Jason Ball's TechBytes

Technology & Venture Capital. Early stage venture capital news mixed with personal views and comments

UK Investment Activity: Early Stage Technology Investments

One question from the VC Show what was happening with Technology investments in the UK recently. I answered that things are picking up, at least in the early stage end of the market.

Today the latest BVCA (British Venture Capital Association) report on UK Investment Activity landed on my desk. The stats reflect my comments over the weekend: early stage technology investments have been increasing. They show that 54% of all companies backed were early stage, up from 45% in 2003. Additionally, UK technology continued to receive more investment than any other industry category. The full report is available to non-BVCA members for £40, and free for BVCA members.

Filed under: Software, Technology, Venture Capital

The VC Show Podcast

I had a chance to talk with Cameron Reilly as the second guest on The VC Show over the weekend. We discuss Bill Gates, and his vision of the future, Google’s latest foray into the communications arena with googletalk, iPods and what’s happening with early stage venture capital investing in London. The podcast is available here.

Filed under: Events, Conferences and Panels, Venture Capital

Stock Options Anyone?

alarm:clock writes:

Tech Stock Options Not Dead

Om expresses an opinion that we had previously written on – that it makes a lot more sense to work for a company like Google than it does to work for a start-up, as nobody is buying into stock options as having any value.

VC Tom Perkins, however, expressed faith that the tech community will figure out a way to make stock options work despite regulations that force the expensing of stock options. He puts his full faith in clever accountants – ‘We have to find some way around this. There probably is a way…I suspect something will come up.’

Read – VC Predicts Eventual Rebirth of Stock Options (News.com)
Read – Grousing About Google (GigaOm)”

This is yet another reason why the UK is an exciting place to make early stage investments: the EMI scheme (Enterprise Management Incentive scheme).

Not only are stock options alive and well, any capital gains for entrepreneurs are only taxed at 10%. The main restriction to qualify is that employees/founders must hold less than 30% of the business to qualify for the scheme.

There is also an EIS scheme which gives angel investors a 20% tax rebate on any funds invested (up to £200,000).

Filed under: Venture Capital

Pitching to a VC [Updated]

I ran accross an old post over at Feld.com. Brad has a list of questions that covers about 90% of the same Q&A I go through with every company I meet:

– What is your big vision?
– What problem are you solving and for whom?
– Where do you want to be in the future?

– How big is the market opportunity you are pursuing and how fast is it growing?
– How established (or nascent) is the market?
– Do you have a credible claim on being one of the top two or three players in the market?

– What is your product/service?
– How does it solve your customer’s problem?
– What is unique about your product/service?

– Who are your existing customers?
– Who is your target customer?
– What defines an “ideal” customer prospect?
– Who actually writes you the check?
– Use specific customer examples where possible.

– What is your value proposition to the customer?
– What kind of ROI can your customer expect by using buying your product/service?
– What pain are you eliminating?
– Are you selling vitamins, aspirin or antibiotics? (I.e. a luxury, a nice-to-have, or a need-to-have)

– What does the sales process look like and how long is the sales cycle?
– How will you reach the target customer? What does it cost to “acquire” a customer?
– What is your sales, marketing and distribution strategy?
– What is the current sales pipeline?

– What is your cost to acquire a customer?
– How will this acquisition cost change over time and why?
– What is the lifetime value of a customer?

– Who is the management team?
– What is their experience?
– What pieces are missing and what is the plan for filling them?

– How do you make money?
– What is your revenue model?
– What is required to become profitable?

– What is your stage of development? Technology/product? Team? Financial metrics/revenue?
– What has been the progress to date (make reality and future clear)?
– What are your future milestones?

– What funds have already been raised?
– How much money are you raising and at what valuation?
– How will the money be spent?
– How long will it last and where will the company “be” on its milestones progress at that time?
– How much additional funding do you anticipate raising & when?

– Who is your existing & likely competition?
– Who is adjacent to you (in the market) that could enter your market (and compete) or could be a co-opted partner?
– What are their strengths/weaknesses?
– Why are you different?

– Who are your key distribution and technology partners (current & future)?
– How dependent are you on these partners?

– How does this fit w/ the investor’s portfolio and expertise?
– What synergies, competition exist with the investor’s existing portfolio?

– What assumptions are key to the success of the business?
– What “gotchas” could change the business overnight? New technologies, new market entrants, change in standards or regulations?
– What are your company’s weak links?

Instead of asking entrepreneurs to present their business, we go through a list of 20-odd questions with them (very similar to the ones above) to walk away from the meeting with a solid understanding of the business and the ability to make a decision on whether or not to continue the investment process. I’ve found this process to be 1000x more productive than sitting through a poorly structured Power Point.

I think it’s important to know who you are pitching to and how they are used to receiving, or prefer to receive information. We require companies presenting to the London Business Angel network to prepare a presentation based on our own Powerpoint template. There is the requisite kicking and screaming, but the results speak for themselves: Over 30% of companies presenting receive their funding. Guy Kawasaki suggests 10 slides in 20 minutes in his book Art of the Start. Other investors prefer to receive an executive summary first- it all depends.

Also, if you’re approaching a VC you should look into whether or not they have recently invested in your space, whether they are actively making investments, and speak to one of their portfolio companies before the meeting if possible.

Filed under: Venture Capital

TiddlyWiki on a PSP

CK’s hacking at TiddlyWiki:

“I just tried running TiddlyWiki – a reusable non-linear personal web notebook on my PSP. No luck. However, I think something like this could work as a portable content management solution for the PSP, if it were tweaked properly…”

I met Jeremy (the guy behind TiddlyWiki) back before Xmas last year- he was looking for VCs funding social software. Unfortunately, Osmosoft lies outside our fund’s investment criteria, but if you’re a VC or an Angel that’s interested in this space, send me an email and I’ll happily connect you to Jeremy.

(CK, maybe you could get Jeremy a free PSP to develop a compatible version of TiddlyWiki until he gets funded.)

Filed under: Software

Tubetrack Widget

WidgetscreenTubetrack is a new widget for tracking your tube line. Not all lines are available and the widget looks a bit buggy still, but nonetheless, this will be a great update tool over my morning coffee.

I hope I can see more than one line at a glance in future builds, I need to catch more than just the Jubilee line every morning. It’s a good start though. If you’re in London, go grab this widget.

Filed under: Apple Computer

Mac OS X on an Intel Box

If you want to hack an Intel Box to run Mac OS X, here’s how.

This might be your only chance to do so, since I would be willing to bet Apple will be locking things down before they go commercial with Intel chips. So get to it.

Why do I think normal Wintel boxes won’t be able to run OS X? Steve Jobs is a control freak.

One of the main reasons Macs just work is that Apple controls the entire food chain- OS, Hardware, Software, Peripheral, et al. This is one of the main reasons a PC is “Plug and Pray” vs Mac’s “Plug and Play”- and I don’t believe Steve is about to change that…

However, I hope my next Mac will boot into Windoze. I still prefer a PC for Excel (for financial modelling)- that’s one area where my Mac lets me down.

Filed under: Apple Computer

Venture Capital Documentation

I ran across a post at Software Only on “Venture Financing Concepts, Process and Documentation”.

There is also good legal documentation available for budding VCs and entrepreneurs at the National Venture Capital Association (NVCA). You might also like to pick up a copy of Term Sheets & Valuations by Alex Wilmerding. It takes a look at term sheets line by line and discusses Company favorable, Neutral and Investor favorable terms.

All of these are US documents, which are 80% relevant for the UK market, however, there are some important differences (i.e. pre-emption, tag-along/drag-along, preference shares). The BVCA does offer “A Guide to Venture Capital Termsheets”, which will introduce these concepts. Hopefully they will be releasing further documentation shortly. There’s no direct link to the Termsheet guide: Go to the BVCA > Publications/Research> Non-members and then scroll down. You can download the file or order a nicely bound paper copy for free.

Filed under: Venture Capital

Pitch your (Symbian) business

Entrepreneur’s have the chance to pitch at the upcoming Symbian expo to a group of VCs focused on funding Symbian OS related businesses. There are no limits on minimum or maximum funding levels and no success fee payable- providing a relatively cost effective opportunity to raise funds. More info available at the Smartphone Show

Filed under: Events, Conferences and Panels, Venture Capital

Where are all the UK startups?

Excellent discussion over at Plasticbag on Where are all the UK startups?.

Networking events. There are quite a few networking events out there, but they aren’t easy to find. I spent a solid year looking for different events. Now, through work, I always receive invitations and find out about new events for entrepreneurs because we fund start-ups… so there’s a pull factor involved which obviously makes my life easier. One event that I just attended this week was the European Tech Wire event in London. Another frequent blogger get-together is Geek Dinner. Most, but not all, of them *are* London-based.

There’s a lot of moaning about everything being in London and not in the remote parts of the UK. The post is about moving to Silicon Valley because that’s where it all happens… Funny, there’s no discussion of Boise, Idaho or Jackson, Mississippi… I can assure you, there are entrepreneurs in Jackson, but they all leave- just like I left. Either you’re in a hub of activity or your not. What you can’t have is the most happening scene in your back yard (unless you’re from San Francisco, London or NY). If you want it, you have to go to it. Sorry, but that’s the case in the US or the UK.

Funding for start-ups. I definitely agree that getting a start-up business funded is extremely difficult. There are 1001 reasons for the market failure. As pointed out, most VCs won’t touch anything under £1million because it’s not worth their effort. At the London Business Angels Network I personally review about 800 business plans per year. Of those only the best 40 present to our network. Of those 40, approximately 15 get funded (£100k-£750k). That works out to 1.8% of companies that initially approach us getting funded. It is *very* competitive. London Seed Capital funds approximately half of those 15…

The LSC requires that the product is finished and there is market validation (through initial sales). The real challenge is getting the business sufficiently developed to raise external funding. The only sources of funds, really, for seed stage development are friends and family. NESTA offers seed and prototype funding, but it is very competitive as well. Setsquared is also mentioned, they are a good resource for very early stage businesses too.

Here are a few considerations when looking for funding that I pulled from the discussion.

Also, if you think VCs fund start-ups, you might want to read this classic article over at RedHerring “Ten myths and realities of VC“:

Myth No. 9: Venture capitalists fund startups.

The reality: Venture capitalists fund established companies. Angel investors fund startups.

OK, this one’s self-serving. Garage.com, which Mr. Reichert dubs a “venture gapitalist,” hooks up seed- and early-stage startups with angel investors. Still, I must agree that early-stage companies are much more likely to find backing from angels than even those VCs who say they focus on early-stage deals.

“There is a whole bunch of mythology that has evolved that says, ‘You find a couple of grad students, have a clever idea, go to Benchmark Capital, and get $15 million,'” Mr. Reichert says. “If you’re serious about starting a company, you’ve got to be realistic. You scrape together a little money from friends, fools, and family and then when you’re ready to go for outside money, there’s a one-in-a-thousand shot that you’re going to get name-brand VC even at that stage.”

Mr. Reichert’s main point, which I think is dead on, is that too many startups have unrealistic expectations, setting them up for discouragement. “Don’t limit your vision to getting your series A funding from a Sand Hill Road venture capital fund,” he says. “There’s this assumption that if, gee, I don’t get Sequoia Capital in my first round, then I’ll never make it with the big boys. There’s a chance, but it’s really unlikely that you’ll get that funding. So, you need to expand your horizons and understand what you’re looking for. Don’t compromise on quality, but be realistic in terms of who is the right investor for you at this point in time.”

Mr. Reichert speaks from experience. In his last company, Academic Systems, he didn’t seek VC initially. It made more sense to get corporate cash. Academic raised $400,000 in smart money from Jostens, which later brought in brand-name Accel Partners. It wasn’t long before Kleiner Perkins Caufield & Byers was on board, bringing along two little companies named Microsoft (Nasdaq: MSFT) and TCI. “There was a very nice food chain effect that happened,” he says.

Risk Tolerance. My opinion on the risk debate is that the US is somewhat better than the UK (although its not a case of showing up and they give you a check) and the UK is 1000x better than continental Europe. If you think it’s tough here, go try it in Spain. I spent six years there and it’s much more difficult to start a company and get funding. One of the main benefits in the UK is the UK government- they have done an excellent job of offering tax credits to business angels through their EIS program. The main issue is there are very few sources for “risk capital”- the UK government has taken steps to address those isses- much more so the any other country.

Filed under: Venture Capital

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