Is the Bubble Ready to Burst?

A non-tech investor recently asked me if I thought the tech market was heading for a crash. "Yes" I replied without hesitation. 

The current tech market and environment has all the warning signs of a crash coming, its just a question of if we choose to get ready for it, or ignore it on the basis that there are still gains to be made right up to the moment it goes bang. It isn't the same as the dot.com burst of the late 90's but the same signs are there and a large part of the tech market seems happy to ignore what's on the horizon.

A combination of rapidly increasing share prices, market confidence that the companies will turn future profits, individual speculative activity in shares, and widely available venture capital has created an environment in which many investors were willing to overlook traditional metrics, such as P/E ratios, in favour of basing confidence on technological advancements.

So what am I basing my future prediction of a tech-bust on?

The current "Unicorns" need to go public to provide their investors with a return on that investment and keep confidence in the market. A small number could be sold but at a certain top-line valuation this is particularly difficult - there aren't that many buyers. The Unicorns are growing revenues very aggressively which is a positive but the question is more over their ability to generate a profit. They are raising new monies constantly and burning most of the money to maintain the growth curve. Ultimately they will need to show a path to baseline profitability with attractive margins to justify their valuation. Sceptical doesn't describe it with me, I'm sure that a lot will not end up being sustainable and its at that point that the confidence will collapse.

Many Unicorns - darlings of the stock market - and other privately held companies will be shutting their doors as they find it impossible to raise more cash with their bloated capital structure and their huge infrastructure costs. Any smaller or more nimble company that can actively cut costs to get at or near profitability will survive but many will not.

I still think that the best way to understand the current situation is to hark back to the last downturn. Mark Cuban (His Broadcast.com company sold for $5.7 billion several months before the dot-com bubble burst) recently said that there is no question whatsoever that we are in the midst of another one. The key piece of learning from the last one? There is no doubt that a lot of people will be devastated when it pops. 

“The biggest of all losers will be anyone who has borrowed money to invest in private companies,” he said. “You were stupid. You blew it. You lost. That simple.” - Mark Cuban

A Perfect Storm?

Absolutely. The start-up market is overheating.

Funding a tech start-ups has never been this easy! One of the prime causes has been because of mutual funds and hedge funds getting in on the action, altering not only the funding landscape for tech start-ups, but also the equation by which valuations are created and therefore expectations.

The concern is really around the valuations for businesses that are defying explanation and negating the established wisdom. Entrepreneurs and investors are deviating from more traditional valuation methods and performance metrics to more radical ones. Another cause quoted for increasing valuations is the trend of protections for late investors that cause valuations to inflate further. These conditions have put the market into a state of very inflated and artificial valuations.

The companies themselves are burning through cash like there is no tomorrow. Throwing money at every aspect of marketing, infrastructure and, in particular, salaries has become the accepted investment strategy for start-up growth - everyone wants a Unicorn. All this perpetuates the vicious cycle of raising more money and spending more money. For the amounts that some of these businesses have raised, there is extreme scepticism on actual profitability.

Where does this end?

As to if the unicorns are in some kind of tech-bubble - I'm not sure. There is so much money vested in their success its likely that more money will just find its way into their eco-system. I'm hesitant to say to-big-to-fail but close. Companies further down the scale are very likely to fail if confidence falls, new money will dry up or only go to the unicorns. Confidence is everything when it comes to investing.

In any gold rush the people who make the real money and the people who build the picks and shovels. A lot of the infrastructure providers have had a long stretch of capacity development through overspending by VC backed companies. They are the real winners.

Pitch Perfect

I've just attended WebSummit 2015 in Dublin. Its one of the largest gatherings of start-ups, investors and business angels during the year. Attendance is typically in the 20k bracket and its a popular event with celebrities such as Bono from U2.

This years event included several live pitch stages where anyone could stand up and live pitch their start-up directly to a group of investors in front of an audience. One of the pitch stages was sponsored by Audi and I watched a number of start-ups pitch during the course of the event.

For a lot of the people using the pitch stage, it didn't end well. We saw a succession of young hopefuls go down in flames under the weight of badly thought of ideas, unworkable business models, rampant ego's and twisted understanding of how investment works.

Anyone who really understands how investment works wouldn't get up on one of the these stages because they understand the damage that a bad pitch or a bad investor reaction to a pitch can be.

Let me just quantify that slightly.

- A bad pitch is an unrealistic, non-commercial or niche idea that has no audience or is unlikely to monetise itself.

- A bad pitch reaction is when you pitch to the wrong people, investors come in flavours and you need to find the right audience for your pitch. Pitching to just anyone who identifies themselves as an investor will ultimately lead you to a bad pitch reaction.

So what makes a good pitch and what is the right scenario to pitch in?

Creating a quality pitch deck takes time and expertise. If you're a first time entrepreneur then get help. Accountants and lawyers are the first port of call and then subject matter experts can all help you get the right vernacular. The slides must be accurate and succinct and must cover all the right aspects that the potential investor will need to know to understand if this is an idea that appeals to them.

Simply:

1. Who are you / who are the team

2. What is idea / problem you're solving

3. What is the solution your developing 

4. What is the revenue model / who is the customer

5. What is the cost of developing the solution

6. What is the time-scales / time to market / 1st £ of revenue

7. What is the exit strategy / Time to exit

At the end of this the investor should be able to rule you in/out of their thinking. They either understand what you're saying, like it and want to continue or they don't get it and you both need to draw it to a close and move on to the next opportunity. 

Based on watching the Audi pitch stage at WebSummit, this is what you cant do:

- Tell the investor they're wrong when they play devils advocate
- Dismiss pertinent questions
- Speak negatively in response to a potentially negative point
- Not look directly at the investor whilst being challenged
- Clearly make things up on the spot to negate a question
- Be anything less than accepting about the advice your given

I watched a number of people pitching just fail to deal with the questions from the panel after their initial pitch 4 minutes went reasonably well. The questions are a pre-cursor to a formal period of due diligence and the investor can judge your proclivities, quirks, attitude and personality as part of that due diligence process. 

There are a few things I can recommend as part of the post-pitch questioning:

- Only use positive language - I am, I will, I can, I accept
- Avoid negative language - I guess, If we're lucky, Maybe
- Look at the person who is asking the question directly, not your feet
- If you don't know the answer, tell the investor you will contact them later with the correct information
- Ask questions back following an answer to a question. "The answer to the question is X, is that an answer that is acceptable or meets your investment requirements?"

Summary

There is a school of thought with pitching that "less is more", its something I agree with. Many pitches get way to technical and detailed. I think that 5-8 slides is enough with 1 minute per slide. You should then be engaging with the investor directly opposed to broadcasting to them. Use the discussion as a part 2 of the pitch. Its pretty impossible to secure the deal in the pitch but its very easy to lose the investors interest so the pitch and the audience must line up perfectly, the pitch itself must be meticulous and the delivery must be well rehearsed and optimal.

Good Time to be a Start-Up?

Personally I'm never convinced that there is a good or bad time to start your own business. Recessions are bad but often make for good start-up conditions (cheap rent, grants, loans, start-up incentives). Economic booms mean customer(s) spending in large amounts but the infrastructure costs can rise. Its a discussion that comes up frequently but I'm not swayed either way.

Lets look at some of the reasons why now (October 2015) might not be a bad time for that tech start-up idea you've been mentally developing:

Culture

The culture-shift in society towards entrepreneurial activity means that there is more acceptance than ever about being your own boss, being a start-up and being a crazy entrepreneur type. There is no stigma or negativity in doing your own thing, conversely its become interesting and cool to be running on near-zero money and doing something risky. Society went from being risk-adverse to risk-rewarding in a very short period of time but its a shift for the better. 

Hardware

Between 1995 and 2015 the cost of hardware to power a world-wide web solution start-up has come down by a factor of 100. Long gone are the days of having to buy bespoke hardware solutions from companies like Sun or Oracle at ridiculous prices. Linux solutions will now run on cheap hardware making scale costs far more tolerable to the masses.

Infrastructure

You just don't need to build from scratch any more. Infrastructure has gone from something that you bought or licensed to being completely free of cost. Linux, Apache, MySQL are all examples of infrastructure that in years gone by the costs would have hung large over a start-up. Open Source as a mentality has taken away a massive barrier to getting going.

Time-scales

Business planning and development now takes days and weeks not weeks and years. In fact its possible to get a business live in a day but I would be sceptical of something born so quickly. As a new entrepreneur there are a plethora of boot-camps and hack days that will give you a rapid start over the course of a weekend and can lead your new business from nothing to something in a month or less. Historically this took years and was a huge barrier for a lot of would-be entrepreneurs.

Going Global

Globalisation has helped in a number of ways. The labour market is now anyone in the world that has the skills you need and understands what you're aiming for - not who you could find in your local environment and making do with what you could find.

Equally, your sales market is now also global in nature, if your product is digital then the whole world is your market size.

Both of these have negatives attached to them but in general I see both of them as being 90% positive in nature and helpful to a new start-up.

Mentors

One of the most positive things for new start-ups is the widespread availability of mentors. These are people who have lived the life your heading for, succeeded, failed and moved on to the next idea. There really is no substitute for experience and a good mentor will be able to help you avoid the common mistakes. You'll probably make a whole new set of new mistakes bespoke to the idea your developing, but you should be able to avoid the run-of-the-mill errors that can plague a new start-up.

Search Engines

30 years ago the world operated around sales and distribution agreements. You needed someone to do something in their locality that meant that potential customers got to see the thing you made and help them make a purchasing decision. Pre the Internet there just wasn't any option to reach customers directly in a cost-effective way.

Search Engine Marketing (SEM) is now everything when it comes to potential customers/users on-boarding to your new start-up venture. A good SEM strategy can bring millions of potential users/customers to your door and can do it on a cost basis that has never existed before. Get your SEM wrong and of course you won't get much for your money. Get it right and you could be heading from zero to hero in a fortnight. All the best tech businesses are the ones with the best SEM strategies.

Money

There are a lot more active angels investing now than ever before. The UK government has recognised this by actively bringing in tax incentives such as EIS, SEIS and Entrepreneurs Relief. This means the number of people writing £80k seed fund cheques to entrepreneurs has increased massively. For the budding entrepreneur it means a small army of people to talk to about the next funding round to get your business pumping - 15 years ago, even 10 years ago this didn't exist.

Bootstrapping

The tech sector is sensitive to its past. The dot.com era of the 90's left investors everywhere (with the exception of Warren Buffet) with a bitter taste in their mouths over unprecedented levels of investment amounting to very little. Its hard to look past boo.com, as an example. $160 Million of VC cash produced very little. Bootstrapping now means that tech companies have a verified method of getting to the first pound of revenue on very little cash. Investors accept this as valid and most tech start-ups can use this method as part of a structured business/investment plan.

Summary

If you're keep wondering if now is the right time then you're probably never going to commit and start. You can wait and see how the business landscape develops over time but as one factor changes positively I can guarantee that some other metric is changing negatively - its just the way things work. Many would-be entrepreneurs (commonly refereed to as Wantrepreneurs) fail to take the first few steps on the hope that something is going to fall in their lap that will make things safe for them - if this is you then you need to look elsewhere, start-up life isn't for you.

Board Now or Board Later

Overview

When I'm working with a start-up one of the more difficult concepts that comes up is the board of directors. This can range from not understanding what one is through to believing that the board will take the company away from them. Not every start up needs a board right away but the earlier that the board is discussed and the process is in place the better.

The definition of a board is "A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organisation."

The key word here is "oversee". A board of directors is there to advise and guide the company management team, not tell it what to do. The management team is the management team and is not replaced or negated by the board of directors.

Purpose

So if the board is not there to tell you what to do, what is it there for?

Advice: The board should be available to the management on a monthly basis to discuss the current issues within the business, be a sounding board and ultimately give advice to the management team.

Guidance

The board should act strategically while the business acts tactically. The longer term trajectory of the business can often be be seen more clearly and objectively from the boards point of view, and the management team needs to allow the board to act in that way by providing all the information it needs.

Compliance

There are several legal requirements for companies that the board is typically best placed to handle - especially within those businesses that have raised VC cash or have private shareholders in place. The board should manage and inform those 3rd parties on behalf of the company and authenticate information coming out of the company that was destined for those 3rd parties.

Format

The board has a format. There is a chairperson - the ringmaster of the board and ultimately the person responsible for the activities of the board, appointments to the board and the interaction between the board and the company. Directors have a board seat. Lastly the board can have an Non-Executive Director contingent - people appointed to the board to advise but don't have a day to day role with the business. 

Constitution

The benefits of a board of directors can be massive as long as the right people are appointed. The Chairperson is the key position. The Chair needs to be someone with the right levels of understanding and background in the sector the business operates in and needs to have the time available to work on the business between board meetings. The Chair should also have connectivity and a network that will benefit the business.

The Chairperson and the management team should then discuss and agree how many and of what DNA the rest of the board should hold. If the business has a large reliance on technology then at least one board member should hold a detailed background in tech. If the company intends to list on the AIM stock-market then at least one board member should have successfully done that before. 

The board members should have two basic abilities, one to deal with the companies core requirements and secondly to be able to plot a route forward for the business. As the company and Chairperson look at the business is should become apparent where the company would benefit from having a board member (sales, marketing, finance, tech etc.) 

Benefits

The benefits of a properly functioning board are massive. The company management should be able to direct the board towards the issues that are holding the company back and get qualified insight back from the board to help the company overcome those issues.

The board should be able to strategise for the management team and bring options and opportunities forward for the management team to consider as part of the development strategy for the company. 

The board should be able to open doors through their combined networks that the business could not access otherwise and be able to bring in expertise that the business can apply to problem areas.

Lastly, the board is the interface to investors, venture capital, share markets and other finance sources to allow the management team to focus on delivering the growth the business needs.

Summary

Its never too early to start the discussion about having a board of directors, the appointment and the use of its members and how to get the most out of it. Its not something that should done lightly or without taking care and attention to learn about how they function and the impact on the company. Start-ups benefit greatly from having a board in place early (as long as its the right people) and establishing trust and a working relationship between the board and the management. If problems set in appointing a board will not save you - it isn't a safety net but correctly dealt with the board should be able to help you pivot out of trouble.

10 Tips for Time Management

Using the following list will help establish where your time currently goes and identify unproductive moments during your work day:

[1] Carry a notebook! Record all your movements, thoughts, conversations and other activities during the week. Create data on how much you get done through a day/week and where your time is going. You'll quickly be able to map out how much time is realistically spent producing results and what percentage of your time is lost on unproductive tasks.

[2] Activity or conversations important to the success of your company should have dedicated time assigned to it. To-do lists get longer and longer to the point where they don't represent a feasible way forward. Go old-school - appointment books work as part of your time management culture. Diarise appointments with yourself and create time silos for high-priority thinking - treat thinking as a task. Schedule when they will begin and end. Have the discipline to keep these appointments.

[3] Plan to spend at least 50% of your available time ring-fenced for thoughts, activities and conversations that produce most of your results.

[4] Schedule time for interruptions. This is a little odd as a concept but if you plan time to be pulled away from what you're doing its less disruptive. Its then possible to tell someone who needs your input or involvement when your next interruption point is and you can leave your planned tasks at the right moment.

[5] Failing to plan is planning to fail as the saying goes. Take the first 20-30 minutes each day to plan your day. Don't start the day until you have a complete break down of what will come when. The most important time needs to be protected and everything else can be sacrificed if necessary.

[6] Take five minutes before every call and task to decide what result you want to attain. This will help you know what success looks like before you start. And it will also slow time down. Take five minutes after each call and activity to determine whether your desired result was achieved. If not, what was missing? How do you put what's missing in your next call or activity?

[7] Put up a "Do not disturb" sign when you absolutely have to get work done. Make sure you do this both physically and digitally. I close the office door which creates a physical barrier to disruptions and then make sure that I have my Skype status set to Do Not Disturb etc. Digital distractions are probably more tempting than the physical type so go to the extremes of logging out of everything if that helps. 

[8] Practice not answering the phone just because it's ringing and e-mails just because they show up. Instantly giving people your attention tends to create the impression that you're always available. If it's absolutely crucial to your business to offer an immediate human response then this has to be part of your time plan. Where possible schedule a time to answer email and return phone calls. I just look at email twice a day as a planned part of my office hours.

[9] If you have staff then think about the level of interaction you need to have with them during the day and make that part of the plan. A new member of staff might take up 80% of your time in the early stages whereas an experienced member of staff might take almost no time. Make sure you delegate correctly to allow senior members of staff to attend to the run-of-the-mill stuff day-to-day.

[10] Remember to review the day at the end and see how your plan held up. If you're not managing to stick to it then there might be other options that allow you to get back on track. If you manage it one day and don't manage it the next then some minor tweaking is probably required. If you're managing to stick to it most days then its probably producing positive results. Either way the post mortem process of going back over the day to see what worked and what didn't is creating knowledge and insight that you can use the following day.

Premature Scaling

So, your company is funded, has a working product, clients, and revenue. On the surface, it would seem like you were growing fast and moving toward the right trajectory, right?

The next train of thought would be that the low level problems have been overcome and now its just a case of making everything to go faster and the end result will be growth, right?

Timing is critical. Too slow to grow means paralysis and a potential loss of market position - but that's another story. Too quick to grow is what this post is really about - and scaling too quickly will kill your company.

Growth

Growth can be one of two things, organic or forced. Forcing growth is a fine line between genius and disaster. The newly-formed theories around growth hacking don't negate the dangers around forcing a company into a cycle of operation to generate revenue without having other aspects of the business in a position to take the strain and maintain the companies ethos.

Slick versus Scrappy

Putting a shine on the companies outward persona seems like the right thing to do. Attending high profile events and conferences, having a large stand or presence at a trade show or using expensive locations to promote your company feels like your lifting your new start-up out of the mud and into the light. This slick and managed step-up puts the company into a new competitive pool of other companies with the same "slick" approach. Upping your approach could easily create more competition or place the company in a more competitive environment.

Scrappy does not mean unprofessional. Scrappy means not being afraid to show you're the new kids on the block and looking to challenge the established paradigm. For companies who have the early adoption mentality this can be extremely attractive.

Keep it scrappy

Trying to scale prematurely is often orientated around attending expensive conferences and trade shows, flights to meet with clients, multiple people in the biz dev team, ego driven decision making processes and 3rd party relationships that go beyond the companies natural levels to operate effectively.

The risk is that growth is placed before the products development or stability. Most early stage companies need to create a scalable customer acquisition channel prior to anything else growth related.


1. Growth has a strict relationship with everything else
There is a ratio of the team that should be working on growing the company. Dependant on sector the ratio should be somewhere between 12% and 18%. If you end up with 20%+ of your current team working on the biz dev then it can end up being counter productive.  If the growth team is good it can vastly increase customer acquisition even though there could be little idea who customers are and how much they are willing to pay. Until there is a predictable, scalable customer acquisition method, there is no need to aggressively grow the biz dev function.

2. Concentrate on customers on-line opposed to going through a lengthy sales cycle. Selling to enterprise level clients can be time consuming and expensive. The strategic decision to go after these large companies(which is hard not to see as the correct choice)is not dependent on a large biz dev team and can definitely be infiltrated in a more scrappy way.  The business rationale behind spending a large budget on conferences and trade shows to acquire customers is contentious. "Chase hard" is a common haiku for start-up sales teams and can be effective, its possible to acquire good customers via this method, but this could have been equally successful if these enterprise clients had been targeted via LinkedIn or email.

When you’re an unproven start-up, you’re looking to find the clients that have a first-mover mentality. These are the types of clients that are forward thinking and will respond to your LinkedIn approaches or emails.

3. Don’t hold any kind of inventory
Don’t buy it until you have sold it in advance.

4. Product and Customer Support are the priority
A common train of thought is to chase the marquee customer for your product or service and thereby gain notoriety and market position. A kick-ass testimonial from a large corporate or celebrity is a happy nirvana for most start-ups. The key is to focus on making the product exactly right for your big client before moving onward to approach others, not treat their early endorsement to mean that the product is "finished" or "market acceptable".

What should be done is to focus the company to buckle down and make the best possible product for their early adopter. Using any early adopter as a testing ground to determine how to effectively capture users and how to seamlessly integrate with any 3rd party systems so that there is never any product or service downtime. Once any product functions well (it doesn't have to be perfect), it should be the case that the company can target other similarly profiled organisations as with the early adopter - citing them as a testimonial. Additionally, this also acts as a template for a customer support model for the early adopter which would allow scale to other clients. 

What's the skinny?

Don’t scale until you’re ready for it. Cash is king, and you need to extend your runway as long as possible until you've found product market fit.

Why oh Why!

I've always understood social media like Facebook and Twitter to be a double-edged sword. Everything I post can bring out the best and worst in people and I need to be prepared for someone in my network to not like what I've posted and comment accordingly. I've always been quite thoughtful over what I post, I don't post personal information, I only publicise trips after the fact and I don't comment on sex, politics or religion. This has largely kept me on the safer side of things - but this is a reflection of my age and appreciation of the issues posting on social media can cause.

Younger generations have bigger problems with this than I do. The impetuous nature of youth means that often they post something that later will come back to haunt them, especially when it comes to pictures. What seems amusing at the time often is embarrassing after the fact and the sharing nature  of the internet means its difficult to hide what you've done after the fact.

So if you've posted something in a drunken haze and the cold light of day leaves you with a need to get rid of hide something, what are your options?

Facebook

Facebook tends to be the daddy when it comes to making those embarrassing mistakes that follow you around. Outside of manually removing every post, deactivating your account is the only way to get rid of your entire Facebook history. Mozilla users can access some add-ons that help with this.

Even then there are things you can't delete. Facebook logs a lot of data, like which adverts you've clicked and the IP addresses you've used to log into the site.

But what you can do is completely restrict who is able to see old content.

You can do this by limiting the privacy of your past posts through the settings tab. With one click of a button this privatises old photos from the times you were more relaxed about posting things. This doesn't actually delete any of your history, it just stops people seeing it.

The settings option can also allow you to view your profile, to see it as other people do, so you can see what friends might see. Remember to check the pages that you liked! There may be a few embarrassing ones in there. Events you are attending may be worth looking at too, especially if you're avoiding someone.

Through the privacy check button you can also see which apps use your Facebook account. This is very important. If you don't trust any of these apps with your data, don't give them access to your Facebook profile.  You can restrict what data it can access (you may not want to give them your address or phone number) by adjusting your app and game settings.

Twitter

It's a bit easier to remove old tweets. Twitter in general (As a company) has a better stance over removing content that other social networks. I sometimes feel that Twitter is more dangerous than Facebook because the velocity that Twitter moves at means that an unfortunate tweet can travel further quicker than other networks. A classic example is the tale of Justine Sacco - read her story here

You can delete old tweets from your timeline using TweetDelete

If you're particularly paranoid you can also set up a rolling auto-delete so that your old tweets are constantly deleted.

Instagram

There are no easy ways to delete old Instagram posts simultaneously but there are a few ways to keep your posts private and limited to yourself and approved friends.

You can change Instagram to "private" by going into the options (this won't affect the followers you have already) but you can also make sure you aren't geotagging your posts so that people can see where you are - or have been.

iOS phones can do this by going into the settings, then privacy, before selecting location services and then removing Instagram's permission to access your location by toggling it to off. It's also important to deselect "Add to Photo Map" before you share a photo.

Summary

There has never been a greater need to manage your on-line profile and persona. Your next job or relationship might depend on it. Its hard to hide those mistakes in the digital realms - so the better strategy would be to not make them in the first place. I've been there, done that, got the t-shirt. You don't need the same t-shirt.