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


Even Boston struggles to get some technology press

From Fortune magazine what’s really wrong with Boston tech says:

TechCrunch does not have a single Boston-based reporter. Neither does Re/Code, Pando. The Verge, nor VentureBeat. And the same goes for more mainstream business outlets like The Wall Street Journal, Bloomberg or Reuters. As for Fortune, I’m one of just two local reporters — and neither of us primarily cover technology.

If even the US’s second tech city is completely in the shadows of Silicon Valley/San Francisco, then there’s not much hope for Switzerland to get much of this international technology press.

European Startup Accelerators: the Hy! Demo day

Saturday Jan 18th 2014 was the first Hy! Demo day, gathering accelerators from around Europe. The format was each accelerator introducing themselves and showcasing their best 3 startups, each with a 3 minute pitch. The wacky Berlin location (disused swimming baths) was overwhelmed with 800 people showing up.

The blogger Robin Wauters kicked off the day with some research about the European accelerator ecosystem. He said:

Entrepreneurs don’t care where they are based. They will move to the best location.

Re: the debate about whether there are too many or too few accelerators: everyone has an opinion, but accelerators themselves say there should be more (but keep the quality high). It’s like saying “can there be too many angel investors?”

What makes a successful accelerator? The possible criteria for judging it are: exits, investment raised, follow on valuations, job creation, IP created…. Exits and valuations provide the strongest justification of a viable ecosystem, however, the ecosystem is still too young to have generated these figures. Even in the US, Y Combinator is an outlier.

Its the mentors who really make the difference. The rest (eg. office space, a bit of investment, etc.) are low barriers.

The culture of the city doesn’t matter. But start-ups should move to where’s best.

Back on the quality vs quantity question. Nobody can judge it. However, the more accelerators, the fewer great start-ups who fall through the net. Poaching does go on between accelerators.

The accelerators

(I ducked in and out of the presentations as there were other networking areas, so this list of accelerators present is incomplete)

Techstars talked about their experience in London: 1,500 applications for 10 places. David Cohen started Techstars (in the US) because being an angel is hard: drinking lots of coffee, reading lots of bad pitches, crossing your fingers…Creating an accelerator was a better solution.

Techstars thought that Europe would be different. It’s not: Techstars US start-ups raise on average $1.5m each – Techstars UK is similar.

Corporates are frightened. A corporate can take 90 days to organize a strategy meeting. In the same 90 days a start-up can go through an entire accelerator program and come out with a viable product. This is why Barclays has built a fintech accelerator in London (and committed to 6 programs over 3 years) – the corporates know that they themselves can’t innovate at this speed.

Adam Wiggins from 
Heroku talked aobut his experience at Ycombinator in 2006. He said “Ycombinator really took us up a level”.

Helsinki Startup Sauna. We are getting the brightest people in. We are 3 years old, no big exits yet. 
Finland had a big-corporate culture: now this has changed.

Y Combinator took 6 years before getting exits.

One of the main benefits of an accelerator is as a support group for entrepreneurs. If you realise you’re not going to make it then you can fold into a more successful startup.

Deutsche Telecom’ accelerator is called hub:raum and offers financing (100-300k equity),
Helping by promoting (mobile) apps on their network.

Startup sauna (Finland) runs a 5 week program, then silicon valley, then demo day. 
8 batches so far. 
Non-profit, takes no equity, for free, invests 10k + 30k government money

Axel Springer’s accelerator is a joint venture with plug & play from the US.

Pro7Sat1 accelerator offers EUR 25K, 3 months on campus. 1 wildcard for EUR 7M of TV advertising.
 All for 5% equity.

Not just mobile apps

Berlin hardware accelerator was present and one of the other accelerators had a robotic startup.

The relevance of all this to Switzerland

We shouldn’t try and hold on to every start-up – they should go to where makes sense. Many will come back, or at least ‘build bridges’.

We should have our own accelerators focused on what we do best: think medtech, micro-technology… and attract the best startups in these domains from all over Europe.

A great start-up pitch is not “here’s our idea”. Instead, it’s “we’ve cracked it: we have the best product, the right team and we’ve found our market”.

Comparing what I learnt from these 3 minute pitches vs. what I know about eg. the early stage startups at la Forge at PSE I don’t think Switzerland has a problem generating ideas which are good enough.

Obviously there’s still a discussion on accelerators vs. incubators or one-to-one coaching/mentoring. But its clear that there’s a lot of momentum towards accelerators: I’ve mentioned several corporates in this blog post who are taking it seriously and articles about this ‘revolution’ are appearing in the serious business press

Thanks to Go Beyond for a free ticket.