Wednesday, October 08, 2014

Cash is still King - or should be!

I’ve been reading the great posts on the subject of ‘burn rate’ of late and found myself nodding furiously in agreement with Marc Andreesen,  Fred Wilson and others.
In this age of very well (and over) funded startups,  I’ve almost forgotten the Number1 piece of advice to new CEOs.

“Have your closing bank balance put on your desk first thing every morning.”

Firstly, why single out this of all the possible KPIs?Many will find this very curious piece of advice.
Simply because there is no better way to have your figure on the pulse of the business by understanding the flows of cash – in and out.

Secondly, why have someone else involved. Why not just look at your on-line balance. Yes, you should do that too – to see the movements - but making it another person’s job means that 2 of you will be aware of this ultimate, most important KPI.

Most startup CEOs keep an eye on their cash only in terms of ‘length of runway’.
They also have a decent idea of their ‘burn rate’. Assuming that this number is constant and will follow the cashflow forecast done in the budget is dangerous.

Its often the case that founders tend not to look at cash balances when they have more than 12 months cash left. Its amazing how one month later, 12 month’s cash suddenly becomes 9 months (and then 6 months when closure costs are factored in)

The daily movements of cash prompt closer examination of cost and revenue areas, working capital movements, spikes in and out. Like a really good Medical Doctor who can tell the health of a patient via very few vital signs, a good CEO in close touch with his/her company’s vital signs – the most important of which is CASH..

In all but the simplest of businesses, the ‘length of runway’ is not just cash on hand divided by cash consumed in the month.
Most businesses have elements of some or all of the following: payments in advance (received and paid), security deposits, accounts receivable, payable, inventory etc.

A daily balance sheet would answer all the questions, but this is simply not a practical way to manage. The daily cash balance tells (and digging into the changes from the previous day) will tell you most of what you need to know.

Most of all, don't take your eye off the cash ball just because you've raised a chunky round.

Sunday, May 04, 2014

Lost in Translation?

This post has been ‘brewing’ in my mind for a number of years now. It’s only taken a shape worthy of publication thanks to Julian Rowe, principal at Horsley Bridge (that Blue Chip investor in the world’s great tech VCs). During a recent meeting, Julian and I were talking about the cultural differences we’d observed between the US and UK, and discovered how much we agreed on. The words that follow are largely Julian’s, the thoughts are ones we share.
It has often been said that Silicon Valley is not a place, rather a state of mind; a state of mind that celebrates ambitious innovation, coupled with a healthy disregard for fear of failure. As Britain’s tech start-up scene has blossomed in recent years, there are signs that something of a Valley mindset has evolved with it, with the very best British tech entrepreneurs now seeking to build companies as large and disruptive as anything emerging from the West Coast.
However, as the Irish playwright George Bernard Shaw observed, Britain and America are two nations divided by the same language — an observation which points not only to what each understands by ‘gas’ or ‘pants’, but also to how they expresses themselves more broadly. British reserve and American exuberance may be well-worn clichés, but like most clichés they carry an underlying truth. While British and American entrepreneurs increasingly harbour similar ambitions, when it comes to articulating them, cultural norms have a tendency to reveal themselves. In pitch situations, this can materially hamper British entrepreneurs’ ability to raise money.
As a broad generalisation, US entrepreneurs tend to be adept at treading that fine line between confidence and arrogance when pitching their ideas and ambitions. Clearly there will be exceptions to this in both directions. However, the proportion of US entrepreneurs who can articulate a big idea, while demonstrating the energy to execute, is remarkably high.
The evidence is mounting that in Britain there are growing numbers of entrepreneurs with the talent and ambition to go toe-to-toe with the best from the US. Yet after years of sitting in pitches with both British and American entrepreneurs, it has become clear to me that Britons struggle to express their drive and ambition more often than their US counterparts. This is certainly not to say that they don’t have the drive in the first place. Rather that where a British VC (or, like me, an investor who has lived in Britain for many years) may recognise a steely resolve lurking below the surface, US VCs can be left scratching their heads and underwhelmed. Much is lost in translation. Even European VCs with high levels of exposure to US entrepreneurs – and to investing in the ‘West Coast’ style — may not be attuned to a British entrepreneurs’ more reserved approach.
To be clear, it is not being suggested here that entrepreneurs should go into pitches with VCs promising the world (unless, of course, you have a clear plan that demonstrates that you can actually deliver the world). Rather that an understated ‘under-promise and over-deliver’ type of approach does not always work well when raising capital.
We’re also not advocating that a tub-thumping entrepreneur is necessarily more effective than a more reserved, follow-my-example type. This is not the primary assessment that VCs are making when looking for energy and conviction from the entrepreneur. But they do want to sense – and see — that the ambition is there to build a massive company, as stated goals can quickly become the targets towards which people end up aspiring. VCs also want to see that a founder will have the self-belief required to weather the inevitable challenges and setbacks along the way.
It is undoubtedly a positive for the British tech ecosystem that in recent years US VCs have proven willing to invest more frequently and at earlier stages in the most promising British tech start-ups. The experience they bring of helping build early fledgling companies to massive sustainable success stories can be invaluable. Furthermore, with the US a vital market for most large tech companies — and with most of the world’s tech giants headquartered there — the deep US networks some VCs can bring are immensely powerful.
A number of British-based companies are likely to attest to this such as Huddle, Just Eat, Hailo, SkyScanner, NewVoiceMedia, Far Fetch, ViaGoGo, Funding Circle and TransferWise, all of which have attracted top-tier US venture capital. Moreover, at Index we routinely partner with US VC firms in backing tech companies from across Europe. Take Criteo, elasticsearch, iZettle, Mimecast, Soundcloud and Zendesk, for example.
Yet in order for more British tech startups to tap into this trend, perhaps tech entrepreneurs in the UK need to get better at speaking to American investors in their own ‘language’.
Perhaps, too, US investors need to recognise that the understated, self-deprecating British entrepreneur may in fact have the hidden depths required to build a really big business. Don’t mistake reticence for lack of ambition, nor a seemingly modest plan for a lack of confidence.
There’s every chance they have both in abundance. They just have a different way of communicating it.
Postscript:  I've been fortunate, because of the fact that I've lived in this green and pleasant land for so long and can recognise the traits, to have backed some pretty extraordinary UK born entrepreneurs. 
Think Alex Chesterman (Zoopla), Richard Moross (Moo) Michael Smith (Mind Candy) Graham Bosher (Graze), Iain Dodsworth (Tweetdeck), Alex Saint and Tom Valentine (Secret Escapes), Greg Marsh (OneFineStay), Ed Molyneux (FreeAgent), Bec Clarke (Astley Clarke) and Ian Hogarth (Songkick). Not all "tub thumpers" by any means.
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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,, 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: ].

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: 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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