“Early stage VC funding is a myth in the UK”

October 11, 2011

Plugg 2009: Anil Hansjee
Those were the words spoken last night at a Taylor Wessing / Tech City event by Anil Hansjee, who used to do M&A at Google in Europe, and is now setting up a seed stage fund here. He did clarify by saying that yes, there have been some deals but “you can count those on a few hands”. Anil is just confirming what us entrepreneurs already know, but here it is coming from a soon-to-be VC and one that knows the market really well.

Anil backed it up by saying that of the 80 inbound pitches he’s received since an article appeared on TechCrunch about his new fund in June, 75% merited a closer look, confirming that the quality of opportunities in Europe appears high. (And a majority of those were from UK based startups). I imagine that’s just scratching the surface of what startups are out there chasing funding.

When Anil’s fund is ready to start investing you should be aware that if your startup is not located in a cluster with a functioning ecosystem, then he won’t be investing and will give you the advice that you should be relocating to the best ecosystem for your industry. He specifically cited SaaS or cloud infrastructure startups where in most cases the best place to be is the Valley; to stay in London would damage your chances of success and funding. But there is some good news, there are plenty of areas where London is the right choice to be if your focus is on fashion, music, finance, advertising, retail, etc.


John Frankel, ff Venture Capital talking to London Web meetup

August 28, 2011

John Frankel is a Brit who is a partner at New York based ff Venture Capital and during a visit back home this week he gave a great talk to a mixed audience of developers and entrepreneurs at the regular London Web meetup. John’s fund, which he describes as “a micro VC or super-angel”, helps companies go from “3 to 30 employees”. ff has invested in companies like Voxy, Cornerstone OnDemand, Phone.com, Mogotix, Klout, ShareSquare and many more.

You can watch the entire talk and Q&A below, or just read on:

ff typically invests in 4 – 12 companies in a year, but since December have invested in 15. The reason? John was unequivocal, this is an “interesting time with unbelievable opportunities for both investors and those seeking to change the world”. The reduction in cost of doing business online in the last decade means that mass customisation is now possible and software can create new and immersive experiences.

This disruption has entered every industry, citing Paige Craig, John told us that “every company is a technology company“. The platforms that didn’t exist 10 years ago are now in place: broadband, smartphones, cheap storage, etc.

He told how Jim Cramer of CNBC’s show “Mad Money” spoke at a conference John attended during the previous dot com boom, telling the story of how the media industry has these massive fixed costs through the legacy of newsprint production, by growing trees, waiting till they are mature, chopping them down, transporting them hundreds of miles, turning them into pulp, transporting paper hundreds of miles into cities usually, making newspapers from them, and then finally putting a pile on every street corner; every 24 hours.

Fast forward ten years and we have Amazon’s kindle, Apple’s iPad, and numerous inexpensive smartphones. John is certain that this time round “this is not a bubble“, although he did indicate they may slow down their investment pace if valuations get too high.

Advice for startups

“Solve big problems, they are more satisfying”.

And he used the example of the Winklevoss twins to tell us that “everyone has ideas, but execution is everything”.


Being in London – with its perennial inferiority complex-  of course the question of geography came up. John said that ecosystems are made by people and infrastructure, and despite the ability to use Skype, meeting “in person is important”. Although he’s prepared to invest almost anywhere it’s harder to justify if that company is off the beaten track. Another crucial geographic factor is big companies being in the vicinity of startups, as is the presence of second-time entrepreneurs.

Talking from his US experience he compared NYC as very individualistic to San Francisco is more team orientated, and collaborative, gaving the example of one of their portfolio companies relocating there for that reason.

What he looks for in investments

“The team”. And “unreasonable and driven people”. He says “pivoting is normal; the start idea is never the same as the end idea”. Specifically he likes companies with low capex model, and those that start charging for their product early, talking of the benefit of “training” your customer to pay.

He cited an example of one company they backed, the enterprise software company Cornerstone OnDemand of whom they were amongst the first outside investors in and since 2002 they invested in all 8 subsequent rounds until it went public in March 2011. Despite that incredibly successful exit, John says he doesn’t “believe in exit strategies”, and puts faith in interesting things happening and valuable things being created if you let smart people do interesting things.

I really enjoyed his talk, and I hope John spends more time in London, we need more of this kind of seed VC in the UK.

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Crowdfunding your business

April 28, 2010
The British Library’s Business & IP Centre is a superb resource for start-ups and established businesses alike. Last night I attended a seminar on Crowdfunding, looking at raising capital from multiple investors as an alternative to traditional routes from a handful of   angels or VCs.
Charles Armstrong of Trampoline Systems

Charles Armstrong of Trampoline Systems

Crowd-anything is a hot topic, and there are a myriad of crowd based alternatives to problems and their traditional solutions:    

  • Lending: Zopa
  • Mutual funds: cutefund
  • Startup capital: GrowVC
  • Contact data: Jigsaw
  • Encyclopaedia: Wikipedia
Embracing the crowd model to fund your business seems to make sense. Everyone knows that access to both debt and equity funding is much more difficult now than it was two years ago. Crowdfunding may fill a gap in the market, between seed funding when you are just setting up and growth capital from VCs which you will need to have a well developed product and revenue stream to justify. The sweet spot is probably from a few hundred thousand to a few million. The logic is simple, don’t rely on just a few limited sources for funding, but tap into investors world-wide. Avoid selling your soul to a VC when you can retain more control by having a greater number of smaller investors, and deal with them on your terms, not theirs. One class of share for everyone, no liquidation preference, no double dip, no ratchets and no more one-sided term sheets.
So why is everyone not doing it?

Charles Armstrong, CEO of London-based Trampoline Systems is a trailblazer who found that whilst the rules and regulations are dense and strict there are numerous grey areas, and these grey areas allow room for some innovation. Trampoline is close to raising £1 million in less than a year, so the approach has worked for them. Financial regulations are extremely strict about companies promoting investment opportunities, presumably to protect the individual from a plethora of get-rich-quick schemes which would otherwise appear. (I don’t see why this is so strictly controlled when it’s possible to gamble or borrow your way to massive financial problems).
It is illegal for private companies to promote investment opportunities in public. Trampoline’s solution: set up a website in isolation to promote interest in crowdfunding (but not directly promote Trampoline).
It is illegal for companies to discuss investment opportunities, to anyone who is not a sophisticated investor, high net worth individual or your friend or family.  Trampoline’s solution: get people to self-certify they fall into one of these two investor categories on the Trampoline website before they are able to access anything further.
It is illegal for companies to send your business plan to more than 99 individuals. Trampoline’s solution: those people who made it into the restricted area of the website were given some additional information, for example, the minimum investment was £10,000, and they then had to get in touch by email and specifically request the business plan.
To be as fair to all potential investors as possible everyone investing was offered shares at the same price, on the same terms (BVCA approved articles) and given access to the same documents for due diligence (after signing a confidentiality agreement). I love this open and fair approach, but do wonder whether the addition of a lot of extra shareholders on such agreeable terms may limit your funding options for the future, and would turn off VCs.
Another perspective came from David Smuts of Elexu, who is instead incorporating as a public limited company, rather than a private limited company.  Elexu aims to raise millions and give equity stakes to far more than the 100 person limit imposed on private companies. It is a myth that PLCs must be listed on an exchange, and the additional governance and legal requirements are only slightly more onerous than for a private limited company. The main drawback is that no matter the size of your PLC you must file full accounts with Companies House, including a profit & loss, not just an abbreviated balance sheet which is sufficient for most small private companies . Despite the extra cost and effort of being a PLC a small number of people choose to incorporate this way for no other reason than the perceived prestige.
The third speaker was Tony Watts of Keystone Law, who terrified and confused the audience with the severe penalties (both civil and criminal) for getting any of this wrong. Anyone looking to crowdfund will need specialist legal advice, and for that reason I’ve chosen not to repeat any of Tony’s specific advice here, I believe in this instance a little knowledge is a dangerous thing. Make sure you find one of the handful of law firms experienced in this and listen to David Smuts advice, “don’t pay your lawyer to learn this stuff at your expense”.
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Getting your company funded in silicon valley by VCs or angel investors

March 17, 2010

Photo credit: Mark Coggins

These are my notes from a panel discussion, “Getting your company funded” by Justin Fishner-Wolfson at SXSWi 2010. Justin is principal of The Founders Fund, an early stage venture capital firm which is managed by past founders of tech start-ups.  There were also occasional video contributions by Reid Hoffman, founder of LinkedIn.

The basics: what is the different between Angels and VCs? The most obvious one is the amount of money invested, although there is no firm guidelines, Angels will invest smaller amounts, sometimes up to $1m, (typically a lot less than that). Early stage VCs will invest up to a few million dollars, and in later rounds VCs may invest hundreds of millions of dollars.  As investors will generally only invest in C corps it is therefore easier to incorporate as a C corp at the outset. An important point: angels should be accredited investors.

Questions that investors ask themselves:

  • Is the idea big enough?
  • Are these the right people?
  • Is the idea possible?

Having a big vision with big ideas and clear milestones is essential, but remember that early on people are mainly investing in you. The people aspect is also something the entrepreneur must consider, and it’s important to build relationships and trust before you need funding. Look for investors who you can get along with and you consider will add value to your business, and not just their money.

Reid Hoffman: “Taking investment is like marriage but after two powerpoints and a dinner”.

To build relationships before funding find people with a common interest and get them on board as an advisor. When the time comes ask if they are interested in investing. Look at their past investments and experience to ensure you are approaching those with relevant interests. Create an advisory board, and offer your advisors a fixed number of shares at the outset. [They will be diluted in the future, but this is acceptable as during the course of building your business your advisors will change over time as your needs change].

Does the VC’s “brand” matter? Mainly, it’s the PEOPLE who count, but the top firms have the best networks and the strongest track record.

Understand the terminology, and ensure you have an experienced lawyer that someone has recommend to you.

  • Common stock (for founders)
  • Fully diluted ownership (FDO) – after all options have been doled out FDO is the equity position of each investor.
  • Liquidation preference – a premium that the investor may receive when the company is sold. e.g. 2x LP means if they put in £50M and company sells for £100M then the investor takes it all.
  • Options (for employees – right to buy stock at a fixed price at a later date)
  • Option Pool – an amount of stock you agree to reserve for future employees. (You may not end up allocating all of this).
  • Placement agents – intermediaries who find and negotiate investment between start-up and investor. These are used more for larger rounds of funding and not for angel or early stage funding.
  • Prefered Stock (for investors – with more rights)
  • Warrants (similar to an option)

Share options for employees:

Generally the more money that you pay staff the less share options you give. Give people enough options that they feel motivated and be generous. Typically more equity will be offered if the company is riskier. Early employees may receive share options of anything from 0.5% to 15%.


Be careful to read and understand all the terms. Don’t just rely on your lawyer, read it all yourself and understand what you are agreeing to. Also pay attention to the issue of control, how the board is composed, voting rights/thresholds, who can sack the CEO and the voting mechanism for an acquisition. It’s important to set up the best possible terms at the beginning, as terms get worse over time and the last money in is the first money out. The key advice when dealing with the finer point is, get a good lawyer. One with a good network. The benefits of a good lawyer are they can provide great insights and advice. Remember to get recommendations and references on your lawyer.


Assuming you have been wooing investors for months, the best way to get commitment is to create a deadline. If you receive one term-sheet it is absolutely right that you let everyone else know you have a deadline looming and if they want a chance they need to put their term-sheet in too.

Additional resources:

What’s wrong with tech entrepreneurship in Europe

December 10, 2009

Photo Credit:  Dave Cynkin

Niklas Zennström, founder of Skype, Kazaa, Joost and now Atomico Ventures spoke at Le Web today about his entrepreneurial experiences. Following that there was a round table panel hosted by Brent Hoberman (co-founder Lastminute.com), discussing why there is a notable lack of billion dollar internet businesses in Europe. The panel included entrepreneurs from the UK, France, Spain and Norway such as the founders of Fon and Opera.

Both Zennström and the panel highlighted some structural issues which are clearly holding back Europe. I was horrified at some of the severe issues which startups have to endure in Spain in particular. It’s no wonder Spain is in deep trouble, with unemployment at a horrific 19%. I feel fortunate the UK does not suffer from anything quite as severe as these issues.

So what is the problem with tech businesses in Europe?

  • VCs have a very low appetite for risk, compared to their silicon valley counterparts
  • European entrepreneurs move to silicon valley to enjoy a more supportive environment, but causing a European brain drain
  • Tax regime is geared towards corporations rather than small startup businesses
  • Restrictions on immigration and visas for high-level people
  • Restrictive hiring and firing legislation which prevents businesses flexibly scaling up or down as required
  • High burden of regulation
  • No critical mass of potential acquirers
  • Large European businesses don’t trust buying from newer small companies
  • More complicated and harder to scale in Europe (due to language and multiple country markets)

Silver lining

Whilst these challenges are undoubtedly hampering Europe’s ability to build significant internet businesses there are some points where we do rather well:

  • It’s easier to build a global business out of Europe, because we’re more used to dealing with different languages and cultures.
  • European managers are better than their American counterparts, partially because of greater international experience.
  • Innovation remains high.

What can be done

  • Reduced regulation
  • Reduced tax burden
  • Better internet infrastructure (e.g. more European cloud operators)
  • More sanguine approach to failure
  • and by far the most important, everyone agreed, a hands off approach from Governments

Finally, it’s worth noting that it’s not all bad, there have been some successful European tech companies, such as Skype, and there will surely be more.

Angel investing in Silicon Valley

November 4, 2009

silicon valley mapAs part of Edinburgh University’s continuing Silicon Valley Speaker Series, supported and organised by Informatics Ventures and the Entrepreneur Club, Jim Papp gave a talk tonight entitled “Angel Investing in Silicon Valley today”. This followed on nicely from last week’s talk by Sean Ellis on how to gauge whether you have product/market fit. Assuming you do then you need to get some angel money to get things moving!

Jim Papp is the CEO of Podaddies, an angel funded online video advertising company, and he is an active angel investor in high tech companies. He is a member of the Band of Angels where he has served on the deal screening committee and has made about a half dozen investments in start-ups in the past several years with a focus on software and internet services, medical devices, and wireless technologies.

Jim started by giving a brief history of Silicon Valley, mentioning that although HP was founded in 1937 in a garage in Palo Alto it wasn’t until 1956 the first “silicon” business started in the valley. In 1968 Intel was founded, and in 1976, the same year I was born, so too was Apple in Steve Jobs’ garage in Los Altos.

The first angel group, the Band of Angels, was formed in 1994. Since then Angel groups have flourished world-wide, including Scotland. Of all the angel groups operating in the USA, 82% of them report making investments into software companies and 48% into telecoms companies. However, they do invest in a range of different industries but the failure rate is consistent, it doesn’t vary from industry-to-industry. More detailed facts and statistics available here.


  • 52% of angel deals return nothing, or less than the initial amount invested
  • 32% return between 1 and 5 times the original amount invested
  • 15% Return greater than 5 times the amount invested

It’s for that reason that angels and VCs look for outsize returns, usually a minimum of 10 times amount invested; simply put, there are a lot of duds that need to be paid for.

The record year for investments by VCs was, unsurprisingly 2000, when an enormous $100Bn was invested. In a telling sign of that overheated period the average amount invested per deal increased significantly. In most years before or after 2000 the average amount invested has been between $20 or $30Bn. Sadly, 2009 has been significantly lower than this amount and shows there is still some way to go before confidence and level of investment returns to normality.

I asked Jim to explain why Silicon Valley still has an advantage for technology startups and he replied by quoting the famous crook who, when asked, “Why do you rob banks?”, sensibly responded, “Because that’s where the money is”. Out of all the VC money invested in the US, 38% is invested into Silicon Valley. As angels and VCs the world over tend to stick to their local area for investing, mainly out of practicality, startups continue to arrive. The odds are stacked against you though. Out of perhaps 70 pitches a month submitted to the Band of Angels, only 3 will get in front of the entire angel group, and only one of these will get funded.

The talk concluded with a summary of what investors look for in their investees:

  • Something that solves a big or complex problem
  • Something unique; a competitive advantage
  • Large and growing market for your product or service
  • Great team
  • Capital efficient and scalable
  • Exit strategy

Find out about the upcoming events in the Silicon Valley Speaker Series, including Alexis Ohanian, founder, Reddit. (I saw Alexis speaking a few weeks ago at MIT and I can definitely recommend attending to hear him!)

How to measure product/market fit and the implication for external finance

October 31, 2009

The Startup Pyramid

Earlier this week I attended one of many excellent talks organised by the Informatics Ventures and Edinburgh University Entrepreneurship Club. This week’s talk was by Sean Ellis of 12in6. Sean has worked in marketing roles at web companies LogMeIn, Xobni and Dropbox; amongst others. He is known for his metrics driven approach to customer development and in this talk he shared with us how you evaluate whether or not you’re at that critical moment in a startup’s life: product/market fit. I want to share with you the implication this moment has on raising and spending capital. I have seen that too many startups are obsessed with raising finance, but don’t appreciate the negative cost of this if taken at the wrong stage.

Although it was made famous by Marc Andreesen, I believe it was Andy Rachleff, co-founder of Benchmark Capital who coined the phrase product/market fit.

Product/market fit is being able to satisfy a good market with a good product.

But how do you determine you are there? According to Sean the key question to ask users is “how would you feel it you could no longer use our product?” If you achieve product/market fit you are looking for greater than 40% of respondents answering “very disappointed” to this question.  If less than that you need to keep working on your product until you have something people really need. Sean’s made available a free survey tool and all the necessary questions pre-populated at Survey.io; if you have a product right now and you’re not sure where you are then start with this.

If you have P/M Fit you probably know it already; the sales are already piling up, the phones are ringing and there is press interest in your product. If you don’t know you are there yet then you’re probably not there yet. Assuming you’re not there and still struggling then a way to measure it will help you get there (and stop you from kidding yourself that things are going well).

Assuming you hit the jackpot and achieve over the 40% benchmark what comes next? Life after product/market fit is very different. It becomes all about the race to scale up; if you have found a successful formula speed is critical and you must go for growth and make the most of your advantage. Before product/market fit you focused on conserving cash, but now you need to change your mindset, you want to spend, spend, spend; assuming you can demonstrate the return. This is where Sean’s metrics driven approach to marketing pays off: relentlessly measure and optimise for ever greater conversion rates. Simply put, spend more on the areas that deliver the biggest ROI.

Spending money is only possible if you have it to spend, so you don’t want to get to this stage and discover you have a fantastic product, loved by the market but due to a lack of cash you cannot scale up and take advantage of your fortunate position. It is at the crucial point of P/M Fit where external capital comes in very handy, and it’s also the point VCs get interested as you have removed a lot of the risk and guesswork by proving you’ve got a valuable product. Luckily as you can demonstrate you have P/M Fit it’s also cheaper for you to fund raise at this time.

Much of success in business is about timing and external capital acts as a magnifier; it magnifies all the good and bad things in your business. I would caution that if you are not at P/M Fit you probably are not ready for that injection of steroids.

Matt Mullenweg, founder of WordPress explains it by likening VC finance to rocket fuel, put it in your car and it will do one of two things: it makes you go very fast or it makes explode. The magnification effect of VC finance acts on all aspects of your business good and bad. Once you have P/M Fit that is the right time to be going fast, before then you want to extend the time it takes till you fail, not speed it up.

The point of all this is… raising money is not what matters, focus instead on building a good product and getting early traction with sales.