Us Brits are famously a nation of shoppers, and that’s translated into being a nation of online shoppers. For a while we’ve spent more online per head than other developed economies and created more than our fair share of ecommerce winners as a result.
New data out from eCommerce Europe shows the picture hasn’t changed and that there’s still a lot of growth to come:
- in 2013 the UK spent $142bn on eCommerce, third in the world on a gross spend basis behind the USA and China which have much larger populations. Germany, the next European country on the list, was two places behind the UK with $84bn spend. Germany has a population of 81m and the UK has 64m people.
- Global eCommerce is forecast to grow at 23% 2013-2014 and 18% 2014-2015. Within that the UK eCommerce is forecast to grow at 17% 2013-2014.
- There are 7.4bn people in the world of which 4.2bn are online and only 1.0bn are e-shoppers. The equivalent figures for Europe are population: 881m, online: 564m, e-shoppers: 331m.
Lots of eCommerce markets have now been ‘done’ from a venture perspective, but there’s still lots of opportunity ahead of us.
In a post yesterday VC Rob Go correctly identified that one of the most common reasons investors pass on investments is some version of “it’s not big enough”. He’s dead right. Most good VCs have a strong discipline of only making investments that can return their fund and that rules out a lot of potential investments.
If a VC has a $200m fund, a 20% stake in a $1bn exit will net them $200m and hence be a fund returner. $200m funds, therefore, should only invest in companies they believe are in markets large enough to sustain companies with an enterprise value of $1bn (assuming they will average 20% stakes at exit).
With the same assumptions $50m funds can invest in markets they have confidence can sustain $250m exits.
When new markets first emerge they are highly speculative with little to no evidence for investors to go on. Then over time evidence accumulates. First there’s enough to be sure there’s a tiny market, then a small, one and so on, until, assuming the best, several $100m+ revenue companies have emerged and all analysts everywhere agree the market is huge.
Small funds are able to take bets earlier in this process and are hence best placed to invest in emerging markets.
That’s why at Forward Partners we have kept our fund size small ($50m). We invest at concept stage when there’s often very little to go on with regard to market size and, just like Rob says, insufficient confidence in the scale of the opportunity is one of the most common reasons we pass. If our fund was any bigger we’d have to pass on even more deals.
When assessing opportunity size we actually look for two things. Firstly that there’s reasonable grounds to believe the opportunity is large enough to return our fund, and secondly there’s a chance that the opportunity will turn out to be much larger. Then we hope that as the evidence accumulates it will become clear that the company has the potential not just to return our fund, but to return a multiple of our fund.
This post will be one of the articles on ThePathForward.io when we have the formal launch on September 9th. There’s currently a placeholder site which explains what The Path Forward is (a guide for ecommerce and marketplace entrepreneurs in their first year). When it goes live we will add a bunch of practical guides like the one below and some case studies. We will continue to add articles and we hope that others will too and that The Path will become a community owned project.
– The essential capabilities in the first months are product design and development
– The company also needs the hustle to get stuff done and find the first few customers
– In the first months it’s best to optimise for the best skills, even if they aren’t in-house
– Don’t compromise on quality for co-founders and other permanent decisions
Building the right founding team
The founding team sets the mould for future employees of a company and the oft repeated cliche that A players hire A players while B players hire C players is very true. So getting those first few team members right is key. And that includes the choice of co-founder.
Yet founders want to move fast and there is an inevitable tension between speed and quality. The challenge is that any compromise made in the choice of co-founders or other early staff will be with the business for a long time, and possibly forever.
In the first couple of months a company should be doing research to prove the need for their idea and find a point of real emotional connection with customers. Then they should capture that need in a compelling value proposition and test it with a prototype.
Completing these tasks requires capabilities in product design and development, as well as the hustle to organise research and find initial customers. One way of doing this is to have a hipster, a hacker, and a hustler on the founding team (Dave McLure has described this combination as the minimum viable team, although it’s possible that two people could cover all three bases between them).
Another way is to bring the capabilities into the business on a more short term basis. Most commonly that’s done through freelance arrangements and sweat equity deals. Outsourcing to agencies is hard to make work at this stage because everything about the business and product is still fuzzy and changing all the time. The key is that whoever is building the product fully understands and buys into the company vision.
What’s most important during this formative period is to quickly validate the idea, not build out a team for the sake of it or because investors say they want to see it. It will become easier to pull great people into the business once the idea is validated, and that includes co-founders.
The first couple of months for a startup are a bit like the big bang at the beginning of time. Lots of key decisions with far reaching consequences get made in a short period of time and the final thing that’s important at this stage is that someone is supporting and challenging the CEO. She should test and probe thinking, operate as a sounding board, help with the emotional challenges of startup life, and provide pressure to perform if/when motivation falters. She could be a co-founder, angel investor, or an outside board member.
Flow is a mental state where we are happy and productive, a term first coined by psychologist Mihaly Csikszentmihalyi in 1990. Stephen Kotler offered this definition in a recent slideshare deck:
Flow is an optimal state of consciousness, a peak state where we both feel our best and perform our best
If you can visualise your favourite athlete when they were at the top of their game, when the world seemed to be moving slowly for them and they could do no wrong then you are seeing someone in flow state. Developers often achieve flow state too, head down, headphones on, cranking out great code. Or picture a dancer, lost in the music. Or a magical conversation with your other half.
Lots of examples, and the point is that all us can experience flow. It’s important because doing so makes us happier and more productive. One way to a happier life, therefore, is to maximise flow. And one way to build a stronger culture is to optimise for flow in the workplace.
Kotler has identified 17 triggers for flow:
- intensely focused attention
- clear goals
- immediate feedback
- challenge that stretches us, but not too much
- high consequences
- rich environment
- deep embodiment
- serious consequences
- shared goals
- good communication
- equal participation and skill level
- sense of control
- close listening
- postive/constructive environment (yes, and…)
Notice that most of the items on this list are features of good company cultures and/or things we try to cultivate in our businesses. Flipping this on its head, the interesting idea for me is whether optimising flow might be a way to think about the goal for a company culture.
Most startups start thinking about their company culture when they get big enough that the founder stops having close contact with everyone in the business. The goal is to make sure the special sauce the founder has discovered doesn’t get lost as the company grows. The business reasons for doing that are usually to maintain productivity and creativity, and to help attract and retain talent.
What I like about Kotler’s 17 triggers for flow is that they provide the link between culture and productivity.
This is an emerging area I will watch with interest.
CB Insights have released a product called Mosaic which gives private companies a score which predicts their likely future success. The score is derived from lots of data they pull from structured and unstructured sources on the web and then process through a heavy statistical analysis. They pulled data from as many sources as possible looked to see which pieces of it have correlated with startup success in the past and assumed that companies scoring highly on those elements will succeed in the future.
The score has three components, momentum, market, and money. That seems reasonable, although doesn’t give as much prominence to team and product as most VCs do when they talk about startups. I guess CB Insights would counter that team and product drive the momentum score.
There’s much more detail on their site here.
I’m interested for three reasons:
- Forward Partners might be able to use Mosaic score as part of our assessment of companies
- VCs might start using the Mosaic score as part of their evaluation when they look at our companies
- Forward Partners might be able to use the market component of the score to identify new market opportunities as they open up and use that for proactive deal sourcing
Having got that straight in my mind it’s clear we should sign up for a free trial and see what we can do.
The analysis looks thorough and I’m hopeful something will come out of it. Right now I can think of two reasons it might not work for us. Most importantly, I think the analysis is based on correlation not causation, and the score will stop being useful if companies deliberately manipulate some of the inputs (i.e. game the system). For example, the momentum score is partly based on the number of job openings at a company, which is easily manipulated. The second question I have is whether it will work well for the very young companies that we invest in, many of which are too small to have many momentum signals, are in markets that aren’t established enough to have sufficient volume of activity for CB Insights to track, and are too fledgling to have any financial strength.
Update: Earlier versions of this post erroneously referred to Mattermark instead of CB Insights.