VC Perspectives

In the June edition of Wired magazine there is a very interesting section on “the next new economy” where writer Chris Anderson predicts more startups, fewer giants and a disaggregation of large companies into smaller entities.

With the internet providing a possibility for minimal transaction costs between supply chain actors, one would think that this decentralization already would have happened. And it has to some extent and in some industries. But on the other hand, we still see successful companies growing into semi-monopoly situations where the market leader wins as much (or often more) on economies of scale and exercising its dominant position as being innovative and fast-moving.

On the other hand, we have also witnessed the vulnerability of such large, inflexible companies and what can happen when someone nimble and fast innovates the hell out of the market leader. And the recent financial turmoil has underlined the problem of these large entities where taking on debt was the primary vehicle for creating value rather than being innovative.

In Wired, Paul Graham of Y-Combinator states:

It turns out the rule “large and disciplined organizations win” needs to have a qualification appended: “at games that change slowly”

Therefore it is very interesting to read Steven Levy’s article about how Google has created its own economy (Googlenomics) exploiting the near-to-zero transaction cost to its favor and how it has designed their ad sales model to be instant, automated and built bottom-up ensuring dynamic, market-driven results.

Although Google is an exceptional company I think there are valuable takeaways for most companies. Both from how it has developed a super efficient auction that is designed to adapt to market changes and the notion that if you’re in the game of transactions, you have to strive for automation and getting to the lowest transaction cost possible.

Kåre Moberg at Øresund Entrepreneurship Academy (who was organizing the Mini Seedcamp in Helsingborg some time ago) notified me about the Sweden Social Web Camp event which aims to be the web equivalent of Woodstock. Kåre writes:

There will be a terrific event at Tjärö, Blekinge on August 21 – 23 that I would like to tip you about, because most of you are in the ICT-business. Sweden Social Web Camp will gather more than 200 ICT-entrepreneurs and social media enthusiasts. We have arranged with a free bussride from Öresund because it’s quite hard to get there by train. We hope that there will be arranged with a correspondent bussride from Stockholm.

I think it is a really cool initiative and there seems to be quite a number of people signed up already. Having visited Tjärö on a number of field trips when I grew up I can vouch for that it’s really beautiful and will be a wonderful location for this event.

In a previous post, I discussed the issue of betting on the idea or the team. Although research suggested that the idea was more important, especially in early-stage when so many things are yet to be defined (even the idea), the team is absolutely critical and often the most important aspect for the VC. But how can entrepreneurs convince a VC about the strengths of the team?

When I am evaluating teams I tend to look at:

Managerial and organizational skills

A team means more than one person. At Creandum we don’t invest in single individuals and we prefer teams of more than two people.

Building a great business has a lot to do with being able to scale the organization. This means recruiting great people as well as creating frameworks for people to perform. The more complete the team is in terms of complementing talents and experiences, the better it is and previous experiences of building organizations are clearly beneficial.

Vision vs execution

Great teams manage to be both executive and visionary. To have a sense of where you are going is important but making sure things happen is even more important. Previous achievements that show executive skills are important and could range from previous ventures to extra-curriculum activities.

Entrepreneurial mindset

Things that I look for include drive, ambition, seeing and seizing opportunities, and being able to create things with limited resources. 

Sales skills

In a startup, almost everyone will or should be involved in sales in one form or another. The sooner a company realizes that products do not sell themselves the better. But you’re not only selling to customers but also to suppliers, investors, banks, and future employees, advisors & board members. The best way to show good sales skills is to have paying customers but how you handle the VC-relation could also be a good indicator (e.g. preparation, presentation, issuing good news at the right time, professional and timely deliverables, over-delivering etc).

The spike

The spike is an area where the team is especially strong. It could for example be technology or specific industry experience/insight. Understanding the industry dynamics and what it takes to be successful is often critical to evaluate market opportunities as well as how to beat the competition. In some cases, patents and IP-rights are valuable but more often it is all about making sure you are better than everyone else at delivering value to your customers.

Integrity and trustworthiness

I want to invest in people that I can trust. Who are not afraid of breaking bad news and who are genuinely interested in building a great business. This is perhaps the toughest part to prove but getting a recommendation by a trusted person is usually helpful. Also, make sure to not overpromise and under-deliver e.g. in terms of falsification of numbers, contacts and relationships, and previous achievements.

Unfortunately I couldn’t attend the Entrepreneurship Forum event held at Stockholm School of Economics the other night. It seems to have been a good event with almost a hundred people interested in entrepreneurship. And thanks to Björn Paulsson who is setting up an open platform for knowledge sharing between entrepreneurs called Open Entrepreneurship (great initiative Björn!), it is now possible to view the panel debate on YouTube: SSE MBA Entrepreneurship Forum - Monetizing digital content.

It’s always frustrating to experience poor service but it can also be useful to be reminded of how frustrating it is.

At first, one would maybe think that startups cannot afford to provide good customer service due to resource contraints but I would say that it is rather the opposite: startups cannot afford poor customer service. When you are a startup, you don’t get that many chances and happy customers provide cash-flow as well as important references. And since so many large, dominant companies are unable to provide good service or think they don’t need to, this actually provides an excellent opportunity to lure customers away from them.

If you want to experience poor service, my safest bet would be to fly SAS. A cancelled flight doesn’t necessarily mean poor service, but it is when things go wrong (and they do go wrong quite often at SAS) you really can make a difference.

I was supposed to fly back from Helsinki to Stockholm to attend the Entrepreneurship Forum event this evening. After several hours of announcements about that more info will come later, rumor starting spreading that the flight had been cancelled. But instead of making an announcement about this and what the consequences would be, SAS kept quiet and instead people were getting really frustrated and started to head for the service desk. After an hour of queuing and individually being told that yes, the flight is cancelled, SAS announced that the flight was cancelled and everyone should head for the service desk.

First lesson, bad news are better that no news at all because at least you can adjust to the situation.

Okay, so how to spend 5 hours at an airport? Well, working would be my choice but working at an airport usually sucks unless you have access to the lounge. Therefore I head for the lounge and ask kindly if I could have access although I am only a Eurobonus Silver member. Well, of course not. Just because I have flown with SAS 25 times the last 10 months and they just ruined my evening without even an excuse didn’t qualify for a table with electricity and wireless access.

Second lesson: It is never too late to make up for things that go wrong. Or you can just continue to piss off your customers.

I find it fascinating that a struggling company such as SAS thinks they can afford to provide poor service. And it’s not like it is news to them. A great story from the 80’s when Jan Carlzon was still CEO. SAS was looking for a new PR-agency. When the agency was presenting their pitch to the mgmt team, they came 20 minutes late. Apparently Jan became furious and wanted to know what the hell was going on. The PR-company replied: ” We just wanted you to feel how your customer’s are feeling” (SAS was notorious for delays). According to the story, the PR-company actually got the deal. I am not sure if this story is true, but it’s still a good story about experiencing the frustration of poor service!

I just received an email from InvestICT about an interesting business plan competition run by Qualcomm Ventures. Please note that the competition is only open for companies that have not received VC-funding.

Qualcomm Ventures is promoting the “QPrize™” a series of international business plan competitions designed to provide over $500,000 in early stage capital for enterprising technology companies. The competition is open to entrepreneurs located throughout the world and will feature semi-final events in key locations where Qualcomm Ventures has active investment offices. Qualcomm Ventures will select one semi-finalists for each of the four contest markets: China, Europe, India and North America. These four semi-finalist will each receive $100,000 (USD) of convertible note funding from Qualcomm Ventures and will be invited to the Qualcomm Ventures CEO Summit in San Diego, Calif. to compete for the Grand Prize. The grand prize winner will receive an additional $150,000 (USD) of convertible note funding, for a total prize of $250,000 (USD) in venture financing. To view the FAQs for the competition click here.

For more information, check out InvestICT and Qualcomm web sites.

In the VC community, there’s an ever-ongoing debate about if the business idea (=the horse) or the team (=the jockey) matter most.

I would say that the most common viewpoint is that the team is more important for several reasons:

• A great team can make also a mediocre idea successful or they will come up with a new more successful one
• A mediocre team can mess up even a great idea
• As markets change (and they do), a great team will adapt to the required changes

However, when Steven Kaplan (one of the leading researchers on private equity) and his research team studied VC-financed firms from early business plan to initial public offering (IPO) to public company (three years after the IPO) they found that on the margin, you should bet on the horse.

Why? First of all, the study showed that it rarely happens that a good team is successful with a poor idea. Secondly, it showed that you can have a good idea and a poor management team and still end up winning (VCs change management teams frequently). In other words, a bad management team does not necessarily kill a good idea, but a bad idea is rarely overcome by a good management team.

Personally I think that in early-stage venture you need to bet on both. The idea has to be good enough and it needs to be in an interesting enough market. Also, if the idea is not very good, it says something about the team as well. But the earlier you invest, the more the jockey matters. In the early stages, a good idea is only a rough diamond that needs polishing. It is hard to recruit new management in an early stage and get the same commitment and hard work as from founders. Also, no idea or product sells itself so you need a great team that can sell the idea or product to customers, employees, advisors, and investors.

Link to the study