Archive for May 2011
Angel investing on the cheap
Earlier this year, I invested in a startup. A side-effect of this is that I get a lot of people asking me what term sheet I used or what law firm I got to draw up the deal.
The fact of the matter is that I didn’t use a term sheet template nor did I take any legal advice. I did ask a lawyer friend of mine how much his firm would charge to handle an angel investment. He said it would be at least £1,000. I decided that, given the investment was relatively small, I didn’t want to incur a comparatively large (as a proportion of the investment) legal bill.
So, the startup and I thrashed out an investment agreement over the course of a couple of days, going back and forth on email and by phone, borrowing bits and pieces of terminology from various documents we found online. Eventually, when we were both happy, we met up (in a pub, natch) to formally sign the agreement.
Now, I’m sure that any half-competent lawyer could poke it full of embarrassing holes but that’s something we accepted at the outset. From my perspective, I’m about to give thousands of pounds to these guys. That implies a certain level of trust up front. It also implies a certain acceptance of risk (let’s face it, if I was risk-averse, I wouldn’t be investing in a startup in the first place).
So, in the interest of demonstrating to other prospective angels that investing in a startup needn’t involve spending hundreds of pounds on legal fees (and at the risk of some smart-ass lawyer – qualified, amateur or wannabe – making me look like a fool), I present a redacted version of the investment agreement between the startup and I.
I deliberately did not opt for a convertible loan, anti-dilution provisions, extra options, preference shares, the right to participate in future rounds or anything fancy like that because (a) I wanted to ensure that the investment would qualify under the Enterprise Investment Scheme and (b) I didn’t want to complicate or put any obstacles in the path of future investment rounds. The whole rationale behind making an angel investment is that you’re providing funding to allow the founders to develop the idea to the stage where they can attract the next round of funding. You don’t want to do anything that might complicate or jeopardise that process, which is why I kept things simple.
The importance of defining innovation correctly
I spent the day at London Business School’s Global Leadership Summit which, this year, focused on the topic of Innovation, which is one of those things that is universally desired but which most people (including many so-called “experts”) struggle to define or, ineed explain. Today, the audience was asked to vote on the best definition of innovation from a list of four. The Economist’s “Fresh thinking that creates value” was the winner, with 58% of the vote. Later in the day, Vince Cable offered his own definition: “Knowledge [and] ideas being turned into commercial application”.
I like to think of myself as knowing a thing or two about innovation. My stock in trade is enacting innovation through the application of technology and I’m occasionally asked to speak on the topic for organisations or companies who are struggling to innovate. When I do so, I like to define the term up front, using the dictionary definition: make changes in something established, esp. by introducing new methods, ideas or products.
People often focus on the creative side of innovation but, to me, that’s the easy part. Ideas are two-a-penny. Implementing them is the difficult part. For me, change is a very important aspect of the definition of innovation, because it points us towards what I consider to be the most common reason behind a failure to innovate: resistance to change.
Change is difficult. As organisations grow and mature, as systems and processes evolve over time, as people settle into a routine and become comfortable with what they’re doing, they become resistant to change. When I talk about how companies can become more innovative, I probably spend over half the time talking about how to overcome resistance to, and fear of, change.
In order to innovate, you must embrace change. Yet today, I barely heard the word “change” mentioned at all. One notable exception was Masahiko Yamada, the President of Fujitsu’s Technical Computing Solutions Unit, who asked the audience “When you wake up in the morning, are you changing the world or just getting through the day? Or just making money?” before going on to point out that “the best innovators’ primary motivation isn’t money. They just want to change the world.”
Some of the other key points I took away from the day were:
- Innovation is “discontinuous and stochastic, not linear and probabilistic.” – George W Buckley (Chairman & CEO, 3M. It’s worth noting that 3M is a business school case study in innovation – it’s part of their DNA. They’ve also been allowing their engineers to spend up to 15% of their time on personal projects since 1948, long before Google’s founders were even born!)
- Nick Hughes, who developed the M-Pesa mobile payments system while working for Vodafone, said that telcos were reluctant to step over the boundary into mobile financial services.
- Nick also stated that companies fear cannibalisation of their existing markets and revenue streams. My personal opinion is that it’s better to self-cannibalise than stand still while a competitor eats your lunch!
- 3M’s Buckley isn’t a fan of bringing in outside consultants to help drive innovation. He’s also reluctant to outsource because “things always go wrong at boundaries”.
- “The public sector accounts for 60% of all venture capital investment in the UK” – Vince Cable
- “Most entrepreneurs will say the best thing the govt can do is get out of the way. I’m not sure they’re right.” Michael Hayman (StartUp Britain)
- Philip Rutnam (Director General for Business and Skills at the Department for Business, Innovation & Skills) pointed out that, if designed properly, regulation can support innovation and cited Ofcom’s statutory duty to support competition as an example.
- Innovation is about new ideas but most new ideas are bad ideas. Challenge is how to cope with high failure rates. Instead of running 100 experiments and picking the winner Cisco let the market do the experiments and bought the winners. – Professor Phanish Puranam (LBS)
- “Some companies forget that their reason to exist is their customers.” – Antonio Horta-Osorio (the new CEO of Lloyds Banking Group)
- “Big companies, small companies must innovate … otherwise you become complacent and you die.” – Antonio Horta-Osorio
- Innovation is not about technology for its own sake. – Masahiko Yamada
- There are more transistors on the planet than grains of rice. – Stephen Leonard (Chief Executive, IBM UK and Ireland)
- We’re at an inflection point in the adoption of mobile devices and the explosion of Internet access from 2bn to 5bn people – Matt Brittin (Managing Director, UK and Ireland Operations, Google UK)
- Companies need to get comfortable with the fact that not every innovation will succeed. Google Wave is an example of unsuccessful innovation. Companies are more likely to die from too little innovation than too much. – Matt Brittin
- “I will bet that, within five years, a major multi-national corporation will base itself in Singapore.” – Sir Martin Sorrell (Chief Executive, WPP)
- Forget about ppl interacting via the ‘Net. Think about the millions of devices that can interact via the ‘Net. – Stephen Leonard
- WPP buys $1bn worth of advertising from Google annually. – Sir Martin Sorrell
- Different brands within the same company may compete with one another but it’s about the overall market share. – Sir Martin Sorrell, talking about competition within WPP.
- Two thirds of the companies on Fast Company’s 2009 list of the Most Innovative Companies weren’t on the 2010 list. – Professor Nader Tavassaloni quoting Gary Hamel.
- In a vote on the role of the CEO, 80% of the audience voted that the CEO is key to driving innovation but by providing top level support rather than being a source of innovation.
- Social innovation is fresh thinking that creates social value. Social enterprise creates social value by applying commercial principles.
- The first digitisation in history was the replacement of gas lighting with electric lightbulbs. – Shai Agassi (Founder & CEO, Better Place)
- Three years after the launch of Kindle, sales of digitised books exceeded sales of physical books on Amazon. – Shai Agassi
- Shai Agassi believes that the advent of cars powered by electricity alone represents the “digitisation” of cars and that we could end up treating cars in a manner similar to how we currently treat mobile phones (i.e. a low up-front cost for the device itself, then we pay for usage).
Google’s Big Tent
I went to Google’s Big Tent event today. It’s essentially a conference following on from the far more headline-grabbing Google Zeitgeist, that focuses on “the big issues facing the Internet today”. This year, it was organised in partnership with Privacy International and the Index on Censorship. There was a variety of speakers, including Eric “We view everything as a ranking problem” Schmidt, Jeremy “I’ll ignore the question you actually asked and, instead, answer the question I wish you’d asked” Hunt MP and Wael Ghonim, who unwittingly became one of the faces of the Egyptian uprising after being arrested in Tahrir Square, and held for 11 days.
It was an interesting change of pace from the commercial world I normally inhabit and gave me a lot of food for thought. Some of my takeaways were:
- Despite claims that legislating for online privacy would stifle innovation, nobody could actually cite an example of this happening. Ever.
- Privacy International’s Simon Davies pointed out that existing laws to protect people’s privacy (e.g. the Data Protection Act) are not being implemented anywhere near rigorously enough.
- “I did not want to assume a leadership role… [I believe that] We should always trust the wisdom of the crowds.” – Wael Ghonim speaking about his role in the Egyptian uprising.
- “We voted with our feet, we moved to Hong Kong. We were unwilling to be subjected to the laws of mainland China.” – Eric Schmidt, speaking about the perils of operating in countries with less-than-sparkling human rights records.
- Mr Schmidt also described a French law requiring that passwords be stored in cleartext as “foolish”.
- Google is building a dashboard to let people see all the information Google holds about them.
- Jeremy hunt’s two big predictions for the Internet in the UK: The Need for Speed and Must be Mobile. He spoke about the potential need for the government to get involved in ensuring the roll-out of high-speed broadband, so that the UK could reap the same benefits that countries like South Korea have.
- Google’s David Drummond pointed out that the more the West restricts free speech, the more repressive regimes will use that fact to justify their actions.
- UNOSAT’s Satellite Sentinel Project uses satellite imagery from commercial satellites to monitor places like the Sudan for signs of conflict, then leverages the high profile of celebrities like George Clooney to publicise the fact that atrocities are happening.
- Google’s Jared Cohen (formerly of the US State Department) averred that the rapid, viral spread of the YouTube video depicting the murder of Iranian protester Neda Soltan directly influenced Barack Obama.
Is the AlphaGov prototype worth £261,000?
Responsibility is a unique concept: it can only reside and inhere in a single individual. You may share it with others, but your portion is not diminished. You may delegate it, but it is still with you. You may disclaim it, but you cannot divest yourself of it. Even if you do not recognize it or admit its presence, you cannot escape it. If responsibility is rightfully yours, no evasion, or ignorance, or passing the blame can shift the burden to someone else. Unless you can point your finger at the person who is responsible when something goes wrong, then you have never had anyone really responsible.
–Admiral Hyman G Rickover, USN
I’ve had a been in my bonnet for a long time about public sector IT. For the past eight years, I’ve advised a central government department on matters relating to information security and, during that time, I’ve seen plenty of evidence that the government struggles to do IT projects (of any size) effectively, due to a lack of commercial expertise, and I’ve witnessed at first hand some absolutely shocking behaviour on the part of IT suppliers which, quite frankly, borders on the fraudulent and would simply not be accepted by a private sector client.
I also have strong opinions on the government’s use of high-profile experts in areas like entrepreneurship, the Internet, cyber security, etc.
So, as you can imagine, my ears pricked up when I read this tweet, so I dug a little deeper and discovered that the AlphaGov project is essentially a £261,000 (+VAT) project to build a prototype of a single government website where you can access all government services. It looks very pretty. However, the first thing I clicked on (“Pay your Council Tax”) resulted in me being asked where I lived and then redirected to my local council’s website, which leaves me thinking “What’s the point?”
Now, fair enough, it’s only a prototype, but if the prototype cost over a quarter of a million pounds, how much will the full thing end up costing and what benefits will it reap?
According to one of the AlphaGov team, the government’s £128m annual bill for websites “could be reduced by more than 50%” and, what’s more, if people did just one monthly government transaction via AlphaGov, that “could save the government £1bn each year“, and a PwC report on “The Economic Case for Digital Inclusion” for “Champion for Digital Inclusion”, Martha Lane Fox (who has been far more successful in promoting herself as a public sector figurehead than she was at creating value for investors who bought shares in Lastminute.com’s floatation) was cited as the “economic case” for AlphaGov.
Now, I very strongly believe that building a strong, logical, detailed benefits case for an IT project is massively important. Project approval decisions are normally based on an assessment of the project cost versus its project benefits. For me, the prospect of getting a benefits case wrong is not an attractive one, given the potential for wasting money and the knock-on impact for my reputation. So, I spend a lot of time researching, number-crunching, chasing down details, checking dependencies, eliminating as much uncertainty as I can and ensuring that the logic and calculations behind the benefits (particularly the financial ones) are correct, logical, easily understood and, perhaps most importantly, independently verifiable.
I don’t like words like “could” and “should” because they imply both uncertainty and a unwillingness on the part of the author to take responsibility for the prediction. I prefer to use the words “will” or “shall”, or, if uncertainty is unavoidable, I’ll aim to make a prediction that I’m happy to put my name against, and if I’m just guesstimating, I make that crystal clear.
So, the AlphaGov team’s use of the word “could” lit up a warning light. It’s very easy to claim that reducing the number of government websites could reduce the expenditure on those websites but it turns out that the AlphaGov team don’t seem to be able to explain, for example, how many jobs would be eliminated by the move, which makes me wonder whether this “more than 50%” estimate is anything more than a finger-in-the-air guesstimate. I had a look through the report they cited but there didn’t seem to be anything in there about the potential savings from reducing the number of government websites.
I did, however, find some mention of the potential benefits of getting people to switch to using online channels for transactions with the government: “If all digitally excluded adults got online and made just one digital contact each month instead of using another channel, this would save an estimated £900 million per annum.”
So, I have two problems here. The first is that AlphaGov seem to be rounding £900m up to £1bn, which is not how I like to do things. The second is that they’re claiming that this benefit would derive from the AlphaGov website whereas it’s pretty clear (to me, at least) from the report that it would derive from the transaction being executed via any online channel, not necessarily AlphaGov. In other words, the AlphaGov team are misappropriating a benefits case that was put together to make the case for getting digitally excluded adults online, and claiming that the same benefit “could” result from the AlphaGov website.
Bottom line? I’m not convinced. £261,000 seems to be an awful lot of money to spend on a prototype. The benefits being put forward for the full website don’t seem to have been well thought through. I also question why the people who are working on the prototype (and who, therefore, presumably stand to benefit if the full project is given the go-ahead) are the ones trying to justify it.
Is it too much to ask, in this age of government openness, transparency and accountability, that the benefits cases for projects like this be published, so that we can all review them? Perhaps more importantly, can it be made clear who is to be held responsible when these massively expensive IT projects go wrong?
Exactly what impact will the Tech City Launchpad competition have?
Update: In the Budget 2013 speech, George Osbourne announced a new tax break for employers called the Employment Allowance which “will work by taking the first £2,000 off the employer National Insurance bill of every company”. It’s great to see blanket measures like this that benefit all companies, no matter where they’re located and I’d rather the powers that be focus on measures like this that will have a real impact and clear benefit, than PR/fluff initiatives of questionable benefit like the Tech City Launchpad and the recently-announced new “High Growth Segment” that will supposedly unleash a wave of tech companies floating on the London Stock Exchange (as if they couldn’t already float on AIM, like ASOS did).
So, top marks for the Chancellor. However, I think he can do more. Specifically, I think the next step should be to introduce an exemption on employers’ NICs for early-stage startups who pay salaries out of angel or seed capital. Implementing such a measure would be straightforward (HMRC could leverage the mechanisms already in place to support SEIS and EIS) and would provide a very powerful incentive for startups to employ people, and further encourage potential angel investors.
I hold very strong views on what the government’s role in encouraging enterprise should be. I’m also not a fan of targeting specific geographic areas. So, as you can imagine, the new Tech City Launchpad competition is getting right up my nose.
This is a competition for funding in digital projects. From the literature: “We are focusing on the existing technology and media cluster in East London, and we encourage companies within it to apply. However, the competition is open to companies across the UK, if they wish to carry out a project in the Tech City area.”
The first startup I was involved in (more than 15 years ago now) was based out of a spare, windowless room in the offices of one of our angel investor’s established companies. The second (during the dot-com boom) was based in Ladbroke Grove because that’s were we found cheap office space. The startup I angel-invested in recently doesn’t even have an office yet – it’s currently run out of the founder’s home, outside of London entirely.
Cheap office space is the primary reason a series of startups have sprung up around Shoreditch (and I hear that rents are rising rapidly). I believe that the purported benefits to a startup of setting up shop in Shoreditch are overstated (I’m not saying that they don’t exist, merely that they are exaggerated or would also apply were a startup to locate themselves in another part of London), which means that the rationale behind encouraging startups to locate themselves in that specific area is tenuous at best. Unfortunately, the government seems to have bought into the “Silicon Roundabout” hype – a media-friendly story that’s being pushed by various parties, including some who stand to benefit from an influx of startups to the area (and who are, of course, absolutely delighted with the Tech City Launchpad initiative).
The government would be far better off supporting entrepreneurship across the whole of the UK, rather than just in one tiny area and I question how effective a competition like this will actually be, particularly given the fact that political considerations are likely to affect the judging (which pretty much rules out any startups operating in the financial sector).
I’d far rather see the government taking steps that will support all startups, no matter where they’re located.
EIS is a great scheme but it’s somewhat limited in scope. Is there something more the government could be doing to encourage investment by VCs and funds into UK startups? (And, by the way, startups don’t typically generate a profit for at least a couple of years, so giving tax credits against corporation tax is of limited utility).
How about tax breaks on, for example, employers’ national insurance contributions, to make it easier and cheaper for startups to employ people?
How about expanding and improving the talent pool from which tech startups can recruit by encouraging and facilitating engagement between startups and universities? Is there any real reason why students couldn’t do work experience, industrial placements or projects for tech startups?
Such initiatives would have a far greater long-term impact than throwing £1m at a small number of startups in one tiny area of the country. Of course, they wouldn’t generate the same media coverage but the government should really be asking themselves whether they want to give the appearance of encouraging entrepreneurship or whether they actually want to do it.
Crashing the social media giants’ party
I’m a great believer in the potential of open, decentralised platforms to disrupt and disintermediate incumbents, particularly in the social media space.
I’ve been keeping my fingers crossed that the students behind Diaspora will make good on their idea of building an open competitor to Facebook (although, with nearly a year now passed since they raised over $200,000 on Kickstarter, my optimism is waning).
The Tahrir Project is the brainchild of Ian Clarke, who intends to build a “distributed, decentralized, anonymous Twitter”. It’s an idea with huge potential and, given that Ian has a very strong track record in this space, having previously developed Freenet, I’m going to be monitoring its progress with a lot of interest.
Enterprise Investment Scheme
I was at an event for entrepreneurs this afternoon, which included a panel with some VC/angel-types. During the panel, it became apparent that a lot of the audience (ostensibly there to get tips on raising capital) had never heard of the Enterprise Investment Scheme (EIS) which is, quite frankly, pretty shocking.
I’m not going to go into the benefits of EIS but I will say this: No would-be entrepreneur should expect to be taken in any way seriously if they’re not familiar with EIS.
Hopefully that’s clear enough!
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