Woman in private equity, we know you are there! My good friend Shelley Bayes asked me to pass on this information. For those of you who don’t know Shelley, she, along with her husband Jack, is the indomitable force behind the Keiretsu London and Paris chapters. Keiretsu is a global platform, across 39 cities and 3 continents, bringing together serious angel investors with high quality deal flow. We are proud to associate with the London and Paris chapters and if you are UK-based either an angel investor, or a company looking for angel funding, I highly recommend that you get in touch with Shelley.
But I digress, Shelley has brought to my attention the Women in Private Equity Awards. I think this is an important and valuable initiative, and I couldn’t be happier about making sure it reaches the widest possible audience. I really hope all of you participate. Here is the snippet from her email:
Women in Private Equity will be honoring key individuals in the field in an event held in London later this fall. The aim of the awards is to make a career in private equity more enticing to women, to create role models for women considering a career in this sector, and to encourage companies to employ and train more women in Private Equity. This is a Europe-wide recognition program, so please feel free to nominate deserving candidates.
The timeline is:
Nominations Deadline 10th September 2015
Finalist announced 28th September 2015
Judging day 7th October 2015
Awards ceremony 12th November 2015
Please use this link to learn more about this excellent program, as well as to nominate candidates: Women in Private Equity Awards
By Ashok Parekh, Director of Investment Services
Imagine a world where everyone has a universal basic income that provides for their food, shelter and health care, so that they will be more equipped to spend their time on projects they care about and create a sustainable world.
That is essentially, the utopian argument for proponents of universal basic income. However, the reality is that what US and UK economists are actually proposing is not exactly that. Instead, the actual distribution of basic income would be limited to $12K/ year or $1K/month in the United States and £7K/ year in the UK for each resident. Of course, everyone wouldn't mind a bit more money, but I think the theory of universal basic income is actually covering up a complex, dynamic problem by attempting to throw meagre funds at the facade of social inequality, hoping to somehow, magically make it all work out in the end.
There is also concern that if nations adopted universal basic income, it would become one of the structural disintegrating factors that would lead to an economic situation of hyperinflation, and the basic things that seem affordable today will become luxury items, called the "New Zero Argument".
However, some proponents argue that a basic income wouldn't cause hyperinflation, and because it is simply the redistribution of existing funds, it would also correlate to higher pay. However, I found this argument a bit specious. Exactly how would one's salary increase by 50% from a private corporation simply because one is receiving $12K/ year from the US government?
A more progressive idea would be to allow each individual to receive a 200% tax refund for anyone who makes £100K or less. The UK already has a 200% tax refund in place to help small businesses and startups. However, since startups rarely make a profit in the first 3 years, why not transfer this tax refund to individuals who work for small businesses? Surely that would be a more practical solution to the goal of creating an ecosystem of entrepreneurship then merely writing someone a cheque for a meagre £7K/ year which would probably just cover the cost of transportation and a laptop and mobile phone.
If the point is for people to not worry about their basic needs- food, water, shelter, then why not focus on those services instead of thinking that a maintenance allowance of $1K/ month will actually do anything to help anyone?
The UK has universal health care, and also a programme for weekly allowance for job seekers. What about giving each resident a food credit card that they can use at participating grocery shops and restaurants? Why not subsidize UK farmers? UK farmers would be able to deliver weekly boxes of fresh, organic fruit and veg to each citizen, impacting the health of citizens and also creating a sustainable model of food consumption.
As for housing, the UK also has a programme in place in which seniors can purchase real estate for less than 50% the market value along with other programmes. In addition, new developments allow a number of flats in upscale neighbourhoods to be available for a fraction of the price for rent for low-income earners.
In comparison, low income housing is concentrated in urban areas in the United States, which have become areas of active criminal activity. Although the UK has similarly allotted council flats, in recent years the UK has attempted to address this issue by mixing up available housing in different areas, therefore, avoiding the concentration of low income families in any one area. Although there are still pockets of areas, Knightsbridge, Kensington, Chelsea, Notting Hill et al that probably will remain privately owned residences by residents with a surplus of disposable income who are interested in raising the value of their homes through underground basement remodeling, called "iceberg homes", other residential areas and developments that are being built are integrating people with a mix of incomes.
In the UK, students with dyslexia also receive free Mac laptops, and University tuition fees, although rising, have not yet reached the exorbitant prices of attending American universities.
UK residents are very lucky to already have Universal Healthcare, but what about Universal Transportation, Universal Nutrition Plans, and Universal Education?
Free public transportation or Universal Transportation for people attending university or learning a new trade or volunteering their time for a charity or cause will give people tools of mobility. The basic income proposed of £7K/year for UK residents will be just enough to cover an oyster card for 1 year which comes out to £3336/ year from zones 1-9 on the London Underground. That leaves £3664 in which one might be able to purchase a laptop and mobile phone along with a phone subscription to be able to have the basic tools for work.
Providing for a free education, eg, Universal Education, would guarantee opportunities in areas where otherwise people might not be able to afford. I like the German model of free education; University is free for residents and foreigners who are accepted into their programmes (with the exception of people pursuing MBA degrees). The rising cost of University is actually what is crippling America's youth, and perhaps the tech elite in the US should consider reverting back to the halcyon days of free education from the 1950s-70s (which they probably took advantage of before becoming heads of corporations) before thinking that social inequality problems could be solved by throwing a meagre $12K/ year to all citizens. After all, $1000 a month would not even cover a studio flat the size of a closet in Silicon Valley.
Also a Universal Nutrition Plan would allow citizens to enjoy sustainable agriculture. As I mentioned before, if the UK utilised farm subsidies for weekly deliveries of fresh boxes of organic fruit and veg for people who are learning new skills in their further development of education and for people who choose to volunteer 2 days/ week for charities and non-profits, then that would create the right kind of ecosystem for people to focus on doing what they love, instead of people focusing on working jobs they hate just to simply pay for their food, education and transportation costs.
It could be that I am missing a convincing key argument for universal basic income, but I think this model has already been tried before- in Communist Russia and the former Eastern Bloc. Instead of creating a society of innovative leaders and social programmes, people became desperate and propagated a society of underground criminal activity and human trafficking of prostitutes. Instead of equality, the government became corrupt (what a surprise) and nearly everything became unaffordable for many, including items of food, such as a single egg. I remember the first time I went to Prague- 10+ years after they had long separated from the Soviet Union and became a representative democratic republic and was astounded to see that their McDonald's was a 5-star restaurant with marble floors and a grand piano. It was the most anachronistic sight I saw, a celebration of wealth, which was derivative of the new money coming into the former Eastern Bloc, after years of oppression from a regime that gave all its citizens a universal salary and basic income.
Of course, there are key differences between the Universal Basic Income Theory and the universal salary given to people in the Communist Soviet Union or even in Communist China, such as ownership of real estate and businesses deferred to the state instead of to private individuals and businesses, however, the examples in both nations further exacerbated the wealth gap and accentuated inequality as opposed to adhering to the Marxist ideal. I'll be curious to see if Communism 2.0 receives traction outside of Utrecht's ongoing experiment on the welfare population in their society, however, I think a more effective way for any government to close the wealth gap is via innovative social programmes that do not rely on the transfer of money to cover up a larger, dynamic problem. What people need are more resources available to them that cover their basic living needs: healthcare, education, food, transportation, and housing are the foundations that enable people to do what they love and contribute to society, and currently in our global world, $12K or £7K/ year does not nearly cover all of it.
By Sierra Choi, Director of Marketing
I wanted to chime in on the news that Calstrs and Calpers, the two giant US pension funds have no idea of the total amount of fees that they pay their private equity and venture capital managers. For those of you who are unaware, Calstrs stands for California State Teachers Retirement System and Calpers is California Public Employees' Retirement System which is part of a US government agency. Calpers Board of Directors include 3 members who are appointed by the California Governor, and one by specified leaders of Legislature, and 4 members who are ex officio (California State Treasurer, California State Controller, Director of the California Department of Human Resources and designee of the California State Personnel Board)
Why does this matter? Because much of the money that is given to venture capital firms who in turn, invest it in technology start-ups is provided by foundations, endowments, pension funds and other institutional investors. These so called “sophisticated” investors have a duty to invest wisely on behalf of their beneficiaries whether that is to provide for pensions or achieve some charitable goal. When these two investors, who collectively have over $50 billion currently invested in private equity across hundreds of managers, don’t know how much they have been paying in carried interest and other fees over a period of some 25 years is both shocking and I would argue almost a dereliction of duty.
How can you have an objective evaluation of investment performance without this information? Having worked in this industry for the past 10 years and having being an LP, and having seen the audited financial statements that all GPs are required to provide to their investors, I can assure you that one certainly can calculate the amount of carried interest and fees being charged –nothing more sophisticated than a calculator is required. However, more importantly, this lack of disclosure also creates the perception that alternative investments are too complicated, too risky, too opaque and should be avoided, and in the long run that does not do our industry any good.
By Ashok Parekh, Director of Investment Services
A week ago, Brian Chesky, CEO/ Founder of Airbnb, amusingly posted the rejection letters he had received to initially fund his startup after he had met with investors in Silicon Valley on his blog long before his startup became valued at $25 billion.
It tells a very interesting story: VCs who are probably hitting themselves on the head now for not seeing the future of open e-Commerce real estate rental platforms. Perhaps there were even some prejudice there of Chesky's liberal arts education. Hype has always existed about Founders who are Engineers, and even Y Combinator will only accept candidates who are primarily engineers and developers, but the reality is that in recent history, the most iconic Founders and heads of companies often have liberal arts degrees.
An Incomplete List
Chad Hurley, Founder CEO YouTube (BA Fine Art, Indiana University)
Brian Chesky, Founder CEO Airbnb (BFA Industrial Design, Rhode Island School of Design)
Stewart Butterfield, Founder CEO Flickr and Slack (BA Philosophy, University of Victoria, M.Phil Philosophy, University of Cambridge)
Mark Zuckerberg, Founder CEO Facebook (Psychology Major at Harvard who also liked Greek and Latin before dropping out)
Sheryl Sandberg, COO Facebook (AB Economics, Harvard University)
Lloyd Blankfein, CEO Goldman Sachs (AB, History, Harvard University)
Jamie Dimon, JPMorgan Chase CEO (BA Psychology and Economics, Tufts University)
Starbucks founders, who were all friends at the University of San Francisco- Gordon Bowker (BA, Literature), Jerry Baldwin (BA Literature) and Zev Siegel (BA History) were all writers/teachers
Steve Ells, Founder CEO Chipotle (BA Art History, University of Colorado, Boulder)
Jack Ma, Founder/Chairman Alibaba (English language- was a teacher) who convinced his students to become Co-Founders of his company. Rejected by all of VCs in the US until he came back to launch the biggest IPO ever in US history
Chris Morton, Founder CEO Lyst (MA Philosophy from Uni of Cambridge)
And even Evan Spiegel, Founder CEO Snapchat (Design Major at Stanford before dropping out)
Sheryl Sandberg has said that the modern career trajectory is not a corporate ladder but a jungle gym and we have to wear many different hats and be able to do different functions. In a similar vein, Anna Wintour, Editor-in-Chief at Vogue Magazine, talks about the problem with specialisation, and becoming quickly outdated in her address to the Oxford Union earlier this year.
My personal experience with many Engineers or Maths majors (not all of course as there are many brilliant exceptions) is that more often than not, they do not possess the kind of noblesse oblige nor a moral compass necessary to lead a company. They mainly function in an insular dog-eat-dog world and that is not good for business, which is primarily built on a system of trust. If you don't trust someone, if someone can't honour contracts or simple verbal agreements, you won't go that extra mile for someone and you won't want to work with them. It's really that simple.
In Silicon Valley, many software developers often have an air of arrogance and dreams of being famous billionaires and retiring on a private island with supermodels, but ultimately, not the least bit interested in solving the world's problems nor any complex problem. The current US government has created an atmosphere that deifies software developers and engineering majors, hoping to encourage more students to major in STEM education. Certainly, STEM is important- however, I wonder if we might not be propagating a society of idiot savants in era of specialisation?
When I first started talking to my CTO, Sam Keays, we had to solve a problem regarding user privacy. His response was so different from the developers in Silicon Valley and Los Angeles I had encountered (who certainly would've never thought that it was important to abide by a moral code nor to honour users rather than exploit them for profit). In Silicon Valley, the mottos: "That's just the way the world is," "Kill before being eaten" and other such mainstream solipsism-derived thinking could often be heard echoing through the halls of different start-ups. However, Sam came to me and told me it was the utmost importance that we do not exploit our potential users and to create an environment where their personal data is completely safe. Sam tends to be on the quieter side, so I was a bit surprised that he had taken an important moral stance against solving a complex problem.
Sam also taught himself how to speak Esperanto, and received a first class degree in History and Political Science before he did his MA in Computer Science in the UK. The great thing about a UK education is that those very qualities: critical thinking, analysis, understanding of a wider scope of vision, integration of contradicting views, is what makes UK education the very best in the world.
That's why a liberal arts education is important. When was the last time a specialist engineer or software developer solved an important societal problem? Instead, if we look at a few representative sample of engineers/ developers who have been CEOs we most often, do not have Google or Microsoft (which were the outliers) we often have abject debacles:
Homejoy- founded by two engineer siblings. A lot of their users were discovered to be homeless people, and instead of creating a platform that solves the homeless problem in San Francisco and abroad, they mercilessly tried to pay them less than minimum wage until they were taken down by multiple lawsuits
(As a bit of digression, I had great hopes for HomeJoy, hoping that it would follow a path similar to Dr. Mimi Silbert's Delancey Street Foundation. She has a criminology degree from UC Berkeley and founded the Delancey Street Restaurant in San Francisco that employs former criminals, drug addicts and convicts. She envisioned a place where substance abusers, former felons and others who had hit bottom would, through their own efforts, be able to turn their lives around. I only know of this restaurant because I used to have brunch there all the time, not realising the people who were serving me were reformed criminals until an entrepreneur friend told me about it. Delancey Street Foundation is a hugely successful, award winning non-profit and the restaurant is very popular with SF's technocratic class, similar to what Jamie Oliver did with Fifteen Restaurant in Hackney, by training and employing at risk youth who were former drug addicts.)
Clinkle, Founder CEO Lucas Duplan (BS Computer Science, Stanford) He is an infamous founder who had often posted photos of himself posing with loads of cash on social media. Treated his employees like navy seals in torture camp. We might be able to forgive him for being young and inexperienced. Hopefully, he'll do better in his next startup.
Secret, Founded by two former Google employees, engineer David Byttow, and product manager Chrys Bader, with the former returning his Ferrari and investor money after the startup raised more than $25 million just a couple of months after it raised $8.6 million in Series A, and then failed.
There are many more examples such as these above, but I think it's worth it to note that they are not the exceptions, but the norm in Silicon Valley.
In fact, more than 90% of Y Combinator's entire net worth is based on 2 startups alone in their entire 10 year history: Dropbox and Airbnb. Out of the hundreds of failures, they have supported exactly 13 winning startups with a valuation of more than 1 billion. 93% of the companies that get accepted by Y Combinator eventually fail.
That is something to think about because contrary to popular media opinion, engineers do not rule the world. At least, engineers who have not been exposed to a liberal arts education, perhaps because they cannot understand concepts and ideas beyond their own specialisation. When we examine the the kind of Founders and Entrepreneurs that have often changed our society, most often than not, they had all studied the liberal arts.
Doing the right thing isn't about idealism, it's about a triple bottom line- when society is able to invest in the very people who are often disenfranchised or ignored by society; care for our environment and increase social value.
That is one of the reasons why I think Brian Chesky is one of the iconic Founders and Entrepreneurs of our generation. He had a choice in Airbnb's early days; if they were going to pay reparations for a user's much publicised trashed apartment, and what did he do? Lawyers and everyone else advised him against admitting guilt in the share-economy, because then Airbnb would be liable to pay damages. But he did what he felt was the right thing to do, which was to apologise for what had happened to that particular user, and then completely compensated her for all damages. Then he integrated (what is now) a $1 million insurance policy for each incident to protect the users who are listing their homes and flats on Airbnb, and that created collective trust within his startup amongst the people who were using his platform, and Airbnb continued to flourish. Brian Chesky is someone who is motivated by that double/triple bottom line. He is more than an entrepreneur, he is a philanthopist and humanist. He cares about his users, cares about his employees and does not see them as disposable methods for short-term profit.
When I think of which startups I want to work with, I always ask myself, which Founders understand the human condition?
Those are always the Founders to invest in long-term.
By Sierra Choi, Director of Marketing
Hailo was originally founded by 3 London cabbies: Terry Runham, Russell Hall and Gary Jackson, who created a platform made for licensed drivers. Since its inception in late 2010, criticisms have surfaced about the company:
1) Hailo did not embrace ride-sharing; it is a platform for licenced taxis only and when they applied for a private hire license, cabbies revolted; and its minimum fixed fees for rides turned off many passengers who were looking to travel short distances.
2) Hailo's failed launch in North America and their early pull-out of NYC and Canada; they saw the extravagant burn Uber maintained to remain the dominant platform in NYC and did not want to burn as much money as Uber.
3) Hailo's stand against emerging technology- they have created public campaigns against driverless car technology and have not created a beneficial bridge between cabbies and driverless cars, and instead put them up against each other.
How Hailo Can Beat Uber:
1) Hailo Carpool: they can integrate ride-sharing features; carpool (neighbours or otherwise). Currently Google is testing out this model in Israel called "FreeRide". It lets people carpool to work or other places. Hailo can match up neighbours and other people who live close by to carpool to school, work and other commutes.
2) Exclusive contracts for drivers: offer benefits and exclusive contracts to all drivers on their platform- this will wipe out at least 65% of the drivers on other transportation apps whose drivers use more than 1 platform. Thus far, Uber has been marketing specifically towards passengers, lowering prices, giving discounts etc., and been more involved in spending burn related to marketing and public policy than catering to their most valuable asset: their drivers
If Hailo offered their drivers certain benefits- such as reimbursement on petrol and discounted car insurance with an exclusive contract not to utilise other apps such as Uber, Lyft and others; this would harvest all the drivers on other platforms. Of course, Uber might change their stance on "contractors not employees" and we have already seen the very first victim in the share economy startup last week as Homejoy will be shutting down at the end of the month from multiple lawsuits and class action lawsuits from their users wanting to be reclassified as employees not contractors, but Uber is spending a lot of their burn denying their most valuable assets: their drivers, simple benefits.
If we have learned anything about the service-oriented share economy, Hailo should quickly take the lessons learned to woo drivers with a new policy that gives drivers benefits.
Hailo could also lobby the UK Govt- perhaps Hailo drivers who are carpooling could be exempt from London congestion taxes etc., but making it appealing for drivers to use the Hailo app while taking away drivers from other transportation apps is what will make it a more valuable platform for users of the platform as well as for passengers.
3) Integration of new technology: Instead of taking a stance against driverless technology, Hailo could embrace driverless technology and integrate it into their platform.
Things have always ended badly when companies do not embrace emerging technology and a democratic platform. The winning goal for Hailo is to create more jobs, not resist against change that people are excited about. If Hailo could re-strategise their stance, and instead woo cabbies to embrace this new technology by offering them opportunities to re-home their skills and talents and via the creation of new jobs, this would be more beneficial for the company in the long-run.
My experience with London cabbies is that they are the best in the world, along with Parisian cabbies. I even had a Paris cab driver travel across the city, through 5 different arrondisements to return my passport, when he realised that I accidently left it in the trunk of his car after it fell out of my bag. I've always had a great experience with London cabbies who have always handled all my luggage without complaint, as well as telling me amusing stories about certain neighbourhoods and places in London. I even had a London cabbie, who was a South African immigrant with a background in political science, tell me about the various corruption present in the South African university system in a ride from Liverpool Street to Euston Square.
As a society, we should take care of these people, and make it worthwhile for them to join a transportation sharing app. Uber has forgotten that their most important assets are their drivers, no matter what kind of spin they pay people to write about in the media.
A lot of the thought-leaders I follow on blogs have commented that Uber will most likely shift all their drivers towards driverless technology in 10 years, but I am somewhat sceptical this will happen for the following reasons:
1. How will Uber shift drivers to "driverless" technology when Google owns all of the patents? Most likely Google will expand their driverless cars to many nations, and regular taxi companies will shift to the integration of driverless cars, but Uber can't suddenly get rid of all their drivers and replace them with Google's driverless cars, otherwise they will just become like any other taxi company. Also people are fickle; just because people use the Uber app this year does not mean they will continue to use the app in the coming years if it doesn't provide them with what they want.
2. The feature that passengers like most about Uber is that it is less expensive than regular cabs. However, I think transportation matching apps like Uber, Lyft and Sidecar are actually trying to solve two different, underlying problems:
a) Congestion/ traffic on the road (ie, most people don't want to drive their own cars and look for parking)
b) Inefficiency of public transportation (ie, subways, metros, trains, Bart, Muni, buses are outdated systems of transportation that the US and other governments have not fixed and have not been updated for several decades)
In comparison, if we take a look at Switzerland's tram and rail system- it is one of the most efficient, safe, clean, convenient ways for people to travel. The Swiss government has made it easy for their citizens and residents to use public transport via its annual update of features, and Swiss citizens pay a certain amount annually to use these services in their annual tax. Therefore, residents don't have to buy tickets for local commutes (only for travel across several cities) which is the most annoying thing about taking public transit (ie, always have enough change to buy tickets or else have an Orange card or Tube card). Instead, Swiss residents just get on and off whenever without having to go through ticketing gates. Switzerland also allows people to travel with their pets which makes it more agreeable to people like myself who like to travel with my dog around different cities.
A passenger on a Swiss tram traveling with their dog. Dogs can have their own seats on Swiss transportation. London also changed their policy to allow dogs on leads in the London Underground after they integrated air conditioning. In comparison, the NY subway only allows dogs that are in cages or dog carrier bags.
In effect, I think the demand for transportation sharing apps is directly derivative from people's discontent with their public transportation system.
In any case, it will be interesting to see how all of these service-oriented share economy startups, especially those in transportation, will evolve over the next 5 years. I certainly hope Hailo will be one of the companies that we can look back on and say that they understood how to integrate change to create a win-win scenario.
By Sierra Choi, Director of Marketing
This morning, I made a quick comparison chart of pay scales between service-oriented on-demand companies such as Uber, Instacart and Homejoy with that of a few companies in the retail sector: Costco, Whole Foods and McDonalds. Surprisingly, all the companies I surveyed above had flexibility in hours, and an employee at Whole Foods only needed to work 20 hours/ week for their benefits to kick in. In a similar vein, Costco gives both full-time and part-time employees all benefits after a certain time frame. For full-time hourly workers, their benefits kicked in after 90 days or 450 hours of work (whichever came first) and for part-time hourly workers, their benefits kicked in after 180 days or 600 hours worked. McDonald's also gives their employees educational assistance for college tuition or other training along with a discounted gym membership. All three food sector companies: Costco, Whole Foods and McDonalds, gave all their employees stock options and other benefits, such as workers compensation and paid holidays and time off.
Not surprisingly, Uber, Instacart and Homejoy came out to pay their "contractors" the least, with the average Uber driver making less than $10/hour after all the out-of-pocket expenses (such as car, insurance, fuel) had been calculated.
According to Sherpa Share, 65% of Uber drivers also used other platforms to earn income, such as Lyft and Sidecar; therefore, more than half of Uber drivers were working more than a full-time shift with all the transportation platforms combined, rather than as a part-time side-gig.
Costco paid their workers the most, and their employees were reported to be happier in their jobs than employees at Silicon Valley companies. (As a bit of digression and on an amusing note, I went to a book signing by Al Gore for one of his books several years ago in San Francisco, and he said that he got the most emails and responses after being on the cover of the Costco Connection than he did when he had been on the cover of Time Magazine.)
We have to think about what kind of example we are setting for the next generation of Americans and Brits, if we were to revert to a kind of feudal culture in which the average worker for a share-economy startup is struggling to make $10/hour from "part-time" work in which 65% of Uber drivers also synonymously use other platforms, such as SideCar and Lyft, so that they can make enough to pay for their car insurance and fuel costs? What kind of nation would we be, if the average worker in the share economy has to work 3 or 4 "part-time" jobs without any benefits? These are hard questions to answer, and thus far, only entrepreneurs have come up with viable solutions, not the government.
In the past, entrepreneurs have typically solved problems in society that changed people's lives for the better, not perpetuated the mentality of slave-wage labourers in the Industrial and Post-Industrial Eras.
If a company that has a valuation higher than 80% of the companies in the S&P (e.g. Uber) says that the drivers who work for them are not exploited under-wage workers but "contractors" who make less than minimum wage (after all their out-of-pocket costs have been subtracted) then what sort of example are we setting for the next generation of thought-leaders?
For entrepreneurs like John Mackey, who is a supporter of "conscious capitalism"; he has said in his book that, “Our belief is that if a company does an outstanding job caring for its team members, creating value for them, and respecting them as key stakeholders, it can successfully avoid unionization.” -Conscious Capitalism: Liberating the Heroic Spirit of Business
In a similiar vein, the CEO of Costco, Craig Jelinek has said, "I just think people need to make a living wage with health benefits. It also puts more money back into the economy and creates a healthier country. It’s really that simple."
We are living in exciting times because in our current era, entrepreneurs and venture capitalists are more powerful and influential than politicians. In comparison, politics is filled with corruption, lobbyists, underhanded deals and payoffs, in addition to being extremely slow at creating any kind of change. If we were to set an example for how our nations should be, we should seek to ask venture capital groups and startup accelerators, such as Sequoia Capital, Kleiner Perkins and Union Square Ventures, in addition to startup accelerators such as Y-Combinator, TechStars and the individual Founders of startups, how to create an ecosystem of "conscious capitalism," instead of seeking to perpetuate the exploitation of the working class.
By Sierra Choi, Director of Marketing
NOTE: Homejoy will be shutting down on July 31, 2015 after being inundated with multiple lawsuits from contractors who wanted to be classified as "employees".
Recapping of seed rounds is still a practice that is not widely practiced, but which threatens to damage the entire venture capital community. Joanne Wilson (Gotham Gal) blogged about it a couple of days ago here.
Imagine this: A startup has angel investors who put in £2 million of convertible debt into their fledging company, and then, not successfully raising their Series A, they fall back for another £500K angel round- except that this particular VC group wants to recap the original £2 million investment, so that those shares are now worth 0.1% of the company, whilst the new £500K round gets 60%. Hence, successfully screwing over the original angel investors who put in £2 million.
Not only is this kind of practice unsavoury and uncouth, but it destroys the tacit honour code that investors have with their entrepreneurs. The reason why the venture capital community is booming today is because there are more angel and seed investors than there were 30 years ago. If this sort of seed round recap becomes common practice, then a chain of events will inevitably follow, in which there will be a drastic decline in seed capital funding- which directly correlates into less capital being available for later rounds because those startups originally funded by angels would simply not exist.
Angel and seed investors take an early chance on startups, and hence should be rewarded, not screwed over. The reason why there are more seed and angel investors today is because the media has capitalised on VC celebrities such as Peter Thiel, Mark Cuban et al who have made original angel investments that have paid off quite well. If it becomes common practice for VC groups to recap seed rounds, there will be less of that wealth to go around in the long run due to a drastic decline of seed round funding in the next decade. This is a trend that should be weeded out before it becomes more widespread. There aren't any government laws against this sort of practice, and to be fair, I am against too many goverment regulations limiting what VC groups can and cannot do, because it doesn't solve the problem, merely masks it with legal loopholes. However, this is a practice that people should simply know is damaging to the entire venture capital community. There aren't laws either for spitting your gum out on the middle of the sidewalk (unless you are in Singapore) nor for defacing public works of art; people simply know that these sorts of actions have negative consequences for the entire community. When seed and angel investors are rewarded, then investments increase in magnitude and sets off a pattern of economic growth which creates a favourable climate for venture capital in the entire nation.
Let's face it, entrepreneurs- if a prominent Silicon Valley VC firm offers you £500K, but wants to recap a seed round, chances are, there will be another VC firm who will match that investment. Don't buy into that poker game of psychological scare tactics- "You're not worth anything because you couldn't raise a Series A". Series A is inevitably harder to raise and longer to close because there will be due diligence, closer analysis of your financials, and more in depth questions to answer, such as LTV (long-term value) and CAC (customer acquisition cost) etc. One Founder of a FinTech startup here in London, told me that he walked away from a Series A funding round at the last minute because the VC group did not give him favourable terms for the founders and the seed round investors. He then went and found another VC group willing to agree to his terms and successfully got his Series A.
So why do some VC groups insist on these kinds of damaging tactics such as seed round recap? Most likely, they have underperforming portfolios and are desperate to make their investment go as far as possible. According to this Kauffman Foundation study in 2012, venture capital groups in Silicon Valley have delivered poor returns for more than a decade, and since 1997, less cash has been returned to investors than has been invested in VC. Only 20 out of 100 venture funds generated returns that beat the public market by an equivalent of more than 3 percent annually, and out of 88 venture funds, the vast majority- 66, had failed to deliver returns. [Note: Since this study was from 3 years ago, and utilised the outlier "successes" of Groupon and Zynga (two previously high-profile unicorn companies), I extrapolate that this trend really hasn't changed much.]
When you (as a Founder) take money from an investor, you are building a relationship with that investor as well. If a VC group wants to screw over your original investors, chances are, they will also screw you over at later rounds. Trust is a tenuous thing- hard to build and easy to break, and most business relationships are built on trust alone. Without trust, you're better off taking money from a loan shark than a VC group that wants to destroy the very foundation of what your startup was built on.
Honour thy seed investors, entrepreneurs.
By Sierra Choi, Director of Marketing
The internet of things (IoT) - the ubiquitous world interconnected by smart devices has certainly been one of the most hyped sectors of the digital economy. In case you missed it, here are a few things that caught my eye over the past few days: First up, was British Gas’ unveiling of its second generation Hive thermostat. The original was a fairly basic way of controlling your home heating system via your phone or computer, similar to Google’s Nest. The new version aims to go much deeper into your home and offers a broad array of sensors and functions. There are motion sensors, door and window sensors, controllable electric plugs and “active lights”. You can order yours here.
The IoT has gotten the Government’s attention. In the March budget announcement there was £40 million allocated to helping the and this week Innovate UK launched a £10 million pound competition to help spur smart cities. Of course there are a bunch of provisions, one being that it must be a collaborative project led by a local authority. However, eligible businesses could receive up to 70% of their project costs in the form of a grant. You can apply here.
And finally, tech giant Cisco announced that they would be investing an additional $1 billion in the UK into the IoT economy. For entrepreneurs, there is the tantalizing prospect that $150 million of that investment will be channeled to start-ups in this space. You can connect with Cisco’s British Innovation Gateway (BIG) here.
By Ashok Parekh, Director of Investment Services
Being a VC from analyst level, you get to spend a lot of time observing on Board meetings before being able to be participate on one. And over time, as you attend more and more, you learn what works and what doesn’t, what the good CEOs do, as well as the bad ones; the good Chairperson and the bad ones, and the genuinely useful Board members and the tag-alongs. For an early stage company, time is of the essence and thus Board meetings can be a total waste of time – or time put to good use…
Lately, I’ve been working with a lot of earlier stage companies. Unlike working with later stage PE companies where the Board has a major compliance and control role, with earlier stage companies, the Board should really be helping - not checking. The Board, thus becomes more of a strategic sounding board and channel for introductions than a governance and control tool. What I have found in some of these earlier stage businesses I have worked with is that more time is spent questioning Management on the information they are reporting than on forward-looking initiatives and helping. As in, "the quality of the reporting has been weak" with a lack of detail and insight, which has meant Board members spending time squeezing information which should have been in the Board pack, piece by piece from the management.
An example I have seen: On the Sales progress slide: “5 new distributors approached, 1 on-boarded”. This sort of a bullet-on-a-slide just begs questions: “What happened the other 4?”, “Which geographies?” “What sales targets do they expect to hit?” etc.
The Board spends the next ten minutes competing to see who could ask the smartest and most insightful question – whilst ideally - if all this information is already on the page – a better conversation would be on the strategic insights gained and how to use them, or ideas on whom to go to next.
Having sat lately on numerous earlier stage (Angel) Boards, I firmly believe at this company stage, generalist board members are not a lot of use. A good board member at this level will be bringing one of the following three with them a) introductions to investors b) introductions on sales leads c) real industry specific strategic insight. If a management team reports well and negates the need for annoying, obvious questions, it becomes obvious quickly which of the board members are really bringing something useful to the table and which are just smart folks asking obvious questions.
I wrote before on how a good Board pack will reflect directly the normal KPIs of the business, a recap is here.
By John Rowland, Managing Partner
There have been many CEOs who are also brilliant orators, so much so that historically, the personalities and tour de force of many Founders have been commented on and elevated into iconic status. Brian Chesky from Airbnb and Parker Conrad from Zenefits are a couple of very inspirational and charismatic speakers who both have very interesting stories to tell and have faced a lot of hardships as they were starting their companies, with the latter even overcoming a diagnosis of cancer.
The United States is a great country because it is a forgiving nation. Many entrepreneurs there have failed many times and even declared bankruptcy before launching successful companies since the time of Henry Ford in the late 1800s. However, I think in many nations, especially in the UK and on the Asian continent, there is a tendency to idolise Silicon Valley, especially from media influences such as TV and film.
Another one of my favourite speakers, Jack Ma, Chairman of Alibaba, gave a very insightful KBS televised interview in front of young South Koreans earlier this year talking his personal philosophy, tidbits about the first year of Alibaba, to what he amusingly thinks about MBAs. (ie, "Many smart people were smart before they went to do their MBA, but after they come back, I don't know...they start to think in a box, so I train them to unlearn what they have learned at Business School").
A twenty-something South Korean asked him what kind of preparations should he make to launch a company in Silicon Valley, as he thought Asia lacked companies with panaché such as Uber, Airbnb and Dropbox, and he wanted to emulate these sorts of startups?
Full interview on YouTube
Jack Ma thinks for a minute and then tells the young man that when he had been younger, he idolised people such as Bill Gates and Warren Buffet, but that later, the people around him became more of a role model to him: his neighbours, his aunts, his uncles. He then tells the young man that Silicon Valley has been around for a long time- 50 or 60 years, and that it's got a great infrastructure and ecosystem but that we should not always put Silicon Valley as the ultimate example because essentially, it is hard to tackle a large, dominating infrastructure that already exists, and that he believes entrepreneurship begins at the local level first; to influence the local community, and that begins a process of the creation of your own infrastructure instead of becoming dependent on the government.
For Londoners who want to move to Silicon Valley, there are pros and cons. Silicon Valley is great for many reasons, and the United States is a wonderful nation, but for entrepreneurs who want to move there, one has to consider living in an area where you have to pay inordinate amounts for your own health care, skyrocketing rent, high overhead, and being completely dependent on your car within a landscape that is always sunny, but in dry heat surrounded by flat landscapes and concrete buildings aren't exactly ideal places for entrepeneurs, unless you have parents like Mark Zuckerberg who were willing to re-mortagage their house to finance your start-up.
One of the great things about London, and the UK in general, aside from universal health care, the smart-city infrastructure, the proximity to other European nations to faciliate inspiration and trip-planning, the arts, the educational opportunities, excellent public transportation, reasonable real estate outside of zone 1 and 2, 200% tax refund for startups, is the sense of community. What Jack Ma talks about- people building their own infrastructure to support the small businesses around them; making impact on a local level first before trying to conquer the world.
I'm always surprised by the startups and small businesses that are thriving in and outside of London, in places like Devon or Brighton or Cambridge. People are doing amazing things in the UK, even if they are not well-known and don't give as many media interviews as people do in the United States.
Jack Ma also says later in the interview that the one thing he regrets is becoming public in the media, in essence, because he lost his privacy. He mentions that his wife often told him that he didn't belong to her, but to the media, and that he would rather spend more time with his family and not travel as much.
Ah, the price of fame.
By Sierra Choi, Director of Marketing