Getting to "yes" in a world of "no"…

Archive for the ‘Startups’ Category

Who should be on the other side of the table?

I’m sorry to have to bring this up, but over the last few weeks it feels to me as though startups are reaching some kind of tipping point: they have become a kind of modern cargo cult. My son, emboldened by the descriptions of startups and pitching permeating the media, has occasionally begun trying to lecture me about New Business, innovation, invention and all the rest of the same sorry mess

Eskimos / ice etc.

I want to inspire him, sure: but how can I get across to him that even if you have an incredible idea, have a powerfully persuasive plan, and can demonstrably prove that you are utterly brilliant at executing such plans, pitching conceptual businesses is an extraordinarily poisoned chalice?

For when you go a-pitchin’, who is on the side of the table?

* Grant-giving organizations – I don’t think so. *choke*
* Angels – really? Really?
* Angel syndicates – hilarious.
* Crowdfunding – good luck with that hoverboard, matey.
* Banks – banks and conceptual business are like oil and water
* Peer to peer lending – interesting concept, but very hard to find a middle ground.
* Private equity – not unless you know all the partners really well, and can scale your concept up to a $5m investment round
* UK Venture capitalists – not unless you have appeared on Newsnight and can scale your concept up to a $10m investment round
* US venture capitalists – not unless you have appeared on Fox News and can scale your concept up to a $20m investment round

In reality, startups circa 2015 have to look at different tables entirely:
* spin-in (where you sell revolutionary ideas into large, late-lifecycle corporations that have become innovation-free zones)
* buy-back customer-funded (where your major customers own you for a period of time, but you have a performance-led buy-back option)
* customer-driven pitches (where you build up a pre-sales relationship with one or two large customers)
* supplier-driven funding (where you build up a relationship with a factory that owns moulds you are deriving your product from)
* etc etc etc

In short, conceptual business pitches now need just as much active innovation for the funding-to-market business model driving their business as any hardware, electronics or software innovation. In many ways, the Widget part of the business equation has become the easy bit: funding, building out, and selling in is where the real innovation bottleneck now is.

But how do you squeeze such a radically different worldview in a PowerPoint presentation deck? It’s really not about high-concept Tech any more, it’s more about having a genuinely integrated approach to business that sees all the parts of the business landscape and finding the precise ways they can all link together that gives all the parties what they are looking for. In short, starting up is now actually all about business configuration innovation, if you can accept that as a genuine phrase without gagging. ūüôā

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?

The Cathedral, The Bazaar, and The Tank…

Eric S. Raymond famously contrasted the ordered (but rigid) “Cathedral” of Big Software Development [e.g. Microsoft Windows] with the disordered (but dynamic) “Bazaar” of Open Source Software [e.g. Linux]. His intention was to try to demonstrate how the Bazaar approach¬†is The Right Answer to the challenges of the modern world, and (conversely) how the Cathedral approach was dead in the water.

As I often tell my young son, anytime someone offers you an either-or choice, the chances are that you’re being conned (or at least coerced). Coke or Pepsi? Errrrm… I’ll have a nice glass of water, if that’s ok with you. So I think Raymond’s dichotomy is something of a forced-argument fallacy, in that by fixing the¬†terms of reference¬†around two massively distant poles, he was trying to make his argument seem more¬†convincing than it actually was.

All the same, I agree it was good that Raymond opened up the whole open-closed debate, because the world of software has historically been very closed. But then again, a lot of software now seems to use open-source libraries on closed platforms (i.e. iOS), so it would seem that¬†neither position¬†actually “won”: rather,¬†the whole idea of software¬†became both more complex and more financially compromised. Even Linux (Raymond’s poster-child for the Bazaar) has itself become a heavily politicised and contested development area, with a tightly controlled feature “funnel” and significant corporate involvement.

The other big issue opened out by Raymond’s open-closed debate was whether the Cathedral-Bazaar / closed-open continuum could usefully be applied to anything apart from software. Having tried for¬†several years¬†to do this with historical research in an online forum, I can say with confidence that it simply doesn’t work. In that context, an online community degenerated into what was more like a third-rate Pub Quiz team,¬†a rag-tag¬†rabble which couldn’t even decide its own name, let alone work together towards a shared purpose.

All of which is why I found this interview with Jaron Lanier in the Smithsonian Magazine so interesting. Despite having helped ‘found’ many of the ideas & ideals of the World Wide Web, Lanier now seems to see it as a socially dysfunctional mess – as having transitioned from utopia to dystopia. Summarizing, he now feels that the endless trolling and schadenfreude¬†gets in the way of any of the kind of positive virtual social interactions he hoped for from the Web, which he sees it as an imminent “social catastrophe”. He seems to see anonymity as a thing that gives people the power to destroy social capital far more readily and easily than anything else can build it.

Moreover,¬†Lanier thinks that what started out as digital libertarianism (of ideas) has become a kind of incultured piracy (of digital property). And don’t get him started on the death of the middle class (which he seems to blame on disintermediation, but it’s not entirely clear how).

¬†‚ÄúI think it‚Äôs the reason why the rise of networking has coincided with the loss¬† of the middle class, instead of an expansion in general wealth, which is what¬†should happen. But if you say we‚Äôre creating the information economy, except¬† that we‚Äôre making information free, then what we‚Äôre saying is we‚Äôre destroying¬† the economy.‚ÄĚ

Perhaps the most audacious part of his argument is that he tries (inexactly, I think, but in broadly the right spirit) to connect rehypothecation with digital piracy Рthat somehow the virtual copiedness of piracy is the same as infinite rehypothecation.

“To my mind an overleveraged unsecured mortgage is exactly the same thing as a pirated music file. It‚Äôs somebody‚Äôs value that‚Äôs been copied many times to give benefit to some distant party.”

This is, I think, where Lanier’s argument train leaves most people’s rails: there may be parallels, sure, but did the web really cause the current (far from finished) Recession? Actually, I would argue that the Recession came about as a consequence of the laissez-faire financial deregulation set in motion by Prime Minister Margaret Thatcher, but that ended up being so brutally amplified by commodities speculation during the period 2001-2007 that the resulting volatility caused the whole system to collapse under the pressure.

Computers played their part in that, sure, but the overall development arc was quite independent of the World Wide Web or anything virtual. Basically, “virtual” is a useful catch-all phrase for ‘non-physical system’, but it really doesn’t have anything like the rhetorical or logical power that Lanier is relying on for his argument.

I think Lanier sees Bad Stuff going on and wants to be The Canary Of Impending Doom: but this isn’t good enough. At any given moment, you can discern¬†a heady mix of Good Stuff and Bad Stuff all around you, but only a pessimistic¬†idealist would think that the Bad Stuff is going to win. The right question is surely how to give nudges to the Good Stuff to keep it all in some kind of ongoing dynamic balance,¬†but I’m not sure Lanier is enough of a pragmatist to do that. Oh well!

For me, the Cathedral and the Bazaar are both unhelpfully idealistic¬†ways of looking at the world, and I can’t help but conclude that Jaron Lanier¬†views the Web in that and similar dichotomies (virtual-physical, wealthy-poor, political-naive etc). This is, however, a fairly impoverished weltanschauung, far from the nuanced realpolitik that holds sway in most human affairs.

I suspect that what is emerging as the¬†major alternative to the Cathedral and the Bazaar is the Tank:¬†a self-contained, self-reliant, compact, Nietzschean powerhouse. In an increasingly paralyzed and¬†purposeless world, what I call a “tank” is a powerful unit with its own self-constructed epistemology and ideology, but where the powerlessness of its context magnifies its own power (relatively speaking).

In the US, the Tea Party movement was surely the first political tank: and perhaps UKIP¬†will¬†turn out to be the UK’s first political¬†tank. By which I mean, the Tea Party and UKIP don’t seem to be built on strong arguments, but the paralysis of their opposition makes them relatively strong. Perhaps the Lean Startup “movement”¬†is also a tank, made powerful largely by the paralysis of the startup funding landscape.

Rehypothecation and the death of working capital…

Here’s some stuff that turned my startup finance world upside down, perhaps it will do the same to yours.

One of my favourite mad economics topics is rehypothecation. If you’ve managed up till now to avoid the word, it’s because you’ve been living in a financial la-la land, a dreamworld where banks and brokers are honest & straightforward, and the world financial system is basically sound.

Of course, they simply aren’t, and it isn’t. But however bad you think everything is, rehypothecation makes¬†it all worse… much, much¬†worse.

The quick version¬†goes like¬†this: that when a bank or broker lends money secured¬†against an asset, they can then borrow against the same asset they’ve lent against. And that the bank or brokers who lend them money can then repeat the process. The initial mortgaging is hypothecation: the subsequent chain of mortgages is called rehypothecation.

As explained on the excellent Zero Hedge site, there is a fundamental asymmetry between US rehypothecation rules and UK rehypothecation rules:-

Under the U.S. Federal Reserve Board’s Regulation T and SEC Rule 15c3-3, a prime broker may re-hypothecate assets to the value of 140% of the client’s liability to the prime broker. For example, assume a customer has deposited $500 in securities and has a debt deficit of $200, resulting in net equity of $300. The broker-dealer can re-hypothecate up to $280 (140 per cent. x $200) of these assets.

But in the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated. In fact, brokers are free to re-hypothecate all and even more than the assets deposited by clients. Instead it is up to clients to negotiate a limit or prohibition on re-hypothecation. On the above example a UK broker could, and frequently would, re-hypothecate 100% of the pledged securities ($500).

And this is why the financial crisis actually started in London, in a¬†little office¬†in 1 Curzon Street, where AIG¬†ran its¬†UK operation –¬†specifically there so that its boss Joe Cassano could sell credit default swaps (CDS’s) within the¬†UK’s lax rehypothecation regime. Errrm…. $2.7 trillion of the b*gg*rs. And when that clever-arse scheme started to unwind, the whole financial world caught a cold. If not actually syphilis.

Of course, the UK government has dramatically responded by… leaving it all in place, exactly as it is. So, no danger of a repeat performance, then? Dream on!

All that’s actually happening is that US legislators are now making it harder for US companies to silently shift assets to London to rehypothecate them many times over. And this kind of activity makes up the core of what is¬†known as¬†the “shadow banking sector” (though the phrase has a different meaning in China).

Even though people know this is going on, they don’t often see what it has to do with them. And in particular, why should any given¬†startup care about this kind of fairly abstruse systemic bad behaviour?

Well, I’ve always thought it was really central to understanding the way banks behave: and today I found this comment that crystallized all my thoughts into one single, chilling iceberg moment. The commenter writes:-

It always seemed strange that banks would accept accounts receivable as loan collateral, but not inventory. Now it makes sense – inventory is too real.

That which is real can be stolen, wither, rot, age, depreciate, fall out of favor, or die. Convert into a journal or book entry, and its value becomes more opinion than fact.

So, it would seem that the actual reason working capital has fallen so drastically out of UK banking fashion is that it’s fundamentally to do with real things. If it were more virtual, it could be endlessly rehypothecated. It’s not that there’s no money in working capital, it’s that there’s no capacity for rehypothecation. And that’s nothing that’s going to change in the UK in the obvious future… the City’s making far too much money out of it.

Hence you can see the UK financial regulation regime as one that has become irreversibly skewed away from the physical to the virtual – that for all the poxy pure software play startups that pop up in Shoreditch, the really virtual part of the economy is the one that attracts foreign assets to the Square Mile to be played endlessly with.

Who’d¬†run a UK startup, eh?

What is entrepreneurialism?

For me, entepreneurialism is simply about…

  • using intelligence, cunning, and sociality
  • to convert opportunity, agility and (limited) capital
  • into action, profit, and (sustainable) growth.

i.e. using different kinds of knowledge…

Intelligence‘ = technical brains, forward reasoning, deductive logic
Cunning‘ = sales, reverse reasoning, inductive logic
Sociality‘ = social brains, PR, outreach, persuasion

…to make the most of internal and external resources…

Opportunity‘ = imbalances in external¬†markets, systemic distortions, inconsistent behaviour, arbitrage
Agility‘ = moving fast, prototyping, iterating, listening to customers, rolling with the punches
Capital‘ = cash, resources, time, goodwill, support

…such that your enterprise finds a growing place for itself in the world through action…

Action‘ = actually doing something or building something, rather than just preparing endless slideshows
Profit‘ = selling products or services for more than their amortized cost (and the earlier the better)
Growth‘ = finding ways of competing and winning in more and more market segments

So… which bit of the above don’t you yet do?