.

Anyway, here’s a link to the first release, please let me know what you think!

UCL “Entrepreneurship Guest Lecture”, free beer & wine… :-)

Just to let you know that I spoke with the UCL organizer lady about my guest entrepreneurship lecture this Thursday (24th November 2011). To my pleasant surprise, she told me (a) that the lecture funding includes a modest amount of beer and wine available afterwards for mingling and chatting (& if/when that runs out, my Plan A is to decamp to the Marlborough Arms nearby), and (b) that all are welcome, not just UCL and LBS students and staff. Naturally, I immediately invited everyone on the OpenCoffee London forum, but we’ll have to see how many of its 3252 members turn up.

Hope to see you there! I’ll be the one at the front. 😉

Liquidation prefs and EIS…

Here in 2011, the UK Government’s Enterprise Investment Scheme (‘EIS’) gives tax payers a number of good reasons to invest their money in eligible startups: there are direct tax incentives (for investing at all), plus other tax incentives covering the up-side (i.e. if the investee does well) and the down-side (i.e. if the investee does badly). Because the government is anxious to ensure that this is only used for fair share arrangements between entrepreneurs and investors, it only allows investors to buy startup equity as ordinary shares (i.e. with no special rights or preferences).

For 2012, the Treasury is preparing a new scheme called “BASIS” (intended to encourage really hardcore angels to invest in full-on high-growth startups), which I think it plans to run in parallel with the existing EIS. The BASIS consultation document (which I discussed here not so long ago) goes to great pains to explicitly allow certain watered-down types of preference shares within BASIS, which – reading between the lines – it seems to think marks a great liberalization of its policy attitude towards angels and entrepreneurs. My guess is that it was not angel trade bodies but VC trade bodies (and if so, probably the BVCA) who were lobbying for this change, though it beats me why the BVCA would want to influence this part of the market given that its UK members hardly ever fund startups that early in their lifecycle.

What is curious here is that it is apparently already possible to get the effect of liquidation prefs with EIS shares. The first time I picked up on alternative liquidation prefs was the mention of the Elderflower approach on TechCrunch in 2009, apparently first noted by well-known UK entrepreneur/angel William Reeve. Essentially, this changes the initial “subscription” (how the equity is bought) so that whereas entrepreneurs has their sweat equity shares initially valued at 0.01p per share, the angel investors have their shares valued at (say) £10. The investors might only end up with (say) 25% of the total number of shares (with the entrepreneur(s) with 75%), but in the [hopefully unlikely 😮 ] case of a liquidation event, the investor would get their subscription back at the £10 per share rate, whereas the entrepreneur would get his/her subscription back at the 0.01p per share rate.

This mechanism, if it still works as described and has not been disqualified by HMRC, should give the same net effect as ‘proper’ liquidation preference shares. According to Tom Allason’s comment on TechCrunch, Shutl used this: and having talked to various startup people around London, it seems that at least one startup may well be using this right now. All the same, Danvers Baillieu noted (also in a TechCrunch comment) there that “I would also be interested to know if any of [the] investments in question have progressed to a further round of funding and, if so, what has happened to the share rights at that point.” Hence, because it’s not as yet entirely clear how this ‘trick’ really works in practice that little bit further down the line, all I can say is “caveat investor / investee”.

Curiously, back in September 2010, Alliott Cole wrote an entry on the Octopus Ventures blog discussing liquidation preference shares:-

“4. Angels in the United Kingdom appear to dislike liquidation preferences too. A cynic may hold the view that this is because most business angels think that to subscribe to a class of share with a preference would prohibit the investor from obtaining Enterprise Investment Scheme (EIS) status (and the associated income tax relief and loss relief). This view is in fact erroneous: the Octopus Venture Partners, who require EIS qualifying investments, co-invest with Octopus on every investment we make – all of which include liquidation preferences. The trick is in how one defines a liquidity event.”

From this, it would seem that Octopus uses a yet different method for emulating liquidation preference shares. *sigh* Please leave a comment below if you happen to know how Octopus’s terms manage to achieve this end, I’m sure we could all do with a laugh. 🙂

OK… even though I understand there is always a ‘sport’ element to law as practised (how close to that line can you throw your legal javelin?), I’m struggling to see how emulating liquidation prefs in this sort of way amounts to anything more than a means for lawyers to make additional money out of angels and startups, at a time in their investment lifecycle when cash is at its greatest premium.

Personally, I’m with the spirit of the law here: just because you can game a system doesn’t mean that you should do so, and it doesn’t mean that the people running that system can’t retrospectively tighten the rules. Really, isn’t setting up a ‘vanilla’ share arrangement plenty expensive enough already?

100th post: the mystery of manufacturing…

Journalists & editors love centenaries and plausible-sounding round number anniversaries: it’s an easy way of making press out of something that happened ages ago, and with the logistical advantage of being a date in the (near-ish) future you can prepare for in advance.

And so it goes with blog posts: only there, the longstanding tradition is to celebrate the 1000th post / 1,000,000th visitor / whatever by posting something really great. In practice, however, this is typically no more than a long list of links to various non-sucky articles you’ve posted, presumably hoping that by so doing they’ll get some kind of celebratory PageRank boost from Google. 🙂

Anyway, the (otherwise totally meaningless) milestone here is that this is the 100th Funding Startups post: and following a thoroughly nice lunch at the Griffin in Claygate with Mike Scase (who incidentally helped design the Amstrad CPC464 for Alan Sugar), I thought I’d post on something he seemed to find interesting… the mystery of manufacturing.

1. Asleep at the wheel?

First, the economic context as viewed from my contrarian swivel chair. When the recent long period of (apparent) financial stability fell to pieces in the Credit Crunch, commercial banks realized that they’d been caught napping. Their balance sheets were awful because for decades they’d been lending large amounts of money at relatively low interest rates – acquisitions, management buy-outs, and all kinds of spurious stuff. Leveraging had vastly changed high-level business funding models: presumption of access to stratospheric levels of debt had even become part of the syllabus at business school.

But now things had changed, and the banks wanted their ball back. One group hit badly by this were the distributors…

2. Piggy in the middle, carefully sliced…

The distribution sector was unhappy about this change in the landscape: numerous large empires had been founded and built up on the model of holding large inventories while giving 60 days’ credit to trade customers. If the banks now won’t let you hold stock or sell much on credit to small trade buyers, what are you supposed to do? Looking at that big liquidity hole in your accounts where all that soft money used to be, it would surely be hard not to conclude that your business bubble had just been popped.

Moreover, now that distributors don’t hold a lot of stock, it’s often the case that bigger customers go directly to manufacturers, forming a direct-from-the-source relationship, shrinking the market in the middle. At the same time, there’s a lot of sideways pressure on distributors from Internet wiseguys also looking to disintermediate them, by replacing their service with a teeny-weeny webbed-up warehouse in Wareham. So if the banks won’t fund your inventory or let you give much credit to trade customers, bigger customers want to cut you out, and web-based micro-disties are trying to eat your lunch, what’s the future of distribution? Really, when everyone wants to take a slice out of what you’ve got, it’s not easy being piggy in the middle.

3. Just In Time(berlake)…

From the point of view of manufacturers, distributors are very often the primary sales channel, their basic “route to market”. But if banks won’t let distributors hold much of anything in stock, it falls to the manufacturers either (a) to finance the stock themselves; or (b) to find clever fast ways of creating stock on demand (the whole “Just In Time” phenomenon). Yet because the whole idea of working capital has become little more than a vague, distant memory, banks have placed manufacturers under arguably even worse pressure than the distributors: hence option (a) [financing the stock themselves] is very rarely practical.

However, even if you are able to devise clever, lean manufacturing models based around small, fast batch sizes – option (b) is the starting point for manufacturing right now – the process of manufacturing continues to be just as capital intensive as ever. You still need to design & prototype (even though 3d printing has made shape functionality testing much easier), build injection moulds (expensive, clunky, and slow), verify functionality, check for standards conformance, adapt for manufacture, assemble, test, pack, ship, and – last but not least – pray like crazy that people do now buy whatever it is you’ve spent so much time making, i.e. that the market for your product hasn’t silently evaporated while you’ve been away with the (development) fairies building it.

4. Finally, we get to “The Mystery of Manufacturing”…

Though I blog about “Funding Startups”, when it comes to funding manufacturing startups I’m entirely mystified. How on earth does anyone do it? There’s no money in distributors, there’s no access to working capital or overdrafts, and there’s only regional development support if you happen to be opening up a decent-sized factory in a region with high structural unemployment… which, frankly, ignores the reality of how most pragmatic modern manufacturers would structure their operations (typically around Far East subassembly and local late assembly for customer flexibility). As far as I can see, the main reason that James Dyson moved production to Malaysia was that his company would be stuffed otherwise: having outsourced much of the Midlands to Shenzhen, what’s our local alternative? It’s like that, that’s the way it is.

As a result, for UK manufacturing startups the only feasible source of funding is typically angels and VCs: but almost all of these have little or no interest in actually building things, preferring to channel their money into mobile apps and social media pixie-dust. It’s no secret that manufacturing doesn’t have anything like that ‘iGlamour’, for how can it compete with neon-look 3d demo buttons on a sleek black handset? Hence, “the mystery of manufacturing” is simply… circa 2011, how on earth is it possible?

So… a hundred posts down the line, it should be clear that I’m starting to flag somewhat. I continue to look at companies such as AlertMe and Nest.com to try to figure out what the secret of their funding success was. However, apart from Pilgrim Beart’s reasonably generic advice to founders to delay inward investment as long as possible, I don’t really see what there is to learn about the realpolitik of funding manufacturing, what microeconomic levers there are out there left to pull.

Ultimately, slicing through the tangled Gordian knot, there’s a high chance that there is in fact no mystery here: that is, the UK has no “mystery of manufacturing” simply because it has no manufacturing. Should people like me abandon the UK and start afresh in Taiwan or Shenzhen, planting the IP seed of their business into a richly loamy cultural soil that not only understands manufacturing but actually values it?

Could it be that I’ve been so caught up with solving super-hard tech development puzzles that I’ve sidelined the properly big question – is this the right place to run a manufacturing company from? That is, might the real mystery of manufacturing be “why do I persist in banging my head against this particular wall?” Or, rephrased as a Zen koan for philosophical heavy metal fans, “what is the sound of one head banging?

Aiming (much) higher than Hackspaces and FabLabs…

In response to my last post on manufacturer hackspaces, Phil Jones (founder of the Future Manufacturing meetup group) left a comment mentioning “James Hardiman’s project to build 50 fablabs“. That project was inspired both by MIT and by the various FabLabs springing up in Holland: James notes that the first UK Fab Lab has arrived in Manchester, called (somewhat unsurprisingly) Fab Lab Manchester, with two more (one in Cambridge, one in Brighton) threatening to get started any minute.

Perhaps I should be pleased by all this, but just as with London Hackspace, this all seems to me to fall well short of the mark. Only people who haven’t actually worked in manufacturing would think that buying a 3d printer and a vinyl cutter would be sufficient investment to push an entire community into a making frame of mind. Prototyping for looks falls well short of prototyping for function or for mass production: additive mass manufacturing is still so far from a reality that I usually find it embarrassing when I see it in someone else’s business plan or pitch. A serious attempt at seeding manufacturing would have proper kit for startups who are driven to change the world, one good idea at a time: an EOS direct metal laser-sintering system, a 3-axis computer controlled mill, a decent laser cutter, and so forth.

But then again, almost nobody in the UK seems to have any sense of how this would work, or why it would be even remotely necessary For many manufacturing hopefuls (particularly those on or just out of design degrees that seem to be Sociology accessorized with a bit of Rhino3d product design module, though you’re not supposed to say that), the grimy side of physically making things is frequently perceived to be nothing more than a ‘design plus’ activity. For once you’ve designed yourself a sleek-looking Jonny Ives-style 3d model of your hypergadget, you lob it over the partition and the rest is easy… errrr, isn’t it?

Actually no, not even close: the gulf between the (mostly Western) turtleneck Mac-design-house mindset and the (mostly Far Eastern) mass production world has arguably never been wider. There are now a billion spectator seats at the manufacturing table for wannabe makers who can sense the global hunger for tools and gadgets: but making one of those into a success is, if anything, harder than ever right now. I don’t even want to speculate on how dwindlingly few people in the UK have a sufficiently good grasp of conceptual design, mechanical design, electronic design, interface design and software design to doggedly push a real project right through from start to finish, and who also ‘get’ customer development enough to build something that people will buy.

Of course, I appreciate that someday we may possibly all have desktop 3d replicators able to summon the world’s digital designs to our hands, one petulant (and probably virtual) mouseclick at a time: I’ve met plenty of people who give the impression of living off the whole sci-fi high of that notion. But for now, I’m sorry to have to say that it’s just nonsense.

This is because the practical limitations of 3d printing are many and varied, all the while the whole process of proper injection moulded parts is rapidly improving. Yes, that’s right: hardly anybody realizes that even though 3d printing is getting better all the time, injection moulding is also continuously improving and reinventing itself too. Going all ‘Wired’ by focusing on the eventual promise of 3d printing will likely cause you to miss out on the real manufacturing revolutions that are happening right here, right now.

So… who should back the UK’s manufacturer hackspaces? I previously proposed the Technology Strategy Board, but OpenCoffee-er Brian Milnes also suggested the Engineering and Physical Sciences Research Council (in fact, they both operate from the same building in Swindon). All the same, I think there’s a strong (and perhaps slightly surprising) case to be made that the best source of all would be NESTA, the National Endowment for Science, Technology and the Arts.

I’ll try to explain. Possibly the biggest argument against any kind of investment in manufacturing is simply that for most people – and I’d certainly include the majority of business angels in this category – building things is just too prosaic a thing to get particularly interested about. But for me, I see manufactured objects as a kind of beautiful miniaturized IP symphony: the customer development, the idea, the form factor, the design, the mouldings, the machines, the electronics, the sensors, the interface, the technology, the packaging, the assembly, the testing, the conformance, the software, the hacking, the platform, the recycling… all of it.

Where you see gadget, I see process. Moreover, where you see prose, I see poetry: for the UK will continue to have no manufacturing all the while it has lost its collective sense of the poetry of production. The ignominious application of production line metaphors to (the actually very creative) industrial life has helped alienate people from the process of making: whereas Lean Manufacturing instead helps to reconnect workers with the project as a whole, by seeing waste as a thing that erodes value, and that corrodes the relationship between customer and producer by making it unnecessarily fragile and contingent.

And this is where I think NESTA comes in. There is a crazy, valuable, wonderful space opening up here for a manufacturing hackspace with a direct remit not just to connect with (and empower) startups with a drive to build, but also to try to piece together and tell the story of manufacturing as it lives in the minds of modern makers. Yet this goes way beyond the whole tokenistic artist-in-residence type of conceit: for if we cannot as a society engage with the manufacturing dreamworld – for what are products but our collective dreams made solid? – then we will end up designing our FabLabs merely to satiate superficial toytown needs, to scratch parochial mercantilistic itches better ignored.

Ultimately, the future history of manufacturing that people such as I are trying to write is a far more nuanced thing than anyone seems to realize: it’s a matter neither of high-value goods vs low-value goods, nor of on-shore vs off-shore vs late assembly, nor even of in-house vs out-house, but one of doing vs not doing. That is, the world does not need more software houses: software is far too often a way of avoiding doing useful work, of sidelining bright people. Rather, the world needs more people doing things, building physical things, and merging hardware and software in useful and unexpected ways. Isn’t it true that apps are arguably the least interesting type of Sampo, that legendary Finnish “magical artefact… that brought good fortune to its holder“?

To my mind, the most subversive act of all is designing and building something new, for that serves to shift the balance of that-which-is-immediately-physical-possible: as useful day-to-day technology moves from spectacles to medicines to lifts to robots to exoskeletons, the sum of our parts becomes more than mere bodies. Yet we have become so accustomed to seeing novelty in apps as our collective metric for ‘interestingness’ that we often overlook this beautifully simple world of useful, empowering objects. Who, now, is looking to curate these machines of modern production, to bring out the subversive story of modern man as maker?