Tuesday, April 09, 2013

Entrepreneurs .... you may have Maggie to thank!

Former British Prime Minister Margaret Thatcher
Former British Prime Minister Margaret Thatcher (Photo credit: Wikipedia)
The passing of Margaret Thatcher has caused me to pause and think back on just what a determined leader can accomplish.

Reams have and will be written about her achievements and the changes she brought about. This post is a personal one and not intended as a general tribute.

I never actually voted for Mrs Thatcher - nor for the Tory party who seemed to me to stand for privilege - in any of the 8 elections for which I have been fortunate enough to qualify. I guess at the time I didn't fully appreciate that her rather uncomfortable, uncompromising approach was exactly what was necessary to change a declining, deeply troubled Britain.

We came to the UK from South Africa at the end of  1976...immigrants like many others. Attracted by the relative freedom and open democracy  but fearful of my ability to thrive as an entrepreneur.
The liberalism of Britain was like a breath of fresh air but the country was in a dreadful state. Morale was rock bottom. People could not understand why one would choose to come to a country where nothing worked.
British Steel, British Leyland, British Rail, British Airways were a national laughing stock, labour strikes were crippling. The great in Great Britain was entirely absent.
The winter of 78/79, named the Winter of Discontent brought the country to a standstill.

There seemed to be a complete absence of enterprise, the major industries and institutions were run by the great and the good who went to the right schools and belonged to the right clubs (the aristocracy). They were clueless as to how to deal with industrial relations. 
In my view, one of Thatcher's greatest and lasting achievements was the ruthless reduction of the power of the aristocracy - from within the Tory party - through deregulation, privatisation and the unleashing of a meritocracy.

The transformation of Britain was not comfortable nor easy - especially for those with a liberal social conscience. A lot of  what Mrs Thatcher did was done in an arrogant and heavy handed way and her demise, 11 years later in 1990 was at least partly due to her stubbornness and divisive style.
Interesting how many of her fundamental economic policies were adopted by Tony Blair and new Labour, enabling him to win 3 terms as PM.
Although the grocers daughter would never have allowed Govt spending to get so out of hand as did in the new century. 'Living within ones means' and 'good housekeeping' were among her favourite mantras.

How different is the UK of today. Today, I believe the UK is the best place in Europe to start and build a business. The nation has its pride back and is, by and large, at peace with itself - in it's multi- cultural and cosmopolitan skin.

The challenges that remain are immense and one does have to wonder whether we have the global leaders today with the clarity of purpose and determination to overcome them.

I guess we have a lot to thank Mrs T for.
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Sunday, February 03, 2013

$1bn has 'gone' in 4 years

English: Diagram of the typical financing cycl...
Diagram of the typical financing cycle for a startup company. (Photo credit: Wikipedia)

Should tech angels stop investing in startups?

The current debate raging in relation to the so-called Series A crunch has highlighted for me the importance of startups and more specifically, angel investors, working more closely with VCs.

The Series A crunch is absolutely nothing new. Sometimes called the ‘valley of death’ for a startup business, the period between raising the initial friends and family or seed round and the first institutional money is a very difficult one and requires very careful navigation.

Sarah Lacy at Pandodaily has called this situation absolutely correctly and referenced a good piece of research from CB Insights who clearly state:


For me , the question is what should startup companies do to mitigate and how can angel investors minimize the ‘death rate’ of their investments?

At TAG we know a thing or two about the valley of death and the Series A crunch having invested in more than 60 tech startups.

Understandably, startups are obsessed with getting their seed round closed so that they can get on and make their first hires and building their products and markets. A bit more work and thought needs to go into where to get their seed funding and just how much cash is necessary.

A lot has been written about the so-called ‘signaling effect’ of taking seed funding from a top tier VC. The phenomenon and the concern is easy to understand. An investment from a top VC at Seed who then does not follow-on (for any number of reasons) provokes suspicions in prospective Series A investors.
The research by CB Insights proves the fallacy of this widely held theory.

On average, 39.4% of seeded companies go onto raise follow-on financing. Interestingly and contrary to what the punditry have often said, seed deals in which VCs participate have a historically higher rate of getting follow-on financing as compared to seed deals in which VCs are not participating.”

This result makes perfect sense to me. VCs are better at predicting what VCs are likely to want to invest in at Series A.

This truism has been at the cornerstone of the TAG Seed philosophy from the very start and is largely the reasons why more than 70% of our seed investments have gone on to raise Series A.
Raising a Series A is, of course, no guarantee of building a decent business. Many companies need further rounds of capital to get to the point where they are generating cash. Getting a VC to back your series A is just the beginning. Sustaining and building on the relationship by delivering results is what will cement the partnership.

No fewer than 4 of the current TAG portfolio are generating profits in excess of £1m per MONTH and another 7 of them have reached profitability while growing strongly.[No prizes for guessing the names, list excludes profitable 'sold' companies].
The majority of these companies are less than 6 years old.

These companies have had the financial and other support to get them there – as well as the necessary talent and hard work – but their focus on being capital efficient and on profitable revenue marks them out. 

Raising funds for startups is generally much more difficult in Europe than it is in the US – particularly in the valley. As a result, the companies that do get funded tend to be more conservatively managed and focus on getting to breakeven quicker and on revenue and profitability at the expense of growth in users/customers.
During tough fund raising cycles, this approach has its advantages – but also leads to better habits and company culture – in my experience.

In addition to the usual criteria for investing in great entrepreneurs addressing large markets etc, angel investors really need to look at the opportunities with “VC eyes”.
A good understanding of the workings of Series A investors is a decided advantage. My time at Atlas Ventures in London – a day a week as Venture Partner - and more recently with Index has given me insight as to what to look for in a solid venture backed opportunity.

How will the founders play to an investment committee of a top tier VC firm? Can you envisage the business being large enough to ‘move the needle’ for the fund which is likely to be a candidate for series A?
Will we have sufficient runway to hit the milestones necessary to make it clear that product/ market fit has been achieved? Will we have the time and the resources necessary to ensure that the “go to market” strategy has been tested and validated?

So, Angels should definitely NOT stop investing in tech startups but do need to define their entry criteria really well.
It should seldom be about valuation but always revolve around the person or people being backed, their vision and how they are thinking of going about building something big. The initial valuation should take into account what has been achieved with scant resources but more importantly must reflect what the ultimate value of the company is likely to be.

Angels need to cultivate strong relationships with a few VCs and take time to understand them and their needs.
In turn, most VCs are on the lookout for active angels – often their best source of quality dealflow.
A big dose of mutual respect goes a long way.

Returns available for angel investors who take the time to study the markets and apply the appropriate disciplines are really very strong indeed and the opportunities available today exceed anything I have seen in 15 years of active investing.

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Sunday, October 21, 2012

European Tech companies are ready to show their mettle

...and why Institutional Investors need not be wary of Venture-Backed Tech Companies

The ‘campaign’ to kickstart the London tech IPO market has kicked off. The blog posts that Neil Rimer and I both published have attracted a lot of press attention. The engagement we’ve had with No10 and the LSE should result in some small but important regulatory changes that should be seen as important steps towards making London a major hub for tech IPOs.

As we have consistently said, however, regulation is not the primary barrier to a robust IPO market. A number of other parts of the ecosystem need to evolve simultaneously. Over the past month, I've heard a number of concerns that Europe’s public markets are not ready for international tech companies. What rot!

Below I list a number of the specific concerns and, where relevant, address them. The main takeaway, to my mind, is that institutional investors should not be wary of venture-backed tech companies—indeed, they should seize on the opportunity to learn more about and invest in this space, a rare ray of light in an otherwise gloomy economy.

1.  How good are the governance structures and procedures?

Companies that are backed by venture capital firms have strong governance built in from their first investment, which is typically a Series A funding round. Formal board meetings are held, usually monthly. Compensation and Audit committees are commonly set up and meet at least annually. Key decisions will normally need Investor Director approval or shareholder approval. The governance rules are set out in the companies articles and shareholders agreement. By the time the typical fast growth technology company is ready to come to the market, governance would have been refined and tightened. Good governance is in the DNA.

2.  Are there dominant shareholders, directors or founders who run the company?

Tech companies seeking IPO will typically not have any controlling shareholder. All preference shares would be converted to common stock. The founders will generally own less than 50% and there will be at least 2 VCs, often 4 or more. The company will typically have little or no debt. Venture backed companies are, by nature,  equity funded. The distinction between this and the typical PE backed company could not be clearer?

3.  How difficult will it be for founders to adapt to life running a public company? 

Clearly this is a challenge for founders who have never been in that position before. But these challenges will not be those of being accountable to a board or shareholders. Founder/CEOs and CFOs will have raised multiple rounds of finance, involving many detailed presentations to investment committees and will have been required to take investors through detailed accounts, budgets and 3 - 5 year plans. Missing quarterly targets cause real consternation and are frequently damaging to valuations achieved at funding rounds - so managing expectations and getting forecasts right are very important.

4.  Won’t share prices be volatile if market capitalisation is low and only 10% of a company is floated?

This is undoubtedly true and will probably eliminate many investors from the share register – at least at floatation. Since a number of the early shareholders (Seed, Series A, Employees) will want to exit at some time in the subsequent year or 2, the float will inevitably rise and opportunities to build stakes will present themselves.
The initial low float should not be a reason for a company not to be listed.

5.  Is the floatation designed to allow founders and other shareholders a quick exit?

The main reason for our pushing for the minimum float rule to be reduced from 25% to 10% is to align founders’ longer-term interests with incoming investors in terms of floatation price. 25% dilution is a large one for a founder to take  whose business is growing at more than 50% per annum. It feels more like 'selling out' than another funding round on the road to building a large successful company.
VCs and other early stage investors will undoubtedly wish to exit over time and a consistent strong performance from the company will facilitate this.

6. Are there really enough suitable tech IPO candidates in Europe?
Quoting from Neil's blog post that kicked off this whole debate:
"We’ve seen over the past few years how most of the successful exits by European companies in our portfolio have been trade sales (MySQL, Skype, Playfish, Lovefilm, Net-a-Porter, Last.fm, PanGenetics, etc.) while only a few went public (Genmab, Betfair, Asos, Addex). We hope the future will tell a different story however. At the Index Ventures annual meeting last week, we presented some data to our LPs (yes, VCs have investors too) that reminded us of the depth of the value pool in Europe. We counted 20 companies (Criteo, Adconion, Photobox, Moleskine, JustEat, King, to name a few) born in Europe, that are at or fast approaching a point of being IPO-ready. "

Just looking at the Tech Track 100, published by the Sunday Times, we see that the 100 fastest growing tech companies in the UK:
- had average growth from 2010 to 2011 of 81%
- had Total Revenues of £2.7bn (what will the total be in 2012?)
- Employ 11,000 people (adding 7500 in the year)
- 75% of them had operating profits - as well as rapid growth
- 51 companies are still majority owned by their founders
- 40 are backed by VCs (6 by TAG and Index) or PE firms

The tech IPO market in the US is heating up again - post the Facebook debacle. It really is time to get the first steps taken here in Europe!

What were the most significant (>$250m) tech exits in Europe in the past 3 years? 
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Sunday, September 16, 2012

Wonga: a successful British tech company worthy of UK Government support

MUNICH, GERMANY - JANUARY 23:  Errol Damelin, ...
Errol Damelin, CEO of Wonga,
How often do we hear the refrain “why doesn’t the UK produce the $bn companies that are churned out in Silicon Valley?”

Reams have been written about this issue and many hours have been spent in think-tanks – in and out of Government – figuring out how we can get the universities to commercialise their innovations, how we can pump more money into start-ups, how we should be training more engineers, more entrepreneurs, or how we can create effective clusters etc.

Successive governments have created enterprise schemes including NESTA, The Technology Strategy Board and, more recently, Tech City. Countless millions have been spent too – some of it to good effect, but much of it wasted. This Government has adopted a supportive and pro-active approach and some of the initiatives are having a very positive effect [see my post:  http://the-accelerator.blogspot.co.uk/2011/03/i-think-uk-government-is-listening-to.html ].

It is widely acknowledged that one the major factors encouraging innovation and entrepreneurial activity is the celebration of success and the making of ‘celebrity’ entrepreneurs. We need the Zuckerbergs, the Bezos’, the Elon Musks. And we do have Richard Branson, James Dyson and Stelios – all great business innovators – but where are the new tech heroes (who have not sold their businesses) whom young entrepreneurs can aspire to emulate?

Based here in London, Wonga is one of the fastest growing companies Europe has yet seen. It may well rank in the top five growth businesses of all time by these measures. After less than five years, it is employing more than 300 people and is still growing at an enormous pace. What’s more, it is continuing to innovate and develop new products spending millions a year on its NPD (new product development) and R&D activities. 

Its results for the year ended 31st December 2011, just announced ... just serve to emphasise how strongly the company is growing and just how many customers it is now serving.

  • Revenue growth, up 225% to £184.7m
  • Net income up 225% to £45.8m
  • Number of loans provided  up 296% to 2.46m
It employs engineers, mathematicians and statisticians (more than 20 in its risk team alone, including several PhDs). It is a truly international business employing people from more than 40 nationalities. And in its founder and CEO, Errol Damelin, there is a charismatic, thoughtful and hard-working leader and entrepreneur - in many ways just the role model the UK Government should want to embrace and promote - or at the very least endorse.

In addition, Wonga is exactly the type of company that we love to hail – disruptive of a failing, oligopolistic industry and doing so using really smart technology to make its processes super-efficient and its service designed around its many customers. Independent research shows they generally love using it as a result and its Net Promoter Score consistently exceeds 70. UK Banking average is Zero.

It is either helping to solve a problem which has existed and been ignored for many years – or is facilitating and empowering hundreds of thousands of consumers. Probably both.

Yet there is a problem. Regulation of the financial services industry is complex and difficult, lags behind product innovation and is highly political. It was not designed for entirely new products such as very short term loans offered on the web in ‘real-time’ and with interest applied daily. The entirely inappropriate Representative APR measure, which is required to be prominently displayed, despite the average duration of these loans being little more than a couple of weeks (16 days), has been more of a focus than the innovation or customer feedback.

It is difficult to think of a more certain way to potentially mislead or confuse consumers, than to show them a calculation based on an annual loan and a daily compounding of interest. The real test is customers being told in clear terms – and up front - how much the loan will cost including all interest and charges in a transparent way .Would that all financial services companies provided that information.

Wonga’s APR has been a lightning rod for virulent and often completely unjustified criticism from sections of the media and some politicians. Many assumptions based on a nonsense number or instances of the company making mistakes has made it a ‘controversial’ company.

But rather than be blinded by hype and headlines, this Government should be looking at the real facts, reading the customer research and hailing Wonga as a triumph of British technology innovation and entrepreneurial brilliance. They should accept the advice of the recent BIS Select Committee that included the strong suggestion that “APR should no longer be used to measure and compare the cost...” Rather than relying on APR, they should enforce clear and upfront indication of the total amount to be repaid as the minimum requirement for all providers and [implicitly] endorse the important role that Wonga is playing in the modern economy.

Wonga has developed an important service, which has enabled many hundreds of thousands of users to manage tricky cash flow situations and not be left in long-term debt or paying a price they weren’t expecting. It’s a difficult subject, but this company really ought to get the credit it deserves. Instead, I have read many column inches on Wonga, most of it regurgitated from snippets of factually incorrect or grossly misleading reports.

Wonga recently opened a new site: www.openwonga.com on which they have published a raft of statistics relating to its business - these provide real insight into the scale of the business, the profile of its customers and details of the loans its makes. 

I do understand the government’s dilemma. Speaking at the Times CEO summit earlier this year, George Osborne ticked off the CEOs and chairmen present for not making the case for free markets and wealth creation to a ‘public that badly needs to hear it’. The current climate, he argued, makes it difficult for the Chancellor to cut corporation tax and offer other inducements to business.

Wonga is not asking for either. Just for some recognition for the outstanding achievement of building a world-leading technology company here in Britain … and the modernisation of the regulation of financial services to create a level playing field (*) and recognition of new financial products unlike any previously offered.

(*) Banks providing unauthorised overdrafts have a 'carve out' in the regulations which does not require them to publish the effective APR of these 'loans' which would run into many thousands in most cases.

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Monday, July 30, 2012

Techs and the City

The post below first appeared on the Index Ventures blog and formed the basis for articles in the Telegraph and City AM
At Index and TAG we feel strongly that a healthy IPO market is an important element of maintaining the strong tech startup momentum that has been building in Europe over the past 5 years.

Together we can get the Tech IPO market going in London
From our vantage point at Index, the centrality of the Tech sector to economic growth -- particularly during the economic slowdown of the last few years -- is all too clear.
A recent piece in the FT reiterated this point. Ed Hammond, the paper's property correspondent reviewed the shifting make-up of the City and the steady transformation of the tenant mix in the Square Mile.
Examples Ed quotes of recent office moves help to illustrate the point:
  • Bloomberg: 500,000sq ft on Walbrook Square
  • Skype: 88,000 sq ft on Waterhouse Square
  • Expedia: 81,000 sq ft on St John St
Those of us working in the tech world or, more accurately, the tech-enabled sectors, have known for some time that the Old Economy is being slowly replaced by the New Economy. Retail is being replaced by eCommerce, Old Media by New Media, enterprise software by SaaS. While industries like law and finance have experienced sluggish growth over the past 5 years, companies in the tech sector are seeing revenue growth of at least 30%/annum, and frequently upwards of 100%/annum. Both start-ups and larger companies like Moshi Monsters and King.com are beneficiaries of this explosive growth. In fact, one of our portfolio companies, Moo.com, has moved or expanded office space seven times in as many years to accommodate its rapid and continuous expansion.
Yet a disconnect remains between the economic vigor in the tech world and the dynamism of the City. My partner, Neil Rimer, wrote an interesting and challenging post recently decrying the fact that the door to London’s IPO market is shut tight for tech companies. Little wonder, then, that despite London’s place as a global financial centre, so many European tech companies like Yandex and Qlik Technologies ended up listing in New York.
What makes this trend even more remarkable, and even more regrettable, is the fact that the UK’s internet economy is one of the most vibrant in the world. Online retail accounts for 13.5% of total UK retail sales, a higher percentage than in any other G-20 country, according to a recent BCG report. The UK is also dominant in online advertising, which accounts for 28.9% of total advertising spend in the country. By comparison, in the G-20 country with the next most developed online advertising market, Japan, only 21.6% of the advertising market has gone digital.
It just does not seem right to me that the City of London, with all its smart investors, would allow the largest seismic shift in the economy to take place without their active participation. Particularly when evidence of this shift can now be found in the buildings outside their back door.
Our sense at Index is that a collective effort needs to be made to kick-start the IPO season for tech companies. And so, in an attempt to invigorate companies, policymakers and the City alike, we’ve put together some recommendations. All it will take is a three-pronged attack from policy-makers, entrepreneurs, and the City alike to make this happen, but it will only work if all the pieces come together.
For the companies capable of listing:
  1. An approach to an IPO needs to be one which recognises that the listing is a fund raising and liquidity event on the way to building a large and great company. It is NOT an exit.
  2. It is important to be IPO ready. This means having the right governance structure in place: an appropriate board with an independent head of audit committee, and well-established remuneration and nomination committees. A well-drilled quarterly rhythm to re-forecasting and a good history of hitting the numbers is also essential.
  3. It is important to communicate a company’s story to the market with clarity and precision.
  4. Ideally VCs will help their company get ready, and be willing and able to hold the stock post float for at least one year. It is the price one year from the float that is most relevant to inside shareholders, so the pricing of the floatation shouldn’t be optimized to the nth degree.
For the policymakers:
  1. The minimum public float requirement of 25% is too high to create a healthy IPO market. Entrepreneurs don’t want to give away so much of their company, particularly when equity is given to the bankers hired to help list the company as well. It would behoove both Europe’s tech companies as well as the public markets if the minimum threshold either dropped to 10%, or a minimum valuation was assigned to companies interesting in listing. The public float is likely to grow over time as early investors (VCs and others) sell their shares.
  2. The stamp duty on shares should be revoked, given that the UK has the joint highest rate of stamp duty in the world. This puts London at a competitive disadvantage when it is competing with New York.
For the Institutional Shareholders and Fund Managers:
  1. It is important to understand the fundamental difference between PE-backed companies and VC-backed companies. PE houses are generally seeking to exit their investments through an IPO or replace debt in the company. VCs generally fund their portfolio without debt and a listing is often seen as a way of raising the company's profile and providing access to further capital.
  2. Strategic investments by city firms are needed to build up specialist analysis and the research required to properly evaluate hyper-growth tech companies and become familiar with the diverse business models and KPIs.
  3. There is a big difference between 2000's tech stocks and 2010's growth stocks. Whilst many of the tech companies will not offer sufficient market liquidity and be sub scale at this stage, it is not hard to see that this situation will not pertain for too long.
Finally, I should add that the motivations for investors like Index in helping strengthen the London IPO market is very similar to those we applied when we began to help build the European start-up ecosystem ten years ago. We believe that a healthy tech sector needs funding at all stages of a company’s life. Without an active IPO market, there is bound to be less capital for startups and early stage businesses.
Follow Robin Klein on Twitter @robinklein

Wednesday, July 18, 2012

A National Grid for Banking - radical thinking by Errol Damelin

The article below is an extract from an opinion piece published in the Times of London from Errol Damelin, founder, CEO of Wonga. It appeared on Monday July 16th. The complete article is here: http://thetim.es/NcY9Ee
Image representing Errol Damelin as depicted i...
Image by Wonga.com via CrunchBase

What Errol proposes here would require a radical shake up of the way in which banking works in the UK - or anywhere else for that matter.
Radical does not, however, mean it is impossible to achieve. The idea, is in essence, the reverse of privatisation and suggests that the infrastructure, the backbone, the networks of the banking system be placed in public ownership (or at least independent ownership from incumbent FS companies) thus creating a level playing field for businesses to build services on top this infrastructure. A little like the National Grid - for bits, bytes and packets rather than  for electricity and Gas.

Wonga as a business has begun by shaking up and transforming the murky world of unsecured consumer lending and I would not bet against Errol and the team at Wonga doing similar to other financial services.

Errol writes (in part) as follows:
"It would help to think of high street banking services in the same way as basic utilities such as water or electricity.
Just as millions of us depend on the water companies to keep the water flowing and our lives working, so we rely on the banks in the same way. Indeed, when a bank's computer system fails and customers cannot get hold of their money, we feel it as keenly as a burst water pipe.
And just as water that flows from our tap comes from a sprawling network of tunnels and pipes, so our ability to withdraw cash at an ATM depends on vast interconnected information networks 
There is a strong case, given the convergence of these computerised systems, to create one single super-bank to look after our basic banking needs. Just as we have one interconnected network for water and energy, or standardised systems for road, rail and air transport, or uniform protocols for the internet and phone systems, so we could have a single, transparent and easy-to-access platform for basic banking services.
This super-bank could be founded and overseen by the Treasury. It would only provide bread and butter services such as a safe place to deposit your money.
You could think of this super-bank in the same way as iOS, the operating system for Apple's iPhones. It is always there, running smoothly in the background, and most people don't even know about its existence.
Similarly, this super-bank would flawlessly send and receive data, facilitating everyday banking needs.

Of course, customers also have more specialised needs — they want mortgages, pensions, loans and ISAs. As individuals we need a wide array of services to suit all kinds of situations. That's why we would need a second layer of services, developed by private companies, on top of the super-bank's superstructure. These companies would compete with each other to offer products at different rates.

Just as the smartphone platform has unleashed apps for everything from telling you when the next bus will arrive to ordering groceries, so the super-bank platform would stimulate cost-efficient solutions to everyday needs on a vast scale. For Wonga, linking our technology systems to a super-bank would let us make consumer and business loan decisions even faster and allow us to bring ideas for new products to market in a fraction of the time.
Our expectations have rocketed since the advent of the internet. We expect to have 24/7 access, to easily be able to make comparisons, to crowd source, order or apply online, pay electronically and receive goods at our home the next day. Although online banking has brought improvements, there has been a lack of fundamental change in banking overall.
At this time of economic torpor, we need to inject new life into the finance sector more than ever.
Ever since the establishment of the Bank of England in 1694, Britain has led the way in financial innovation, and the country has profited from it. Surely it's time to take the lead again."

For the complete article in the Times go to: http://thetim.es/NcY9Ee
TAG is an investor in Wonga

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