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BrightSun have just published research on the number of seed funds in Europe. As you can see from the graphs below the number of seed funds is growing very fast whilst the number of later stage funds is flat.
There are two obvious take aways here. I’m going to deal with the country point first. The number of countries where small funds invest is double the number of countries where large funds invest. If I was a ambitious startup with large capital requirements I would make sure I was in a geography where large funds invest regularly. Even if that meant moving the company. The chances of success on any other path are too low. If I was passionate about my country’s startup ecosystem I would aim to make good money out of my startup and then come home and invest the proceeds locally.
The second point is that the ratio of early stage funds to later stage funds has shifted from around 1:1 to 2:1, implying that the number of seed funded companies is growing much faster than the number of Series A funded companies and that we will have a Series A crunch here in Europe at some point. When you consider that a large number of the new early stage funds are accelerator programmes making 20+ investments each year then it seems almost inevitable that an increasing proportion of companies funded at the seed level will fail to raise Series A.
For anyone running an early stage fund or accelerator programme that means you have to work like crazy to be the very best of the 278 funds investing in rounds of $1m and less. That includes us at Forward Partners where we focus on two things – being attractive to entrepreneurs by being the best at helping them get to the next stage and on making great investment decisions by having a deep understanding of our target markets and companies.
For entrepreneurs raising money it means that if you have the luxury of choosing between investors you should select based on which one is going to give you the best chance of getting your next round away. At the risk of talking our own book, I think that comes from a combination of focus on making sure the fundamentals of the business are strong and connections with investors at larger funds.
The goal of most consumer focused startups is to become an automatic habit for their customers and I’ve written before about Nir Eyal’s powerful Desire Engine framework for building habit forming services (tl;dr: take users round and round a four step habit loop – trigger, action, reward, investment). Yesterday Nir wrote about applying this framework to turning users into visitors, advocating that companies should use the onboarding process to take users round the habit loop for the first time.
In practice that means:
Yesterday I wrote about how building a startup is increasingly an exercise in disciplined application of process. Creativity and flair will always be important, but whereas that used to be most everything and charismatic sales driven entrepreneurs with huge personalities were common, these days implementation of processes like ‘lean’ and ‘customer development’ are increasingly important and the personality profile of entrepreneurs is changing. We used to get lots of Larry Ellison’s and these days we get more Mark Zuckerberg’s.
The reason for this is that many processes formerly regarded as the preserve of creatives have been broken down into process steps that non-creatives can follow. It turns out that Apple’s new product process is one of those. This is a quote from Leander Kahney’s recently published book on Apple design chief Jony Ive:
“In the world according to Steve Jobs, the ANPP would rapidly evolve into a well-defined process for bringing new products to market by laying out in extreme detail every stage of product development.
Embodied in a program that runs on the company’s internal network, the ANPP resembled a giant checklist. It detailed exactly what everyone was to do at every stage for every product, with instructions for every department ranging from hardware to software, and on to operations, finance, marketing, even the support teams that troubleshoot and repair the product after it goes to market.”
I remain in awe of Jobs’ ability to come up with products that hundreds of millions of people coveted – that was his genius, his magic spark – the point here is not to take anything away from that, but rather to point out that as far as possible everything downstream from the idea is engineered. The beauty of this is that it improves reliability and predictability of execution.
I’m thinking now that the venture capital could be similarly broken down into checklists and good process.
Yesterday Kissmetrics blogged A recipe of viral features used by the fastest growing startups. It’s a good read for anybody who wants to increase the number of free customers they are getting. Who wouldn’t want that? The list is written for software companies, but there’s something for everyone.
However, the paragraph that caught my eye though was about the nature of virality rather than how to generate it:
Virality is not a single feature. It’s a design principle. It’s not a result of good luck. It’s engineered. Forget about forcing users to use random share buttons. You must understand your audience and design a user flow that leads to sharing.
In other words virality is science not art. It comes by virtue of intelligence and hard work, not from luck (at least not usually).
Increasingly this is true for all areas of building a startup. The lean startup movement laid out an iterative process which uses customer feedback to minimise the role of chance in building a product people want, design thinking breaks down innovation into process steps, SEO is now well understood, as is enterprise software, and so on. Just on Monday I blogged about The Mom Test a book which makes it easy for anyone with discipline and a bit of get up and go to do great customer development.
My hope is that all great work I’ve listed will enable entrepreneurs (and their investors) to have lower failure rates, or at least lower the cost when failing. Here at Forward Partners we aim to be in the vanguard of that change, working with our entrepreneurs to bring practices to their companies which reduce the need for magic and luck and increase the chances of success.
As you can see from the chart above time spent accessing the web from mobile apps has now passed time spent accessing the web for PCs. Moreover, the trends are only going one way, which begs the question of when it will become the norm for startups to build an app before they build a website.
Up until now there have been a few ‘mobile first’ startups, but they have been the exception rather than the norm. I see that balance shifting. We are close to backing our first (maybe the first) ‘mobile first’ ecommerce business.
Remember also that the action is increasingly phones now rather than tablets.