Poor CFO…
These videos are becoming more and more entertaining – after the stunning Visa Commercial Add I have now found a video from Oracle that literally draws a very different picture of CFOs and their daily challenges.
Digital investment strategy …
When and how is the digital industry shift/storm/tsunami going to reach global capital markets? So far companies like Facebook, Google and Apple already provide shining examples of new businesses that mostly rely on new web-based technologies. These businesses have created substantial shareholder value and firmly put “digital” investments on the radar of any professional investor.
Significant amount of funds are already allocated towards these businesses – but this is only one side of a not so shiny coin. If there are new sources of capital allocation there should be other sectors where funds are withdrawn.
Here in Germany more and more companies are going bankrupt – established merchants like Praktiker (Bloomberg News) are going belly up. In my opinion this is not just a continued chain of bankruptcies that are linked to failed business strategies/bad management but clearly a seismic shift in terms of consumer behavior. Traditional business models can no longer keep up with online models that have proven higher agility. Through this agility they are much better at attracting customers while being highly price competitive due to lack of “legacy” structures. This asks for a rapid change in capital allocation and provides opportunities for some interesting trading strategies. So it becomes interesting to predict who is going to be next and to see if it is possible to short stocks like crazy 😉
Now in German…
I am proud to announce that “Digitalkaufmann.de” is now up and running. I am now publishing all my German articles and analysis there. Enjoy!
Healthcare and digital innovation?
During my work with eTribes we have completed several projects for merchants, producers and publishing houses. All these industries have already been heavily impacted by digital innovation and new, web based technologies. Many of the established players in these industries have not quickly enough “braced for impact” and will eventually disappear since their business models have become obsolet in the digitalized economy.
Recently, the healthcare sector has picked up on the ever fastening process of digitalization. Funding is moving to all time highs and even crowd funding is picking up on the trend. Rock Health recently published an interesting analysis of where funding is allocated in the United States.
“With half of 2013 behind us, we’re able to uncover some interesting insights and trends in funding in digital health. We saw continued growth with $849M invested in 90 different companies. This is 12% more money and 25% more deal volume than this time last year.”
So there is money, other industries as examples and a definite need in the healthcare industry to innovate. Therefore, we have now combined the traditional “start-up weekend” methodology with the healthcare industry and created the “Healthcare Innovation Weekend 2013” in Hamburg. We hope to encourage budding entrepreneurs in the healthcare sector to innovate and to build new businesses in this favorable environment. Come join us for an interesting and fun weekend in September!
In eigener Sache: vielen Dank!
Heute haben wir den Verkauf von NetImpact und Creative-Task bekannt gegeben. Vielen Dank für alle die uns auf dem Weg begleitet haben! Alex und ich freuen uns auf die weitere Zusammenarbeit bei eTribes und werden Tarek+Betzi+Team mit allen Möglichkeiten unterstützen.
Mehr Info findet Ihr hier!
OTTO PR wurde ebenfalls heute raus gegeben.
Eine genaue Beschreibung und Analyse könnt Ihr im Detail bei Alex auf Kassenzone nachlesen.
In English!
Today we announced the sale of NetImpact and Creative-Task – the above links are all in German but with Google translate you should get most of the info.
I really wanted to thank all of those that have supported us along the way! Alex and I are looking forward to continuing our work at eTribes and wish all the best to Tarek+Betzi+ Team, who we will of course continue to support!
What to do with all this liquidity…?
Encouraged by Alexander Graf and his critical analysis of the current digital environment I asked myself why so many irrational business seem to get an almost unlimited amount of funding. In Germany there is always Zalando as a great example of this trend. The business is so far not profitable and investments that by now are topping over a billion Euros will never be recovered but international money is being thrown at Rocket Internet with an ever increasing speed. Its business model is not closely examined and investors push new capital into the firm without even asking some of the most basic due diligence questions. Is it really a plan to buy up the fashion market and pray that your proprietary brands and size will eventually lead you to break even? How are logistics organized behind the shiny technology and TV commercials? Why is there such an irrational rush to throw more money at these kind of businesses? Since we are now starting to talk about investments going into the billions I am going to take a macro economic perspective to create a possible explanation.
Due to the current monetary crisis money has been pumped into our economic environment – if printing presses would still be responsible for monetary supply we would be running out of ink.
As you can see from the graph above monetary supply has increased substantially. In Europe it is a fairly even growth story but it becomes even more drastic if you look at monetary supply expansion in the United States.
What are investor to do with all this capital that has been pumped into our economy? There is no substantial growth in the “real” economic output within the developed word – in fact there is a decline based on the recession the European Economic Area and the United States are currently going through. In addition there is only so much capital that can be invested in “traditional” economies in rapidly growing markets e.g. BRICS countries. On top of these factors investors are also scarred – the ongoing EURO crisis, horribel US economic data, emerging conflicts in the Middle East and Asia … all this has impacted the ability to invest large amounts of capital. Investors now have less opportunities and more importantly have come to terms with lower return expectations, while taking higher risks.
What does this mean for digital investments?
Based on the above described trends we will continue to see irrational capital allocation in digital growth projects such as Zalando. Investors will increasingly accept long-term returns that are barely above inflation just for a chance to allocate some of their access capital. It does not mean that it will become any easier to raise growth capital below EUR50 million but it is becoming easier to collect amounts above EUR250 millions for growth projects.
Entrepreneurs THINK BIG!
So in conclusion tech-savvy entrepreneurs: stop thinking about running a business on EUR10 million start to think how you could allocate EUR500 million!
Due diligence – what is important for digital acquisitions?
Over the last month we have supported a wide range of acquisitions in Germany with eTribes. On the one hand we have worked with our clients to identify targets on the other hand we are constantly asked to evaluate business ideas by VC/angle investors or by entrepreneurs who are looking for feedback. In addition, we also have to work with the CEOs of our equity participations to create new business models and to react to a digital environment that has really picked up speed. Through these various mandates and evaluations a range of points have come up again and again – so I am now publishing a quick summary. I am hoping that some of it will save me from hearing the same catch phrases over and over again e.g. if I had a dime for every time a marketing plan consist of “it will go viral” I could probably buy Apple.
Team
Probably one of the most overused catch phrases is “team is everything” but again it is absolutely true. Give me an A team with a B idea anytime over a B team with an A idea. Therefore, we pay lot of attention to the skill set of the founds and team – are they complementary? Can they cover the entire needed range from business skills to online marketing expertise? Will they be good at sales? How do they deal with stress? How well do they talk to investors? Here, we do not only look for solid CV credentials but also talk to people they have worked with in the past to get a good understanding of the work they have done historically.
Additionally, I would argue that not only having a certain skill set is key but that implementation trumps credentials every time. What do I mean by that – some people will have worked in corporates and gained substantial experience in a field (on paper) without ever actually doing the work. Supervising an add agency that prepares an online campaign is not the same as running your own web project with a marketing campaign you have to set-up and optimize. Often people will be surprised by the difficulty that is in between theoretically understanding a concept and implementing it.
Customer Acquisition Cost
This key variable is often connected to the marketing section shown below. 9 out of 10 entrepreneurs we talk with have not thought scalability and customer acquisition cost through. Every time we are surprised by this – online business models collect an amazing amount of data and so determining a rough estimate of customer acquisition cost very early one is not very hard. How much does it take to get a customer to buy your product? How often do you need to be in contact before a purchase is made and what does each contact cost? How often will your customer come back e.g. what is your customer lifetime value? I do not expect to get a formula that is absolutely correct but I do expect the entrepreneur to have thought about this!
Marketing (Viral does not work!)
Marketing is expensive. Even in times where zalando clearly spends millions and millions on advertising most business models still think that if there product is strong enough customers will just be running through the (non existent) doors of their website. Here we most often see horribly wrong assumptions about marketing costs. These days it is incredibly hard (and expensive!!!) to differentiate yourself online and to get a customers attention long enough to place your product. There are very few viral models that have worked historically and generally these work only in the United States and not in Europe.
An accumulation of hype phrases is not a business model
Oh my – have you seen my newest mobile optimized app that through geo location really adds value in the social media space through its gaming characteristics … 🙂 Going to a digital conference and adding all the seminar titles together does not create a business. Where is the differentiating value? How do you plan to make money? How do you acquire your customers? What problem do you solve? These are questions that are not answered through hype phrases but through well thought out business plans!
Money & Billing
So often I see entrepreneurs who sit here and tell me that they have already several very happy customers – my next questions always is: great, what is your revenue? Unbelievably enough I often get the reply: well we are using a freemium model and are not actually charging anything. If you do not value your product enough to charge money for it, why would or even should your customer value it? How honest is feedback for something you get for free? Make money right from the start – get a billing system and send out invoices!
Hockey Stick (but only in sales)
Never missing is the famous hockey stick for sales projections – customers will love the product after 6 months and make you rich. Unfortunately, lots of business plans show this trend but neglect to create a sensible cost to revenue ration. I do not believe that you can either increase revenue by 10x without hiring additional people nor do I think that additional people will not need new / bigger office space etc. Often business plans will have a strong cost /revenue correlation for 6-12 months and in month 18 show entirely surreal ratios.
Team
Is key! So here it is a second time 🙂
Book Review: „What would Apple do?“ by Dirk Beckmann
by Anika
As I wait at the central station in Hamburg for my delayed train to Cologne, I notice the huge white posters advertising the new iPad mini. This triggers, as if often happens, the thought, “Wow, what has Apple come up with now?”. The hype around the success story of the probably most innovative company in the world and its founder Steve Jobs has fascinated the media, retail industry and e-commerce sector for years. Apple products (iPhone, iPod, iPad, …) or the AppStore are well-known to roll up entire markets.
During the last two years alone, more than seven German-language books have been published about Apple. Subject of discussions are mainly the development of the company, the life of Steve Jobs and the company’s unique design.
The economic book “What would Apple do?”, which was on the short list for the German Book Prize 2011, I have looked at more closely. It is written by Dirk Beckmann, CEO of a German digital agency and an expert in digital innovation. ,It deals in an entertaining way with Apple-related questions like “What makes Apple so special?”, “What can you learn from Apple“ and so forth.
According to the author, there are three things, which make the company unique: its business model, technology and the design of Apple.
Apple’s business model
Apple exclusively produces products with the sole aim of deriving profit. Apple’s secret of success is to continuously develop new, complete supply chains, implement own ideas without compromises and to make resulting platforms, products and solutions usable by other companies. However, Apple controls Apple-compatible products of other companies (such as apps) to the smallest detail. One could assume that Apple has a ’madness of control’ regarding its products. For example, all apps developed by other companies run through strict controls and must be released by Apple.
The company offers a wide range of products and waives a comprehensive market analysis. However, sophisticated marketing and advertising strategies will be implemented. Apple’s success is especially noteworthy in terms of the digital music download through the development of a revolutionary software, the AppStore. In December 2012, the company published a press release in this regard, in which it declared a new record: AppStore customers downloaded more than 40 billion apps, of which nearly 20 billion alone in 2012.
Apple’s technology
Apple knows how to not only use existing technologies and assembling these to its liking but it also develops entirely new applications and revolutionary products like the iPhone with its new user experience. As an innovative technology brand, the company is investing exorbitant sums in research and development of their products.
Ipad and Co. are developed as an integrated package of hardware and software preventing a ‚function overkill’, and the user does not notice the technology, while using the device. Apple particularly focuses on the customers’ needs. The products are extremely easy to use, can interact with other Apple products and are of high quality. In addition, the users’ devices can be customized with various apps.
Apple’s design
Over the years, Apple has become a well-established and modern lifestyle brand. A special role in the brand building process plays Apple’s design. The company intents to trigger the customers’ emotions such as excitement with its products. Apple is convincing for instance with a reduced structure of the company website, an innovative design of stationary AppStores as well as visually appealing products.
Last but not least…
Reading this book has given me a broader understanding of the phenomenon Apple. The author Dirk Beckmann has chosen the title of the book consciously referring to the book “What would Google do?”, which was written by Jeff Jarvis in 2009. The book focuses on the aspect how you can benefit from the success strategies of internet giant Google. In „What would Apple do?“, Beckmann has repeatedly related to the business model of Google. I have not discussed this aspect in this blog article as it should only concentrates on Apple.
Beckmann praises Apple at the highest stage. I would have liked to learn even more about the failures and problems Apple faces e.g. problems with the sales figures, staff fluctuations, criticism of the production in the Far East or the constant pressure to innovate. In addition, I was not that excited about the chapter “What would Apple do?”, which demonstrated potential business models of Apple by means of examples such as a car, a kitchen or an e-learning platform. This chapter could have been covered by just one example. The remarks were partly irrelevant and have been repeated.
Moreover it should be clear, that the strategies and concepts of Apple are not simple transferable to other products, but rather be seen as an inspiration for other companies. Likewise, I would have found it interesting to learn more about the development of Apple’s key performance indicators. The author describes Apple’s development over time without mentioning the company’s key performance indicators (sales, development of R&D expenditures).
Conclusion: Venture Capital – does it still work?
…finishing of my post series in regards to VC industry changes …
Will prices for start-ups significantly change?
In my opinion most start-ups will continue to raise the necessary funds in Germany. Firstly, venture capital never played a significant role here and secondly a large range of new capital sources have been developed over the last years. Corporate investors have become much more active and crowd funding offers a new way to raise initial proof of concept financing. Universities and government agencies have also been offering additional financing sources. So I believe that in terms of start-up financing there will not be a significant impact from the declining venture capital funding. Internationally, this will probably be a different story.
But what does it mean for valuations? Again I believe that most German start-ups would not have been sold/continued financing rounds to/with VC funds in any case. Trade exits are the normal route to go for start-ups here and most corporates are not only willing to invest in start-ups but have been allocating significant amounts of capital. In terms of pricing I also believe that Germany is looking at incredibly low valuations anyhow and that equity markets are not an exit route for start-ups due to depressed listing outlooks. Hopefully corporate capital availability will actually help to increase pricing levels here.
In my experience …
Overall, I believe that corporates will play a significantly larger role in the German start-up scene than VCs ever had, have and will. The OTTO Group alone has an early phase incubator (Liquid Labs http://www.liquidlabs.de/), later stage incubator (Project A http://www.project-a.com/) and a later stage VC funding partner (eVentures http://www.eventures.vc/). Most other large German corporates are following this trend and are establishing their own teams.
In addition, I am pretty sure that we will start to see an increasing number of more specialized incubators that offer additional guidance and support as well as follow-up funding through corporate buyers. Here an interesting trend from the US are specialized healthcare incubators like Rockhealth or Medstartr.
“Rockhealth is one of the growing incubators in the healthcare industry. They help teams with venture capital, advice and their network to find proper healthcare business models & help to scale them. The startup industry is just starting to innovate around healthcare and those incubators are likely to be in the centrum of this development.” http://rockhealth.com/
These significantly more specialized funds will take over start-up financing and provide industry trade buyers for growing start-ups. Entrepreneurs who are looking to grow their business should therefore forget about impressing VCs and start building their corporate contact network.
eTribes Business: StartUp-Roundtable am 19. März 2013 – come see Alex in action!
Liebe Mitglieder und Freunde von Hamburg@work,
Woche für Woche sprießen neue StartUps wie Pilze aus dem Boden. Es lockt der Traum der Selbstständigkeit mit der zündenden Idee. Doch nicht jedes StartUp kann zum Knaller werden.
“Rising Star oder Flop! Ist Erfolg eines StartUps planbar?” heißt das Thema unseres nächsten StartUp-Roundtables am 19. März 2013:
- Wie bewerte ich, ob mein Geschäftsmodell erfolgreich sein kann?
- Der ‘Proof of Concept’ ist erbracht; aber wie bringe ich meine Idee
zum wahren Erfolg? - Auf welche Faktoren kommt es dabei wirklich an?
Auf diese und viele weitere Fragen zur erfolgreichen Umsetzung einer Geschäftsidee, werden Ihnen unsere 4 erfahrenen Podiumsteilnehmer in der moderierten Diskussion Antworten geben.
Freuen Sie sich mit uns auf:
- Jörg Binnenbrücker; Geschäftsführer von DuMont Venture, Beteiligungs-Unternehmen für digitale Medien & IT sowie Capnamic Ventures, dem neusten Multi-Corporate Fonds.
- Alexander Graf; Gründer und Geschäftsführer der eTribes Framework GmbH sowie Herausgeber von kassenzone.de.
- Katharina Wolff; Bürgerschaftsabgeordnete der CDU und erfolgreiche Gründerin der Personalberatung “Premium-Consultants“.
- Christian Richter; bekannt als Serial Entrepreneur, gehörte z.B. zu den Initiatoren von radio.de; heute Geschäftsführer der internationalen Digitalagentur Spoiled Milk.
Weitere Informationen zu den Podiumsteilnehmern finden Sie hier.
Ablauf:
Einlass: 18:00 Uhr
Beginn: 18:30 Uhr
Networking: ca. 20.30 Uhr
Im Anschluss an die Podiumsdiskussion laden wir Sie sehr herzlich ein, sich bei Drinks und einem kleinen Buffet auszutauschen.
Anmeldung:
Bitte melden Sie sich bis Mittwoch, den 13. März 2013 zu der Veranstaltung HIER an.
Wir freuen uns auf Ihr Kommen – ob junger Gründer, erfahrenes StartUp oder innovativer Unternehmer – und danken Ernst & Young ganz herzlich für die Unterstützung!
Herzliche Grüße,
Ihr
Hamburg@work Team
What are the implications for start-ups?
cont’d from last post VC funding…
Does it matter whether venture capital is a failed asset class or not? Yes, some capital restrictions will apply but I would argue that there are sufficient alternative sources of capital to not significantly restrict new venture creation. Smart entrepreneurs can bootstrap, rely on angle networks or newly emerging crowd funding platforms in order to bring a venture through the proof of concept phase.
Additional follow-up capital rounds can then be financed through trade investors who are currently committing significant amounts of capital. There is a significant interest from trade, publishing and pharma companies to invest in digital start-ups. These companies have hundredth of millions available for new venture creation or “corporate innovation” outsourcing. Almost daily new funds, initiatives or deals are announced by corporates who are looking to mitigate the impact of digitalization on their core investment business. These sources of funds should be able to replace venture funding (at least in Europe). In addition, German/European entrepreneurs are also cashing out and are ready to invest in new ventures. In Hamburg there is a wide range of angle / VC money available from successful industries partners e.g. HackFwd – Lars Hinrichs.
Therefore, I would argue that especially in Europe the decline of the venture capital industry does not create significant problems and is compensated through alternative sources of capital.
Book Review: “E-commerce for advanced readers” by Krisch & Rowold
Hello – I am Anika and new to the digital world. After receiving a stellar business education at University of Rostock and spending some time abroad I decided to join the eTribes Framework team in Hamburg. I quickly needed to broaden my understanding of the digital world and therefore took it upon me to read a whole list of recommended books. Together with eCFO I am now publishing the resulting reviews/learnings from my reading materials.
My first book ‚E-Commerce für Fortgeschrittene – 50 Denkanstösse für den Online-Handel’, written by Jochen Krisch and Sascha R. Rowold, I devoured within a few hours.
The author Jochen Krisch is a well known e-commerce expert in Germany and also the editor of the internet-branch service Exciting Commerce. In line with the editor’s motto „the exciting future of e-commerce“, the book presents the top 50 blog articles of 2009 to 2011 describing different kinds of business models and discussing the latest e-commerce trends due to new technologies and social innovations. The columns are cross-sectoral and broach the issues of among other things live shopping, mobile commerce, shopping systems and clubs, setting up shopping networks and applications, social shopping as well as Ebay, Amazon, Facebook & Co.
Ebay, for instance, has progressively turned from an open marketplace to a managed marketplace (i.e. more fixed prices, professional sellers and new goods) in recent years. However, the expected increases in sales remained slightly down in comparison to Amazon. A return to the traditional retail auctioneering business offers eBay’s classifieds platform. But not only Ebay will evolve in the future. Likewise, the development of Amazon, Google, facebook or Zalando as relevant players in e-commerce is exciting.
Also worth reading were the blog articles about shop systems. According to the authors, shop systems should no longer be based on catalogue models or be standardized. Due to increasing predatory competition and the online ordering saturation, online retailers are better adviced to find special, innovative shopping solutions. To be successful in the future and to achieve growth through a regular customer business, they must reinvent themselves and especially inspire their customers emotionally. Alternatively, online retailers should specialize in a market niche.
What I especially like about this book is that subjects were taken up several times to identify and analyze new developments e.g. the business models of Vente Privée or Ebay. Thus, I got a feel how fast and in which directions the online world can change within two years.
For eTribes and it’s stakeholders the book is a good read to learn about different business models. New trends and the rapid development in e-commerce e.g. the increase of online buyers from 45 percent in 2004 to 69 percent in 2011 show, that the retail is constantly moving to the internet. This means that companies have to adapt e-commerce solutions to their business models.
Also this year, I am convinced that Jochen Krisch and his team will publish diverse pioneering articles about e-commerce on their website. The book incited me to think about future trends of e-commerce, too. I’m particularly looking forward to the developments in mobile commerce – how will mobile shopping be improved this year? How will Ebay’s new payment system will work out? – Let’s get ready to be excited!
Februar is launch month for eTribes
So many new projects I thought I share them here as well. We have diligently planned for quite a while not to bring our new initiatives online. Here a quick overview what has been launched this month (and it is only the beginning of the month) and what else you can be excited about up as the “short” February month continues:
Here it is:
Netshops Commerce relaunched their website!
Localgourmet stands for meat for all and all for meat (fresh and delicious!) Localgourmet
PreziDay Europe is upon us! Check it out!
Competence Center for Digital Analytics now offering the first classes!
Last and definitely not least:
eTribes has launched a new offering together with an updated web presence.
Still to come:
launchwerk GmbH’s new web presence
Developer Conference Hamburg 2013 sneak preview
Netshops first appearance during CEBIT 2013 in Hannover, Germany!
… and lots more!
Book Review: “Rework” by Fried & Hansson
Rating: excellent
Useful for: everybody
“Rework” is an excellent book to read while traveling, in the bathroom or during short work breaks since it is separated into short, interesting paragraphs that are usually not longer than a page. This book came highly recommended and out work library has no less than 3 copies of the book in English and German. We are also using some of the products the authors have developed: Highrise (CRM) and Basecamp (Project Management). Since both applications are very useful for a small to medium business I was wondering what the people behind these products had to say.
Since the book is split into several main sections, which consist of a catch-phrase and a quick explanation I am going to highlight the ten “commandments” I found to be most interesting. This is a highly subjective view and each of the short sections will probably be of varying interest depending on a reader’s perspective. Most importantly you can tell that these guys are strongly product focused and therefore some sections apply less to other business models such as service businesses.
These ten principles highlighted below really hit home for me and I will be integrating them into my daily business routine.
Learning from mistakes is overrated (p. 16)
I love this statement. I guess in Germany people take this approach anyhow since an entrepreneur who has failed will very rarely gets another chance. Nonetheless, I believe that celebrating mistakes will often lead to not fully understanding why a business failed. This is especially true in the US / venture funded start-ups where burning through millions of investor money seems to be a rite of passage for an entrepreneur. Being good at spending money is very, very easy – being good in making money is a totally different game.
Why grow (p. 22)
We have scaled down whenever we could. Each time we got to be more than 20 people we founded a new business with a separate CEO who would focus on growing a specific aspect of our business. We are currently again downsizing from 30FTE to less than 4 FTEs and I honestly believe that building a valuable and lasting business has nothing to do with growth. Profitability and client satisfaction are the only measure that counts. If you cannot profitability keep one client happy you will also not keep 1000 clients happy – and should you?
Outside money is plan z (p. 50)
I could not agree more. Lots of post on my blog deal with sources of capital and honestly bootstrapping or “robbing through the mud” (as we call it) still has the greatest appeal to me. Who do you respect more: the elite single ninja who relies on his skills and resourcefulness to reach an objective or an over equipped tank that just drives somewhere through pure scale?
Interruption is the enemy of productivity (p. 104)
Yeep.
Say no by default (p. 153)
The hardest lesson we learned so far. As an entrepreneur you will tend to see opportunities everywhere and you will always be excited about following up on them. It will almost always turn out to be a disaster. Focus, focus and more focus will lead to success and focus is only possible if you say “no” to almost everything.
Welcome obscurity (p. 167)
Haven’t been famous yet but I sure know that being outside of the limelight while testing our business model and various ideas has been a blessing.
Hire when it hurts (p. 204)
Not a second earlier. It is always easy to hire but damn hard to fire. Not having external financing helps with taking this commandment serious.
Decisions are temporary (p. 250)
Nothing is forever… keeping enough flexibility to change decisions is a key aspect of being an entrepreneur.
What do I not agree with:
Planning is guessing (p. 19)
Deep down I am a CFO and I will always be a CFO – so please do not expect me to agree with this statement J I believe that over planning is guessing but coming up with a range of estimates to evaluate our day-to-day achievements is educated guessing and therefore legit.
Hire managers of one (p 220)
Well, if you are really not planning to grow this is the way to go. Yet I believe that these managers of one are very hard to find. Very, very few people are able to solely manage themselves without supervision. Most who do poses this skill will already be self-employed or entrepreneurs. So following this example will limit your hiring pool significantly.
So here is a quick impression of the book. My recommendation: MUST READ!
Book reviews!
Trying to read while going full throttle at work is often difficult. Luckily enough, there are holidays and less busy periods that allow for some interesting reading. I find reading books pretty recreational but it also helps to evaluate operational decisions and to provide perspective. Therefore, I am going to provide some quick feedback on books I have recently enjoyed. Each review will contain a quick rating and evaluation of the most interesting topics.
In addition, Anika Radder, will also publish her reviews for you to enjoy!
Great video: ENTREPRENEURSHIP
In German only from the University of St. Gallen!
What consequences does this bring for VC funds, which have fully invested their current capital?
As discussed in the previous post – times are tough for VC funds – but what implications does that bring? Funds need to start lasting value creation to attract new capital! As a first step I think that VCs need to reevaluate how they select investments. So far the industry has a way too high failure quote – I even think that VCs with their general herd behavior often miss interesting opportunities. Secondly, they need to increase their target range. There are lots of successful start-ups outside of the Silicon Valley and SV like hubs that would present interesting funding targets. Thirdly, they really need to develop beyond pure capital providers. Almost all of them will tell you that they are really value add above and beyond capital – that is generally just a statement but far from reality. Increasing number of start-up accelerator programs indicates that pure venture capital financing is not successful. More skills, support and knowledge are necessary. Investing in a VC environment is incredibly hard and finding the right investment criteria and sticking with them is quite a challenge. This is nicely described in Paul Graham’s “Black Swan Farming” article. Source: http://paulgraham.com/swan.html
Small is beautiful
VC firms should also stop raising larger and larger funds. Even if they successfully invested their smaller funds it does not meet that they should now double or triple their fund size. In several articles and also in the conclusion of the Kauffman Foundation report the authors argue that only smaller VC funds are able to provide decent returns. In addition, they focus a lot on the compensation structure and clearly show that having a significant amount of “skin in the game” is necessary to get solid returns from a VC management team.
„The incentive for small funds is aligned with investors and more achievable. A $100 million fund could buy 20% of 25 startups and handily outperform the public markets by building four to five companies into $400 million exit values, or a broader set of successes across the most typical venture exit values of $50 million – $500 million. Annual fees keep the lights on in the meantime, while the potential profit share from generating 300400% gains provides the prime incentive.“
Source: http://venturebeat.com/2012/08/18/lean-vc-why-small-is-beautiful-in-venture-capital/
Compensation for the industry should also be changed. Funds will have to proof that their management team is not only investment savvy but also resourceful and has significant skin in the game.
While we agree on Kauffman’s recommendation on looking beyond large funds, a deeper analysis suggests the need to look at the risks and returns in the fund structure — the profit share of each partner, the spread of capital committed per partner, and so on — and remove the reliance on a heroic grand slam as the only, yet unlikely, path to outsized results. Other qualitative factors include structurally leveraging all partners’ expertise across the portfolio, and garnering meaningful returns from more than just a few deals. These are among the many critical and structural advantages of the smaller venture fund.
Source: http://venturebeat.com/2012/08/18/lean-vc-why-small-is-beautiful-in-venture-capital/
If these challenges are met successfully VCs will continue to play a significant role for start-ups – if not it looks like the industry’s funding sources will dry up and soon start-ups will have to look for funding elsewhere.
Venture Capital – does it still work?
Previously, venture capital as an asset class has been critically discussed by Jochen and Alex in their respective blogs excitingcommerce.de and kassenzone.de.
Source: http://www.excitingcommerce.de/2012/09/vcs-und-die-hohe-wahrscheinlichkeit-des-unwahrscheinlichen.html and http://www.kassenzone.de/2012/09/12/venture-capital-funktioniert-nicht/
In his last blog Alex already hinted that I am working on a more detailed analysis of the subject. Why do I find this interesting? Well, after having worked in the PE and VC industry I always wondered how it would feel to change sides – become an entrepreneur and learn the nuts and bolts of daily operational challenges. It has been very interesting and I am tempted to claim that “professional” VCs who have been in banking or consulting all their lives and therefore represent the favorite MBA trained elite that joins VC/PE firms on a junior level – know next to nothing except how to draw pretty slides, talk in “investor” slang at fancy conferences and run after hypes like a crazy bunch of headless chickens. This is clearly an exaggerated view but overall the question remains if venture capital is an asset class with a future. The question is, if the more experienced senior staff has the ability to find deals and make investments that are profitable. In addition, I am wondering if only a select few sometime “get lucky” or if this is a sustainable industry with a risk/reward ration that should be attractive to investors.
In addition, Germany has seen a significant increase in venture capital through the Berlin “hype”. Now, with the entire industry under fire it becomes extremely interesting to see how the industry is going to develop. Even more importantly I am certain that these new analysis will have an impact on the rapidly developing European start-up environment.
Based on a range of studies it has become clear that the venture capital industry in general simply sucks at being investors and even more importantly sucks as an investment vehicle for their Limited Partners (“LPs”). Returns of venture capital as an asset class are simply not sufficient to continuously attract new capital.
How bad are returns?
The Kauffman Foundation, a highly reputable Limited Partner in many venture capital firms, has published the following facts based on their significant, long-standing venture capital investment history.
“Only twenty of 100 venture funds generated returns that beat a public-market equivalent by more than 3 percent annually, and half of those began investing prior to 1995.
The majority of funds—sixty-two out of 100—failed to exceed returns available from the public markets, after fees and carry were paid.
There is not consistent evidence of a J-curve in venture investing since 1997; the typical Kauffman Foundation venture fund reported peak internal rates of return (IRRs) and investment multiples early in a fund’s life (while still in the typical sixty-month investment period), followed by serial fundraising in month twenty-seven.
Only four of thirty venture capital funds with committed capital of more than $400 million delivered returns better than those available from a publicly traded small cap common stock index.
Of eighty-eight venture funds in our sample, sixty-six failed to deliver expected venture rates of return in the first twenty-seven months (prior to serial fundraises). The cumulative effect of fees, carry, and the uneven nature of venture investing ultimately left us with sixty-nine funds (78 percent) that did not achieve returns sufficient to reward us for patient, expensive, long- term investing.”
Source: http://www.kauffman.org/uploadedFiles/vc-enemy-is-us-report.pdf
There are also other articles and reports that are based on the Kauffmann analysis and the inability of venture firms to raise new funds. Limited Partners have finally woken up to the reality that blindly investing in larger and larger venture capital funds no longer makes sense. Why is that? As Fred Wilson states in a recent MIT technology review interview:
“Because the returns haven’t been very good in the venture capital industry for a long time. I think if you talk to the investors in venture capital partnerships, they’ll tell you that they’re very much on the fence on venture capital, and if venture capital continues to put up mediocre returns, they’re not going to stick with it forever.”
Source: http://www.technologyreview.com/qa/428869/fred-wilson-on-why-the-collapse-of-venture/
At the moment Berlin delivers a wonderful live case study to prove my point. The current hype, number of horrible investments and general herd behavior of investors in Europe’s new venture capital “capital”. Where are the actuals businesses that are supposed to generate lasting returns in the current “hype-cycle”? Where are the returns, exists or just simply lasting value creation? A small elite group of investors such as the Samwer Brothers are highly successful but from my impression the overall industry does not generate lasting value.
The Kauffmann report goes on to argue that actually LPs should re-evaluate their investment behavior and focus on other key value drivers within the VC industry.
- “Invest in VC funds of less than $400 million with a history of consistently high public market equivalent (PME) performance, and in which GPs commit at least 5 percent of capital;
- Invest directly in a small portfolio of new companies, without being saddled by high fees and carry;
- Co-invest in later-round deals side-by-side with seasoned investors;
- Move a portion of capital invested in VC into the public markets. There are not enough strong VC investors with above-market returns to absorb even our limited investment capital.”
The Kauffmann report also has an interesting title:
“MET THE ENEMY… AND HE IS US” – Lessons from Twenty Years of the Kauffman Foundation’s Investments in Venture Capital Funds and The Triumph of Hope over Experience“.
They consider the problem the be the LPs – they need to change their asset allocation in order to substantially alter industry behavior and subsequently the return rate for the industry as a whole.
The previously listed investment recommendations are only one side of the equation. I think that there is a general consensus that due to the lack of returns and the issues outlined by the Kauffmann Foundation the VC industry will change.
Therefore, there are a lot of questions that remain:
What are the implications for start-ups? What consequences does this bring for VC funds, which have fully invested their current capital? Will prices for start-ups significantly change?
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eCFO news for start-ups! 
