When I first heard about 3DayStartup last September, it was being pitched by the organisers of 3DayStartup Paris at FailCon. Listening to the idea, I thought what most people probably think at first: “Oh great, another StartupWeekend knock off.” I quickly jotted down the differences in my head: not backed by Kauffman Foundation, no winners*, and you have to apply and get accepted – sounded like a losing combination, which is how I went into their end of the weekend pitch session this past Sunday.

The first thing that was struck me was the quality of mentors they had brought to the weekend. Where I normally expect to see the likes of Blaise Vignon, head of Microsoft France’s Bizspark program, and the other event usuals, I instead saw the likes of Frederic Mazzella – you may know him as the CEO of Comuto/CoVoiturage, Accel’s most recent $10 million investment. Other notable mentors included the Cedric Giorgi, CEOs of KissKissBankBank, PearlTrees, Super Marmite, & La Ruche qui dit oui.

The theme for the weekend was Collaborative Consumption, and the projects came in many forms. While many ideas still have some kinks to work out, and some of them just plain won’t work, there were two that resonated with me and impressed me for a weekend sprint.

Du Ble Dans Le Jardin, literally “Wheat in the Garden,” proposed a P2P platform for gardens. The idea is simple: most gardens in France go unused, and plenty of people without gardens would be willing to pay, either in percentage of produce or in cash, to have a garden near home. I spoke with Alison von Ketteler, the strategy consultant from Germany who brought the idea to 3DS, about the project to see if she would be taking the project forward.

Just like in her pitch and during the often grueling Q&A session, Alison had answers for every question, and had clearly well thought out many aspects of the idea.She plans to spend the next month talking to potential customers to see what they need and want, in order to optimize her platform and its offerings. The second idea that I enjoyed was Troc2Jouets, or “Junk for toys.” This P2P platform allowed users to trade their old toys for other ones from other people – finally, I can get rid of my Beanie Baby collection!

I caught up with Cam Houser, the Austin native co-founder who made his way out to Paris to make sure the first edition of 3DSxParis went well. He smiled as I told him about my initial comparison’s between StartupWeekend and 3DS – I’m sure he gets it all the time. He told me how he and his grad-student co-founders came up with the idea – in grad school, of course.

They looked to startup successes like Zuck, Jobs, and Gates, and instead of asking “why are we in school?” they thought “Why did those guys have to drop out to succeed? Why can’t Universirties teach students to launch startups?” And so they launched 3DayStartup. With now over 1000 3DS alumni having raised over $4 million in the past year, the university-oriented weekend sprint focuses heavily on getting universities and college students involved.

3DS’ format varies a bit from StartupWeekend: if one team lacks a designer, for example, multiple groups will share a single designer, in order for each team to progress as far as possible. Elminating the competition aspect, there is no winner announced, though audience members are each given forms to rate and comment on each presentation.

While Cam assured me that, just like any weekend event, the quality of the presentations varies, there was definitely a sense that the quality of ideas created was higher than average – whether that was the application process, the high-level mentors, the enthusiasm of the participants, or just plain dumb luck, only time will tell. 3DayStartup has spread well outside the US, with events now taking place everywhere from Chile to China, from Amsterdam to Spain.

The next 3DayStartup will take place in Portugal next month, and while there may not be an event in your town yet, but there’s no reason why you can’t get one started today.

This is a part II in a series of guest posts by Erik Bovee, a founder and partner in SpeedInvest, an early stage venture fund focusing on Central Europe. He’s previously written about why “Things happen fast“.

My fiancee, who is a violinist, and takes no interest in my work with startups, except to express the opinion that people who work in business (and particularly finance and hi-tech) are overpaid, and probably dishonest, came up with a second observation recently:

Fiancee: ‘I hear most European tech startups are just copycats of successful US companies.’

Me: ‘What?! Wait! Where did you hear this?’

Fiancee: ‘Mike Butcher wrote about it in TechCrunch.’

Me: ‘How do you know Mike Butcher? Why are you reading TechCrunch?’

Fiancee: ‘It’s great! It keeps me from thinking about Mozart all day, and has tons of good gossip. Did you know that Mike made Oliver Samwer cry?’

Me: ‘No. And you’re not allowed to read TechCrunch anymore!’

There followed a long argument, but I’ll summarize my winning position: ‘Who cares? Can we stop talking about this now?’

The fact that Europe has copycat or clone startups should be irrelevant. The real issue fueling this whole conversation is that people don’t like being made fun of. A natural reaction is to turn the ‘copycat’ accusation into a term of pride that you are not one (see, ‘The Pirate Summit’), to deny the accusation, or, in rare cases, to walk out of an interview in tears (or perhaps there was just a misunderstanding. These are all emotional reactions that don’t address the substance of the accusation.

Let me put it to you this way: who today complains about Japan’s copycat auto industry? No one. That is because Japan learned from the models of others, as everyone must do, and became an economic powerhouse in its own right. And anyone who dares repeat the old canard that the Japanese, as a whole, make good copycats, but are unable to innovate (…because of their stifling education system, their cultural homogeneity, their bland diet, blah, blah, blah…) needs to take a hard look at the recent 30-years’ history of consumer electronics, or Japanese world-leading innovation in robotics today. Any remaining doubters can spend some time investigating the glorious Kajimoto Lab!

Bill Gates himself spent his early teen years pulling printed source code out of rubbish bins so that he could copy other people and become a better programmer himself. A period of ‘copycatting’ characterizes almost any individual or collective route to success.

The recent Euro troubles pose a far greater, long-term threat to the EU tech ecosystem than any reliance on copycatting. The fundamentals remain strong for creating a European nexus of innovation, and a technical and economic engine to rival Silicon Valley: Things happen fast. Ten years from now, this entire little flurry of name-calling will be forgotten, Europe will likely have a couple of mega-successes under its belt, and the tears will have long since dried on Oliver Samwer’s cold, German cheeks.

Flash is on the endangered species list, already extinct on mobile, and Silverlight has been all but aborted. HTML5 is being heralded as both the cause and the solution but what is it and are we getting caught up in a game of buzzword bingo that has spiralled out of control?

“HTML5 is the new Web 2.0″

The only difference here is that it’s somehow more convincing. Version 5 sounds like we’re on a journey while simply putting a 2 on the end of something has significantly less gravitas.

So many people are saying that HTML5 is the future of the web. They tell us that it will create richer web experiences that will match and surpass client applications and Flash sites. Er, lets get one thing straight. There is nothing in the HTML5 specification for animations, moving or otherwise visually manipulating anything. Nothing. The best you can do is play a video. Woop.

So let me be clear here if you think you’ve been witnessing optical illusions when you’ve seen animating sites. That’s Javascript and CSS moving things around. Well written, nicely implemented and totally unrelated to HTML5. And totally possible on HTML4.

My point is that there is a growing group of idiots who have been caught up in the whole HTML5 hurricane and are confusing meatballs with meatballs, spaghetti and sauce. To extend the metaphor, it’s time for you to Ketchup.

But please don’t think I’m having a big downer on this whole field. I love what’s possible in browsers and I believe the future for services and applications delivered that way is immense. After all, what HTML5 does promise – offline storage, universal media embeds, proper SVG support and so on, is fantastic. We’ll find ourselves with highly capable software running on multiple screens wherever we may be.

I love the ideas that we collectively share for the future of online applications. I guess I’m just trying to clear muddy waters so we can agree on what things are called. The fact is we have plenty of time to get the semantics. The HTML5 specification is supposed to be complete in 2022, more than a decade away.

While we are seeing certain elements of support for HTML5 features appearing in desktop browsers, the support is inconsistent and not standard enough to rely upon any given feature of the HTML5 specification across all browsers. It’s like the early days with Netscape Navigator and IE causing all kinds of incompatibility problems. Conversely, the Javascript and CSS 3 support of browsers is good – so we’re not limited there.

Here’s a hint. Let’s call it an early Christmas present or just a suggestion for a New Year’s resolution. Don’t be that guy who sucks up the buzzwords and regurgitates them without understanding them.

Look up HTML5 for yourselves. Understand what it can do, when it will do it and what it will never do. Understand the relationship between Javascript, CSS and actual markup and realise what you can do today with existing technologies. Walk today, leave the running until tomorrow.

I’ve been wanting to write this article for a while but it has never been the right time. Ideally I’d like to do a series of articles on the daily deal / group buying space as it is still a fascinating model and still an early market sector. I must be one of very few people, perhaps the only one in Europe, who has been involved in co-founding and running a daily deal site on one hand and then flipped to run a company that sells a product and service on the other. I believe this gives me a real unique perspective on things (which hopefully you agree with after reading this).

This piece is divided into two parts where I try and see both sides and try and present an impartial account of what it’s like to be a daily deal site selling to merchants and then a merchant wanting to promote themselves through these channels… Here goes..

Perspective: A daily deal site trying to convince a merchant to run an offer

I was the co-founder of one of the UK’s daily deal sites and the MD for the first half of this year and thus I’m very familiar with how these businesses are run and what they’re trying to achieve. Think of it along these lines:

1: You have to run a minimum of one deal every single day for most of the year – that’s a lot of selling. Not only that, but these deals are the only chance to make any money that day so they must have a great price, be a great product that people want, and sell in decent volumes. It’s not easy to get all this right hence the pressure on the sales people to get the deals in.

2: In terms of customer loyalty, while no one really segments the audience that buys the deals, you do expect the merchant to be a bit more savvy than they often are. If you structure a deal that rewards a single purchase and a single activity then you’re setting yourself up for a non-repeat customer. The clever ones do things such as offer a discount on the day for more services or products (i.e. great value spa treatment + 20% off any products bought that day) and also smaller discounts for 2nd and 3rd visits. They’ll take down their details and contact them again in a months time, keeping them involved. You’ll be amazed how very few merchants even do this, so it’s not entirely the fault of the daily deal site who drive customers in the door.

3: There’s a lot of competition and no loyalty to any one group buying site, which means you’re always trying to outdo the other. On average, people are signed up to more than one daily deal site and these days, you often see the same deals in multiple places and over time, so there is never a real reason for someone to only subscribe to you. I still think that a loyalty program in the same vein as Amazon Prime for group buying would work very well if someone took the risk first. As it is, you’re trying to get better deals than the next site who also has a vast marketing budget and substantial email list – not easy.

4: Repeat deals happen more often than you think to plug the gaps. Imagine a merchant has let you down or you don’t have as many offers to run that month as you want – what do you do? Easy, call up an old merchant and re-run one of their deals again. Not ideal, but it works. The downside – every site does this and the sector has now lost its sense of uniqueness and time sensitivity. No longer do you think “I must buy this deal now before it disappears for good” but instead “I don’t have to buy this now as it’ll come around again either on this site or another one”.

5: You can’t always run what you want to. Daily deal businesses have enough data to know exactly the type of deals and the price points that work. What this means is that some deals you just have to skip even though they sound great. Cupcake deals are a good example – very popular but never enough margin to run them enough. Same for most online retail businesses too.

6: It’s all about the relationships you have with merchants as every single sales person from every single site hassles the owners constantly. After a while, I can imagine this leads to group buying overload for the very people you’re trying to do business with.

It’s a tough old business as a sales person in a daily deals site – that’s why they often don’t last very long and get replaced every 6-12 months – they just burn out.

Perspective: A merchant discussing terms with a daily deal site

As the co-founder of a brand new gourmet coffee subscription business Kopi (www.kopi.co.uk), I have now seen what it’s like to be on the other side of the fence and be an actual merchant who wants to get brand awareness and sales. I must admit it’s pretty hard work when you’re looking at it from this different perspective, even knowing what I do.

I have spoken to the majority of daily deal sites on behalf of Kopi and discussed terms. Here’s my findings for those chats:

1: ALL of them really push at least 50% discount for customers as a minimum as it “really helps sales”. I don’t believe that it always need to be so price led as unique offerings with less discount work just as well as Gilt City can testify in the US, and it’s probably the final value of the item which has the most effect and not how much % you knock off.

2: It’s all about sales volume and commission for the daily deal sites. Each of them tell you they have minimum revenue target they’ve been given per each deal and from that they work out their commission levels (20% to 35% in general). From this, they really started to push hard on getting me to commit to a minimum level of volume (e.g “you have to have a minimum cap above 500 or we can’t run you”), else the sales person wouldn’t make enough money or hit their own set targets (based on revenue brought in per deal). That’s pretty harsh if you’re a small business and don’t have the resources for it. This gets worse if you’re trying to do a deal with one of the bigger players.

3: The financial calculations are really quite complicated to fully get your head around especially for someone who is not used to it. Take a price you normally sell something for, half it, take off 30% commission, add in VAT that they will charge you on top as “advertising services” and also sometimes they add in credit card transaction fees if you’re not careful. Now consider that some sites might pay you 50% upfront and 50% over the next 3 months, so you’ll have a cashflow shortage too. Some of them are better and will pay you on redemption (i.e. when you provide the service, they will pay you your share of that customer). It’s easy to see how people can get confused with this and not realise the true cost, especially as it’s not in the daily deal sites’ interest to explain it more than they have too.

4: Breakage – some of the sites told me that up to 30% of people may never redeem their voucher (miss expiry date, change of circumstances, forget about it..) and you’ll want to make sure you either keep this breakage yourself or share it 50/50 with the daily deal site. If you don’t, the people who bought the deal will just be revenue in a pocket that isn’t yours.

5: The email list figures they quote aren’t exactly the whole picture as they are people who have registered their emails for free and not really people who are active buyers. The general figure seems to be that 10-20% of the email lists will have made at least one purchase before, as garnered from Groupon’s IPO document.

6: It’s impossible to know whether the customers will be loyal or high quality. The daily deal sites don’t segment the audience and will send you anyone who buys, so you just won’t know until they come through the door. Well, no one told me they did anyway!

So, is it really worth it as a merchant? If you want a good level of brand awareness (albeit coming across as one who will offer discounts) then going out to a large number of emails is definitely a positive, plus you’ll get a big bulk of customers who may or may not come back and orders to keep you busy. On the downside, you’re not going to make any money out of it and in fact will take a hit on profitability and cashflow while you do it and often be stretched to fulfil orders.

I hope you’ll agree, it’s a fascinating space…

You see people raising millions for stupid shit. But if you dig deeper you find out that they sold a company to Cisco for ½ billion (and their cheese sandwich restaurant got funded) or built several huge companies (and their photosharing app with no users or purpose got $41m) or pretty much built Facebook (and investors pile up on their social network who can only have 150 friends like it cures cancer) or had multiple rounds of funding already and a completely finished product with tons of users and healthy revenues.

So yes it might sound crazy but it’s probably a calculated risk.

But what if you are the underdog? What if you do not have yet achieved great momentum but still want to try to raise external funding? What if you are in the UK and not the SF Bay Area?

Here’s my notes and advice on funding.

1. Before you actually start raising money

• Create your personal profile on AngelList

• Look at successful startups, follow them for a couple of weeks, see how they are doing it?

• Speak with your network of investors before you start fundraising and product development (here’s why http://blogs.reuters.com/small-business/2010/11/18/invest-in-lines-not-dots/ )

• If you do not have a network of VCs, subscribe to http://startupdigest.com/ and also trawl http://plancast.com/
I am assuming you have a team. If not find a technical co-founder. Nobody will invest in you.

• Mine the hell out of your Linkedin connections to get in touch with people who can help you.

• Find a great lawyer. Ask for intros and free advice.

• Find hacker hubs. TechHub in London is an example. Lots of events going on.

• As you go along you should have your network set up, all investors should be aware of what you are doing.

• Keep it simple as people need to label you to remember what you are doing (“mobile security” “airbnb for dogs” etc).

• If you are still in product development make a video of your product to show how it might work.

• You have an idea but no money to develop? Call all Computer Science professors at all universities in your area. Find students who want to co-found a business or will code for shares in their spare time.

• Incorporate VC feedback. A lot of VCs are dumb. But hey a lot of VCs are really really smart. And they look at startups for a living so give them credit and try to address their concerns.

• You either find people that fund PowerPoint, or find people that work for free. The latter is more probable.

• Do not “pay-to-pitch”. Ever.

• Never accept an offer where you pay a fee in exchange for introductions and advice on how to pitch (unless it’s like a nominal fee for $50, in which case try to void it as well). Keiretsu Forum is an example of what to avoid. Unless you are raising $10m+ you cannot generate enough fees for any serious corporate banker to look at you. And for the sake of this discussion you are too early anyway.

• Only when you have done a lot of this, list your startup on AngelList.

2. Once you start fundraising:

Email has to be replied immediately. Like, now. Like, real now.

• If a meteorite hits your house and kills all your pets, people will understand if you take up to 24 hours to reply.

• If it takes more to reply, better be a fucking tsunami, Godzilla, or both.

• You should always run on inbox zero. If you fail that before you launch, certainly with more money and pressure it’s not going to get better.

• Since you might want to compress your funding as much as possible, this might mean emailing 100+ people to let them know you are fundraising and ask for a conference call or a meeting. As the saying goes, there are two types of gunslingers, the quick and the dead. Same goes for email.

• Find small angels who are willing to commit some capital to you can add them to the investor roster. Being first is being lonely so fill the roster fast.

• Have one item of good news per week. Interesting stuff. Nobody cares that you had “great progress” if it’s not tangible. On Friday morning all your startup followers get an email with your weekly updates.

• Having advisors helps, make sure you add them one at a time for maximum effect. Also, make sure that they are not your mom.
Negotiate a larger round and find a lead investor. Once you secure their money you are free to go and raise the rest of the round but you don’t have to deal with millions of tiny corrections to your funding documents.

• Professional investors either commit or they don’t. There is no between, only wishful thinking. If they do not commit in 48 hours do not waste time. Many VCs don’t know how to say no.

• Be thankful to those who say no. Do not argue with them. They just did a huge favor by saving lots of time. Move on. They invest in people not products. Draw your own conclusions.

• “Weekend” angels on the other hand might want to see a lot of documentation and handholding before they say yes. Sometimes they just waste your time. Guess what? If you still need the money then suck it up.

• Bay Area startups have access to 10x the capital compared to UK ones. Deal with it.
Kayak, Airbnb and Skype. Go to San Francisco for a month and try to raise money there. Let your UK contacts know that you are leaving.

3: Most importantly: one bargains with equals or near equals!

In every negotiation, you need to know when to leave. If an investor adds bullshit terms to a deal after a term sheet is signed, walk away. And leave negative feedback on http://www.thefunded.com/ (maybe checking there before signing would be a good step).

You do not want to be in a situation where you are forced to raise money from an investor that you do not like just because you failed to have alternative offers.

Getting offered a term sheet by a VC is a great step, but you want them to do a due diligence before that. Otherwise they might have a change of heart and you cannot shop your deal around (and generally be considered “damaged goods” by other investors).

The successful launch of Hojoki, a German start-up, goes some way to confirm the view that that creating a central repository for all your cloud notifications is emerging as a new business model.

Let’s say you are working with Dropbox, Google Calendar, Pivotal Tracker, Evernote and Twitter on a project. Where can you have a real time global vision of a team’s activity in the project? Where can you have a “one stop search window” which finds in these numerous cloud applications, the document, the comment, or the modification that you are looking for?

Amongst the start-ups who try to answer these questions, Hojoki, a German start-up, was successfully launched on beta, last Wednesday, at LeWeb11. No doubt that Hojoki raised interests: Fisheye Analytics calculated that their launch was the most retweeted tweet of the day at LeWeb11, and in two days, they got more than 1,000 new users. I spoke to Martin Böhringer, Hojoki CEO, and his objective is to reach a 6 digit number of users by the end of 2012.

Hojoki integrates cloud apps (Google Apps, Dropbox, Github…) into one stream. So you can share your cloud apps activity – or part of it – with whoever you want, and get instantly notified of theirs. As you see what others are doing on the project (eg. they are tweeting something, they are modifying a Google Doc, etc.), you can provide realtime inputs and comments. You can also search in the stream, in order to find a document, comment or modification. The design is great, and the tool looks flexible enough to trigger disruptive usages.

Their business model is a freemium one.

Other start-ups came up recently with the same general idea. In Eastern Europe, 300miligrams (Estonia) was launched this summer, whereas Busyflow (Poland) released its private beta on November 16, and Streamerapp (who attended TechCrunch disrupt SF last September) offers a more business and charts oriented service. In the United States Dispatch (who got
its start at the TechCrunch Disrupt NYC hackathon) raised $975,000 last month, and Joukuu (winner of Singapore Seedcamp) is expanding rapidly and already has big clients like Paypal.

So there is room for a new business here, but some great challenges have to be overcome.

Howwever, there is a lot of noise in this space. What is the point of knowing that X has modified the date of the meeting, whereas you already have this information which pops up in your browser? Hojoki will soon have a “hide button” (like facebook’s one), but it will not entirely solve the problem. Second, the design: how do you keep the dashboard readable, where you can have new information coming from various clouds apps every second? Design can also be a market differentiating element amongst start-ups. Right now, Hojoki comes up with a timeline, which gives a BtoC gut feeling, whereas Streamerapp seems to have a more BtoB oriented dasboard.

Last but not least, privacy issues and protection of personal data is another great challenge. On this peculiar topic, Hojoki’s servers are based in Germany. Thus, the usage of data collected by Hojoki is ruled by the law, one of the strongest in terms of privacy protection.

This is a guest post by Hélène Huby who is working at faberNovel. faberNovel architects an open and digital future with visionary
organizations. faberNovel combines technology, design and emerging trends to invent new products, services, and experiences.

This is a guest post by Raj Uttamchandani
who runs Incubatrix, a company that develops cloud application software and digital films. He also advises the Government of India on international trade matters.

A year ago, I arrived in Chile at the invitation of the Chilean government, or rather, as one of the first 23 participants of the Start Up Chile pilot programme. In the last 12 months I have:

• found our initial customers who have worked with us to develop our application;
• met the president of Chile;
• become a trade advisor to the government of India;
• met Vivek Wadhwa;
• debated with a Stanford professor;
• made some great friends;
• networked with interesting people;
• gave a talk at one of Chile’s top Universities
• experienced some of Chile and South America
• been exploring other business opportunities in the region; and
• met some potential investors

For anyone who does not know by now, Start Up Chile gives you $40,000 to spend on your start-up with no equity requirement. The programme has grown from our initial group of 23 a year ago to over 300 teams, currently. About 30% of the teams from our group have decided to establish a presence in Chile after the initial 6 months as we have either, established customers, raised finance, or are developing other business ideas here and for the rest of Latin America. It will be interesting to see how many teams finally end up staying indefinitely.

The main point of this post is not to explain or evaluate the Start Up Chile programme, but to actually determine what lessons if any, can be applied to Europe, where the problems compound on a daily basis and growth has been stagnant for a while.

Chile is blessed with mineral resources-it supplies 36% of the world’s copper. Corporation tax is low at 17% and corruption is almost non-existent. The money raised by the government is spent on stimulating private enterprise, with mixed results.

The main problem it seems, is the perception that entrepreneurship is risky. Failure has a life-long stigma attached to it. One of the objectives of Start Up Chile has been to try and change this through an influx of foreign entrepreneurs who are “gung ho” and who see failure as part of the journey. It is hoped some of this attitude rubs off locally. It is starting to happen but it is too early to judge the result yet.

In Europe, the situation is almost the polar opposite. We have a culture of would-be entrepreneurs who, having being fed a diet of “Dragon’s Den” and “The Apprentice” have seen first hand the victory of a capitalist system over the former socialist republics. There is no need to convince most people in Europe about the benefits of being in business; people would take risks if the environment was conducive to them doing so. Right now it is not.

However, imagine if, instead of quantitative easing (government spending/printing more money), European banks/governments gave young people the opportunity to learn how to become entrepreneurs. This would be done through:

• Giving them $40,000 (GBP 25,000/Euro 30,000) to start their own businesses;
• Providing a tax holiday on the first x years of profit;
• Simplifying employment contracts/regulations/paperwork;
• Scrapping national insurance payments for the first y years;
• Providing networking opportunities with similar start ups in other countries (there could be some business to business/synergy opportunities within the group);
• Mentoring; and
• Arranging access to angel/VC financing

Government spending on unemployment benefits would immediately fall, as the funded entrepreneurs themselves and whoever they employ would not be claiming such benefits. In addition, any money spent by the start-ups would also provide fiscal stimulation of the economy, which would be compounded through the multiplier effect. For example, if start-ups congregated around a certain area, a local cafe might see more demand and they in turn need to get more supplies and hire more staff to cope. So the money gets handed down the chain. This is something that is currently not happening in Europe as banks refuse to lend to small businesses, thereby cutting off the supply to a whole range of businesses /individuals further down the line.

Now imagine if 1,000 or 5,000 start-ups were funded this way in every European country. You would have failures and you might have some companies that would survive quite nicely. But you would also have a few companies that become truly spectacular. They would be paying taxes, hiring people, growing. The psychological benefits would be multifold and intangible; as people would see their peers achieving and becoming successful, this would more than likely allow them overcome any underlying fear of failure. The risks to each person inherent in trying in the first instance are also further mitigated as the government provides the seed capital. In short, there’s nothing to lose.

In this way, not only would one reduce unemployment, increase spending and productivity but would, by default, create an eco system, a European hub to (potentially) rival silicon valley as regards founders, mentors, customers and access to finance. As companies become successful, more private money will flow in to fuel this explosion.

Now add in the ability to write off student loans against your start up’s tax plus apprenticeships/internships offered to students and one can really start to create something special, ground breaking and self sustaining.

But how much would it cost? To fund 1,000 start-ups would cost the UK GBP 25 million. Not a lot of money really, given the potential benefits. Incidentally, a pot of GBP 250 million has already been created in the UK for businesses to create training programmes. However, that is wrong; the money needs to go directly to start-ups and if it did, it would fund 1,000 start-ups a year for 10 years.

The government needs to instigate the push: an environment in which people feel enabled. The private sector then needs to provide the pull by determining the direction. This is exactly what happened in Israel, which since the 1990′s has been the most vibrant high technology cluster outside the US. Several complementary factors have contributed to this: a highly adaptive innovative entrepreneurial culture’ government spending on educational establishments, the highly skilled immigration wave from the former Soviet Union, and pro-active government policy for the promotion of civilian R&D spending. From a standing start it now ranks second to the US in terms of invested private equity financing to GDP and is number one in terms of research and development as a percentage of GDP.

Chile is trying to emulate this by attracting entrepreneurs from Europe, Asia, Africa, USA and Latin America to stimulate local entrepreneurship. If Chile can seize the moment with a population of 16 million, then the UK and the rest of Europe have to recognise that it’s time to think radically if they want to remain competitive.

We are no longer in a cycle of boom and bust. Events in other countries can, and do, have an effect on how we all live.

With capital and labour flowing easily across borders, Europe needs to be careful of losing the very people who could stimulate economic growth and recovery.

At risk is the ability to compete not for now or the next few years, but for this century and beyond.

The Chinese equate danger with opportunity. Never has this been truer than now.

This past weekend I was invited to be a juror for Startup Weekend Strasbourg, one of many Startup Weekend events going on this weekend during Global Entrepreneurship Week 2011. Having never heard of anything startup-related in Strasbourg, I expected to see your standard “1^st edition” of StartupWeekend: 50-70 participants, a lack of developers, and a relative ‘youth’ (read: mediocrity) in the ideas – boy was I in for a surprise.

The attendees broke 130 people before organizers finally turned down participants, and at the end of the first night counted 18 projects. I talked with Yann Klis, one of the organizers, about how he got such so many people from so many backgrounds together: “well, after I turned down an offer from Square to bring my entire company to San Francisco, I realized I needed to kickstart this startup scene in Strasbourg, so I got to work calling everyone in my address book.”

One of the weekends initial sponsors was SEMIA, a local incubator run by pharmaceutical entrepreneur Jean-Luc Dimarcq. The incubator is well dug in to the Pharmaceutical network, having helped get dozens of startups funded over the past three years. SEMIA reached out to the pharmaceutical students in its network, and encouraged them to bring whatever ideas they had to startup weekend. One of those ideas was Alzapp , which wants to improve treatment for Alzheimer’s patients. Backed by a team of 4 pharmaceutical students, a few developers, and some “Biz Guys,” Alzapp wants to build an iPad app which will both test the state of the patient, as well as aid in preventing Alzheimer’s from getting worse. While Alzapp is aware that Alzheimer’s cannot be prevented with an iPad app, they recognized that current care is neglectful, and that a little disruption might just be what Alzheimer’s patients need.

when TSA stood on stage and said they wanted to disrupt how ambulances communicate, there was a bit of doubt in the audience (and the jury) – that is, until he changed slides and showed what the current interface for ambulances is. Rambling off statistics on the number of different ambulance firms in France alone, as well as the inefficiency of the current system, TSA ergonomic alpha product that they created in just 54 hours, allowing dispatchers to quickly determine which ambulances were best fit for a job given the location of an incident and of the surrounding ambulances. With years in the industry to back up their claim, TSA is definitely a company to watch in the coming months. They’ve been awarded 3 months of incubation at SEMIA, and already hold a letter of intent from a local ambulance company in Strasbourg.

At a time when European cities need to identify their strengths in order to attract European startups to them (and away from the US), Strasbourg has certainly made its claim: for Biotech companies thinking of going to Boston to launch their product, there might just be another way.

I woke up the other day to find that some of the worst regimes in the Middle East were on the verge of collapse, and Vienna had a startup scene. I don’t want to overuse the ‘Arab Spring’ metaphor, so I will stop right here and never, ever mention it again. It might all have come as a surprise for Americans who, paying intermittent attention to their inadequate news media (pro-tip: BBC World), have had little more than a vague impression that ‘things are pretty complicated over there.’

While you where sleeping…

But the seeds of the sudden blossoming in tech entrepreneurship in Central and Eastern Europe (CEE) were sown long ago, and they fell on ground that few realized was so fertile. Like a lot of important historical phenomena, the whole thing started with a deep sense of inadequacy: Europeans have been scratching their heads for decades trying (badly) to recreate the economic engine of Silicon Valley. Planned scientific/technical communities like Sophia Antipolis in France fail even to come close. Chamber of Commerce initiatives hoping to foster ‘innovation exchange’ or ‘to seed the ecosystem’ usually amount to nothing more than a handful of Euros and a 12-week lease on a grubby cubicle in Sunnyvale. Although, I have to admit the Danish Chamber of Commerce program doesn’t look too bad, like the best item on the menu of a tourist trap restaurant on Mariahilfestrasse.

Looking at the history of Silicon Valley doesn’t really provide any clues on how it should be done today, in a small cluster of countries whose rich technical achievements of the past two centuries are often overlooked. What worked for Cupertino in 1976 probably wouldn’t work for Budapest today. But one doesn’t have to go too far back into the recent past to a time when Budapest and Vienna where the cosmopolitan centres of a dominant European empire that produced a surplus of great mathematicians, engineers and technicians. Something of that culture is alive now, and it is taking little to revive it quickly.

Silicon Valley had Stanford, and research and development flourished there that bridged the tricky cultural gap between industry and the academy. Frederick Terman helped establish the Stanford Industrial Park in 1954 to help stave off Stanford’s financial problems, and to retain graduates who might otherwise have headed back to New York to look for real jobs (Stanford was surrounded by farmland at the time). The next thirty or so years look nothing like the development of technical innovation centres now (unless you focus only on China). Back then it was all about the hardware. Large scale investment in industrial laboratories, fabs and warehouses humming with mainframes (AT&T Bell, Intel, Fairchild, etc.) drove innovation at a costly and glacial pace by today’s standards. The history and current indicators that make Silicon Valley such a success don’t necessarily play a role in the creation of other tech hotspots.

Anything you can do, I can do better!

So what are the primary factors driving economic growth and innovation in Silicon Valley today? And can we compare them to what is happening in Europe to help understand what the future holds for CEE?

People.

First, in Silicon Valley, the human resources needs are met by immigrants (and, in fact, immigrants drive economic growth and investment in new companies – they founded 25% of US venture backed public companies: http://bit.ly/lGtPqB). When I ran mobile messaging at VeriSign, 60% of my team were from India., with a few Israelis and Europeans sprinkled in. When I look at friends with startups (or even university labs in the US) I see a very large proportion of foreign talent. European secondary education beats the US, hands down: young Europeans are better educated in math and science than their US counterparts, and they maintain their lead. European Union (EU) enrolments in university mathematics, science and technology programs (under- and postgraduate) as a percentage of total enrolment hover at around 25%. In the US that number is 17%. And in strange places like Finland, Germany and Austria, the numbers are 35%, 30% and 26%, respectively (http://bit.ly/nd0HYC). The engineering talent pool is proportionately larger, and better in many respects.

‘OK, sure, but Silicon Valley has the money…’

Not for long. The offices might be on Sand Hill Road, but the capital is global. Funds will go were the opportunities are, and European private investment is recovering faster than that in the US. Large venture funds are beginning to take a serious interest in CEE technology sectors, and new funds (such as ours at SpeedInvest) are popping up quickly. EU VC/private equity investment (including buyout, replacement, rescue, growth, late-stage, venture, startup and seed capital) grew, or recovered, 92% from 2009-2010, with the largest change in growth capital and buyout investment (http://bit.ly/qBfome). It’s not entirely comparing apples to apples, but US venture investment recovered only 21% in the same timeframe (http://bit.ly/nEhG0R). European private investment growth exceeds the US rate over the last two years in nearly all categories.

‘…But US Engineering schools, like Stanford, still have the best industry ties’

You don’t need 8 years and 100 million dollars to create an industrial research lab in order to drive significant innovation anymore. The tools are open source, and the hardware is commoditized. And platforms like Ruby on Rails mean that services are easier to build, easier to deploy, easier to maintain. Small teams can do a lot, and most importantly, there are no more geographic restrictions. Incubators and ‘hacker spaces’ provide equipment, ideas and community, and they have sprung up like wildflowers since 2008 in places like Vienna, Budapest and Prague (not to speak of Berlin or the UK, which now have many 100s). Additionally, university programs across Europe are modernising. I was at Oxford for the inception of its first MBA class. Now Oxford, Cambridge and even Technische Universität Wien (TU) not only have world class MBA programs, they have technology management and entrepreneurship tracks. (Seriously, look – http://bit.ly/qokzGW) And academic institutions throughout Europe have significantly dropped barriers to spin-offs. TU has dedicated, transitional entrepreneurship programs to support its graduates.

But probably most interesting is the emergence of organizations like STARTeurope (www.starteurope.at) that have rightly taken the leadership from the clumsy Chamber of Commerce initiatives of 3 years ago. STARTeurope provides a large number of events and platforms that bring entrepreneurs together in CEE, and provide access to ideas, capital and human resources. And the organization’s growth is a strong indicator of things to come: in the space of a year they have gone from sponsoring meetups and events that attracted hundreds of participants and a few dozen startup teams, to the recent Vienna STARTup Week 2011 with TechCrunch, my venture fund SpeedInvest, and local consultancy i5invest – which is chronicled in Wired: 1,300 participants, 400 startup teams, standing room only and speakers like Esther Dyson and Morten Lund (Skype). More broadly, the explosive growth of incubator and support platforms has generated speculation of a European incubator bubble (although interviewees remain quite optimistic) – http://eu.techcrunch.com/2011/06/24/is-there-a-european-tech-incubator-bubble/

The Results

Despite former TechCrunch writer Paul Carr complaining that everything in Europe sucks (http://tgr.ph/fvPkPN) indicators point toward growth that is not only accelerating the size and productivity of tech hubs like Berlin, London and even Vienna, but also to a phenomenon that could reach the sort of critical mass to create a self-sustaining nexus of innovation centres to compete on equal terms with Silicon Valley. Carr’s metaphor of recording artists and music production is a good one: he argues that Europe has produced nothing but small copycats (he calls them “tribute bands”) and that comparisons to Silicon Valley are premature and vastly optimistic. But bands like The Rolling Stones, or The Beatles of 1961 were nothing but pale imitations of American sounds until they quickly found their own voices and created a phenomenon at least as large as the first wave of US rock and roll, but also unique in significant ways. Within four years, the entire world had Merseybeat coming out its ears, and the whole thing happened fast, because the precedent had been set, the audience was there and a successful model was available to build upon, and to adapt. It doesn’t matter if Europe hasn’t produced a Google yet. It will. Among the founders and investors of our fund, SpeedInvest, if you only count the Austrians, we have had nearly 1 billion dollars in exits since 2005. Growth of incubators, investment in engineering grads, growth of university support programs for entrepreneurs, an inflow of venture capital investments; all of these things are at least keeping pace with, and in most cases beating, US growth rates. It’s happening fast and one morning central Europeans are going to wake up to see their society has been transformed, like the young activists in Egypt who recently… Oh, f***k.

Whilst we don’t know when or where the next Facebook will be created, we do know where to start looking: Berlin. It’s a city which defines ingenuity and creativity. Walking between Prenzlauer Berg and Mitte, you could easily believe you were in South of Market (SOMA) in San Francisco during the nineties. There’s the same energy, the same passion and the same creative atmosphere which is transforming Germany’s ‘capital of cool’ into Germany’s ‘capital of start ups’.

But this begs the question: Why Berlin? From my perspective, I believe there are five factors that have combined to create a unique ecosystem.

1. Second generation entrepreneurs have been moving on from Start-Up Factories

In the last few years several of the controversial Samwer-style start-up factories have started appearing in Berlin. They consistently divide opinion as to the ethical nature of their objectives, but few can deny the educational dimension that they bring to the Berlin ecosystem. They allow young teams of first time entrepreneurs to set up companies under the guidance and leadership of veteran entrepreneurs, which means they can learn on the job in a relatively low-risk environment whilst being paid a salary.

And whilst I always prefer to invest in entrepreneurs who have significant ‘skin in the game’, it is important to recognize that start-up factories are creating a city of knowledgeable and practised entrepreneurs. Most of these teams go on to set up second ventures and the second time around they are much better equipped to manage the risks , better informed when it comes to funding options and they understand the exact mix of ingredients needed to build successful companies.

2. Universities are serious about entrepreneurship

German Business Schools attach considerable importance to entrepreneurship and rank it highly on the curriculum. Indeed at WHU, the University Administration is even considering establishing their own business incubator and every year they organise a conference on entrepreneurship. I sincerely hope European business schools follow their lead.

3. Internationalisation is a key trend across the whole city

Walking around Berlin is clear that most people speak English. In the world of start-ups this has become even more important – in my portfolio company Wooga there are people coming from 20 different nationalities and the only language used internally is English.

4. Local momentum is picking up

The number of start-ups being founded in the city has snowballed. When posing the question on the Berlin StartUps Facebook Page , entrepreneurs counted 20 companies which had been funded with more than €1M in the last 12 months. And this clearly does not take into account the multitude of companies that are funded with less capital at the early seed stage.

5. Creativity is the fuel

With more and more artists drawn in, Berlin has become a thriving hub of ingenuity. The city is now home to the world’s greatest Electronic Music scene, critically acclaimed architects and a much-touted art scene. It’s an atmosphere of creativity that nurtures talent and inspires a diverse talent pool to continue growing.

At Balderton Capital we like to invest at the earliest stages and we are geographically agnostic. However, I will make it my personal mission to ensure Berlin is my centre of gravitas. Why? Obvious…I am hunting for the next Facebook!

City King is a way to list your favourite London places.

Jottify is a new space for writers to share, read and sell their work.

Layer Vault promises to give simple version control for designers.

Here are their pitches, produced by Chris Leydon of Keyone Producitons for TechCrunch TV.

City King:

TechCrunch TV: City King Pitch from Chris Leydon on Vimeo.

Layer Vault:

TechCrunch TV: Layer Vault Pitch from Chris Leydon on Vimeo.

Jottify:

TechCrunch TV: Jottify Pitch from Chris Leydon on Vimeo.

This is a guest post by Jos White of Notion Capital who blogs here and Tweets here.

It’s difficult to know where to invest your money right now. Most asset classes are moving in the wrong direction as the world teeters on the edge of a double dip recession.

There is growing distrust of most of the established financial markets – complaints include that they are deliberately complicated and full of jargon, they are over regulated, there are huge rewards for a very few that are not necessarily linked to sustained performance and, perhaps most importantly, when things go wrong it seems to be the ordinary people who are the ones that really suffer.

Let’s look at two of the most common asset classes for personal investment – stocks and bonds. The FTSE is the most widely used index of stocks in the UK. In October 2001 the FTSE stood at 5036 and today it is 4944 – actually down over the ten year period. Once you factor in inflation it is clear that the FTSE today is worth materially less than the FTSE of 2001.

UK government bonds have traditionally been a solid way of ensuring a reasonable return with good downside protection. Currently a 10 Year UK Government bond is yielding a miserly 2.4% – and again this doesn’t even keep up with inflation.

With all of this in mind it occurred to me that our entrepreneurs, with their hopes and dreams of offering customers something different and something better, represent a much safer place to put our hard earned money.

Of course, investing in start-ups is a high-risk exercise and also locks up your money for a good few years. But at the same time you are investing in the companies of the future rather than the ones of the past. In addition, these companies will be reaching maturity and perhaps looking towards an exit a few years down the road when there is a very good chance that the economy will be in better health.

All of this of course depends on the basic fundamentals of choosing companies and markets that are growing fast and will be able to prosper through the economic downturn. In the technology market I think there are three megatrends right now that would all qualify in this way – namely social, cloud computing and mobile.

In terms of Europe, I’ve made various points before about why investing in early stage companies in this region represents a great opportunity. You can see a previous post on the subject here but, in essence, my argument is that there is now an under supply of funds available to invest in European companies which presents great opportunities for investors to strike good deals at the right price, especially as compared to the inflated US market.

All of this of course depends on the basic fundamentals of choosing companies and markets that are growing fast and will be able to prosper through the economic downturn. I invest in the technology market and I think there are three megatrends right now that would all qualify in this way – namely social, cloud computing and mobile.

Social networking is transforming the way we use the web, which used to be about search but is now increasingly about who we are connected to; mobile is predicted this year to overtake the PC as the primary way we access the internet; and the cloud has been described by Steve Jobs as the new ‘digital hub’ as more and more computing resources are moved across to centralized data centers. These trends are huge and bring about tremendous disruption and opportunities – both signs that this is a great time to invest. I’m sure there are similar major changes going on in other industries as well.

By investing in early stage companies in fast-growth industries there is also an altruistic thread (although making money has to come first) in that we will be helping the wider economy, creating jobs and helping to restore much needed confidence and growth. Instead of complaining about how industries are shrinking, or being lost to other countries or regions, shouldn’t we be investing in new industries that can replace them and where we can still compete and deliver a great product or service?

So it begs the question – are traditional areas of stocks, bonds and property still the best place to have your money? Will they, over a ten year period, at least ensure that you have more money than you started with, after adjusting for inflation? Or has the world changed?

I think the world has changed and you will be much better off investing in the people and the companies who are changing it rather than in outdated markets that have let us down.

The European Investment Fund (EIF) put out a working paper recently that initially sounds like bad news. Fortunately, for those of us in the market long enough, it's actually good news. As a side note, I'm glad to see this paper come out from the EIF. For those of you not in the know, they are one of the largest limited partners (LP's: investors in venture capital funds) in Europe and are basically in almost all the funds throughout the market. Hence anything from them is going to be based on information that truly represents the situation in Europe. 

I wanted to address each of their hypothesis directly though. I personally believe that when you read through this working paper, there is pent up energy behind the hypothesis just waiting to explode. So many things have happened in the past 10 years in the European market that hindsight sure does paint an ugly picture. But if you dig a bit further, the ground work has been laid. Each and every one of these hypothesis is derived from a rear-view mirror perspective. I far prefer to look forward!

Hypothesis 1: Insufficient VC investment in Europe    

This may have been the case in the past but what has happened recently? Well, you've had a stabilization of the Tier 1 funds. The top firms have come through the dip, raised additional funds and proved that they can generate significant exits. Micro-VC's or "super angels" have also established themselves in Europe. Guys like the Samwers have made a killing and if you look at what the Kleins are doing via Index and Seedcamp, you clearly see players at the seed end of the spectrum. Further, a lot of former entrepreneurs are launching their own funds, such as Atomico or very recently Heiko Hubertz in Germany. I also know of other serial entrepreneurs who are soon launching their own vehicles. There may have been insufficient VC investment in the past but we're in a position to finally increase the number of deals.

Hypothesis 2: Available funding is spread too thinly    

This is still somewhat true but we are finally starting to see larger rounds taking place in Europe. Look at Wooga or Wimdu. The size of rounds basically is dependant on exits. No one is going to invest more initially if at the tail end one can't expect a significant return. Further, once you have established players in the market with larger funds, you'll also see larger rounds initially, making European start-ups far more competitive with their US counterparts. Additionally, once the funds themselves have significant capital, they will double-down on the good deals in their portfolio and put more money to work. This is very difficult to do if you constantly have to worry about running out of capital in your fund or not having enough reserves to avoid dilution. This is very much the case if your portfolio company explodes and is able to raise from others with more capital than you yourself have available. 

Hypothesis 3: Insufficient diversification in European VC managers’ portfolios    

This again is connected to the size of funds and the number of available target investments. Funds at the top end have increased in size and seed funds which have established themselves tend to have more to work with than 10 years ago. In general, eyeballing it, I'd say there is more money in funds across the board (the ones that survived or recently launched). We also see far more companies getting started in multiple segments. Hence the possibility to diversify ones portfolio is clearly there and is connected with professional management within funds. Smart players know to diversify early and to continue to diversify throughout the life of the fund. This is far easier to do if you can expect to raise additional funds down the road and can concentrate on your fund's strategy.  

Hypothesis 4: European VC managers have an inappropriate background    

This is very clearly disappearing quickly. The former bankers and consultants simply can't raise new funds. They will slowly but surely disappear in the coming years. If you see the new funds which have recently been launched you can tell the LP's are putting their money with former entrepreneurs. Another year or two and we'll be close to the end of the consolidation in the market and mostly entrepreneur driven funds will survive. This for me is a no-brainer.

Hypothesis 5: European VC managers are targeting the wrong sectors and have insufficient focus    

By having more former entrepreneurs driving fund decisions you'll also get specialization. In the near term, you'll still have insufficient focus but once teams are in place with the right structure and the number of deals available increases, this becomes less of an issue. Further, with the ease of launching start-ups in multiple segments going up, you'll see entrepreneurs forming cliques around the funds focused on them. Exits will feed future intermingling amongst the entrepreneurs and the funds financing them. With an ecosystem established focus will be inevitable.  

Hypothesis 6: European VC managers are targeting the wrong investment stages    

This is very clearly intertwined with fund size and ability to raise future funds. With the right teams in place, a sector focus and sufficient funds, you'll see funds looking more towards the seed stage to make sure they are in the best deals early enough to generate necessary returns. Historically, because it was so difficult to bet on your next fund, you chased the deals and exits. Funds grew to be able to play at the growth stage of the sector. This was also driven by a dependence on management fees as carry wasn't typically often paid in European funds. This trend has reversed and the smart players in the market know that if they don't feed the ecosystem, they'll have nowhere to invest their funds. No ecosystem means no start-ups, means no exits, means no future funds. After the bubble burst, the players who remain in the market learned this the hard way. 

Hypothesis 7: European exit markets are too fragmented    

This is a tough one. You will always have multiple markets in Europe verses one market in the US. Although attempts are being made to unify things, I am skeptical about this one. At the same time, US buyers are looking more to Europe and are actually buying companies. If IPO's return, you basically will have two to three public markets you can sell into. Nevertheless, this will remain a hurdle for some time and is dependant on future performance. Historic performance will be a major issue in this regard until the new players can prove that the EU can generate necessary returns for LP's to be investing here. 

Hypothesis 8: Pension fund regulations and practices limit European access to funds    

This too is a major pain the ass for funds in Europe. Pension funds hardly invest into VC funds right now and I am not too sure this will happen in the near future. If you look at Germany specifically, hardly any LP's invest in local funds, preferring to invest the little that they do, in the US. Therefore we may have to wait a bit on this one in terms of performance. Once European funds start to perform better, the local LP's will adapt. Further I believe pension funds in Europe will also come around if the numbers are right. Unfortunately this takes time and has so many political implications that I too remain skeptical. At the same time, other players such as large family offices have stepped up their investments in funds and backfilled the holes left by a lack of pension funds in the market. Further many funds went to other areas to search for money such as the Middle East or Asia. I believe this will very much remain a necessary channel for capital into funds in the future. 

Hypothesis 9: The problem is on the demand side    

This one is in my mind changing the fastest. There are a ton of new start-ups appearing. Just go hang out in London or Berlin to get a sense of this. Further, the copycat movement is coming to an end and entrepreneurs are genuinely trying to innovate again. If I look at recent financing in Europe I am positively convinced that we are at the cusp of positive developments on the demand side. This is truly a hypothesis that is extremely subjective. I prefer to remain optimistic about this one and the upcoming generation of entrepreneurs. They are leaving their "Europeanness" behind and are becoming global players right from the start. 

Hypothesis 10: European venture capital lacks critical mass    

I've been arguing this for some time. In Europe, two clusters have established themselves: London & Berlin. Both are quickly striving for critical mass. One could even argue that they are close to reaching it. If I were an LP, I'd be investing right now in the top players. Give it another two to three years and you'll have missed the boat. 

Hypothesis 11: European VC does not have critical mass because Europe lacks a venture capital ecosystem 

Just as the previous hypothesis falsely looks backwards, I believe things are about to change quickly here. Once clusters establish themselves, the ecosystems grow. London and Berlin will have a combination of VC's, angels, serial entrepreneurs and potential buyers in place. M&A might not happen via buyers who are local to London or Berlin but the US guys are constantly snooping around these geographies. Further, once exits take place, the system feeds upon itself. The entrepreneurs go into funds or start angel investing while launching their next gig. An ecosystem needs time to establish itself and the past ten to fifteen years have been just that: The Beginning. 

The seed for this article was sown by Sarah Lacy when she stated she was not writing enough about “admittedly boring infrastructure or enterprise software names.” Boring? How can anyone think that about data centre energy management software! Then Mark Goldenson discovered that “only 2% of TechCrunch stories are about enterprise companies.” And that did it – time for action. So, this is for enterprise software and some other boring sectors, too!

There are so many great technology companies out there that get no exposure because most of the mainstream media ignores them. It seems to me sometimes that the word “technology” has been hijacked by journalists to refer almost exclusively to consumer-oriented tech – ecommerce, mobile, apps and social media and so on. Exciting though these are, what about the rest – the unknown technology innovators out there who are trying to create great solutions for business or for medicine or whatever? Perhaps they don’t even come from Silicon Valley or Silicon Roundabout. Perhaps, shock horror, they don’t have VC-backing nor a pre-revenue $1 billion valuation. (Perhaps they should but that is another story). What they do, though, is address $billion markets – such as data centre energy management.

Let me illustrate with a specific set of examples drawn from an even more unlikely scenario – a government-backed initiative. Often the kiss of death for entrepreneurship, this one from the British government could buck the trend. I am referring to the Cabinet Office’s Innovation Launch Pad (ILP). Set up in April 2011, its aim is to increase the percentage of public sector contracts being awarded to SMEs from the current low, low level of 17% towards 25%. Given that the government spends around £700 billion per year in total, the scale of the market is self-evident. Francis Maude, Minister for Cabinet Office, kicked off proceedings saying that it is about investing to save. He expressed a firm belief that UK SMEs can deliver innovative solutions that deliver real savings to government at lower cost representing outstanding value to taxpayers.

From 351 initial proposals submitted to the web-site after a month, around 30 were called in to pitch to up to 4 selection panels each; the panels were drawn from different parts of the Civil Service, enhanced by involvement from successful entrepreneurs. 9 companies were shortlisted to present at the ILP Product Surgery on 19^th July following voting across the Civil Service (12,500 votes cast). The top SMEs received mentoring from leading entrepreneurs including Sherry Coutu, Jon Moulton, Andy Phillipps, and Sara Murray, as well as senior commercial directors from across the Civil Service. My company, AdInfa, was one of those selected. Our focus is the 250,000 data centres and countless server rooms in the world which consume around 2% of global electricity and tend to be poorly, if at all, monitored and managed when it comes to energy usage and environmental factors. (The UK public sector utilises perhaps 1000 data centres according to this document.)

The audience for the surgery comprised around 100 of the top commercial and procurement executives from government – possibly the biggest collective spending power to be gathered together in one room anywhere. Each of us had 10 minutes to present and 10 minutes of Q&A from a panel of 3 Civil Servants and 1 entrepreneur. This was followed by a networking reception at Downing Street. We nine SMEs made pitches that in aggregate would save the Government £1.7 billion p.a. – not bad going for companies which neither the procurement chiefs nor you have probably ever heard of. So here they are:-

• AdInfa – develops
  InSite software for monitoring and managing data centre energy consumption in real-time. Proposal to help Government save £220 million p.a. on energy and cut carbon emissions whilst optimising operating efficiencies across its estate of data centres.
• Becrypt – provides highly secure, low cost, mobile access from any unmanaged, internet enabled PC/laptop/thin client. This enables people to work from home or remotely, using their own equipment without compromising data
  security.
• Cambridge Temperature Concepts
  – increasing IVF success rates by 80% in specific patient groups whilst reducing cost-per-pregnancy by 50% resulting in £millions saved for the NHS
• CatN Hosting
  – a proposal to migrate government websites to open source frameworks and save a significant proportion of the £24M spent per year on infrastructure and hosting.
• Health Analytics – a platform for clinicians and patients to access integrated NHS and social care records, enabling Health and Well-being boards to make informed decisions across health and social care, enabling huge savings from effective and joined up preventative care.
• HotDocs –
  a software tool to standardise and automate the
  production of routine documentation and forms.
• Learning Pool – an e-learning training system for local government that has saved over £30M for public sector customers over the last three years.
• MyWorkSearch
  – an online system offering a suite of services to help job seekers find employment.
• Software Europe limited – a service that automates clerical systems for claiming and processing
  travel and related expense within the public sector delivering savings of around 15%.

AdInfa has not tried to do business with government before having assumed that it would be too hard, too time consuming, too bureaucratic, and with too little chance of success. Our view was: leave it to the big boys who have teams of people they can throw at it but start-ups don’t have the time or resources to compete. To be clear, there was no prize up for grabs at the Product Surgery, no guaranteed contract for any of us. However, we have now had conversations with the chief procurement officers of several principal government departments, we have some meetings set up to discuss ideas and we have at least one introduction to a leading systems integrator.

We are not so naïve as to assume deals will just flow – we will need to work hard to build momentum, identify projects and close sales. But we have a toe in the door and we have their attention. The process so far has been run efficiently and the people we have worked with have been helpful, friendly and appear genuinely committed and open to the ideas presented to them. This is critical because entrepreneurs and SMEs are the wellspring of UK innovation and the Government can benefit hugely from engaging with them. It just needs to take the plunge because the risks are low and the rewards for the UK are potentially huge.

On the day it proved difficult to get much news coverage – the Murdochs were sitting across the road giving a full account of themselves to a Parliamentary enquiry! (Coincidentally, my Q&A session was led by Mike Lynch who, knowing what we do now, was possibly distracted somewhat by thoughts of HP!) That is a shame because there is some great news here – really innovative, ambitious UK technology companies delivering great business and societal benefits combined with huge economic wins. And many are addressing global markets. Perhaps boring is the hot new tech!

First: Ask family and friends

The first stage to raising finance is through family and friends, getting off the ground can be the hardest part. The thing with this is that it’s probably the easiest access to finance. If you go to an angel investor with just an idea they will obviously want way too much equity to fund it, and you end up working your ass off for peanuts. Families and friends are your biggest allies early on, even if it means asking for enough to make a MVP- minimum viable product. By building a MVP, at least you can prove to potential investors that this could work, instead of just given them a theory, build them a website with example scenarios or create a prototype.

Borrowing money for your business from your family and friends is a double edged sword. Whilst you may get the benefit of better terms and more money, the relationship may get strained if the investment doesn’t go to plan. If you go down this route it is essential that you make sure you obtain a written agreement because you never know what might happen and you have to protect yourself. You can download Business Loan Agreements templates online. The benefit of this method of borrowing is that it doesn’t stretch your credit to the limit on something that may fail! So that’s why this is probably the best option to start your business with.

The Bank

The simple truth is the bank will probably not lend you money and it can be quite a tedious process. As a start up, you wont have a track record proving to them that your start up is a good bet.

However, if you are unable to raise money through family and friends, your best option is to arrange a loan under your own name, this is highly risky because it could wreck your credit score. The trick to being able to get a hold of a lot of credit is to be a ‘bad’ borrower. Banks are here to make money, and they make money in the form of penalty fees. They don’t make much money from ‘Perfect’ borrowers, so repay late a few times and you’ll be able to borrow much more money.

Before Angel Investors
If you cant get either family and friends to invest or a loan from a bank, look for other ways to raise before going to Angel Investors. Try anyone you can, crowdsource it, try fund raising websites, such as Funding Circle, Kickstarter, zopa, indiegogo and our personal recommendation goes to Funding Circle. To quote The Economist- “The bank said it would take eight to ten weeks to approve the £30,000 of funding needed… there was an alternative: a new financing platform called Funding Circle, which found the money within two weeks.”

Do everything you can to raise funds for a Minimum Viable Product before you go to Angel Investors.

Angel Investors
Once you have a MVP up and functional, take your product to an Angel Investor. Angel Investors are usually retired entrepreneurs with high net worths who invest in early stage start ups for either equity or convertible debt. This form of investment pertains mostly to high growth sectors, this is why web based start ups are so popular in this area. But any high growth sector can gain investment from an Angel Investor. Anything from £10,000 to a few thousand to few million (in rare cases) can be raised by start ups. There are nearly 18,000 business angels out there in the UK.

The British Business Angel Association registers most of the Angel organisations in the UK. Angel List is a social network for Angels and Start ups, this is a great way to connect and network with potential investors, view the start ups they’ve already invested in and find someone that’s right for you.

When going for an Angel investment, you must be careful when negotiating issues such as responsibilities, growth targets, investment terms and financial forecasts, try to gain some advice from a legal advisor or a business mentor so you know what would be fair for you.

The main trick to getting Angel investment is to get yourself in front of as many Angels as possible, they will most likely tell you where you went wrong if it doesn’t work out, you can use this feedback for the next Angel.

Venture/Start up Conferences
Venture conferences or start up conferences are a great way of gaining investment for your business and at the same time get a whole bunch of publicity. There is usually a fee to enter your company into these conferences, but the feedback you can get from seasoned industry heads is invaluable.

Techcrunch Disrupt – The start up battlefield
Runs from September 12-14 every year in San Francisco, US and October 31 – November 1 in Beijing, China. Up for grabs is $50,000, but to be eligible the start up must be live for fewer than 3 months and less than 2 years old. Tickets are free if you get selected to participate.
http://disrupt.techcrunch.com/

LAUNCH conference
Runs from March 7-8 every year in San Fransisco, US. There are two types of competition at LAUNCH. LAUNCH 1.0 is for companies who’ve never had any press or publicity and are in Alpha or early Beta mode and LAUNCH 2.0 is for existing companies who are launching a completely new product.
http://conference.launch.is/

GeeknRolla
Runs March/April in London, UK. Tickets are £350-£450 for start up tables. Participating in GeeknRolla can be very beneficial, Duedil entered last year and we won! It was a fantastic experience and we came away with £50,000 investment from DFJ Esprit and a whole bunch of other goodies including £,5000 worth of free legal advice! Very much recommended due to the fact that its so close to home.
http://www.geeknrolla.com

DEMO
Demo your company, and get yourself infront of potential investors. There are two events in the Year, DEMO fall and DEMO spring (April 17-19)
The Prices are: 8k for Bootstrapped companies, 12k for Angel funded and 18.5k for Funded A round +. Demo success stories: Salesforce.com, JAVA, Boingo, Palm, Symantec and e*trade.

Venture capital
Money from investors come into a fund, this is then managed by fund managers who pick and choose different investments for the fund money. VCs tend to invest in high-risk and high-potential early stage start ups usually in the technology sector. If you’re reading this from the UK, you’ll be glad to hear that most Venture capital investments in Europe are invested in UK companies. Investments usually start from £4 million, with total invested in Europe amounting to billions of Euros. To obtain their funds you must demonstrate a good track record. Most of the major banks have Private equity arms that invest millions in early to mid stage start ups. VC firms include Barlcays Capital, Goldman Sachs, Bain Capital.

A great resource of information about angel investing and venture capital, Venture Hacks provides a wealth of information on raising funds.

This week in start ups is a great podcast hosted by Jason Calacanis (The angel investor Founder of Weblogs inc, Mahalo.com) and his guest panel of CEOs, VCs and Angels, reviewing start ups, talking to start ups, and giving out start up advice.

Business Incubators
These business hotbeds are dotted all around the UK, there are approximately 300 business incubators supporting over 12,000 high growth technology businesses. Business Incubators typically provide a wide range of support from: -

a) small business units and leases on flexible terms,
b) R&D facilities and links into university and academic resources,
c) ongoing mentoring and business support from experienced personnel,
d) technical assistance,
e) training and development opportunities,
f) access to funding opportunities,
g) networking opportunities with other entrepreneurs, and
h) fee-based business support services such as receptionist services, secretarial support, accounting, video-conferencing and access to meeting rooms.

Info on Business Incubators can be found here: www.ukti.gov.uk/investintheuk/whytheuk/localisation/107013

Government Help
The Government offers financial support in the form of grants. However these grants are hard to get a hold of, there’s alot of competition and a tough criteria to meet. Grants are usually given to proposed ideas and not ideas that have already been started.

Grant eligibility
The government has set some criteria so that grant money is most effectively distributed.

Location
The government loves local businesses, so if you plan to stay in one place for a number of years and employing local workers then you have a good shot.

Size of business
If you’re reading this blog post, chances are your business is very small or not even started yet. The Government loves you too!

Your industry sector
The Government supports projects through a variety of innovation and technological advancement.

The purpose of the grant
Grants are usually given for the purposes such as purchasing machinery, improving offices, increasing employment or developing export markets.

You will normally be successful if your business is compatible with Government objectives.

To obtain this grant, your best chance is to speak to the people over at Business Link. Find your nearest branch HERE.

The Technology Strategy Board Grant for Research and Development scheme
In order to be eligible for this grant, your small to medium sized company needs to be in the area of science, technology or engineering, with potential to be gaining massive returns.

There are currently three types of grant available, but you can only apply for one:

1. The proof of market grant
Up to £25,000 is given to be used on market research, competitor analysis, intellectual property issues other costs needed to bring the product or service into the market. The money is given on the condition that it is not over 60% of total funds invested and the project is no longer than 9 months.

2. The proof of concept grant
Up to £100,000 is given for feasibility studies, developing the prototype, testing the prototype, researching production methods, protecting intellectual property. Again, it is given on the condition that it is not over 60% of total funds but it allows for the project to be no longer than 18 months.

3. Development of the prototype
A grant of up to £250,000 is given for making the prototype, any testing needed, which includes market testing. However, the grant given must not account for more than 35% of the total project cost for medium sized businesses and 45% for small sized businesses. The project in question must not last longer than two years.

Find more info and apply for this grant HERE.

The Internet, driven by technological innovation and the free market, has brought huge benefits. But freedom without responsibility or accountability simply leads to chaos and lawlessness. People are losing trust in on-line commerce as increasingly they find their personal information being harvested and sold without their knowledge or consent, and realise that the “free” services offered to them are in exchange for becoming the product, not the purchaser.

When you surf the internet the sites that you visit are communicated to others. Some will combine your surfing history with others anonymously so they can supply statistical analytics information. Some will use it to target you with “behavioural tracking” advertisements, while others may simply sell your browsing history on.

When you visit a site that includes a “web beacon” another party receives an indication that you have visited the site. These beacons, which are often display advertisements placed by advertisement data aggregators such as Microsoft, Yahoo, Google, AOL or Quantserve, are now ubiquitous. They include “like” and similar buttons from social networking websites such as Facebook, LinkedIn & Twitter. You do not have to click on these web beacons for them to work; you only need to visit a page where they are located. The record of sites visited can then be associated with other information the beacon operators or their partners hold about you such as your age, name, address and list of friends. It can also, by using the HTTP Referrer Header , be associated with the site you linked to the new site from, which can also indicate the search terms you used to find the site. Web beacons use several techniques to identify you including those based on HTTP cookies, HTML Local Storage , “Flash Cookies”, ETAG tracking and (the far less accurate) browser fingerprinting technique. Some combine some of these techniques to make sure they can continue to track even if you delete all the cookies in your browser.

A US Today/Gallup poll last year showed that consumers were largely opposed to these tactics. Of those surveyed 67% said that advertisers should not be allowed to do this, and 61% thought that free access to the net was not worth the invasion of privacy involved. Only 14% thought that all advertisers should be allowed to do specific ad targeting, 37% saying that no advertisers should do this, and 47% saying they would accept it as long as they could choose the advertisers.

It cannot be in the interest of healthy on-line commerce for brands that use online advertising to be associated with tracking potential customers without their consent. As more people realise what information advertisers have harvested from them they may lose trust in the brands they associate with the practice. Brands and advertisers should seize the opportunity to interact with their customers in an honest and transparent way as part of the process required to gain consent for behavioural advertising.

Legislators in the US and Europe, motivated by the necessity to reflect popular opinion and civic morality, have drafted laws with the intent of protecting consumer’s rights to privacy. Recently this protection has been extended to cover the technology used for tracking.

The E-Privacy Directive came into force in May in Denmark, Estonia, Finland, Sweden and the UK with the other 22 countries missing their deadline but committed to follow. The law requires that web site operators obtain consent before they store any information in a visitor’s browser. It has been drafted in this way to cover any technique that may be developed to uniquely track consumers, not just cookies, although it does not cover the browser fingerprinting technique which does not need to store information in browsers. The European level technical and legal advisory committee that is responsible for the legislation, the Article 29 Working Group, has recently reiterated its opinion that consent cannot be assumed and must be specifically asked for before any tagging information is stored. It has also called for “streamlined procedures whereby users could accept (or decline) cookies of the various ad network providers publishing ads on one website, in a centralized way, while respecting granularity”.

In the US a bill to give consumers the right to stop collection of their personal information has passed the California Senate Judiciary committee and a similar bill, the Do-Not-Track Online Act 2011 has been introduced in the US Senate. This will call for the ability of consumers to specify that all their web requests are labelled with a DNT (Do Not Track) indication, and that web sites that receive the indication do not use any tracking technique.

The proposed US legislation has some weaknesses compared with the EU framework. It does not require browsers to have the DNT indication set by default, making it less effective at protecting the privacy of consumers who may not know how to change their browser settings, or why they should. It is also worse for brands and advertisers. Many consumers, especially the more educated and therefore probably with higher income, will still find how to set the DNT indication and leave it set. This will remove the opportunity of brands to interact with them in order to establish trust and to gain consent for tracking. The Do Not Track standard does, however, offer a way to signal to beacons not to use the browser fingerprinting technique.

Recent comments by some senior EU Commission figures such as Neelie Kroes, Vice-President of the European Commission responsible for the Digital Agenda, have unfortunately confused the situation. Probably motivated by the need to reach a common privacy framework with the US, and also to incorporate controls over tracking using browser fingerprinting, she has expressed support for recent self-regulation proposals put forward by the advertising industry while calling for the creation of a standard on how web sites should respond to a US type DNT track indication. Neither of these can comply with EU law as they are both based on opt-out consent models where consent (for tracking) can be assumed if no action is taken by consumers. The IAB proposal has now been rejected by the Article 29 Committee, and it has asked them to come up with further proposals based on the required opt-in model.

The browser companies, which are often also the advertising data aggregators, have introduced some enhancements that enhance a consumer’s ability to manage third party cookies, but have not been able to overcome internal business unit pressure and introduce an opt-in mode. The insertion of Do Not Track indications is now supported by Internet Explorer 9 and Firefox 4 Beta, but only available to consumers who can navigate their way into the complex settings and switch from the default opted-in case. The Tracker Protection List standard put forward by Microsoft and now a feature of Internet Explorer 9 shows good potential for giving consumers specific control over third party cookies as used by web beacons, but this currently has some weaknesses, especially the ease by which blocking rules can be overridden.

It is unlikely that effective self-regulation will be forthcoming from the advertisers or the, mostly US based, browser companies alone because of the enormous revenue they currently attract from behavioural advertising. Even Mozilla, the organisation responsible for the Firefox browser, gets almost all its income from advertisers, with nearly 90% from Google alone.

But with the push from legislators, especially in Europe with 500M affluent consumers, technology based solutions are now becoming available from independent European start-up companies which can give consumers transparent control of tracking and at the same time give brands and advertisers the ability to interact with potential customers to gain their consent and trust. It is now possible to imagine a legal framework combining the technical clarity of the EU e-privacy regulations with the flexibility and ability of the US proposed DNT header to rule out browser fingerprinting. This, combined with incremental improvement to standards and further innovative technology, will help make the Internet a safer environment, respectful of individual privacy and to encourage consumer confidence in on-line commerce.

The UK government has spent most of 2011 whacking the same pro-enterprise rhetorical stake into the ground. It wants to turn the UK into ‘Venture Central’, “the best place in Europe to start, finance and grow a business”; and it claims that it will do pretty much whatever it takes to achieve this.

10/10 for ambition, but… what’s the plan? Aside from Tech City grandstanding (a bit shallow, but decent enough PR) and the whole Enterprise Zone fiasco-to-be (more offices? Why?), what the government wants to happen now is for business angels and VCs to start funding lots of high growth startups – fast.

Yet even though the March 2011 Budget increased the income tax relief available to angels via the Enterprise Investment Scheme (EIS) to 30%, that decent-hearted snowball failed to trigger the government’s hoped-for avalanche of UK tech investments (seen any on TechCrunch? Nope, neither have we). As a result, it started to wonder whether the problem might be with EIS itself. So in July, HM Treasury opened up a three month consultation period on radical updates to the EIS, to end on 28^th September 2011.

However, the only ‘stakeholders’ likely to read (let alone submit detailed commentary on) its hefty document’s government-speak are the usual suspects: larger angel networks and trade bodies (e.g. the BBAA and the BVCA). This is not entirely unlike consulting solely with lions on your “Preferred Access to Wildebeest” scheme.

We (Andrew & Nick) wanted to know how this change will impact the UK’s startup finance landscape, so we both trawled carefully through its 62 pages. What follows is our joint summary of it, so that you don’t have to put yourself through that same ordeal…

Here’s what the consultation document says.

Essentially, HM Treasury wants to retain EIS while offering a new scheme called ‘BASIS’ (“Business Angel Seed Investment Scheme”) entirely in parallel. This will offer even more tax advantages, but only to hardcore angel investors, investing at high personal risk in high tech startups. Which begs the question: who / what should qualify for BASIS? Because if BASIS ends up significantly more tax advantageous than EIS, then stricter vetting will be needed to avoid abuse and manipulation.

As a result, most of the Treasury’s document is filled with a near-interminable sequence of open questions addressing what precise attributes of angels and startups should make them eligible / ineligible for this extra tax advantage. (Angel networks would probably like ‘membership of an accredited angel network’ to be the deciding factor for the former, for example.)

So, what’s the big difference with this new scheme? Well, whereas for EIS 100% of an angel’s investment has to be in ordinary shares in order to qualify, the intention here seems to be to make the new BASIS scheme as laissez faire liberalized as EU constraints will allow. Though the document airily claims that this ‘simplifies’ the legislation, in practice its details and implications are very far from straightforward. (Cue fat fees for lawyers, accountants, agencies, brokers and various other non-value-adding service providers.)

Let’s look at some of the funding options that may now become accessible:-

1. Preference shares

Preference shares give more rights than ordinary shares, though what those rights are varies considerably. For example, they can act rather like a bond, specifying a fixed dividend that has to be paid in full before any ordinary shareholders get anything at all: this would be a preferential right to dividends. As a result, having preference shareholders can be quite divisive, because the outcome of business decisions may affect each different class of shareholder differently, unsubtly shifting their view of what the company should do.

Even angel groups haven’t been openly campaigning for preference shares, because (for the most part) they genuinely want angels’ interests to align with entrepreneurs, something that EIS’ insistence on ordinary shares arguably achieves.

Andrew: …although many founders still end up loathing their backers, so it clearly isn’t that simple.

Despite these reservations, allowing preference shares is an avenue HM Treasury is keen to explore, though admittedly with only a very limited subset of the nothing-up-my-sleeves chicanery VCs like to put in place (e.g. not with any preferential rights on winding up, nor any future right to be redeemed, nor any preferential right to variable and/or cumulative dividends).

Despite the fact this is intended to help angels not be marginalized in later VC-led rounds, the Treasury’s EU-constrained version of preference shares is downright ‘soft’ compared to VC versions. Consequently, even if angels do end up with Treasury-friendly preference shares, the strong suspicion is that VCs will always find a way to make their own prefs more ‘senior’ (i.e. with far better rights on dividends, assets, liquidation, etc). Asking VCs not to do this would be rather like asking a dog not to bark: they can’t help it, that’s what they do.

2. Quasi-what?

HM Treasury additionally proposes that while up to 30% of an investment can be in the form of debt (more on that below), 70% of the investment must be in equity or quasi-equity, to bring it into line with its VCT legislation. Errm… quasi-what, exactly?

*sigh*

“Quasi-equity” is a fearsomely voguey word in the Charities sector, but almost never used in startups. One example of it is a Revenue Participation Right, whereby the investee sells the rights to a percentage of a company’s gross audited revenue (note: not its profit) or revenue above a certain agreed level. This loosely makes sense, insofar as the investors (or ‘revenue participators’, call them what you like) thereby start earning a return as soon as money starts coming in. It’s a bit like sales commission, but on your whole sales line, not just on that earned by a single individual.

In the context of charities, the total figures to be paid back are usually capped to prevent the actual IRR becoming accidentally stratospheric: but the HM Treasury document doesn’t even begin to cover to what degree any of this fits startups.

Andrew: I’ve used similar structures in the past, which usually end in something close to tears. I avoid them now.

3. Convertible notes

Reading between the lines, the main factor driving the whole exercise seems to be ‘bubble envy’. Looking across the Atlantic at the massive US startup finance bubble (crazy valuations, huge quick raises, early VC rounds – deals, deals, deals, baby), the Treasury must surely be wondering what it can do over here to engineer even 5% of the extraordinary startup dealflow happening over there. (But let’s put to one side the question of whether that’s actually a gargantuan vastly-oversold techy-startupy-social-Ponzi scheme. Even though it probably is.)

One of the key funding mechanisms widely believed to be driving the US startup bubble is convertible notes, an in-fashion form of debt finance that magically turns itself into equity in a subsequent (normally VC) round. Essentially, the parties pre-agree not a price, but a discount relative to whatever the later round’s pricing comes in at. It’s a neat way to ensure that investors can both have their cake and eat it.

Yet there is a world of difference between this and the (frankly rather vanilla) ordinary shares required by the present EIS. Can the debt-heavy convertible notes mechanism ever be shoe-horned into BASIS’ equity-heavy setup? Possibly, but it’s hard to see how to retain that same post-sale pricing flexibility without leaving the overall system open to abuse.

4. Debt

What does the Treasury team think can be achieved by allowing up to 30% of an qualifying angel investement to be debt? If that 30% is structured as actual (i.e. on the books) debt, this could very well go down badly with banks, whose lending debt is normally the most senior. Regardless, few startups have much collateral to borrow against except IP (and therein lies another set of problems completely), so the potential hazard of trading insolvently is never far away. And with 30% actual debt, you certainly don’t get the transaction savings of a full convertible note round, because a proper equity arrangement still needs to be negotiated and drawn up for the other 70%.

It’s more likely that HM Treasury’s finance wonks intend the 30% figure to be merely a weighting metric for hybrid debt/equity instruments, depending on how the debt and equity components should be divvied up. But what specific hybrids do they have in mind, apart from prefs and quasi-equity? Their intentions with all this are far from clear: much more transparency would be helpful. (NB: if you’re losing the will to live by now, you try reading the original document.)

OK, but… what does it mean?

At this point, it all gets somewhat subjective, so we’ve split the commentary out into our two different viewpoints. But be sure to let HM Treasury know your thoughts before 28th September 2011 – for if they don’t have a properly balanced range of viewpoints to weigh up, BASIS could work out very badly indeed.

The Entrepreneur view – Nick Pelling

What’s going on in the Treasury team’s minds here? I suspect the bottom line is that they want BASIS (a) to raise income tax relief to the magic number 50% (i.e. matched state-funding), while (b) allowing only a small subset of hardcore angels and (hopefully high growth) tech startups to be eligible, but (c) without falling foul of EU state aid constraints.

Yet the so-called “simplification” (actually, just plain liberalization) aspects of BASIS don’t quite add up. For example, the Treasury’s watered-down preference shares seem to divide angels and entrepreneurs, while still not actually protecting angels from VCs – no wall that strong has yet been built, nor perhaps could one ever be.

Similarly, quasi-equity is surely a financial minefield of epic proportions. For me, the casual mention of such exotic financial engineering instruments is perhaps a sign that open-mindedness to options has gone too far.

Finally, using even partly debt-based funding instruments might well give banks yet more reasons not to lend to startups: have banks been explicitly included in this consultation? I didn’t notice any evidence of this.

So as an entrepreneur, I don’t see any tangible benefit for BASIS over EIS beyond the increased tax relief aspect (and I suspect that what is in fact missing in the UK is an active culture of angel investing rather than improved governmental sweeteners). But as far as BASIS’ liberalization of eligible share structures goes, I really do wonder whether HM Treasury will ultimately take its cues from both lions and wildebeest… or just be led by the lions. If their ”advice” led to pure laissez faire hybrids being allowed, I would be highly unsurprised if it quickly proved to be a disaster for everyone involved (except the lawyers and accountants).

The Angel view – Andrew Lockley

The problem with all these tax relief schemes is that they are essentially meddling. Right now, the tech sector is awash with investment, particularly in the US. This has lead to the formation of a bubble – a classic inflationary scenario, with too much money chasing too few goods (the goods in this case being tech stocks). We’re ripe for a shakedown soon. Solid foundations in any industry are not founded on investment bubbles, for these are followed inevitably by busts. All this tax-system meddling smells just like the government’s interfering attempts to keep the UK’s heavy industry afloat in the 70s and 80s. Business needs genuine simplicity, not legislative knots.

Whilst the minutiae of this-or-that tax relief scheme might seem terribly important, it’s really not the demand side for investment which is broken right now – it’s the supply side. The global tech sector is swilling with money, but the ability of the UK to keep pace with these global opportunities is choked off – not by the lack of investment, but by the poor quality of much of the sector. Before you stone me to death, allow me to clarify – I’m not trying to say that your startup is rubbish. What I’m saying is that the sector isn’t principally held back by a lack of funding, but by a second-rate education system, where schoolkids think that computer studies is about Facebook and not about Linux.

However, much more pressing in the short-term is the woeful lack of entrepreneurship baked into the education system. If more tech graduates knew more about business, there’d be more businesses worth investing in – and even more which could succeed without an investment begging bowl. (Shock horror – successful companies can come from organic growth.)

With a few notable exceptions such as UCL, the hungry entrepreneurial graduates coming out of university today have been denied the most elementary introduction to real business skills. What little tuition is given is generally abstract to the point of uselessness. I know this first hand, as I went to business school.

Nick: so did I, and – financial accounting aside, which is a must-have skill – I’d basically agree.

I reckon you’d learn more about business selling fruit out of a barrow. Most graduates, especially techies, have not been taught the importance of the profit imperative, they lack management and delegation experience, and they don’t appreciate how to apply their know-how in a commercial startup – especially one where funding isn’t necessarily available or needed.

Sure, there are a load of exceptions, and that’s what makes hot spots like Silicon Roundabout so exciting. But the UK is a big place, and it needs a lot more energy in the startup scene. That starts with education, not quick fixes to tease artificially-cheap investment money into the community. The government should stop mucking about with meddlesome subsidies, tax breaks and other interfering nonsense, and instead get on with fixing our lacklustre education system and generally reducing the complexity of doing business.

As attractive as these relief schemes seem, they’re actually part of the problem. In general, good businesses will ultimately find backers – if and when these are needed. Tax incentives can sweeten the mix, but they’re the icing and not the cake, and it’s the cake we need to get right. A plethora of quality firms run by well-educated people is what this country needs; but right now we’re falling behind for the lack of decent business and technical education. Ever-more complex tax and subsidy fiddling won’t fix the real problem, they’ll just distort the market. It’s time we thought differently.

This is a guest post by Adam Wynne: founder and Geek-in-chief of StreamScience. He co-founded a startup in Cape Town, South Africa, in 2000 and exited in 2004. In 2005 he came to London and worked in the IT dept of a prominent investment bank for a year, and then as a quantitative analyst for another four. He has now given it all up to found StreamScience and is Entrepreneur-in-residence in his second-bedroom.

Working on a trading floor in an investment bank taught me two things: to deliver things that work, as quickly as possible; and to avoid the Cos lettuce at the canteen salad bar (I once found a live worm in it covered in salad dressing, inching for its life – true story). Now I’m not going to lie to you: these past 5 years have given me some delicious problems to work on, and have rewarded me handsomely for doing so, so why, you might rightly ask, would I give it all up for the tumult, terrors and triumphs of founding another startup? “Fortune and glory, kid. Fortune and glory.”

When working at the bank, most of my colleagues were highly educated (PhD’s and France’s Grandes Ecoles graduates) and highly intelligent. Some of them had been academics in their previous lives and had given it all up for the golden handcuffs of bonuses and the promise of working on hard problems. Often times, the hard problems would dry up or fail to materialize (or happen infrequently enough to be ignored), so eventually it became more about the bonuses. When comparing the remuneration for finance vs. non-finance technology jobs, the disparity is significant for jobs with similar levels of responsibility and required ability (in my experience around 2x).

So how exactly does one compete with that level of compensation when hiring developers/CTO’s? For one thing, you need to make peace with the fact that there are some people you simply will not get. There are plenty of money-driven people in banking whether for need or for greed. You will not hire these people.

Never the less, during my tenure, I noticed some chinks in investment banking’s rather shiny armour. You need to play to your strengths:

• Flexibility: the bank I worked in was monolithic in its structure. There were rigid rules in place for everything (including technology stack) and trying to change things goes over like a pork-chop at a bartmitzvah. One could not work from home at our bank, and thus a whole host of talented moms would leave finance (usually permanently), once they’d given birth.
• Fame: you will not (bar the most high-profile quants and traders) get known for anything in the outside world, when working at a bank. The greater populace will never use your products and your professional interaction will be with a very limited subset of people. When non-finance people ask you what you do, and you tell them, their eyes glaze over before you can say “relative value arbitrage”. Fame usually leads to opportunity and is not to be underestimated.
• Fulfillment: this is a big one, and the older I get, the more I understand it. I have always said that life is too short for boring work and whilst I concede that there are some exciting tech projects going on in banks, I think for the most part, the work is much more tedious than startups. The promise of building something from the ground up and seeing it through to value generation for customers is an enlightening feeling.
• Fast: life is like a box of chocolates in that it makes you fat and eventually runs out. Not sure where I’m going with this, but the point is: the inherent battle for survival in a startup forces you to up your game, try new things; and have your fingers on technology’s binary pulse. The pace of iteration is frenetic and not for the faint of heart – but things get done quickly or not at all.
• Flearning: it has been my experience that you will never learn as much as you do in a startup. Not only are you exposed to non-technology domains, but also get to interact with people with cutting edge skills (whether it be in house, or in open source communities). Banks are not likely to be on the bleeding edge of technology (ours was on IE 6 and Windows XP as of late 2010).

Often times in London, graduates are looking for coding experience before entering the banking arena and startups are an ideal place to get it. The startups get the benefit of super keen employees and the graduates get to learn the craft of coding from the senior members of the team. It was my experience that most people in banks with non-finance experience were better technologists.

As to remuneration: owning a significant equity share of a startup with a moderate exit will more than likely result in life-changing money; but it is beyond the scope of this article as to whether a startup employee (as opposed to founder) is privy to this upside.

In my opinion, the startup future looks bright for London (despite what some people might think). The ecosystem is evolving quickly with communities like Techhub, Bootlaw, OpenCoffee, SeedCamp and more. Silicon Milkroundabout is portentous of startups being seriously considered alongside a career in finance. With a couple more high profile exits in the press, it should start to give the UK’s copious talent pause for thought.

image by Harshil Shah

In a Techcrunch article in April of 2010, Tim O’Shea, founder of Blurtit, wrote about his experience of trying to launch a Groupon Clone in a Hyper Competitive London market in the first quarter of 2010. At that time, MyCityDeal (who were later to be acquired by Groupon) had just launched and a variety of players ranging from cash strapped start-ups to spin offs from major companies were all hoping to become the next Groupon. Livingsocial was still based in the US and would not arrive on the scene until Q2 that year.

Tim’s article is a good read. One of his predictions was that there would be two market leaders and that there would be a gulf between them and the rest of the pack. We now have the data to see how his observations and predictions fared out.

At Siftie we aggregate Daily Deals into a single email and maintain a database of all the deals offered by the major UK operators. Our data shows that Groupon is trouncing its two main competitors with over three quarters of the total market. Groupon sold £24 million worth of vouchers in the UK in July, compared to £2.5 million for KGB deals and £1.7 million for Livingsocial. It came as a surprise to us that Groupon is outselling its arch rival Livingsocial fourteen to one in the UK. Another surprise is that KGB is outselling Livingsocial three to two.

O’Shea’s prediction of two major players has borne out all right, but in North America and not in the UK. Most people would agree that there are two gorillas in North America, with Groupon being a couple of hundred pounds heavier than Livingsocial. But in the UK, there is one genuine 800 pound gorilla and it is the big G.

So how did Groupon do it?

Many commentators have pointed to execution and we have to agree. In the article above, O’Shea describes some of the smart moves made by CityDeal in the early days in the UK. A classic was a £1 film voucher that sold 27,000, mostly to new subscribers and which generated huge publicity. This particular offer was straight out of the CityDeal playbook where a similar offer in France sold 75,000 as described by Jonathan Besnainou.

A cinema deal has become something of a Daily Deal launch staple, with the latest to repeat it GrabOne, who sold 8,000 when they launched in Belfast. Not bad for a relatively small market.

Groupon’s successful execution has resulted in a large disparity in the quantity of deals being offered by Groupon versus its competitors. On a typical day this week in Greater London, Groupon offered 40 deals to Livingsocial’s seven, while KGB offered eighteen. In addition Groupon serves far more markets than its competitors with deals offered in 45 cities (we count London as one city) versus 19 by Livingsocial and 23 by KGB. In addition, Groupon offers multiple deals per city (and indeed City Quarter such as London North, London South, etc) whereas Livingsocial and KGB tend to offer just one, or in some cases two.

Quite why Livingsocial has not responded to this competition is perplexing. At Siftie.co.uk we have historical data and analytics for Ireland also where we see Livingsocial giving Groupon a good run for their money; achieving about half Groupon’s sales and gaining market share at the expense of smaller players.

I have two theories.

The first is that Livingsocial are focussing on quality rather than quantity in the UK. Perhaps they are hoping to build a differentiated brand that can survive whatever changes the marketplace will bring.

The second is that they are going to acquire another UK Player. The only problem with that is that the only acquisition target worth acquiring is KGB. However KGB is a big player in the US so acquiring them would leave them with duplicated operations rather than filling geographical holes.

Perhaps readers can speculate in the comments.

Ciarán is a Principal at Earlybird Venture Capital and represents the first institutional VC to set up shop in Berlin. His current investments include Peak Games, CrowdPark, Madvertise, simfy and B2X Care.

When fellow Earlybirds Jason Whitmire and Hendrik Brandis published their report on European VC performance, strongly suggesting there are valid signs that European Venture Capital may have become and will probably continue to be a more attractive asset class than it has ever been before, and given that U.S. VC is considered the gold standard for comparison, we wanted to kick of a well-needed and overdue fact based debate on the whole topic. Not the simplistic “Europe can’t produce category leaders because it has no Google” debate, but a refreshing exchange of facts and views on them. Wow, we sure have that debate on our hands now.

Some people made the suggestion that we have an obvious agenda. Hell yes we have an agenda: we love Europe and are extremely excited about it’s start-up ecosystem (from our side, 20 new investments in the last two and a half years, more to come!) and we are going to be rooting for European entrepreneurs and VCs maximo style. The problem however is this: As amazing, ambitious and active as Europe has become, we’re still really good at one thing: massively under-selling ourselves and indulging in acts of self-flagellation, to the point where entire guest posts lambasting the industry can be written and hardly any one European VC comes out to disagree (apart from the odd exception). This mea culpa attitude spanning our ecosystem has tarnished the image of an industry which almost everyone in Europe knows is back on its feet, and there is no turning back – so at Earlybird we’ve simply decided we are not having it anymore and that its about time we started taking control by joining the discussion with new facts vs. being a passive reader of Dow Jones VentureSource data, which makes no distinction between early and growth stage and barely makes an effort to call out the boom in technology enabled services, where most early-stage VC money is headed to these days.

Back to “the report.” Most responses have been positive, some critical, but all have definitely been helpful. Many entrepreneurs have come out praising the new attitude, whereas some have raised the valid point that the report suggests Europe is a tough place for them and they should potentially be fundraising in the U.S. Ouch. We neglected to highlight what this means for entrepreneurs, but I’ll touch on that later. Other responses have been largely obnoxious and sentiment vs. fact based – such as David Cowan’s.  Whereas he has some valid points, he obviously also didn’t like the fact that we were giving credit to the intern who helped gather some of the data, or the fact it looked graphically polished. I don’t think that needs further comment. I’m just going to focus on some of the more substantial points made where we have a different opinion (no surprise here!):

• We looked far beyond the last two years (2009 and 2010) to derive our key messages; the data on returns is from 2004/2005 onward, and in other cases we show an even longer timer period. We only mention the 2009/2010 period on a single slide. And in any case 2009 / 2010 was incredibly tough in Europe too, not just in the US. 

• Yes, there are a couple of monster U.S. exits down the road. But will that mean the few (massively) outsized returns in the U.S. will be superior to the more stable, spread-out returns now achieved in Europe? Moreover, suggesting that there won’t be any or many outsized returns in Europe over the next two to three years is probably a false assumption.

• Unlike their U.S. counterparts, European funds do not have to report their performance, and thus many top funds choose not to, i.e. the official dataset in Europe is largely driven by the underperforming funds, which are irrelevant to LPs going forward.  Our report offers a broader view dataset on European funds than official datasets in Europe, which are misleading because 85% of the funds listed in DowJones and Thomson databases are from “Zombie VCs,” which is why we filtered this group out of the data for the first time.

• The fact is, European-backed IPO performance has, since 2004, matched US performance both pre-and post IPO.  The full dataset is available for anyone to test, and this conclusion is nothing short of astonishing. Why is it irrelevant that Europe is creating sustainable capital market champions?

• Many of the factual statements within the report are now common knowledge in Europe (i.e., large demand-supply in-equilibrium in the market, etc.) and are deemed “assertions“ only, or in the case of the exit data “anecdotal,“ when in fact the numbers are the numbers.

Okay, now back to what really matters in this discussion: European entrepreneurs. We’re in this together. If we can bring across good arguments (“the report”) why Europe is (and is going to be) a kick-ass place to invest in start-ups, we are likely to improve the funding situation for European entrepreneurs, which without a shadow of a doubt are currently chasing after a more limited pool of capital than in the U.S. Let’s change this together. Whereas we have come out waving the flag for European VCs, we are rooting even more for European founders – after all they are responsible for 100% of our success.

We know how great European entrepreneurs are and we love them – but they too have an image problem. Whereas it is improving dramatically, there is still a misplaced but relatively widespread view that European entrepreneurs are not as ambitious as their U.S. counterparts and are focused on copying U.S. business models. This view is based on general sentiment and not facts, so let’s put ourselves in charge of this discussion too. I’ve looked at a couple of VC portfolios (Balderton and Index for UK, Prime Ventures for Benelux, Northzone and Creandum for Scandinavia, Ventech and Sofinnova for France, Wellington, Target and Earlybird for Germany, 360 partners for Italy) and have found that:

• Only a mere handful of copycats exist in these portfolios, which are largely comprised of truly non-linear deals; copycats are definitely less than 5%, so we are massively funding innovation.
• 90%+ of the portfolio companies are international businesses serving a global market, so there is little hint of “I’ll make it big in my home market and exit early”; there are now too many role models to not shoot for the stars.
• There is almost an even ratio within founder teams of passionate newcomers and repeat entrepreneurs (in our case nearly exactly 50/50), suggesting that European entrepreneurs are not happy with their first exit, but are natural born entrepreneurs. It also means European VCs are not hesitating to take risks to back passionate newcomers or swing for the fences also.

Sure, there are a couple of prominent copycats (and they have helped contribute to the ecosystem by the experience they provide and the money people have made while exiting them) and the media love writing about them. But it’s not the dominating reality on the ground based on facts.  European founders are just as innovative and ambitious as their US peers. And I am not even going to comment on long lunches or work ethics – that discussion is not only wrong but also especially silly.

Now that we’ve helped make the case for European entrepreneurs, are they really being hindered by evil, risk-averse, “founder unfriendly” European VCs? Should not all halfway respectable entrepreneurs head to the U.S. to get funding? Don’t get me wrong – if you can get a U.S. VC on board it’s just brilliant (in fact I would say definitely try to at some stage!), and of course a supply-demand imbalance at times leads to an unbalanced bargaining power position for European VCs. And do some people in the industry misuse that? Certainly. Do a majority of European VCs do so? Hell no. We all realise that venture capital is about backing great teams with great products and not engineering a financial deal – forget about the first generation European VCs: look at who is actively doing the deals now – they get it. While I have not had the time to analyse the portfolios of the above-mentioned VCs in detail for the next points, here is some evidence from our portfolio that paints a slightly different picture.

• Risk-averse?: Over 90% of our investments were pre-revenue, with a ton of product development left to be done, partially incomplete teams and creating disruptive new models – i.e. no safe bets (which suck anyway because they don’t exist). We take these risks not with a couple of hundred thousand initially, but with a couple of million. I am sure the same can be said for many other VC firms in Europe – so I am not too sure where the “risk averse” rumour is coming from. Sure there are some European VCs that entirely nuked their first fund in the 1999 / 2000 era and, were unable to raise new funds, and are now pushing for early exits and extreme capital efficiency to survive, but this isn’t because they are evil. Again, this is the low end of the market, and it’s time we stopped focusing on them as they are already peeling away.

• Evil terms / low funding?: Sure, we have a couple of old deals where we feel terms may have been a bit too harsh – that’s if you call a 1.3x liquidation preference or a 8% preferred interest harsh; we’ve never (at least in my time) indulged in the 3x liquidation preference deals etc. that we heard went down – those optimise downside; good VCs recognise it’s more important to optimise upside. Nowadays we usually have a 1x liquidation preference, often non-participating or capped at a low multiple on the total deal, 0 preferred interest (yes there are exceptions), a weighted average anti-dilution or none at all, we invest up to €15m per business (we try to build a syndicate that can invest €30m-€40m though), and for that amount of money we usually (yes there are exceptions and sometimes things go wrong) hold between 15%-25% of the company. Again I am sure that the majority of VCs in Europe active today have similar metrics. To me they sound pretty un-evil. We are simply not in the business of screwing over founders, as it hasn’t worked, ever. We have also, with a whole bunch of other European VCs, joined the initiative for a common term-sheet. All in all it doesn’t exactly sound like were the anti-entrepreneurial bunch were made out to be sometimes.

Sure not everyone is running into “high-quality” / “founder-friendly” capital (no surplus anywhere), but we’re making it sound like it does not exist in Europe at all, which is simply wrong. But we’ll be the first to agree Europe needs more of it!

To wrap up, as Fred Destin rightly pointed out, we have bigger problems than U.S. VC vs. European VC, especially if VC funds are competing against the risk / return profile Chinese forests and other asset classes are delivering. Perhaps more than anything I have read recently, this insightful manifesto from the Founders Fund underscores subjects that truly affect the global VC industry, and we will need to tackle these together to stay relevant as an asset class. What we are saying though is this: the European ecosystem has staged a painful yet broadly evident comeback, and it’s about time we let everyone know: the decade of self-flagellation is over.

The British Government has beaten the US to a startup visa – but what this means in practical terms for founders and investors hasn’t really been explained. I am a co-founder of London-based YourJobDone.com, and am Australian. I have seen intended visa options shut-down after considerable investment, been detained twice by the UK Border Authority, experienced interrogations and searches of many hours, had my passport confiscated for a week, witnessed and contributed to the new visas and am one of the earliest recipients of these new visas. I know about visas and border protection in practice.

I’ll give you some background, explain the requirements of the new visas, and illustrate why supportive and relevant personal networks are critical to making it work.

Why should anyone migrate to the UK to start a business?

Many startups are a product of chance alignment in time, space and inspiration. Ambitious, inspired, interesting people often travel, seeking opportunity, new experiences and perspective. It is hardly surprising that while people are abroad they meld others’ thoughts with their own, develop new ideas and develop new partnerships. And if you’re inspired to do something a bit edgy, where it is hard to find people with both the skills and motivation, you don’t want to be contained necessarily to collaborating only with people holding the same passport as you.

There are thousands of examples in the tech world of multinational teams giving rise to amazing new things- one of my favourites is Google Maps, founded in Sydney by two Danes and two Australians. Those amazing new things do wonders for the economy, providing employment and increasing the efficiency of the economy with more competitive, better ways of doing things.

Some meet while studying, others in a workplace. I met my cofounder, Shane Swallow, in a flatshare in East London in 2009. At that time I was working as an operations consultant in a London engineering firm, he was managing a Chinese language training service he’d founded two years earlier.

There are many opportunities in the UK market that are particular to the UK. We both saw huge potential for mobile peer-to-peer coordination of small jobs. Unlike my home town of Sydney, London is perfectly suited to it. As a consequence of post-war housing policy, right throughout London’s population of 8 million, there is the interspersion of people with cash and no time, and people with time who need cash. People living within close proximity have mutually fulfilable needs, they just haven’t a platform to be efficiently connected with one another to get little jobs done. We had a solution for that.

Visa changes over the last 2 years

When I set out the UK visa system was straight forward and stable, and I was eligible for a visa. Things started to change pretty rapidly though, with the requirements for the “highly skilled” Tier 1 visa increased to a Masters’ degree, and requirements for Tier 2 “skills shortage” made impossible for a startup. On short notice I became ineligible to change visas and remain in London, after having invested almost a year in YourJobDone.

Around the time of the UK General Election, after much lobbying from the business sector, the new Government reviewed how a further reduction of skilled immigration would impact on the economy. Amid this was press coverage of my own predicament.

At the launch of “Tech City East”, Prime Minister Cameron announced that visa rules would be changed to “put out the red carpet” for entrepreneurs.

The practical manifestation of this came with amazing speed in April this year when UK Visa Rule changes effectively created two new visas:

1. Prospective Entrepreneur (Business Visitor)

A 6 month visa for proving up a startup and conducting discussions with investors with a view to raising £50,000 (USD80,500) or more. This visa precludes any form of employment in the UK, and is not able to be transitioned to any other visa type unless finance is raised.
The biggest challenge I found was the requirement for an invitation to discussions from a UK Financial Services Authority (FSA) registered VC fund. I’ll return to this below.

2. Tier 1 Entrepreneur

A 3 year visa for a founder who has a funding commitment of £50,000 or more from one or more of: an FSA registered VC, a Government Department, or a UKTI recognised seed funding competition (SeedCamp or Springboard). Alternatively, left over from the old visa rules, if you have £200,000 (USD322,000) cash at your personal disposal you can also qualify.

The idea is that you use the Prospective Entrepreneur visa to pitch your startup, and then if successful in raising a seed round you transition to a tier 1 Entrepreneur visa.

Key challenges for founders and investors

There are a few challenges here. The main one is going from arrival in the UK to funded within 6 months, in order to make the transition to the Tier 1 visa. This is not much time to establish face-to-face rapport, demonstrate product-market fit and raise capital. If the deadline is missed it’s all over, there is no follow-on visa. This leaves a considerable risk for international founders who could, after committing much cash and time, narrowly miss the target and get the boot before closing a deal.

The other major challenges are a consequence of the characterisation of an eligible investor. Like the US Startup Visa Bill (Which requires a sponsoring investor to be based in the US and have invested USD10m+ in the last 2 years), The UK startup visa also requires support from big-hitting VCs, registered with the UK Financial Services Authority (FSA). Alternative eligible investors are the two government recognised startup competitions or a Government department.

At present, the highly constrained extent of approved competitions investing over £50,000, and the unlikely case of a Government department directly investing in start-ups, means that for most start-ups an FSA registered VC would have to be at least part, if not the whole, source of capital to obtain a Tier 1 visa during the 6 month Prospective Entrepreneur term.

The impact of this for the founder is two-fold: firstly it means that the entrepreneur is seeking an initial invitation from an FSA registered VC, who may in fact be a bad fit compared to a domain-experienced angel (or syndicate). Secondly it means that the founder has to get straight to a VC round within 6 months, which is quite unusual for a pre-revenue company (significantly, the startup is not allowed to sell anything during those 6 months, and the entrepreneur is not allowed to earn income in the UK). My experience so far is with only the first part of the challenge.

VCs are busy people, and even if you know a few in your target market, getting a hard-copy, signed letter-head invitation to discussions in the UK is not easy. Particularly if you are more realistically positioned for £50k-£500k angel discussions, as YourJobDone is, most VCs will not happily entertain the idea of writing a formal letter to support someone who is seeking to put their case for a first round.

My requests to the FSA registered VCs I knew personally were turned-down (albeit after serious consideration) for various reasons, including internal governance issues and unknown compliance risks associated with issuing a formal invitation to discussions. In truth this probably translates to: they did not care enough about the possibility of investing to warrant the effort, or they were not willing to do me a favour in the long-shot that there was an opportunity for them.

At this point I was starting to think it was all over, unable to return to London to push our beta, meet people we could collaborate with, or show our wares. A looming great loss to me, and a lost opportunity for UK innovation.

This is where personal relationships became central. While in the TechHub coworking space in East London in December 2010 I had met many interesting people doing similar things. Two people came to my aid – Teamly.com founder Scott Alison and TechHub co-founder Elizabeth Varley.

They reached out to the VCs they knew who had portfolios covering similar markets and technology. Though I was declined by several more, one good man, recognising both the possibility of the opportunity, and gravity of the situation for me, was prepared to go to the effort of making a formal invitation to discuss the possibility of investment. Being a non-Briton himself, he had a first-hand appreciation for how problematic UK visas can be. I am extremely grateful to that VC, and to Scott and Elizabeth for their introductions.

A few founders, who raise capital through SpringBoard or SeedCamp, should find meeting the criteria fairly straight-forward. The challenge for most non-EU entrepreneurs aspiring to innovate in the UK is: who do you know that believes in what you’re doing and who can help you reach out to the people you need to support you?

Over time the UK Government may adjust some of the criteria to make it more practical for the kinds of startups you read about in TechCrunch. Though there aren’t any impending changes, some things that are deserving of consideration include:

1. recognising domain angel investors as legitimate investors,

2. allowing pre-VC startups (i.e. with Prospective Entreprenuer founders) to take revenue,

3. requiring at-least-one rather than all investors in a syndicate up to £50,000 to meet the investor eligibility criteria, and

4. allowing extension of the Prospective visa to 12-months in-country if further invitations to discussion are received.

The UK has moved fast to implement these visas- compare it with the US- and some issues will need to be ironed out with the benefit of experience.

Thoughts for non-EU aspiring UK innovators:

For the time being, if you’re a non-EU founder anything like me with UK aspirations, understand that your friends in the global startup community are critical to getting the right references. There’s no better place to cultivate those relationships than in a tech-startp coworking space like TechHub.

If you do meet VCs who are interested in what you’re doing, be prepared to help them with the contents of the letter. Provide referenced statements that satisfy the requirements of the immigration rules, so that the VC just has to add the finishing touches.

Thoughts for UK FSA registered VCs:

You are now the arbiters of who can remain in or come to the UK to start cool new companies. The requirements of the Prospective Entrepreneur are not onerous. If for no other reason than to avoid shutting-out highly motivated international innovators, please be sensitive to the constraints and willing to deal with the friction of a formal invitation even if it’s a long shot.

Three years ago, almost any English-speaking international graduate on a decent salary could come to London, get a startup going in parallel to a source of income, meet you casually, warm up connections etc. Now a non-EU founder planning to serve the UK market must be invited by you, is not allowed to take income in the UK, and their startup is not allowed to sell services or goods in the UK.

Also be sure to provide feedback to the UK Government. If you think for instance that domain-experienced angels might be better suited arbiters of credibility of early pre-revenue companies, make it known.

As far as I’m concerned, we have a startup to scale. I’m hoping I’ll meet the requirements to transition visas as a matter of course. There are going to be a lot of interesting challenges, and getting money from the right source is one more. I’ll let you know how it works out.

Further reading on the visa requirements:
Prospective Entrepreneur

Tier 1 Entrepreneur

Nick Halstead at Datasift seems to have ticked people off the wrong way with a candid assessment of his experience fundraising in Europe. He might might not return emails but he’s also raised money from one of the smartest dudes around (Roger Ehrenberg and his Big Data Band) so if you allow me I’ll pay some attention to his opinion, and in fact expand on it.

Nick’s video interview with Mike Butcher starts exactly as I would like to start my article: I’ve always been a huge advocate of Europe, and a believer that we can blaze our own trail. I would not have invested the amount of time I have in, say, Seedcamp since its founding by being an investor, board member, mentor and contributor (my Prezi slides and a little plug) if I did not believe we could build great things, and thankfully, occasionally, we do.

Since the excellent Jos White at Notion Capital has stated the motion for the house, I will state, Oxford style, the motion against and focus on what I think is broken in our industry. Jos essentially states that whilst the European venture industry is lacking in some respects, it is a great place to make money given macro indicators that suggest there is a shortage of venture capital, a track record of generating exits on less capital invested, and great opportunities in the market at reasonable prices. I don’t actually disagree with his points, but wonder whether we can seize our moment.

My motion is simple: the European venture capital industry deserves a B- at best, and is unlikely as a whole to capitalize on the opportunities presented above.

It is generally very average, sometimes downright ugly and only sporadically brilliant. Rather than go macro, I am going to go micro and focus on the quality of our ecosystem at a grassroots level to illustrate this statement.

Entrepreneurs are pissed off
Great entrepreneurs talk amongst themselves about their experience with venture capitalists, and I never miss an occasion to listen hard. Unfortunately, the feedback is almost universally negative; entrepreneurs typically have had a bad experience with Euro VC’s and are generally wary of taking their money.

There are usually three types of issues at work:

• Too many VC’s look at everything though the lens of the budget and are unable to go deep on product, tech or strategy. A few examples: the CEO of a social gaming startup laments the fact that none of his five investors uses twitter or facebook and none has ever tried one of his games, yet the success of his companies relies entirely on gameplay and social distribution. A senior VC tells the CEO of a company in an insanely fast moving segment: “I am not here to talk strategy, and no one else around this table has any clue about strategy, I am here to check what you do with my money every month”.

• There’s very little empathy with the management team and in the end boards become threatening or cumbersome reporting environments which are formulaic and useless instead of being a work session where the future of the company is being discussed and honed in a collaborative manner. I wrote a long evidence-based post about this a while back entitled “the Arrogant VC” if you want more depth.

• Too many VC’s are, simply put, afraid of failure. It makes it very difficult for the entrepreneur to discuss openly when the model is struggling and a significant pivot or strategy shift is required. I have been involved with one company a while back where the lead VC response to a fundamental go-to-market and single customer dependency issue was to review every line of spending at every board, one-by-one. Including travel, IT, and so on. Unfortunately, I am neither kidding nor exaggerating. I also had a case with Zoopla where in the early days we used to run ourselves lean on fast iteration 3-months budgets and roadmaps. We were raising money and had few alternatives, and ended up with one investor insisting on a 2-year budget being appended to the legal docs. In the end, Alex and I had the appetite for neither building that budget nor dealing with that investor and turned them off, even though that meant we had to fund Zoopla internally: the incoming VC was just barking up the wrong tree, asking for security and comfort where they could be none, since the numbers were clearly not worth the paper they were written on. I have written on the need to embrace ignorance before, though now of course you could think of that as being Lean.

In general, VC’s are not considered evil by euro entrepreneurs; they’re just the least-worst form of capital, perceived to be a necessary burden that comes with reporting obligations, oversight and very little value-add. It is too rare to hear an entrepreneur praise a VC he’s worked with for great help and insight, even though this is a common occurrence stateside.

I could of course write a companion post about how many Euro entrepreneurs need to toughen up, stop looking at VC as the root of all their failings, and generally think more ambitiously too, but that will be for another day. And on balance, I have to say I find the VC ecosystem is letting even our best hopes down too often, and that’s that.

Limited Partners are pissed off
The reason why I think we’re well past the complacency stage is that the situation within the LP community (“Limited Partners” or LP’s are the institutions who give money to venture capitalists) are even more dispirited than the entrepreneurs are. Seriously. Many top tier LP’s have written off Europe and don’t even have a “Europe venture allocation” anymore. Those that do are either focused on their top 5 funds list or are looking for (very few) emerging managers. All of them are concentrating money in the hands of fewer managers.

Why do you think every national venture capital association is reviving the debate around the “funding gap” and the need for the government or the EIF to get involved? Solace lies close to home and thanks to a network of government agencies, local banks and funds and so on many funds are managing to stay alive. The point is, we’ve managed to piss off our funding base, or at the very least make them extremely wary of backing us.

What’s wrong with us?
What I stated before is based on tens of conversations with investors and entrepreneurs. What I am going to be stating now is my personal opinion of what we do wrong, my diagnosis of why, on average, we suck.

• For some, wrong incentives: there are too many guys out there who have no incentive to either lose or make real money. To them being a venture capitalist is a job. Allow me for a second to paint a different picture of that VC you were very impressed by at the cocktail drinks. He talked a good talk but he’s actually employed by a regional financial institution that gives him money to invest every year. He does not make that much, he enjoys the perks and the feeling of importance and the Beamer but he really has no incentive to do things that are too great, rather make sure he doesn’t drop the ball on any of his investments. He really enjoys when his boss tells him he negotiated great, harsh terms. He’ll never go against his partnership for a company he believes in but that’s in serious trouble. He does not invest in his own fund, or very little. He does not really care that much as long as you get him cash back, because that’s probably enough for him to survive inside his organisation.

• For too many, wrong DNA: following up on the above, I am convinced that many folks involved in Euro VC are just in the wrong industry. They’re not entrepreneur champions and they never will be. They’re not risk takers, willing to embrace failure as the unavoidable counterpoint of attempting to be great. This is partly why I think we need new entrants, a revolution rather than an evolution, as so much of what we have currently is just wrong and non fixable. One company I was involved with was on the wrong track, because the investment thesis was turning out to be flawed. I remember the reaction of my co-investors to what was obviously an extremely hard to solve product/market fit problem, and here is what they told the CEO: “fight for as many years as you need to bring us money back, any money back”. A perverted form of “earn your stripes by salvaging a wreck” that was going to cost the CEO years and not allow a talented guy to move on to the next project. I resigned from the board after we hired a banker and told the CEO to take 12 months to try and sell and otherwise do an orderly shut down. The company somehow survived two more years after that but failed anyway; I bet the CEO did not get as much as a thank you for trying.

• Lack of depth: I cannot count the number of times I have heard entrepreneurs lament the fact that they cannot go into any level of detail on product or tech. Of course we have grandiose exceptions (most of the hardware investors in the UK would qualify) but boy, I have certainly witnessed first hand my share of shallow commentary. It’s extremely difficult to be subtle about say, pricing levels and go-to-market strategy where you have no real insights into the underlying products you are selling. Funny anecdote: this other VC sits next to me at dinner and comments on a product the CEO is demo’ing: “neat, is that from google ?”. CEO responds: “huh no, we’ve had it for two years”. No comment.

• Lack of accessibility: ever wondered why every single deal seems to come with a banker attached these days? Again, ask the entrepreneurs. The pain and friction in running a European fundraising process is such that hiring a fundraising agent is considered not only prudent but also necessary. Too many VC’s are hard to get to, non-responsive, too slow. Again there are glorious exceptions of course: Errol at Wonga had at least 4 term-sheets on the table in a matter of a few weeks from starting to fundraise for his series B, and that’s before they took off. But this is where the delta with the Americans is so huge. When Shafqat at Newscred got sponsored onto Angellist, his endless and soul-sucking European fundraising process turned into a 2 week whirlwind of investor interest and a brisk move to New York.

• Still treating legal terms as an upside mechanism: I could go on for hours here. Yes, major progress has been made, including with the Seedsummit terms that Seedcamp, Tina Baker and co. designed. But whereas legals should really be considered an insurance policy against bad behaviour, they are often used as a way to juice returns, applying what are mostly private equity techniques to young companies that should really be free to iterate fast in search of the perfect way to scale. For example:

- taking founder shares into escrow and having confusing good / leaver bad leaver language inserted (Yee Lee comes to mind more often that you’d think !), or severely restricting exercise periods for employee options.

- putting performance ratchets in place for a Series A or B company that only have a few million in revenues (including EBIT targets, as if you could know at that stage whether you should be gunning for profitability or growth ?)

- Participating preferred of course, which although they are a legitimate way to trade-off price/returns profiles when you “get” finance, are rarely well understood by founders … with VC’s obligingly leaving them in the dark

- And of course full ratchet and multiple liquidation preferences, which are not yet a thing of the past. The equivalent of the Iron Maiden for entrepreneurs I suppose, delivered at a VC shop near you.

Who are you again ?
I may piss some people off coming for a first guest post on TC with a broad brush critique of the venture community. Yes, I am a Belgian who recently deserted Europe, and whose fund was a good example of raising too much in 2000 and trying to expand too far, and I am far from perfect. Yes, I have pulled from a deal after a signed term-sheet once (sorry G), yes I failed to tell an entrepreneur for weeks I was not investing in him even though I was pursuing a business in the same field (sorry R), and yes I have been involved in two founders being removed from the post of CEO, though both times I fought hard to make them successful first.

If you come out of reading this thinking I’m a lesson giver who’s left the building, you’re missing the point. If we want to fix ourselves, we first need a harsh and intellectually honest look at how we are operating, and what our key constituents think of us. You cannot fix what you do not accept is broken.

I have frankly seen my share of odd or bad behavior directly. Whilst the blackberry obsessed distracted board member with the gorgeous soft leather daybag is by no means a European invention, we’ve added our own garden variety of venture gnome that only wakes up for the last ten minutes of the board when the monthly financials are being reviewed.

The Times They Are A-changin’
The good news is of course that our ecosystem is changing fast (and has been improving since the dawn of venture). We know strong ecosystems take time and consistency to build, and we have more and more of the ingredients coming into place:

First and foremost are great entrepreneurs building awesome successes. Skype transformed Estonia (ASI, ERPLY, Grabcad and many others), gave us a great new VC firm (Atomico) and a bunch of awesome offshoots (Spotify). And we have many more brewing, such as Wonga, Soundcloud, Gameforge etc. Every success spawns smart angels, repeat entrepreneurs, and more importantly a sense of confidence.

We’ve always had some strong VC’s (a minority in my book), we’ve had one homegrown tier I brand name with Index Ventures, a bunch of strong ones in the making often with a US heritage (Accel, Balderton, Northzone, Wellington etc), a number of exciting emerging managers (Mangrove, ISAI Notion, Passion etc, see Rise of The SuperAngel), at least one super-optionality fund (Kima) and, finally, initiatives that are truly focused on technical founders (Seedcamp, hackfwd etc)

A Revolution in mindset required, still
Whilst change is happening, I am still thinking we need a bit more of a revolution than Jos’ more gentle evolution. I would not want to suggest all VC’s are dinosaurs like my anything-but-boring friend Dave McClure, but I do hope the LP community funds the VC marsupials selectively and aggressively stops funding the VC dinosaurs.

It’s OK to shrink ourselves back to health … and we do NOT need some mis-allocated Government money introducing bias into VC selection. The government should focus on giving tax breaks to angels and lowering operating costs and red tape for startups.

On the current model, European VC’s too often think of a “deal” as an agreement with an entrepreneur about hitting a set number of milestones and financial objectives, i.e. what they perfectly rationally think of as “building a business”.

Whilst it sounds reasonable, are you more excited about doing the above or “backing exceptional people to go do exceptional things” even if that means investing with a much higher level of risk and accepting a very uncertain path to success?

If we want to avoid seeing too many of our entrepreneurs sucked by the Valley Vortex or funded by travelling Yankee fans, we better get our act together and improve the quality of our offering to the best entrepreneurs out there. They’re a finite population! Yes, the US market may be frothy and delusional, but let’s not take that as a comfortable excuse to not raise our game yet again. Onward.

Picture manilulation thanks to @c_kahler and @friedcell

Nat Wei (@natwei), is a social entrepreneur. As Baron Wei of Shoreditch he has an interest in the emergence of the cluster of startup technology companies in the Shoreditch/Hoxton area of London which has come to be known as Silicon Roundabout and which has informed the UK government’s new “East London Tech City” initiative. This is the third in in a series of guest posts on the use of technology in re-building civic society. The first is here, the second here.

There are dramatic changes happening in the way public services are evolving to become more citizen led and people driven. In the UK there is a huge amount of activity currently underway to reform and open up public services so that decisions are made more locally and on the front line, so that workers in public services have more say in how their services are shaped and can respond better to citizens who are being armed in turn with more data, and in how providers will be rewarded (or not) for their outcomes. A forthcoming White paper on public services will shortly set out the framework for this change.

Even before the bills are passed however, public service reform is already underway, and technology has had a crucial role to play and will have even more of role moving forwards. One of the critical differences emerging in this landscape is how organic versus planned public service platforms will be. On the one hand there are emerging models like Clinical Current, an online application that will be launched later this year for medical professionals. On the other hand there are already models such as The Key. And thirdly there is the forums and discussion board format which has been around almost as long as the Internet itself.

In this post I want to consider the challenges ahead for apps like these, which are leading the way in bringing together frontline professionals who are geographically diffused in a shared online space where they can benefit from each others’ knowledge and improve the delivery of services all over the country. The tension for developers will be a balance between user-generated and more curated, edited content. Who will define professional knowledge and where will the power be held? Apps like these will have to retain their professional credibility as well as maintaining a high standard, whilst catering to the needs of their users who will benefit from a less firm hand on the tiller.

Neil Cooper is the joint founder of Doccrates, which is launching Clinical Current this coming October. Neil’s background is the pharma research industry, which has given him a grounding in the healthcare system and enabled the development of an online space where doctors can network effectively – which he calls a ‘bit of a linked in’ for medics. Doctors, whose relationships tend to be at the local level and not beyond their local boundaries unless they are attending seminars and symposia, are also acutely aware that knowledge in their field is constantly developing and sometimes at a rapid pace. As a rule therefore they are open to sharing information, keen both to learn and to help others learn.

From the outset, Doccrates are holding to the philosophy that the users should lead the way on how their model develops. This network will initially be purely web-based app, but Neil and his company already have plans for smartphone and iphone apps. Importantly, though, they want to watch closely how doctors use the site before they progress the design further. Such a site could be used for sharing more than just medical knowledge; with the new health care professional consortia proposed, for example, in the UK it might be beneficial for doctors and other health workers to develop a plurality of relationships with people that they may not have come into contact with in the past – technology can help to open these up. Similarly, if health care workers are going to be able to bid for patients that lie outside of their previously existing allotted areas, being able to communicate in such a networked way could become a significant tool.

The other broad approach developers can take is that of The Key, a support service site for school leaders. For a fee, headteachers and the rest of their team can access over 2,000 regularly reviewed and updated articles, specifically addressing issues in their profession. Topics relate to school status, local authorities, inspections, improvements – basically anything that the membership determine is salient and ask to be dealt with that will help them save time and money. Here the members are determining what the content should be, but writers and editors are creating it. All writing and reviewing activity is driven by the demands and feedback of the school leaders, moulding the shifting knowledge base in a highly efficient (but quality assured) way. The comparative trade-off might be said to be quality control against direct user input.

My own hunch is that closed models such as the Key will thrive, but like Apple’s iPhone, will be suited for a more niche professional market. The Key’s parent company already has plans to provide services for other professional groups in health and social care. The ‘traditional’ and tried and tested discussion board will continue to have mass appeal, whether using relatively bespoke platforms such as Doccrates or more universally focussed ones such as twitter/facebook etc.

However, for this kind of technology to be a help and not a hindrance in the public sector, we need a broad culture shift in the way government approaches technology in three ways.

The first is a greater openness and willingness to collaborate in the design and programming of platforms. Something which is happily already being done in the UK is the opening up of government alpha source code and APIs to developers through hack days and online. This has been done both at the national level, with data.gov.uk and now with the alpha.gov.uk site, and at the municipal level around the country. For example, Sandwell Council and others have opened up their archiving and records systems to programmers who believe that they can combine forces to improve usability and functionality. Collaboration and early testing and prototyping together is the way forward.

Second, we need less reluctance towards sharing information. This could be achieved in many cases by the lowering of firewalls. Another solution could be to have two networks where in the past there has been one – an internal, restricted government database which links to a second, cloud-based network. This is a proto version of solutions that the US (who are ahead in many ways in this area) have already implemented in healthcare, which allow hospitals to use apps from third-party providers that act as portals to centrally held, secure patient information.

Whichever model comes to dominate, changes will be needed in how government encourages its workers to use social media and even private devices. I believe that the greater use of personal devices like iPads, iPhones and other smartphones and the secure information that can be held on them will represent a big step forward (as in the US) whether in health or in other public sector areas. In health, there is mileage to be gained from harnessing the fact that doctors are comparatively higher users of smartphones than the rest of the population and tend to be on their feet a lot, not having many opportunities throughout the day to use a computer, so iPhone and iPad and other smartphone apps that access secure patient information quickly and easily would be of great benefit to them.

Whichever models ultimately go mainstream, open or closed, there is one certainty when it comes to the use of technology in the public sector: the days of monolithic one sized fits all platforms expensively procured are over. We shall see how long it takes for their nimbler replacements to gain adoption.

For the last couple of days I’ve had the pleasure of attending “La Red Innova” for the first time. This is a web conference held in Madrid, Spain that aims to bring together high-profile speakers and leaders from different companies worldwide with emphasis on Spanish-speaking and Latin-American countries.

Celebrated right in the centre of Madrid in the great Teatro Circo Price, the venue and setup were excellent, if not a little too small for the close to 1,000 attendees there. For those more interested in up-and-coming startups from the Hispanic market parallel sessions oddly named “workshops” occurred in rather small, unsuitable rooms with generally bad acoustics and no WiFi connection. 

However, I did find some of the talks inspiring, such as Luke Williams’ (@LukeGWilliams), Richard Gerver’s, Pau Garcia-Milà’s (@Pau) or Chema Alonso’s (@ChemaAlonso), which covered competition, education, entrepreneurship and security topics with upbeat and lively discussions. Unfortunately, many of the others (and I’m not going to point any fingers) either felt more like blunt marketing attempts directed at an audience that may have preferred to learn more about the European startup ecosystem and startup experiences in Spanish speaking markets. Or they were simply not very well prepared, proofread and rehearsed.

As it is to be expected from any large conference the program suffered quite a few last-minute modifications and notable delays, which prevented me from attending two of the talks I was looking forward to the most, the one by Bernardo Hernández (@BernieHernie) and the one by Martín Varsavsky (@Martinvars), which no doubt I will be watching as soon as their recordings are made available.

On an up note, this time around La Red Innova included a startup competition called “Open Talent” where 20 businesses presented their products or services and competed for €100,000 (~$140,000) prize money from BBVA (one of the main sponsors of the event). The main problem with these presentations were that they were too long, the slides generally bloated, the rooms tiny, there was no jury to challenge the ideas and the attendees had no say on the outcome.

It was clear that the participants had been selected in conjunction with if not exclusively by BBVA, whose interests may very well be biased; as a result it was nothing like TechCrunch Disrupt and the startups that presented were given the small, packed rooms with bad acoustics (not exactly the place to be). 

Having attended a few web conferences and events I have to say I had higher expectations for La Red Innova, namely being the “Le Web” of the Hispanic world, and needless to say those expectations -if a bit unrealistic- were not met.

Unlike in conferences like GeeknRolla, here we started off with no ice-breaker that would have encouraged us to meet other like-minded people. There was a dedicated networking area, but you couldn’t talk to anyone without having a cloud of cigarette smoke blown on your face.

The truth is, organisation-wise, the event left a lot to be desired; long queues, frequent changes in schedule, considerable delays and to top it all most of the interesting speakers, high-profile employees or founders came for their talk and swiftly disappeared through the “VIP doors”, killing your chances to have any real and meaningful discussion with them or get a chance to pitch your business.

For a conference that celebrated entrepreneurship, I expected a more open attitude, more speeches like Pau Garcia-Milà’s, the founder of eyeOS, more real networking and less smoke.

Let’s hope they address these topics for next year’s edition.

Despite articles to the contrary, many think that Groupon is valuable and still has big potential. I agree, but wonder if my reasons are different. I think that their deep discount model is unsustainable as Groupon’s longevity is reliant on repeat business. Much of what Groupon does is not new; deals, time-limits, coupons. What Groupon has done is more impressive than it may seem; Attribution. The biggest advance that Groupon has made is that it makes an online recommendation of an offline venue (a place). This again in itself is not new; tracking the success of that recommendation is.

Once Google worked out Adwords it exploded in value. Google get paid whether a sale is made or not as companies pay for clicks to their website. Facebook collected data on people, and allowed people to organise themselves into interest groups, to ‘like’ products, people and companies. Once Facebook perfected an ability to market to subsections of groups, (“Married Women, over 25 in Boston Who Like Britney Spears”) their value rocketed. A commerce website has to be incrementally improved to be a machine that can continually convert those visits from Google, Facebook (or anywhere else for that matter) into sales. Whole industries have grown up around the paid search platform. It’s still the same model though, companies paying for clicks not sales.

Affiliate networks have added tracking and attribution to this. An online recommendation can be tracked end-to-end to an online sale. Finance Directors prefer paying for actual sales rather than measuring the success rate of their site and paying for traffic; its complicated and not 100% reliable. A new wave of automated self-serve tools is hitting the web and online recommendation aligned to tracking sales is huge business.

Until now, all of this was fine and dandy for companies who wanted visits to their websites and who made sales online. But it didn’t do much for physical businesses. Whilst the move is to have online cover every aspect of your life, the internet can’t cut your hair.

Groupon has closed the loop between online and offline. They provide online recommendations for people who then go to physical, actual, offline businesses. Businesses are attracting new customers and paying Groupon for them on a success basis. Actual clicks to actual bricks.

The closed loop is as big as Adwords. Paying for a customer is a no-brainer. With one proviso; in order to make money, you must pay less for a new customer than you will make from them, even if they only come once. You need to structure the deal sensibly, and you need to measure its performance.

Coupon.com‘s recent $200m raise and announcements from Facebook, Google (and almost everyone else) that they will be joining the coupon club, shows that this industry is about to get really competitive. Like it did around Adwords, an ancillary industry will spring up around these coupons; businesses that grease the wheels or improve the performance of this new marketing channel. Any software or service that can improve margins for businesses, aid the merchants or the deal sites, will be snapped up in a phase of land-grabbing, improving chances of longevity in this soon to be highly competitive landscape.

The more insight a deal site can get into its merchants then the better it can help them. What’s the average basket size? When are you least busy? Is your business seasonal? How is your stock management? Knowing these things will be hugely valuable to merchants and deal-mongers alike. Software as a service businesses such as accounting services, stock systems and booking and voucher redemption platforms all represent sensible tie-ups in this field. Both sides will see advantages when they have better knowledge about the merchant’s business. Further to this, knowing which deal sites perform better with which business-types, and in what neighbourhoods, will help merchants target their campaigns and improve efficiency.

Horror stories in this sector are all too common and certainly repeated loudly. In order to succeed, deal sites will have to stop this happening. Merchants, often entrepreneurial small-business-types, are likely to be bullish about what volume of coupons they can do and so accept offers to sell thousands of coupons in a day. Groupon then duly focuses its powerful marketing lens on said merchant and as a result the business can be overrun. Dissatisfaction in this industry happens either when the merchant loses money or the customer is not able to redeem their coupon. Better insight, when it comes, will reduce this; a business will not be allowed to oversell and will be well informed of the money they will make on the deal.

Although this industry has been founded on huge discounts, sold daily, the closed loop is what underpins it. We can expect big changes from the status quo, the discounts to fall and people to successfully sell without time limits. Groupon’s IPO (should it happen) is likely to support the $25bn valuation (See Below). Expect all the major players to get involved, expect market leading small business tools to be compatible with the big deal site and expect them to have ‚Äòplatforms’ (think Facebook). Some strategic acquisitions in this vein would be well advised. New advances are coming in, tying online accounts and email addresses to offline transactions, Jack Dorsey’s Square (funded now by Visa) and Google’s new Wallet project will feature heavily and develop competitors of their own. Don’t presume Groupon will fail or that investors will lose their shirts. The loop is closed. Long live the loop.

THE ROAD TO TWENTY-FIVE BILLION DOLLARS

Groupon’s rumoured IPO is currently big news but they are proposing to only put 3% of the company public. This tiny percentage could be a sign that Groupon are planning profitability in the near future, but I think releasing a relatively small amount of stock to the market will keep demand high enough to ensure that astronomical valuation stays up there.

The Point was established in 2007 and raised $5m in VC in January 2008 as a community-focussed, “group action network”, before “pivoting” (sorry) to concentrate on their newer idea of daily deals and group buying. The Point became Groupon in November 2008 and caused a European start-up-clone goldrush in January 2009 when they announced a $30m cash injection at a $280m valuation from the very astute Accel Partners.

With their new valuation and trajectory they bought six-month-old MyCityDeal in May 2010 in a deal rumoured to have been worth a big number in cash for the Samwer Brothers as well as 10% of Groupon’s share capital for the Euro-clone-extraordinaires.

Groupon raised $950m in funding (admittedly immediately taking a large amount of this straight off the table) in January 2011 from Kleiner Perkins, the prolific investors who have chunks of Twitter, Flipboard, Lockerz and Zazzle and are, one assumes, not very easily parted from their money. “Sure thing” investors, Russian outfit Digital Sky joined the round. The valuation of the business for this round at $4.75bn probably explains the rejection of Google’s acquisition offer at $6bn barely 30 days before. They clearly felt they could go further.