Investment Thesis and Strategy

Since I announced that I am setting up a Syndicate, I have had some requests on what and how I plan to implement this. And I really happy that 2 people have already committed to support me in this initiative. I think more would join if they understood how all of this worked. I am going to write a series of blog posts outlining how I am thinking about this and why I believe this is the best way to disrupt investing in Iceland. For those of you wanting to see how Angel Syndicate Works, check out this linkFAQ is here.

I had posted a link to a Prezi presentation of the pitch for a Venture Capital Fund in Iceland that I started putting together in 2009, the vision remains. Here is the presentation:

Investment Thesis

Investment Thesis Prezi

I believe there is enough raw materials in Iceland to build world class companies in Iceland, like everywhere else it takes effort, networks, resources and strategy to execute on that. Iceland has one of the best infrastructures in the world, I am saying that after living in different continents and countries. I believe that software is going to run everything, those who are building software to solve some of the challenges that we are creating are going to create value. My investment thesis is very simple, lets look back each decade for the last half a century. In the 1960, it was companies like Digital, IBM, etc the micro computer manufacturers, in1970s it was Apple, Atari, etc the mini or personal computers, the focus was on hardware and devices, in 80s it was companies that wrote software for those devices like Microsoft, WordPerfect, Lotus, Apple, in the 90s it was the networking companies that connected these computers like Cisco, Sun Microsystems, Juniper Network, Nortel Networks etc, in the 2000s, it was the software companies that wrote software on top of the connected networks or the internet like Yahoo, Ebay, Google, Amazon etc and 2010s it is software companies that are building applications on top of the new internet infrastructure like Apple, Android, Facebook, Twitter, LinkedIn, Blogging platforms etc so my thesis is that any company that is leveraging the new infrastructure to build applications in an industry that is inefficient compared to the speed of the internet will be disrupted and value created. The neat thing about this is that the disruption can happen from any part of the world, including Iceland.

Anyone can come up with the above idea, as I have written before ideas mean nothing if not followed through with execution. Through the Angel Syndicate I plan to invest in this thesis. I have a proven track record, and of course I got very lucky with our investments. We sold the first company that we invested in to Jive Software, the second company that we invested in is growing nicely. The third company that I am involved in is moving in the right direction but still a lot of work to do. The thing about what we do is that it is hard to predict success but what we do know to do is work with entrepreneurs to increase the odds of success and reduce the odds of failure. Most of the challenges in Icelandic startups is related to Marketing and Sales, Team development and scaling the product or service. Those challenges are not easy to solve if not impossible. The motivation to do this is always to build a sustainable startup community and ecosystem right here in Iceland, if we are able to make it worth everyone’s while who are willing to participate in the journey so be it.

Microsoft vs Google in the Enterprise

I was reading an article in the guardian titled “Microsoft threatened, as smartphones and tablets rise, Gartner warns” and another post by Fred Wilson/Christina about “Monopolies and Startups” both are connected to the theme of transformation that I have been referring to for sometime now. My colleague was telling me that someone asked him a question What about Surface? when they were discussing some device and technology choice, and his response was What about Surface? i.e who cares? That is the problem, when fringe products that are suppose to appeal to everyone usually does not appeal to anyone. Focus and niche strategy is the best way to launch a new product. It also goes back to the Innovators dilemma, on the new entrant. Microsoft is a new entrant in this space, and they should have acted like one instead they are acting like a big company they are which is sad to see because have many choices is good the consumer. In additino, the interesting part about these transformations is that everyone ignores it until it is too late. The Gartner report about the rise of Smartphones and Tablets is very interesting because few of us were seeing this before it has hit mainstream. IMHO, Microsoft lost out on this battle and Google has gained a huge advantage with their Chromebook, Android Ecosystem. This is the projection of Gartner and Fred Wilson actually wrote about this a while backOperating Systems shipmentsI believe the problem with the competition to the Android and iOS ecosystems should have been fought by Microsoft in a different way. They should have entered the low end market i.e a price point that works in large markets like India, China or Brazil or Latin America less that $150 like the Chromebook with their new operating system. The problem for Microsoft is that they want to be in the enterprise and the Enterprise IT is getting consumerized right in front of our eyes, Deloitte, one of the big 4 Accounting and Consulting firms allows their consultants now to bring their own device and they even subsidize a iPhone 5. I know because my wife just got a new iPhone and she DOES NOT like Apple products, but she now loves her new phone. I think it is a matter of time before the smartphone/tablet User Interface takes over the Laptop/Desktop. I think that is the inflection point that Gartner is alluding to. I think the biggest winner in this over the long haul is going to be Google, because they are very quietly innovating and coming up with Cloud based solutions that work seamlessly with their Android and Chromium ecosystems. Microsoft has found itself in a perfect storm, the assault by Apple in the high end devices and by Google, Amazon and many smaller startups in the lower end. To add insult to injury, enterprises are starting to see if they dont adapt their IT systems they will be left behind by their competitors so they are also looking for newer things that consumers are using. All the people who sell to the Enterprise continue to live in this dream world of yesterday. I have a strange feeling that in a couple of years, I will refer to this post to say I told you so. Consumers i.e employees in the enterprise will dictate what kind of software and device and infrastructure they want to run on rather than the IT department.

Something Ventured – the art of venture investing

Saw the documentary “Something Ventured – The Risk, Reward and the Original Venture Capitalists“. It was great! loved it… it was so much fun to see or rather to get transported to a time when it all started and all the challenges that the industry veterans like Arthur Rock, Tom Perkins and Don Valentine talk about when they started. It is actually quite interesting to see the background of those who basically started the industry of Venture investing. Arthur Rock came from the Investment Banking business, Tom Perkins was an Engineer and Don Valentine was a Marketing and Sales Executive. The common theme that just got reinforced for me is that all these smart people almost 60 years ago faced the same questions and challenges.

Something Ventured

Something Ventured

The language that they use is quite reveling, for example “I was an accidental entrepreneur”, “We really did not know what we were doing”, “There was enormous risk when we started”. It would be even more interesting to see all those who failed miserably in this business, because that is the nature of this industry. We have a survivorship bias, ie only those who survive tell the story.

Someone had to see the opportunity, but none of them knew where it was going. And it is also very interesting to me that when they all ventured to raise capital they all got a LOT of NOs… that is how VC capital raise works.

The summary of the documentary for me was something very profund and simple, Entrepreneurs are the leaders without Entrepreneurs there is no VC business. To the credit of all the VCs who survived long enough to tell the story is that all of them were extremely hands on ie. they helped entrepreneurs in every and all ways they could. They brought in mentoring, expertise, business networks, business relationships etc. Even the Steve Jobs of Apple had to learn management, marketing and sales and distribution from Don Valentine and Mike Markkula, Marketing Manager at Intel and Don Valentine used to be the Marketing person in Fairchild Semiconductors. There is a huge body of knowledge that gets missed when we look at Entrepreneurs who have been successful, there are a number of people who help them, mentor them and guide them to reach that vision. That in my view is the art of Venture Investing.

All the VCs worked with the companies to build them and many of the VCs passed on opportunities. The classic quote was by Nolan Bushnell, the founder of Atari – “I could have had 1/3rd of Apple for $50.000… big mistake”, ‘cos he passed on the opportunity! Not just that, even Don Valentine passed on Apple until Mark Markkula took over Apple as its President and CEO and built a very powerful board with experience and expertise to guide the company. A lot of that information gets lost when someone looks at the shinny new iPhone. End of the day it is always People who make things happen and putting the right team together is an Art. Successful VCs know how to do it and when to do it and what is needed. It is not taught in School but through their life experiences. If you are a VC or an investor, ask yourself are you doing the same amount of work that these people did? and if you are an Entrepreneur ask yourself do you have the right board and advisors and investors who can help you to execute and achieve your vision.

Here is the list of pioneer VCs interviewed in the movie.

Arthur Rock Early investor in Fairchild Semiconductor, Intel, Apple and Teledyne
Tom Perkins Founder of Kleiner Perkins Caufield & Byers, early investor in companies linke Genentech and Tandem
Don Valentine Founder of Sequoia Capital; early investor in companies like Apple, Cisco, Oracle, Electronic Arts and LSI Logic
Dick Kramlich Founder of New Enterprise Associates, investor in companies like PowerPoint, Juniper Networks, Macromedia and Dallas Semiconductor
Reid Dennis Founder of Institutional Venture Partners
Bill Draper Founder of Sutter Hill Ventures; Founder of Draper Richards
Pitch Johnson Co-founder of Draper and Johnson Investment; Founder of Asset Management Company
Bill Bowes Founder of US Venture Partners
Bill Edwards Founder of Bryan and Edwards
Jim Gaither One of the early developers of the venture financing structure still in use today

Innovator’s Dilemma

English: Disruptive Technology Graph

English: Disruptive Technology Graph (Photo credit: Wikipedia)

Been reading the book Innovator’s Dilemma by Clayton Christensen. There are a couple of graphs in the book that really resonate with what is going on with the Mobile Device market. If you have not read this book, I highly recommend it. Clayton Christensen used the Hard Disk Drive Market to study a fundamental questions that were bugging him… the questions were:

  1. Why is success so difficult to sustain?
  2. Is successful innovation really as unpredictable as the data suggest?

It is fascinating to see how the evolution of the Hard Disk Market has been following the path that he wrote about 15 years back, the only thing that is different is that his prediction of disruptive technologies has just accelerated in their adoption in the market and making a number of “successful” of even “great” companies fail in the market place. I re-tweeted

@karaswisher: It’s Official: The Era of the Personal Computer Is Over http://dthin.gs/RT6rmo  long live the PC

You read the article and it shows the slow decline in the demand for Personal Computers and the explosion in demand for devices that are Smart (read has a micro processor), Connect (read wifi enabled) and Portable (light and can be carried anywhere). These devices are distributing the work one used to do only on their Personal Computers. I believe Mobile First, Web Second paradigm which to me was first introduced by Fred Wilson through his avc.com blog is so relevant and crucial for the survival of many the currently successful software as a service companies. However, I am sure that the “currently successful” companies will face the same challenges as the previously successful companies did. There are 5 principles that is given in the book are a given they don’t change over time and if companies i.e. managers of companies ignore these principles, it will definitely lead to them loosing in the market place. The principles are:

  1. Companies Depend on Customers and Investors for Resourceskey take away for startups and managers is that they DO NOT control the resources
  2. Small Markets Don’t Solve the Growth Needs of Large Companies – key take away for a large company manager is not to wait until a market is “large enough to be interesting” but invest in smaller companies that are going after these small markets
  3. Markets that Don’t Exist Can’t Be Analyzedusing proven market research and business planning to understand disruptive technologies leading to new markets have a dismal record of predicting the trajectory. Key take away for established organizations is don’t waste time in trying to analyze the market, adopt a lean startup or customer development approach or invest in companies that are doing that
  4. Organization‘s Capabilities Define Its Disabilitieskey take away an organizations capabilities resides in two places, its PROCESSES and VALUES. The very processes and values that constitute an organization’s capabilities in one context, define its disabilities in another context.
  5. Technology Supply May Not Equal Market Demandunderstanding the difference between Sustaining and Disruptive technology adoption in the market is key to understanding the technology supply to market demand interaction. Established companies are moving so high up the value chain that they underestimate the new market at the lower end of the spectrum thereby giving rise to disruptive incumbents.

Internet Piracy and Business Models

Chart showing downloads and available apps on ...

Peter Singer makes a case for finding a business model that would make it fair for content creators in his article “The Ethics of Internet Piracy“. He goes on to say that he is fortunate enough to make a living off his salary that he does not need royalties of his work. It is an interesting argument, I wonder if every author starts out having 1 billion potential customers of their content. The economics of the Internet is not complex it is just different, it is hard to fit a model that has worked before into the new world. There have been many instances of debates and opinions around this and more recently by Open Rights Group with the title “We don’t have to choose between freedom and copyright“. There have been independent voices that say that most I mean 90+% of consumers on the internet would willingly pay for content, whether it is a scientific paper, music, video, movies or whatever the biggest challenge on the internet is determining the reservation price. To remind myself on what I learnt in Economics 101, that reservation price of a good is the price a consumer is willing to pay for that good. This is the basis for all of economic theory, the downward sloping demand curve, etc. The power of the network skews this model quite a bit. I am not smart enough to define a theory that would work for the Internet, but I can make some observations and try to tinker with the model. Lets take a first time author, what are the chances of her work being found and consumed on the internet when she publishes her work through her blog? well, depending on how big her network is and how good the content is and how many of the relationship she can influence to share, it can spread exponentially. So the pricing of the content should be a function of the network that her content is distributed through. Traditionally, the distribution mechanisms were monopolies, driven by the economic strength of movie studio, record production company or the circulation of a newspaper. That model is still valid and relevant but that model does not work for the millions no billions of bits of content that is being created by everyone who has access to the internet and an input device.

I fundamentally believe that those who create content and do not want to have it distributed through the internet should resort to the old mechanism of publishing, whether it is records, CDs, DVDs or paper books. But most of this content is going to be digitized by someone and distributed on the Internet, if the original distributor was not capable of using the Internet as a medium to find the right pricing to reach the billions of people online then too bad. Figure out a model, pricing plan to make the Internet work for you. I believe most of the people on the Internet would like to pay for content, but given the network effect, the pricing has to be driven by the network. Think of iTunes and the App Store by Apple. I believe they have solved the network pricing problem, 0.99 cents seems small enough that one can appeal to a large target audience and if the content is relevant to the target audience then it should enable the content creator to monetize the work profitably. I am not trying to say Copyright infringement is good or one is ok to steal on the internet, all I am making a case for is that the Problem is not out there, the problem is always with the content creator. If we start with working on ourselves, it actually leads to positive change in the environment. I want wrap this blog post with a quote “when morays are sufficient, laws are unnecessary. When morays are insufficientlaws are unenforceable”.

Business Model vs. Business Plan

There is a fundamental difference between a business model and business plan. A Business Model defines how you will make your product or service economically viable. A business plan describe how you are going to make your business model work. One does not always know how the plan is going to evolve, so building detailed plans although a great thought or intellectual exercise adds no real value because you are wasting time making assumption about the world out there and hope that your strategies or “plans” will address those assumptions and hypothesis. The truth could not be far from it. Most people confuse this with the product development road map and the classic example I get is people saying “hey, Steve Jobs did not go and interview his customers before he created the iPod, iPad, the Mac Air or any of the products that has come out of Apple…” to that I have only one answer, unfortunately there was only one Steve Jobs and how do we know that Steve did not do that? he had a keen eye for design and detail, he spend considerable amount of time in Silicon Valley being part of the information

revolution and he had many fails to learn from. I try to remind those I am talking to that they need to spend 30 years in Silicon Valley, formed 2 or 3 multi-billion dollar companies, have the same network and experience of Steve Jobs before being able to compare themselves to what Steve Jobs did.

There is a simpler way, Steve Blank, has written books, taught classesand has done many things to showcase the Customer Development Methodology, which is nothing but a Business Model. If you approach problems with the Customer Development method, you can build a pretty good hypothesis and once you have an hypothesis, it can be validated and based on the results you can build a business. The trick is to get through that cycle as fast as you can and then execute based on the learning. It is never simple and straight forward you have change your hypothesis several times and build and re-build your business model that is why it is a startup.

Strategies to Test Business Hypothesis – 6th Meetup

A diagram of what Simon Sinek calls 'The Golde...

A diagram of what Simon Sinek calls 'The Golden Circle'. In his TEDx talk, he says 'People don't buy what you do; they buy why you do it." (Photo credit: Wikipedia)

We had our 6th Meetup @Cafe Solon last evening. We once again had a very good turn up, around 30 people. The topic of the discussion was Strategies to Test Business Hypothesis, which was a follow up from last week’s meet topic “Business as a Hypothesis”, here are the Notes to that meetup and follow up write up. Björn Brynjar Jónsson, give a 5 minute brief talk about a topic of interest that he wanted to share with the group. The topic that he talked about was from the book “Start with Why” by Simon Sinek. It was very interesting and inspiring. Björn talked about the Golden Circle from the book. The premise is that we tend to focus our effort our vision etc on the “What”, whereas great leaders who inspire us usually start with the “Why”, which refers to the Purpose of why we do the things we do. When we understand the purpose and communicate the purpose we can inspire people to action. He gave the example of Apple. Here is the Video of Simon talking in Tedx.http://video.ted.com/assets/player/swf/EmbedPlayer.swf

  • We talked about Strategies that were used in Clara to test their business model through the product Vaktarinn. Originally, Clara had not created the software that automatically sources all the digital content and provides the visualization that they do on Textual information. Gunnar explained how they got 10 of their friends to manually enter all the text from different sources into Excel Spreadsheets and then manually created the visualization look and feel on the data to validate if anyone would be interested to buy the product. Their first revenue was in selling that manual work, once they validated that idea they went on to build all the software that powers Clara Insight and Vaktarinn now. This was a quick and dirty way to see if there is a market for what you want to build.
  • The second example was from the company Buuteeq, how the team there validated their hypothesis that Independent Hotel Owners are willing to share their contact details and everything about their hotels to a third party and host their solution on a third party platform. They validated that by creating a Hotel Directory Service for Independent Hotel Owners called Wandari.com. Not only were they able to validate that business hypothesis they also created their customer funnel which they could target and convert into actual paying customers.
  • There was a discussion on a new business hypothesis that Safe Drivers would be willing to save money on their car insurance by allowing a tracking device to be installed in the car. We talked about how this hypothesis can be validated by just creating a web page with a simple button that says “Are you a Safe Driver? If you answered Yes, You can save 30% on your Car Insurance!” Sign up to be the First of the Safe Drivers to take advantage of the offer.” Ok, I made the actual sentences up but that is where the discussion was going!
  • The 4th business hypothesis was about non-availability of Icelandic Candy on Souvenir shops. One of the participants wanted to create a business on creating an attractive wrapper around the traditional Icelandic Candy and sell it to the Souvenir shops. The group guided her to actually pre-sell the candy to the stores with just using Digital images and depending on the demand she could build up her business. I was so happy to see how excited she was about being able to launch her business by this weekend! Entrepreneurs find the way!
  • Kristján Freyr Kristjánsson shared the story of how they created a business to sell the Eyafjalljokul’s volcanic ash. They sold this idea while they were stranded in the airport in London, they just used digital images to create a visualization of a fancy bottle with the Ash in it and they sold it even before the product was ready. Overall a fantastic meetup and the next meetup is going to be on Pivot Stories.

Isafjordur the next Startup Hub?

I saw this video on Bloomberg TV, the interesting thing is many of the new “hot” startups are cropping up in NYC because I believe there is a transition that is starting to happen, the technology is getting easier to put together the cost of creating a company is also getting to be not a huge hole in your wallet. NYC has many of the Fortune 500 companies, so if your startup is in the business of Media, Advertising, Fashion, Financial Services or even Pharmaceutical NYC is not such a bad place to be. Goes back to the Investment thesis that I wrote about, all the traditional businesses are now the users of new technology infrastructure built by Google, Facebook, LinkedIn, Amazon, Apple etc.
The investment thesis is quite simple, if one looks at:

  • 1970s: Successful companies that created a lot of value were the hardware companies like Atari, Tandy, Radio Shack, Apple etc
  • 1980s: IBM PC, Microsoft, Lotus 123, WordPerfect, HP, Compaq, Apple – Software companies that built applications for the Micro and Mini computers (back then Personal Computers were called that!)
  • 1990s: Sun Microsystems, Cisco Systems, Microsoft, NeXT, Novell – Network related companies that made the plumbing of the Internet work
  • 2000s: Google, Amazon, Ebay, PayPal, Yahoo, Apple, Microsoft – Software companies that build application on top of the Internet infrastructure
  • 2008+: Facebook, Twitter, LinkedIn, Apple, Google, Amazon – Software as service companies that run on top of the software that connects the Internet.
  • 2010+: Any company that is building applications on top of the software stack of Facebook, Twitter, LinkedIn, Google, Amazon and the Mobile Devices
What is even more exciting is that the companies in the future that are building things on top of the Internet Software Infrastructure can be located anywhere and still sell it to the entire world. This creates an  awesome level playing field for places like Iceland. You can be in Isafjordur or Egilstadir and still create companies that solve a global problem. The picture is from Isafjordur, not a bad place to start the next Google. Nobody says it cannot be done!

Snoop-Around.com vs mbl.is

I saw this website snoop-around.com on the SVEF awards night, snoop-around.com is a Photo/Interview website in Reykjavik, where they visit creative people in their workshop or home and do a profile on them. The website won the award for being the Best Approach, Blog and Video Content category. It was really fascinating to see how creative one can get watching people doing creative work. The vicarious feeling I get being around others who are doing fantastic things is infective, it forces me to act. Anyway, I have written before about how having a balanced Creative and Analytical skill set is critical for a team to increase the odds of success. When one things about the web, it is a balance of the creative and analytical sites that get the attention. Apple is a classic example, I am writing this blog post in a Mac Air and I keep thinking how much work should have gone into the creative side compared to the engineering side of putting this piece of machine together. It is a balanced engineering and design effort that I think is amazing. I believe that is the recipe for increasing the odds of success in any endeavor.  If you are web designer focus on form and function, beauty and analytical. I believe we are embarking on a new world where Art, Creativity, Design has to in the front with all the geeky engineering and analytical discipline behind to make the thing work. The Snoop-Around.com website is a good example of that. I think their business model is built around advertisements, I don’t see the advertisement on the main view of the page… it is clean, shows what I expect it to show but when you scroll down you see the advertisements done beautifully. I want to compare that to another site whose business model is built on advertisement mbl.is. I think mbl.is is a great website but the design side of it needs work, it is too messy, crowded, it actually turns me off when I go to the site. The actual content is probably 3% of the real estate and 97% of it is moving advertisements and nothing that really interests me why would I even bother going to the site? it is just poor design! What do you think?