Sunday, November 29, 2015

Startup Founders: Vision, Determination, and Friendship

Investors are always looking for the next founder of a $1 billion valued startup, the so called unicorn. The next Steve Jobs. The next Bill Gates. The next Elon Musk. The next Larry Page.

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But truth be told: How does an investor realize that  the next superstar founder is in front of their eyes?  What are the tell tale signs, especially if the founder has no discernible track record? What if the founder is great, but the idea is just an average idea?

In 2013, Cowboy Ventures analyzed the characteristics of founders of unicorn companies. These companies had thirtysomething year old founders with a shared history. At least one of the co-founders had co-founded a company before. One or more of the founders had a technical degree, and had prior experience working in tech/software.

Cowboy’s analysis was purely data driven, and was not able to shed any light on the qualities of the founders. Looking back at the past may not be a useful predictor of the future. For example, the thirtysomething year old founder criterion would have excluded Gates, Jobs, Musk and Page. Oops.

What then are relevant criteria for finding unicorn founders?  The least worst option is to look at key qualities that successful founders exhibit. As Vince Lombardi said, ‘The quality of a person's life is in direct proportion to their commitment to excellence, regardless of their chosen field of endeavor.’

The founder’s ability to articulate the value that the product delivers today is at the core of any vision. A founder needs to think ahead for five to ten years: What is the compelling value for the user? What kind of business could it be? Are there comparable businesses? What will the world look like? What do you want to be when you grow up? To paraphrase Lewis Carroll: Do you want where you are going?
Investors should be looking for founder/market fit. Peter Thiel’s ‘secret’ is a good way to go beyond just book learning and get to the level of insights that founders have: ‘What do you understand about your business that other companies in it just don’t get?’ Paul Graham of Y Combinator points out that imagination is critical to come up with new ideas.
One word of caution: Vision without execution is just hallucination. In their application, Y Combinator is asking for the most impressive thing that each founder has built or achieved, other than the idea they are applying with.


Determination and focus
In optics, focus means that everything converges. In a startup, it is important to get rid of all distractions and focus on what is essential. Peter Thiel: ‘It does matter what you do. You should focus relentlessly on something you're good at doing, but before that you must think hard about whether it will be valuable in the future.’  Paul Graham: ‘ long as you're over a certain threshold of intelligence, what matters most is determination.’ Elon Musk: ‘Focus on signal over noise’.
There are tell tale signs in the language and in the actions of focused founders. The conjunction ‘or’ is their worst enemy. ‘And’ is the second worst enemy. Saying ‘no’ is essential, and it happens frequently.

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Founders need to enjoy hanging out together, which is probably easier done when you are young. These are not casual acquaintances, but instead require shared interests and an extraordinary commitment to each other. Steve Jobs and Stephen Wozniak, Bill Gates and Paul Allen, Elon and Kimbal Musk, Larry Page and Sergey Brin. Y Combinator’s application is asking ‘Please tell us more about an interesting project, preferably outside of class or work, that two or more of you created together’.
Eventually many of these founders go it alone, but partnership is critical in the early years.

Other qualities in supporting roles are a sense of humor bordering on naughtiness, brains and education, and energy and passion. Niceness has never been mentioned as a critical quality, ever.

Will success be guaranteed if all these qualities are evident?

It is impossible to assess these qualities after the hero’s narrative has been created. But one can safely assume that Y Combinator has systematically evaluated their thousands of applicants accepted into the program. And indeed, Y combinator has produced outsize returns. But many of the startups in their programs have failed. Many successful program startups will not become unicorns. Hence, these desired qualities can only serve as references. Founders may not score the highest marks on all desired qualities, but at a minimum, they are outliers in at least one category. McKinsey & Company call it ‘having a spike.’

Investors should always consider the option value of investing in great teams, even if the founders don’t find a great market the first time and the financial investment has to be written off. GO was a well documented example of a terrific team that met an unsuccessful outcome. Investing in any of their team members in later ventures would have yielded significant returns.

Picture credits: Extremetech,,,

Thursday, November 12, 2015

Winning Founders Find Great Markets

Prominent investors like Chris Dixon and Brad Feld highlighted the importance of founder/market fit. Andy Rachleff and Marc Andreessen postulated that the ‘market always wins’, asserting that a market trumps the team. And to amplify the different outcomes, Rachleff labeled teams and markets either  ‘great’ or ‘lousy’. If a team stumbles onto a great market, good things will happen.

Predicting a great market is difficult, if not impossible. Value creation and new market segments arise from external shocks such as changes in demand, regulation and technology. The magnitude and the timing of these shocks are what makes the difference between ‘lousy’ and ‘great’.

This leaves early stage investors with the age old conundrum of what to invest in: Founders? Ideas? Markets?

It is a long way from a founding team to a business and to market success. Founders have to go through multiple iterations before hitting upon the best idea. An idea that can’t get to a minimum viable product (MVP) is worthless. An MVP that doesn’t scale to a business remains a hobby. And businesses which don’t disrupt markets  will not be very valuable.

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Investors cannot fund markets, but they can back great founders and their ideas. And a great team will abandon a business in a lousy market to reset and move into a great market - that’s what makes them truly distinctive. So the main job of the investor is to go out and find that extraordinary team. And be patient until they find that disruptive idea with great market potential.

Monday, October 19, 2015

Enterprise Startups in Germany - Where to Look

In a past blog post I hypothesized that enterprise SW related startups do exist in Europe, but that they are hard to find. I now used the data from the recently published annual German Startup Monitor survey* to test this hypothesis for B2B startups. I also wanted to find the best hunting ground for investors in Germany.

The key takeaways for investors to find enterprise focused startups?

Berlin is by far the largest breeding ground for enterprise startups. These startups have easier access to capital to speed up growth. The ready availability of talent makes internationalization strategies easier to pursue.

  • More than 50% of all startups in the survey are B2B focused (although not all B2B startups are in software)
  • The unofficial startup capital Berlin has more than three times as many (B2B) startups as any of the other regions surveyed
  • Berlin has the best access to domestic and international venture capital
  • The startups in the industrialized Southwest region of Stuttgart/Karlsruhe are predominantly B2B focused, but there was only one fourth as many startups compared to Berlin
  • Stuttgart/Karlsruhe startups have little access to venture capital. Hence, they are more often self financed compared other regions, including Berlin

Contrary to public - and media - opinion, B2B startups exist

More than 50% of all surveyed startups are B2B focused. That percentage even reaches 80% in the Southwest. Since there are four times as many startups in Berlin, Berlin also has the highest absolute number of B2B startups.

Only half of all startups consider themselves innovative enough to go international

Investors with large aspirations should be concerned about the lack of internationalization and innovation. There is a clear bifurcation among startups: Only half of the startups have ambitions to compete globally or across Europe. The other half is not even trying: Innovation, if there is any, is limited to Germany, or only to a region in Germany.

Internationalization seems easier to pursue for Berlin based startups. Here, one third of startup employees are from outside of Germany.

Self funding is common

Across the country, 20% of startups have not raised outside funding at all. In the Southwest, that ratio reaches 25%. These companies may have never been noticed by angel investors, venture capitalists, and journalists. In terms of public awareness, they are flying under the radar. In Berlin, that share is only 10%. One reason is the ready availability of angel and venture capital.

Berlin has the the best access to (international) venture money

Across the country, one third of all startups are using capital from business angels. Venture capitalist have  funded 30% of Berlin startups, versus 8% in the Southwest. Berlin also has the highest share of international venture capitalists with over 30%. In the Southwest that percentage drops to less than 5%.

*The survey is based on self-disclosed data and was published in September 2015. The survey compared five regional clusters across Germany.

Photo credit:

Friday, September 11, 2015

B2B Networks Are Making a Comeback - 15 Factors For A Successful Reboot

Christian Dahlen & Oana Olteanu

A seemingly endless number of B2B networks was started during the first dot-com bubble. But just as quickly as they had started, they almost all disappeared after the bubble burst in 2001. In the decade that followed, activity in the B2B network sector came to a complete halt and startup activities instead focused on launching and scaling online enterprise software companies. Outside of the enterprise space, massive B2C and C2C networks like AirBnb, Uber and Facebook emerged during the same time to a degree where it might seem that all personal interactions are becoming networks.

Buoyed by the success of these consumer networks and the movement to online enterprise software, there has been renewed interest to launch two sided or even multi sided business network startups in industries such as banking, advertising, commodities, industrial goods and consumer goods.

Is this then a new dawn for B2B networks? How can investors avoid the costly mistakes for the B2B startups during the first dot-com boom? What has changed? Is there anything that can be learned from successful B2C and C2C networks?

The Business Model Canvas has emerged as a useful tool to assess the quality of a startup idea. And while the canvas can also be used to document some of the key assumptions of a business network, it falls short in evaluating the potential success of new marketplace opportunities. The fifteen insights from two seminal blog posts about digital B2C and B2C marketplaces are far better suited to assess B2B networks:  Bill Gurley to evaluate the fundamental attractiveness of a network idea, and Boris Wertz  to devise an effective go-to-market (GTM) approach.
Before a business network is rolled out to customers, the founder and her investors need to understand whether this idea will make money. A test to assess the network attractiveness is needed, just as a compass is required to know which direction to take. Gurley’s ten factors can be used to evaluate and shape such business network ideas. The three key  ‘must have’ factors for successful business networks are being part of the payment flow, having high frequency of transactions, and extending the market through the network. One of the most successful B2B networks that connects buyers and suppliers is successful because the network charges a percentage of the transaction, the frequency of transactions is high, and the availability of the network and its usage extends the market for trading. A similar network with millions of users has been far less successful: the payment model consists of a fixed fee and it is not correlated with the size of the transaction; the frequency of transactions is low;  and the payment is fixed and does not encourage further development. In consequence, Gurley’s ten factors not only assess the relative quality of an idea for a business network; they actually provide insight into whether the business network will be viable.

Understanding this structural attractiveness of a marketplace is a necessary, but not sufficient condition before investing. It becomes sufficient only when the idea has been validated to reduce the risk of failure. In the case of business networks, the failure risk increases exponentially due to the complexity of adoption in a network. There are two or more user groups who need to adopt the network, and they need to do it in a synchronous manner. And in the B2B world the user is often different than the economic buyer, which in turn requires multiple actors and multiple groups of actors to come together at the same time. Successful B2B networks can tackle this complexity by signing up reference customers for each of the user groups. Once this link is established, they replicate the model by connecting similar companies onto the network. This  increases network attractiveness one link at a time. Each link helps to build the chain of connections in the network until the network has a sufficiently large chain of connections, and users voluntarily choose to actively contribute to adopt the network and thus increase its reach. When this happens and the adoption flourishes without push from the network provider, the network has the potential to reach the tipping point and ‘the winner takes all’.

Wertz further defines five factors for sufficiency by addressing the network specific GTM aspects. Often, this is also where those new networks encounter their biggest challenges: Understanding and leveraging buyer and seller communities with a narrow segment focus, relentlessly working to provide additional value to both sellers and buyers, defining KPIs to understand when a tipping point has been reached, and incentivizing community managers - these are some of the more frequent hurdles encountered. Another hurdle in the business software world is represented by the relative newness of the business network concept and the lack of community managers. Product managers and salespeople abound, but none of these are incentivized to build the community and increase network adoption. This was the case of a financial network which scored high on the Gurley test, but struggled to reach wider adoption due to the fact that no one was made responsible for managing the communities.

It is a fallacy to believe that there is an evolutionary way for a typical enterprise software company to evolve into a B2B network. In a network, every part of the business system follows its own set of rules, and new GTM approaches are required to overcome the innovator’s dilemma. Just as the Matrix was rebooted multiple times, new frameworks and tools are in place to turn the failures of the first dot-com bubble networks into a distant memory and to fulfill the promise of ‘the winner takes it all’ economies.

Photo credits here.

Monday, August 17, 2015

Where Are The Unicorns In Enterprise Software In Europe ?

The venture market in the United States has seen a significant number of enterprise software startups go through a successful IPO. Veeva, Tableau, Splunk, Fireeye, Marketo, and are just a few examples of the past years. Many more privately held enterprise software startups are generating revenues that approach or even exceed $100 million annually and are enjoying $1 billion+ valuations. Clearly, investing in enterprise software can be as lucrative as investing in consumer apps and according to CB Insights, the capital efficiency in enterprise software has even been higher than in consumer tech companies..

When surveying recent exits and private unicorns in Europe, there is a plethora of consumer and e-commerce focused activity. In the enterprise software space, however: Next to nothing. Nada. Nichts. Rien. Nula. Niente.

As an active angel investor in enterprise software with a significant background in working for European high tech companies, this prompted me to dig deeper into this issue: Is my perception right? Are there really no big enterprise related software startups in Europe (and by that, I mean any software that is sold to an enterprise, whether is is to the CIO, other lines of business, or individual employees) ? And if so, what are the reasons: Is it a lack of seed money? Is there a lack of growth capital for enterprise software in particular? Is it that there are no entrepreneurs entering the space? Could it be that entrepreneurs are scared away by the omnipresence of large incumbent providers such as SAP and Sage?
I set out to find the answers to these questions and visited the hotbed European startup activity, Berlin. Here I talked to multiple CEOs of enterprise software startups and several  prominent seed stage venture capitalists.  What I learned was eye opening.

There is very little transparency about startups in the enterprise software sector: Compared to consumer and e-commerce startups, the trade press does not like to write about B2B. Entrepreneurs in this space have historically been focused on running a cash flow positive business without taking in venture capital at the early stages, and hence they ‘fly under the radar’. And while there are many startups in the sector, there is no natural center for them to cluster around and hence no critical mass in one place.

Large company CIOs in Europe appear to have comparatively little risk appetite to work with startups. European venture capitalists also don’t seem have a network of companies who are ready to serve as one the first ten early adopters for a new product. In fact, some people claimed that many venture capitalists of the current generation don’t understand enterprise sales to a CIO, and hence don’t invest in it. On a positive note, investing into software for the lines of business outside of the CIO’s decision power works as well here as it does in the U.S.. More importantly, small and medium enterprises are often the better early adopters of new technology compared to large incumbents. And as one venture capitalist pointed out, startups can be particularly successful selling to other rocket ship startups, for instance in the ecommerce space.

European based series A/B investors are expecting just as aggressive revenue growth rates as their U.S. counterparts: A startup in any European country immediately needs to look beyond the initial borders to tackle a big enough target market. In other words, purely French, Italian, German (name your country here) startups are not viable. The good news is that places like Berlin and London offer a workforce that can cover all of Europe from one location. One venture capitalist was also adamant that Europe alone is not big enough, and that startups therefore cannot ignore doing business in the U.S. And since any capital city in Europe can be reached within an hour or two via a budget airline,  there is no longer such thing as UK venture capital or German venture capital or French venture capital. The larger venture firms such as Index or Mosaic invest their money across Europe. The dispersion of startups across many localities today makes it difficult for angel investors to add value and gain insight in a scalable way.

The bottom line:
Enterprise related software startups in Europe are plentiful and they are investable, but the founders and investors need to be aware of the boundary conditions and challenges imposed by their environment.

If you are an enterprise related software startup and are based in Germany or France in particular, send me an email. If you an investor with a different perspective, I would love to hear from you.

Picture credits here and here.

Monday, August 10, 2015

The Business Model Canvas Is A Swiss Army Knife For Innovation - You Need To Know When To Use Which Tool

Christian Dahlen & Oana Olteanu

Every product owner wants her new product to be successful. Every company prides itself for being innovative. Changes in software development tools and methodologies have made it much easier to build new products. New products are announced and developed at a rapid clip.

But how do we define success? In the software business, license agreements are rapidly being replaced with subscription models which need to be periodically renewed. These contracts can be cancelled at a moment’s notice if the customer does not receive value. And yet, many new offerings never get to customer mass adoption.

Clayton Christensen and Geoffrey Moore have extensively researched the failure of large, incumbent companies to innovate, particularly in the tech sector. Perhaps counterintuitively, their findings identified the inability of those companies to identify new customer needs and segments, and to change their Go-To-Market (GTM) approaches accordingly, as the main reasons of failure to innovate. Hence, innovation requires a company to think about the GTM strategy already in the idea phase.

The Business Model Canvas (BMC) and variations such as the Lean Canvas is a framework that has proven extremely useful to instill this thinking for startups. The canvas provides a holistic view of the business, and makes it easy to iterate on the sheer endless number of innovative business ideas before significant resources are being committed. In particular, the canvas forces startups to pay significant attention to identifying customer segments, marketing and sales channels, and revenue streams.

Less has been said about how larger companies can use the canvas to help innovate.

We used the Lean Canvas version for more than 70 software products across the whole stack, for new and for existing market segments, and at all stages of the product  lifecycle.  For each of the nine canvas tiles, we developed a set of diagnostic questions.

  • Idea stage - customer segments, problem statement, unique value proposition and unfair advantage

    We found the canvas to be particularly powerful when used as the first step in the Investment Readiness Level (IRL) assessment. The canvas is used to assess the potential of the idea before any time and effort are put into development. The problem/solution validation begins with focusing on one customer segment. The users of this customer segment are united by a shared paint point that they urgently need to solve, and they agree that the new solution will provide significantly improved value. Viability and desirability take a front seat and answer the salient question whether the idea is worth a product, and whether it is the right time to invest. The focus on the customer segment and the potential routes to market already highlights whether the innovation will be sustaining or disruptive.  

  • New product development stage - solution, revenue streams, channels

    Once a good idea has been pre qualified with the canvas, the team needs to iterate and find the Minimum Viable Product (MVP) based on customer feedback. The canvas keeps the team focused on the entire business model and fosters discussions among all parties accountable for the whole product. Once the MVP has been built, the focus is on scaling the customer base and developing the corresponding GTM to get to product/market fit. At that point, the canvas has been used to test the whole value chain from customer to revenue to channels. In particular, the right hand side of the canvas is combined with the IRL and can be used to assess whether a product is ready for launch.

  • Later versions and sunsetting stage - Customers, revenues, cost, and the whole canvas

    For mature products, a product owner needs to decide whether she wants to continue investing, maximize margin, or sunset a product. By evaluating the customer problem to be solved, revisiting users and buying centers, and testing the unique value proposition, we found the canvas to be a useful tool to help make these decisions. For example, in one case a product extension of an existing product to a new use case promised to generate new revenues, and justified significant new investment in development, while keeping the GTM the same.

The canvas is an incredibly rich and flexible tool set which, in large companies, becomes even more effective when combined with complementary frameworks such as the three horizons model, customer development and the investment readiness level scale. We found that the canvas is a must-have framework that helps diagnose and improve business model innovation by emphasizing that customer validation is essential for product adoption, thus for product success. Its usefulness is entirely driven by stressing the right topics at the right stage, and by asking the right questions for each of the canvas tiles.

Picture credits here and here.