Now Japan’s overall economy seems to be following suit. This week’s Economist offers a fantastic assessment on Japan’s sudden rebound. Only The Economist could link references to Superman, Soapland, and a Scarlett Johansson / Bill Murray film in a macroeconomic report and keep a straight face.

With a cover of Prime Minister Abe in superhero flight, the series recounts Japan’s economic awakening since the last elections: a galloping stock market, GDP growth of 3.5%, $100 billion in stimulus, an export-boosting currency devaluation, adherence to the Trans-Pacific Partnership espousing free trade, and more.

Given the Bank of Japan’s deliberate policy toward inflation, it’s no wonder that the U.S. government complains about currency manipulation, nor that many investors like Mark Cuban have made a massive short bet on the yen.

For a variety of reasons, I have a strong personal affinity for Japan. Yet beyond personal attachments, I believe the country’s renewed tech sector offers a ton of inspiration for France.

Let’s start with mobile gaming. Platform companies Gree and DeNA have become household names in Japan and are increasingly looking internationally. Both firms have cracked the nut of freemium, with revenues of $422m and $567m respectively per quarter, profit margins exceeding 30%, and ARPU figures that put Zynga to shame, even at its peak (don’t miss Tom Limongello’s piece on the Japanese art of monetization).

Meanwhile, GungHo, the developer of the jawdroppingly successful mobile game Puzzles & Dragons, generated $113m in April alone and now boasts a market cap that exceeds Gree, DeNA, and Zynga combined (surpassing Nintendo even).

Take a related topic which I submit poses tremendous potential: HTML5. Japan’s Docomo embraces this new standard, throwing its weight behind new O/S Tizen and Buongiorno’s efforts here. KDDI Mugen Labo, the tech incubator by Japan’s second largest telco, has set up a special application category for HTML5-engineering startups.

With an eye toward building a global leader in e-commerce, in 2010 Rakuten CEO Hiroshi Mikitani embarked on a program of global m&a (including among several the acquisition of PriceMinister). And one day Mikitani unleashed an edict of “Englishnization”, suddenly requiring all company business to be conducted in English.

And it’s not just the proven success stories that are looking abroad. Many seed-stage firms in Japan exhibit global ambition from the start (this great post from SD Japan zooms in on five of them).

More generally, take design. The same simplicity principles of wabasabi that so inspire Jack Dorsey lend themselves to the design of user interfaces on some of France’s best consumer tech: mobile apps like Bankin, or hardware like Invoxia’s voip console. There still exist too few examples like this in France, though I am encouraged by the upcoming generation of French entrepreneurs with global aspirations and audaciousness in mind at inception. Hopefully both the government and financing sector will catch up.

A word of caution, of course: Japan’s growth trajectory will probably not be full-ahead, full-time, and witness a 70% stock market rise every 6 months. There will likely be some throttling. The weakening yen may dampen the lofty valuations of foreign acquisitions. Already Gree is retrenching a bit from its international adventures in China. What matters is the long-term trend. And right now, the fundamentals look positive.

In an interconnected world, insularity leads to economic ruin, wrote Mikitani in his new book.

Yeah, I’d say France could draw a lesson or two from Japan.

I enjoy reading Buffet’s yearly letter to shareholders in introduction of BRK’s annual report. And while I’m still sifting through some of the euphoria of the shareholder meeting for his customary pearls of wisdom, one gem struck me as particularly relevant for stakeholders in the current state of France’s VC market, to paraphrase Buffet:

If consumers try to invest in every product pitched to them, they will do very well for their money manager and not very well for themselves.

French taxpayers tempted to blindly plow their savings into tax-optimization products, I’m thinking of you. Undoubtedly due to a burdensome fiscal environment, France boasts one of the largest and most developed industries of tax advisory intermediaries in Europe. For anyone owing income or wealth tax in France, a panoply of financial products exists to help them reduce the tax bill: charities, support for the arts, overseas territory investments, real estate schemes, and even tech VC funds. I’ve already written extensively about this last option – so-called retail VC funds – so I won’t rehash all the gory details.

However, I believe that we have entered a phase where many of these retail funds have become Zombie VCs. Danielle Morill wrote a trenchant piece on Zombie VC funds, complete with warnings for startups and even a list of candidates for the zombie status. I also recommend Fred Destin’s follow-up to this piece with his handy guidelines for entrepreneurs to spot an active VC firm.

Beyond the relevance for startups raising money, in France a wariness of zombie VCs is also relevant for taxpayers considering investing in such a fund.

Danielle and Fred explain it eloquently (and these recent pieces in The Economist and the FT add some additional color, or should I say pallor?). But in a nutshell, a zombie VC is a fund that has stopped or severely curtailed the lifeblood of its business: investing in startups promising high potential, and culling those that don’t, all in the pursuit of financial performance.

When a VC runs out of money, it of course can no longer invest in new companies. Often those entering zombie status will preserve their remaining funds to support their existing portfolio.

The nature of France’s retail VC model, however, makes the onset of zombie status particularly acute. First, retail VC funds operate on a yearly, even semi-annual, fundraising cycle (whereas conventional institutional VCs raise larger funds on average every 5~7 years). The precipitous decline in retail VC fundraising (due largely to fiscal changes discussed here), combined with the economic downturn, has suddenly thrust the majority of France’s VC sector into risk of zombie status.

To make matters worse, a French retail VC zombie has little incentive to cull the underperformers in their portfolio. Better to keep such firms on drip financing status, just alive enough to justify continued billing of management fees to the funds’ investors (once a portfolio firm is written off, the VC can no longer charge management fees on that asset). The result is the creation of a class of Zombie Startups and a huge disservice to the funds’ investors who are paying fees to someone to throw good money after bad.

As the FT points out, “The problem with these ‘zombie’ funds is that if nothing is happening with a private equity fund, the very concept of charging a 1.5% to 2% fee for managing it deserves to be challenged.” (2.5% to 4% in France, by the way).

Taxpayers: do your research before sticking your necks out.

It is hard to understand exactly what this means. Judging from the Euronext press release, the initiative appears to represent more of a hierarchical restructuring of reporting lines than a new dedicated exchange.

Apparently, the Marketplace will encompass companies that are listed on the B & C compartments of Euronext, as well as the Alternext listed companies in Paris, Amsterdam, and Brussels, a total of 800 public companies, essentially small and mid-caps. It does not appear, however, to involve any kind of merger or aggregation of the three exchanges.

If this move merely represents an administrative reshuffling, that would be a pity. However, to the extent that this launch represents a concerted effort to improve accountability, visibility, and by consequence, trading volumes, there may well be some benefits in this.

I’ve long been a skeptic of small French tech companies going public too early. The Alternext tends to be the market of choice for such companies: it is lightly regulated (technically ‘unregulated’); there are a handful of local investment banks that will serve as listing sponsor for a modest fee; and raising capital in the range of 10M€ is fairly straightforward (albeit still requires a formal filing process and a successful sales effort of securities to the public market).

My beef with small firms going IPO is that after the initial capital injection occurs, many companies fall into some sort of purgatory. The trading volumes, and hence liquidity, are low. Two detrimental consquences ensue. First, low trading volumes often handicap a company’s stock price, resulting in a market cap that sits below the intrinsic value of the firm. The danger of a consistent situation of undervaluation is its demotivating effect on management, employees, and shareholders. It also taints any discussion with potential strategic acquirers with whom hypothetical negotiations would inevitably anchor toward the low market cap.

The dirty little secret of French VCs

The second consequence is a dirty little secret in the French retail VC world. It is not uncommon for French VC funds to push their venture-backed companies toward an IPO. The ostensible justification is the quest for an exit. However, barring a few limited exceptions, an IPO on these smaller markets is not an exit. Far from it. The trading volumes are simply not sufficient to enable a significant shareholder like a VC to sell its block of shares, even over the course of several years. Yet, this is where the dirty little secret comes in: VC’s that IPO a portfolio company while remaining a shareholder can still assess management fees to the funds’ investors. Furthermore, since management fees are calculated on the net asset value of assets under management, a VC can effectively increase its take in management fees if the IPO valuation of the company is higher than its initial investment cost (which is almost always the case). It’s the best of both worlds for a VC management company: boast about an exit while still milking high management fees.

A re-branding effort of the Alternext and its lightly traded counterparts B & C of the Euronext, with a veritable commitment to provide resources to and to promote the exchanges’ listed SMEs, would be a welcome boon to the investors and the companies who are floundering today on the public market.

1. Send me a blind teaser, aka Project X, containing such a paucity of information on the project that an initial judgment is impossible without signing your attached NDA.
2. Send your pitch to me in an email addressed as Dear Sir or Madam, or Monsieur/Madame.
3. On an even sillier variation of 2, send me your pitch in an email with numerous other VCs in the To: field.
4. Following exchange of pitch deck and upon my invitation, spend a fruitful first meeting with me, of which the conclusion is a clear decision to not invest, though not without a fair dose of constructive ideas for your business. Then a few months later, contact my partner behind my back with the same investment pitch.
5. Prominently pitch your project as having the Oséo qualification Entreprise Innovante. Believe it or not, I still frequently receive pitches where this point is displayed front and center in boldface in executive summaries. If the fact that you completed some government forms to receive an arbitrary “innovation certification” by some bureaucrat is your project’s best attribute, it’s not suitable for investment from a performance-focused VC.

Of course, nowadays I don’t have to travel all the way to New York for a bagel. Paris seems to be suddenly crawling with snack shops selling supposedly authentic NY bagels and pastrami sandwiches (less authentically, our city’s not crawling with the most frequent patrons of the NY shops: cockroaches).

So as a bagel and pastrami consumer, I should be delighted, shouldn’t I ? Well, actually, no.

Granted, for Paris to become a more international city, importing some trendy foreign restaurant concepts is both necessary and welcome. But this American copycat phase has gone too far. First came the Los Angeles-style food trucks like Le Camion Qui Fume and Cantine California (hats off to these pioneering expats who validated a market). Then the late adopters joined the fray, renovating traditional French brasseries into wanna-be Brooklyn-style hipster cafés (TriBeCa on Rue Cler, I’m thinking of you). And now, in proof that Paris has finally jumped the shark on this concept, a place on rue du Strasbourg St-Denis called PNY (Paris New York) opens up offering burgers, cheesecake, and “yumise”.

If Paris reduces itself to a mere fast food follower in the culinary sector, what’s next on this greasy slope ? Next thing you know we’ll be awash in unversity sweatshirts, startup accelerators, and government-sponsored Silicon Valley replicas. Oh wait…

The danger is that an egregious absence of original thinking manifests itself in questionable projects like the French Google-copycat, Quaero, or more recently, the Commission Innovation 2030. Announced just last week, the French government created the Commission Innovation 2030 headed by former atomic energy agency chief Anne Lauvergeon and 19 other old white Enarques (grads of the Ecole Nationale d’Administration, finishing school for top bureaucrats) whose mission is to identify France’s next Apple.

Maybe bagels every breakfast and burgers every dinner will be easier to stomach.

Grant’s research, on which he elaborates in his upcoming book, Give and Take, (and encapsulated in a great article by Susan Dominus in the NY Times Magazine), espouses the notion of how giving unconditionally to others can unlock professional success.

Grant identifies three categories of people through this lens: Givers, Matchers, and Takers.

Givers give without expectation of immediate gain; they never seem too busy to help; they share credit openly and mentor generously. Matchers view the world more in terms of reciprocal checks and balances, giving generously to people who they think can help them or when they can see how they might receive something of comparable value in return. Takers exhibit the Heads-I-win / Tails-you-lose mentality, are averse to sharing information openly and are defensive about their turf.

Grant advocates that helping lavishly without any expectation of payback motivates the Giver in a way that spurs increased productivity and creativity, effectively returning dividends far beyond the time and energy spent assisting other people.

Reading about Grant’s research triggered me to think of its applicability to venture capital. While I had never thought in terms of Grant’s three specific labels, my preconceived belief was that good VCs tend to be Matchers. They build relationships early with entrepreneurs with an eye toward future deal flow. They build relationships with other VCs with future co-investment needs or opportunities in mind. They build relationships with key actors in an ecosystem that may one day become suppliers, customers, advisors, partners, or acquirers of their portfolio companies.

I’ve generally modeled my own professional behavior on the Matcher model. And frankly, I submit that in Europe this has proven to be a differentiator for me. It amazes me how many VCs I’ve encountered that tend more toward the Taker profile. Taker VCs seek to come out ahead in every business exchange. My guess is that the VCs reading this do not fall into the Taker category, but that many entrepreneurs reading this have experienced an interaction with a Taker VC.

My thoughts are still evolving on this topic. While I could never accept being a Taker as it’s simply not in my nature, I cannot claim to be an altruistic saint of a Giver either. Inspired by Grant’s convictions, I’m going to think more about how I might exhibit more Giver-like behavior.

So ask yourself, entrepreneurs, is the VC with whom you are engaging a Giver, Matcher, or Taker? And similarly in the spirit of personal advancement, I welcome constructive suggestions on how I can be more of a Giver VC.

Seventeen year-old memories of such an uninspiring waste of time of money that Hollywood tricked me into taking my girlfriend to see on date night were strangely unearthed last week when I read about the fate of Quaero.

Quaero, which means I Seek in Latin, was an initiative launched during French President Jacques Chirac’s administration with ambition to become the European ‘anti-Google’. It’s safe to say that France never found what it was looking for with this one.

I’ve already written about the futility of government attempts to carbon-copy Silicon Valley in their home territories. Just as previous attempts to duplicate the Silicon Valley ecosystem have ended in embarrassment and wasted resources, government efforts to duplicate specific companies without regard to market dynamics often meet similar fates. The latest example of this type of embarrassment and wasted resources made headlines last week in France upon the release of Oséo’s post-mortem of the Quaero project.

Even back in 2005, a government initiative to create a search engine counterweight to Google, was as silly as it sounds today. I recall mocking the idea at dinner parties back then, but I had no idea how stubborn and wasteful the government would prove to be in this distraction.

The verdict was rendered last week, paradoxically in the form of a celebratory luncheon: a leviathon of 32 industriel companies led by the French government collectively spent over five years and 198M€, half of which came from French taxpayers.

Oséo is arguing that the project spawned multiple ‘technological ruptures’. Possible. But over-engineered pieces of soon-to-be-obsolete technologies without a market is my bet. Even if some parts are salvageable (and I sincerely hope the full 198M€ was not squandered), the project is an epic fail. It’s not Oséo’s risk-appetite I’m against; on the contrary, France badly needs a culture of calculated risk-taking, and I commend Oséo’s attitude here. The problem is that Quaero is a fail (not failure, which is more respectable, but fail) in terms of efficiency of capital and opportunity cost.

You see, when the private sector invests in innovation, its capital can be patient (also like Oséo is proud to claim), but let’s not confuse patience with exigeance. Private capital demands a financial return on its investment. The higher the investment and the more time goes by, the higher the absolute return must be. When the leaders of an ambitious project request additional funds, private sector investors will carefully scrutinize signs of progress and confirmation of continued ROI potential before opening their wallets.

The opportunity cost of such a monumental misguided effort is that it sucks the air out of other innovative projects in adjacent domains. The talented individuals working on Quaero were off the market for five years. A project of highly-complex technical components can draw some of the brightest engineers away from other things. Former CEO and founder of Autonomy, Mike Lynch expressed it this way:

“Not only did [the Quaero project] fail but it had a scorched earth policy — no one would invest in related areas in Europe, thus it killed areas of innovation.”

Oséo remains undaunted, announcing its appetite to sponsor other similar ‘radically innovative’ programs. While I sincerely appreciate the government’s badly needed financial support to innovation in this country, I submit that there are more effective ways than dispensing large sums on projects that require unwieldy collaboration of multiple enterprises (hint: a week ago I wrote about just one).

Although I have come out clearly skeptical of government attempts to replicate Silicon Valley in France, I do endorse such region-sponsored investor/startup meetups as a cost-effective expenditure of state funds.

Why ? Well, for historical reasons, France is an extremely centralized country. The centralization model began with the public sector but spilled over into the business sectors as well, with virtually everything passing through Paris. The old quip that the fastest train connection between Bordeaux and Marseille runs via Paris actually still holds true (think running two legs of an equidistant triangle to reach the third point). Even inside Paris city limits, practically all the VCs and many business law firms have their offices in the (culturally-challenged) 8eme arrondissement; the insurance companies are all in the 9eme, and so on…

This excessive centralization poses challenges for outsiders to rise in visibility. It’s probably the most legitimate reason that French startups relocate to Paris. As I explained in this space last week, the proximity concept is very powerful in creating a critical mass for creative combustion. Additionally, for startups selling to enterprises, the decision-makers of their prospects may be disproportionally based in Paris.

Yet, creativity also happens outside of Paris. In fact, being “on the fringe” in some form or another is often a key ingredient in producing new insights. It is where Clayton Christensen’s disruptive innovators are born. France’s regions are in many ways on the fringe of the mainstream groupthink of the Paris metropolitan area.

Moreover, each region has unique strengths that may be conducive to certain types of innovation. Languedoc-Roussillon, to cite just one example, offers an easy proximity to Spain (and Catalunya), an international community of talented people, some advanced educational and research institutions, and an international airport.

Hence the beauty of these regional meetup conferences is that in one day investors from out of town can obtain a synthetic glimpse of some of the most promising local startups. Region-sponsored incubators have already performed an extensive pre-selection and coaching process, an opinion I trust as they’re well-embedded in the local fabric. So hats off to the fine folks over at Cap Omega for their tireless commitment to promoting the Languedoc-Roussillon region’s startups !

{Disclosure: I happen to be particularly biased toward the Montpellier area for its favorited destination among professional triathletes and for its climate which resembles fairly closely my native Northern California. A West Coast reader of last week’s piece on Silicon Valley reminded me of this tune. Props to anyone who can guess it without searching: From LA to the Bay – what you say – all day… everyday… any damn day. Take a look around, we got the whole world locked down. Going on and on, it don’t stop, won’t stop, can’t stop…).

]]> http://markbivens.com/m/archives/regional-incubators/feed 0 http://markbivens.com/m/archives/silicon-valleys-secret-sauce http://markbivens.com/m/archives/silicon-valleys-secret-sauce#comments Tue, 19 Mar 2013 14:00:29 +0000 mark bivens http://markbivens.com/m/?p=1525 Over the past few weeks in this space, inspired by Fleur Pellerin’s current government initiative to replicate Silicon Valley, I’ve recapped some of the history of the region and reconsidered the wisdom of attempts to reproduce the Silicon Valley model elsewhere.

I submit that trying to imitate Silicon Valley is futile. However, France’s government and business community can derive inspiration from the factors that rendered Silicon Valley a success. Regions finding the most success in creating clusters of innovation have been those that do it on their own terms and play to their own unique strengths, where the government facilitates an environment that doesn’t penalize failure and then gets out of the way. New York City comes to mind as one prominent example. A local innovator there whom I had the pleasure of meeting just last week pointed out that it was only once New York ditched its Silicon Alley moniker that the city’s tech entrepreneurial ecosystem really began to take off.

So how can France derive inspiration from the Silicon Valley model ?

This is a tough question for two reasons. First, nobody can identify with certainty all of the factors made Silicon Valley such a success. There exists a certain degree of chance and cognitive dissonance rendering attempts to copy Silicon Valley impossible.

Secondly, one key ingredient to SV’s success – its excessive proportion of people with crazy ambition – cannot be so easily exported. According to an analysis of LinkedIn profiles, residents of Silicon Valley dream bigger than the rest of the world. People who include the keywords “change the world” in their LinkedIn profiles are far more common in the San Francisco Bay Area than anywhere else (source: Venture Capital Dispatch).

Perhaps a better question would be: which ingredients of Silicon Valley’s secret sauce might be transferrable here ?

Two prominent factors come to mind which might be relevant for France to carefully consider: i) proximity, and ii) immigration. (Note that I’ve deliberately decided to set aside a third factor – fiscal environment – in order to avoid summary dismissal of these constructive suggestions by bureaucrats that may be reading this).

Proximity

By proximity, I mean the proximity of educational institutions, businesses, and the design community. Proximity of this diverse group is important because when talented people of multi-disciplinary expertise come together, the odds increase exponentially for serendipitous encounters that spawn innovation. Subsequent to the traitorous eight’s creation of Farichild Semiconductor, two of the most familiar names (Robert Noyce and Gordon Moore) went on to found Intel right down the street. Not far away in Menlo Park, a third founding father by the name of Eugene Kleiner teamed up with a veteran from HP in nearby Palo Alto, Tom Perkins, to give birth to one of the world’s most renowned venture capital funds.

A more recent example and arguably one of the most successful entrepreneurial endeavors in history, Google’s ascendancy stemmed from the chance encounter at Palo Alto’s Stanford University of Sergey Brin and Larry Page. The proximity of institutions like Stanford and UC Berkeley facilitated the recruitment of high-caliber engineers and managers as the company grew, including for example, Stanford graduate Marissa Mayer, who conceived the Google home page’s elegantly simplistic design.

The design element cannot be underestimated either, especially in innovation today. Thanks to the proliferation of open source code bases, cloud infrastructures, open standards like html etc., creating a new high-tech offering is remarkably accessible. The innovation of a product or service lies not in the complexity of the underlying technology, but rather in its user experience. Design, or its more evolved form as creative intelligence, forms the heart of user experience, and Silicon Valley has always been rife with artists, designers, and creative conceivers.

Immigration

Immigration is a less obvious but equally important ingredient. Brad Templeton, Director of the Electonic Frontier Foundation, wrote an excellent piece last year in Forbes magazine, The Real Secret Behind Silicon Valley’s Success, in which he recounts his epiphany during a high-end conference for PC and internet executives in the late 90s. A speaker wanted to make a point about immigration to the room, which was full of founders and top executives from high-tech companies, instructing, “If you were born outside the United States, please stand up.” And more than half of those in the room stood up.

Researchers from Duke University concluded in a report that immigrant-founded companies created over 450,000 jobs in 2005, and that 52% of startup founders in the U.S. were immigrants. Most of these people gave up a life somewhere else to come to Silicon Valley in order to live the entrepreneurial dream.

There is something in an immigrant’s DNA that lends itself to entrepreneurship. Perhaps it’s an absence of fear of new adventures, an ability to operate on the fringe of society, unconstrained by social norms and conventional thinking, the sink-or-swim pressure of starting over, or some combination of all of these factors plus others.

So what are the lessons for France ?

I submit that one lesson is to establish a smarter policy on immigration that doesn’t hamper the retention of talented entrepreneurial individuals, regardless of their familial attachments to the hexagon.

Another is to think carefully about the gravitational importance of proximity. The rumored choice of Saclay as the hub of the Paris Capitale Numérique initiative grossly neglects the proximity concept. Why the government overlooks the one area that ticks almost all the boxes, the Sentier district in central Paris, (which Liam Boogar wrote about a while ago) – a place with already a critical mass of entrepreneurs, conveniently accessible, and adjacent to the heart of the country’s fashion and design neighborhood – still escapes me.

As we like to say in France, here’s hoping the mayonaise takes…

]]> http://markbivens.com/m/archives/silicon-valleys-secret-sauce/feed 1 http://markbivens.com/m/archives/voulez-vous-yahoo http://markbivens.com/m/archives/voulez-vous-yahoo#comments Tue, 12 Mar 2013 14:00:41 +0000 mark bivens http://markbivens.com/m/?p=1515 A worrying phenomenon is brewing among a handful of French companies that are using the brouhaha at Yahoo! as an excuse to forbid working from home. Unless you’ve miraculously escaped the tireless media coverage, you’re aware that Yahoo! CEO Marissa Mayer announced last month that she was abolishing the firm’s work-from-home policy, saying that to create a new culture of innovation and collaboration at the company, employees needed to come in to the office to report to work.

I wonder if this move would be scrutinized so relentlessly by the media were Yahoo!’s CEO not Marissa Mayer but rather some boring old white dude. But that’s a debate for another day… (and I just noticed well-covered by Sarah Lacy in Pando Daily last week).

Mayer’s new policy at Yahoo! is her way of shaking things up. And Yahoo! needs shaking up. The company faces a unique set of challenges, for instance the number of fiefdoms had developed which were hindering collaboration. Perhaps the physical presence rule will prove effective in re-kindling the creative cohesion that made Yahoo! exciting once upon a time; or perhaps it’s a misstep. Time will tell.

However, it strikes me as a little too convenient for traditionally staid, hierarchical French firms to seize upon the Yahoo! policy to serve their own employee empowerment-repressing habits. This smacks of the same disingenuous vibe conveyed by Jean-Marc Ayrault when he said last week that the French government should “take inspiration from the Swiss” in reference to the recent successful referendum in Switzerland to limit corporate executive remuneration (so if we’re following the Swiss model now, Switzerland is abundant with countless other astute economic measures from which to draw lessons, Monsieur Le Premier Ministre).

With all due respect, “Groupe Français SA“, you are not a Silicon Valley firm like Yahoo!. You have never named a women to the post of CEO. You espouse structured corporate hierarchies with an omnipotent and autocratic management layer whose objective is to transform human resources in human assets: cogs in a machine.

Only once you have built your credibility of genuinely exploring ways to inspire your employees will you earn the right to back-pedal on perks like telecommuting. If your goal is genuinely as you claim, to improve employee performance, then I encourage you to first try some techniques that have demonstrated fantastic success in Silicon Valley, such as flex-working, flatter organizational structures, universal stock options, free lunch, free smartphones, or even somewhat radical ideas like the unlimited vacation policy practiced by Evernote, Netflix, and even France’s very own Kwaga.

Witnessing these government efforts re-surge over the years, of which France’s current incarnation is dubbed Paris Capitale Numérique, I submit that two fundamental questions should be addressed: i) should governments even try to copy Silicon Valley, and ii) what is the secret sauce that makes Silicon Valley such a bastion of entrepreneurship and innovation ?

Regarding the first question, my opinion is that the answer should generally be no. Silicon Valley today encompasses such a unique confluence of factors — some planned, most serendipitous, and many even difficult to identify — that government attempts to create a replica of Silicon Valley in their home market will inevitably end in futility.

For the Silicon Valley model is one that has evolved over decades. No European government has demonstrated an ability to cultivate a 30-year project. Furthermore, Silicon Valley is not the result of a centrally-planned state endeavor. The government, more specifically the State of California, created an environment that fostered the emergence of Silicon Valley, in large part by trying to do no evil. But it was predominantly the private sector and an abundance of rugged individuals that built the foundation for today’s Silicon Valley.

An experienced European VC that I respect a lot reminded me of The Netherlands’ misplaced ambition to replicate Silicon Valley in 1997:

In 1997 the Dutch Government thought of stimulating IT entrepreneurship by setting up a Government supported VC fund called Twinning. All those hype days….. Anyway, like so many other initiatives of governments also this idea ended in a mass failure. In my opinion there is no way of just copying the Silicon valley concept. That is an unique situation, the environment, the infrastructure, the knowledge, experience, but also the heritage, the long experience and history. No way of copying it in 5 years. No way of copying it anyway!

Don’t try to copy. Think different.

None of this wisdom has prevented numerous regions from trying. Silicon Alley, Silicon Prairie, Silicon Roundabout, Silicon Gulf, Silicon Welly, Silicon Beach, Silicon Border, Silicon Desert, Silicon Glen, etc. and those are just the ones beginning with the word Silicon, the list is actually quite ridiculous.

Yet the areas with the most success in creating clusters of innovation have been those that do it on their own terms and play to their own unique strengths, where the government facilitates an environment that doesn’t penalize failure and then gets out of the way.

New York City has emerged as the world’s second largest market of VC-backed digital media startups thanks largely to the area’s fashion and media sectors (and ironically the Silicon Alley term has fallen out of fashion). Mayor Bloomberg’s policies have supported a vibrant ecosystem of lifestyle and design.

Los Angeles is now gaining status as fertile ground for games startups, its proximity to the Hollywood film studios undoubtedly playing a key role.

Israel boasts the highest concentration of high-tech firms per capita in the world, often companies developing cutting-edge communications and security technologies for export worldwide.

I submit that governments should not seek to copy Silicon Valley, but rather take inspiration from the factors that rendered it a success. In the third and final post of this series on Silicon Valley, we’ll look at the most relevant ingredients of the region’s secret sauce which might inspire France in its goal to spur innovation.

It almost sounds like I’m overstating the obvious when I think about it like that (and remember, this is the basic crawl-before-you-can-walk VC mind speaking). After all, the very set of standards that laid the foundation for the world wide web see their reincarnation in HTML5, in other words: HTML. Yet in a strange (and immensely pleasurable) sort of way, the iPhone kind of distracted us, playing the role of Pied Piper leading us back inside the walled gardens from which we had escaped.

Before you pigeonhole me as an app hater, let me gush a little: I love apps (especially of the Android variety), I spend time with apps everyday, and some of my best friends are apps. From the consumer point of view, apps are working fantastically (look at all the free stuff we’re getting), and I hope this continues.

But if we look at the state of affairs today: native apps are no longer working so well for developers. 80% of native app developers do not generate enough revenue to sustain a business. The long tail is not able to survive in the native app stores.

The beauty of HTML5 is its ability to level the playing field for developers. Its fundamental tenet as a web standard means that “applications” developed in HTML5 will be interoperable across devices and OS’s. Furthermore, with HTML5, developing an application does not require an expertise in Objective C, C#, etc. but rather only a basic understanding of markup language to create content. Kind of like how the original HTML let anyone publish a web page, and WordPress made anyone a blogger.

These democratizing tendencies of HTML5 are interesting from the standpoint of venture investing for several reasons. First, they will spur a whole range of new fields of innovation, and hence fertile ground for startups, such as in search, discovery, analytics, promotion, monetization, etc.

Secondly, a slew of wealthy vested interests are desperately seeking an escape from the clutches of the native app stores. For mobile operators, the future of customer engagement is on-device. The proliferation of multi-screen devices is just beginning. Solutions that provide a consistent and enjoyable user experience across all screens while helping the carriers stop being bypassed will look mighty tasty. For a startup, sitting in the path of progress of cash-rich global leaders facing transformation can be a pretty interesting place to be.

Additionally, the new worldview that is brought about by the openness and democratizing force of HTML5 will in and of itself represent a step function. The sky’s the limit on where the next insight will bring us (imagine if everyone were a mobile game developer…).

I’m writing this on the eve of the Mobile World Congress 2013. Scanning the program, I do not see HTML5 figuring prominently among any conference discussions, so I’m curious to see the extent to which this topic vibrates at this year’s congress.

Here’s a hint: it’s not Blackstone Valley in Massachusetts, nor is it Berlin, East London, and especially not Saclay, France.

A swathe of apple orchards and orange groves spanning Santa Clara County in Northern California is what gave Silicon Valley this original nickname. In 1953, transistor inventor William Shockley left Bell Labs, moved to Mountain View, California and founded Shockley Semiconductor Laboratory with the belief that silicon would be a better material than the conventional germanium for making transistors. Shockley was a brilliant engineer but proved a terrible manager, so in 1957 eight of his best engineers (including a character by the name of Gordon Moore) quit and went on to found Fairchild Semiconductor.

This is of course only one little excerpt of a fascinating story, but it seems timely to review the history of the creation of Silicon Valley as the French government embarks on (yet another) attempt to replicate Silicon Valley in France with its Paris Capitale Numérique initiative.

I’m a Silicon Valley native. My first residence when I entered the world almost four decades ago was in Tiburon, an island just north of the Golden Gate Bridge. Besides a brief stint in Tokyo, I spent much of my childhood growing up in Los Altos, a sleepy residential town smack in the middle of Silicon Valley. I attended the same high school as Steve Jobs and Steve Wozniak in Cupertino, albeit almost two decades later.

We knew our region as Silicon Valley (not “The Valley”, as people that never lived there sometimes call it). However, as kids, we didn’t necessarily realize that we were a part of something so unique. The high-tech boom of the 80′s was in full swing, though it was about designing microprocessors rather than designing mobile apps.

HP, VisiCorp, and Varian were like the Google, Facebook, and Zynga of the era. Entrepreneurship was a natural reflex, not something to be forcibly learned. I recall my first entrepreneurial experience at the age of 15 which began with a paper route and, encouraged by a more industrious neighborhood kid, evolved into locking up town-wide distribution for the local newspapers and subsequently hiring junior high kids for pennies to perform the actual delivery. The San Jose Mercury News was the big brand, but the lower-quality Peninsula Times Tribune proved a nice complement with its fatter margins.

Maybe it was due to the omnipresent earthquake risk (I recall the menacing San Andreas fault line ran right down our street), but the prevalent vibe was the cycle of creating, enterprising, destroying, and rebuilding. Of course there were the folkloric stories of tinkerers in garages launching tech companies. Less often reported were the far more numerous incidents of lifestyle entrepreneurs creating small businesses: dry cleaners, pizzerias, and ice cream parlours. And just as Fairchild Seminconductor later gave way to Intel, the ice cream parlours were disrupted by frozen yogurt shops. It’s no coincidence that of the three aforementioned Silicon Valley corporate titans of the 80′s, only one name is recognizable today – HP – and it’s not exactly a poster-child for the visionary companies list nowadays.

So as the French government launches its initiative in order to “stimulate France’s digital sector increase its international visibility,” I submit that it’s worthwhile to study how Silicon Valley came to be what it is today. Some lessons may be relevant for France, others less so. In the spirit of constructive brainstorming, which Fleur Pellerin has graciously welcomed, I’ll use this blog in a future post to expound on the confluence of factors which transformed the Valley of Heart’s Delight.

In a split second, this opportunity became a No-Go in my mind. I completely lost interest. Why? Because a startup whose founder has such a mindset is not suited for raising venture capital.

That doesn’t mean that the business does not have merit. Nor does it necessarily mean that the founder would not be a capable business owner (though it does raise questions here). It doesn’t even mean that it’s wrong or illegitimate for a founder to place his personal shareholding above everything else.

It does mean, however, that the personal goals of the founder and the inherent objectives of venture capital are incompatible.

The fundamental objective of a VC, in fact the fiduciary duty, is to generate an elevated rate of return on the capital committed to the VC fund by the fund’s investors. Since the risk is high (most startups fail to ever reach escape velocity), and since liquidity is low (most VC funds lock up their investors’ money for 10 years), the investors in the venture capital asset class expect a high return on their investment, often upwards of 25% or 30% per annum (here in Europe, our performance is woefully below this, but that’s another story…).

Accordingly, the pressure is on the VCs to deploy their capital into opportunities that, with the right leadership, market factors and financial support, can scale up to a level that can generate such rates of return. Let’s take the example of France. A typical French VC fund has to deploy around 5m~10m€ on average per portfolio company. Note that this is an average, as a good VC will usually stage investments and will only continue investing in portfolio companies that maintain strong prospects for success. If we take the midpoint of this average and assume a typical holding period of 8 years before successfully exiting, that means that the VC’s 7.5m€ investment needs to be worth 80m€ at time of exit. In other words, VCs need to be looking for companies that have the potential to reach a valuation approaching the 100m€ range and upwards.

For a company to reach this ballpark, it’s going to require the convergence of a lot of factors: ambitious leadership, the right product for a large and growing market, luck, etc. It’s also going to require capital, often at critical and unexpected moments (e.g. to finance acceleration of the business, or a cash crisis, or a strategic pivot, or an opportunistic acquisition, to name just a few).

If the founder is resistant to raising capital at these junctures — even if it’s in the best interests of the business — due to the impact on his personal shareholding, the company will fail to accelerate and cede ground to the competition, or miss an opportunity, or go into financial distress.

In the case of the company I mentioned at the beginning, given the stage of the venture and the initial funding needed, it would have been very unlikely that the founder’s stake would have diluted below 50% at the time of my initial investment. However, the founder’s state of mind that makes him view every opportunity through the lens of his personal shareholding percentage signaled to me that he was focused on the wrong thing, and that future conflict would be inevitable, regardless of the percentage at stake.

There is nothing morally wrong about a founder wanting to preserve a certain percentage of his company. It’s perfectly understandable. Furthermore, there exist plenty of tech companies that by not raising venture capital can not only succeed wildly but also enable the founders to make a lot of money, create jobs, and work on something they love. For that smaller proportion of companies that do fit the VC model, in my experience the best founders tend be more driven by value than by percentage.

By way of refresher, Retail VCs are the venture capital firms whose principal sources of funds come from tax-incentivized “retail” investors (i.e. French taxpayers). Such retail fund vehicles are a uniquely French concoction. Unlike conventional VC firms in Silicon Valley, for example, whose funding sources are institutional limited partners (“LP”s) like pension funds, insurance companies, endowments, and other corporations, retail funds come solely from a broad base of “unsophisticated” French taxpayers who receive a generous tax credit in return for supporting small companies.

France has two main types of retail funding vehicles: FCPIs (fonds commun de placement dans l’innovation) and FIPs (fonds d’investissement de proximité). Both vehicles offer the taxpayer an immediate 18% income tax credit and are free of capital gains taxes (a deduction off of wealth tax can also be an option). The creation of the FIP was intended to economically rejuvenate France’s regions, and accordingly, the vehicle is required to invest in young companies of a specific region, though not necessarily high-tech companies. FCPIs, in contrast, do not have the same geographical constraint but rather are required to invest in young companies defined to be “innovative” by the French government. FCPIs thus tend to invest more in high-tech startups, and over the last decade have represented the primary source of French VC funding alongside institutionally-backed conventional VC funds called FCPRs (fonds commun de placement à risque).

After a sharp fall in tax money raised in the prior year, the amount of funds raised be FCPIs in 2012 declined by “only” 28%, down to 184M€ in total. This substantial decline was no doubt propelled by the new French government’s tax measures which I warned about in an open letter to the President last September (cannot take all the credit as I certainly wasn’t the only one ringing the alarm). For the optimists that see reason to celebrate that the 2012 decline was not as precipitous as in 2011, I regret to break it to you that this probably does not signal a bottoming-out of the asset class but rather is likely due to the elimination of a different tax loophole called Scellier (a real estate vehicle) which used to compete for the same tax euros.

So what does all this mean for French startups?

The short answer is: it’s bad news for those hoping to raise VC funding in the near future. In the short term, it is likely that all retail VC funds (which still represent the lion’s share of the French VC market) are taking either of two positions: i) conserving their remaining funds for their existing portfolios, or ii) preparing to wind down their operations. If your startup is aready backed by a retail VC, it behooves you to find out which of these categories your VC is in. Perhaps France’s dropping to third place behind the UK and Germany in startup funding represents the canary in the coalmine of this gloomy trend.

There is, however, a silver lining to the storm clouds. First, some high-caliber French VCs are raising or have recently succeeded in raising conventional (FCPR) funds. Secondly, some VCs outside of France have demonstrated an appetite to invest in French startups of late. And as a last resort, one can always hold out hope that some alternative government initiatives will become viable substitutes over time to resuscitate the asset class.

]]> http://markbivens.com/m/archives/state-of-the-french-vc-union-bleak/feed 0 http://markbivens.com/m/archives/html5-now-carrier-grade http://markbivens.com/m/archives/html5-now-carrier-grade#comments Fri, 01 Feb 2013 13:48:37 +0000 mark bivens http://markbivens.com/m/?p=1457 CTO of Momac Alex Rutgers crafted a whitepaper years before HTML5 took the mobile world by storm on the technology’s compelling potential. It was thus with great enthusiasm that I learned that Alex found time to produce a sequel to his original paper laying out his vision for HTML5′s future evolution.

One interesting conclusion is that HTML5 is now carrier grade, and that we will likely increasingly witness mobile operators embracing the technology standard, for example for use in self-care or subscriber profiling applications. Download the full whitepaper here.

I’ve often felt like a lone voice in the wilderness on this topic, at least in France. Indeed, maybe the blogging habit comes more naturally in cultures that don’t frown upon self-promotion. However, I submit that regular blogging is about far more than shameless self-promotion; it’s about communication of thoughts, transparency in opinions, and beta-testing ideas with the sounding-board of your readers.

Despite my conviction, I’ve never been particularly effective in convincing my portfolio company CEO’s to adopt a blogging routine. Accordingly, it was with great enthusiasm and even a sense of vindication that I discovered this blog post called Why Every Entrepreneur Needs To Blog by former entrepreneur-turned-VC Charlie O’Donnell. Here’s my recap of the key benefits of blogging for entrepreneurs, largely inspired by Charlie’s post.

1. Being able to innovate requires both intuition and creativity. Regular blogging hones both skills, by training the mind to be more perceptive to patterns and recognize trends.
2. Writing things down forces you to sort your ideas with clarity, helping you to separate the signals from the noise in your mind before articulating them openly.
3. Blogging can establish you as a thought leader in your domain. It allows you to champion your startup’s space and the trends behind it. It’s a way to seed ideas with journalists, over time encouraging the press to seek your expertise on the dynamics of a market in flux.
4. It’s also a long-term recruiting tool. Blogging about your vision creates a continuous, long-term narrative that over time can represent your most persuasive tool to convince talented people to join you in your high-risk, low-pay adventure.
5. This narrative you repeat via blogging also of course builds your company’s brand, generates inbound interest, and creates sustainable competitive advantage.
6. Every startup in which I’ve ever invested was led by an entrepreneur that successfully formed a long-term relationship with me (and reciprocally, thanks to this relationship accepted me as a VC partner). Blogging is one of the best ways to craft such a relationship.

But my summary doesn’t do justice to the way Charlie has articulated the importance of blogging for entrepreneurs, so I encourage to you to read his post and reference it on your permanent bookmark list of internet wisdom.

Finally, for similar reasons, I submit that the importance of blogging extends to VCs too. Far from comparable to my blogging VC peers, I still try to practice what I preach by striving toward a weekly cadence of writing (most of which I archive here). I recall incredulously asking a very smart classmate in my electrical engineering undergraduate program why he switched into the English department to become a writing major. His response: “College is meant to be a time of self-discovery, and I learn more about myself every time I write.”

We were discussing a nascent but growing trend in the US and UK of companies offering a policy of unlimited holidays to their full-time staff. Yes, you read that right: unlimited vacation days. Take as much time off as you like, companies tell their employees. As long as you meet your annual objectives, we’re happy.

Too good to be true?

One could be forgiven for having such a first reaction. But this is exactly what companies like Netflix and frequent LeWeb participant Evernote, offer. The perk is genuine too, as the firms refuse to track holiday allowance. And according to them, the policy is not abused; it really works. As Evernote CEO Phil Libin told the Financial Times in an interview on the subject:

“Getting a job at Evernote is tough and people want to be there. If you take the attitude that being in the office isn’t a punishment, then spending days outside the office isn’t a reward.”

Could this ever work in France?

Maybe I am being too idealistic, but I’d like to believe that this concept could work in France too (I’m unaware of any serious implementation of this in France to date but would be delighted to hear if you know otherwise).

Granted, a number of systemic hurdles would need to be overcome. The largest may well be those of business culture. The relationship between management and employees in most French companies tends more toward adversial than collegial, or at least there’s a clear line of demarcation between management and staff. This institutionalized corporate hierarchy creates a practically uncrossable chasm for most employees. Why should an employee expend extraordinary effort if they don’t feel part of something bigger ? Worse yet, many companies exacerbate this two-speed system by depriving the proletariat of the very privileges that management might enjoy, be it stock options, flexible working hours, or heavens, even unaccounted holiday periods.

Stringent labor regulations will undoubtedly be cited in rebuttal. And although the recent labor reform accord between government and unions takes a step in the right direction, companies still face challenges and uncertainty in reducing headcount. What if, employers might ask, the employee turns out to be a bad apple and abuses our vacation policy?

I suppose the risk of abuse is slightly higher in a culture where people do not necessarily define themselves by their vocation. But I’d also like to believe that if a company embraces trust and empowerment of its employees, the vast majority of them will raise their game for the company. We just need a few early adopters to break the ice. The tech startup community strikes me as particularly well-suited to innovate here. Any takers?

In the web and mobile companies whose products follow consumer buying patterns, the short month of February translates directly into fewer days of consumption, and thus an inevitable dip in revenues. For the enterprise software companies, advertising models, or generally those focused on a B2B offering, the dip often manifests itself straight away in January. Since this latter category represents the majority of our current portfolio, I am more sensitive to it and thus have been giving it a fair amount of thought.

One obvious explanation is that January arrives on the heels of fiscal year-end for most companies. This is of course a time of year that business prospects allocate their final remaining budgets for the waning year, or more often make decisions on their purchasing for the next one. Indeed, one of the knocks on the enterprise software license business model (before the recurring SaaS model became so in vogue) was that a software vendor wouldn’t know if they had a good year until late December, when the flurry of seasonal decision-making final arrived.

Yet from my observations across a portfolio over the years is that there is another phenomenon at play here, and it has to do with salespeople.

I’m fascinated by good salespeople. Part of it is personal. I once thought that I was a good salesperson… until I met a real one. One salesman in particular practically singlehandedly turned a company I founded in the 90s into a success. Another individual that strikes me as an amazing salesperson as I discover his story through his recent notoriety in the press is John McAfee. Here’s a guy that convinced people to pay shipping and handling fees for a “free” magazine subscription, and later applied similar creativity to shrewdly crafting a business model out of giving away free antivirus software.

Incredible salespeople like this are a rare breed, yet are often the lifeblood of any startup. Which brings me to my second hypothesis about the common Q1 revenue dip in startups. For this is also the time of year that companies update their sales remuneration structures. It feels like salespeople disappear for two weeks to run advanced Excel Solver models to determine the optimal mix of product and market segments they should target in order to maximize their new bonus plans.

That’s the beauty of strong salespeople. Properly align their incentive structures with company goals, and you have a powerful machine.

When I look across our portfolio, I notice that the most effective CEOs have figured out how to motivate their salespeople. I’m not sure that there’s any magic formula either. I recall how one of the winningest coaches in basketball, Phil Jackson, used to operate. Jackson figured out how to treat a collection of exceptionally talented athletes each in a distinctively individual way in order to maximize their motivation levels and subsequent performance.

Similar with salespeople. Even talented salespeople people have different personality characteristics. Sometimes they need a shoulder to cry on, in which the CEO may show empathy by offering to accompany the salesperson on a visit to a prospect to hear feedback directly from the market on how hard it is out there. Sometimes the cold shoulder is a more effective tool. I know one CEO of a company with a considerable sales force who made it a matter of principle to fire the lowest relative performing salesperson every year, regardless of his or her absolute performance, just to keep the others on their toes.

The topic of building and motivating an effective sales force is vital for many startups, and it’s one I intend to explore further in this blog. I also welcome any wisdom or anecdotes on the subject.

Think about how much better society would be if we had politicians who pitched us an ambitious vision and then persuaded us to follow them down the rabbit hole.

I submit that this moral lends itself to venture-backed startups too. Managerial competency and financial prudence are laudable attributes… but not in an entrepreneur of an early-stage tech startup. Mistakenly, many VCs in Europe tend to overrate these qualities, either by restricting their investments to tried and true business models (service agencies, e-commerce, etc.) or by replacing founders with a ‘safe pair of hands’ too early in a startup’s development.

With too many of us European VCs as former bankers or MBAs, and not enough of us as former entrepreneurs, investing in an unorthodox visionary with radical ambition falls outside our comfort zone.

I hope that in 2013 we can learn to more frequently step outside our comfort zone, as voters and investors alike.

]]> http://markbivens.com/m/archives/courage-to-vote-for-courage/feed 0 http://markbivens.com/m/archives/job-trends-html http://markbivens.com/m/archives/job-trends-html#comments Sat, 05 Jan 2013 17:25:44 +0000 mark http://markbivens.com/m/?p=1406 Another signal of the maturing nature of HTML5 (courtesy of Indeed.com):

HTML5, flash, ios, android Job Trends

Html5 jobs – Flash jobs – Ios jobs – Android jobs

Here are 5 standouts over the past decade (caveat viewer: I’m not claiming that these are good!).

1. Onset Ventures – for over 15 years Onset has been creating a multi-page holiday card (the only one on this list that is not a video, but included because it has become a venerable tradition in the Bay Area VC scene.

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2. Labrador Ventures

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3. First Round Capital – another perennial that turns out the most fans and haters. Here’s the 2010 version because the 2011 model is too embarrassing to post:

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4. Foundry Group

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5. Softbank Venture Capital – a blast from the past. This is probably my favorite for its timely relevance (Oct 2000) and its pioneering of the genre (serious props to Dan Primack for digging this one up).

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Finally, if you think the above cannot get any worse (or you’re a glutton for punishment), I offer you your very own Rude VC’s trainwreck from two years ago:

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I wish all readers of this blog a safe and enjoyable holiday. See you in 2013 !

The Rude VC holds himself accountable too, as I’ve written critically about recent events, not so much to complain but rather to instigate constructive action.

But as 2012 winds to a close, I assert that there are many things during this holiday season which merit our giving thanks. Here is my personal list of reasons for holiday cheer:

First and foremost, I am thankful for the entrepreneurs that make this ecosystem exist. Almost every entrepreneur I’ve met manages to tune out the negative noise from the outside and maintains tireless dedication and enthusiasm for his/her respective venture. I consider myself fortunate to be able to spend most of my working time collaborating with such angels of positive energy.

I’m also grateful that an insightful and provocative media site now exists to sniff out the saucy stuff in France tech and bring it to the world: the Rude Baguette.

Thirdly, I am thankful for the investors in venture capital funds, without whom I would not have a job. These people include the institutional investors, who place money in a VC fund for the sole purpose of generating a return, or retail investors – individual French taxpayers – who invest for a tax break or even with purely altruistic intentions of supporting innovation. Regardless of the source, a human being at some point in the chain makes a conscious decision to invest in VC, and I try not to forget how lucky I am to be chosen as one of the stewards of their capital.

Fourthly, France. Yes, the country that has been the whipping boy of the financial press, the credit ratings agencies, the markets, even some elements of the government, deserves my gratitude. My adopted country and my second nationality, France is still one of the best places on earth in my opinion. We have a high-quality public transport system, a TGV network that can whisk us from the capital to the Mediteranean sun for a weekend, a fantastic and affordable broadband network, one of the best tech conferences in LeWeb, extravagantly privileged public services like health care and elementary education, a vast array of culture and the arts accessible to everyone, fashion, food, foire aux vins, and more. When I lived in Silicon Valley many of my friends dreamed of accumulating enough wealth to go retire to France. Just by being here, we’re already living part of that dream.

Finally and most importantly, I am thankful for my wife, son, and our collective good health. This blessing exceeds all the others.

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Accordingly, I welcomed the RATP’s refurbishment efforts of the regional RER B line that runs from CDG through several stations in Paris before continuing south towards Orly airport as a small but smart step in addressing at least part of the problem. (An even better improvement would be the creation of an express train service similar to London’s Paddington Express from CDG straight into the heart of the business district, such as Place de l’Etoile, but for the moment this remains but a pipe dream).

To my astonishment, barely a few months into the deployment of the new trains, several of the cars are already trashed. Many are tagged with graffiti, the seats are stained with gum, and rubbish litters the floors. Am I just becoming a grouchy old man, or have we become savages ?

I pride myself on walking or taking public transportation whenever I travel, even when traveling to other cities on business, where re-billing a taxi fare to my portfolio companies or to my fund is common practice in this business. I assert that one indicator of an advanced society is the number of people with means who proactively choose to avoid driving in lieu of public transportation. Indeed, it’s one of the primary reasons that inspired me to leave Silicon Valley – where sitting in traffic on 101 (or even 280 during bubble times) became insufferable – for Paris.

So it’s a pity that our beautiful new RER B trains have already been dissed. I submit that it’s really a case of disrespect. And I want to draw a distinction between actively seeking to change the rules for the better – i.e. the trait of successful entrepreneurs – and juvenile disrespect for order out of sheer delinquency. The latter, I would argue, depletes time and money from innovative projects and thus holds society back.

This incident with the RER trains reminds me of the kerfuffle last spring in voting the budget of Paris’ 2eme arrondissement.

To recap: the questionable line item of the draft budget revolved around a proposed expenditure on materials and labor for pesticide spraying. If you’re wondering why pesticide spraying was needed in the smallest district of the concrete jungle in the center of Paris, you’re not alone. Apparently, the planter boxes filled with flowers and herbs that adorned the poteaux des trottoirs on several streets had attracted swarms of gnats.

The poteaux des trottoirs are the hazardous meter high brown poles that dot the Paris sidewalks. Since not a day goes by without a grown man in a hurry knocking his groin on one the poles, or a 5 year-old smacking his head on one, the hazards inspired some neighborhoods to beautify the poles with artwork, flowers, or plants, such as the Opération Potogreen initiative in Paris 2eme.

Opération Potogreen proved a commendable textbook success in community solidarity. Within two months in 2011, 600 of the district’s schoolchildren collected over a thousand recycled milkcartons, the mayor’s office provided soil, a local farm furnished organic seeds, and the neighborhood’s sidewalk retailers and residents pitched in to hang the planters on five dozen sidewalks. The outcome was gorgeous.

Unfortunately, an unintended secondary outcome involved the attraction of a million insects from the armpit of city known as Ile Saint Louis, hence triggering the debate about pesticides in the only arrondissement whose mayor hails from the Green party.

The whole brouhaha prompted me to explore the reason for these pesky poteaux des trottoirs in the first place. It turns out that these poles – also referred to as poteaux anti-stationnement – were originally installed to prevent cars from parking on the sidewalks!

That’s right, a simple No Parking sign proved insufficient. The only way to effectively prevent illegal parking in Parisian society required the installation of 335,000 steel poles on the sidewalks, for an estimated cost of € 20 million. Of course, that’s excluding the cost of the pesticides…

A week ago Friday, The Economist published a damning report on the parlous state of France’s economy with a cheeky cover story calling the country The Time-Bomb at the Heart of Europe.

Then on November 19^th, Moody’s downgraded France’s credit rating from the prized AAA status to AA1. “France’s long-term economic growth outlook is negatively affected by multiple structural challenges, including its gradual, sustained loss of competitiveness and the long-standing rigidities of its labour, goods and service markets,” the agency stated.

I find it hard to cry foul about this credit downgrade. True, France does not inhabit the same economic terrain as Greece, Italy, nor Spain. And France’s government bond spreads reflect this. In other words, France can borrow at an interest rate that is about 0.8% higher than Germany (i.e. the “spread” = 0.8%, or 80 basis points). For Greece, Italy, and Spain, the spreads are 1500, 330, and 420, respectively.

But France is definitely exposed to these struggling economies. For example, French enterprises are particularly exposed to markets in Italy and Spain, and French banks were collectively the largest holders of Greek sovereign debt (which they have been quietly unwinding, by the way).

Combine this exposure to Europe’s peripheral economies with France’s home-grown problems – public spending at 57% of GDP, debt at 90% of GDP, unemployment > 10%, etc. – and a one-notch ratings downgrade is difficult to contest.

This is not to suggest that the credit ratings agencies are flawless. On the contrary, they screwed up royally in the period leading up to the sub-prime mortgage fiasco and ensuing global recession, turning an unacceptable blind eye to the financial shenanigans that triggered the crisis. Yet another reason to pay attention to the new initiative of creating an international non-profit credit rating agency that would be structured so that management and rating decisions are independent from its financial backers (read more about INCRA).

In any case, Moody’s is not alone in depriving France of the coveted AAA rating. Standard & Poor’s had issued a downgrade in January, and analysts expect the third ratings agency, Fitch, to follow suit early next year, reiterating many of the economic ailments afflicting France as cited in The Economist’s special report.

In denial ?

Parties seem to be talking past each other on this. The French government says it’s doing a lot, though what exactly this is apart from such encouraging talk about Gallois’ diagnostic still eludes me. The traditional media in France are not exactly echoing a sense of urgency either, with Le Nouvel Observateur and TF1 downplaying the incident, citing as evidence a negligeable reaction from the markets. But as Stéphane Deo of UBS points out, a spread of 80 basis points is 10 times higher than the spread before the crisis. Le Monde casts doubt on the credibility of the American agencies, and Journal du Net even features an OpEd piece from Camille Sari, President of the IEMEP (l’Institut Euro Maghrébin d’Etudes et de Prospectives) who questions how a foreign agency can accurately rate any country, especially those like France that shun “wild capitalism.”

Playing politics

Economic Minister Pierre Moscovici interpreted the downgrade as punishment for the situation the new government inherited (i.e. it’s Sarkozy’s fault). Of course, statements like this are playing politics, but they are encouraging. Why? Because only if our current politicians can find a face-saving way to make painful unpopular reforms will France rediscover the path of economic growth.

“Much better to expand to the U.S. with a series of small well managed steps than to jump in with two feet and a blindfold on.”

My own track record investing in European startups that attempted to penetrate the U.S. market is probably more spotted than Nic’s. I think I could legitimately claim to be 4-for-6 in enterprise software. If I try to glean patterns from this small data set, I note that the four success stories followed Nic’s advice in two areas: i) they piggy-backed on domestic subsidiaries of large American multinationals to extend the account geographically; and ii) the CEO invested significant time early on with prospects and analysts in the U.S. before opening an office in the States.

The two portfolio companies that stumbled in their transatlantic quests invested a big chunk of money to open a U.S. office, hired a premium headhunter to recruit high-caliber but expensive American country managers, and sunk capital into a long struggle to gain market traction which never really paid off. While in both cases, the funds at risk encompassed significant portions of subsidies, the opportunity cost of the investment in money and especially time never justified the relatively limited fruits borne by the efforts.

Another difference was that the successful companies were either Belgian or Dutch, whereras the other two firms were French. Again, a data set of six is too insignificant to draw any general conclusions. But this brings up another set of distinctions: the Belgian and Dutch companies did not raise any government subsidies; they started in small domestic markets; and they operated in English as their base language.

Whilst British startups have the benefit of speaking English by nature, it’s not the same language as in America. Even DFJ Esprit’s best practices involve British firms employing locals with Yankee accents when they intend to target the U.S. market (and of course, there’s no scarcity of ‘culturally daring’ Americans in London).

You have to do better than Wall Street English™

This notion of standardizing on American English from day one is even more important for French ventures with global aspirations. The local startup accelerator Le Camping wisely imposes this as a rule on all its members.

Even if selling into markets beyond France and francophone Belgium is not part of the plan (which barring some exceptions, is probably a mistake), every tech startup should understand their role in the international ecosystem of partners, investors, acquirers, etc. and for this should maintain web and presentation materials in English at a minimum. Furthermore, all such materials should be proof-read by a native English speaker before release (yes, even your choice of company name). Do this and you’ll already be one step ahead of the French government.

And there’s really no excuse for not doing this. There are over 150,000 American residents in France, with an estimated 25% young, educated (and hence I would guess, tech-savvy). Some, like the leaders of the Rude Baguette, possess direct expertise for building businesses in the States. Others are simply bright expats that have learned almost by osmosis over years of being bombarded with American marketing messages.

Now go West for mom and apple pie…

.

Here’s a summary of the position.

Requirements:

• a dynamic and entrepreneurial individual with aspirations to spend 6 months working in a VC fund
• authorized status in French university to qualify for a ‘stage’ (typically the French undergraduate business schools are the primary source of interns, but this is not a requirement. any French university could work.)
• a self-starting individual able to work in an unstructured environment (read: fun but chaotic)
• a comfort level with the digital media, mobile, and software domains
• a willingness to perform a variety of professional tasks, some highly intellectually stimulating, others less so
• proficiency in 2 of the following languages: French, English, Japanese, Portuguese

Not pre-requisites, but please highlight if you have a comfort level with any of the following:

• new technologies in digital media or mobile apps
• social media: twitter, wordpress, etc.
• basic excel modeling
• powerpoint slide creation
• coding

Here’s what I can offer:

• Low remuneration with no likelihood of a permanent position, however, the possibility of an endorsed recommendation into the private equity industry post-internship.
• Exposure to an array of entrepreneurs and business ventures in the European tech space.
• A chance to learn some of the methods, practices, and tools employed in the VC business, and an opportunity to contribute to their improvement.
• A variety of tasks, ranging from quantitative to qualitative, analytical to motivational, and mundane to inspirational.
• Practically unfettered access to investment pitches, board meetings, negotiations, strategy discussions, deal evaluations, and any other typical VC activities that occur during the period of the internship.

For interested candidates: please send me an email with a concise pitch of how you would be a good fit for the role based on the above explanation.

Encompassing six major themes and 22 specific proposals, the Pacte pour la Compétitivité de L’industrie Française is both sweeping in its analysis and prescriptive in recommending solutions.

Gallois begins by sounding the alarm: French industrial competitiveness has been declining for the past 10 years at an accelerating rate; the trade deficit exceeds 70B€ and is galloping higher; and the industrial sector’s contribution to GDP is shrinking more rapidly than in most other European countries.

The report covers a range of ideas spanning from investment in innovation, energy policy, education and training, and social welfare. I won’t review the whole report but rather focus on the parts directly relevant to the tech startup ecosystem. My spirits rose when I read the following:

« S’agissant plus précisément des actifs gérés par les sociétés d’assurance, en principe adaptés aux financements de long terme et représentant des montants considérables (1 680 milliards d’euros fin 2010)… pratiquement rien ne va vers les PME et ETI non cotées. »

Loosely translated, Gallois points out that of all the monies managed by French insurance companies (i.e. the cash they collect in the form of premiums which they must invest for a rainy day, “the float”), practically nothing is invested into SMEs or even mid-caps. Amen. Contrast this with the U.S., where 3~5% of the float of insurance companies is allocated to high-risk/high-return investments like VC and private equity funds, which in turn finance SMEs.

Accordingly, Gallois recommends a handful of concrete actions to strengthen the balance sheets of businesses and ensure that SMEs are better capitalized.

• Extend the term of assurance-vie contracts to render them better suited to long-term investment (the implication being in startups).
• Steer insurance companies toward investing approximately 2% of their float into non-listed firms, most likely via specialized investment funds (such as VC).
• Encourage individual retirement accounts (PEA) to invest in SMEs and mid-caps (using tax incentives).
• Sustain the existing FCPI and FIP investment vehicles (“retail VC funds”) by providing consistent fiscal policy, and even consider raising the cap on such investment tax shelters.

Some of these proposals sound very similar to France Digitale’s excellent set of suggestions made back in September (and reviewed here).

Not so easily dismissed

Initially, the government seemed to downplay the report. And indeed, the administration may well decide not to implement any of Gallois’ proposals. However, inconvenient as his prescriptions may be for the Socialist government of François Hollande and Jean-Marc Ayrault, Gallois cannot be so easily ignored because he is a ‘patron de gauche’. The former CEO of state-sponsored institutions like Snecma, Aérospatiale, SNCF, and then EADS, Louis Gallois has been a card-carrying member of France’s Socialist party since the ’70s. Already within the week, there have been some encouraging signals, including from the Prime Minister himself, that Gallois’ assessment will not be buried.

However, let’s not get ahead of ourselves. In 2008 the Sarkozy/Fillon government commissioned Jacques Attali to perform a similar exercise on kickstarting growth, a report for which only a fraction of the recommendations were ever implemented. My guess this time around is that on some highly-charged issues like the tax treatment for retail VC funds, the worst-case scenario originally espoused by the government will not happen, at least not right away. Recommendations like shifting investment allocations of insurance companies may meet more resistance and prove more complex to implement (though I hope that over time progress could be made here).

So as members of the France tech ecosystem, I suspect we’re facing a prospect resembling more the status quo rather than a detrimental step backwards as originally feared. The Pigeon movement and France Digitale undoubtedly deserve some credit.

Pumped up because the country that the West likes to deride as the one of the “lost decade” is demonstrating a renewed appetite for expansion abroad, especially in the tech sector. This makes sense for several reasons.

With a population of over 120 million and a mobile penetration of exceeding 106%, Japan boasts a strong domestic market. The technological sophistication of its populace (we joked about the contrasting qualification of “broadband” between Japan and Europe), the ubiquitous and reliable mobile networks (though thankfully I managed to find one zone that was off the grid), and the relatively high disposable income levels hold the promise of high ARPU for new innovative products.

The flip side of this is that Japan remains an island. The population is aging; the political system is gridlocked, and its domestic market is isolated and hence limited in growth.

Combine this conjuncture with a relentlessly strong yen, and a number of leading Japanese tech firms are exploring growth internationally. Recent forays overseas by leading mobile gaming networks Gree (which recently invested in Amsterdam-based eBuddy) and DeNA, or by mobile carriers like NTT Docomo (which recently acquired Italy’s Buongiorno) and Softbank, or by e-commerce leaders like Rakuten (which just today acquired France’s Alpha Direct Services) attest to this trend, which is not limited to just the adventurous players either.

The world witnessed a temporary overseas m&a frenzy in the past by Japanese firms, such as of golf courses in Hawaii and baseball teams in Seattle, so a bit of perspective is warranted.

The difference this time, at least for the moment, is that many of these tech firms genuinely aspire to become global leaders, and are cultivating the corporate culture and talent to succeed internationally.

I’m cautiously optimistic because I see a lot of complementarity with European innovators. Here in Europe, we have some fantastic technologies and consumer products (take Criteo’s arrangement with Yahoo Japan as one example), a set of markets with generally high ARPU rates (even higher than the U.S.), and perhaps most importantly, the insight into how to serve this substantial market of 300 million that represents really a collection of very disparate national markets.

During one of my previous visits to Tokyo around a conversation about Japan’s macroeconomic situation, a suggestion was made that Japan should look to France as a model for how to gracefully manage a once-leading economic superpower in its gradual decline. The suggestion that Japan could actually learn something about economics from France definitely caught me off-guard. But it was a typically Japanese thing to say, a phrase filled with humility and perspective.

The theory of the agency problem, or more accurately, agency costs, represents the inherent misalignment in the relationship between an agent and a principal.  Agency costs arise when a company’s employees (the agents) may act in their own interest in a way that is detrimental to the shareholders (the principals).

The concept of agency costs offers insight into why founders often make the best CEOs.

Minimizing agency costs comes naturally to the best entrepreneurs.  A good entrepreneur excels not only in recruiting top talent, but also in encouraging new recruits to behave with the same passion and fervor as if it’s their own company.

Although large complex organizations can find a way to stumble forward even while making their workforce feel like cogs in a machine (and I would argue that such organizations still fall short of their true potential), a successfully growing entrepreneurial venture requires all personnel to frequently punch above their weight class. Successfully minimizing agency costs plays a key role here.

Here are a collection of techniques for cracking the agency problem which I’ve observed in inspiring entrepreneurial leaders, many within our own portfolio:

• Helping employees see the whole picture, and making them realize how their role in the company is crucial to the overall vision.
• Opening the kimono and sharing virtually all company information with all personnel.
• Providing regular communication with staff, and over-communication in times of uncertainty.
• Giving employees a sense of ownership over decision-making.  Consulting with them before making decisions, and offering them a voice, if not a vote, in the decision-making process.
• Granting employees the benefit of the doubt.  Defining their objectives clearly up front but then giving them free reign to achieve in the manner they deem appropriate.

I encourage all entrepreneurs to reflect on the agency problem when thinking critically about how to maximize their team’s performance.

]]> http://markbivens.com/m/archives/inspiring-leaders-crack-the-agency-problem/feed 1 http://markbivens.com/m/archives/power-of-immediate-feedback http://markbivens.com/m/archives/power-of-immediate-feedback#comments Tue, 16 Oct 2012 13:00:27 +0000 mark http://markbivens.com/m/?p=1203 Probably the best recruitment I ever made when I was running my internet real estate startup was of a salesman named Bob.  I stumbled onto Bob by accident and hired him in a daze of desperation after a disastrous experience with a previous salesperson.

Bob was coaching high school football when I met him, and he wasn’t exactly an expert in internet or in real estate.  But he was a great people person, and as my co-founder observed, there was fire in Bob’s belly.

Bob’s disarming disposition proved to be a precious talent in convincing skeptical real estate brokers to join our service.  In a few short months, Bob became a star salesperson and almost singlehandedly helped our business to surmount a key inflection point at the time.

I tried to covertly witness Bob in action in an effort to uncover the secret to his effectiveness.  One of my favorite routines Bob exhibited was his habit of talking to himself in the car before entering a sales meeting.  He would pump himself up by chanting, “You da man; you da man!” to himself in private.

This was just one example of the emotion and passion that Bob poured into every sales encounter.  I asked Bob what made him so passionate about sales.  After thinking about it for a while, Bob explained that what he liked most about sales, not dissimilar from high school football, was the “power of immediate feedback.”

Miss a tackle, and the opposing running back scores a touchdown.  Misread a prospect’s needs, and the sale doesn’t close.  Both experiences provide instantaneous feedback and allow one to move on.  While good salespeople particularly thrive on it, it is human nature to crave on immediate feedback, starting from our first steps as toddler.  Here’s one example of academic research in this area.

Accordingly, gleaning immediate feedback can be a powerful tool for the sales function of almost any business. It’s one of the underlying tenets of the minimum viable product philosophy in identifying a market. Once in growth mode, a company that knows its customer sufficiently well can make an educated guess of the customer’s next purchasing activity, thus further increasing revenue.

I push all of my portfolio companies to try to espouse people and processes that can harvest the power of immediate feedback.

President François Hollande’s Socialist government unveiled its draft 2013 budget comprising some potentially devastating tax dis-incentives for entrepreneurs and VCs. A revolt ensued, with the birth of the Pigeon Movement, an explosion of emotion on social media sites, worldwide media attention, and the culmination of a dialogue with certain key government ministers involved in the measure.

While I won’t rehash all the political and economic implications of everything that’s elapsed over the past week, I would like to tip my cap to the efforts of France Digitale (Marie Ekeland and company), Jean-David Chamboredon, Olivier Duha, et al who met with three government ministers on Thursday to explain the importance of entrepreneurship and thus constructively improve the government’s fiscal budget for 2013. The outcome of this session, no doubt assisted by the pressure of the Pigeon Movement, is a far less egregious version of the budget, albeit there is still work to do.

As with any movement that rapidly gains traction, a counter-movement also emerged, ranging from doubters, to haters, to conspiracy theorists even. This is natural, and skepticism is healthy.

One sentiment in particuler, expressed by many in the “anti-pigeon” camp, caught my attention for its larger implications: the blaming of the pigeons and even the media in general for the negative consequences incurred by this brouhaha. This sentiment was probably best encapsulated by Henri Verdier in his blog post last week:

“Le recours à la presse internationale et les tweets en Anglais pénalisent notre écosystème et vont dissuader encore plus les investisseurs internationaux d’investir dans notre pays.”

{Roughly translated: “Appeals to the foreign media and tweets in English are penalizing our ecosystem and are going to further deter foreign investors from investing in France.”}

You’ve got to be kidding me !

In fairness to Verdier, he makes some excellent points in his write-up too, so I encourage you to read the whole post in French or with Google translate (Pourquoi je ne veux pas être un pigeon). {Incidentally, I find a dual irony in Verdier’s remark: i) it’s in a blog post (which is a well-maintained and thought-provoking blog, by the way), and ii) two days later in the same blog Verdier praised President Obama’s initiatives toward openness in government.}

But while as an anglophone writer I would love to take credit (as I’m sure Liam Boogar would too) for the fact that noteworthy publications like the Financial Times, Business Insider, and The Economist picked up on the Pigeon Movement, the fact of the matter is that these insightful journalistic organizations have more sophisticated research methods than simply reading http://markbivens.com and http://rudebaguette.com.

The greater issue here is the legacy French bias against openness. Respecting privacy and being discreet are merits of an evolved society, and I’m not condemning these cultural characteristics. Rather, I’m referring to closed-mindedness in business. The mindset of “Let’s not tell the world what we’re working on because competitors might find out.” This anti-openness bias can be particularly damaging to innovation. Recent history is scattered with examples of innovative new businesses built on sharing or collaboration. AirBnb, Uber, France’s own KelBillet all represent innovative platforms that enable the sharing of excess capacity, to cite but one space. France’s burgeoning success story, Criteo, uses social media to engage with customers, recruit talent, open its vision, i.e. for a lot more than mere promotion.

The investor ecosystem in France is guilty too. How many financial intermediaries still systematically request an NDA for every investment pitch ? (answer: far too many). How many VC’s blog openly and actively about their investment views ? (answer: far too few).

The wise adage of, “What happens in Vegas stays in Vegas,” is about Las Vegas, not France.

Thankfully, this new generation of French entrepreneurs demonstrates their freedom from the anti-openness bias. Let’s hope the government doesn’t scare them off, else we’ll all be in for one very bad trip…

]]> http://markbivens.com/m/archives/pigeons-dont-poop-in-private/feed 0 http://markbivens.com/m/archives/html5-vs-apps http://markbivens.com/m/archives/html5-vs-apps#comments Wed, 03 Oct 2012 22:02:04 +0000 mark bivens http://markbivens.com/m/?p=1153 Like Yin vs Yang, Cain vs Abel, Coke vs Pepsi, another of the universe’s great dualities manifests itself in the face-off of HTML5 vs Apps. I share with you some domain carknowledge from the wisest man I know on this topic, BoosterMedia founder Laurens Rutten…

Not too long ago, the HTML5 developer camp was cheering its victory over Flash for mobile devices. A hype was born, with a little help from Steve. A true open technology had arrived and cross-platform application development would be bright and sunny from then on.

 

Now that the dust from the first excitement has settled, it is clear that HTML5 is just like any other technology, with its own pros and cons. For certain type of games, such as 3D shooters or fast-paced platformers, HTML5 performance is not optimal yet and native development could still be the logical choice.

 

But from BoosterMedia’s position in the center of the HTML5 gaming ecosystem, we see the technology maturing at full speed. Recently, hundreds of developers gathered in Warsaw to learn about the latest HTML5 gaming trends. Including, to name just one example, complete 3D game-engines.

 

Last week, Nick Earl, Senior VP of Global Mobile and Social Studios at Electronic Arts, spoke about a possible “holy war” between HTML5 and native-apps coming up. And to make the right bet, EA is preparing for both.

 

An increasing number of developers are utilizing the benefits of native and HTML5 technologies into one game. They find their way with ‘hybrid apps’ into the app-stores or distribute the games via the open mobile web directly. BoosterMedia believes in a peaceful coexistence instead of a war between ecosystems. Both web-based and native technologies are here to stay. But HTML5 has definitely passed beyond the hype.

- Laurens Rutten, Founder and CEO of BoosterMedia

Periods like this require prudence, of course.

However, prudence means different things to different groups. For large corporations, prudence means sticking to your knitting and ‘playing the ostrich’. Resist change and don’t stray from your core business. If anything, make small incremental improvements in processes or cost efficencies. Silence the mavericks, require consensus before acting, and by all means don’t do anything radical.

Startups that try to behave in the same manner of prudence as large corporations, on the other hand, may well be doomed. In a startup, ‘playing the ostrich’ is playing to your weakness. Startups don’t possess the luxury of abundant resources like large firms do. Keep your head down for too long, and you may end up jolted to the realization that you cannot meet payroll and the end of the month.

Entrepreneurs: in periods like this, rather than succumbing to your weakness, play to your strength: agility.

Agility is your greatest defense during periods of great uncertainty. Agility is the reason that incumbents become disrupted by innovators. Heck, it’s probably the very reason that your employees left their stable, boring CAC40 jobs and joined your hair-brained adventure.

Agility in times of doubt means being aware of the shifting market environment and pivoting swiftly — and often — if necessary. It means stripping away all those planned features from your product beta and launching one that is viable in its truly bare minimum form. Ruthlessly prioritize your market segments; don’t try to be everything, everywhere. It means ship now and apologize later.

Overall, it means being decisive. Don’t wait to make those gut-wrenching decisions to cut your burn rate and give yourself a safety margin. You’re by nature commendably optimistic. But that not-yet-signed VC term sheet on the table, or that imminent bank facility that is pending a “mere formality”, or that verbal order confirmation from a big prospect whose signed contract will come “any day now”, etc. just might not materialize before it’s too late. Over-compensate now, and if necessary, you can always course-correct later.

I say pleasure, because I really did enjoy reading the organization’s pragmatic proposal of four concrete measures to include in the upcoming Loi des Finances 2013. For those who are not familiar, France Digitale is a new French lobbying association for the digital economy comprised of some of the best VCs and entrepreneurs that France has to offer. Given the talented leadership of France Digitale, and the fact that the whitepaper reinforced many of the points I advocated two weeks ago in my letter to President Hollande (which I’m sure is coincidence), FD’s “4 Measures” did not disappoint.

First the facts: As many of us in the venture industry have long argued, small, high-growth technology companies are the engine of France’s future economic development. France Digitale cites two recent studies –  from McKinsey and Ernst & Young — that reiterate this point. French startups of the digital economy post average annual revenue growth of 33%, increase headcount an average of 24% each year, employ personnel with an average age of only 32 (compared to 41 in large firms), and offer permanent contracts to 87% of new hires. No other sector of the French economy comes close to matching this potential. Yet alarmingly, France’s internet economy contributed to only 3.2% of GDP in 2009 with hopes to climb to only 5.5% in 2015. Contrast this with UK, where it was 7.2% in 2009 and expected to reach 15% of GDP in 2015. It’s no coincidence the UK considers the internet sector to be an economic priority.

So concretely, what can be done to rev up this engine ?

As I have argued in the past, venture capital represents the premium fuel that can improve performance and keep this motor running smoothly in a sustainable way. Similarly, France Digitale proposes the new government a badly-needed tune-up in the form of four pragmatic measures:

1. Refine and reinforce the ‘young innovative entreprise’ status.
2. Channel assurance-vie monies toward innovative SMEs by forcing them to invest in VC.
3. Improve the R&D tax credit to strengthen links between large companies and innovative SMEs.
4. Maintain the tax incentives that preserve the retail VC model.

Overall, I believe these are excellent suggestions, evoking reactions ranging from “It’s ridiculous that France hasn’t fixed this earlier,” to “That’s a truly original idea that just might work.”

For example, FD underscores a legitimate problem of how France’s narrow definition of innovation hinders economic success stories like Facebook, LinkedIn, and Netflix. Are these companies innovative ? Most of the world would argue resoundingly that they are. But by France’s current definition of what constitutes an innovative company, which requires a minimum 15% op.ex spend on R&D, these companies do not qualify. Idem for Instagram, Pinterest, Etsy, and even Twitter.

Maintaining policy that over-emphasizes the importance of R&D to the detriment of web service ventures is not only embarrassing, it can be dangerous. The fact of the matter is that the world has changed. With the accessibility of open source components, APIs, and cloud services, it’s cheaper than ever before to start a software or digital media company. The real innovation, and ultimately, capital requirements, come from identifying new markets and designing solutions for them.

Restricting subsidies to engineering effort implicitly undervalues notions like product conception, design, user experience, and marketing — qualities which distinguish the winners in the new paradigm. Even worse, it perpetuates the errant yet pervasive view that innovation is “technology-driven” rather than market-driven. By subsidizing the process of over-engineering a product until it’s perfect and only later seeking a market for it will all but ensure the absence of innovation. Redefining innovation more accurately, as per FD’s first suggestion, with the corresponding re-alignment of subsidies, is thus a no-brainer.

On the truly original end of the spectrum, FD’s suggestion to require large enterprises to invest 20% of their R&D tax credit subsidies (CIR) into venture capital funds (measure #3) could kill several birds with one stone. First, with the right parameters, it would ensure these subsidies are subsequently directed toward the most innovative opportunities in the market (far more efficiently than happens currently). Secondly, it would address the challenge facing French VCs in raising new funds from institutions that are hampered by Bâle 3 and Solvency II regulations. And perhaps most politically palatable of all, it wouldn’t cost anything extra to the government budget.

But the free market should still play a role

The other two of FD’s proposed measures (#2 and 4) reflect a premise on which my viewpoint diverges, though I do endorse their conclusions.

Take measure 4, for example, where FD sounds the alarm about the government’s rumored plans to both reduce and cap the tax breaks individual taxpayers receive when they invest in retail VC funds (i.e. FCPIs and FIPs). I agree that taking drastic action like this would send deadly shockwaves to the hundreds of SMEs currently financed by such fund vehicles. However, as I’ve contended (again, here) the long-term goal should be to transform the investment case for retail VC funds into one that is based on performance rather than based on tax deductions.

The same logic applies to the second proposed measure, which would require Assurance-Vie companies to invest at least 0.2% of their float into venture capital funds that promise to invest in “innovative” opportunities (the same restrictions governing retail VC funds). {An assurance-vie is a life insurance policy that essentially behaves almost like an open investment account offering favorable tax treatment if the investments inside are not withdrawn until after 8 years}. My contention is that if such VC funds demonstrate strong investment performance over time, eventually Assurance-Vie holders will want to allocate a portion of their portfolios to such VCs.

In fact, there is a precedent for this in the U.S. In 1978, the U.S. government revised certain parts of the ERISA law (regulations governing employee pension funds), under a “prudent man rule,” thus allowing (though not obliging) corporate pension funds to invest up to 5% of their allocations to private equity. Pension funds were not required to invest in VC, but they increasingly clamored to do so as the asset class demonstrated high return potential.

In France, the government could help advance the VC industry’s migration toward performance by defining consistent standards for calculating investment returns and then requiring disclosure for each fund that seeks tax money. Ultimately, this will force VC practitioners to deliver superior value creation and hence economic growth.

That being said, conventional wisdom needs to be shaken up during a time of crisis, and in that spirit, I find the four measures recommended by France Digitale as an excellent place to start.

]]> http://markbivens.com/m/archives/pour-une-france-competitive/feed 0 http://markbivens.com/m/archives/year-of-the-draghi http://markbivens.com/m/archives/year-of-the-draghi#comments Tue, 18 Sep 2012 13:00:33 +0000 mark bivens http://markbivens.com/m/?p=1122 It appears that rumors of the death of the Euro have been greatly exaggerated, at least for now. This is thanks in large part to the efforts of the President of the European Central Bank, Mario Draghi.

Mr. Draghi seems to have made all the right moves so far. He successfully convinced Germany to accept the ECB’s proposed bond purchase program, neutralizing the critics at the Bundesbank and winning the confidence of Chancellor Merkel. In parallel, he rendered the program viable by making aid conditional upon the commitment to structural reform and fiscal discpline by any member state.

One result has been the sharp climb in the value of the Euro, which has rebounded to a value of $1.31, up from $1.21 only slightly over a month ago. While relief from the depressing decline of the single currency provides grounds for optimism about the common market, these short-term swings can prove dizzying for European businesses that export outside the Euro-zone.

European startups may be particularly jostled by the currency whiplash effect. Many segments of tech firms (enterprise software, to name one) are more likely to have a significant revenue base in dollars while the bulk of their cost base often remains in euros. For small and medium businesses in this situation with relatively limited budgets,  currency volatility can wreak havoc with cash flow, which as we know, is always tight in startups anyway.

This problem will not dwindle away. Tech startups are increasingly selling to worldwide markets. By nature, they do not splurge on sophisticated financial departments, and they possess neither the resources nor the volumes to warrant elaborate currency hedging methods. There are, however, some best practices that young companies can consider to limit their exposure to foreign exchange swings.

First, small firms should consider operational currency hedging techniques. Operational hedging is essentially the practice of matching revenues and expenses in the same currency. For example, an IT services firm might pay its salaries in dollars to the consultants who service U.S. clients, and in euros to those serving European-based accounts.

Albeit not as easy as it is for large firms with global operations, operational hedging could also work for a startup. The COS (cost of sales) line is often the first place to look. For example, a startup that works with various content partners unique to each customer deployment may try to use U.S.-based content partners when it sells into U.S. customers. And even in the Op.Ex section, a European startup could gradually shift some of its expenses into dollars (such as travel or computer equipment) as its signs more U.S. clients.

Another avenue worth exploring could involve negotiating foreign customer contracts in euros in the first place. This may be a non-starter for some international prospects, but other clients may not object to this. You’ll never know if you don’t ask.

Finally, even commercial banks can provide forex solutions tailored for small firms. One of my portfolio companies uses a well-adapted hedging product from ABN AMRO with great satisfaction. The service essentially allows the firm to lock in an exchange rate at the time of signing a foreign customer contract for a very modest bank fee.

For small companies, no perfectly suited solution to insulating against currency fluctuations exists. However, a combination of the above techniques can help de-risk the impact of foreign exchange volatility on cash flow and allow small firms to focus on what’s most important: signing new customers.

Dear Mr. President,

First off, thank you for opening my mail. If you’re reading this letter, you would be the first politician on either side of the Atlantic to waste precious time on my meandering drivel. I also should congratulate you on your presidential election win. Albeit a close second round, the process was open, universal, and honest, with a voter turnout that should put my native U.S. to shame.

Now, if you would kindly forgive me in advance for being a Rude VC, there are a few things I need to get off my chest.

For starters, I have to say that when it comes to the fiscal policy of your new administration, I sometimes wonder if you’re leaking seemingly half-baked ideas to the public in order gauge their popularity before making legislation. Coincidentally, this is a technique I recommend to my startups when evaluating the market for a new offer (we call it MVP – minimum viable product), but I question its relevance for what will inevitably become unpopular tax initiatives necessary to govern a country in crisis. But hey, not wanting to miss a chance to weigh in, here are my € 0.02 on some of the latest tax policy rumors related to France’s private equity sector. Let’s take some of your alleged policies one by one…

Confusing Private Equity LBO funds with Venture Capital

If there’s any credence to the rumors, your administration seems to be grouping VC funds together with LBO funds. Don’t worry, the U.S. government fell under the same confusion at first until they were enlightened by the American VC associations. While it’s true that both VC and LBO fall under the same ‘Private Equity’ umbrella, they warrant consideration for different tax treatment.

The raison d’être of an LBO fund is to acquire a company with mostly borrowed money, implement operational efficiencies in the acquired firm, repay the debt with the acquired firm’s own cash flow, and ultimately re-sell the firm to an industrial buyer or even another LBO fund. Even if the firm is sold at the same price at which it was originally acquired, the original LBO fund will still make a tidy profit since the borrowed money was repaid by the underlying firm itself. In other words, an LBO is essentially an exercise in financial engineering, with no understanding of the underlying business required. In venture capital we have a joke the goes something like: “Q: what does it take to run an LBO fund? A: a pulse.“

Venture Capital, in contrast, is about investing in small companies, helping them grow, and re-selling the investment once the company has hopefully substantially increased in value. Value creation in small companies translates into job creation in the nation’s economy. Whereas a successful LBO may often reduce headcount, a successful VC investment usually results in a lot of hiring. As one of my colleagues likes to put it: In an LBO transaction, the cash goes into other shareholders’ pockets; whereas in a VC transaction, the cash goes into the company.

Please keep this distinction in my mind before penalizing an essential engine of economic growth and employment – SMEs – by handicapping France’s VC sector.

Abolishing fiscal unity

The generally accepted accounting practice of fiscal unity allows a subsidiary and its holding company to behave as a singular tax entity. This practice is a boon to LBO funds because it allows them to deduct interest payments on their acquisition debt from the profits of the company they acquired, thus reducing taxes. I can appreciate your wish to close this quasi-loophole, which gives these transactions an effective tax subsidy of 33%, but implementing it in practice may be tricky. Such a move however, would not directly impact VC transactions, so I won’t stand in your way.

Raising capital gains tax up to income tax rates

The alleged rumor is that you’re considering raising the capital gains tax to the level of income tax by treating capital gains as salary. This would have a direct and unwelcome impact on a core motivational component of fund professionals: their carried interest. Carried interest represents the pot of gold at the end of the rainbow for investment professionals. The reason we work our butts off for our portfolio companies while earning relatively modest salaries is the hope of a future gain resulting from the value we create for the fund over time. Carried interest is more like a profit-sharing scheme than a bonus, in that it is not at all guaranteed. It comes only after several years of toil, and only once the fund’s investors have fully recovered their entire investment plus a minimum profit. France already boasts the highest capital gains tax rates in Europe (over 33% when you include CSG/CRDS). Further penalizing investment professionals on their only carrot will erase any rational preference for an uncertain gain (read: performance) over a salary (read: risk aversion).

Capping tax deductions and reducing the tax credit in retail VC funds

If you’ve been advised that France’s VC sector needs fixing, your rumored solution on this point would involve taking a sledgehammer to something that perhaps a screwdriver could fix. Your budget minister’s announcement to limit all tax deductions of any variety to € 10k per household while simultaneously reducing the credit taxpayers receive when investing in a retail VC fund (an FCPI or FIP) will single-handedly crush overnight the retail VC model as we know it.

Despite being somewhat biased on this topic, I believe that I’ve objectively argued that France’s retail VC model needs improvement. However, a precipitous implementation of your budget minister’s suggestion would send deadly shockwaves to the hundreds of SMEs currently financed by these vehicles.

I appreciate that as Président de la République you’re facing some dire problems, and that solutions to these challenges will inevitably involve pain and sacrifice. But I hope you’ll also take into consideration the undesirable consequences of your rumored tinkerings before making rash decisions. Moreover, I submit that better alternatives exist, for example:

a)  Nudge the investment case for retail VC funds to be based on performance rather than tax deductions. This will enable you to accomplish the same objectives over time, but with the benefit of forcing investment professionals to deliver superior value creation and hence economic growth. You could do this for example by improving transparency of funds’ preformances by defining standards for calculating investment returns.

b)  Use tax policy to discourage the practice of funds getting rich off management fees. Typically ranging from 2~3% for an investment fund, annual management fees are meant to pay the ongoing costs of operating a fund (e.g. salaries, rent, travel, etc.). They were never intended to be a source of wealth generation for investment teams. Retail VC funds in France tend to be the biggest abusers, mainly because, unlike their counterparts at institutional VC or LBO funds (e.g. FCPR structures), retail VCs don’t have to worry about powerful, sophisticated institutional investors scrutinizing their budgets.

c)  Require full disclosure of where the fees go. On a related note, the taxpayers that invest in retail VC vehicles may see upwards of 5% of their investment go up in smoke annually in the form of fees that are paid to various intermediairies. Bringing more sunlight into these dark corners will undoubtedly disinfect.

d)  Don’t necessarily reduce the allocations of subsidies to innovation, but make them smarter. France dispenses almost € 2 billion annually on subsidizing innovation plus another € 9 billion in guaranteed loans for SMEs. Bravo! But since € 11 billion might seem like a fatty morsel, before you even think of trimming it, I can assure you that there are myriad inefficiences that would render these badly-needed allocations to be even more effective.

These are just a few ideas to get you started. But by all means feel free to solicit the advice of your experts too; don’t just take my word for it. After all, I’m just a normal VC.

Undoubtedly the most prominent was the United States Anti Doping Agency’s (USADA) stripping of Lance Armstrong’s seven Tour de France championship titles. Quick recap: USADA alleged that Lance had used banned substances during certain periods of his professional cycling career. Even amid nagging questions about its juridiction and motives, the anti-doping agency had apparently assembled ten former teammates as witnesses and was preparing to submit Lance’s indictment to binding arbitration. Despite Lance’s proclamations of his innocence, on August 23 he decided to no longer fight the charges stating that, “Enough is enough.“

Another seemingly less discussed incident that also took place in August was the UK’s performance in the men’s triathlon event at the Olympic Games. To sum up the Brits’ performance in one word: dominant. The UK’s Jonathan Brownlee earned the bronze medal, and his older brother Alistair won the gold, clocking in a breathtaking record time of 1:46.

Only the Spaniard Javier Gomez proved anywhere close to keeping pace with the Brownlee brothers, taking the silver medal (which the younger Brownlee would have won were it not for a penalty delay).

The Brownlee brothers have proven their mettle as phenomenal triathletes on the short distances (they’ve raced a number of triathlons in France too). They ranked among the favorites to finish on the Olympics podium, and they didn’t disappoint.

However, the UK triathlon team employed a tactic that definitely gave them a marked advantage over the other athletes. Specifically, the two Brownlees’ lighting-fast 10k run splits of 29 minutes stemmed in part from the energy they conserved during the bike segment just prior. This is where the teamwork element came in. Stuart Hayes, the third member of the UK triathlon team, played the role of ‘domestique’. In order words, Hayes, who finished in 37th place overall, served to drag along the Brownlee brothers during the bike segment (a rider drafting behind a lead rider can economize as much as 30% energy).

The UK triathlon team drew inspiration from the Tour de France, and in applying this tactic to the Olympics, they caught the other riders off guard. Unlike gaining an edge from banned substances, the British triathletes’ drafting technique was perfectly legal and legitimate. But in both this case and Lance’s alleged doping, one could argue that the atheletes gained an unfair advantage by not competing on a level playing field.

Successful entrepreneurs do this all the time

In many ways, the UK triathlon team’s actions resemble what disruptive entrepreneurial ventures do. They essentially changed the rules of the game (my guess is this practice will become more prevalent in the 2016 Rio games). Entrepreneurs by nature tend to defy rules and conventional wisdom. Moreover, as VCs, we actively seek out companies that have an unlevel playing field tilted in their favor. So when does the rule-breaking go too far ?

I’m convinced that an ability to act first and seek forgiveness later, rather than requesting advance permission, is an astute practice of successful entrepreneurs. But of course this reasoning can be carried too far. Would YouTube have emerged as the worldwide leader in online video without its early abundance of unauthorized music videos ? Would Badoo have scaled so quickly without its allegedly fictional profiles of hot women ?

At what point does an entrepreneur cross the line from resourceful to immoral…

• Inflating revenue projections ?
• Exaggerating product benefits in a sales call ?
• Padding a technology application for an innovation subsidy ?
• Posing as a prospective customer to gain competitive intelligence ?

It’s an age-old question: when, if ever, does the end justify the means ?

But in at least one sector of France people struggled to completely relax: the private equity / venture capital firms whose principal sources of funds are tax-incentivized “retail” investors. Such retail fund vehicles are a fairly uniquely French concept. Unlike conventional VC firms in Silicon Valley, for example, whose funding sources are institutional limited partners (“LP”s) like pension funds, insurance companies, endowments, and other corporations, retail funds come solely from a broad base of “unsophisticated” French taxpayers who receive a generous tax credit in return for their risk-taking.

The private equity players that manage such retail vehicles have enjoyed over 10 years of a gravy train that produces a somewhat predictable annual envelope of investment funds – sourced from a collection of non-discerning investors that are more concerned about their tax break than fund IRR – along with a very predictable annuity in the form of management fees over an 8~10 year commitment.

Now however, indications abound that this cash cow may be finally drying up.

In 2011, receipts from retail funds fell off a cliff, plunging 42% to 588 M€ from 838 M€ in 2010. Moreover, the past year has witnessed a tendency for distributors of such vehicles (e.g. retail banks, tax advisors) to increasingly push individual mandates over fund vehicles to their networks. Last but not least, all bets are off regarding how the new administration of President François Hollande, with an “anti-rich” campaign posture and facing monumental fiscal challenges, will view the tax loopholes of retail FCPI, FIP, and ISF-related funds.

One example of a “retail VC firm” sitting on the front lines of this shift is A Plus Finance (recently featured in Les Echos). The case of A Plus is symbolic given the firm’s core strategy from its 1998 inception on developing a distribution network to raise such retail funds. Their single-minded focus propelled A Plus to be among the top retail fundraisers each year, for example raising over 70 M€ in tax-incentivized FCPI and FIP vehicles in 2011.

But now, in a sharp strategic pivot, A Plus has begun targeting institutional LPs for its new investment vehicles, starting with its A Plus Yield Capital mezzanine fund, and perhaps later even a pure VC fund, LP-backed in the classic sense.

As far as retail GPs go, A Plus boasts a relatively long track record, and may well succeed in raising its new LP funds. However, demand for institutional LP investment in the French private equity asset class far outstrips supply.

Over the past 12 months, at least 40 French private equity firms tried raising funds from institutional LPs, either overtly in the form of formal fundraising road shows, or more quietly behind the scenes. So far, only 8 of the 40 firms have succeeded, as pointed out by Jean-Christel Trabarel, founder of placement agent Jasmin Capital.

Part of the problem is that such fundraising initiatives, particularly those sub-100M€ targets, do not appeal to LPs outside of France. The new banking regulations of Solvency II and Bâle III place further burden on institutions when investing in the asset class.

But there is an elephant in the room that is not lost on Trabarel, and that is that unlike retail investors, institutional LPs are laser-focused on fund performance. Most retail VCs simply lack the track records, coherent investment strategies, compensation structures, and human talent to garner interest from the sophisticated LPs.

It’s going to be an interesting year ahead for this group.

Awaiting me among other things upon my return to the office last week: 34 voice mails and 582 email messages.

Those of you that know me know that I’m notoriously inept at managing my voice mail, even during the working season. The reasons are multiple:

• Habitual: I forget to check it.
• Practical: When I do think about my voice mail, I’m usually in a metro, train, plane, on my bike, or after hours, which makes checking and responding to it difficult.
• Philosophical: I’m often traveling outside of France and refuse to be gouged by operator roaming charges.

I’ve long favored email as the best means of holding a dialogue. Henry Kissinger once remarked on how each of the U.S. presidents he advised had a single preferred method for receiving important information (Nixon supposedly enjoyed reviewing voluminous dossiers, Ford preferred a verbal exchange, Carter apparently liked bullet point lists).

Still an email guy, but…

Well, if one sole medium was sufficient for them, it’s certainly more than enough for me. And for me that medium is email.

I like to have conversations over email and particularly appreciate the assymetry of it. It enables me to respond in a somewhat thoughtful manner during the in-between time that might otherwise be wasted (my record is 44 deeply thought through emails sent during a recent Thalys return from Rotterdam). I sometimes even attempt to start a negotiation over email.

Until Google Voice becomes widespread in Europe, I submit that you will find me most responsive if you send me an email (and if talking is easier for you than typing, then I invite you to call my U.S. Google Voice number (but make sure you indicate your email address so I can respond).

Now, back to those 582 unread email messages. I regret to say that I’m considering pulling another unprecedented stunt: declaring email bankruptcy. Such a radical move would be another first for me, and I’m really struggling with the very thought (some people say I’ve become admirably European). But there’s something appealing of wiping the slate clean to start anew with la Rentrée.

So if you’re one of those 582 senders, I kindly request that you reinitiate your request if it’s still relevant.

Welcome back everyone.

Inside Apple. by Adam Lashinsky
Walter Isaacson’s biography of Steve Jobs has been probably been the most widely discussed business book this year, but Adam Lashinsky’s Inside Apple tops it for summer reading. Perhaps attending the same high school as Jobs afforded me a sufficient dose of his incredible story, so I found Inside Apple even more intriguing, particularly for its insight into how Apple may develop without Jobs.

Too Big to Fail. by Andrew Ross Sorkin
This book came out at the end of 2009, but its insight into the behavior of bankers still rings hauntingly true in today’s world of relentless banking scandals. The best irony comes in Jamie Dimon’s portrayal as a master CEO during the subprime crisis. Believe it or not, this book really is almost a page-turner, so easily qualifies for summer leisure reading.

What Money Can’t Buy: The Moral Limits of Markets. By Michael Sandel.
I haven’t read this one yet, but The Economist gave What Money Can’t Buy a glowing review: “Mr Sandel poses two objections consistently. One is inequality: the more things money can buy, the more the lack of it hurts. The other Mr Sandel calls “corruption”: buying and selling can change the way a good is perceived. Paying people to give blood does not work. Giving schoolchildren money as an incentive to read books may make reading a chore rather than a lifelong pleasure.”

Final Venture. By Michael Ridpath
For sheer mindless escapism, this is a thriller whose backdrop is a Boston-based venture capital firm. Far from anything close to resembling literature, but the plot is tight, making this a sufficient way to pass the time under a beach umbrella.

Parable of the Sower. By Octavia Butler
Pretty much everything I’ve read from Octavia Butler not only resembles great literature, it raises the bar in science fiction. Butler penned Parable of the Sower almost 20 years ago, yet its story chillingly reflects a potential outcome for today’s European crisis.

]]> http://markbivens.com/m/archives/summer-reading-2012/feed 0 http://markbivens.com/m/archives/google-yahoo-conspiracy http://markbivens.com/m/archives/google-yahoo-conspiracy#comments Tue, 24 Jul 2012 13:00:52 +0000 mark bivens http://markbivens.com/m/?p=993 Anyone reading the tech press last week couldn’t avoid the gushing over Marissa Mayer’s appointment to become CEO of Yahoo!. Google’s first female engineer and the brains behind the elegantly simple white search home page, the 37-year old Mayer will face a tremendous new challenge in taking the helm of the ailing internet company. Whether she will be capable of restoring Yahoo! to its once great stature is debateable (is any human so capable ?), and I certainly wish her success for many reasons. But let’s get down to the more pressing questions…

To acquire… or sabotage ?

Is this a devious scheme by Google to either a) get their hands on or b) sabotage their former arch-rival in the web portal race ? By installing one of their most loyal lieutenants (remember, Mayer was employee #20 at Google), could this be a sneaky tactic to repurpose Yahoo! from the inside, perhaps even using Yahoo! as a pawn in the greater battle against Facebook ?

The Yahoo!/Mayer announcement generated an interesting contrast of reactions between France and the U.S. Although my sample size is purely anecdotal, the near entirety of my French network reacted to this news with suspicion of a Google/Yahoo! conspiracy. And these are educated, tech-savvy individuals who pay attention to the digital media space and often have some form of professional involvement in the sector. In contrast, the conspiracy theory didn’t even occur to a single one of my American counterparts.

Why such a stark contrast ?

Studies have shown how conspiracy theories depend a lot on environment. Beyond crystal meth labs and bong-filled fraternity houses, people that are distant from the source of an event are more inclined to succomb to conspiratory imagination than those within proximity. Countries with dominant state control, or that eschew meritocracy, can be more conducive environments too. Sound familiar, France ?

The French, of course, do not have a monopoly on paranoia. Barely topping the “Birthers” and the “Truthers” in America, one of my overall favorites is the eccentric Englishmen, David Icke, who believes that the world is secretly run by a group of shape-shifting intergalactic lizards. Subscribing to a conspiracy theory can be comforting, relieving the believers of the burden of understanding the complex nature of the world. A conspiracy theory can make sense out of a topic that is otherwise confusing, and it can do so in an appealingly simple way.

Suggesting that Marissa Mayer’s placement is part of a nefarious Google scheme would get you ridiculed at a cocktail party in Palo Alto. The fact of the matter is that Mayer is an incredibly competent, talented and ambitious person for whom the top job at Yahoo! was simply too compelling a challenge to pass up. In continuing the spirit of “Don’t be evil”, I hope Mayer does good. I also hope she does well.

Less than six months after radical innovator NetVibes caved in to Dassault Systèmes for 20m€ and almost five years to the exact day after navigation firm Webraska lost its way into the arms of Sanef, the social news sharing site Digg was sold to Betaworks for a reported $500k. This sum represents just a fraction of the company’s last institutional investment round valuation of $160m.

Digg was once one of the most promising social media web sites. Founded in 2004, the service gave consumers a way to assemble their own collections of news and Internet content, rather than relying on the choices made by newspaper editors. In 2008, Digg allegedly declined a trade sale to Google for close to $200m.

Stories like that of Digg — and to a lesser extent, Webraska and NetVibes — are not uncommon but are easily overlooked when we re-create the narrative of hot tech startups riding the latest trend. We all remember the billion-dollar-plus Instagram, Yammer, and Skype transactions, but the lion’s share of venture-backed startups, especially in Europe, do not follow the same path. I would argue that the best-advised ones sell too early.

There’s something to be said for selling too early. From a purely financial perspective, it is of course far better than selling too late. Locking in some financial gains, modest as they may be, can help an entrepreneur and investor alike build confidence for the next trick.

But selling too early is more easily said than done. For starters, how do you know when it’s not too late ? A short putt nevers drops in the hole, as the golfing expression goes.

Part of the problem is psychological. It’s easy to get caught up in the euphoria of astronomical valuation announcements coming out of Silicon Valley: Facebook, Instagram, Zynga, etc. Even here in Europe, we’re not sheltered from the sensationalist headlines thanks to the tech press and blogosphere.

Another factor relates to the nature of the VC model. Venture investors seek an IRR across their portfolio of 25%~30%. Given the disparity of performance in any given portfolio, even in Europe a VC needs to have one or two big winners to balance out all their fair-to-middling investments. In Europe, that means a multiple of 5~10x the investment. While a modest acquisition offer from a strategic acquirer might return 2~3x the VC’s money, a VC might take the acquisition interest as a sign that they have a veritable goldmine on their hands, and thus hold out for more. Because European VC’s often control all key decisions a startup can make, they can successfully force the entrepreneur to hold out with them.

There is also an element at play that is more uniquely European: the tendency to view a given startup venture as a one-time event. The U.S. affliction of repeat entrepreneurship is only just begining to infect us here. Like game theory predicts, when we view the war as not one but a series of several independent battles, our behavior concerning one particular “round” changes.

For me, I draw two primary lessons from the Digg story:

1. If anyone offers you $200m for anything, take it.
2. For European startups, if there’s a proposal on the table in which investors make a reasonable multiple on their money and founders earn a comfortable amount, I submit that such an opportunity needs to be carefully considered.

While risking the cliché of seeing a metaphor in everything, I submit that triathletes and tech entrepreneurs have a lot in common.

Like triathletes, entrepreneurs must exhibit a boundless level of dedication. This can be said about almost any high-performance activity. But consistent, regular effort and progress trump raw talent in the sport of triathlon, and this is particularly true in entrepreneurship.

For surviving as an entrepreneur requires a diversity of skills rather than mastery in just one area. The world’s fastest swimmers never win Ironman triathlons. To succeed as an entrepreneur, you must possess a depth of talent in a combination of areas: be it design, coding, sales, evangelizing, even fundraising. Building a successful company requires a willingness to do a bit of everything at the beginning to make it work, and with a healthy degree of excellence spanning broad areas to boot.

Similarly, triathlons and startups alike both require a proper balance of disciplines to be successful. The best technology only becomes a successful business if it is developed via the lens of appreciation of market needs. Marathon runners typically require recovery time of weeks following an event, whereas a triathlete can recover physically within days, even after an Ironman event (which includes a full marathon for the run segment), thanks to the balanced effect of cross-training.

Builders of innovative companies and triathletes also improve with age. Professional footballers’ careers are over by the time they reach their thirties. Idem for basketball, baseball, and rugby players. Triathlon, on the other hand, is a rare endurance sport where aging amateur athletes actually flourish. The experience factor plays a dominant role in triathlons, such as in the importance of regular training, the adherence to a proper nutritional program, and the expertise in efficiently managing swim/bike and bike/run transitions.

There’s always a risk of pushing an analogy too far, but as we prepare to embark on the period of (hopefully) nice weather and (hopefully) slightly lighter work obligations, perhaps we can derive some inspiration from triathlon on the lessons of balance and perspective.

In venture-backed tech startups, the VC firm almost inevitably demands a certain level of presence and authority at the company’s board of directors. This is not unreasonable, given that tech startups are highly risky, and the VC wants to ensure that management will be a good steward of his financial investment. The challenge when VC’s stack the board, however, is to prevent them from slipping into the natural reflex of defending their own interests as investor-shareholders in the board setting.

The CEO of one of my past investments would sometimes quip, “Is this a board meeting, or a shareholder meeting?” He was only half-joking. For maximizing shareholder interests is but a part of the over-arching objectives of a company’s board.

The way I see it, in a tech startup, the board of directors (or supervisory board in a two-tier structure) serves two primary types of functions: Control and Support.

The control function is one of reporting and corporate governance. The board is granted a certain level of rights and powers in the company, such as the right to regular financial updates, the right to approve budgets, and veto power over strategic or material decisions affecting the company’s assets. It is the board’s duty to serve as a sanity buffer, and prevent the company from doing something rash or stupid that could imperil the firm’s livelihood.

Equally if not more important is the support function of the board. If I used the board meeting to request an explanation every time the CEO misses his numbers, I would start to sound like a broken record. I believe my responsibility as a boardmember must also be to help the CEO set strategic priorities, to assist in opening access to the right people and expertise, and to serve as a sounding board on the tough issues.

If the board doesn’t create an environment in which the entrepreneur feels comfortable to share what they’re losing sleep over, it’s falling short. A board should play the complex role of cheerleader, sparring partner, coach, and guru to the management team of the company they serve. The best entrepreneurs will proactively construct their board with these objectives in mind.

I submit that VC’s in France lean too far toward the Control rather Support end of the spectrum, and I’d like to see this behavior change.

]]> http://markbivens.com/m/archives/boards-control-vs-support/feed 0 http://markbivens.com/m/archives/owning-the-dot-com http://markbivens.com/m/archives/owning-the-dot-com#comments Tue, 26 Jun 2012 13:00:33 +0000 mark http://markbivens.com/m/?p=559

I remember back in 1996 when my grandmother (since passed, bless her soul) caught me off guard, as she had a knack for doing, with a highly-esoteric tech question. She had invited me for lunch at the Hobees in Cupertino, an annual ritual in which we caught up on each others’ lives, and toward the end of the meal, turned academic: “Now, there’s something I’ve been meaning to ask you: what is a dot-com?”

It’s hard to imagine today how unusual such a question would have sounded, but this was back in 1996, and coming from my grandma, who had never even touched a pc. I scrambled to piece together a professorial explanation on a topic which was still relatively new even to me.

But this was Silicon Valley, and my grandma was a voracious reader of the news, so she quickly picked up on this emerging new jargon.

An asset whose value even my grandmother could perceive sixteen years ago has now become an indisputable requirement for any business. Yet, amazingly, even today some web businesses fail to grasp this detail.

I was reminded of this during recent conversations with two different digital media startups. One is launching a new product; another is a startup in stealth mode that is now in the process of choosing its trade name prior to launch.

Even for European ventures, the dot-com is the neighborhood to inhabit. Sure, feel free to register your local country extensions and other name variants, but if your digital media venture does not possess the dot-com for your core name, I submit that your company’s value will be inescapably diminished.

Fred Wilson of Union Square Ventures advises his portfolio companies to spend up to $50,000 to acquire their dot-com if they don’t own it already. He also offers some excellent suggestions for procuring this asset, such as rent-to-own or purchase-for-equity schemes.

Perhaps even better yet, consult the available dot-com’s — or probe the secondary domain market for those on reasonable offer — before finalizing your product name. Failing to secure your dot-com early will make you rue the day you’ve built a successful business only to witness an unrelenting drag on your marketing efforts.

]]> http://markbivens.com/m/archives/owning-the-dot-com/feed 0 http://markbivens.com/m/archives/before-i-hire-you-tell-me-about-your-problems http://markbivens.com/m/archives/before-i-hire-you-tell-me-about-your-problems#comments Tue, 19 Jun 2012 13:00:22 +0000 mark bivens http://markbivens.com/m/?p=940 I’ve noticed a typical recruiting occurence in the States sadly creeping into hiring processes in Europe, even among startups.  I’m referring to the dreaded question during a job interview of: “What are your weaknesses?”

“Tell me about your weaknesses” is an interview question with which I’ve always struggled.  Without a doubt, it is far less pleasant to answer than questions like “Tell me about your strengths” or even “What is your greatest failure?”

The failure question is actually not all that difficult.  The key is to recount an incident of failure, ideally with business implications, package it into a concise story, and polish it off with a moral of the lessons you learned during the ordeal.

But answering the “Tell me your weaknesses” question, at least in a sincere manner, is trickier.

What gives recruiters the right to probe into my psyche and perform a psychiatrical examination during a job interview ?  Isn’t this supposed to be a professional encounter about my qualifications for a prospective job posting, not a therapy session ?  Especially during a down economy with high unemployment and bleak prospects in Europe, I almost wonder if the interviewer is embarking on a bit of a power trip.

There was one job interview I had in France several years back with a person whom I found increasingly irritating during the process.  When my counterpart asked me, “What is your greatest weakness?” I responded with, “J’ai du mal à supporter les cons” (I don’t suffer fools very well).  Needless to say, I wasn’t offered that job.

Unless you aspire to join the ranks of a large French group, typically found on the CAC40, with an imposing corporate culture whose core tenet snuffs out any thread of creativity, rebelliousness, or originality in order to keep all company robots employees marching in the same direction, I submit that the weakness question is inappropriate.

When you’re recruiting for your startup, particularly of the fast-growing high-tech variety which interests many readers of this blog, this question has no place in a job interview.  On the contrary, as an entrepreneur, you need to favor practicality over behavioral interview theory.  You should try to hire a diverse set of energetic people that will bring fresh and original thinking to your business.  Often great genius is accompanied by a flip side of personality quirks which could be construed as weaknesses.

And in the meantime, for seekers of jobs in startups, if you encounter the weakness question you could seize the opportunity to demonstrate your personality with a bit of humor, responding to “What is your greatest weakness?” with answers like:

“My greatest weakness?  Excessive humility!”

or

“How much time do we have… shall we conf call in my wife for this?”

.

.

.

]]> http://markbivens.com/m/archives/before-i-hire-you-tell-me-about-your-problems/feed 0 http://markbivens.com/m/archives/feeling-a-part-of-something-bigger http://markbivens.com/m/archives/feeling-a-part-of-something-bigger#comments Tue, 12 Jun 2012 13:00:00 +0000 mark bivens http://markbivens.com/m/?p=934 The other day a tech CEO that I admire and keep in touch with occasionally mentioned something that really resonated with me.  The guy is a fantastic entrepreneur, one of the best I know, as well as an excellent visionary in his marketspace.  Like most CEO’s in a fast-growing technology venture, this one finds himself on the road often, striking business development deals and generally evangelizing his company all over the world.

Following one particular stretch in which this guy was traveling for an extended period, some members of his staff remarked how refreshing it was to have him back in the office to re-energize their motivation levels for their relentlessly demanding jobs.

I find this totally unsurprising.  It isn’t that his employees are not self-starters lacking the ability to work without daily guidance.  On the contrary, employees in a startup are by definition talented and ambitious, and this group was no exception.  They simply experienced withdrawal symptons from going too long without being reminded in person of how they fit into this radically innovative company in a way that only a founder can convey.

Indeed, only candidates of a certain profile are attracted to work in a startup.  Stability, predictability, and a comfortable salary are certainly not the lures.  Rather, it is the opportunity to achieve fulfillment.

People need to feel a part of something bigger.

This is human nature.  It’s the top chunk of Maslow’s pyramid.  Without this feeling, we lose our souls.  We become zombies in mindless corporate careers where the sky has been blotted out, so hopelessly dependent on the “system” that we later fight to protect it.

If your motivation level at work is chronically sub-optimal, or you feel that your career is drifting sideways, think about the underlying issue.  Look around your work environment.  Do you have autonomy ?  Do you work for an inspiring leader ?  Are you surrounded by colleagues with infectious enthusiasm ?  Do you have the chance to succeed or fail on a daily basis ?  Are you made to feel like you are a key component of a larger vision ?

Feeling a part of something bigger can be the most fulfilling reason to work in a startup.

Even if it’s more precise, the answer still varies widely, so let’s narrow the scope even further. Let’s restrict ourselves to the IT/TMT segment (i.e. excluding life science and energy ventures). Also, the vast of majority of European VC’s only invest in businesses with some minimum initial revenue traction.

That leaves three primary valuation methodologies:

1. the discounted cash flow method (DCF)
2. the Comparables method
3. the VC method

The DCF method involves estimating the company’s future cash flows and discounting them at the cost of capital to calculate the net present value. With the right inputs, this method is scientifically the most accurate way to determine the true, or intrinsic, value of a company. The challenge in applying this method to valuing early-stage companies is that it requires far too much precision in a context of far too much uncertainty, so it is generally not appropriate in the VC setting.

The “VC method” comes in many different flavors which I’ll try to explain in a future post.

Let’s focus on the Comparables method, which is very common among VC’s that are investing in revenue-stage companies. The Comparables method involves picking a basket of publicly-listed companies (i.e. the “Comps”) which resemble the company you want to value, and assessing their respective valuations as a multiple of some quantifiable indicator for each Comp.

In homage to our recent series on IPO’s, I’ll apply this model to the example of Facebook.

First, if you haven’t seen it yet, I recommend reading Henry Blodget’s excellent article on his calculation of Facebook’s value. While he didn’t reveal his exact calculation, Blodget applied a form of the Comparables Method in his analysis. His analysis resulted in a fair valuation of Facebook to be the range of $16~24 per share.

The image below links to my valuation model for Facebook based on the Comparables method which you’re welcome to borrow. I left it in PDF format for legibility, but if you’d like the Excel version feel free to ask.

In contrast with Blodget’s analysis, I extended my basket of Comps to include social networking businesses LinkedIn and Renren (in addition to Google and Apple, which Blodget used). I also added a weighting factor to the different Comps. For example, I assigned Apple a weighting of 1/3, while for LinkedIn, which I consider to more closely resemble Facebook in business model, I assigned a 3/3 weighting. Finally, I applied my analysis to multiples of Revenue and Ebitda (whereas Blodget focused on a multiple of earnings), and centered on the years of 2011, 2012, and 2013. The fundamental principles of my method are the same, but I was curious to see how a slightly different approach would stack up against Blodget’s analysis.

This approach using the Comparables method suggests a valuation midpoint for Facebook of approximately $20 per share.

The fact that my model’s estimation happens to fall almost smack on the midpoint of Blodget’s analysis is somewhat coincidental, but it also demonstrates why the Comparables method is so relevant for VC valuations.  It offers a fairly consistent range of guidance even under slight variations in application or in the choice of Comps used.  The fact is that nobody can calculate with certainty the fair valuation of a private company; these models only provide the guidance for an informed negotiation between willing parties.

]]> http://markbivens.com/m/archives/how-do-vcs-calculate-valuations/feed 0 http://markbivens.com/m/archives/triathlon-du-sud http://markbivens.com/m/archives/triathlon-du-sud#comments Sun, 03 Jun 2012 15:14:10 +0000 mark bivens http://markbivens.com/m/?p=1179 How I love the south of France. It’s only the first weekend in June, and I’ve already had my pick of 6 sprint or olympic distance triathlons within easy convenience of a tgv station (needless to say racing one every other weekend is certainly enough for me).

This weekend brought me to the town of Sommières, in the department of the Gard, for an Olympic distance which also offered a full ironman the following day. What a fantastic race. Beautiful scenery, some rolling hills for the bike, perfect conditions, and a top-notch event organization. This triathlon makes my short list for an annual return.

In the last two columns we reviewed the basics of IPO’s and examined some of the challenges that venture-backed companies like Facebook confront in going public in the U.S. In today’s third installment of the series, we’ll focus on the ramifications of going public for venture-backed tech companies in France specifically.

A French tech company that is planning to go public has one main group of exchanges to consider for its IPO in Paris: the Euronext (now NYSE-Euronext following its sale to the NYSE in 2007), which actually encompasses three distinct exchanges: the Euronext, the Alternext, and the Marché Libre. Although it is not impossible for a French company to go public on some other European exchanges, such as the Scandinavian OMX or the London AIM, the contortions involved make this very unusual. Of course, any French company can shift its headquarters to another geography and go public there (such as Business Objects did on the Nasdaq), or even pursue a dual listing (which Business Objects also later did), but such a move requires the company to achieve substantial scale before becoming worthwhile.

Of the NYSE-Euronext group in Paris, the Euronext is the dominant exchange. This is where all CAC40 companies are listed, among 635 other mid and large cap firms. Due to the size threshholds and extent of compliance obligations, it is unusual for tech companies with market caps below 100M€ to go public on this exchange. Accordingly, the most commonly viable IPO options for French tech firms are either the Alternext or the Marché Libre.

What a fricking joke

Let’s start with the Marché Libre. In my undoubtedly controversial opinion, and to quote Aravand Adiga’s protagonist in The White Tiger, the Marché Libre is a fricking joke. It offers, in my opinion, all of the drawbacks of the Alternext, almost none of the Alternext’s benefits, and a few disadvantages of its own. Perhaps the most salient drawback is its sleazy connotation. Think of the dreaded ‘Pink Sheets’ in the U.S. where penny stocks, shell companies, and firms of dubious nature lurk. Don’t get me wrong: I’m not suggesting that the 250 companies currently trading on the Marché Libre are illegitimate. It’s just that given the extremely light regulatory requirements, a few bad apples, and nominal liquidity, most professionals don’t take the Marché Libre companies seriously. Even the relatively good ones are subject to a valuation discount due to their ‘location’. The analogy might be that of a decent residential home which is current on all mortgage payments but has the misfortune of being located in a neighborhood of foreclosures.

Surely there’s a viable alternative ?

There is: the Alternext. French tech companies consider the Paris Alternext as a natural first choice when planning an IPO. There can be advantages to going public for tech firms, and the Alternext sometimes delivers.

Let’s recap the principal reasons for going public:

1. Raising cash
2. Attaining prestige, credibility
3. Attracting and retaining key employees
4. Establishing a ‘currency’ of stock to facilitate future acquisitions
5. Providing a liquid return to investors and employees

On the first two points, the Alternext can deliver, at least up to a point. Raising money is certainly feasible on the Alternext, and even though France doesn’t have a strong culture of individuals playing the stock market, there is a handful of institutional money and tax-advantaged fund vehicles which are commissioned to invest in Alternext issues. And thanks to its modest regulation and respectable collection of 175 listed firms, a company that is public on the Alternext can inspire a degree of integrity and stability (the Marché Libre gives the opposite effect here).

Size (volume) matters

On points 3 ~ 5, however, I submit that even the Alternext falls short. The crux of the problem is lack of volume. Lack of volume, i.e. limited trading transactions on a given company’s shares, can be devastating to a small company. For one thing, it makes it difficult for insiders to sell the stock. Unlike when a small fry like me sells 100 shares of a high-volume stock like Microsoft and nobody notices, a sell order of even a modest size on a stock with low trading volume pushes the share price down disproportionately.

And on the Alternext, trading volumes are miniscule. Only 15 companies on the Alternext surpassed € 1 million worth of trading in a month. For comparison purposes, Microsoft exceeds $1 billion worth of trades every single day.

An even more pernicious effect of low volumes is related to the notion of market efficiency. Market efficiency, when a stock price fully reflects all publicly available information on a company, requires a high volume of buyers and sellers in order to work properly. When trading volume on a stock is low, the stock price is less likely to reflect the true (or intrinsic) value of the company. This means that a public company with low trading volumes will often be penalized with a liquidity discount and a valuation that is far lower than the fundamentals of the business would justify. I can think of several examples on the Alternext today of solid companies for whom this liquidity discount is severely punishing.

A low stock price, especially one that is artificially low, will be useless as a currency for acquisitions. In addition to demoralizing employees, a low stock price will also bias any future takeover discussions with would-be suitors. Think about it: a tech company with a strong position in France or Europe may represent an attractive acquisition target by a large American and Asian acquirer. As long as the company is private, it can pitch an elaborate and promising equity story about its prospects and future value. When the company is public however, the potential acquirer is going to use the company’s low market valuation as an anchor for any m&a negotiations.

]]> http://markbivens.com/m/archives/to-ipo-or-not-to-ipo/feed 0 http://markbivens.com/m/archives/going-public-its-complicated http://markbivens.com/m/archives/going-public-its-complicated#comments Tue, 22 May 2012 13:01:58 +0000 mark bivens http://markbivens.com/m/?p=899 {Note: this post represents the second installment in a Rude VC series on IPO. The introductory post is here.}

Last week in this column we reviewed the basics on an initial public offering, particularly the flavor available in France. Unless you’ve been living in a cave, you would know that since then, Facebook has gone public, having raised $16 billion in its initial public offering and begun trading last Friday.

Facebook’s first two days as a public company were anti-climactic, to say the least. On its first day of trading, the stock didn’t pop; it barely budged, opening at $38 and closing at $38.23. Its bankers were even forced to buy shares to prevent a symbolically devastating slide below it’s IPO price. (By the way, I would argue that this outcome was actually a good thing for Facebook, as the company pretty much maximized its IPO fundraising at minimum dilution). But the absence of the customary IPO day run-up combined with yesterday’s significant decline in the stock price certainly deflates a lot of the market euphoria surrounding the IPO event.

Last month Wired magazine featured a great piece assessing the tech industry’s “senseless addiction to the IPO.” The article cites the example of Facebook, which in preparation for its IPO the company instilled a number of safeguards — such as enabling Mark Zuckerberg to retain control of over 55% of the voting rights, to unilaterally appoint directors, and to name his successor — that Zuckerberg will continue to run it like his own privately held concern. So when a company as successful and omnipresent as Facebook tries to minimize the impact of being public, one has to wonder if the IPO model is broken.

Part of the problem in the U.S. is that new regulations like Sarbanes-Oxley have made it extremely costly to be a public company. And since the dotcom collapse, internet companies must demonstrate consistent profitability before going public. So in order to go public, a company must already have a horde of cash.

That leaves the principal rationale for an IPO to be one of providing an exit to shareholders. This is generally a good thing, because the company can use the prospect of going public to lure top talent with equity.

However, this is also where shareholders’ interest diverge. Founders and key employees cannot easily sell their equity shortly after an IPO. First, there’s often a lockup provision for many of them. But even beyond the lockup, a founder selling a significant chunk of equity can send a negative signal to the market and erode confidence.

The VC’s, on the other hand, intend to and are expected to sell their equity stakes post-IPO in an expeditious manner. In fact, the VCs’ obligation is to maximize their investment performance, not the long-term performance of the company. Since the ‘equity story’ of a successful tech IPO often revolves around the theme of high growth, VC’s may push their companies into unsustainably high cycles of growth in effort to accelerate the IPO event and thus optimize their exit.

I submit that on this side of the pond, at least in France, the IPO model isn’t suffering the same problems as in the U.S. But that’s not to say that it’s flawless here either. On the contrary, I would argue that for high-tech startups in France, the drawbacks of going public generally outweigh the benefits. I’ll explain my rationale in detail in the third installment of this series on IPO’s.

Already affecting a billion people on the planet, and probably 100% of RudeBaguette readers, Facebook strikes me as the perfect trigger to kick off a discussion on this blog about IPO’s, specifically their role in European venture-backed technology startups. This post represents the first installment of a multi-part series on the topic.

Today we’ll first discuss a few IPO basics, and in a later post touch on the specific implications for our market here.

This is only the beginning…

One could be forgiven for viewing the IPO event as an end goal. The media encourages this notion by reporting on the ‘home run exits’ for the VC’s, or on the newfound wealth of company founders and early employees, as if now they all hit the jackpot and are taking all their chips off the table. But like the first word in the I.P.O. acronym, the IPO event is really more of a beginning than an end for a company and most of its stakeholders.

An initial public offering is the first sale of stock by a company to the public. A company can raise money by issuing either debt or equity (the joke in France is that there’s a third option: subsidies). Anyway, when raising money via equity, a company can tap accredited investors (e.g. VC funds, high net worth ‘sophisticated’ individual investors, or other institutions and corporations); or additionally, a company can offer shares to the public markets. When restricting its equity issuances to a limited number of accredited investors, the company remains private. In the latter case, the company takes on the new status of public company, begins trading on a public stock exchange, and becomes subject to a new regulatory framework, governed by the SEC in the U.S. (the AMF in France) designed to protect public investors.

Pros and Cons

The Wikipedia entry on IPO’s discusses the fundamentals in more detail, but in summary the rationale for a company to consider going public can encompass the following:

• Strengthening and broadening the equity base
• Starting the process of creating liquidity for the initial shareholders
• Attracting and retaining employees through equity on a liquid market
• Facilitating future access to capital and creating new financing opportunities
• Exposure, prestige and public image
• Facilitating acquisitions

And of course being public can entail any number of drawbacks:

• Significant legal, accounting and marketing costs
• Ongoing requirement to disclose financial and business information
• Meaningful time, effort and attention required of senior management
• Risk that required funding will not be raised
• Public dissemination of information which may be useful to competitors, suppliers and customers
• Increased pressure on short-term financial performance

Process

The process of going public typically involves one or more investment banks which are known as “underwriters”. The company going public enters into a contract with the lead underwriter to sell its shares to the public. In a song-and-dance routine dubbed the “road show,” the underwriter approaches investors with an offer to sell the company’s common shares. Upon selling the shares, the underwriter(s) keep a commission based on a percentage of the value of the shares sold.

In addition to investment banks, and because of the wide array of legal requirements, IPO’s typically involve one or more law firms with a deep practice in securities law.

Public offerings are sold to both institutional investors (such as mutual funds, or in France, SICAV’s and even tax fund management firms) and to retail customers (the general public, e.g. widows and orphans). Because of the tendering of shares to the general public, the process is closely regulated. For example, in France a company going public must obtain two steps of authorization from the AMF, and publish a detailed prospectus (‘document de référence’) while adhering to a variety of deadlines and notice periods.

Following the road show and compliance with all regulatory requirements, the underwriter sets a deadline for the investment commitments from the institutional and retail investor groups. At some point almost in parallel, the company and its advisors will likely choose one of two primary ways of setting the price of the shares being sold: either i) by announcing a fixed price, or ii) by going through a process of ‘book-building’ in which the underwriter attempts to gauge investor demand for the IPO and thus determine the most appropriate price which will ensure the fundraising target amount is met.

If and when the targeted fundraising amount is attained, the IPO operation will generally be deemed a success. The underwriter often is allowed to increase the size of the public offering by up to 15% under certain circumstances (known as the ‘greenshoe’ option).

The investment bank underwriting the IPO will often also initiate research coverage on the company so that their corporate finance department and retail division can attract and market new issues.

Stock Exchanges

Finally, a word on the public markets. The stock exchanges with some minimum degree of pan-European exposure that would be relevant for a French company are:

• Euronext (which in France includes the Alternext and the Marché Libre)
• OMX (headquartered in Stockholm)
• London Stock Exchange and AIM
• Deutsche Börse

Additionally, practically every European country boasts its own stock exchange (Borsa Italiana, Helsinki Stock Exchange, etc.) which generally is more appropriate (and often restricted, even) to listings in the home country.

We’ll elaborate on these points further in the context of European tech companies in a future post.

I encourage you to read them all (start here) when you have time and come back to this post later if you like.

One of Fred’s pearls of wisdom on board meetings struck me as particularly relevant for startups here in continental Europe:

“Board meetings should not be held for the benefit of the board; they should be for the benefit of the CEO.”

This message resonated with me when I think about board meetings in many venture-backed startups here. VC’s often dominate the boards of European startups, certainly in terms of influence if not in full legal voting majority. Board composition in European companies is closely correlated with the company’s corporate form. In Belgium and the Netherlands, for instance, the common BV corporate entity has a two-tier structure, with a board of supervisory directors separated from the board of managing directors. In France, a startup may have a single tier structure (conseil d’administration) but frequently adapts a two-tier one at it matures (directoire + conseil de surveillance). Because of the absence of management in the supervisory board layer of a two-tier structure, this organ is commonly controlled by the VC’s.

This is certainly not a problem per se. However, a VC-dominated board can create an environment in which the management team comes to regard the board meeting as a reporting obligation to plow through, i.e. a quarterly or bi-monthly chore. A European VC tilt toward under-capitalization — or at least the reluctance to fund outsize financing rounds that give even those companies with a high burn rate an extended cash runway — can keep startups on a tight financing leash and thus also reinforce the headmaster/pupil dynamic.

The consequence is that board sessions turn into operational update exercises as opposed to truly open exchanges on the most important strategic issues facing the company.

So how to avoid this trap ?

Both the VC’s and the entrepreneurs are responsible. As VC’s, we should communicate clear expectations and board meeting rules of engagement to entrepreneurs at the time of the deal. We should also take care to isolate the important but operationally-oriented reporting items to a place outside the boundaries of the board meeting.

Entrepreneurs, and this can be uncomfortable, need to learn how to (politely) say ‘No’ to VC requests to add non-strategic topics to the board agenda. Rather, they should be strict in prioritizing the most important strategic topics for discussion and should view each board meeting as a chance to share (as Fred called it) “the issues that are keeping them awake at night.”

Then we’ll all get a good night sleep.

So I behaved prudently, particularly on the bike. Due to a combination of ideal weather conditions, the flattest bike course I’ve ever experienced, and my excessive caution early on, I entered the run segment feeling springtime fresh. The result was my fastest sprint run split and a perfectly respectable finish. It’s great to be back.

But the equivalent of rearranging deck chairs on the Titanic is what it feels like we do all too often here in France.

My favorite local neighborhood wise man and actuarial genius, Joseph Leddet, recently described the manifestation of this phenomenon in the Paris metro system. RATP employees in 9 out of 10 metro stations no longer sell tickets; they’ve been re-commissioned as “public information points.” As Leddet points out, this means that the employees in 9 out of 10 metro stations have nothing to do, because regular metro passengers have no need for “public information.” They merely need to buy metro tickets or renew their monthly pass. And now the employees can no longer render such a service; they merely redirect the passenger to the automated ticket kiosk. So, since the employees still maintain their positions in the metro stations, no cost savings are realized. Nor are they re-trained and re-deployed in other innovative areas that could, heaven forbid, actually become new revenue lines for the RATP. And since the automated kiosks are incomprensible to most tourists and incompatible with many foreign bank cards, one could argue that there’s a been a regression in the notion of public service.

Yet this phenomenon also extends to the high-tech startup scene.

I’ve written a lot about the Easy Money period and the distorting effects that tax-incentivized investment vehicles can have on France’s venture capital industry. The rearranging deck chairs metaphor comes into play when we think about the perverse impact on the efficient allocation of capital. As I’ve suggested before, tax-incentivized funds prioritize capital preservation over high risk/high reward pursuits.

High risk-taking inevitably means some bankruptcies. Bankruptcies can endanger the gravy train of intermediaries that push these investment vehicles on French taxpayers looking for a fiscal break. So rather than allocate capital to high-risk endeavours that have the chance to become the next Twitter, it is much more prudent to invest in relatively safer technology or service businesses that sacrifice growth in favor of short-term profitability. Or worse, to drip feed companies that once had a technology edge but never quite scaled when now their market opportunity has long since morphed into something else.

Happy anniversary.

To be fair, fundraising in a startup is never easy. The fundraising process represents a substantial effort in time and distraction for the entrepreneur, even during the frothiest of times.

But stimulated by fiscal measures in France, the two-month stretch between April 15 and June 15 has become a period in which a wave of investment vehicles come out of the woodwork in a rush to invest in French startups.

The genesis of this wave began in August 2007 in the form of a French law enacted to stimulate work (travail), employment (emploi), and purchasing power (pouvoir d’achat), abbreviated as the “Loi TEPA”. While this law encompasses a basket of tax incentives, the most impactful for the venture capital industry has in my opinion been the component that treats the French wealth tax.

The French wealth tax (ISF) represents a progressive tax on households possessing net assets exceeding a certain threshhold, formerly at 800k€ and now at 1.3m€. The annual filing deadline for the ISF tax return is June 15.

Specifically, under the Loi TEPA, French taxpayers liable to the ISF can receive an immediate tax deduction on investments they make in French SME’s that are not publicly-quoted. This tax deduction reached as high as 75% in 2010, though now has been trimmed back to 50%. In other words, a taxpayer that invests 90k€ in a French startup before June 15 will receive an immediate deduction of 45k€ on his ISF tax. Of course, certain boundaries apply, for example, the total deductible amount is capped at 45k€, and the SME must meet certain criteria, notably a number of employees below 2,000 and a business activity that is considered “innovative.” While SMEs in other EU countries and even non-tech industries may qualify in theory, the upshot is that this ISF tax deduction is easiest to justify for investments in French high-tech startups.

The French seem to be even more passionate about tax deductions than about foie gras or fine wine. And the amount of ISF tax receipts in France is significant (3.8m€ in 2008). So, investment vehicles which offer ISF tax deductions are popular among the French upper middle-class. Moreover, private bankers love these ISF Funds; they represent another investment product they can push out to their wealthy clients which is an easy sell and hence a fast fee generator.

As a result, ISF Funds are numerous. And they target investments in the very same companies that traditional VC funds would target.

However, the nature of these ISF Funds leads to one key distinction: since the investors in these vehicles have already received a significant tax deduction, their ROI requirements on the performance of the funds’ underlying investments is less important. In fact, a general perception among ISF Fund investors, rightly or wrongly, is to be satisfied with a money-back situation. If the ISF Fund returns exactly the original investment, say 5 years later, one could argue that the performance of the Fund is unacceptable. Yet the individual investor will be delighted with his tax-adjusted return, thanks to the significant fiscal deduction at entry.

This key distinction creates a mismatch in the market relative to traditional VC funds. On the one hand, an ISF Fund does not require the same rigor and high-calibre team necessary in a traditional VC fund. Traditional VC’s must keep their institutional investors happy; and it is largely on the basis of their track record that they succeed or fail in raising future funds. Raising an ISF Fund does not require a road show, merely the right distribution network to reach the individual taxpayers with a no-brainer product.

Additionally, thanks to the existence of the “tax shield,” an ISF Fund can thus afford to invest at higher valuations than a traditional VC whose investors’ IRR will be based solely on the capital gains.

So the existence of these vehicles is a double-edged sword. For entrepreneurs seeking to raise money at higher-than-market valuations, the ISF Funds can be a relative easier source of funding. Decision cycles with these vehicles tend to be fast too, as they must invest before June 15 to qualify for the tax deduction.

On the flip side, the entrepreneur may in return forfeit the longer-term benefits of partnering with a VC firm who will be laser-focused in adding value in whatever way they can (network, recruiting, m&a, international expansion, etc.) with the sole objective of maximizing capital appreciation of the company.

I had the honor of spending the past week there on a business trip, which by stroke of good fortune, coincided with a week of cherry blossoms (sakura) in full bloom.

Appreciation of the fleeting moment of flowering cherry blossoms and the corresponding hanami celebrations are typically Japanese traits.  The blooming of the sakura marks the arrival of spring, representing not only a renewal of the seasons but also a rebirth of many facets of life: the start of a new school year, a recalibration of personal goals, and a reassessment of business objectives.

One industry undergoing dramatic rejuvenation which interests me professionally is the gaming sector.  Historically. Japan has produced worldwide leaders in this area: card games like Hanafuda which my Japanese aunt’s grandparents played as kids, arcade games from companies like Konami and Namco (remember Pac-Man ?), later giving way to console games from goliaths like Sega and Sony, only to be subsequently out-innovated by Nintendo’s Wii.

Today, the gaming sector faces a new kind of disruption in the form of social games.  In the West, we cannot escape almost daily coverage in the tech press of social game darling Zynga.  However, the true leaders of this sector are in Japan:  notably DeNA and Gree – two incredible success stories with market caps comparable to Zynga yet with operating margins exceeding a whopping 40% – and to a lesser extent Nexon, a Korean company recently succeeding its IPO on the Tokyo Stock Exchange as well.

Oh and by the way, unlike Zynga, these two Japanese leaders operate their gaming activities almost exclusively on mobile.

I submit that the nascent market of Europe, particularly France with its deep bench of game development talent, can learn a lot from these giants.  For example, a relentless focus on market iteration helps these firms develop advanced insights into customer experience.  These insights translate into savoir-faire in monetization, resulting in ARPUs surpassing the already impressive figures of Zynga by 3~5x.  Applying just a fraction of those metrics to the European market produces some insanely audacious projections.

But like the short-lived blossoming of the sakura, the current gaming model will not last indefinitely.  Already rumors swirl about the prospect of increased government oversight and potential regulation of the highly profitable free-to-play/upsell model.

Combine this risk with a saturated domestic market, a strong yen, and a new generation of internationally-minded Japanese entrepreneurs, and we have a perfect storm of convergence for adventures abroad, such as DeNA’s acquisition of Ngmoco and Gree’s acquisition of OpenFeint in the past 18 months.

On my last night in Tokyo, my dinner companions spoke about the general macroeconomic situation facing Japan, and one person even posited that Japan should look to France as a model for how to gracefully manage a once-leading economic superpower in its gradual decline.

The suggestion that Japan could actually learn something about economics from France definitely caught me off-guard.  But it was a typically Japanese thing to say, a phrase filled with humility and perspective.

My gut feeling, however, is that Japan will continue to reinvent itself.  After all, the creator of the original hanafuda paper card game fell from grace only to later rise again with a blockbuster success: Nintendo.  Wii shall overcome.

I understand the well-meaning intent. The entrepreneur’s objectives are often twofold: i) convey us that the market potential for the given startup is enormous; and ii) convince us that the entrepreneur will be a prudent steward of the investor’s capital.

The first objective reminds me a bit of the Chinese market analogy, i.e. if we sell this to only 0.1% of the Chinese market, look how many millions we’ll make! This is problematic for me because it underscores a top-down approach to market research. Top-down analysis is a useful sanity check to test assumptions — most investors will do this anyway — but it is anathema to the fundamentals of building a successful product in a startup, i.e. determine a pain point in the market, develop a prototype or alpha version to test your thesis, iterate based on customer feedback, then scale. It is far easier to extrapolate projections into large numbers once these preliminary proof points are in place.

The second objective is more complex. On the one hand, I can certainly appreciate the entrepreneur’s desire to reassure us of their frugality. Resourcefulness is a key character trait of a good entrepreneur, and I want every entrepreneur we support to be efficient with our capital.

However, to creators of high-tech startups with conservative aspirations, I say, you’re in the wrong place. Either you’re not ambitious enough to launch a company that can attain the growth on which venture capitalists rely, or you’re telling me what you think I want to hear. Don’t get me wrong, not all business ventures should target explosive triple-digit growth in their early years. Lifestyle businesses are perfectly laudable, and I commend the entrepreneurs that create them. But the VC model is predicated upon outsize returns. If the growth that can generate outsize returns is not relevant for your business, then venture capital is not the relevant source of financing.

I can also understand why you might downplay your projections, even if you’re concealing your genuinely lofty ambitions. The French educational system, such as the noteworthy Ecole Polytechnique, prides itself on training future business leaders to perform exhaustive what-if analyses and risk-avoidance simulations before finalizing any decision that contains a tad of uncertainty. Moreover, as VCs in Europe, we’re collectively guilty of reinforcing such behavior by chronically under-capitalizing startups and typically favoring profitability over revenue growth. There’s also the cultural element, which I find both unusual and admirable as an American, of the European values of modesty and not over-promising.

Think BHAGs

Jim Collins in Built to Last famously cited the BHAG acronym — big hairy audacious goal — as a consistent characteristic of visionary companies. I submit that BHAG thinking is also a fundamental tenet of successful entrepreneurs. It is only by setting the bar high, by being audacious in your plans, by being overly-ambitious in your efforts, that heroic results occur. I expect you to fall short in your forecasts; a business plan never shakes out as projected. But you need to aim for Mars if you merely want to reach the moon. Perhaps the golfing metaphor would be, “A short putt never drops in the hole.”

Oh, and please don’t generously propose to be a diversified lower risk asset for our portfolio. VC’s will perform their own risk mitigation exercises. This forms the basis of professional portfolio management, and heck, half of the VC’s in Europe are former bankers. Furthermore, risk mitigation is built into the very architecture of the venture capital model in that LP’s allocate only a fraction (<1% in Europe) of their total funds under management to the VC asset class.

So if I were asked to articulate what I would ideally like to hear in an entrepreneur’s pitch to ensure they capture my attention, it would probably include something like this:

The call from HR the following week came as expected, but their request was one you did not expect. The HR manager conveyed the positive feedback on your candidacy, but then informed you that in order to continue the process, they require the keys to your apartment for a few days.

The Company intends to examine your personal affairs before making a final hiring decision. They will have an opportunity to examine the cleanliness of your living quarters, check the expiration dates of the perishables in your fridge, sniff the mildew on your dirty laundry, and perhaps find that 1980′s copy of Playboy with the Farrah Fawcet centerfold stashed under your mattress (yes I’m thinking of you, Brian Miller from the 8th grade). The Company may riffle through the papers in your filing cabinet, thumb through your photo albums, jam to your Bob Marley cd collection, and watch the latest recordings on your DVR.

But don’t worry, they won’t take anything, and they’ll be careful not to break anything. This exercise is merely standard procedure to ensure that you’re a good fit before their final hiring decision. They won’t even make copies of anything they discover; after all, the Company respects your privacy.

{Note: My portfolio companies’ recruiting methods are limited to obsolete techniques like merely asking candidates for references.}

Dear Mr. Bivens

Student at [local university], I’m looking for a job in private equity in Paris.

Competitive, aggressive, and dominant on the French private equity market, Truffle Capital is the enterprise corresponding to my aspirations, which I why I wish to join.

I attach my CV and remain at your disposal for further information by email or phone.

Sincerely,

Emails like this surprise me, especially coming from a student at one of France’s top grandes écoles.

First of course, there’s the cardinal rule that when sending a CV with a job inquiry, it’s worth doing a tiny bit of research into the recipient before writing the cover email. If this candidate had spent 60 seconds looking at our firm’s website, he would have known that Truffle Capital divides itself into three specialized sectors – biotech, energy, and IT – and would have indicated which sector his interests and talents fit best. He would have added some semblance of specificity rather than throwing out generic platitudes like ‘competitive’, ‘aggressive’, and ‘dominant’, which don’t really tell me anything. He also would have addressed the message to a proper email address, which in my case can be easily found on my blog.

There’s also another issue at play here, which I suppose I cannot expect young adults fresh out of college to think through – especially in France – but one that bothers me nonetheless. And that is that newly-minted undergraduates are not thinking long-term when they expect to join a VC firm as their first job.

I can understand why becoming a VC looks attractive on the surface: the job sounds glamourous, and there’s a prestige factor at landing a VC gig, perhaps even greater than McKinsey or Morgan Stanley for ambitious undergraduates. The glamour and prestige are over-estimated, but the perception is understandable given today’s self promotion-oriented VC community.

But the truth of the matter is this: venture capital is all about the portfolio companies. Venture capitalists work in service to the entrepreneurs they finance.

Accordingly, to be a good VC, you have to be able to provide relevant and beneficial assistance to the portfolio companies.  The value you will be called upon to bring can encompass direct sectorial knowledge, networks, privileged introductions, strategic guidance, operational insights, processes and methods, and especially credible ‘cheerleadership’. I submit that in order to do all this, you must gain industry experience before becoming a VC.

Furthermore, and I recognize this it is practically heresy to say this in France, but I firmly believe that to be a truly effective VC, you must have significant startup experience.

So when I receive a job inquiry from a new graduate, I immediately think that the candidate hasn’t sufficiently thought through the implications of what it takes to become an effective VC, or worse, the candidate is merely interested in the job for the prestige.

So, am I just wasting my time if I send you my CV ?

Not if you’re still reading this!  I am a firm believer in helping people that are serious and committed.  I welcome people contacting me over the transom for contacts or advice on employment opportunities within the VC/startup ecosystem in which I operate. In fact, I very much value this. Our portfolio companies are relentlessly seeking growth, and the recruitment of top talent plays a key role in their progression. At any given time, there are several employment opportunities, or at least unmet needs, across our portfolio.

That being said, my bandwidth is extremely limited. I help people with career guidance when I can, but I must give priority to our investors, my colleagues, and my portfolio companies.

Accordingly, some ways of soliciting career advice from me are more effective than others. Here are a few suggestions to increase the likelihood of a desirable outcome:

• Mass emailings of a CV and/or cover letter are not effective. I usually junk immediately unless my stringent spam filter does it for me.
• Tell me clearly what you’re looking for. A generic, “do you have any job openings for me?” often goes straight to trash.
• If you’re looking for a job in venture capital, and you’re a newly-minted undergraduate / grande école degree-holder, you clearly haven’t been paying attention.
• However, if you have substantial work experience, and are convinced you want to become a VC, I urge you to first take a month to reconsider. If after that month, you still remain undaunted, spend the effort first to fully understand the VC model, research the firms in the market, and feel free to let me know what type of role you’re seeking. Also, be aware that VC funds generally don’t have formal or frequent recruiting processes. The VC model is not scaleable in headcount like big corporations, banking, or consulting. Be prepared for a binary yes/no response that is usually ‘no’.
• If you’re looking for a job in a startup, I applaud your decision! (see Free your career). Now, how can I help? Take a look at our portfolio companies. Which interest you the most? Of that subset, visit their respective web sites. Many post job openings in clear view (I also maintain a list under the ‘jobs’ tag on my blog. If you see a role you want, please apply directly to the company, but feel free also to alert me of your interest. I will try to ensure that your application receives attention and that your candidacy is seriously considered.

If you do not see a startup job opening that corresponds to your specific aspirations, get creative! If you’re passionate about a specific space in which one of our portfolio companies is operating, think about how you might be able to add value to the firm.

I’m of the mindset that passion is far more important than which university you attended, and often even more so than specific sectorial experience. If you can succinctly articulate how you think you might be able to benefit a given portfolio company, I will probably go out of my way to introduce you to the decision-maker there.

I’m of course referring to the Kony2012 short film produced by Invisible Children.  The human rights organization launched a video with a sole objective to render famous and agitate for the arrest of Joseph Kony, head of the Lord’s Resistance Army, abuser of child soldiers, and international war criminal #1.  As of last night, the Kony2012 video has surpassed 100 million views (source: Visible Measures).

I’ve found this phenomenon fascinating, and not solely because of its welcome spotlight on a continent-wide topic directly involving another young man I’ve had the honor of knowing (for further reading on the subject, I recommend Ishmael Beah’s first-hand account of his experience as a child soldier in Sierra Leone).

It feels like we’re approaching another inflection point, in which social media is elevating citizen activism to a level which obliges politicians to act.

Like any larger-than-life movement, an inevitable backlash movement does not trail far behind.  In the West, the two camps seem to fall along generational lines.  In Uganda and much of the African diaspora, the video campaign feels more like Rudyard Kipling’s condescending 19^th century poem, “The White Man’s Burden,”  and understandably so (for an excellent perspective on the nuanced issue, I recommend you start reading here).

But even if iPad-touting youth in the West are re-tweeting video links and buying t-shirts so that they can feel better about themselves, you cannot condemn their intentions.   I’d much rather see virality on a complex, geopolitical topic like this than the traditional allocation of mindshare to the Kardashian sisters.  And Kony2012 does seem to be encouraging many people to research the complex topic more thoroughly.

Regardless of your opinion on the worthiness of the cause of hunting Joseph Kony, or on the agenda of the Invisible Children organization, one fact is undeniable:  the momentum generated by the Kony2012 campaign has forced politicians worldwide to take a position on a human rights issue that they likely would have ignored in a previous era.

I submit that we’re only beginning to understand the approaching sea change of civic activism enabled by technology and the network effects of social media.

In addition to being the year of Joseph Kony, 2012 will also mark presidential elections among 3/5^ths of the UN Security Council permanent members: the U.S., Russia, and France.  In the first, President Barack Obama counts almost 13 million Twitter followers and boasts a whopping 91 for a Klout score.  The second withnessed an unprecedented expression of public outcry, with grass roots solidarity largely enhanced by Facebook and Twitter during its election last week.  And here in France, politicians have underscored the power posed by social media in their curious zeal to censor it.

We may not yet have reached the year in which digital activism tips an election, but the day is near for when it is the politician who is not necessarily the best-financed, but rather who best masters the power of social media that wins.

In an article on this very subject, TechCrunch questioned whether the MWC will continue to remain to relevant. They observed how the center of gravity in mobile is shifting away from the network operators and towards handset platforms and software. The show is less about Vodafone and more about Android and Angry Birds. In the past, the stars of the show were gladiator CEOs like Sir Christopher Gent. Now, the celebrities are people like Denis Crowley of Foursquare.

TechCrunch argues that the new product announcements or business partnerships in this new paradigm happen on a regular basis, that it no longer takes a yearly carrier-sponsored trade show to handshake on an agreement in a convention center hospitality suite.

While I agree that the trend toward software and content is indisputable, as a VC I enjoy attending the MWC each year, and I submit that the conference has far from outlived its utility. The MWC is the sole conference that I consistently reserve on my calendar. I look forward to it annually for a few primary reasons.

How do I say “You’re beautiful” in Catalan ?

First, it’s a chance to escape Paris and experience gorgeous Barcelona weather in February. More importantly, this is the only conference in the world that assembles all the people in the mobile ecosystem in one place: the mobile operators, the operator vendors, the content players, startups, investors, and investment bankers. Only at an event as wide and as comprehensive as this can I glean a sense of where the next innovations may bud, simply by walking the floor.

This year I overcharged my agenda, regretfully not leaving a ton of spare time to wander and soak in the vibe. Still, some trends were unmistakable.

Takeaways from this year’s conference

HTML5, for example, is the current technology buzzword. We’ll see how sustainable this fascination is, though with Facebook’s initiative in partnership with 9 global carrier groups to upgrade mobile phone browsers in order to enrich the technology’s capabilities, I would be bullish on HTML5. While apps are here to stay, I more broadly believe the mobile browser ecosystem is giving rise to a number of cool activities ripe for VC funding.

Another shift apparent at the conference was the mobile operators’ burgeoning interest in using the mobile device to enhance customer engagement and customer retention. Operator vendors, at least those who aren’t still restructuring, seem to be responding.

Perhaps the most audacious statement came from Nokia. Last year their platform may have been burning, but this year their stand was on fire! Between the stand that represented an amusement park, the free ice cream, and the aesthetically dynamite lineup of new smartphones, Nokia made it resoundingly clear that they’re not going down without a fight.

It’s all about human contact

Another principal reason that I love the MWC is that it represents one of the rare opportunities to catch up in person with a geographically disparate group of people, for example with my VC counterparts in Silicon Valley, or with potential partners for my portfolio companies from east Asia, the only time of year when several of them congregate in Europe. In this world of always-on, social media enabled connectivity, I submit that the physical encounter is still indispensable. No matter what industry we’re in, we’re all in the people business. The physical crossing-of-paths facilitated by MWC allows us to build relationships, speak off the record, exchange body language, and fundamentally interact as human beings.

TechCrunch points out that the most interesting activities occur not in the central Mobile Congress, but at the fringe events, such as at elaborate parties in hotels, yachts, football stadiums, or historic Gaudi-architectured dwellings throughout the city. This is true. But you cannot have these fun sideshows without the main event.

ago.  His runner-up finish at the inaugural event confirmed that Armstrong has set his sights on the triathlon world as his next competitive battleground.

Rumors have swirled periodically since Armstrong’s retirement from the Tour de France that he would transition his skills into triathlon racing, a sport in which he actually had already dabbled before becoming a professional cyclist.

When these rumors first surfaced, Ironman columnist Lee Gruenfeld offered some coaching advice for

Lance.  [As a personal aside, Lee Gruenfeld is a writer, philosopher, and satirist that also happens to be the husband and cheerleader of Cherie Gruenfeld, a.k.a. the « TriBeast », a dominant triathlete in my own mother’s age group who consistently thrashes my mom in every Ironman race that matters, thus keeping « KonaKarin » Bivens’ ego in check and earning my gratitude.]

Gruenfeld’s counsel to Lance comprises a tongue-in-cheek list of tips from an avowed non-athlete to one of the world’s greatest.  My favorite piece of advice was this one:

Don’t save anything for the run.  Everyone else is going to tell you otherwise. Ignore them. If

Michael Phelps were doing Ironman, those guys would tell him to hang back on the swim. You’re the most relentlessly competitive human being since Eleanor of Aquitaine. Telling you to take it easy on the bike would be like telling Al Capone to forgive a few debts. Hammer that sucker! It’s simple arithmetic: The better the lead you have at the end of the bike, the farther ahead you’re going to be when the run starts.

So what does this have to do with startups ?

Lee’s advice for Lance stikes me as equally relevant in the context of venture-funded technology startups.  In case you’re not familiar, an Ironman is the mama of all triathlons, consisting of a 3.8km swim segment, followed by a 180km bike segment, and concluding with a marathon run (and yes, that’s all in the same day !).  In all likelihood, Lance’s participation in Panama’s “mere” half-distance was a dress-rehearsal for the big dance, quite possibly even the Ironman World Championship in Hawaii in October.

The conventional wisdom for champion cyclist Lance Armstrong when competing in long-distance triathlons dictates that Lance economize some energy during his undisputed leadership in the bike segment so that he can perform strongly in the final run segment.  This is considered conventional and wise because for most athletes, balancing physical effort across the three race segments can make the difference between crossing the finish line successfully or finishing in the medical tent.  Yet Lance is  not your typical athlete, and Gruenfeld dismisses the conventional wisdom in his case.

High-growth technology companies often face a similar dilemma. Should they save something for later, or rather shatter their quarterly financial forecast with the risk of experiencing a dip in performance in the following quarter ?  I say shatter.

Sure, there is something to be said for the argument of showing a consistent upward trend, building a nice story with pretty graphs to present to potential acquirers.  But I don’t want my portfolio company to « throttle back ».  This is the volatile high-tech startup world, not the world of the highly-liquid publicly-traded conglomerate like GE in a market that rewarded Jack Welch for smoothing growth and earnings.  Volatility is expected.  A temporary dip can be explained and overcome.  More difficult to overcome, however, is a loss of momentum.

When a CEO tries to trivialize an underwhelming quarter by pointing to the likely uptick in the subsequent quarter, my stomach tightens.   Empirical evidence suggests that the subsequent quarter in question will barely exceed the forecast, and often even fall just shy of it, beginning a pattern of chronic underperformance.

Rather, I would argue that going all out, and not saving anything for later, is a healthy atmosphere in a high-tech startup.  It raises the performance bar for everybody inside the organization.  Externally, it creates a buzz in the startup’s market segment and can even spur a virtuous upward spiral resulting in more record quarters.

As Lee says, hammer that sucker !

I’ve written in the past on the perverse effects that these taxpayer-funded structures can have on the venture capital sector.  And for full disclosure, a significant percentage of Truffle’s funds under management are in the form of FCPIs, whose closest resemblance in Europe would probably be the UK’s VCT structure.

{As a reminder, an FCPI, or fonds commun de placement à l’innovation, is a French fund vehicle managed by venture capital firms with a requirement to invest in innovative technology companies.  An FIP, or fonds d’investissement de proximité, is a French fund vehicle that requires investment in a specific region of France.  Both vehicles raise their funds from taxpayers who are in turn offered a substantial tax credit on their income tax, wealth tax, or both}.

The article reveals the preponderant role that distributors play in the annual collection of these vehicles.  All it takes is one or two large distributors to change partners, and any given fund management company or VC firm can shift from having a banner fundraising year to falling off the map.

I’ll explore this perverse distribution game another time, but in the meantime, invite you to read the full article here (subscription required, though a free trial is sometimes available).

For me, however, the money shot of the article is a citation from an anonymous professional of the sector:

« Les ratios, délais et contraintes de toutes sortes se sont multipliés, selon qu’il s’agit d’un FIP ou d’un FCPI, d’un fonds ISF ou IR.  Un véhicule fiscal peut désormais devoir satisfaire simultanément jusqu’à quatorze obligations différentes, voire contradictoire. »

Roughly translated: [The ratios, deadlines, and myriad investment constraints governing these fund structures have ballooned.  Such vehicles nowadays often find themselves in a situation of having to satisfy up to 14 different investment constraints concurrently, some of which can even be contradictory.]

This is unhealthy.  As we’ve witnessed with the U.S. tax code, legal complexity combined with high stakes benefits the lawyers not the entrepreneurs.

Bogle’s investment values center on favoring the little guy, the individual investor who doesn’t have the capital nor the advanced trading technologies that are at the disposal of professional traders and investment banks.

By lashing out yesterday against the tax rate on carried interest, Bogle remains classically true to form in leveling the playing field for the average joe.  “Carried interest is a bit of a technical fraud,” as he says.

The debate about the tax on carried interest has surged in the U.S. thanks to revelations that potential Republican presidential candidate Mitt Romney paid an overall effective tax rate of less than 14% in 2010.  One of the principal reasons that Romney, whose income was in the tens of millions, paid such a low effective rate is the fact that most of his income came in the form of carried interest from his time at Bain Capital, which was taxed at the long-term capital gains rate of 15%.

I admire John Bogle.  Just as he saw the 2~5% annual management fees on actively-managed mutual funds as a hoodwinking of the public, he exposes the low carried interest tax as a fiscal boondoggle to most private equity and VC general partners who are investing other people’s money.

Perhaps as a VC myself, I should fall firmly on the side of keeping the carried interest tax at rock-bottom.  However, I have two major objections to not raising it substantially.  First, financially, I am not in the same boat as GPs in the U.S.  The effective carried interest tax in France is over 30% when counting all auxiliary social charges.  Moreover, as a U.S. citizen with a French salary, I am paying tax to two countries, setting my cumulative effective income tax rate at an obscene 67%.  So Romney pays 14%; I pay a whopping two-thirds.  I find this infuriating.

Even more importantly, however, giving carried interest a tax break is totally unfair.  Carried interest is essentially a fee paid for managing other people’s money.  This fee happens to be based on performance, but it is a fee nonetheless.  The logic of rewarding investment risk with a lower tax rate is not relevant for a GP whose carried interest income is by and large pure gravy (granted, with a tad of personal investment, but this is extremely limited).

Fred Wilson presents a third compelling argument that taxing carried interest as ordinary income is good policy.  I encourage you to read Fred’s post if you haven’t seen it.

Perhaps it took a circus of in-fighting in the U.S. Republican primaries to bring this issue to light, but I am glad that the media and the public are taking notice.

]]> http://markbivens.com/m/archives/bogle-on-carried-interest/feed 2 http://markbivens.com/m/archives/frances-chopra-moment http://markbivens.com/m/archives/frances-chopra-moment#comments Mon, 13 Feb 2012 19:30:29 +0000 mark http://markbivens.com/m/?p=726 It has been interesting to follow the recent transatlantic flap triggered by Ilan Abehassera’s interview in Betabeat.

Abehassera denigrated the French entrepreneurial scene in a piece that oozed of auto-pr; Liam Boogar of Rude Baguette called b.s. In reality, I suspect both individuals were viewing the same market but through the lenses of different eras.

The brouhaha fizzled before it became exciting, mostly because Boogar refused to play the tit-for-tat game. Which is admirable, though I would have liked to see some fisticuffs on this issue, because there’s clearly a departure underway now from the traditional stereotypes about tech entrepreneurship in France clung to by Abehassera that is a very recent but indisputable phenomenon.

I’ve been a tech VC in Paris for ten years now, and I submit that we’re now enthusiastically witnessing the Deepak Chopra moment for the French entrepreneurial scene. In other words, French entrepreneurship seems to be finally breaking out of the karmic cycle of risk-aversion, underinvestment, and narrow ambitions (Chopra is notorious for exhausting the metaphor of kundalini teachings in business world applications, but if you’re not convinced, read: The Seven Spiritual Laws of Success). But you have to be on the ground here to detect this phenomenon, trust me.

The new generation of French entrepreneurs are breaking the mold. Every single finalist of the Founders Institute program — and every member of Le Camping I’ve met — pitches a well thought-through yet audacious venture with global ambitions reminiscent of what I heard in Silicon Valley in the 90s. First-time teams that have failed make strategic pivots and try again. French co-founders of bay area companies return to France for their second or third ventures (yes, it really happens). I even know of a few cases of Americans moving to Paris to start their tech companies. Granted, a lot of this evidence is anecdotal, but stories like these were unheard of five years ago, even eighteen months ago.

The government, on which the French often instinctively rely to take the lead in innovation, is stepping up in it’s role too. Between record Oseo subsidy grants, the newly-formed Fonds National d’Amorçage (the new 400m€ state-sponsored seed fund-of-funds), and it’s continued support (for the moment) of the tax-break-incentivized investment vehicles like FCPIs, FIPs, and ISF Holdings, early-stage capital is flooding the market. Does France’s legal framework around labor law leave room for improvement ? Of course. But this double-edged sword has benefits. For example, with programs like the Accre, unemployed workers can receive an advance of 50% of their 23-months of unemployment benefits if they apply it to starting a new business. And the government’s efforts to untangle the red tape of the past has rendered company creation formalities inexpensive and fast. As a matter of fact, just recently at Truffle we aided our partners in incorporating 7 brand new companies in the week between Christmas and New Year’s.

On the investment side, there’s definitely still a ways to go (mea culpa). But with the increasingly ubiquitous collection of professionally-run incubators (see How many startup accelerators is too many?), and seed funds like Isai and Kima, France is no longer totally devoid of U.S.-style early-stage investing.

Yet I submit that it is in the corporate sector where change is slowest. Whether it’s due to conservative values, complex decision-making processes, or insular networks, French enterprises do not have it in their DNA to do business with startups. There’s an old joke that a French software startup has better odds selling into American corporations than into its own backyard that still holds true. It’s no coincidence that the new generation of French startups gaining the most traction nowadays are by and large consumer internet plays.

To all you French entrepreneurial refugees in the States, I salute you for being adventuresome. I hold a (conveniently self-serving) respect for entrepreneurial immigrants in both countries. But also realize that it’s soon going to be safe to come home again.

The idea seemed attractive to the board at the time. With its pan-European footprint of titles like ITEspresso, Silicon, and The Inquirer, the company found itself exposed on multiple fronts: first, B2B technology ad budgets had been slashed by all large tech companies; but moreover, NME’s core markets of France, Germany, Spain, and Italy were all entering recession.

On digital content’s B2C side, things weren’t nearly as dire. Although CPMs were experiencing downward pressure, the diversity of audience and thus advertising base enabled quality consumer-facing websites like CommentCaMarche.com to remain sheltered from the downturn in corporate ad spending. The siren’s call of relative ad revenue stability on the consumer side was challenging to resist, especially when financial investors become alarmed at the impact on the bottom line short-term. Something had to be done !

But to the management team’s credit, they held their ground. Actually, they doubled-down. At the 2009 low point for B2B digital media, NME opened a UK presence. Even more crucially at the time, the company began brainstorming on how to diversify its revenue base while best leveraging its valuable audience of corporate IT decison-makers, such as expanding into lead generation. I won’t elaborate on the details because the story is still being written. But in hindsight it looks as though those difficult decisions at the nadir of the global financial crisis proved genius.

Charlie McCurdy, CEO of Apprise Media reinforced some of these choices in his excellent presentation at American Business Media’s Advanced Leadership Program on The Future of B2B Media. “Marketers are probably not buying banners or sponsorships for the media exposure, they want to drive leads to their websites. If white papers or Google AdSense deliver, they’ll do that instead.” In terms of b-to-b marketing share, ABM attendees forecast that live events would grow from 45.1% in 2011 to 48.4% in 2016; digital would grow from 12.8% in 2011 to 18.2% in 2016; and print would fall from 29.2% in 2011 to 11.7% in 2016.

In late 2010, NME witnessed a return of the banner ad budgets from corporates, but makes no secret of its appreciation of the importance of a diverse offer for this core client base, nor of the importance of scale. The company recently acquired the German subsidiary of CBS Interactive, and is on the hunt for additional acquisitions in Britain and France.

Nowadays it’s very fashionable in startup parlance to talk about strategic ‘pivots’. Indeed, the accelerating pace of innovation in technology often creates an environment where only those startups capable of redirecting their strategy on a dime can avoid obsolesence. But if there’s a moral to this story, it’s that there are no easy answers. Sometimes a ‘pivot’ is needed. Sometimes it’s better to scrap everything and restart with a blank sheet of paper. And yet sometimes, the old-fashioned wisdom of ‘sticking to your knitting’ prevails.

On January 17, only 31 members of the U.S. House of Representatives opposed the legislation, with 80 in support.  The day after the Jan.18 blackout, the 31-member opposition had surged to 122-strong (see ProPublica).  Even this microscopic blog’s activism elicited a surprising number of reactions here in France, including even from an assistant to a U.S. Congressman that happened to be on vacation in Paris.

But this is only round 1.  The $63m-funded army of lobbyists defending the well-financed old guard media are still in the ring.  David Binetti offers an insightful op-ed in TechCrunch explaining how the lobbyists will most likely take the fight to the most powerful influencers of the opposition directly, i.e. venture capitalists and thought leaders of digital media giants.  Round 2 will prove interesting.

My question is what should we do about this in Europe.  Europe was largely silent in round 1 (heaven knows we have other problems right now).  A typical government policy, like that of the UK, is to not intervene in the domestic legislative debates of another sovereign nation.  This is understandable.  But nefarious ill-conceived copyright legislation like SOPA would affect citizens of Europe as well.  What is the appropriate level of response?  I submit that it has to start with netizens of European digital media as well, a grass-roots effort just like in the U.S.

Hopefully, as Binetti suggests, this incident of SOPA opposition will come to represent an inflection point in the disruption of the entire political industry.  What if a successful political campaign relied not on how well-financed it is, but rather on mastery of social media to communicate a platform of integrity?  Now that would be something.

For more rationale, see: Why SOPA must be stopped

.

The divestment allows CBSI to focus on its core markets of North America and Asia. For NME, it enables the company to shore up its previously modest presence in Germany with one of the top online IT media players. Now NME counts a truly pan-European footprint in France, Germany, the UK, Spain, and Italy. Notable online brands of CBSI Germany include ZDNet.de, CNET.de, and Silicon.de. NME combined will now attain close to 20 million monthly page impressions on its network of websites, all dedicated to B2B IT professionals, consistent with the company’s strategy to remain focused on high-value audiences. This acquisition also provides a significant bump in revenues to the profitable venture, which we carved out of the former VNU Group in 2007.

I commend the heroic efforts of Dominique Busso, Anilda Billon, Ruud Bakker, and the rest of NME’s leadership team in executing on this game-changing acquisition, and we welcome CBSI Germany into the NME family.

Here is a link to the announcement in TechWeekEurope.

Part of my mood stems from the thought of today’s hearing by the U.S. House Judiciary Committee on the Stop Online Piracy Act. The SOPA legislation currently winding its way through the U.S. congress would allow the U.S. Department of Justice, as well as copyright holders, to seek court orders against websites accused of enabling or facilitating copyright infringement. The bill would also make unauthorized streaming of copyrighted content a felony.

In a typical vast overreaction to a threat of a limited group (remember the Patriot Act?), the SOPA bill risks enshrining Internet censorship and crippling the Internet. I recommend Fred Destin’s post on Five reasons why SOPA is luddite legislation to understand how braindead Texas congressman Lamar Smith’s sponsored bill is.

The other item chapping my hide is the fact that I just submitted my U.S. tax return for last year. As an American working in France, I am required to file two tax returns: one with the France fiscal authority and a second with the U.S. IRS. The U.S. is one of only two countries in the world that taxes its citizens globally, no matter where they live, work, and pay taxes. So every year I have the luxury of paying taxes on my French income, and then an additional chunk to Uncle Sam on my same French income. Granted, there is a limited foreign tax credit, but all in, I’m contributing between 60% and 70% of my gross income to both governments.

I don’t mind paying French taxes and social charges, even their elevated amount. It’s the U.S. IRS’ demand of its pint of blood for income that I earn and am already taxed on in France that I find particularly egregious. This is double-taxation without representation. Adding insult to injury are the myriad penalties on many French investment products (like IRAs and mutual funds), rendering such vehicles so costly as to be unpalatable. No wonder that many Americans living overseas refuse to play by the rules. I’d like to see the “tea party” take on this cause with as much fervor as their other ideas.

Worse yet, the threat of new tax legislation called FATCA will increase the obligation of Americans worldwide on all of their financial assets. Foreign banks in particular will bear a significant reporting burden. An officer of a large French retail bank mentioned to me that if FATCA is implemented, his bank will likely no longer accept American customers due to the associated costs.

Americans living overseas are the foot soliders in the U.S. government’s battle to win hearts and minds. We could represent the States’ ambassadors writ large, but sometimes it feels like we’re being treated as traitors.

Among the takeaways of LeWeb’11, we are led to appreciate the inevitability of ‘social’ and ‘mobile’, as testified by the success of companies like AirBnB, or the famous “cross-over” of Google Maps into permanent predominance of mobile usage.

But the verdict on ‘local’ is mixed.

Gabe Rivera, CEO of Techmeme, suggests that ‘local’ is over-rated, and would not launch a local offer.  Why ?  Quality of local content is spurious.  More significantly, local content is not sufficiently abundant.

AOL’s Patch service boasts 10 million unique visitors across its network, built over the past 18 months.  Is this significant ?

Is local content sufficiently interesting to advertisers ?  If not, how will local be monetized ?  Just as we witnessed the small-town newspaper as the first casualty of the digital media age, does local offer enough scale to make business economics work in a global world ?

To be continued…

• A java back-end developer, to work closely with the Head of Technology and the Game Development team.
• A mobile games content manager, responsible for testing and selecting new mobile games that fit the audiences of the various gaming portals.

The above opportunities are based in the Netherlands.  Any interested candidates are welcome to contact me directly by email.

]]> http://markbivens.com/m/archives/portfolio-job-openings/feed 0 http://markbivens.com/m/archives/these-premises-are-utterly-confidential http://markbivens.com/m/archives/these-premises-are-utterly-confidential#comments Tue, 29 Nov 2011 21:41:04 +0000 mark http://markbivens.com/m/?p=666 Fred Wilson captured my feelings perfectly in his post today about Reception Desk NDAs.

Thankfully, this practice has not taken hold in Europe yet, European subsidiaries of US firms notwithstanding.

European startups, particularly their fundraising advisors, love asking VCs to sign an NDA.  As I’ve written before, I think NDAs waste precious time, bring little value, and backfire on most firms trying to raise capital.

Reception Desk NDAs represent one of the rare habits I sincerely hope Silicon Valley does not export.

So I’m looking for an ambitious intern with the following profile:

• a dynamic and entrepreneurial individual with aspirations to spend 6 months working in a VC fund
• authorized status in French university to qualify for a ‘stage’ (typically the French undergraduate business schools are the primary source of interns, but this is not a requirement.  any French university could work.)
• a self-starting individual able to work in an unstructured environment (read: fun but chaotic)
• a comfort level with the digital media, mobile, and software domains
• a willingness to perform a variety of professional tasks, some highly intellectually stimulation, others less so
• proficiency in 2 of the following languages: French, English, Japanese, Portuguese

Any interested candidates are welcome to contact me directly by email.

• Scan & Target
• Utel
• CrowdyNews

All three were investments in conjunction with 3 of the 16 independent holding incubatrices vehicles we advise.

As readers of my blog know (yes, I’m talking to both of you), I’m not a big fan of vc blogs that merely regurgutate news bits, but rather prefer those that actually provide at minimum some interesting opinion and better yet some insight into the rationale for doing something.

In this spirit, here’s an excerpt of why we decided to make these investments. Our seemingly valid rationale today will most likely be proven inaccurate tomorrow, but that’s what makes this exercise fun.

Scan & Target

We suspect that Scan & Target’s tremendously powerful technology of contextual intelligence, battle-tested in military applications, could be perhaps even more relevant in the social media space. One of our investment beliefs at Truffle is the disruptive nature of social media on the enterprise, and this fits well within this theme. We co-invested in this transaction alongside the “Internet Holding Incubatrice.”

Utel

Utel, and their flagship service Fotochat, offers casual dating over mobile. It’s a sector with a broad array of high-potential niches. We believe that Utel positions itself smartly on a select few of the most promising ones. Our main rationale for investing was two-fold: i) a highly opportunistic secondary transaction, and ii) a crazily positive (and positively crazy) entrepreneur brilliant at monetization. We co-invested in this deal alongside another holding vehicle “Holding Incubatrice Mobile”, aka Solomoco.

CrowdyNews

Rounding out the trifecta, CrowdyNews has a clever algorithm based on Twitter that places relevant Tweets alongside online news articles. It’s no secret that newspapers are struggling to find ways to replace their declining classified ad revenue. CrowdyNews helps them do this, while also adding a real-time UGC opinion component to their websites. We think we can complement Crowdy’s U.S. penetration with an entrée into Brazil. Yet another of our 16 holding vehicles, the Holding Incubatrice Internet & Mobile, led this investment.

I’ve long argued that the VC model in Europe is plagued by the tendency to keep Zombie startups alive, to the detriment of plowing more time, resources, and capital in the real disruptors.

Johnson cites recent research from the UK’s National Endowment for Science, Technology and the Arts indicating that when it comes to job creation, the new companies that really make the difference are not the mass of start-ups – which will never grow much or employ many staff – but the gazelles.  These ambitious, bold ventures that innovate and build something significant are transformational in terms of jobs, technology and wealth creation.

Johnson prescribes the same model to politicians eager to spur innovation and stimulate job creation:

It is partly about targeting money and assistance towards opportunities that offer enormous upside. Funds and government support should be directed at situations that address large markets, not tiny niches. And these markets should be growing: mature sectors rarely see hyper-growth entrants. Deregulation, tax breaks, credit – all these initiatives should be channelled towards the most dynamic and professional start-ups, which are typically raising venture finance. They are the projects most likely to make it big.

Politicians should forget about being fair. Resources must be focused on real talent where there is a better chance of a breakthrough. If anything, they must increase inequality to ensure help reaches the right places.

Uncertainty causes unease. Unease causes indecision.

Startups: if you sell products or services to enterprises in Europe, prepare for longer sales lead times, deferred purchasing decisions, and extended payment terms. And if you’re in the process of raising VC money, close your round lickety-split, because I can assure you that every VC in Europe right now is entering wait-and-see mode.

I’m asking my portfolio companies to prepare a crash case scenario, not necessarily to act on any drastic measures, but at least to begin the mentally draining process of thinking about it. To be continued…

The only reaction this three-letter acronym would elicit in France, however, would be ‘Tony Parker’. And even that is limited to a select sub-segment of the general public.

Now, I have a feeling that all this is about to change. Within the span of a week, I’ve heard two separate entrepreneurs boast about their Minimum Viable Product.

The concept of Minimum Viable Product is anathema in France, running counter to almost everything product development here stands for… and I think it’s brillant.

Minimum Viable Product is not merely a beta version or a stripped-down service, it is a methodology and a mantra for product development (I defer to Eric Ries’ comprehensive explanation). And I think that as a guiding principle it has the power to transform tech entrepreneurship in France.

An MVP mindset will give entrepreneurs no choice but to throw out the part of their engineering training that encourages the pursuit of technology sophistication and perfection, forcing them instead to start with their hypothesis of the market need, and ask what is the bare minimum necessary to validate their hypothesis in order to develop a v2.

I’ll be looking forward to hearing more entrepreneurs pitch me their minimum viable products. Perhaps even one day Ecole Polytechnique will institute a course on the methodology like Harvard has done.

I think we’re on the verge of something monumental.

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Here in France, unemployment improved slightly in Q2 but still hovers between 9.5 and 10%.  Relatively speaking, the figure is not quite as shocking as in the States.

But I think this will rise further for one simple explanation that highlights the contrast between France and U.S. labor markets.  In France, most unemployed persons receive 23 months of unemployment benefits equivalent to approximately 70% of their previous salary.  This is a very comfortable remuneration for 100% free time.  Talk about a paid, extended sabbatical that most working Americans could only dream of.

One modest proposal that re-surfaces every few years yet falls on deaf ears involves forcing the unemployed to work.  The idea of forced labor triggers unpleasant reactions.  But the latest incarnation of the concept actually strikes me as not unreasonable: the unemployed would only be forced to work in order to maintain their unemployment payments above a certain minimum threshhold; they could choose the company in which they work; and the work commitment could be structured as a part-time gig to allow the individual the critical time for activities like a proper job search, continuing education, or trade re-training.

The details would necessarily require substantial and legitimate debate, but it seems that the idea merits discussion.  What I like about it is what this could mean for France’s startup environment.  One of brakes on entrepreneurship in France is the challenge startups face in assuming the financial risk of hiring.  Reforming France’s restrictive labor laws is the systemic solution, but enabling startups to benefit from supplementary personnel without any financial risk would be more politically-palatable to implement and interesting to test in practice.

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The swim featured a three-loop lake circuit with a “double-australian” exit and a tight transition area. Not ideal, but ample width in the lake made for a pleasant swim with minimal combat swimming.

The 44km bike course proved to be my downfall. A particularly steep and gravel-filled descent took out a handful of cyclists, including me. I left the race in an ambulance with a fractured clavicle. Season over. Major fail.

To look on Monty Python’s proverbial bright side, there are a handful of ways to spin a positive light on this:

1. I found an excuse to escape the grueling 12km run course which I was dreading.
2. I can claim to have lost out on the bike split to Laurent Jalabert, former Tour de France cyclist who was also competing in this race.
3. Most importantly, I witnessed the best in human nature: A fireman triathlete who happened to be behind me stopped his race in order to resuscitate me and call the paramedics. I figure I cost him at least 8 minutes off his finishing time. This man is a saint and reinforces what triathlon is truly about.

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The initial calamity of not being able to play Flash on the iPad (and not being able to do this even faster on the iPad2) has subsided. This is probably due to a number of factors, such as the rising legitimacy of Html5, tools like Google’s Swiffy that enable Flash to Html5 conversion, the increasing willingness of content owners to offer iPad friendly sites, and in my opinion the fact that the iPad is so cool that consumers were willing to overlook this defect pending the rollout of Html5 versions of major sites.

Still, Peter Judge provides some interesting testimony in eWeekEurope about why Flash still has legs, notably for reasons of lack of seasoning when it comes to security.

At our portfolio company BoosterMedia, we’re fairly agnostic in the debate. The company’s primary thrust in social mobile games centers on the Html5 standard, but currently the bulk of its portfolio of mobile social games are developed in Flash. Html5 has come a long way in the past year, and it is only recently that the technology is sufficiently sophisticated to enable a social game. In fact, to my knowledge, BoosterMedia is the first company to offer a browser-based social game on mobile based on Html5 (see http://jewelclubgame.com).

So, Five alive, but Adobe’s no flash in the pan.

France undoubtedly boasts some outstanding engineering talent.  Even better, the entrepreneurial spirit, especially among the new generation of developers, has progressed exponentially over the past ten years.

However, the French VC market has become the epitome of the cliché of “too much money chasing too few deals”.

The French state plays both an indirect and a direct role in all this.  Indirectly, the government encourages capital flows into venture funds via its extremely generous tax incentives, both on income and on wealth taxes.  The proliferation of “Loi-Tepa”-inspired funds is one of the main reasons that we curtail our investing during the “Easy-Money Period” each spring.

Now the French state will double-down on its direct impact in VC.  Building on its flush Fonds Stratégique d’Investissement, the state-sponsored investment vehicle CDC Entreprises has announced a €400 million digital ventures fund (as part of the government’s €1.4b National Endowment for the Digital Society, “FSN”).  Known as FSN PME, the fund will invest up to €10m in early-stage companies, with the aim to make 30 investments by the end of 2011.

30 investments within the next 6 months.  Wow !

To its credit, the government seems to be fulfilling its primary objective, which is job creation.  While job creation is certainly a welcome by-product of VC investing, an independent venture fund’s true north is capital gains generation.  Both are noteworthy aims, but giving priority to one can hamper the other.

According to a recent mailer, starting November 18 this year, my Air France Amex card will offer 15 Flying Blue miles for every 10€ spent with Air France, KLM, and Hertz. This most grandiose gesture represents a negligible improvement over the current 14 miles / 10€ expense now. Accompanying this change, however, is that all future spend on this card will no longer earn Air France qualifying status miles as it has in the past. This draconian move eliminates in my opinion the only worthwhile benefit of the French American Express card.

Moreover, the smelliest part of all this is AMEX France’s presentation of this modification as an “advantageous improvement.” Hogwash.

I feel betrayed, AMEX. French merchants are notorious for refusing to accept the Amex card because of your above-market transaction fees. I would regularly defend your side, AMEX, vigorously protesting against those merchants who try to talk me out of paying with my Amex card. I would even favor Amex-friendly merchants whenever possible with my patronage (for example, I always chose Go Sport over Decathlon).

That you have the audacity to mock clients like me by presenting this program change as a benefit turns me against you, AMEX France. I will express my displeasure with my pocketbook and discourage your other clients as well.

One of the beauties of Europe is the accessibility of my habitual destinations via high-speed rail from Paris.  Paradoxically, an inexpensive and brief 2-hour train ride can lay the groundwork for an unwieldy mobile phone bill the minute I cross a national border.

Roaming fees, especially data roaming, contribute substantially to the net margins of European telco’s.  Although they are under regulatory attack from the EU, including some frighteningly audacious propositions which I’ll write about later, roaming fees remain exorbitant.

I’ve experimented with a handful of solutions to circumvent these fees.  Here’s what works best for me:

1. I purchased local prepaid sim cards in certain countries, notably the UK and the Netherlands where I spend the most time.
2. At my office we use an excellent VOIP provider called Keyyo, which also happens to be one of our legacy portfolio companies (now publicly-traded Euronext ticker: ALKEY).  In addition to my mobile number, I’ve also systematically distributed my Keyyo land line number to my contacts.
3. Keyyo provides me with economical calling rates from my Keyyo line to mobile phones, even international mobile numbers.
4. Before my trip, using Keyyo’s web interface I program my Keyyo line to transfer all calls to my local sim card at my destination.
5. Anybody that calls me on my Keyyo line is automatically transferred to my local mobile phone in the country I’m in.
6. Although I pay Keyyo a fee for these international calls, I save a bundle on expenses relative to the data roaming fees I would pay on incoming calls to my French mobile phones while abroad.

Moreover, with relatively inexpensive prepaid data plans, like those offered by T-Mobile in the Netherlands, I can use a second Android phone while abroad that remains fully in sync with my Gmail account and eliminates the hassle of physically swapping sim cards.

My objective of this scheme is to circumvent roaming fees all while not incurring any substantial inconvenience.  There is undoubtedly room for improvement, and I welcome any inspiration others may have.

]]> http://markbivens.com/m/archives/an-end-run-around-roaming/feed 2 http://markbivens.com/m/archives/a-three-peat-repeat http://markbivens.com/m/archives/a-three-peat-repeat#comments Sun, 03 Jul 2011 18:45:20 +0000 mark http://markbivens.com/m/?p=586 A new world Ironman record fell today in Klagenfurt thanks to Marino Vanhoenacker’s gobsmacking 7:46 performance in his sixth-straight Ironman Austria victory.

And I thought last year we had seen it all.  I’m dumbfounded in awe and admiration.