Most new markets have matured – growing startups has become a serious business

Most new markets are ten years old, if not older. Ecommerce, Online apps, disintermediation platforms, social, mobile, games, enterprise SaaS, etc. are all mature or maturing markets. What this means to new startups is when they try to scale user acquisition they are up against serious competition:

  • Mature startups with a full product suite and a sales & marketing machine staffed with teams with a track record of growing, maintaining and monetising user bases. They are either already profitable, or have raised tens of millions of growth capital.
  • Mature global companies who, when it’s clear there’s a sizeable market opportunity, they move into this market.

Gone is the day where customers will mix together products from dozens of new startups. Apart from a few early adopters who will buy the best tool for each task, most see this as too complicated. Instead it’s easier, less risky, to by a product suite, one tool which does everything OK, works together and has enough customer references/online reviews to say it works.

These mature startups and global companies have mature sales and marketing operations – to them it doesn’t mater if it takes a couple of years before a new customer is generating revenue for them. Their products are bigger than the “minimum viable product” from a young startup – they can sell it for more so they can outbid the young startups in all user acquisition channels. This dynamic has always existed – it’s about scale. However in the past there’s been several paradigm shifts which have shifted the power from mature products towards startups:

  • Exponential growth of internet users starting in the 90s – a rising tide raises all boats meant success for many who were one of the first to see an opportunity
  • Disintermediation (many players in a value-chain were no-longer adding value in an online world and they could be easily disrupted by startups starting off small – eg. Ebay)
  • The first wave of agile product development (in 2000 mature products were built on Oracle & coded in C or Java, and along came Linux, Apache, PHP and Mysql which was free and easy to update your product continuously)
  • The techcrunch effect circa 2006 was strong enough to launch new products
  • The rise of social
  • The second wave of agile product development – the move to the cloud, SaaS, cheap and scalable
  • Exponetial growth of smart phones (Mature products were slow to adapt to building mobile versions)

Maybe there will be new paradigm shifts which will create opportunities again. However the main shift I see is working against startups. It’s the convergence of hardware, software and services with the internet of things, sensors, wearables, increasingly complex smart phones. It’s difficult to see what a “minimum viable product” is in a world where everything is converging and the tech giants (Google, Apple, etc.) are sucking in more and more data.

As a tech seed investor, it’s become increasingly difficult to judge what’s going to succeed. For a startup to see off the mature competitors it will need a VC to back it all the way and a team which is motivated to build out the product until it and the team have matured – its a long and uncertain journey. In this interconnected world, the halfway solution (that we’ve used in Europe where startups raise a tenth of what they raise in the US and find a niche) is going to be increasingly difficult to make work. Even if the IP (intellectual property) is compelling, it’s risky to try and build an industry from scratch unless you have access to the full US scale VC capital (tens of millions) and a team with a track record to scale startups big. The default European option will continue to be to sell the startup early to avoid the risks of going it alone.

My guess is somehow this maturing will play into the hands of the multinationals. They have the scale, and somehow the combination of them, their corporate VC teams, kickstarter/indigogo (as a means of testing product/market interest), accelerators/incubators (to process ideas in large batches), VCs and angels will have work together to get new products to scale.

But (except for the rare exceptions) it’s not going to be about startups going it alone. As markets mature, its brutal out there for startups.

P.S. Here’s an example of Apple’s software maturing and competing with many startups

The global hardware startup ecosystem in depth

The Silicon Valley/Shenzen based hardware accelerator haxlr8r has just published a 200 slide presentation “hardware trends 2015” on slideshare.

Masses of info showing trends, successes and failures – every slide has some key information that anyone involved in hardware startups needs to know. For example here’s an extensive list of traps to avoid:

hardware risks

Hardware innovation is happening very fast. You can see that there’s lots of elements driving this. Behind all this is also the commoditization of hardware components such as sensors, platforms such as Arduino, and a lot of software components (frameworks and algorithms) which are mature enough and modular enough to use as building blocks.

In Switzerland we’re doing well in intellectual property for components, but we are struggling to capture more of the value with complete products or even just subsystems. The only example of a Swiss product I can find in the presentation is Gimball (due later this year) – I think the other Swiss drones are still research projects.

The Silicon Valley seed-investing bubble deflates

Mattermark has just published a report showing that Amid Pre-IPO Mega Deals, Overall Q4 2014 Startup Deal Volume Returns to Late 2011 Levels with Seed Rounds Slowing Dramatically – here’s a couple of graphs from that report (linked from their site) which show it clearly.

I think this lower volume makes sense when you consider the following:

For low-funded startups its difficult impossible to retain rockstar engineers in Silicon Valley – they all want to work at somewhere like Uber where they think that their stock options are more valuable. Note: this is a silicon Valley specific problem – elsewhere it’s not the case.

As sectors mature, it’s difficult impossible to launch a startup with a tiny team of 2 or 3 founders – a hacker (programmer), a hustler (deal maker, biz dev) and a hipster (designer). Eg. in order to get visibility on the app store you also need a marketing budget of $50k/month to build traction and in a lot of sectors it’s now extremely difficult to launch an app which is really just a feature solving one pain-point – users are expecting something more fully-featured from day one. For many sectors to build,test and support a minimum viable product and to create enough mindshare amongst users to get growth needs a team of 10 or more.

There’s serious momentum investing (I’ve written about this before) where one startup in each sector gets $ tens of millions and, unless they screw up big time, this cash gives them enough power to crush all competition and dominate their market. Seed investing in this environment is high risk unless you’re sure you’re backing the one which will attract the momentum investors.

Why raising money for Hardware startups is hard

Here’s my attempt to summarising the investment ecosystem for hardware startups (with my European bias, but it does seem to be a similar position in the US). It’s based on what I saw and heard at the Invest in Photonics (photonics is lasers, displays, LEDs, etc.) conference recently in France, plus my own experience as an angel investor in several Swiss hardware startups.

On the face of it, it’s all very contradictory. For example, in the same presentation at Invest in Photonics a US VC said:

  • Optics + IT will save more lives than doctors.
  • VCs won’t invest in the hard part (the optics).

The discussions, presentations & roundtables at the conference did provide some logic to this. VCs get a better return on investing money in software, so they focus on that. Hard stuff is just too hard for VCs to finance and to get a return comparable with software. If they do invest in hardware then it’s startups who are mostly just packaging up components and building a brand – eg. Occulus Rift, Nest, GoPro, etc. or, occasionally materials.

In addition to the lack of proven returns is another less-obvious issue: traditional VCs don’t have the network to do proper due diligence on most hardware startups. Doing DD involves getting actionable data on the market, how it is going to evolve, what the completion will look like and which tech is going to win out. Only industry insiders have this. A VC can’t act on the limited data that he can get hold of.

Even European success stories like Novaled’s recent exit (to Samsung) for 260M EUR hasn’t change the VCs’ lack of interest. The general consensus from speakers & panels (including Novaled’s outgoing CEO) is that it’s got even more difficult to finance hardware startups the last few years.

Most of the advice was pointing to this strategy for startups:

  1. raise initial funding from a combination of government grants & angels.
  2. be very capital efficient
  3. raise follow on from Corporate VCs and/or family offices.

Wellington Partners said they see all photonics fundraising post-series-A coming from family offices (what they call “unconventional sources”). But it’s not that simple – matching a family office to a deal can’t be done systematically – it has to be opportunistic networking on a case by case basis.

Corporate VCs also seem to be getting involved at a late stage and filing some of the void of traditional VCs (my guess is at this later stage they can do the due diligence that traditional VCs can’t). The general feeling is that getting a corporate VC onboard works well unless there’s a conflict over strategy between the startup and the corporate VC, therefore a corporate VC who operates independently of the mother ship should be best.

All this uncertainty in the investment ecosystem means that the initial investors have to expect that there is a high probability that they will have to lead the follow-on investing all the way until the startup reaches break even. And the new normal is the hardware CEO is always in full-time fundraising mode. Although for really exceptional startups it can be a lot easier than all this.

And finally: although financing hardware innovation is a bit pessimistic, the technology continues to advance. In the near future Airbus thinks we’ll see drones powered from laser beams on the ground and other fun stuff!

Tech Innovation in China

A quick report from the LIFT China conference & maker tour of Shanghai and Shenzen.

Anyone following high-tech innovation in Europe also needs to follow what happens in the US (mainly Silicon Valley) and Israel (mainly Tel-Aviv). We know things are happening in China but does it need to be on this watchlist? In September 2014 I headed to the LIFT China conference and LIFT’s tour of the maker/kickstarter ecosystem to better understand what’s happening there.

I’d been to Shanghai 6 years ago (when we were setting up manufacturing for Poken). It’s still the same city but I think since then it feels that there’s a lot more Chinese who have exposure to the west (speaking excellent English, easy to have in-depth discussions about China vs. the West, etc.). There’s also about 1M Westerners in China, many of these working in high-tech.

We had a tour of DFrobot in Shanghai. DFrobot sell robot kits (and related things) online, distributing worldwide. Because their cost base is lower than Europe and also because they are in such a big efficient manufacturing ecosystem, they can design & build products so much cheaper, they can just throw them out there (like this DIY spider bot for $6) and because it’s great value there’s a market. Whereas the Swiss approach would be to beautifully engineer something and then struggle to sell a few of them at $200 each.

I started to think that maybe in the same way that Silicon Valley has built an engine which sucks in data, capital and brains, China has built an engine which produces electronics.

When we moved on to Shenzen, we met some of the team from Seeed studio. Seeed in an electronics manufacturing operation which helps design and manufactures hardware products for many of the Kickstarter startups. Again, a very efficient organisation.

We were invited for a tour and discussion of Foxconn. Usually it’s impossible to get a tour of Foxconn, but now they have decided to reach out to the kickstarter/maker community. Foxconn say they want to be innovators, not just assemblers & copycats. They want to enable some of their 1 million employees to start prototyping ideas (as people would in a hacker space), and to also have makers bring ideas to them. They have set up a site where anyone can pitch ideas to them called This site is in Chinese only because they are not ready to process world-wide applications.

Clearly Foxconn is in a dominant position for doing large scale high-tech manufacturing. When you see the scale of what they have, it seems possible that Foxconn and Shenzen could turn this manufacturing dominance into an engine which sucks in innovation and progressively more of the value chain (and finally rid themselves of their employee-exploitive past).

So maybe the US and China both have powerful engines which increase their dominance in tech, and Europe will be powerless to compete.

Thanks to the LIFT conferece and David Li  from the XinCheJian hacker space for organizing the tour.

Bilan & Le Réseau’s manifesto for Swiss startups

Bilan and Le Réseau have published a 10 point manifesto (in french) for the Swiss government to make some simple changes to improve the startup ecosystem:

  1. Allow private individuals to make tax free investments into startups. Tax would be paid if the investment is subsequently successful (sounds similar in principle to the UK EIS scheme)
  2. Improve the fiscal system for startups. Encourage R&D and the generation of revenue from IP
  3. Improve the system for share options. Granting options has been made easier, but the tax status on exercising options when startups are still loss making is currently unclear.
  4. Create a VC fund of funds. Get the pension funds to invest into local high-tech.
  5. Create a Swiss “second market”. Lower the barriers of entry for IPO or create a separate segment.
  6. Legislate for crowd-funding and the sharing economy.
  7. Create an “entrepreneur’s visa”. Like several other countries are doing/have done.
  8. Have a small business act. Improve the ability for SMEs to bit on public projects.
  9. Reform the CTI. Streamline the Commission for Technology & Innovation, and make it more accessible for startups who aren’t spinouts.
  10. Create a Swiss “DARPA”.  Use military spending to help create disruptive technologies.

It all seems pretty logical and would make a massive difference to the ecosystem. The petition can be signed here

Full disclosure: I am a passive member of Le Réseau.

How the Israeli government’s tech investments complement private money

Israel is on a bit of a roll with 2 recent near billion dollar exits (Waze and Viber). So it’s interesting to see some details in the FT about how the Israeli government supports innovation funding through the Office of the Chief Scientist (OCS). The OCS has similarities to the Commission for Technology and Innovation (CTI) here in Switzerland because they both offer state money to fund research/engineering which is very innovative.

The Office of the Chief Scientist is continually addressing market failure – areas of broad economic benefit that private investors do not serve – rather than cherry-picking opportunities venture capital companies might well have taken on by themselves.

Waze: it lent about $1m to the company, and got about $3m back; the Israeli tax authority also reclaimed about $230m on the sale to Google in taxes paid to transfer the company’s intellectual property overseas