Ideas are cheap. Enthusiasm is priceless

Back in 2008, Y-Combinator threw out a list of startup ideas they thought would be interesting to see and followed up with a more formal request for startups in a few key areas. A few days ago I recounted a list from May 2009 where a VC listed areas he could see room for innovation. Earlier this year, not long after we got back from WWDC, I posted a forum called Ideas Café to a group of friends who were on the WWDC trip and populated it with a few ideas that I’d come up with, simply in order to see what could come out of it. I’m not a developer (and likely will never be) but I have plenty of ideas.

Earlier today ReadWriteWeb came up with 6 Awesome Apps Begging to Be Developed.

I know there are developers out there in my community who have said to me, “Yeah, I can write code, but I don’t have an ideas on what to write.” or something similar. There’s a gazillion ideas out there – if you’re not sure about something, ask.

Back in the nineties when I was writing my books, I remember having to sit and pitch the story to a friend of mine who, at hearing the tagline, wasn’t interested. For two minutes I explained the premise and at the end created a fan who not only promoted the book at every turn but wrote an incredible amount of supporting material.

There will be ideas like that out there. Concepts that when you first read them they’ll be kinda wooly. So talk to people about them. Talk to me. Turn up at one of the many OpenCoffeeClub meetings in your region (we have around 6 different OCC geographies in Northern Ireland alone). Maybe someone can give you that two minute pitch to make you insanely enthusiastic?

Kirkisms: Funding by Numbers part 1

“US VC’s will give you a “no” in 20 mins, NI VC’s will give you a perpetual “come back when … “

I feel very privileged to say David Kirk is my friend. We’ve shared laughs and commiserations, broken bread at the two best Italian restaurants I have ever eaten in and talked family almost as much as finance. He’s encouraged me in my latest inane scheme of owning a boat (by showing my pictures of his yacht) and tempted me with boozy cocktails in arid climates.

In this case, I’m giving him kudos not only because of his history of being a senior executive in companies like AOL and Cisco but because he’s also now a seasoned business advisor and serial investor. David sent me this, a part one of two, which attempts to explain how the Venture Capital system is meant to work from his point of view.

David begins:
Whether you are an entrepreneur or a VC – I like to think I have a foot in each camp – we live in interesting times. Barely a month goes by without a new report showing some “interesting” aspect of investment in 2008/2009, whether it be valuation multiples, return multiples, shift in investment stage focus or just the consolidation of funds out there.

While there is, and always will be, market specific conditions that free or freeze funds, the basics of investing in technology companies, remains somewhat constant, and should always be considered as the backdrop to any specific funding strategy.

When a company seeks funding, they are selling themselves and the investment opportunity that their business represents to the investor. I’m of the opinion that selling, whether it be ice cream or cars, is always much more effective when you really know your potential “customer” – their needs, their wants, what they look for, hot buttons, turn offs. Its no different with VC’s. It’s a business. We need to make money, just like you.

So how does it work?

The returns on any investment is governed by its risk. The riskier the investment, the higher the returns expected. Investing in technology startup companies is very risky. Failure rates of up to 90% are quoted. VC’s expect and plan for 60-70% of their portfolio companies to fail or limp along. Similarly, investors in venture funds – the Limited Partners – expect a corresponding higher return than safer investments. The US ten-year average returns (IRR) on all venture funds in ~17%.

At this point, the discerning reader has all the information needed to determine every ratio and “rule-of-thumb” that will follow. But there is need for a great big caveat. Presented here will be pro-forma numbers. I have never seen, nor heard of any business, investment opportunity or fund that mirrors exactly what is given here. The exactly numbers and ratios are somewhat interesting, more – much more – importantly are the ideas behind the numbers. Grasp these, and you’ll be able to apply the principles to any, real-world situation.

Right. Now that’s out of the way, back to arithmetic.

I’m a fund manager. I have ten portfolio companies. Being smart (i.e. I’ve lost money in the past) I’m planning for three of those companies to fail without returning anything, and three or four to “go nowhere” returning, perhaps, the money that was invested. That leaves three “winners” in the portfolio to generate all the returns for the limited partners, the “carry” for the General Partners, and to cover the management fees. That means that each of these “winners” has to return x10 – x15 the investment, to cover the “losers” and the “going nowhere”.

My personal rule of thumb is that an investment needs to return x7 – x10 my investment in 3-5 years.

OK. Next we need some discussion on how to calculate “return”. On one hand its very easy to calculate, but the simplicity in calculation, belies an ocean of “art” and “judgment” surrounding it. If my investment in a company buys me x% of equity, then my return is x% of the exit valuation $y. At this point, given two variables, it could almost appear that we can plug in whatever values for x and y we like, to come up with our investment multiple. Not quite. I look for 20%-25% equity in a company (but, full disclosure here, every investor and VC has their own perspective on this). Less and you lose “influence”, more and you risk demotivating the founders. But be very careful here, you’ll hear many times the argument, “would you like 80% of $1M business or 20% of a $100M business.”

Equity understood. Check!

What about valuation. This is where you will need to do your own analysis, based on industry, business model, geography, etc. In general, the exit valuate is based on a multiple of either revenue or profit. As an interesting sidebar, in the absence of both – as we experienced in 1999 – valuation of those dotcom darlings was $1M per developer. Science? Nay, magic eight ball. Over the past 15 years, predominantly in software, I’ve used smaller and smaller multiples. In the mid-90’s, x5 revenue seemed to fly with trade sales. Today I use x2, and even that is appearing to be generous. Exit or investment valuation is 90% art, 10% science and 100% negotiation. You need to understand this.

OK. At this point you should be able to answer the last question a VC asks “is this a good deal for me?” But there is one big variable that will depend upon whether you are looking for investment from a $1B fund or a $10M fund. That is scale and bandwidth. An individual VC can only adequately manage a handful (or two) of portfolio companies. If there are n VC’s in a $1B fund, then the average deal size is likely ($1B/10n)*.60 (where 60% is ration of funds invested initially). Calculate that out. Perhaps their sweet spot is $5M – and likely you can find this on the home page of their website. So now you have a very simple litmus test.

With a $5M investment (ignoring follow-on money), a 25% equity position, and an exit value of x2 revenue – the revenue in year 5 should be at least $100M.

Big gulp!!!

Part 2 will go into the first three things a VC looks for in an investment opportunity; a big market, a hot product, and a team that can deliver.

Sling, Skype, now Qik – no mojo on iPhone

Qik for iPhone has arrived. (iTunes link)

Engadget says: The good news is that Qik for iPhone 3GS is now available, and it’s completely gratis to download. The bad news is that it probably won’t do exactly what you want it to. You see, those on Symbian S60 have grown used to a Qik that can actually stream live video to the internet, whereas this app is currently just a “capture and upload” piece. Moreover, it only works via WiFi, so if you’re not near a hotspot once your video is done, you’ll have to wait until you wander back over to one before it automatically begins uploading.

Why is Apple doing this?

It’s very simple. It’s because of this graph from Flickr.


Now, that’s for Flickr. For still images. The Carriers are TERRIFIED that people like you and I will start to do the same with our videos. Our videos which can be many, many megabytes in size, heading up to Qik for immediate streaming down again to dozens or even hundreds of users.

This is exactly why Sling was also ‘disabled’ and limited to WiFi and it’s why Skype has had it’s mojo removed as well – it’s the carriers. They’re as afraid of losing revenue (for voice minutes) as they are about their networks falling over as their hollow promises are realised.

This is why we need rree, muni WiFi everywhere.

Global, social, open, mobile, playful, intelligent and instantaneous

TechCrunch writes:

Venture Capitalist (Union Square Ventures) and blogger Fred Wilson gave a talk a few days ago at Google’s headquarters in Mountain View. The key point of his talk was about disruption.
The talk includes his six words to live by on the Internet: Global, social, open, mobile, playful, intelligent — and a bonus seventh one: instantaneous.
Google has just posted the video of the talk on YouTube

As ‘media’ has become disruptive – are there other industries that can be end-to-end digital: created, distributed and consumed – without every becoming atoms.

Fred suggests:
Consumer Finance – money is already just bits. Why do we still use cash?
Education – education is interactivity, media, straight to the brain. The web as a textbook.
Energy – smart power in the home, renewable energy creating peer-produced micro-grids
Healthcare – self-care reporting, digital doctors, sharing data worldwide about pandemics?
Government – procurement, defence, law enforcement, entitlement, planning, crowd-sourcing?

Think about these areas: they’re incredibly disruptive to large organisations. To banks, schools and universities, power companies, hospitals and health trusts and, of course, the government itself.

Creative Sandbox: Show and Tell for Techies

Creative Sandbox was designed to spark the imagination of agencies by showing the best uses of Google products and creative possibilities in a high energy environment.

The more I think about it, the more we need to have more ‘show and tell’ of what we’re doing in Northern Ireland. There are risks – those of disclosure of unprotected IP – but there is a lot to be gained from showing and telling, not only the Venture Capitalists and Business Angels, but also the everyman, the tourist, the would-be entrepreneur (wantrepreneur).

Tax should be less taxing

Before we start, I am not an economist.

From Wikipedia:

A Special Economic Zone (SEZ) is a geographical region that has economic laws that are more liberal than a country’s typical economic laws. The category ‘SEZ’ covers a broad range of more specific zone types, including Free Trade Zones (FTZ), Export Processing Zones (EPZ), Free Zones (FZ), Industrial Estates (IE), Free Ports, Urban Enterprise Zones and others. Usually the goal of a structure is to increase foreign direct investment by foreign investors, typically an international business or a multinational corporation (MNC).

SEZs are often developed under a public-private partnership arrangement, in which the public sector provides some level of support (provision of off-site infrastructure, equity investment, soft loans, bond issues, etc) to enable a private sector developer to obtain a reasonable rate of return on the project (typically 10-20% depending on risk levels).

One of the best things about meeting new and interesting people is in the stories they relate and the new words and phrases they bring. Today, the phrase was “Special Economic Zone”.

Also…from The Paradise of Capitalism, which also lists many of the potentially negative effects of an EPZ with respect to potential abuses from employers:

The first EPZ (Export Processing Zone) was established in 1959 in Ireland but it was in East and South East Asia that the idea found most enthusiastic support. Countries like Taiwan , Singapore , Malaysia and the British colony of Hong Kong embraced the concept that economic growth can be promoted best through encouraging exports rather than through import substitution.

In the sixties there were just 10 such zones around the world, which by the mid-eighties had increased to 176 zones across 47 countries. In 2003, the number of zones increased to over 3000 across 116 countries.

There are risks, listed in both articles with Free Trade Zones but there are ways to reduce them. Limit the applicability of the Export Processing Zone to, for example, Software and Digital Content. Ensure that the incentives only apply to products/service which are primarily sold outside the hosting country. These aren’t enough but there’s certainly a seed of an idea.

Scotland, hotbed of game development in the UK, is lobbying for up to a 20% tax break for their industry, citing Gary Langlands, president of the Dundee and Angus Chamber of Commerce:

“Canada, France, Australia and the US already offer subsidies. Let’s see fair play to support our own industry,” he added.

This is in response to an EU statement which authorised a tax break for French games companies which met the criteria of “quality, originality and contribute to cultural diversity”.

As the UK film and music industry already enjoys tax breaks, it would be nice to see some of our elected representatives in the White House On The Hill, pursuing what can be done to increase the chances of local companies. The only tax break scheme I am aware of which applies in Northern Ireland is the R&D Tax Credits which, direct from HMRC, is not applicable to content development.

As I mentioned, I am not an economist. I’d like to speak to some, hear their thoughts and see whether anything is possible.

Twitter down?

Apparently Twitter has been down for hours and related services are still recovering.

I never noticed.

Today was incredibly busy – and it’s just the beginning of a heap of long days and hard work. Today something new started and alliances were made. I’m committed, stretched, enthused, inspired and tired.

I wouldn’t have it any other way.

Welcome to the Desert of the Unreal

A bit more about AR (pr LR: Layered Reality) to whet your appetite.

I previously speculated that things would get really interesting when Linden Labs released their AR platform or plugin.

The beauty will not, however, be in the presence of avatars in LayeredReality but in the presence of buildings. That said, being handed virtual flyers by virtual people in real streets has some interest – but only because it beats the real alternative. Handing out flyers is a shit job – something we should use software for.

This, and other examples are at GamesAlFresco’s top 10 augmented reality demos which will revolutionise video games. To a degree, I believe them.

The potential for AR is amazing and finally within our grasp.

Sensible Speculation and Gradual Accumulation

Matt from 37Signals writes

And it’s true that building a business requires plenty of time and effort. But the idea that you need to quit your job to do it right is misguided. If you quit your job, you shift everything. You don’t gain time, you lose it. You put a shot clock on your business. You box yourself into a position where you have to profit immediately or the whole thing goes under. You’ve got to make it work now or give up forever.

This is something I’ve been wrestling with.

The only issue with doing two things at a time is attention span. I only find this difficult when I’m juggling a LOT of things though. For instance, my gaming blog suffers when I’m utterly immersed in both my day job and my other hobby. Is this bad? I don’t think so. Gaming is a release – something I involve myself in when I’m feeling stressed or unable to contribute creatively to something.

At the moment I like my day job. It’s not perfect in some ways (after being independent it’s always difficult to do what others say and the innate impatience of someone used to doing their own thing can be very limiting).

One of the things apparent to me is that I’m fascinated with the local tech scene. My wife reckons that even if I had no ties to NI and no need to work, I’d likely be doing much of the same thing as I’m doing now. Whether that’s working on creating conversations, trying to think of different ways to look at things or encouraging others to follow their dreams – I’d still be doing it. After all, I was doing it before (sponsor of BarCamp, OpenCoffeeClub and part of the nonsense on this blog)

Working the day job is not going to get in the way of things. Especially if it’s complementary.

So speculate sensibly. Don’t gamble everything on an idea taking 6 months to exit – if you’ve only funding for six and it takes seven, you lose everything.