There is good news for start-ups this Monday. Index Ventures, a EU based firm has launched a new fund focusing on early stage deals, and plans to invest in twenty companies over the coming 24 months. Aside from the positive indicator that money is being raised in order to invest in new companies and that we’re seeing signs of life from the VC sector, what really differentiates this move by Index Ventures is its strong focus on the startup, and it’s approach to investment in them.
What this means is that the partners of the firm will take an active stake in the start-ups by joining their boards, this is a shift away from the status-quo of larger firms whose partners typically don’t engage the startup team due to time constraints or otherwise.
Index Ventures new seed fund is exactly what needs to happen in the VC industry. VC’s need to take a more hands on approach in their invested firms to ensure a greater success to failure ratio, and at the same time, they need to fill the gap in early stage capital that is lacking in many European markets. Some of Index Ventures prior investments are MySQL, Skype, Playfish and RightScale.
In more financing news, the Guaridan has reported that Luke Johnson, the man who brought Pizza Express to market in the 1990’s has acquired a 27% stake in the Beer & Partners angel investment network.
As a whole, good indicators, and again it seems that those who will lead the world out of its current slump will once again be entrepreneurs.
Let’s face it, the days of the IPO are over, the dot com IPO boom (there’s something that you probably haven’t heard in a while) was historically speaking a marvel, both for its rampant and somewhat unfettered investment in anything that housed a .com in it’s name, but also because a major planetary technology was reaching households around the world leading for companies such as Yahoo!, Google, and others to enter a relatively new space with global appeal.
IPO markets recovering, kind of.
While the IPO market did recover from 05-07 the relative amount of companies issuing public offerings was still nowhere at the level of the late 90’s, fast forward to 2009, and you’ve got 76 IPO’s worldwide, and while prospects look marginally better for 2010, this is by no means an indicator that we will see every Tom, Dick, and Harry issuing public offerings.
In fact it’s just the reverse, those companies that will make an IPO will typically be extremely specialized. The vast majority of current startups, simply put don’t have a strong enough business model nor product to do so.
Options outside of an IPO.
So what’s the option? This doesn’t mean that the entrepreneurship scene is dead, but with the credit crunch still firmly holding its grip over lending, investors being more cautious and no evident new market to exploit, entrepreneurs have to think of different and more creative exit strategies.
One such a strategy is acquisitions, large multinationals are the ones who have the cash to invest in new enterprise, and start-uppers need to identify those companies whose products and strategy would tie in well with the needs of their customers and whose own product are complimentary to those of the larger multinational.
This is not a new model by any means but one that has been employed and tested within the pharmaceutical industry for years, and is now being employed by hardware manufacturers and telephone companies among others.
Are you ready to sell?
But what and when is a company ready for such an acquisition? I would say that revenues in excess of €2m, would signal the possibility of an exit, but more than just revenues, the HR structure of the company, it’s growth potential, international reach, and scalability threshold of the company are possibly the most important factors.
Meaning, if said €2m/ annum company has 30 full time employees on it’s roster, and another 10-20 freelancers, it’s non agile (cannot respond to market fluctuations quickly), and has a stagnant revenue curve, well, Houston, we’ve got a problem.
Stagnant revenues aside, you may be asking yourself why HR is important, aside from the simple answer of wages digging into your cash-flows it also dictates that you’re revenue per employee is lowered.
Say we employ the 30 full time staff model, the revenue per employee will be €2m/3o = €66.6k per employee, just above the average salary, now if we’re to cut that number down to 10 full time staff the revenue per employee jumps to €200k, a much better metric indicator of company success.
In reality, you should always try to strive for a ratio of revenues to employees that will be on the plus side of €200k per person because.
1. You will have limited employment issues
2. You will be agile and portable
3. You will have a more flexible business
4. Your chances of selling your enterprise will be higher
5. You will have more time to spend on the actual business itself rather than HR issues
6. If you sell, your sale costs will be low due to simple due diligence
So whether you’re a company that’s out of the valley of death, or just starting out writing your business plan, be sure to assess your plans for an exit and ask yourself the following questions.
1. What is the market like now, and what will it be like in the next five years?
2. What sector am I in, and what overlapping sectors are in my market space?
3. Is / will my business be agile, and how can I make it more so?
4. What are the possible exit channels? VC, buyout, merger, etc…
5. Do you want to sell? And if so, how will you approach buyers.
While being bothered about someone’s mafia farm chicken may be a bit bothersome, it’s also indicative of a much bigger and more important change that facebook is currently undergoing, and underpins a larger trend in web based technology as a whole.
Given we’ve heard a lot about cloud computing services such as MobileMe, Amazon’s EC2, and Microsoft’s Azure Platform which will be a pivotal part of the next MS Office release, but these services are all trivial in comparison to what’s happening on facebook.
What is this? Effectively facebook games, as well as other applications are creating a market for a new type of web based operating system, and software delivery medium. This being facebook.
Simply speaking, a device will only to connect to the net in order to utilize those facebook applications that the user wants, and no actual data will need to be installed on the user owned device itself.
Clearly we are now seeing the infancy of this system as facebook applications in all are very simplistic in design and functionality, but their success has proven that there is not only a market but also a large one for value added services via facebook.
A similar trend is Google Apps & Marketplace. Google currently sells online business service competing with the likes of MS Exhange and IBM Lotus notes, it’s developer marketplace is likewise targeted at the business community and allows for independent developers to distribute add-ons for its suite of online business products.
Whether facebook will see the development of business type applications or keep to the current entertainment type applications that we’re seeing is still up in the air, though I would wager that – online collaboration tools will undoubtedly appear on facebook within the next 2-5 years.
Aside from allowing for new revenue streams for developers, facebook has a brilliant opportunity to capitalize on its platform by employing the Apple iTunes store model. Meaning that the new project management software running on facebook could cost the end user $50 per annual license, and facebook would then receive a % of sales. Plain as day, the platform is clearly scalable and the array of applications that it can offer the end user can be immense.
Then why doesn’t it do it? Why is facebook focusing on revenue generation through adverts that next to no one clicks on? For that you’ll have to ask the kid from Ardsley, but the strengthened focus on facebook’s developer community clearly shows a change in strategy for the social networking giant. Everyone sees that there is a huge market opportunity there, the question is – what will traditional players such as Microsoft, Apple, and the like do about it? And what about Google? Clearly both FB and Google are headed in the same direction, Google focusing more on business and facebook on entertainment, but will their paths cross? Will this be the next great showdown? Only time will tell.
What do you think?
As a startup ourselves, we figured we may as well convey some of the things that we’ve been going through in these last few days since we’ve opened up the site to the community.
So far reactions have been overwhelmingly positive, we’ve gotten press coverage in the U.S., U.K, Ireland, Romania, Poland, and Spain, regarding next top startup, we’ve since seen out traffic skyrocket, and have identified a number of issues with the website (and are working on remedying them), implemented user functionality improvements for registered members and have seen traffic go through the roof, at least in comparison to previous days and for that matter weeks.
So all in all good, notwithstanding we’ve seen a few new registrants, and the event is definitely gaining traction. All in all we’d say good. And while we have you here, why not register on the site, and see what all the hoopla is about behind the scenes.
As for what the past few days looked like, here goes.
Sunday: 01:00, the site opens up – and anyone and everyone can register, we feel as if though an era has ended, the day to do day is no longer about design, strategy formulation, but about actually doing those things that we’ve laid out.
Monday: Final touches on the press release are going back and forth between us, around 10-11am it’s finalized, and so the distribution begins. The next few hours are spent what for openness we’ll just call PR spam. Sites in the US, UK, Ireland, Poland, and Romania pick up on us and the event, some tweet, others post blogs. Traffic goes through the roof and we’re very pleased.
Tuesday: Can’t speak for the rest of the team, but definitely a turbulent night. Woke up a few times, but upon waking up in the AM was greeted to a media inquiry from Read Write Web, quite cool. Traffic was still going through the roof, and then we got featured on StartupIsrael, and EnergyByte. Rest of the day spent strategizing, figuring out where the gaps are in our launch plan, what we can improve on, and what we can leave for the time being. We also had to move servers, too much traffic. 🙂
Wednesday: Highest traffic day to date, an inquiry from ibusinessangel.com, and a response that we’re going on the site within the next few days, and can’t wait to see it. More work on the site, in terms of fixing bugs that popped up, and just reaching out to possible sponsors, and wrapping up mentors. Results – again – overall positive.
In all, it’s been a good week thus far for f3f and we’re excited about what the future will bring, we know this wasn’t the usual f3f article but what better way to celebrate the good news, than to share it with the community.
Thanks for reading and for those that did, thanks for signing up 🙂
Something to the effect of 80% of Angel invested businesses go under, and when looking at angel investor activity from those individuals who have been actively investing in the industry the rate drops to approximately 60%. meaning, 2/3 investments will fail even under the guidance of experienced investors, and 4/5 as a whole. Quite the number.
Every single investment requires the following three things to be in place, if any of these are missing chances are that the investment will fail. These three things are.
1. A great business idea
2. A great management team
3. A great mentor
If any of these three factors is lacking, chances are that the business is unlikely to succeed, and an established angel investor would be wise to keep their money in their pocket until the sartuppers manage to make any one of the weakened factors rock solid.
Mind you this type of feedback will only come from good angels, as they will have the ample experience necessary to critique and analyze the idea. A new Business Angel may become influenced by the energy of a new entrepreneur who wholeheartedly believes in his / her idea, and like others in the general vicinity of the BA too becomes enamored with the idea.
As an entrepreneur yourself, you have to look at the BA’s you’re pitching too and working with, and seeing if they see you and your business objectively or if they’re just another member of the crowd jumping on the bandwagon. Mind you as an entrepreneur this is a very difficult task, as you’re probably thinking your primary goal is securing capital to help in delivering your business to the next level, and while in part that’s true, the greater picture is that as an entrepreneur, you should be more concerned with ensuring the success of your enterprise – rather than running after the first buck.
Oftentimes, BA’s will also say that that they would rather back a good team rather than a good idea, this is preposterous – any good team will only go so far with a mediocre idea and never provide the 30x returns that any BA should be looking for, these are not the risk takes that will back the next big thing, and if you’re idea is truly cutting edge, you’re chances with these folks are slim.
The good and successful BA, will remain cool, and over a period of weeks maybe a month to three decide if the proposal is right, it’s the right business idea, the right management team, and has the right mentors to see it grow, the business angel, will also know the market and understand the current business environment.
Ensuring your BA holds all these characteristics chances are you’ll wind up in the 44% of well thought out investments that actually make it, and when dealing with BA’s, it’s like anyone else, a give and take relationship.