News for oktober 2010

Systemic problems in European VC

Fred Wilson who blogs at AVC has earlier described the venture capital math problem, that there are too many VC funds in the US for them to make good returns. For the record good returns means about returning the fund 3X over 10 years, something that becomes more difficult when there are too many VC firms in the market.

Well as usually with VC, fast forward to Europe for a much bleeker view.

Here the problem is not only that VC is extremely underdeveloped in several parts such as Italy which only saw 20 VC deals close in 2009, but also that returns of VC funds in Europe in general are very bad. Over the past 5 years Europe’s VC firms have returned only 0,7% annually and lost 1,9% annually over 10 years. There are more details in the article here where there is also some more optimistic voices, however if VC funds do not return any money to their institutional investors it’s unlikely they will be able to raise new funds. This is simple natural selection and that funds that lose their investors money have to shut down, however we might have a more serious problem in Europe if there is not only too few VC funds, but the ones that are here are not doing well.

This seems to be a paradox: If entrepreneurs complain that they don’t get funded, a very credible and relevant complaint in e.g. Italy while VC firms might have harder times raising new funds there seems to be a catch-22. More institutional investors and pension funds need to allocate more of their portfolios to the VC asset class and they are not going to to that if they’re not getting any returns.

I think a couple of things are needed to improve this although overall I completely agree with Hussein Kanji’s answer on Quora about what Europe lacks:

  • More early-stage investments
  • Much more interaction. US colleges have the advantage that Computer Science majors can also take classe at the b-school and vice versa. I think more interaction between different disciplines is essential
  • Less bureaucracy and well-meaning states trying to be VCs
  • More of the most successful people from abroad. Just as successful Europeans have become successful in the US and elsewhere, we need some of those to come back to Europe to show how things are done. There’s a lot of pattern recognition in VC and transfer best practices can speed this up
  • More transparency. Of course funds that are not doing well will be against this but then it’ll serve as a way to let the best peformers to share how they are doing
  • More focus on emerging sectors in which Europe may have advantages: sectors like fashion and food come to mind

Another possibility is also that investors are just not very good at their jobs and they have perverse incentives in terms of management fees which reward them hansomely anyway. The few VCs I have met seem genuinely passionate and motivated about creating great companies and I really hope that we will see more VC funds and more successful exits in the near future.

PS. What is considered a disappointing return for a VC might of course be a perfectly acceptable outcome for the entreprenuer (i.e building a sustainable business with a 1-2X return to the VC)

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Posted: oktober 30th, 2010
Categories: Europe, startups, VC
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Always remember the 2nd law of thermodynamics!

After 5 years of university education, you forget some things you have learned along the way, but the most important concepts, ideas and ways of thinking hopefully stick with you.

In my case, I have been fortunate to have several inspiring teachers and class mates along the way but the main lesson that has really stuck with me is something I learned in my second year: “Always remember the 2nd law of thermodynamics” The second law is described in detail here but the practical implications of it as well as entropy is what really stuck with me: When as system cannot get rid of its energy, entropy increases and increasing amounts of energy is no longer available to do work untill the system eventually overheats.

Taken to a business context this is very simple: closed system always die. This might seem like a simple observation when you observe failures after they have happened, however how do you make you that your system remains open and dynamic and also how can you defined what closed means?

The best answer to both questions is orientation. Orientation is the most important element in John Boyd’s OODA loops. For any firm, entrepreneur or investor for that matter orientation means to realign your self as quickly as possible with the contexts you are embedded in. This also solves the issue of defining closed systems, because open systems are those that constantly reshape their decisions and strategies based on what they see. So although Apple have chosen an integared approach to their products, they are clearly an open system since they are excellent at evolving with and defining their environments. This is in no way obvious to many people who are in the middle of an industry and are bound by all the traditional way of doing things but when firms repeatedly fail to re-orient to match the reality around them, the future catches up with them. Myspace is partly  trying to re-orient their strategy towards Gen Y and music, but they clearly missed the boat on e.g. people being ready to use their real names and information for social networks. An excellent example of a company that has been quick to implement changes based on their observations is Twitter, which based on usage patterns implemented the @ and # features.

I went one to write my bachelor thesis about OODA loops and although I am not an expert in the lean startup movement, they are clearly influenced by OODA loops as well. I will write more about OODA loops and the importance of agility, but if you are hungry for more about OODA loops Chet Richards have written the preeminent book on how to apply John Boyd’s concepts to business. It is hard to find a better business book and you can buy it here.

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Posted: oktober 28th, 2010
Categories: miscellaneous
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VC firms should have Anti-Portfolios

VCs get to review hundred of business plans a year and while it should be clear to most people that people are more important than the idea. This is because often the idea will have to change and the original business plan never holds so it is important for VCs to find people they really believe can see their idea through all these changes. At the time most VCs are pitched for investment it is very early and it might often be unclear what the business model of the company is and it is still extremely difficult to predict how people will do. Recently Vinod Khosla told the story of how the Google founders wanted to sell it for a million dollars and this illustrates how extreme the uncertainty can be even for the people who have the idea and vision. When entrepreneurs don’t even realize the potential value of their business it’s of course very hard for investors to foresee which investments will be successful and therefore many VC investments will likely fail. These are the rules of the VC game and most people agree on them.

However  just as VCs celebrate when they exit their good investments, it would be interesting to see more have anti-portifolios of the deals they were pitched and turned down, which have gone on to become successful. An old and also very successful VC fund that does this is Bessemer Venture Partners. You can see their anti-portfolio along with the entertaining background stories here.

It’s also clearly not very easy to be a VC and many of them also don’t do a particularly impressive job in generating returns to their investors so they might prefer opecity over transparency but in general I think entrepreneurs and VCs would be better off knowing more about the mistakes VCs have made in evaluating investment opportunities. This takes investors who has also had successes and is honest about admitting their mistakes and from an entrepreneur’s point of view I think it sends a strong signal.

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Posted: oktober 26th, 2010
Categories: startups, VC
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Thoughts on Milan Startup Weekend and why programmers should know some strategy

Last weekend I participated in Milan Startup Weekend and overall it was a really nice experience and a great initiavive. If startup weekend is coming to your city you should go. You will meet lots of like-minded people and although the entire thing was in Italian most people spoke English so don’t be shy if your Italian is not perfect you can still attend.

The idea about startup weekend is not so much work on existing startups as actually showing a real demo that has been made in about 48 hours. This means that the main focus will be on web technologies and rightfully programmers and designers are in highest demand where us with business degree were helping out in terms of strategy, market sizing and marketing ideas.

I really like the concept and I was working on someone’s idea of a social Q & A site for shopping, which I really like. It’s still a work in progress but you can see the site here. Overall, there was a very nice and helpful atmosphere the entire weekend and between working on projects there were guest speakers (Massimo Sgrelli, Raffaele Mauro and Alberto D’Ottavi were most interesting in my opinion).

Since time is the main restraint on building something, many of the ideas will be pretty small features and applications but I like the idea of finishing something managable than start out with some big and time-consuming vision that is unlikely to be realized. It has already been explained that it is becoming cheaper to start web companies and here is an excellent explanation of how disruptive cloud computing is for startups.

However, as the barriers to entry has been significantly lowered  a useful  concept taught in business school today is called the resource-based view comes into mind. The quintessential part of strategy is to create sustainable competitve advantages, and sustainable means that you still kick ass after someone repeatedly tries to copy you, however in order for companies to create these advantages they must do things in ways that competitors cannot easily copy. As anybody can now launch a startup in 48 hours and take advantage of the same tools and technologies (Twitter, Get satisfaction, Amazon web services etc.) the competition shifts to being the best at acquring users and build some a brand as quickkly and effectively as possible. Strategic partnerships e.g. with key suppliers or distribution channels (e.g Groupon if they partner with Yahoo) and finding ways to increase switching costs for users become critical.

Aalthough this is not something that should be the main concern at an event like Startup Weekend it is something that anybody who is thinking about starting a company should spend time on thinking about. If you can launch a live demo in 48 hours so can anybody else and from then on it’s game on about who is able to convince users that they should use your site and not any of your competitiors.

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Posted: oktober 24th, 2010
Categories: Italy, startups
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Competing for the future

Competing for the future is one of the best management books I have ever read, and it also has some important lessons for entrepreneurs or anybody who is thinking about starting a business. Competing for the future is written by Gary Hamel and C.K. Prahalad who are among the best and most original management thinkers in this generation and their most famous contribution to the field of strategy is probably that of core competencies.

Some of the important consequences of Hamel’s and Prahalad’s work is that while companies have core competencies and things they do extremely well, industries change and evolve and companies might not be able to change with them and so they become stuck while continuing to focus on the things that were yesterdays success parameters. Of course managers could avoid some of that by asking themselves more questions about where their industries are headed in the future, however when a certain strategy has brought you success in the past it is very difficult to change the direction the company is going in. Also don’t underestimate how much ego is at stake, most corporate cultures still stigmatize failures so it is quite rare for the same CEOs to strategic shifts that differ significantly from the strategy followed in the past. Therefore a good way to look at it for entrepreneurs today is that there are a lot of companies today where the future has essentially caught up with them and all the systems and processes they have in place are geared to an industry an environment that is no longer relevant.

One of the quotes that I have really taken to me from the book is that “starting resource positions are a very poor indication of future leadership”. This is tremendous news for anybody who’s trying to start something, bacause it means that whoever is going to leas in ten years is not decided by who has the biggest budgets today. Many industries today change at a break-neck speed and there are loads of opportunities to find things that large corporations today are not doing very well and attack those niches with all the scrapiness and clout you have. As an example of this opportunity take advertising. Advertising continues to drive many business models online and yet as this blog shows the majority of the billions of advertising dollars are still spent on television and newspaper ads so there is still a lot of billions in advertising dollars thar are going to migrate from offline to online. Even outdoor advertising is still a huge market that seems ripe for disruptions, possibly by these guys.

So I suggest you go ahead and read the book and study some of the examples of successful cases where corporations that have been huge underdogs have ended up overtaken their much larger competitiors. You can buy the book and read reviews of it here.

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Posted: oktober 11th, 2010
Categories: startups
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Bocconi’s Learning Lab

One of the lesser know parts of Bocconi which deserves a lot more recognition is the Bocconi Learning Lab. On a daily basis the learning lab creates various applications and games, primarily for the executive management school SDA Bocconi, however they also do all sorts of hacks on other projects.

I went there a couple a weeks ago to see what my two friends who work there Luca and Luca were up to and they are extremely helpful and passionate about building applications and talking about technology. Their philosophy is inspired by that of 37signals and they’re particularly into building web applications with Ruby on Rails. Very few people know about the Learning Lab and that’s really a shame. I would also hope that a place like the learning lab could organize evening courses or events in general for the Bocconi students who are interested in web and startups. Something like in “web development for beginners” or something like that.

Both Luca and Luca are very helpful and great at explaining complex concepts in a simple no-fuss manner so if you’re at Bocconi and interested in technology you should send them a message or just drop by their office and see if they have time for a chat.

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Posted: oktober 8th, 2010
Categories: Bocconi
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Yozma and Italy – Why copying Israel’s VC cluster is unlikely to be a good idea

On his blog at il sole 24ore Gianluca Dettori recently pointed to a new proposal for VC in Italy. The gist of the purpose is to create a fund of funds with a mix of public and private money. The proposal is nicely summed up here and the idea is clearly to create an Italian parallel to Yozma, which was fundamental in creating Israel’s thriving VC and high-tech clusters.

VC getting more love and attention from politicians is very nice, however there are in my opinion several reasons why the “let’s make an Italian Yozma” is unlikely to be an ideal approach. (disclaimer: I don’t follow Italian politics, so if you believe my assertions below are wrong, please point it out).

First of all, it is a traditional cause-effect fallcy within public planning to observe a successful effect in one context and trying to replicate it without thinking more about all the underlying causes. This is similar to why many companies have failed in trying to copy the Toyota Production System. They observe that any employee can stop the entire prodution line by pulling a chord and then the problem is traditionally resolved quickly, so the key to lean production must be to install this system. However the system works because of all the tacit knowledge, trust and mutual understanding between the workers and therefore it is extremely difficult to copy and require a change in all the underlying processes that lead up to the “pull the part chord”. The similarity to the VC system is the countless and failed attempts to emulate Silicon Valley and just like I consider it unlikely that Italy can successfully copy Yozma, the people behind this proposal should start somewhere else and study the conditions in Israel when Yozma was launched.

Before Yozma became world famous they had the Inbal program which was a similar approach that suffered from problems such as too much bureaucracy, low upside and difficulty to attract good VCs. If an initiative in Italy is going to work there has to be a compelte minimum of bureaucracy, and the state has to acknowledge that private VC fund managers have to have an upside and might become very wealthy if the fund is successful. Paricularities of Israel, that I doubt are present in Italy:

  • A strong domestic military indusstry. A lot of Israel’s successful startups had a background in the military industry.
  • Office of the Chief Scientist (OCS). Excellent capabilities in applied sciences and a generally the OCS was a very respected and admired  institution.
  • Tech-heavy foreign multinationals such as Intel, IBM and Motorola.
  • Immigration in the form of thousand of highly skilled engineers and scientists.

Another aspect that is critical is that the Yozma program was seen as the third phase of the VC industry lifecycle which began with the background being set in the 1970. You therefore can’t ignore what happened in the 20 something years leading up to the Yozma program and instead Italian policy makers should study this period and find out why conditions in Israel were ripe for a VC cluster. Particularly, the experience from Israel also showed that there needs to be a critical mass of high-tech entrepreneurs before a VC cluster can successfully emerge, and as much as I wish this was the case in Italy, I think we are at least a decade from where Israel where when Yozma was launched. A good start would be to educate more engineers and scientists and make Italy more open to the best immigrants in these disciplines.

If you want to read more in detail about the the co-evolution of Israel’s high-tech and VC clusters, I co-wrote a paper about this two years ago. I couldn’t embed it but you can read it here.

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Posted: oktober 6th, 2010
Categories: Italy, VC
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Comments: 2 Comments.

Entrepreneurship news from the past week

Last week there were a couple of positive entrepreneurship-related events that I think deserve to be mentioned.

The first was the inaugural meeting for Bocconi’s new entrepreneurshup club Young Entrepreneurs at Bocconi. The club has the valiant purpose to encourage more entrepreneurship and to be a place where young entrepreneurs can meet and exchange ideas and help each other out. The idea is also to have guest speakers and work shops with various purposes so its activities are like entrepreneurship clubs at most universities. It’s a great initiative and it seems like Bocconi is also supportive, so I hope it’ll be succesful. However there is also room for improvement:

  • First of all more people have to know about it. Only 6 people showed up and three of us were foreigners so foreigners are perhaps more apt than Italians to have entrepreneurial aspirations?
  • If it’s going to be helpful people have to openly share their ideas and what they need help to! I can’t say this enough but it’s really a banal and unjustified fear to be afraid of having ones idea copied.
  • More technical focus and not being afraid of bold projects. The challenge with an entrepreneurship club just for business students is that the skill sets are very similar and whenever somebody has to built somethng technical, software developers are needed. I think it would be ideal to have the entrepreneurship clubs of Bocconi and the different technical universities meet up and share ideas.

The club doesn’t yet have a website but if you are at Bocconi and interested in joining I really suggest you go check it out, since it is just getting started you have a great opportunity to get a lot of influence from the beginnig! If you want to know more then send me an email and I will get you in touch with the founders.

The second event I attended was “mifaccioimpresa” this weekend at Bocconi. It was a fair dedicated to entrepreneurship and with lots of panel discussions about everything from financing and marketing to legal issues and the role of VC in Italy. The fair lasted all of Friday and Saturday however I only attended on Friday and the most interesting thing for me was a panelk discussion about innovation and financing and SMEs and the role of VC in this.

The panel consisted of Roberto del Giudice head of the Italian Private Equity and Venture Capital association AIFI, Francesco Perrini from Bocconi and an investment manager from the Italian VF fund Quantica sgr. The discussion was about the status of VC in Italy and although this might be already know to some, the state of affairs is pretty bleek. Here are the main takeaways from the discussion:

  • A total of only 20 VC investments were made in Italy in 2009
  • 5 VCs represent 50% of all the deals and out of these, the most active were Innogest, Piemonte High Technology and Quantica
  • Some funds barely average 1 investment per year from 2004-2009
  • Italy is completely divided in North-South in terms of VC and no investments at all in e.g. Calabria, Puglia and Sicily.
  • Overall, Italy is a country of SMEs but not innovative SMS.
  • To put innovativeness in perspective, the 20 VC investments are out of 5000 new firms formed every year.

Overall, the picture is bleek and anyone who has tried to raise seed or venture capital in Italy knows that it is extremely difficult, however one can also look at in a more contrarian and positive way. Since so few innovative companies are founded in Italy you actually have a better shot at being funded if you offer something cool and innovative!  The start-up scene is not exactly Silicon Valley so if you do something original there are plenty of chances to get yourself noticed. One of the reasons I do not worry much about anybody copying our business idea is simply that most people Italians think it’s nuts and that it can’t be done.

So get started and don’t blame the bad economy, now is a great time to start a company!

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Posted: oktober 4th, 2010
Categories: Bocconi, Italy, startups, VC
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Choosing colours for your startup

One of my favourite blogs is easily kissmetrics which offers great insights about marketing, webdeisgn and usability.

A couple of weeks ago I read their post about how colours affect purchase decisions and it is does a good job of showing which message different colours convey to US consumers. Startups should think about this when designing their website but don’t overanalyze it and if you are unsure you can run A/B test to test which colours are most effective with your visitors.

While it might seem obvious today that facebook is blue, they actually chose this because Mark Zuckerberg is red-green colour blind so since you will be looking at your website a lot, just choose a colour you really like and which supports your products’ message.

You should also look at which colours the existing competitors are using and choose a different one. In the industry I am trying to start a company in, there are few very large companies. Since I have always liked green and none of the current companies use green we chose green and are sticking with that. Choosing colours shouldn’t become a major decision to make and in the early stages and it can be changed if you completely regret it.

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Posted: oktober 4th, 2010
Categories: marketing, startups
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