Competitive differentiation – are you the WiFi or the cinnamon?

Around our offices in Red Lion Square there must be 50 cafes within 5 minutes’ walk. There are the big chains – Starbucks (two of them), Caffe Nero, Costa Coffee; there are bakery cafes; there are outdoor stall cafes; there are sit-down-for-lunch cafes; there are takeaway cafes. Lots of choice.

Sitting in one of the two Starbucks the other day, to which I’d been coming regularly for 18 months, I realised that Starbucks had successfully differentiated itself in my mind as one of the better options for me.

For a long time Starbucks was the only major coffee shop chain in London to offer free wireless internet to all its customers. It was also the only one that stocked cinnamon shakers so that you could add your own cinnamon to your coffee.

So for 18 months I’ve been going regularly to Starbucks despite the fact that it’s not the most friendly cafe in the area; it’s not the best coffee; it’s not the closest to the office; and it doesn’t do the best food. But it has free wireless internet (I don’t care much for cinnamon).

In fact I can’t imagine there are many people who would consistently choose Starbucks for its cinnamon shaker whereas I know plenty who go there for its internet.

I often meet entrepreneurs that are competing in very crowded markets – particularly in the B2C world of apps or consumer internet – and they talk through their “significant”, “compelling”, and “unique” competitive differentiators and USPs.

Unfortunately a lot of the time those differentiators can sound like cinnamon and not like free internet.

Interview with Ascendant: the current trends in UK tech investment

Stuart McKnight is the Managing Director of Ascendant, a technology and media focussed Corporate Finance house that specialises in growth stage companies. Ascendant also has experience in fundraising for buying and selling businesses and technology licensing deals. RIG’s Managing Director, Shields Russell sits on Ascendant’s Advisory Board.

Ascendant has tracked all growth-stage investments in technology companies in the UK and Ireland since 1996. Their definition of technology is broad – covering software, telecoms, Cleantech, semiconductors, and internet/wireless services – but excluding life sciences and most medical devices, as well as Management Buy-Outs and Private Equity deals.

What are the growth-stage investment trends that you look to cover?

“We keep track of five key questions in the growth-stage technology sector in the UK and Ireland: how much money is being invested; who’s writing the cheques; what they’re investing in; the stage of the companies; and whom they’re co-investing with – that’s very important as well.

“2011 was a very interesting year – we saw good growth in the total amount of investment (£786m up from £620m in 2010) and the capital was more concentrated – there were 193 deals greater than £0.5m in 2011 compared to 213 in 2010.

“228 different investors participated in those deals last year. That number 228 is important because if you speak to the many of the London-based VCs and ask them how many different people are investing they typically say 20-25 – or a maximum of about 40 – but nobody imagines that it’s closer to 250.

“There is a geographical locus in terms of where VCs are based but not in terms of what they invest in. Most of the most active VCs in the UK and Ireland are based in London but many look at companies throughout the UK and at deals in Europe too.

“There are also a large number of trade investors looking to invest. In 2011, there were 34 deals in which trade investors participated. So financial VCs are not the only solution.”

How do companies perceive VCs in the UK compared to overseas?

“If I had a pound for every person who came to me saying that they were looking for a US investor, I’d be a very rich man.

“Companies can spend a lot of time looking for a US investors as there is a perception that they are better at Tech investing than the Brits. For a company that’s grown well in the UK the obvious next stop is the US and so picking up a US VC whilst you are there seems like a good idea. Add the belief that there is a big pot of gold waiting for them over there and you get an army of UK companies getting on planes to head for the US.

“Initially many find that there is a lot of interest. It’s easy to get meetings in the US – anyone can line up two weeks of investor meetings of 45 minutes to an hour each. However many US investors see these as a ‘fishing trip’ to see what’s going on in the European market. But it’s much more difficult to get serious, hour-and-a-half meetings where investors are really thinking about you as an investing opportunity.

“Companies and their shareholders have to be really sure that the US is right for them They need to be realistic about the chances of getting US money – only 11 UK tech companies received money from the States last year.

“Europe’s actually been a much more fertile ground, and it’s much more enthusiastic on mobile/internet companies. The VCs in Munich, Paris, and Brussels have been active in the UK, and the Nordic funds have recovered a bit but they’re still not back to the position they were in about a decade ago.”

Which sectors are getting the most interest at the moment?

“There’s been a strong sector bias – the three primary areas of investment were Internet/Wireless services, Cleantech, and Software. We find that in many cases investors tend to hunt in the same packs: they follow the same trends and look for the same ideas. There’s a cohesion about what investors look for at a certain time.

“Cleantech is interesting because it’s still strong but we’re beginning to see it wane. I could go to a Cleantech conference every day of the week but in truth there was a dramatic drop in Cleantech deals last year, even taking a broad definition of Cleantech that includes solar, fuel cells, electric motors, and so on.

“In Q1 last year there were hardly any Cleantech deals – perhaps 2 or 3; Q2 was very busy then Q3 and Q4 were very low. There were only 31 Cleantech deals in total compared to 45 in 2010, which compares to typically 60-70 deals per year in Internet/Wireless services and 45-50 in Software.

“Investors in Cleantech are making bigger gambles on later-stage companies than they were when Cleantech started to become popular and we started tracking it in around 2004/5.

“A lot of these businesses are still effectively early-stage because they are struggling to get meaningful orders from customers or even just getting a customer even though they’ve been going for many years. For most LLP backed VCs, when an investment holding period extends beyond 5 years, the IRR on the investment starts to get difficult. Many funds are starting to realise that in some cases Cleantech can be like semiconductors in needing lots of capital and long holding periods. Hence the rapid reduction in the number of active investors in the sector.

“Cleantech companies are starting to look for other options like funding through the balance sheet investors or ‘green funds,’ and we’ve seen a larger participation from non-standard VC funds like trade funds or family funds that can take a longer-term position.”

The majority of deals last year had more than one investor. Why do firms co-invest?

“Co-investment can be a bit of a magic trick for investors and for companies. Not all investors get the same deal flow – some get a lot of high-quality deals; some get a lot of average deals; and some struggle to find the right opportunities.

“Well-established firms like Index, Balderton, and Accel see a high-quality deal flow, whereas for the others a bit further down the league table it can be a rational business development strategy to build up relationships with other investors and look to co-invest with them.

“It’s in the investors’ interest to network. The relationships between VCs are partly personal and partly corporate. The relationships are primarily personal but there is such a thing as corporate memory – people will remember joint successes and they’ll remember joint failures.

“In the UK around 60% of deals have more than one investor. This is one indicator that the market is in ‘good health.’ Just before the ‘internet bubble’ burst in 2000-1 less than 40% deals were done jointly – reflecting the misplaced sense of confidence VCs had at that time – they were so sure that they had the best deals that they did not want to share and wanted everything for themselves. Fortunately many of those folks are no longer with us.”

What advice would you give to growth-stage companies looking for funding at the moment?

“Before a company speaks to investors, they need to have a significant opportunity, a clear differentiated plan to exploit it, a good team, and realistic expectations in value and the amounts they want to raise.

“For Ascendant to take on a deal, we would need to comfortable on all these points and be certain that we could identify 30-40 potential investors who would actively consider the opportunity. We are happy to give some guidance to companies looking at funding options – it is a tricky market out there. ”

For more information on Ascendant contact Stuart McKnight at

Information is Free, Knowledge is Expensive, Wisdom is Priceless

A couple of weeks ago I had a chance to hear some of the speakers from the event “Silicon Valley Comes to the UK” in Cambridge. Several of the speakers talked of the amazing possibilities opening up with the availability of large data sets that effectively index information, language, and the world itself. It got me thinking about the nature of information, knowledge, and wisdom, and my thoughts turned, of course, to the old giant Vafþrúðnir (Vaf-thruth-neer).

In the Old Norse poem Vafþrúðnismál (Vaf-thruth-nis-maul)The Sayings of Vafþrúðnir—the god Óðin (O-thin) comes to the giant Vafþrúðnir in disguise. Both are powerful figures in body and mind, but Óðin challenges Vafþrúðnir not to a contest of strength, but to one of wisdom.

The giant agrees, but it is his hall and his rules. They set the terms of the competition: he who loses the battle of wisdom shall forfeit his head. The cultural implications of this wager are great. Strength without wisdom is useless; the strong fool is as good as dead.

The giant does not know, of course, that he battles against Óðin, and is therefore doomed to fail. But Óðin finds a dauntless opponent in the giant as he crafts riddle after riddle, and must win in a rather sneaky way. He asks a question to which only he knows the answer: What did Óðin whisper into the ear of Baldr when he was laid on the funeral pyre? Upon hearing the question, the giant realises that his opponent must be Óðin, for only Óðin would know the answer to this question. Aware of his error, he concedes defeat.

In the Q&A period after the final session of the Silicon Valley Comes to the UK conference, one person asked about what skill-set will be required in the coming years of computer-based living as opposed to the skill-sets cultivated in years past.

The first answer came from Reid Hoffman, co-founder of LinkedIn, who said that memory and memorizing would no longer be necessary, and instead people would only need to know how to navigate data and find the information they need in the moment. Delivered to an audience largely comprised of current Cambridge students, this answer did not seem to sit well with the crowd.

After a brief, half-hearted challenge from Megan Smith at Google, Andrew McLaughlin of Civic Commons championed the opposition to Hoffman, saying that no matter how readily available information and data in the coming years may become, nothing can match the human being’s ability to integrate and synthesize information into something newer and better. Memorizing, he said, would still be important not for mechanical recollection of facts, but for the pathways it opens up in the human mind that facilitate true growth, unmatched by any program or computer.

The response received loud applause from the audience. Without the processes that real learning initialises within an individual, what purpose do the advancements in data storage and processing actually present mankind? Information has always been free. Everything we know as a species we have learned through observation, exploration, and experimentation. The information has always been there; we just needed eyes to see it, like Newton beneath the apple tree. The effort required to unearth and organise that information, however, speaks to the costliness of knowledge. Knowledge is not just about possessing information, but also about possessing methods and means of storing, processing, and using that information. It requires action. Owning an encyclopedia is useless if one never reads it, much like the uncut pages of the books in Gatsby’s library. Information is just potential, useless unless developed into knowledge, and then used with knowledge. 

And then we get to wisdom. Wisdom is yet another step further, a kind of combination of knowledge and experience that transcends the articulable. Knowledge can be traded, bought, sold, and passed on; wisdom must be developed within each and every person individually. Knowledge is also limited to a specific subject area, whereas wisdom applies across the range of human experience. And that is precisely why no matter how advanced data processing and applications become in the years ahead, they ultimately have nothing to do with the internal advancement of each human being that makes life worth living.

Wisdom will always be our rarest and most expensive commodity. In our quest to explore the applications of data, we must be sure we do not neglect the importance of wisdom and lose our heads like the giant Vafþrúðnir.

"Get Thee Down to a Hackathon, Young Man"

Hackathons are generally seen as being the preserve of enthusiastic developers. It’s all about the code, surely..??

I recently had the good fortune to be accepted for the Seedcamp Seedhack event – there were going to be 120 attendees, with a mix between coders and ‘business types’. My personal aim in going was to see inside the black box and understand what ‘bits’ it actually takes to build a web app/service.

As the event approached, I had a sense of great excitement at taking part but also a lot of self-doubt: what can I possibly contribute?

Shortly after arriving at LBS on a Friday evening, we were taken at breakneck pace through a raft of API presentations by companies such as Facebook and GIS Cloud. Then there was a special session highlighting the role that entrepreneur-driven innovation can play in the delivery of healthcare: Richard Stubbs, Programme Director for NHS Innovation Challenge Prizes, hailed the role of local initiatives as the antidote to the ‘one big system mentality’ behind the failed NHS core IT project. This was then nicely illustrated by the presentation that Mohammed Al-Ubaydli gave on the approach that his company, Patients Know Best, takes to healthcare data innovation.

In the days running up to the event, we had all been encouraged to post ideas on the event’s forum so that they could be commented on and voted on. The people with the highest scoring ideas then pitched them to the room – ideas included a credit scoring system based on social media data, a Facebook API-driven social dating application and an online social calendar. Teams were formed on the spot and went off to start work. Our mission was to have a minimum viable product (i.e. a working demonstration) by 4pm on Sunday.

Although I had posted my own idea which was a concept based on emerging Smart TV platforms, I chose instead to join an existing group so I could see a web app being built from the ground up. I joined up with three bright young developers from a development company in Bielsko-Biala, Poland who wanted to write a web-delivered system to integrate all the different operating and financial data sources that a small professional services company uses in order to generate easy and insightful profitability analysis metrics.

Fortunately I was able to be very useful – there was an emphasis on having an outline business rationale (which was based on the Lean Canvas framework) – so ‘business types’ like me were able to provide critical input on the customer proposition, the routes to market and the revenue models.

What was great was how much the developers valued the business input as they wanted to make something not just ‘cool’ but also with commercial potential.

By Sunday, most of the teams had a product demonstration ready. My team had a nicely designed online dashboard with a set of metrics and interactive Javascript graphs linked to dummy data on a custom-built Ruby on Rails engine. Very satisfying!

As we headed off to the nearby pub, everyone was happy but exhausted – at least one person had coded for 48 hours straight! I came out of the event with a much better sense of what it takes to build a decent web service, and having met a really good bunch of talented and motivated people (and having eaten more pizza in two days than I thought was humanly possible).

If you haven’t attended a hackathon, I would strongly recommend it!

Many thanks to Carlos Eduardo Espinal of Seedcamp and his team for putting together a fantastic event.

Can you be a lean startup and a visionary entrepreneur?

I like the ideas around 'lean' methodologies for startups that have been developed from their manufacturing background in Eric Ries' new book, The Lean Startup. It's now on our recommended reading list and I cited some of its principles in my recent podcast on market leadership.

To use Ries' 'lean methodology' is to ensure that your startup grows its customers, its product, its team, its financials, and its business model in sync: slowly, iteratively, and securely.

As an example, an entrepreneur should never make huge investment in a product without getting the right feedback from potential customers; without getting the right team in place to deliver it; without being properly financed; and without having developed a business model to support it. Ries implies that expanding markedly along any single axis will lead to wasted investment and potentially catastrophic failure.

The Startup Genome project produced an excellent report entitled A Deep Dive Into The Anatomy Of Premature Scaling, using the example of the Sequoia Capital-backed startup, Color, which managed to raise $46m in Venture Capital funding before its launch. The graphic shows how Color was out of harmony in its growth because it had a huge PR campaign, a highly-experienced and extensive management team, lots of capital, but no product and no customers.

But I'm not sure that 'lean' growth is always the right approach for startups.

Admittedly, there are some startups that are trying to respond to a current, well-known need in the market. For instance, the UK's Carbon Reduction Commitment legislation required UK businesses of a certain size to declare their carbon footprint on an annual basis, so a group of technology startups sprung up providing services and software to help them do it. In that case, it makes a lot of sense to grow a startup securely on the basis of regular customer feedback.

But there is another category of startups that are making a bet on an emerging, currently unperceived need. Twitter was one of those startups. So was Zynga. Color might be another. These are companies that ignored early market sentiment because they believed in a vision of how the market would act if their product became sufficiently developed.

Plenty of investors looked at early versions Twitter and Zynga and professed to 'not getting it': "Why would I want to limit my blog posts to 140 characters?"; "Why would I login to Facebook to play poker?"; but both companies now have enormous valuations. Howard Schultz of Starbucks used to say, "If I went to a group of consumers and asked them if I should sell a $4 cup of coffee, what would they have told me?"

But it's the companies that make these bets successfully that generate the greatest returns because they have more time to get ahead of the competition – not the ones that compete to respond best to existing market needs. Conversely it's the companies that make the wrong bets about the future that fail the quickest.

I like the ideas behind 'lean' but I don't think it should be seen as the only viable set of principles for a startup's growth. If you're trying to create a 'visionary' startup that's truly transformational then you should allow yourself to press ahead despite negative feedback in the early days, as long as you do so in the knowledge that this approach has a higher risk of failure as well as a higher potential return.

If your assumptions about the market prove to be incorrect then you'll fail spectacularly. If you're proved correct then you'll be on the front page of Forbes magazine.

How to give your startup more power when selling to corporates

A friend of mine used to run a technology project at Tesco, working alongside a growth-stage technology company. Whenever he phoned that technology company, he represented Tesco with the full weight of its brand and its revenue potential: his calls would be answered at all hours of the day. On the other hand, even the CEO of the technology company was seen as only one element of a much wider project, from which my friend would shortly move on to the next one.

There seems to be a clear imbalance of power here. I think that this can sometimes arise from the very understandable eagerness as a growth-stage company to prove yourself and your product or service to the best and the biggest in your sector.

But growth-stage companies should remember that they have power too. And this should be reflected in your approach to potential customers.

Compare these two approaches:

  1. We have a really great product; we have experience in your sector and a proven ROI; we can save you £1m within the first year. Based on your characteristics x, y, and z we think you might be a good fit for us. We'd love to open a dialogue with you to see whether we might be able to help you
  2. We have taken funding from VC investors in order to demonstrate in the next 12 months that one of the major players in this sector can save £1m within the first year through using our product. We're going through a process of identifying which the best company would be to partner with to generate this proof. We feel based on your characteristics x, y, and z that you might be interested in exploring this with us.

The second approach creates a sense of scarcity: the startup is choosing the customer not the other way around. There is an opportunity here to save £1m, the entrepreneur is saying, but it's not open to everybody. The offer won't be around for long because our investors need to see a return. It's then up to the potential customer to convince the entrepreneur that they are the right people to capitalise on this opportunity.

Give yourself more power when selling to corporates by remembering that your resources are limited and so you have to be just as careful to select with whom you work as your customers are.

Good entrepreneurs are risk-averse

Ask a man on the street what he thinks about entrepreneurs and risks. He’ll likely say that entrepreneurs thrive off risks. In reality, the best CEOs of start-up companies are very risk averse; their skill lies in their ability to mitigate risk.

We are currently helping a client raise funding and design a go-to-market strategy for a technology it is building. A focus on risk mitigation has been central to this strategy.

Historically, a company at this stage would have faced two key risks:

  1. Technical – can a solution be built to specification? Will it work?
  2. Market – will the market adopt the technology? Will it do so within acceptable timeframes and costs? Is there a product / market fit?

In today’s environment, investors are much less concerned about technical risk. They assume the system can be built to requirements. Their key questions are all around market adoption, and this was the area our strategy looked to address.

Step one – market selection

The solution, once built, will be applicable across a wide range of markets. We began by selecting a niche one for initial deployment. This way the solution can be built precisely for this market, from the ground up, and therefore compete by being better able to meet precise user-requirements than the generic solutions of its competitors.

The market was selected because it will face new legislation in the next 18 months: no driver is stronger than a legislative one, where the result of non-compliance could be a criminal conviction. Our strategy is for the solution to enable companies to gain assurance of and demonstrate compliance to the legislation in the most cost-effective and straight-forward manner. Currently there is no effective solution on the market to enable them to do this.

Step two – partner selection

Our second step was to form a partnership with a major ($2bn turnover) services company, operating across a wide range of markets, and currently number two in our chosen market. We will build them a solution ‘free of charge’ (i.e. fully funded), they will input user-requirements and market it to their customer base. This partnership will mitigate market risk in the following ways:

  1. The resulting solution will have the endorsement of a leading market brand
  2. The system will be ‘best-of-breed’ in terms of precisely meeting user requirements, thanks to the partner’s input of expertise during the build process
  3. Most crucially, there will be a ready-made large customer base (i.e. that of the partner’s) to enable a smooth path to revenue upon product completion 
  4. There will be a significant reduction in terms of marketing spend due to the partner’s ability to promote to its customer base. The partner’s current number two position in a strategically important market means it is strongly motivated to leverage the incoming legislation to gain a leading position – our client’s solution will be a chief enabler for this
  5. Market development – subsequent target markets are also served by the partner