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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Sunday, July 01, 2012

Getting your foot in a VC's door

This post first appeared in the Financial Times on Saturday 2nd June and was written specifically for the FT. 

A lot of start-ups ask me how to get a meeting with a venture capitalist. The first question I would ask them is why they would want a meeting with a VC firm.
The obvious answer is to raise capital for their venture. However, the more important question might be whether a VC is the best, most appropriate partner and source of funds at this stage – or at all.
Assuming their analysis of this point results in the conviction that venture capital is the way for them to go and they have figured out approximately how much they wish to raise (yet another subject) then here is how I suggest they proceed.

Firstly, take a highly targeted approach. A scatter gun will not only not yield the desired meeting but if by chance it does, then it is very unlikely to result on an investment from a suitable partner. What you want is a well aimed rifleshot.

Secondly, review the landscape of funding available. VC firms come in many different shapes and sizes. However, they can broadly be categorised along three dimensions: size of typical investment, geographical focus and sector or theme within sector.

Having narrowed the candidate VC firms down by these rough parameters, look very carefully at their most recent investments. How many have they made? What types of companies did they invest in? If possible estimate the size of their investment.
How many partners are there in the firm? Do they tend to specialise?
Next, read what the firm says about such things as their investment philosophy, approach and sector focus, and see how closely this matches with their most recent investment.
Remember that not all VC firms invest at early stage or do seed investment. The majority of what are called VC firms should probably be better described as private equity investors because they prefer providing growth capital to established companies.

Once you have identified the three or four candidate VC firms, you now really need to dig in to the data and start your networking research. Note that no approach should yet be made. An unsolicited approach will invariably fail. It is not rudeness for even the most well crafted email, letter or other communication to be ignored. 
If my inbox is anything to go by, it is simply impossible to reply to all – many look like they’ve been sent to multiple investors and being unqualified in any way have to be filtered out. A polite, but canned response is of no value to the recipient.

The best way to approach a VC firm is to identify the partner, principle or associate most likely to be a match to your requirements. Find out all you can about this person. Read their blog, follow their tweets, check out their LinkedIn profile and find anyone you know who may know them, been funded by them, know someone who knows them. Try also to get hold of another  founder who has been funded by them.

The next step is the key that unlocks the door. Get an introduction from a trusted third party. Someone who has recent and better still frequent contact with your target and whose judgement they are likely to respect.

If yours is a technology startup, there is an enormous amount of data available today and resources like Google, LinkedIn, Techcrunch (Crunchbase),  Seedcamp, Angelist, to name but a few, are invaluable.
All of this desk research and networking is time consuming but will save an awful lot of wasted hours cold calling, mailing and meeting one potential investor after another.
If all this sounds difficult or impossible, remember it is easy compared with building a great business, which is what you want to do, is it not?
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