Getting to "yes" in a world of "no"…

Archive for the ‘Angels’ Category

Scalable startups…

Having been happily away from the London startup ‘scene’ for a little while, it was actually rather refreshing to talk with a friend about her startup ideas a few days ago.

The most difficult part of the conversation was getting across the central idea of building a scalable company – i.e. that, given that starting up a scalable company is almost exactly as hard as starting up a non-scalable one, why waste your time with the latter?

Scalability isn’t about making yourself rich, it’s about seeing the world as a long series of genuinely accessible marketplaces and distribution channels, all of which you can get to from wherever you happen to start. Contrast that with being, say, a maker on Etsy etc: all such ‘creative platforms’ tend to do (in my opinion) is encourage people to build their own never-really-satisfying niche, and then lock themselves firmly into it. It’s nice but… not really (capital-B) Business in any properly entrepreneurial sense.

But at the same time, as we were talking I felt like I had silently morphed into a bit of a dinosaur without even knowing it. For even describing ‘scaling’ in such openly conceptual terms is a bit of a cop-out, startup ‘Top Trumps’ word fakery more for PowerPointing than for actually using in The Real World.

What struck me is that the genuine craft of entrepreneurialism isn’t about “aiming for scalability”, but rather “avoiding nicheness” – for what’s worse, (a) being trapped in a ghetto, or (b) being trapped in a ghetto that you built yourself?

The problem with ‘scalability’ – and indeed with all the other over-blown and over-conceptualized ways of thinking about startups – is that they can so easily become slideware cargo cults, bullet-point lists of abstract qualities or attributes or methodologies that your new business Must Have In Order To Be The Real Deal. You know, like that whole Lean Startup thing. *sigh*

The sad truth is that most startups dismally fail to service even their most accessible, best-understood markets: and so the whole notion of being able to scale that initial hopeful venture to attack larger, more global markets is rarely little more than a tragicomic joke, albeit one that many angel investors like to obsess over.

So what’s the right answer, Nick?

I guess I’m as tired of “conceptrepreneurs” (for whom scalability is not only utterly essential but also the backbone of slides 3-5 in their killer presentation deck) as of “nichepreneurs” (who deliberately aim low, probably out of a misplaced sense of fear). For me, the former group embodies the pointless, ungrounded sophistication that is all too typical of urban startup discourse: while the latter group embodies the trembling wannabe naivety about business I run into all too often these days elsewhere. Both suck.

For me, startups need to be a living social revolution – if you’re not in it to dramatically change people’s lives for the better, you’ve probably wildly misjudged the value of what you’re doing. All ‘scalability’ therefore means is that you’ve tried to set things up so that The Revolution Can Go Big: but without a great big revolution right at its heart, that startup is very probably a waste of time / effort / money, sorry. ūüė¶

Fake pitches and real startups…

I had a nice coffee today with an old friend from my schooldays who sold his decent-sized company not so long ago: it didn’t take long for the conversation to turn to business angels and pitch meetings, something which we both have had a lot of exposure to (though largely on opposite sides of the same wonky-legged table).

On the one hand, in order for startups to get past angel gatekeepers to pitch, they have to kid both themselves and others that in 3-5 years’ time they will multiply an given investor’s stake by at least 10x: this is the modern pitch template, the model that startups are required to replicate in order to be considered “credible” (But of course nobody has that kind of control over the future, however smart you are).

Yet on the other hand, my experience of rapidly growing companies is that they are structured in an open way to allow external serendipity to play a very significant (if not actually a near-majority) part. In fact, I suspect the real growth of such companies would best be charted in a bar graph with “Years” along the bottom and “Lucky Breaks” up the side. (Note that I don’t believe anyone has ever put such a graph up in front of potential investors, except perhaps with some kind of satirical point in mind.)

What struck me most forcefully was the sharp contrast between these two startup “models” – between the PowerPointy pretence of control and the (actual) near-total absence of control. The whole startup discourse has become a slave to the MBA-ified cult of the jut-jawed CEO hero making dramatic bets against the market’s groupthink, all the while the realpolitik of business has grown more diffuse and collaborative, where opportunities more often arrive as partnership outcomes than as snatched moments of solo market brio.

I don’t know: as I’m typing this, I’m feeling the hopelessness of the whole situation – as though angel investors and their groups have, by steering the ‘model’ to such foolish extremes, become 10x more of a hindrance than a genuine help to the whole sector. Add in the triple-whammy cargo cults of the ‘killer deck’, ‘elevator pitch’, and ‘executive summary’, and you have a pervasively dysfunctional setup to deal with.

Right now, I have this huge urge to stand in front of a room of business angels and just, I don’t know, tell them the goddamn truth. You know, that business is hard, arbitrary, strange, but collaborative; that what genuinely differentiates proper startups from, say, window cleaners is they take a certain combination of ambition, drive and scalability and aim it all at a fat (but wobbly) market; and that if I could tell the future as well as angels apparently need me to, I’d be betting on Lucky Boy in the 2.30 at Haydock Park, not standing in front of them.

But most importantly I want to tell them that it is their shared model that is killing startups: that if they had the guts to invest in startups without having them go through that stupid ritual of pretending to have sufficient omniscience, omnipotence, and precognition to guarantee insanely good ROI, then maybe they’d get the kind of returns on their investment they wanted.

Really, do I honestly think there’s even a 1% chance many will stop punting their miserable pin-money stakes into social me2dia shutdowns (i.e. the opposite of startups) anytime soon? No, of course not, not a hope. But that’s the view I get from here, make of it all what you will.

Hot news: relatively speaking, VCs don’t actually suck…

I just read a clip-quotes-together-and-number-them article supposedly on why the VC model sucks. It annoyed me enough to want to answer my own question: right now, what in Startup Land really sucks?


Well… Venture Captal¬†as an asset class does indeed currently suck, it’s quite true.

But the way that wannabe entrepreneurs flood VCs with pathetic app-centric slideware designed more to wrap around the VC business model than around real customer needs, that also sucks.

And the ridiculous way that journalists and bloggers write about VCs and startups sucks too. I mean, what is the point of reading an article in TechCrunch about how insanely clever startup X’s founder is to have got VC funding, when the odds are at least 9:1 that it’ll all turn brown and runny inside 12 months?

Oh, and the way that business angels claim to be liquid (when nearly all their actual worth is tied up in a whole myriad of tax avoidance schemes): and so spend most of their time wasting entrepreneurs’ time doing meetings when they have an actual business to run:¬†that sucks as well.

And really, don’t get me started on how ridiculous cargo cults such as The Lean Startup waste startups’, angels’, and VCs’ time by encouraging entrepreneurs to design their companies around processes that can almost never¬†be funded or scaled. Because that sucks.

Even so, despite all that pathetic sucking, right now the maximal suckage in the whole train-wreck startup ecosystem is simply this: 95 or more out of every 100 people who currently want to be an entrepreneur are just f^&king kidding themselves.

Jeeez, so you lost your job as¬†a mid-ranking software project¬†manager at Acme Corp: does that automatically make you an entrepreneur? No. So you think you’d like to write a cool¬†app, does that make you an entrepreneur either? No. In fact, do just about any of the half-baked excuses people put about for being an entrepreneur actually make you an entrepreneur? No, they don’t. They really, honestly¬†don’t. And the more I hear them, the sadder it makes me.

Back here on Planet F^&king Earth, being an entrepreneur actually involves two things: (1) not spending money while still moving forward, and (2) selling like the biggest sales monster ever¬†seen. Almost all of the current demented crop of entrepreneurs act as if these are two¬†skills they can somehow get by without having to acquire or use: but they’re wrong, ridiculously and riotously wrong.

In fact, anyone can knock together a business plan based around spending someone else’s money (a Fantasy Startup game a child could play), but the real world is the cruel¬†antithesis to such self-indulgent reveries. It is the immovable rock on which all such plywood dream ships get brutally shattered. You don’t like this? Well, sorry, but welcome to my world.

So… you want to be an entrepreneur, do you? Ever wondered whether you might actually be part of the problem?

Starting up in 2013…



Through 2012, you may well have seen a fair number of examples of UK entrepreneurs ably demonstrating two key skills they apparently have in abundance:-

  1. Moaning how US startups are plainly in a vast unsustainable funding bubble (but can we have some of that here, please?)
  2. Moaning how UK startups are plainly in a vast unsustainable non-funding lull (and why-oh-why can’t the government fix it?)

Yet as we move into 2013, both of these are ringing quite hollow. Unless you’re trying to get a refund on an unflattering top¬†from a department store, moaning does not give you any kind of¬†competitive advantage. Moreover, moaning about something that isn’t actually a problem is just pathetic.

For example, the real reason US startups are in a funding bubble is because (a) an unbelievable number of startups try to start up every year in the US, (b)¬†US entrepreneurs¬†are actually quite good at getting startups going, and (c) they genuinely try to create A+ startups with a real possibility of scale, for which ambitious VC-class investment is a sensible path. Contrastall ¬†that with UK startups’ business plans, most of which seem to be based around C-grade social media hacks. Somewhat unpopularly, I would argue that it is UK entrepreneurs’ collective lack of ambition and vision that has made an effective seed-level VC sector pretty much untenable in the UK.

If you want to change this whole game, aim higher, go bigger, and astound the world.

But it is the non-funding lull moaning that makes me even more annoyed. Too many entrepreneurs assume that their only possible way to make a workable company is via a financial leg-up from someone else’s money. Yet the entire business¬†landscape has changed: have they not noticed eBay, Amazon Marketplace, and a hundred other diverse routes to market that have opened up in every crack?

In fact, I would go so far as to say that a 2013 business plan that specifically¬†relies on someone else’s money to make things happen is¬†nothing short of dead in the water. Rather,¬†a workable 2013 business plan says:

  1. Here’s how my company is making money right now in niche sector A
  2. Here’s the size of the much, much larger market B¬†it can address if you come on board with ¬£300K
  3. Let’s¬†get to¬†it…

The most damaging thing about seeking funding is when it absorbs so much of your time and effort that it ends up¬†costing you your company. So don’t do that: the sexiest thing you can put on a whiteboard is ongoing sales. Prove that you can both sell and deliver, and people will want in, big-time. Make that your goal in 2013, OK? ūüôā

Building a startup is like building a boat…

out of flotsam, while swimming alone in the middle of a vast ocean. By the way, it’s cold out there, really cold.

So, how are you going to do it? Well… government grants are leaky lifebelts that help keep you afloat (but only for a short while). Oh, I should mention that to get them, you have to swim 50 miles and back, leaving your part-constructed boat behind you to sink ignominiously beneath the waves. EU grants are the same, except that you need to swim 1000 miles while also collaborating with people building their own sinking boats in different countries. then you’ll probably be turned down anyway.

You’re not swimming completely alone out there, though. Business angels enjoy motoring past in their speedboats to see how your funny little tech construction project is going. Even so, they rarely bring along anything of use with them: most are content to have a chat with you over a cup of (salt watery) tea, and to share their reminiscences about how difficult they found it to build their own first boat way back when (at a time when, curiously enough, banks were happy to lend to boat-builders). Then off they motor, leaving you freezing in the water, scavenging nails to fix passing planks together.

Occasionally a VC cruise liner will sashay past you, sending bloggy ripples that confuse and annoy. Their captains wave, but never actually stop: though you can see all the waste food being chucked over the side, seagulls get it all before you can reach it. And although it’s sometimes nice to dream about building your boat in a shipyard (the way that VCs claim to do), sadly that’s not an option for you either.

Coaches tell you how to dive deeper to find the nails you need: while mentors tell you which planks they’d choose to build with. But even with all their “help”,¬†your best case startup scenario will almost always be a leaking,hacked-together contraption that is barely sound enough to keep itself afloat, never mind keep you afloat as well.

Errr…. do you still want to be an entrepreneur?

* * * * * * * * * *

OK, I completely accept that all human endeavour is, to a very large degree, no more than an attempt to create small bubbles of order in a vast ocean of entropy and doubt: and that in those terms, starting up a company is no different to any other exercise. But all the same, what is the sense of having such a complicated network of non-funding funders, inept financial gatekeepers and pointless service providers when so few young tech companies ever manage to start up both successfully and scalably?

Has nobody actually noticed¬†how unbelievably cold it is out there? Even if you are an experienced ice diver, you may not arrive in port…

Securitization, patent lien, and startups…

In these post credit-crunch days, there is a lot of pressure on banks not to lend – not just to startups, but to anyone at all. That includes lending to business angels, many (if not indeed most) of whom are both wealthy and illiquid.

Yet at the same time, the innate growth logic of young business itself has not managed to magically sidestep the need for capital through some kind of hitherto-unknown financial engineering trickery. (Oh, and you can shout “Lean Startup” at me here until you’re blue in the face, tell it to the hand coz the wallet ain’t buyin’ it).

So, what kind of security could a startup offer a bank? This is something I’ve long thought about, ever since I first heard about “Bowie bonds”. Love or hate his music, you have to admire the former Ziggy Stardust’s timing, in that his financial advisors found a way to sell future revenue from¬†Bowie’s back catalogue, all packaged up in the form of bonds. Which, given that CD sales tend to spike when rockstars die, would seem to be a neat way of profiting now from your own future death (whensoever that may arrive).

And so I wondered whether a startup could effectively secure loans against their patent portfolio – in other words, securitize their IP. As I understand it, the only UK bank that ever did this to any appreciable degree was Lloyds TSB,¬†which for a while had a London office specializing in IP securitization. It was never really for startups, though: and my understanding is that the cost of performing an external valuation on a patent via a specialist patent valuation house is¬†somewhere between¬†¬£25K to ¬£50K. Even then, most of what such companies do seems to involve looking at the financial inflows directly arising from patents, which isn’t exactly financial rocket science.

The short answer, then, would seem to be that startups can’t obviously securitize their patents.

Yet just now I read an American case from Massachusetts, where patent agents were owed $109,000 by an advertising agency that had gone bust. They believed that they had a lien on the patents that were gained through their work, but the liquidators handling the bankruptcy subsequently backtracked (having sold off the patents). The patent agents pursued their claim to the SJC, which in 2009 found fairly comprehensively in their favour.

The moral of the story (if anything to do with American attorneys can be said to have a moral) is simply that the outstanding money owed to the patent agents by the bankrupt agency was effectively implicitly secured against its patent portfolio, even from before they were sold.

The even bigger macroeconomic picture is that the shadow banking sector Рwhere such securitization is now utterly commonplace Рwas worth $60 trillion as of late 2011. Yet it is not clear to me that even a cent of that is going to non-traditional funds trying to support startups. All of which strikes me as a massive market inefficiency Рthe part of the economy that has arguably the greatest capacity for rapid growth in the economy is being run in a way that consciously reduces its access to finance, just in case that kind of funding accidentally proves to be an inflationary bubble. And the one thing that they genuinely have РIP Рis excluded from the whole game. It makes no sense.

At the same time, the whole shadow banking sector is coming under increasing scrutiny from lawmakers and economists. It is now widely believed (with¬†plenty of justification, I think) that the way that shadow banking is largely unregulated may well have been the root cause of much of the credit crunch (and don’t even start me on rehypthecation churn, I’ll be typing here all night).

But securitization against¬†patent assets would go against this trend, in that it would be¬†adding assets to¬†the world’s trade balance sheets rather than simply trading against multiply leveraged existing collateral. (And we all know where that led to not so long ago).

I therefore wonder whether groups of startups specifically with patent IP could pool them into securitized funds that were somehow partially liquid, for them to loan against from the fund.

But if they could, they would almost certainly need patent administration¬†removed from¬†each startup’s¬†day-to-day running to prevent¬†it accidentally messing the application up (and thus trashing the fund’s¬†collateral). Yet the requirements for this kind of arrangement would probably run counter to the ownership requirements of the new Patent Box tax regime coming in. So it could be that the Patent Box works as an effective mechanism to prevent¬†companies from looking for ways to securitize their patents. All very confusing!

Overprediction, the entrepreneurial curse…


Over the last few days, I’ve started to think about writing a book for¬†entrepreneurs – a proper, meaty, practical book that helps you see through the fog of the business world around you (and believe me, there’s a whole lot of fog out there). It’s early days just yet, so we’ll all have to see how (or indeed if) this book¬†takes shape. (As with all such projects, the only¬†sure thing¬†is that holding your breath waiting for it would be¬†A Very Bad Idea Indeed.)

All the same, big books need to address big questions: and hence¬†the big question I’ve been banging my head against is… why is it that nearly all startups fail? Or rather,¬†what’s the big problem with starting up? It struck me that if I were to assemble, arrange & present¬†all my thoughts in such a way as to answer that near-universal question in a pragmatic & accessible way, I’d have a book that would literally be worth its weight in gold (at today’s gold price, errrm, round about ¬£15K for the weight of a 250 page softback).

Now, even though the following is¬†only a part of a much¬†larger picture, I think it’s fair to say that one of the biggest¬†curses that¬†plague entrepreneurs is overprediction – that is, not only predicting how people (whom you haven’t met or fully researched) currently behave, but also predicting how ecstatically & differently (in your favour) they’ll¬†respond when presented with your game-changing Android-powered CyberFruitBowl 3000. Oh, and predicting how potential funders will evaluate what you’re doing, too.

You think that’s a reasonable ask? Oh, come off it! The world is a complicated place, and people have wildly varied & complex reactions to even simple things (yes, even to your lovely CyberFruitBowl 3000). Yet at the same time, there is an enormous pressure on entrepreneurs to present what they do¬†with utter certainty (and using TechCrunch-style hyperbole), not only when pitching to angels but also when talking to everybody else.

In just about every useful sense, this yields an abysmal¬†disparity – the ever-widening gap between (a) the way the world really works and (b) the overwhelming social compulsion to misrepresent¬†that in order to paint¬†a picture of your company as a credible tech startup. Being brutally realistic, this disparity will either crush your moral spirit¬†in the short term or come back to financially bite your hairy yellow arse¬†in the medium term (startups don’t do long term, of course).

Regardless, this means that what entrepreneurs pretty much have to do is to overpredict how things will work out for their development & product/service rollout, to a degree that wouldn’t even be realistic for a company that was already a market leader. If Apple / Samsung / Vodafone¬†/ Virgin wouldn’t put it on a slide, why would you?

In a way, the one good thing about the kind of discourse espoused by Lean Startup evangelists is that it focuses on genuinely not knowing anything (which is true for most entrepreneurs), rather than pretending to know everything. Of course, reality always lies squarely between these two extrema: but what would a Streaky Startup Рi.e. neither excessively Lean nor foolishly Fatty Рbusiness plan look like?