London needs to think bigger, faster.

22 May 2017

I’ve spent the last thirteen years of my life building technology startups in the US, and I moved to London just under ten months ago. In the first few months, I was here, I’ve met with several VCs and investors, and offered to meet with their startups. Some to see if there was a fit for me, some just to provide advice, including startups from accelerators like TechStars, Seedcamp, and Startupbootcamp.

I believe I’ve met with about forty tech startups. Of those, a handful was outstanding and onto great things. I was impressed by the founders, the vision, and the execution; the others, not so much.

These entrepreneurs were approaching tech startups in shockingly different ways from the US. The differences fell into three buckets:

Technology as a non-core function
Lack of urgency
Thinking too small

I’m sure I’ll end up offending someone because that’s how things go on the Internet, but if it makes you feel any better, assume this is an uninformed, prejudicial, stupid-generalization.

Technology debt

At least half the startups I’ve met with were in a state of despair around the technology. They took shortcuts — without knowing they were shortcuts — and tech became a barrier to growth and innovation. It came in two flavors: They outsourced their entire product development, or they hired developers without knowing the first thing about how to hire developers (and clearly didn’t get the best ones).

The two worst cases I’ve seen was a startup which lost it’s entire source code, entire customer database, and production website because an outsourced developer messed up. The other, had a team of 20 developers, but their product was in such a state of technical debt, and they had brewed such a bad culture, they were looking for a CTO to re-architect their product, and rebuild the team (yes, fire 20 developers, and hire all new). There was also the case of the FinTech startup in which the CEO was manually updating financial data in the database to fix problems with the software. Yes, that company is managing someone’s money.

Participating in London founders groups, you hear things like “why would anyone spend more than $3,000 to build an app” or “we need a developer to build our spec for three months [and then we are done].”

The other half understand the value of tech. Usually, they had a tech co-founder, or the founder appreciated the importance of a tech team when building a tech company, even if she didn’t know how to hire and manage a tech team.

Urgency

The perception from across the pond is that in Europe people work fewer hours, have long vacations and are not interested in working hard to build something meaningful. Some of that is true; some is false. What it lacks is context.

My wife and I have been working here as hard as we did in the US. We thought it would be very different based on our misconceptions about Europe (maybe London is different, I don’t know).

What is missing here is a sense of urgency. Maybe entrepreneurs in the US have too much urgency. If they don’t launch their product in the next 3-months, they will miss the only window of opportunity to build a billion dollar business. That’s how many think in the US. A ridiculous way to approach company building (or any software project for that matter).

However, if the US is a 100% on the urgency scale, most entrepreneurs in London are in the 20%, even when they are working 80-hours a week!

I’ve met with hard-core entrepreneurs working their butts off to build a business. However, they were scheduling meetings with customers for 3-weeks from now; or trying to recruit a senior machine learning engineer and the phone screening was not until next month.

There needs to be a doubling of the urgency rate. The best candidates will get offers the quickest. The customer that says is interested in your product can change their mind. The investor that said he wants to invest cannot go cold. Get the check. Close the deal. Hire the candidate. Faster.

Thinking Small

Thinking small comes in two forms for me: 1) addressing a small market, or 2) focusing on short-term revenue in detriment of long-term value creation or market-share.

The symptoms of those are how entrepreneurs in London (most, but not all) try to approach the problem. A few stories from the last few months:

A startup is creating a bad-ass AI simulation technology that could save the aerospace industry tens of millions when building prototypes and accelerate from a two-year test to a month test. Big-bold vision. Startup fund-raising goal: $75K!
Multiple companies from accelerators *at* demo day: “We are not fundraising yet, and we’ll start next year.” (You might get kicked out of an accelerator program in the US if you are not fundraising at Demo Day, with the exceptions that you closed your round already or you are in acquisition negotiations).
Startup that found product-market fit: We just raised a $2M Series B (after a $2M Series A) to accelerate growth and avoid diluting our shares too much.
Startup with everything working (including product-market fit & revenue): We are not expanding into new markets yet, we are rebuild our experience (this startup in the US would have raised $50M to go big).

Some of them also think small on how they build their team. They will avoid hiring an exception Sales person because she was asking 25% more than a good salesperson. Or, they will prefer to hire 3 junior engineers for the price of two experienced ones.

I know there is more than one way to build a startup. You can indeed bootstrap, build a modest recurring revenue business, and get some decent income out of that. But that’s not the VC game. If you want to play this game, you have to use the rules of the game.

On the addressable market…

If you are going after a market that has a potential of $50M revenue, you are in trouble. You’ll not get 100% market-share, so your potential revenue is much smaller than that. Not all VCs think alike, but quite a few of them don’t invest in a business that could not (theoretically and assume good odds) achieve $100M / year in revenue by year 7.

It’s fine to start with a market that has a potential of $50M in revenue, as long as that’s your “Pilot market” and you can explain what phase 2 will be after that; and phase 2 better be a $500M/year opportunity.

Like Glenn Kelman, CEO of Redfin, once said: If you are going to build a business, build one in a very large market that affords you a lot of room for mistakes. Or, Expedia’s & Zillow’s founder Rich Barton quote on how to create a big lasting business: “Find a big pond to go fishing in and find really talented people to fish with.”

I’m a believer that any idea — no matter how small it starts — can be broadened and expanded to encompass a billion dollar opportunity.

Short-term revenue

Honestly, the thinking around here reminds of the thinking in the US about consumer tech circa 2005. The US was coming out of the startup winter after the tech bubble and ideas of the type “build an audience and figure out revenue later” were discarded immediately. Until a few companies started to be extremely successful building audiences first and revenue later. Not many expected them to acquire (in such a short period) so many users. Startups like MySpace, Facebook, Twitter, Tumblr, Flickr, YouTube. They were bleeding money, but the users kept coming. The critics were ferociously calling it a “Bubble 2.0”. However, some investors knew this time was different. The Internet was much bigger, and the advertising dollars were shifting at a faster pace than ever to online.

Another big wave happened: SaaS. As a company building a SaaS business, you front-load your R&D, sales, and marketing cost, but you’ll get a steady stream of revenue over a prolonged period. Now the success of SaaS is as obvious as the success of mobile but read Scott Kupor post about it in 2014 justifying why SaaS company need to spend a lot of money and be in the red for a while to be successful.

I don’t think most entrepreneurs in London get either concept; the idea of the value of large audiences or the idea of losing money for years in SaaS business models. We are at the thick of the SaaS transformation in London, and a few more years everyone will get it. But the direct-to-consumer massive advertising audience play is not acceptable here. I can’t see anything like Snapchat or Pinterest being created around here for the sheer lack of support from investors, and some SaaS business might be slower here because the investors will push for profitability sooner.

To be clear, what I describe above is one way to think about how to build companies. Like I said before, there are other ways. Do whatever works for you.