Great tech entrepreneur spoof on Jay-Z/Alicia Keys (I love the power of mashups and YouTube productions!):
Here's a stark reminder of why the UK government should stay out of the business of 'funding innovation':
(By Jim Pickard, Political Correspondent, Financial Times)
Published: March 9 2010 00:04
An investment by taxpayers of £74m into regional venture capital funds has been marked down to just £5m according to a report by the Whitehall auditor, which is highly critical of the government’s wider venture capital programme.
Since 2000, the Department for Business has invested £338m in 28 venture capital funds – through seven umbrella schemes – that have provided seed money to more than 800 companies.
The regional venture capital funds – one of the seven schemes – has reported an interim rate of return of -15.7 per cent, far worse than the -0.4 per cent delivered by other similar European funds.
Meanwhile, many of the funds have been paying high costs to private sector fund managers. The RVCF, for example, spent £46m in fees against £130m invested up to December 2008.
Source: Financial Times
Not only do these 'investments' artificially prolong the life of bad fund managers; they also distort the market for commercial VCs that are forced to compete with subsidised funds. The money would be so much better spent reducing red tape in the investment world and/or supporting academic research.
A few weeks ago I was invited to be on a panel in front of several dozen SaaS companies attending the Rackspace seminar on "SaaS and the Cloud 2010". The VCs who were there (Mike Chalfen, Jeppe Zink, Saul Klein, Ivan Farneti) discussed the typical challenges faced by SaaS companies as they grow, and some of the difficult decisions they have to make along the way.
Many of the questions that came up are ones we hear a lot when talking to SaaS companies, so I thought it worthwhile to summarise them below. The video of our session is here:
Self-hosted vs cloud-hosted SaaS?
The consensus on the panel seemed to be (with a tip of the hat to our host Rackspace) that it makes sense to host your applications in the cloud to begin with. It's the easiest and cheapest way to get up and running. But as the business scales up significantly, pay-per-use can become expensive. So either cloud services will have to evolve to be more cost-competitive at the high-volume end, or self-hosting your apps will continue to make sense beyond a certain scale.
Valuations of SaaS companies vs traditional software vendors?
SaaS companies are still valued by public markets at roughly 2x traditional licence software vendors. All agreed that some premium is warranted for more predictable revenues and -- in theory -- greater eventual profits. But at the moment the public markets do not seem to be thinking about software vendors in the right categories. It's not about licence vs SaaS, but rather about market segments that are more or less attractive, eg CRM, systems management, financial/accounting apps, supply chain apps, consumer software, etc. That is the way we used to analyse the software industry.
Are enterprises still resistant to deploying SaaS solutions and how to overcome this?
The short answer is: yes, there is always resistance to trying something new. And undoubtedly resistance is greater in Europe today than it is in the US. But ultimately it depends on the value of the solution. If you're offering a straight replacement for a traditional behind-the-firewall application, of equivalent functionality, then you'll struggle to convince a company to make a change. You have to offer something that inherently exploits the SaaS delivery model, ie additional value that can't be delivered by the legacy software package (see "future of SaaS" below).
How do we deal with the recession and pricing pressure?
Focus on sales productivity. It's the only metric that matters besides churn control. See here for some thoughts on how SaaS sales productivity needs to adapt in the current market. The key is to find the right sales model for each price point of your sale: web only, inside sales, direct sales.
What is the future of SaaS; what is the next shift?
It's early days for SaaS companies, and most vendors are still delivering software functions that are similar to the traditional software packages, albeit via the web. In the coming years, they will have to develop much more valuable features that take advantage of the web as platform, for example:
More on these topics to come.
Thanks to John Tridgell of Rackspace for organising the event -- who knew there were so many SaaS companies in Europe!?
But now I think the FT's editors have really lost their way. (I'm picking on the editors because I assume they write the headlines and lead paragraph of stories ultimately published.)
In the March 1 print edition, the FT ran a headline "UK venture capitalists to get state bail-out" (see on search page here). The same article appeared in the online edition under "IIF to throw entrepreneurs £200m lifeline", which is rather more accurate.
The article describes a new EU facility designed to encourage investment in UK-based start-ups, and disingenuously positions this as a 'bail-out' of either VCs or entrepreneurs (depending on which edition you read). This spin on the story was presumably meant to pre-empt populist competition from the headline writers at the Daily Mail?
I've written about the misguided genesis of this Gordon Brown project here, and Fred Destin provides good perspective in his critique of the project here. The debate the FT should be covering is whether government-directed funds are at all effective in fostering innovation. But instead the FT does little more than re-tweet this yet-another-bail-out story.
The facts. The IIF is an investment vehicle funded 50:50 by the European Investment Fund (EIF) and the UK government. As such it is identical to other such facilities that have been run by the EIF in Germany (€500m!), Portugal, Spain, France, Turkey and other countries for many years. These are part of an ongoing programme originated by the European Investment Bank (EIB), worth billions of euros, to support innovation and small company formation.
In this context, the UK IIF is simply another European project that is meant to increase the availability of financing for early-stage businesses, which allegedly face an 'equity gap'.
The fund will participate in existing regional and smaller venture funds, who will have more capital to invest than they otherwise would have. Unlike banks who received equity injections to shore up their balance sheets and to encourage more lending, VCs do not have the option of sitting on the extra capital -- they have to deploy it. It sits in funds, not on balance sheets. The beneficiaries are start-ups across the country, who may stay alive longer and end up employing more people.
Ultimately the government's policy objective is probably to maintain or increase employment. This vehicle is likely to be a highly inefficient way of going about it.
But characterising this as a state bail-out of the UK VC sector is misleading, and represents low-brow low-effort journalism from an outfit that should know, and do, better.
In his daily email digest, Richard Holway today pointed to an interesting new development in enterprise SaaS applications: Freemium-based lead generation. UK-based vendor of accounting software IRIS announced it is giving away a basic version of its payroll software product (in partnership with HMRC no less!).
This was inevitable, given the ongoing restructuring of sales productivity in the software industry. But I didn't expect to see it so soon among line-of-business applications. Giving away free versions of software to generate leads has worked in the consumer market and in tools and infrastructure for SMEs (see NTR for example).
But this approach historically relied on the vendor handling huge volumes of 'free users' for a very small fraction of paying users. For example, when LogMeIn filed to go public last spring, the company had 22m registered users, of which 188,000 were paying an average of $153 per year. That's a conversion rate of 0.85%, and represents a lot of servers to keep humming for the general populace!
They key for application vendors like IRIS will be to make their free versions sticky enough to drive a high conversion rate. Any app that pulls in corporate data and stages it for external consumption (eg reporting or analytics) is a great candidate for this. Once the app owns the data, the inertia to keep it switched on is huge. The consumer analogue for this is back-up and sync services like Mozy or SugarSync. I ran each as a trial and now I'm in year 2 of paying mostly because I can't be bothered to change providers!
It will be interesting to see what other application vendors go down this route. It's not easy to:
I've been a bit slow in blogging this, but a couple of weeks ago we held the second online marketing workshop sponsored by a group of VCs (Kennet, Accel, Advent, Wellington). The concept was to get marketing professionals from a cross-section of European growth companies into a room to discuss what works and what doesn't in online marketing.
Our first workshop last summer was all about search engine marketing (SEM). This one was all about the more nuanced art of search engine optimisation (SEO).
The evening revealed some interesting tidbits. First, less than 30% of traffic and less than 20% of paying customers -- on average across the set of 25 participating companies -- is coming in via SEO. The magic number being targeted is more like 30-40%.Second, many Internet companies admit to being essentially underinvested in SEO and still being on the learning curve (unlike in SEM). It doesn't help that SEO means wildly different things depending on what type of business you are: eCommerce, consumer web services, content publisher, B2B. The general mood was that there is still a lot of low-hanging fruit, and this field is evolving all the time.
Below I summarise the other take-aways: top 3 SEO basics everyone should be on top of (perhaps obvious to many of you, but not to a neophyte like me); the most interesting specific initiative we heard about; the biggest mistakes; and the biggest unknown:
Top 3 SEO basics:
Most interesting initiative: widget syndication - think about a piece of data or entertainment that your partners would be happy to present on their sites, which links directly back to yours. The better the partner's own Google score, the more effective. Here's a great example from Trivago.
Biggest unknown: how to use social media, especially Facebook and Twitter to drive SEO. Twitter links are fairly worthless, but reblogs from Twitter can be useful, so don't stop (start?) tweeting just yet.
Thanks to all the marketeers who participated and also to Will Critchlow of Distilled, for showing us some of the cutting edge of SEO (and some inexplicable stuff like this and priceless analysis like this).
Joel York has a great post in which does the math to prove what most SaaS companies knew instinctively, if perhaps not so crisply: that new customer acquisition has to outpace churn. But the devil is in the detailed math -- the rate of new customer acquisition must also increase if the business is to continue growing. Given the declining productivity of many SaaS salesforces, this is a tough objective for 2010.
SaaS vendors need to buy time to repair their sales productivity, and the best way to do that is to reduce churn. Some good ideas I've seen are to centralise and improve account and renewals management, and to look for quick-win product improvements that make the service a lot stickier.
This is a great time for SaaS companies to think about what benchmarking data, or other analytics they can layer on top of their solution -- something that is proprietary to them, and has value for the users. We talked about this a lot in 2009, but I haven't seen many examples yet.
Following my mediocre performance with last year's predictions, let's hope that this year will see more action in the market, and hence more of my predictions coming true!
If last year's theme was the waiting game, I see this year's as the spotty recovery. There will be some big successes -- major IPOs, spectacular M&A deals -- but they will represent spikes in an otherwise halting market. Picking the right assets and the right timing will be key for for investors and entrepreneurs alike during 2010 (and probably into 2011).
Here are my punts for the year (in no particular order):
January 12, 2010 in Apple, Business Models, Capital Markets, Deals, eCommerce, European Venture Capital, Financial crisis, Gadgets, Google, Green IT, Microsoft, Mobile, Music, SaaS, Software, Web/Tech | Permalink | Comments (1) | TrackBack (0)
Tags: 2010, apple, Blackberry, google, greentech, Lala, micropayments, microsoft, music streaming, predictions, RIM, SD cards, solid-state, tablet, tech market, useability, videoconferencing
Here it is -- the moment of reckoning for last year's predictions. Looking back, 2009 feels like the year the world froze, waiting for stimuli to kick in and new policies to emerge from the fog. Everyone was in a holding pattern, trying to keep the boat from leaking too much. As a result, the most frequent verdict on my 2009 predictions is 'sort of true, but not yet'.
Let's call 2009 the year of lost momentum. Both positive and negative trends slowed to a trickle...
Next week I'll try to divine 2010 tech market trends, but in the meantime, here is a summary of my 2009 calls and how they fared:
And the one item from my wishlist...
Stay tuned for a gaze into the 2010 crystal ball.
What I like about Michael's approach is that it brings together best practice from the worlds of online marketing and offline retailing.
It is all too easy for eCommerce startups to think purely in Internet terms: traffic, conversion, CPO by channel. Many -- if not most -- of these companies are run by young entrepreneurs without any traditional retail experience. That is (mostly) to their advantage, as they try to disrupt traditional retail. But that doesn't mean they can't learn from the highly optimised, analytical world of old retail.
That is why Michael preaches concepts like 'Lost Profit per Order' and 'Return on Inventory' as being key to eCommerce success. Read the article for more, including some basic rules to follow to make sure your custom KPIs are really useful.
I just came across a really useful primer on KPIs for SaaS companies here (thanks John Coldicutt at Fizzback for the link). It's a piece by Joel York linking KPIs to the B2B customer acquisition process.
There is no shortage of sources online for customer acquisition KPIs, mostly designed for the consumer Internet, although we are starting to see more science around B2B customer acquisition too. What I like about Joel York's post is that it applies the language of process optimisation (bottlenecks, resources, critical paths, etc) to figuring out which KPIs matter to your business.
This is much more useful to B2B companies who understand their processes, but have struggled to fit square KPIs from the consumer Web into round process holes.
My partner Javier Rojas has published another post in his 'Return leaders' series on SandHill.com, interviewing the founder of BlueLithium about how he built his company on only $11m of venture capital to an eventual exit of $300m.
I love this interview series -- especially in this recessionary environment -- because it is entirely focused on how to create equity value with a minimum of external capital. Javier has tracked down the most successful bootstrapped entrepreneurs, and drilled them about how they kept their businesses capital-efficient, how they timed eventual venture financings, and how they maximised equity value at exit.
This collection of interviews is gradually becoming a practitioner's guide to capital-efficient entrepreneurship:
The usual suspects come to mind -- Bernard Liautaud of Business Objects, John O'Connell of Staffware, et al. If you can think of other examples of 'return leaders' who built successful businesses on little capital, do let me know. I'm sure I can lean on Javier to interview them ;-)
Tags: Aelita, BlueLithium, Bootstrapping, capital-efficiency, Cramer Systems, entrepreneurship, Javier Rojas, LinkShare, marketRx, RightNow, Salary.com, SandHill
As digital book distribution takes hold and Kindles multiply like rabbits, it is becoming ever harder to choose good books. And given that most of us allocate precious little time to reading, we don't want to waste it by getting halfway through a book that turns out to be crap.
Traditional Sunday newspapers are fine for reviews of new novels, history books and the occasional pop economics tome, but the longer tail of business books remains largely unreviewed. Not only that, but if you've ever picked one up on the fly you know that quality is all over the map.
Javier has been bending our ears for years with weekly expositions and insights gleaned from new books, interviews with successful entrepreneurs, and hard-won experiences with his portfolio companies. His enthusiasm, positivism and problem-solving approach are both infectious and effective. Now a broader audience will get to see the world through his eyes.
Welcome to the blogosphere Javier!
Philippe Botteri has put together an interesting analysis of his 13-member index of public SaaS companies (see here for the full spreadsheet). Essentially he has applied the same sales productivity metrics we use to evaluate private SaaS companies to public companies and charted their evolution over time.
The resulting graph provides a stark picture of the recession's impact on these companies: an 85% decline in the productivity ratio (incremental gross profit / sales & marketing cost), which is now running at 0.10 vs a target of 1.00. These companies are struggling to add new customer revenue and are surviving primarily on their existing recurring revenue base.
The rate and scale of the productivity decline are telling, but the absolute ratios should be taken with a grain of salt.
First, this way of calculating sales productivity does not take into account the actual lifetime value of a customer, which can differ greatly depending on the churn rate. Very sticky SaaS apps can have churn rates as low as 10%. This means that the average customer has a life of 9-10 years. But many SaaS apps have churn rates approaching 30% or higher (especially in the current environment), implying a life of 3-4 years. Obviously you can afford spend a lot more on sales to capture a 10-year customer than a 3-year customer, so for some vendors the target ratio should be lower than 1.00, for others it should be higher.
Second, it would be a mistake to conclude that SaaS vendors should reduce sales headcount by a lot in the short-term to bring the ratio back into line. The extremely low productivity reflects the fact that the bulk of the sales force that propelled growth in the good days is still there, costing the company money, while actual new sales have slowed dramatically. The great benefit of the recurring revenue model is that such an overhang can be supported for a while, until markets recover (at least for most vendors). In the traditional licence sales model cuts would have to come a lot sooner.
Third, perhaps the biggest challenge for SaaS companies (hidden in this data) is the continuous, permanent change in the way software products are distributed, which is reflected in lower average sale prices. The components of the SaaS application and infrastructure stack are being commoditised from the bottom up. Witness what Zoho is doing to Salesforce, or what Google Analytics did to the web analytics applications industry, or what services like SugarSync are doing to the backup and recovery solutions market.
Last week Microsoft announced a 33% reduction in prices for some of its SaaS products, to better compete with Google Apps and others.
SaaS vendors may feel that their sales productivity will return to normal once the economic recovery is underway. That would be a mistake. What they will find is that their sales model has become permanently too expensive for the revenues generated. What seemed like an efficient direct sales force should now be telesales; what was a great telesales machine should now be a self-service e-commerce site; and perhaps what was an effective online e-commerce channel should now be a full-blown freemium lead generation programme.
Selling SaaS already has a lot less in common with selling enterprise software than it does with selling B2C web services. Increasingly business applications are not sold to companies at all, but to business users, also known as consumers. SaaS companies -- especially the ones we can now comfortably call 'legacy' eg Salesforce.com -- will need to master that consumer distribution model in order to survive.
The news that GSI Commerce has acquired private shopping club Rue La La for $350m has put the small but excitable world of European shopping clubs and their investors into a tizzy. The concept of members-only short-duration sales online was a European invention, and the largest players in the category remain European -- a rare exception to US dominance of Internet business models. And yet the first shot of M&A was fired within the US.
This deal gives some comfort to the many European VCs who have placed bets with vendors over here. One of the big unknowns they all faced at the time of their investment is what the ultimate capital markets value of these businesses would be. The pessimistic view is that these are lowish gross margin businesses that would eventually trade like mature online retailers of branded goods, eg around 1x revenues. Amazon's acquisition of Zappos for just under or just over 1x revenues (depending on whether you net off returns) earlier this year seemed to confirm this view. (If you like transaction forensics is your cup of tea, here is a good analysis of the Amazon/Zappos deal).
But this view does not take account of the extraordinary growth rates the buying clubs are experiencing. Rue La La is on an annualised revenue run-rate (based on Q3) of $112m, and is said to be forecasting $230m revenues next year. This resembles the 2006-2007 trajectory of market leader Vente-Privee, and puts Rue La La only slightly ahead of the runners-up in Europe, including BuyVIP and Brands4Friends. So now we know what growth is worth in this market: over 3x run-rate revenues.
This reflect a broader trend in the technology and Internet markets as the US emerges from recession and the rest of the world muddles through it. Growth is at a premium, and the tech industry -- cash-rich as it is relative to other industries -- will increasingly seek to convert cash into growth. Cisco's recent acquisition of security managed services firm ScanSafe for $183m is another prime example. Scansafe's revenues in 2008 were said to be just $23m, but supposedly doubling year on year.
For a venture capital industry hungry for exits from aging portfolios this is a spot of good news. But clearly it is those companies that can return to growth quickest in the recovery who will be first in line.
Mark Suster (Build-Online/Koral/GRP) has a good post on why it's reasonable for founders to take some cash out in later-stage financing rounds. Mark has more experience of running heavily VC-backed companies than most people, in both Europe and the US, and gets both sides of this particular debate.
I totally agree with Mark and I think his 'strawman rules' for working out how much founders should be allowed to cash out and under what circumstances are very useful. The only comment I would question is whether Mark Zuckerberg deserves $20m, but then thankfully that dilemma doesn't come up too often.
Mark's key observation is that in considering partial liquidity for founders, both investor and founder need to take into account the main objective: to align incentives. This requires evaluating not only how much value the founder has created in the business already, but also his current financial position, cash taken out in the past, and the need for appropriate lock-in on the founders' remaining equity.
As the growth equity investing model develops in Europe, more founders will seek partial liquidity. Nearly every investment we make involves some measure of cashing out existing shareholders, so we work hard to get this balance right.
Dharmesh Shah had a really good post a couple of days ago about building sales teams in startups, which is frankly applicable in growth companies too.
Of his 14 points, the ones I would highlight for more mature businesses are 9,10, and 12 (understand your sales economics) and 5 and 7 (keep incentives simple and aligned with customer satisfaction).
An extension of his 2nd point (don't hire a VP Sales first) is that you probably need fewer sales managers than you think. It is particularly true in Europe -- where technology sales management is a less developed skill than in the US -- that one good sales manager can make a huge difference, while 3 mediocre ones can be very expensive bureaucracy.
Viktoria at Tiburon TV must have quite a backlog of interviews to post on her blog! Here is the video of our meeting at the Red Herring Europe 100 conference in Berlin back in April. It's a good summary of our views on the investment climate, the quality of European entrepreneurship, bootstrapping tips, and Kennet's most recent investments. Let's hope my predictions aren't too far off the mark... ;-)
We had a great turnout at Monday's inaugural networking event for online marketeers, which we rather unimaginatively called Beyond SEM. What struck me was the openness with which the 8 presenting companies shared their good and bad experiences with different online marketing techniques. With 45 people in rather cramped surroundings, good networking was inevitable!
The most exciting categories of online businesses were represented: fashion eCommerce (Koodos, BuyVIP, Inspirational Stores), mass customisation/ crowdsourcing (Spreadshirt, MOO, Glasses Direct, Crowdstorm), other e-tailing (Warehouse Express, Swoopo, Astley Clarke), ticketing (Seatwave), travel (isango, dealchecker), entertainment (LoveFilm, GameDuell, WeeWorld), online marketplaces (Price Minister), consumer services (MyDeco, moveme.com, RatedPeople, Qype, Zoopla, Wonga), and enterprise SaaS/services companies like KDS, NTRglobal, FRSglobal, TradingPartners, Fizzback, eCourier and ShipServ.
The evening also confirmed our thesis that -- even among B2C Internet companies -- there is a wide range of experience and sophistication with online customer acquisition tools: from managing hundreds of thousands of keywords in SEM campaigns, to experimenting with Facebook widgets, to scalably generating good quality content to drive SEO traffic.
I can't share the slide-decks with you, but here is a sample of the range of methods tried by participants and their variable outcomes:
The challenges all these companies face are similar:
I think it's crucial for European marketing professionals to exchange ideas more freely so that we can accelerate learning and avoid re-inventing the wheel as often as possible. This is particularly important for those companies competing globally, since they face competition from US Internet companies that are often (though not always) ahead of the game.
My original plan was to get some Internet companies over from the US, in order to share practices from both sides of the pond. That didn't work out this time, but is something we will work on for future events.
We also learned that it's difficult to combine B2B and B2C in the same event, even if the front-end of customer acquisition (online marketing) is similar. I have no doubt that our B2B companies learned from the hard-core consumer-focused marketeers, but the lessons going the other way were far fewer. This may reflect where the B2C companies are in terms of their market lifecycle -- most remain focused mainly on customer acquisition and less on retention and the consumer equivalent of account management. The exceptions to this were the larger businesses like LoveFilm and Warehouse Express, who have made an impressive science out of nurturing consumer accounts over the long-term.
A big thanks both to the VCs who sponsored the event, opened their portfolios and encouraged their companies to participate (Accel, Advent, Atlas, DFJ Esprit, Wellington) and to the battle-hardened experts who joined the discussion: Robin Klein, William Reeve, Michael Ross and Jamie Jaggard.
What next for this forum? There was fairly universal agreement that it's worth running something like this on a more regular basis. The event really only scratched the surface of the many questions raised:
Over the coming weeks we'll cook up ideas about tackling these questions in more focused events so that we can bring this crew together again. Do send me your suggestions, ideas, quibbles. And I promise we'll increase the square footage per head to enable more expansive thinking!
He basically demonstrates how the traditional venture capital model of the 1990s -- with its reliance on very large 'hits' -- no longer works. This is something we've known in Europe for many years, but he makes a case that even in Silicon Valley, VCs now need to learn how to generate returns from a more balanced approach to risk.
In Peter's view, VCs should take a page from private equity's playbook, learning how to handle valuation, exit timing and funding risk, in addition to the traditional focus on markets, innovation and team.
In other words, VCs need to manage their investments as much for the downside and middle-exit scenario, as for the big upside. This is really what traditional growth equity investing has always been about, and it's clear that in the current environment the growth equity niche is growing into a more established asset class.
But I really like Peter's suggestion that even early-stage investing can take a more measured approach to risk to reduce the variability of outcomes. By focusing as much on capital useage, valuation, timing of follow-on financing and timing of markets, VCs can increase the number of 3x returns while still having a shot at the occasional 20x.
What Peter does not mention in his article is the importance of capital efficiency. A lot of the middle-exit risk VCs take is the result of overcapitalising companies, which depresses returns precisely in the most likely range of outcomes, ie exits of $80-120m (see Why you have to build companies for less). By focusing more on core metrics early on and controlling cash useage VCs (and the founders they back) retain more options to make a positive return.
Like Kennet, Peter's fund sat out the post-bubble market of 2001-2003, making few investments. Unlike Kennet, his conclusion is now to move into adjacent markets (cleantech) and focus on selective early-stage investments. This is because a rise in later-stage valuations (driven by VCs looking for deals closer IPO) has created a price bubble.
I agree that too many VCs are making bets on the near-term IPO queue, but I also believe there are plenty of capital-efficient, appropriately priced investment opportunities in mature growth companies. The key is to find these entrepreneur-led businesses (which typically do not need to raise capital), and to have an investment proposition specifically adapted to their needs. This is why growth equity is so different frmo late-stage VC.
Green IT conferences are proliferating, like Green IT '09 which just took place in London. (Where are the slideshare presentations? Where is the video footage? For tech industry event organisers the guys at Tech:Touchstone seem to be in the dark ages...)
Sorry for that mini-rant.
Let's hope the green IT initiatives don't become casualties of the recession. Thinking about green IT is good.
Unlike industrial green initiatives, succesfully improving the 'green' credentials of IT usually results in cost savings. For example, companies clearly have a strong financial incentive to reduce the energy consumption of data centres. Similarly, using video conferencing and remote support tools reduces travel costs and carbon footprint all at once.
If you're attending the Cloud Computing expo in Prague next week, please check out the session on Green SaaS being given by Lluis Font, the CEO of NTRglobal (disclosure: Kennet portfolio company). Lluis is a great evangeliser of green computing, and he has some surprisingly simple ideas on how companies can save money and be greener at the same time.
I won't be able to attend, but I'm looking forward to hearing from you all about the event!
I've got a real issue with the breathless, paranoid tone of a lot of media coverage lately. The combination of the 24-hour news cycle and too many news outlets, amplified by P2P communications methods like Twitter, is generating too much panic and too little analysis and reflection.
I confess I sometimes miss the way we watched news 20 years ago, gathered as a family at 8pm for the one evening news programme, which presented 24 hours of digested, verified, analysed news for our consideration.
We're seeing the exaggerated effects of this play out in spades with coverage of the swine flu, and (especially in US broadcast media) even with the smallest of stories. Witness the over-the-top reaction of news anchors to Arlen Specter's leaving the Republican Party (best summarised by Jon Stewart here).
In future posts I'd like to explore further some of the negative effects this excessive media hype has on government policy making in particular, and whether anything can be done about it. In the meantime, thanks to The Economist for exposing one particular story as being the result of a political turf war rather than a real global threat: the recent reports of serious cybersecurity attacks on US infrastructure.
We all read the news stories about Chinese hackers' breaching the US electricity grid and several national agency computer networks. There was something faintly hard to believe about the sudden panic. Now it turns out that this story was leaked, and hyped, by intelligence agencies fighting for control over cybersecurity. Read the detail here.
It's an appalling abuse of the viral power of today's media, and makes it difficult for any of us to tell real dangers from fiction. Let's hope that more of the supposedly serious media (like The Economist) improve their record of exposing these stories, preferably before they go into hype-mode.
Over lunch today, Nic was complimenting one of the current crop of great bootstrapped entrepreneurs William Reeve (LoveFilm, Graze, Zoopla). As it happens Will gave a presentation on our favourite topic at last week's GeeknRolla conference.
I wasn't there but my colleague Mike said it was a very useable presentation, full of practical advice (and real-world examples) on managing your cash flows and scaling your business while in bootstrap mode. I especially like his approach to funding yourself by improving your working capital cycle. The presentation is embedded below for your viewing pleasure:
In this case, for a viral video advertising stunt (for a local TV reality show):
I think the first-mover for this kind of gimmick was T-Mobile whose dancing mob took over Liverpool Street Station in London in January:
I love this kind of stuff.
Last fall I wrote about how Obama's campaign made such good use of web marketing to mobilise grassroots supporters and spread campaign messages. His team have continued to press that advantage from the White House, most recently rallying the 13 million people in Obama's email database (and 5 million in social networks) to lobby Congress in favour of the proposed budget bill.
Derrick Harris over on GigaOM yesterday kicked off an analysis of how the Obama technology gurus (Dan Langer and Luke Peterson) harnessed integrated email databases with traditional voter calling efforts to leap ahead of the McCain camp. What is particularly impressive here is that they did it using off-the-shelf technologies at relatlively low cost and in a way that clearly scaled very very well.
In Part II of the article out today, details emerge that make this project a poster-child for web marketing best practices, and for what ambitious government IT projects could be if they were run by commercial, web-savvy people and not Pentagon bureaucrats.
Laptops, open-source databases, cloud computing resources, VoiP, mobile phone applications, and every flavour of SaaS. This is definitely not the Microsoft generation -- the campaign team used more GoogleDocs / EditGrid spreadsheets than traditional Excel.
Both the UK and US governments could learn a thing or two from Obama's team about IT procurement for data integration projects... Let's hope some of it rubs off.
This morning we announced an investment in BuyVIP, one of several fast-growing online shopping clubs in Europe. This is one of those unusual, uniquely European business models -- basically the online equivalent of a fashion outlet mall.
The private sales model was pioneered by Vente-Privee in France and quickly copied in pretty much every country in Europe. BuyVIP is probably the biggest player after Vente-Privee, with 3.5m members in Spain, Italy and Germany.
It's fair to say that the companies in this sector have had revenue growth unlike anything we have ever seen in Europe. In this volatile economic cycle, discount eCommerce is thriving as consumers flock online to find bargains.
BuyVIP and its competitors basically operate similar models: they run frequent, short-duration online sales (70% off!) of surplus fashion goods. The sales are only open to members of the club, a feature designed to protect the brands' image and keep the sales from being crawlable by price comparison engines.
What we like about this market in particular (apart from the explosive growth) is that private online outlets are becoming a key distribution channel for brands. At €1bn+ in 2008 and growing, it's a channel that the fashion industry is starting to build into regular supply chain plans. We're already seeing this concept evolve from a way to dispose of excess inventory into an incremental outlet for current-season goods.
Picking the best business to back in this market seems difficult on the surface. There are 3 or 4 European players that have shown great traction in their home territory, including Brand Alley (GB), Brands4Friends (DE), Privalia (ES), Private Outlet/Andrino Group (FR). Most have received hefty doses of growth financing from angels and VCs. But we had to choose, and we're excited to back BuyVIP for several reasons:
So how does this deal fit with our stated strategy of backing mostly bootstrapped, founder-owned businesses, you might ask? Well, for us the key question is always about capital efficiency. We're happy to invest in companies that demonstrate an ability to create significant equity value with modest amounts of capital. BuyVIP meets that test. And contrary to rumour, we do like working with existing investors, it just depends who they are ;-)
Congrats David -- I'm looking forward to seeing an evolution in your wardrobe... no excuses now!
... and why bootstrapping and VC are compatible funding strategies.
As promised, here is the presentation I gave yesterday at the Red Herring 100 conference in Berlin. Thanks to the hardy entrepreneurs and VCs that got up early after following my colleague Don Stalter through the Berlin bar scene until the wee hours...
You might be wondering why we're making investments at such a blistering pace at the moment, when many funds are slowing down and waiting for the markets to stabilise. Part of the answer lies in our deal sourcing strategy. Because we like profitable, founder-owned businesses in particular, we often build relationships with entrepreneurs over years before making an investment.
So as it happens, a number of those relationships came to fruition in the past 4 months, independently of the economic turmoil. And so we closed investments in Schoolwires, Go Internet Media, Spreadshirt and GoViral (with another one to be announced next week) -- many of them companies we had known and courted for some time.
As promised in last week's post on Web cinema, here's an aside on commercial viral video. My partner Michael Elias closed an investment this week in GoViral, an ad network for branded viral video. GoViral is a Kennet 'sweet spot' deal -- bootstrapped, with an experienced management team (ex-Trade Doubler, Leo Burnett, Rawflow), strong commercial traction and growth, and a global market opportunity.
So what the heck is branded viral video? You've all seen the funny, quirky videos that have made the rounds like wildfire, like Cadbury's gorilla advert and Levi's Moonwalker. Well, there is some structure and strategy behind getting those videos to 'go viral'. Brands have cottoned on to the fact that if their video is good enough, funny or edgy enough, it can get a lot of 'free' distribution by getting on to blogs, into emails, and onto social networks. But to get that level of distribution, the videos need a solid kickstart. That's where services like GoViral's come in.
GoViral built a global network of web publishers in 80 countries, where it can 'seed' its clients' videos to get the viral ball rolling. GoViral's videos play in a YouTube-like player, directly within the content of the site. Once consumers see the video, they can easily share it, blog it, rate it, etc. The best videos get the most distribution and the most views. GoViral tracks the video's voyage across the Web and delivers detailed performance reports back to the brand that originated it.
The key is to work closely with brands to make sure only the best videos with viral potential make it onto the network. That effort has produced gems like this one, a jam session of extreme street football in Mexico:
But this approach can also be applied to traditional high-quality commercials like this one for Nissan Qashqai:
Or they can be low-budget guerrilla projects like the dynamite surfers from Quicksilver:
When it works, the results can be astounding. As reported by GigaOm, the Quicksilver video above got 20 million views and generated £68 in sales revenue for every £1 spent on the campaign.
Viral video seeding is in its infancy, but big brands are jumping on board (and not only with video, but also games and widgets). Check out one of my favourite campaigns, Virgin Media's Right Music Wrongs.
After several false starts in recent years, films made specifically for the Web are finally making it to the must-see list. This is thanks to both technical advances (eg, streaming HD via Silverlight), as well as format improvements that are better adapted to interactive Web behaviour. The only missing element is finding a reliable way to get the stuff in front of many eyeballs.
Unfortunately YouTube seems to be stuck in a crappy UGC time-warp that makes it a poor distribution platform for quality HD content.
A great recent showcase for this kind of production is the interactive Web thriller Kirill, launched last year by MSN and Endemol UK. (See coverage in The Guardian here.) Kirill is a slick, dark sci-fi drama chronicles the travails of a CERN scientist and blogger (played by David Schofield) who tries to save the world from his exile in a dystopian future.
The series ran in ten 3-minute episodes over a five-week period, and was supplemented with clues and activity on MSN's instant messaging and social networking sites (I know this seems a bit of a waste, but MSN has the bucks...).
Kirill looks hot in Silverlight HD. It's a great combination of high production values with one of the better technologies developed by Microsoft in recent years. That said, it hasn't yet had the broad viewing it deserves because it was distributed on MSN Video, and in the UK only.
The only valid online distribution mechanism is viral, and Kirill hasn't been allowed (or encouraged) to surf the viral wave as yet. According to MSN (quoted here), Kirill got 1.5m streams and 500k unique users during its UK run. That statement is hard to reconcile with Kirill's traction on the open Web. If you look at its 130 subscribers on YouTube (where episodes aired unofficially) and fewer than 500 fans on Facebook, you'd have to call it a viral flop.
The commercial value of Web flicks remains unproven while quality productions like Kirill and Beyond the Rave don't come cheap. Endemol's budget for The Gap Year, a reality Web show for social network Bebo reportedly had a budget of £1m. In all, it is estimated that some 50 digital shows have been commissioned in the past two years for the Web. The BBC is also in on the act, and expects to launch several long-form shows this year.
The leading big-name producer for this medium is probably Endemol UK, but the majority of new Web shows are being developed by independent producers like Conker Media and Pure Grass Films, who co-produced Kirill.
But in order to succeed Web cinema will have to do more than pay lip service to the interactive potential of the Web. Productions need to integrate virality and interactivity and find ways to exploit the distribution potential of social networks, blogs and bookmarking. For this reason, expect edgy independent firms run by Generation X'ers to lead the genre for some time.
Let's hope that real film investors will follow the marketing bucks spent by MSN to finance quality productions for their own sake. They'll have to be patient while this model finds its feet and becomes commercially interesting. Certainly we will see a significant step-up in the quality of productions at this year's Digital Emmys and Bafta Interactive awards.
Stay tuned for more on viral video, and its direct marketing applications, next week.
Fred Wilson had a great post last week responding to a suggestion (by Tom Friedman of the New York Times) that the government put its stimulus money into venture capital rather than the auto industry. The sentiment is a good one, but the idea is bad, as I highlighted last year.
Gordon Brown and the propeller-heads at NESTA would do well to digest Fred's post carefully, as they are already ahead of the US in making this bad idea a reality. As in the US, there is no shortage of capital for good ventures in the UK. Any money from the government is likely to flow to bad business ideas or bad investors, depress returns for good investors, and crowd out smart money.
Don Dodge suggests some alternative ideas for $1bn to promote entrepreneurship here. I hope Gordon reads blogs as well as policy papers.
This morning we announced an investment in Spreadshirt, certainly the most fun business in my portfolio. It’s all the more fun thanks to the whirlwind presence of the company’s talented and energetic CEO Jana Eggers, who blogs about the challenges of managing growth here.
Many of you will know Spreadshirt or some of its competitors already. If you haven’t tried it, you’ll be amazed how easy it is to find a cool t-shirt and personalise it. I've abused my position already by arranging for 20% off for my readers for the next 10 days: simply visit Spreadshirt US or Spreadshirt EU and enter EXPRESSYOURSELF in the coupon code field at checkout.
Back to the business:
Spreadshirt is different from the traditional enterprise software and Web services companies I’ve invested in over the years. But that’s not because the company sells t-shirts rather than bytes. Or even because they are organic cotton, high quality t-shirts, often delivered within 48 hours. Its because Spreadshirt has a purpose.
The first chapter in the book Mavericks at Work shows why companies built around a cause, an original idea, are more successful than those built around a simple business objective. Instead of “beat the competition” or “maximise cash flow”, these companies aim to “help people save” (INGDirect USA), or “democratise the skies” (Southwest).
Jana Eggers was a computational chemist at Los Alamos National Laboratory, helped build supercomputers for Lycos, and developed a SaaS business before anyone had heard of SaaS. So why is she so excited about making t-shirts with slogans?
What you quickly realise in talking to Jana and learning more about the quirky, hypergrowth world of mass customised apparel, is that it’s not about the clothes at all. It’s about self-expression. And everyone has something to say. The clothes are a medium, a billboard, a door opener, a conversation starter. The first time I met Jana, her t-shirt read:
Giving an outlet to personal creativity is Spreadshirt’s cause, and the whole company has embraced it. Every employee collects his favourite quotes or coolest drawings. They share them in meetings, blog about them, twitter on them. Production staff in Leipzig reward the most creative customers with a personal note of encouragement.
The cause unites a company that straddles Germany, France the US and other countries. And it opens up a market that is not constrained by traditional definitions. This is not the t-shirt market, it’s the self-expression market.
Last week Jana’s shirt said:
But the cause isn’t just good for company morale. It drives a lot of business value. When customers design a Spreadshirt they take on some of its production costs and create something valuable for themselves. This means Spreadshirt benefits from twice the gross margin of a branded eCommerce site, and the consumer gets a product to wear “everytime it’s clean” (so say 75%). Customer satisfaction runs high, with a Net Promoter Score above 50%.
Some time during our due diligence:
Focusing on the cause also allows Spreadshirt to distribute self-expression without being constrained by traditional channels for 'fashion'. On Spreadshirt’s web sites, the message can be a one-off gift, a design shared with the community via Spreadshirt’s Marketplace, or a full range of apparel sold through one of 500,000 shops that people have set up –- be they bloggers, tattoo artists, graphic designers, cult martial arts heroes, cartoonists or pop-rock bands.
Enterprises have also cottoned on the potential. CNN has thousands of walking billboards thanks to its wildly successful “headline on a t-shirt” offering. Innovative ad agencies have helped brands like Holiday Inn use Spreadshirts to launch new offerings. Warner Brothers used it to promote the last Harry Potter film, while Electronic Arts operates its Spore t-shirt shop on Spreadshirt.
Think of all the content that could be part of a personalised shirt or jacket: music lyrics, blog excerpts, film quotations, inside jokes. In spite of what you hear these days, content does have value, but much more so if it has an emotional connection with the consumer. Personalised apparel creates that connection, more effectively than an iPhone or a Web browser. It’s an early market.
I like entrepreneurs who think like this:
This blog is often about the growing quality of entrepeneurial leadership in Europe. Jana Eggers is a good example of a manager –- who happens to be American –- running a trans-Atlantic business by harnessing its regional strengths. She takes best practices from the US (marketing anyone?) and from Germany (quality control and production efficiency) and merges them into a coherent company culture. The result is an organisation of impressive dynamism and resilience. And a lot of air miles for Jana.
Spreadshirt fits our investment model to a T (no pun intended) because it was founded by a couple of real bootstrappers, Lukasz Gadowski and Matthias Spiess. They created the early momentum, built the business in Germany, and then took it global with funding from Accel Partners’ Harry Nelis. And all this on a relatively small amount of capital. Today, with over 300 people, Spreadshirt is market leader in Europe and a top contender in the US.
What I’m wearing today:
I didn't stay long at this year's MWC conference (fka 3GSM) in Barcelona. Just long enough to tap the screens of the latest iPhone copycat devices, to absorb a lot of techie promo about LTE and WiMAX, and to wonder aloud whether CBoss's legendary booth babes are old enough to be here and what on earth they have to do with IT crisis management.
Two things struck me:
First, the number of subscale technology companies trying to sell similar software or hardware products to mobile operators -- mobile browsers, content delivery platforms, billing solutions, device management platforms, subscriber management, and so on.
It is clear that in mobile -- as in enterprise technologies -- only a fraction of the innovations of recent years have been integrated into mainstream services. There is a huge overhang of well-designed, scalable products, but too little appetite from operators to buy them. Many vendors stay alive by selling into operators in developing countries, while trying to find an angle into one of the majors.
There will be a lot of fall-out in the coming years, as many of the private vendors disappear or consolidate. Operators will largely focus on making the technologies they already bought deliver their ARPU-increasing promise.
My gross generalisation of the day: it's not a good time to be a mobile infrastructure or application startup.
Second, the battle of the giants for the mobile value chain is really heating up.
Microsoft, Nokia, RIM, Orange and O2 all announced new application store initiatives, trying to recapture lost ground against Apple's fabulously popular iTunes-based App Store. Operators are taking advantage to re-brand and re-launch their expensive, failed content portals. The competition among Ovi, Windows Marketplace, Application Center, and O2 Litmus should be a boon to app developers, and may well be the nail in the coffin for independent aggregators of apps and content.
Then Nokia really pulled took of the gloves, announcing that it would embed Skype's VoiP client in upcoming Nokia phones. That's a slap in the face of its operator partners, whose precious voice revenues are under attack from all sides. At the Jefferies cocktail, VCs were talking about peer-to-peer WiFi networking that would enable phones to connect while bypassing the operator altogether. Ouch.
Globally, mobile voice and data revenues are a bright spot in an otherwise bleak outlook for tech markets. But within those headline figures are some brutal shifts. Handset sales will be down this year, so phone makers have to find new sources of revenue. The mobile operating systems are being pushed into commoditisation by Google Android and a soon-to-be-open-source Symbian. And operators are under pressure to open their walled gardens so that consumers can have the mobile web access they so desperately want. The solution for all three is a subscription or transaction relationship with the consumer.
But surely the most exciting development of all was the GSMA's announcement that it had finally wrested agreement from handset vendors to standardise their chargers! Yippee!
Amazing factoid: disposed chargers generate 51,000 metric tons (!) of waste globally each year. I suspect that number will get a short-term boost as millions of people bin the 3 chargers they've been saving 'just in case' they return to Motorola... What I'd really like to know is how much revenue the handset vendors are giving up by doing away with proprietary, expensive-to-replace chargers. If they really go through with this during the recession, I will have a newfound respect for corporate social responsibility.
As always, one item for the wishlist (I didn't get my dumbed-down cellphone last year...):
Finally, I still see this is a great time for European entrepreneurs. In fact, many will fare better in this market than their US peers, having always been more frugal and used to operating with fewer financing options. The maturation of serial entrepeneurship in Europe will continue.
Stay tuned for news from the Mobile World Congress (fka 3GSM) next week...
This email landed in my partner's in-box this morning:
To which my other partner suggested the following reply:
(Names have been changed to protect the daft innocent.)
Both companies are good examples of the type of business we love to invest in: they are profitable, bootstrapped, founder-owned companies that have demonstrated an ability to grow rapidly using little or no external capital. That puts them in a strong position to accelerate growth with judicious use of our investment capital.
Thanks, Peter, for the heads-up!
Silicon Alley Insider tops my list of clever desperate but obnoxious attempts to increase their ad page views. In this intriguing "Top X List" post on the VCs most exposed to Web 2.0 companies, you can't actually get to the list itself. No, you're forced to click on "START HERE" and to turn pages on each entry, accompanies by a new advert. Give me a break.
I'm taking bets on the next tech blog site to go under...
The US music industry association, RIAA, has canned its strategy of suing online music pirates, according to the WSJ. This comes after 5 years of using the services of security firm MediaSentry to document the sharing of music files in order to prosecute the pimply teens behind that nefarious activity. Some 35,000 lawsuits were filed and many are still ongoing (RIAA says it will continue to pursue any legal action in flight).
MediaSentry is a unit of SafeNet, Inc., the largest provider of security technology to the US government. SafeNet is a $300m-revenue business that was taken private by software buyout specialist Vector Capital a couple of years ago. MediaSentry's technology is also used by the Motion Picture Association and eBay, among others, to detect copyright infringements on the Web.
RIAA's change in strategy is an admission of failure. The same proportion of people aged 13 and over admit to using P2P networks to share music today as did 5 years ago, before RIAA launched its campaign (about 20%, according to a 2008 NPD report). In fact, 26% of tweens (aged 9-14) use illegal file sharing services. Perhaps that's the stat that did it -- surely even RIAA realises that suing pre-teen children may have adverse PR effects.
RIAA's focus now is on a so-called 'graduated response' -- getting ISPs and university authorities to warn and eventually fine prolific file sharers. It's hard to see how that will be more effective.
Perhaps RIAA is just continuing to 'make work' so that the music studios who finance it don't cut its budget. How do you justify the existence of an association whose primary public role in recent years has been to chase file sharers, when the publishers are busy lanuching DRM-free download deals with online music vendors?
The smallest of the Big 4 labels, EMI, led the way, stunning the industry by dropping DRM encryption across its repertoire in April 2007. The other labels followed with similar, if more limited, initiatives: first Universal, then Warner Music and last November Sony BMG.
RIAA's move is welcome, but if the association wants to extend its life it would do better to invest in coming up with a new system of royalty payments for music that is distributed P2P. Now that would be useful.
Pic credits: Xboxic, Slate/Cincinatti Post.
Well, 2008 is over and what a year it has been! It's time to score the predictions I made a year ago and to start thinking about a new set of predictions of 2009. As one of our portfolio company CEOs wrote to me today: "2009 should be a hoot!"
Before I get to the hoot, let's see how I did with 2008:
That makes it 6/10, which is worse than last year's score of 7/10. I need to steer clear of technology developments themselves -- those predictions always underestimate how long it takes for innovation to find the right application and to get adopted... Stay tuned for my shot at 2009.
Just when you thought the US Congress was gunning for a monopoly on bad ideas, along comes the stumbling Brown administration with a whopper of its own. It takes the form of a purported £1bn venture fund for UK technology start-ups, supposedly left behind when 3i decided to get out of the venture game to focus on growth equity and buyouts.
Fred Destin does a great job dissecting this issue here. All I would add is that governments playing VC rarely leads to an increase in the number of successful companies. Post-war reconstruction (via 3i) may be the exception, but that was only due to the complete absence of private sector funds. There is no shortage of investment funds for start-ups today. In fact, the industry is still trying to work through the overhang created by record fundraisings in recent years.
I suspect no one has told Brown that VC funds -- unlike hedge funds -- can't pull out of a market on a dime. They're usually locked in for 10 years, which makes it pretty difficult for them to react to a recession by pulling back.
Government intervention in the venture capital industry has at least 3 deleterious effects:
Oh... and most government funds (or funds benefiting heavily from tax breaks like VCTs in the UK, or FCPR funds in France) attach so many strings to their investments that their portfolio companies are strangled by shareholder constraints that prevent them breaking loose from the pack.
If Brown wants to promote the technology industry, he should reduce the bureaucratic and tax barriers to setting up private venture funds, support basic R&D at universities, and consider tax breaks for entrepreneurs.
As the global banking sector convulses with the most comprehensive restructuring in memory, voices on both sides of the Atlantic are calling for tighter banking regulation in order to prevent a future meltdown. Heads had to roll and a number of senior executives have lost their jobs, while others find themselves inadvertently turned into civil servants operating state-owned banks.
Relatively speaking, that was the easy part. The question now is: how to regulate the industry better without stifling financial innovation?
There is no shortage of ideas coming from European and US regulators, many bad (executive pay caps, short sale bans), some good (clearinghouses for private financial contracts). The only thing we can say for certain is that there will be amendments to existing Basel II and Mifid regulations, as well as new initiatives to increase disclosure and fiddle with capital adequacy rules.
As a participant on the margins of financial markets, I hope regulators err on the side of improving the transparency and liquidity of existing financial innovations, rather than try to constrain the complex financial products whose reckless distribution got us into this mess.
The fact is that every link in the chain of this financial crisis -- subprime mortgages, credit default swaps, counterparty defaults, off-balance sheet investment vehicles -- was beset by the same fundamental problem:
This was an information crisis. The new financial instruments and their markets simply got ahead of risk managers', CEOs' and regulators' ability to keep track of them. And this is in spite of all the technical tools to manage this information being readily available.
We have a vested interest in this problem, through our investment in FRSglobal. Until this year, FRS provided necessary but unexciting solutions to banks to calculate risk and to automate regulatory reporting. Today, FRS is talking to regulators all over the world about how to improve everyone's visibility of risks and interdependencies among banks. FRS CEO Steve Husk blogs about these issues here.
The crisis is the catalyst that is finally bringing together risk management, business analytics and reporting -- a 3-way marriage software vendors and consultants have talked about for a decade, but which no one has yet consummated. It's time for CFOs to have a single view of risk exposure, and to report on that view to both their boards and the regulators.
To this end, FRS has made two acquisitions in the past 3 months: Swiss-based vendor of integrated risk management solutions IRIS (see Gartner's take here), and SAP/Business Objects subsidiary SECAM+, a specialist in regulatory reporting for the UK securities industry.
Traditional ERP and even banking systems vendors acknowledge that the new paradigm of risk management and reporting is a highly specialised activity, requiring purpose-built analytical tools and extensive banking domain knowledge. For this reason, incumbents like SAP and Temenos are partnering with FRS to deliver unified risk management to their clients.
It's only the beginning of the consolidation in this market and a lot of uncertainty remains. But to death and taxes, we can undoubtedly add 'more regulation' to the list of certainties.
We’ve seen a lot of advice flying around on how to prepare for a recession, but most of it is targeted either at large companies or at VC-backed businesses (eg, the now-notorious Sequoia presentation).
But most companies are neither. They are the thousands of growth companies that are profitable or close to it, and who are used to growing faster than their markets in any part of the cycle. For them, weathering the downturn is about striking the right balance -– planning for survival without sacrificing the growth opportunity.
Below is a summary of the 12 1/2 steps I'm working through with my portfolio companies and entrepreneurs I meet. It's based on our experience with past recessions and taking into account the particulars of this downturn. As always, your comments are welcome.
Your New Budget
1. Write a revenue budget for 2009 that aims for modest growth (20% if you’re used to 50%, 15% if 40%, etc), and a cost budget for 0% growth. This won’t be enough (see below), but it’s a start.
2. Cut personnel costs. Cut deep enough to remain cash-flow positive even if 2009 growth is anemic. If revenue growth turns out to be higher, you can start recruiting again mid-year and you’ll benefit from a better pool of candidates.
3. Freeze general & administrative expenses, then go through them with a fine-tooth comb and cut some more. You can always travel less (or less comfortably), use Skype, postpone seminars, push back on lawyers’ fees, etc. This is is mostly symbolic if you’re already quite lean, but it puts everyone in cost-conscious mode, which is critical.
4. Cut discretionary marketing spend and re-focus on online lead generation and performance-based advertising – anything that drives immediate sales. Your brand will survive 6 months out of the limelight of TV ads. The hard part is working out which marketing activity to cut –- knowing your conversion metrics by channel is key.
5. Review variable pay schemes to make sure they are both realistic for the low-growth scenario AND still incentivise growth. You should still aim to outgrow your broader market, even in a downturn. Your best people need to be incentivised to achieve this.
6. Analyse the profitability of your business by product, by customer, and by business line. Eliminate those that are not contributing positively to your central overheads; consider eliminating the least profitable 10-20%. There is no room for marginal clients (but you all have them!).
7. Pause or stop skunk works and other experiments with new product ideas or business lines. You can always revisit these later. Consider parking that expansion plan for China for a couple of quarters.
8. Reposition your product/service offering. Every pitch to your customers needs to be about saving them money, about solving their problems caused by the recession. Quantify the quick ROI. If you’re very sure of your ability to deliver cash value to clients, consider risk-sharing contracts where some of your fees are variable.
9. Increase your share of markets where your competition is weakest. Many companies will disappear in the coming year; try to predict which ones and focus on those territories or segments.
11. Manage cash collection tightly. Your clients will stretch payments and your suppliers will push you hard to collect early. You have no choice but to do the same to them.
12. Look for creative financing options to improve your working capital: sale & leaseback of equipment or property, receivables financing, government grants, bank financing (to the extent available).
The Human Factor
12.5 Most important, talk openly and honestly to your managers and your employees! The most damaging effect we see in recessions is a demoralising split between senior management in crisis mode, and everyone else wondering what they’re up to. Well-run companies can pull through if everyone is motivated to do it, and if management appears to be in control. It is the CEO’s role to listen and to lead, in good times and bad.
As my partner Michael Elias pointed out this morning (and Jeremy Paxman did last night), this guy really knows how to use email:
Really makes you feel special (even if you have no vote and are not allowed to donate, like me). It's no secret that Obama killed this election in part through his masterful use of email, SMS, viral videos and and social networking sites to:
So what happens when this tech-savvy guy gets into the White House? Will we continue to get regular email updates from the President? That would be cool.
Will he use his direct channel to millions of Americans (and foreigners) to make the case for difficult policy decisions directly to the people? That could be revolutionary.
This Presidency will be the first truly web-enabled administration. I'm sure someone will call it Government 2.0 [cringe]. I think both Congress and the media could end up wrong-footed as Obama supplements the traditional political horse-trading process with direct campaigns to the people. It's going to be very interesting.
A lot of people have been asking me what impact the global financial crisis has on the business of venture capital and growth equity. The short answer to this question is: not much. The slightly longer answer is: not much, yet.
Let me explain.
If you are currently raising a venture capital or growth capital fund, the paralysis of investors worldwide means slower decision-making and a longer fund-raising cycle. You may even lose some previously committed investors who are now conserving cash to cover losses in other asset classes. If you have recently raised a fund then you are in good shape. As banks, non-bank companies and consumers are rapidly finding out, when credit is tight cash is king.
But what about the impact on our business of investing in businesses? Our existing portfolio companies will feel the crisis on two fronts: commercial performance and exit horizon.
First, a prolonged recession will make it harder to land customers and grow revenues. This means that business plans will take longer to achieve. The exception may be in countercyclical or recession-proof segments, such low-priced entertainment (eg, games), discount retail (eCommerce), cost-reduction tools (eSourcing, supply chain optimisation), and products that address the current crisis directly (like compliance software, or trading platforms for previously 'hidden' financial assets). More on the latter category in a future post.
Second, as the IPO window remains shut for longer and M&A activity slows, there will be fewer buyers for companies and acquisition prices will be depressed. We already saw throughout 2008 a flight to quality: companies with strong topline growth and high profitability are still being acquired and achieving good valuations. The companies best able to survive this environment are those with strong 'operating leverage' -- that's VC-speak for high gross margins. High margins reduce the effect of slower revenue growth and give companies more flexibility to reduce their cost structure as the market slows.
For investors, the key is to be able to wait for the right time to sell a company. This means both the internal timing (strong operations, good growth, a clean balance sheet) and external timing (market interest). Companies that are profitable or close to profitability have a huge advantage in this market.
The impact on the private equity industry will vary drastically. At the top end, LBO funds have already seen a huge increase in their equity cost as they refinance debt packages with equity, while their companies' earnings decline. This is a continuation of the shake-out that started a year ago.
The second most affected category will be early-stage VC. Most VC-backed companies are loss-making and were valued at the time of investment on the basis of aggressive growth forecasts, or expected strategic value on exit, or both. Slower growth and a longer-time-to-exit means they will need to raise more capital, probably on worse terms. This increases the equity cost of their investors and extends their investment horizon, depressing rates of return.
Already we are seeing VC firms increase the follow-on reserves for existing portfolio companies, which will mean less capital available for new investments. In the last downturn, many shifted their focus to later-stage investments, leading to a funding drought for pre-revenue companies. More on the dilemma for early-stage companies on Fred Wilson's blog here, and Jason Calacanis' here.
The least affected, in my view, will be growth equity and midmarket buyout firms. Growth equity portfolio companies typically have little or no debt financing and are cash-generative (or can get there quickly). This means they can adapt their operations to slower market conditions, invest in discrete growth opportunities, and wait for the right time to exit. The best ones will be acquired for the quality of their earnings by savvy buyers even during the downturn. Growth equity investors can focus these businesses on improving the quality of the business and finding pockets of higher growth while positioning the business with potential acquirers.
Lastly, the more unpredictable effect is on the making of new investments in the technology markets. In the 2001-2003 downturn (which was heavily weighted toward the technology industry) few entrepreneurs felt confident enough to write aggressive growth plans, and as a result it was difficult to find quality companies to invest in. But I think this one is going to be different. Here's why:
First, this recession is going to be more generalised, similar to the banking-led industrial downturn of 1980-82, with a correspondingly smaller effect on the technology industry itself.
Second, the European investment eco-system is far deeper and more mature than it was in 2001. Back then, a nascent VC and entrepreneurship market was nearly wiped out by the collapse in stock market values. Today, we are tracking thousands of European technology companies that have shown more than 5 years of continuous growth, are profitable and in many cases geographically diversified. This represents a very deep pool of potential investments, which are supported by a broad universe of specialised lawyers, bankers, recruiters, and angel investors. So, I think that for investors with funds, good research capability and a broad network of sources for dealflow, there will be no shortage of investment opportunities. Equally, for entrepreneurs with capital-efficient businesses, that have demonstrated an ability to prosper in good times and bad, there will be no shortage of investment capital.
Let's see how it plays out.
What NetPro was good at is helping organisations get more (a LOT more) out of Microsoft Active Directory. Its platform basically layers auditing, policy management, backup & recovery, and sophisticated analytics on top of AD -- useful stuff for frustrated IT managers trying to handle large AD implementations.
As a company, NetPro is a classic example of the kind of growth business we like: