In the Game - Julie Meyer

A new lexicon

It strikes me that so frequently we succumb to the wrong language for expressing ourselves.

A friend of mine - JP Flouru - at the Adam Smith Institute has started this helpful new lexicon.

I'm reading his book right now - What the Immigrant Saw - it is outstanding, and really encourage you to also - http://www.amazon.co.uk/What-Immigrant-Jean-Paul-Floru/dp/1907791604

A New Lexicon
Do not say	Say
austerity	living within our means
welfare state	something-for-nothing society
selfishness	responsibility
investment (state)	spending
free (state services)	taxpayers’ money
greedy bankers	greedy government
bailing out the banks	politicians bailing out the banks
public sector	big government
public services	services
regulating	nannying
regulations	red tape
the rich	people who have done well
accumulating wealth	saving for later
broadest shoulders	someone else
greed	work
cuts	bringing back to reasonable spending levels
fat cats	entrepreneurs
wealth	nest egg
key workers	key voters
affordable housing	subsidised housing
safety net	state hammock
quantitative easing	printing money
state created jobs	private jobs taxed out of existence
people	taxpayers
fair share of taxes	excessive taxes
fairness	reward for effort
redistribution	punishing success
poverty is inequality	poverty is absolute
fair trade	free trade
he earns more than the PM	he earns less than the PM if you  include the PM’s benefits
fair share	I don't know where to start to describe what's wrong here.
public	statist
progressive taxation	disproportionate taxation
income inequality	reward for effort
nantional insurance contribution	tax on jobs
commercial	what people want

 

 

11 Years of Ariadne Capital * What We Have Learned * Ideas Building Upon Ideas

Ariadne Capital celebrated its 11^th year anniversary on the 7^th of December 2011.    As I reflected on that recently, I reminded myself of how fortunate we’ve been to stand shoulder to shoulder with some great men and women who are bringing the future to us.

From the start, we were always going to be different.     We stated at the beginning that the capital wasn’t the point, but the ideas and the people who drove those ideas were.    I’ve worked in the technology world since September 1988, and what excites me about it is that it really is about ideas.    The ideas which shape markets, and how they can be accelerated through the application of technology.    Through the various “de facto standards”, “beachheads”, “go to market” strategies that I’ve been involved in in my career so far, new facts emerge – new winners and losers – it’s a fascinating race to the future. 

Matt Ridley called it, “Ideas having sex”.    That’s what moves the world.   The connections of ideas in calculated and serendipitous ways.   So a brief history of Ariadne Capital’s own engagement with ideas is probably called for on our 11^th birthday: 

2001 – BeTheDealer – Peer to peer gambling.     We advised on a capital raise for a company based out of Israel which offered the world’s first peer to peer betting product.    This was an early sign that the hub/spoke architecture of the IT industry was shifting.   

2001/2 – Nanomuscle – Ariadne’s first sizable deal where we raised $15 million into a micro-motor firm in the US with offices in HongKong which had the ability to create torque in a unique fashion.    We were intrigued with its applications in cars and toys. 

2002 – Espotting – Pay Per Click Advertising.    Ariadne was a business development advisor to this company which had the original business model that Google later adopted.    It was acquired for ~$200 million in January 2004.    Demonstrated that the UK can build at scale paradigm shift companies, but Espotting struggled to get the funding to enable it to become a global leader. 

2003 -  Skype – Free calls on the web – Howard Hartenbaum, the original angel investor in Skype through the Draper Richards fund reached out to me in September 2003 asking me to “take a look”.    Ariadne did a lot of the early business development at Skype through 4 dedicated people who eventually flipped into Skype.    It was amazing to see something go from underfunded to sold for $2.5 billion in less than 2 years.

2003 – Intamac – Remote Home Monitoring and Management – this one hurt.    I first met the Founder and CEO through BT, who we were advising at the time.    He had had the vision in 2000 from his work on the engines of airplanes while in the airforce that houses would be run like an airplane cockpit.    I could see it, and I tried really hard to get this company into a leadership position.     The company didn’t focus on getting consumers using it, but tried and failed to get the telco incumbents to adopt it.    We learned what SpinVox later proved – that all B2B companies are ultimately B2C2B companies.    I’m proud that Ariadne helped Intamac do the first partnership deal that CISCO through Linksys did with a company in the EMEA region.   I’m sad that we couldn’t get it over the line.    When Barry Maloney, Partner of Benchmark Capital, said to me, “we were 95% of the way there, Julie” – I had to disengage.    It was just too painful.

2004 – Monitise – mobile money.    Alastair LUkies, the CEO first reached out to me after a panel discussion in March 2004, and we have been advising Monitise since November 2004 on business development, acquisitions, investor strategy, go to market and marketing.     They provide a solution to 250 financial institutions to help them get into the world of mobile money.    Monitise sit at the heart of the mobile money ecosystem and organise the traffic flows and business model for the industry.   Backed by VISA five times, operating on 4 continents, every 20 seconds someone uses a Monitise service to access their balance, transfer funds, or buy something.

2005 – Zopa – peer to peer lending – Ariadne had been advising Egg and Richard Duvall’s team when he and they broke away to set up Zopa (Zopa of Potential Agreement).    Richard first put me onto Carlotta Perez, from whom a great deal of learning has been had at Ariadne Capital.   Perez’s theory of disruptive technology and adoption is fundamental to understanding the world that we live in.    She also spoke of free-formers – what I would later refer to as Individual Capitalists.    Ariadne helped the Zopa founding team with their July 2005 round of capital, bringing in Jonathan Rowland and Tim Draper from our own network.   We also helped them secure early lenders.   Zopa was one of the first consumer financial services plays that Ariadne advised on.    While Zopa today is not the subversive play that Duvall had originally thought up, it is well-placed to reshape the world of money.    Technology in 2007/8 was becoming standardised and componentised, and companies like Zopa didn’t benefit from that as they spent a lot more than they would today to build the same thing.

2006 – SpinVox – voice to text -  I first met Christina Domecq, the founder of SpinVox, at CarPhone Warehouse where we were doing some work in the summer of XX.     Spinvox would go on to secure £50 million, and be sold to Nuance Technologies.   What we learned from SpinVox is that all B2B companies are ultimately B2C2B companies.        What Spinvox did really really right was to get circa 100,000 users through a clever CarPhone Warehouse deal and then march that user demand into the mobile carriers, securing 33 carrier deals.

2006 – Otodio – text to voice – Although Otodio didn’t work, they had the idea – opposite of SpinVox – that people would want text read out to them in cars on the way to work, on the train, etc.    Otodio was trying to organise a set of actions in a multi-dependency world (a network) – getting adoption by publishers, device manufacturers, auto manufacturers.  They didn’t have the market power to do this, and they and we didn’t focus on business model enough.

2006 – Independent IP – a “linked in” for music publishers.   Based in Amsterdam, this management team wanted to start afresh with a way to create the vault of music where rights and income streams for the artist could be managed by a center body, Independent IP.    IIP would enable transactions, and organise the business model.    Traction was tough as they were dealing with Goliaths in the music industry who were interested in the new new thing, but were never going to break ranks and adopt it.    They or their model will become where the music industry moves to.   We learned that the entrepreneur understands the new digital network  or ecosystem that the established industry is moving into before the established industry does.   But we weren’t able to help them enough find their early adopter.    We could see though the shape of the David/Goliath battles to come. 

2006/7 – Lickerish – redesign of the world of professional photography.    The founders of Lickerish had a central thesis around incentivising costs and revenue streams for all of the parties in the transaction.    Put another way, the celebrity being shot will choose to take a taxi rather than a limo if the costs of the photoshoot are deducted from the net proceeds to him/her.  This was ground-breaking.  While ultimately not as successful as they/we would have liked, they were on to a big idea around “making it people’s interest for you to be successful” early on.

2007 -  The Bizmo – We were quite captivated by The Bizmo as it was the first time that we actively focused on business model as the disruptive force.    The Bizmo had an application that would “forward distribute” content, and where each party which touched the application would take a cut.    While ground-breaking, the application wasn’t sufficiently good.    The management team have moved on.

2008 – 1click2fame – The management team was early to understand how competitions online could drive engagement between artists and followers, and brands and users.     They have morphed their proposition a number of times, but have successfully built client relationships with Tesco and Pepsi.    Ariadne learned a lot through this project – primarily about how the world of TV is moving to the web, how digital applications (“digital enablers” in Ariadne speak) are transforming established companies, and ultimately how it’s “all about the data”.

2009 – SliceThePie/ Sound Out – Through Paul Brown, a former EIR at Ariadne, we were introduced to David Courtier-Dutton, the Founder and CEO of SoundOut.    SoundOut has created a vault of crowd-reviewed tracks from unsigned artists.   Through their deal with CBS, Tomorrow’s Hits Today, they are proving that it will be the digital enablers which transform the music industry.   It wasn’t their first product (fan financing – SliceThePie) or their first go to market strategy (discussions with the Record Labels), but second product and second go to market – speaking to the radio stations who were tired of being told by the Record Labels what to play, that they got their mojo, and realised that radio stations which a great ability to break new artists could do that in the digital world too. 

2010 – Digital Stores - D2C music merchandise - Ariadne advised on the sale to EMI. 

2011 – BeatThatQuote – Although the sale of BeatThatQuote to Google was completed on the 4^th of March 2011, this was 21 months in the making.    Ariadne had been advising BTQ on business development activity when they received an approach from Google that we helped to negotiate to a close.    The conclusion was a 122 EBITDA multiple on exit valuation.    BTQ was a financial services price comparison, but crucially was offering cashback deals where the end users data was being given an economic upside.     We see that data is the next battleground, and that the digital enablers are the ones that are building this consumer data profiles which are then leveraged across the Goliath distribution bases.  

2011 - LivingPlanIT - Smart Cities - Ariadne started advising LivingPlanIT in March 2011.    LivingPlanIT have created Urban OS (operating system) which connects the ecosystem of connected buildings.    Watch this space.

I write this column on the flight out of Hanoi en route to London via Moscow.    I am on the Board of Vestergaard Frandsen, a for-profit, privately held humanitarian development firm, which has factories in Vietnam which we visited.

As an American, it’s slightly odd going to Vietnam – perhaps a bit like going to Cuba.    A bit of history, but life has moved on.   Still you can’t help but be aware of the past as you go there.

And yet, the country surprised me on many levels.    I was aware that the 90 million Vietnamese are experiencing a high-growth rate, and growing a middle class.     In cities like London and San Francisco, you can see their expats as industrious manicurists, restaurant owners, and dry cleaners in particular.    But in Hanoi this past week, I just was swept away by their niceness.   Yes, niceness.    Their attitude to life is fantastic.

I found at every counter and restaurant a very friendly, gracious Vietnamese person.    They were quick to be helpful, got me out of the Hanoi airport at 2 am when a flight cancelled, and I thought I would never get my bags out from the plane hold until morning (but they did).    The folks at the factory were professional, articulate, passionate, and just plain lovely.

Outside of the Intercontinental (where the Sunset Bar is a must go to place), the city is well – not clean and looks poor.     It would have been easy to say – “they’ve got a long way to go”.    You might find yourself even thinking a thought of, “poor Vietnamese”.    I even remarked at one point how friendly everyone was only to get the response back from one of my Board colleagues, “well, why wouldn’t they be?   They’ve won.     They routed everyone that’s tried to take over their country – the French, the Japanese, the Americans and the Chinese.     People who win feel great.  They have nothing to feel bad about”. 

Touche!

I thought about that the rest of the trip.     Here is a country where it seems the average person is  about 5’3’’; they are not physically imposing.      They’re growing rapidly.    The friendliness is not one of subservience at all, but one of magnanimous graciousness.    Love it.

Vietnam, as a country, is like an entrepreneur.     Playing a game of asymmetrical warfare.    You can underestimate them if you want; feel sorry for them if it makes you feel good.    But like with every entrepreneur, the fact of underestimating them gives them good road to accomplish what they seek to achieve. 

I’ll never forget sitting across from the then CEO of an incumbent telco in early 2005 as he was being condescending to Skype, one of Ariadne Capital’s clients at that time on a Radio 4 show.    I remember saying something along the lines of – “fascinating really ... your industry is in a trillion dollar freefall, and you have yet to explain how you are going to recover, and yet you scoff at Skype’s ability to change the rules of the game.     Let’s watch this play out”.

Entrepreneurs  must think big, start small, and move fast.    If you ever stop thinking big, it’s game over.   That’s what entrepreneurs do as a habit.   They redefine industries – first in their mind, then in the market.     They identify the way the market should work, and feel compelled to bring that vision to life.   

But you have to start small.    You have – typically – a grubby little office at the beginning if you’re lucky enough to have an office at all.     You convince yourself that the simplicity of the early days brings you closer together, and it probably does.    Your advantage is the mental game that you are playing.    You know that you can make a decision and implement it.    You don’t have to have it approved by 5 layers of management.

And you win – when you do -  by playing a better mental game than the incumbent or your competitor.   For life, really ultimately is all a mind game.    I play a number of games with myself every week from deciding that things I don’t want to do hold a total fascination for myself, to focusing on what my business will be like in 5 years time, and using that vision to keep me going in the rough times.

I ruthlessly eliminate negative people from my life, and I do mean ruthlessly.    I pretend that insults are really compliments, and I try to always be gracious to people who are not so to me.   Why?   It freaks people out.     They can’t figure out where your positive energy comes from.

When you are friendly and gracious – even when you don’t feel like being so, you realise that it helps you achieve what you want to.    It flips your mind into a field of – “I’m the one who has the capacity to rise above the pettiness, simple game-playing, mere childishness of what’s going on, and be the adult”.

Most of the world operates along pretty prescriptive patterns of  - master/slave, supplicant/provider, senior/junior, you versus me, incumbent/challener.    The really subversive stance to take is to be independent.    Defy the definitions.    Don’t react to the other side.    Imply a different standard of behaviour. 

This is what I came to love about Vietnam in the past week.    They seem to be saying, “it’s not perfect, but we’re working towards that.   We’re happy with who we are, and we’ve demonstrated a great amount of houtzpah.    We know what we’re doing, and feel how you want to feel about us, but we know who we are, and we are in the ascendancy.”

If we could bottle that, and sell it to anyone considering setting up a new business, I would.     While there are lots of theories about why some people are successful, and others not, why some get funded, and others don’t, why some change industries, and others are merely profitable enterprises, the older I get, and the more I see entrepreneurs in different parts of the world, I have reduced my recipe to success to an exceedingly simple – “Play the right mental game”. 

1. Be positive at all times – not a cheerleader, not a fantastist, not an airhead, but positive about the options for building from wherever you are.    Think of negativity as a killer virus that you must immunise yourself against.
2. Act like a winner.    Exhude warmth, graciousness, time for others.   This is what people do who feel great.   Even if you don’t, flip the switch, and fake it.... you’ll find that you’ll get there faster by faking this than working to genuinely feel it.
3. Underestimate no one.     And I do mean – no one.   The guy who smells.    The woman who speaks English poorly.     The older man who doesn’t seem like he is au fait with technology.   The older woman who seems well, old.    Everyone can have a card up there sleeve.    Everyone can be a natural ally.    Alliances can be built out of simple raw materials.  
4. Forgive and forget mistakes.   They happen, but make them history fast.    The more you try to assess and apply blame, the worse it gets.
5. Be a fighter.    It’s not over until it is.    Keep the faith that you can pull it through.     Focus on what you are achieving, not what you haven’t been able to do yet.    Eighty percent of the significant deals that I’ve gotten done in my career were No’s I had to change to Yes’s.   In some cases, I had to neutralise what was a negative first before even beginning to get to Yes.
6. Be thankful.    We can all focus on what we don’t have, and didn’t get, or what remarkable things we have to be thankful for.    The latter is a much better place to be.

Life is all about where you are going; not where you came from.     Build a position for 2012 in your mind of “abundance” and “ascendancy”, and watch through the year as that mental position becomes reality.

 

 

 

Every once in a while

Every once in a while, something happens which makes you want to let loose a loud "hurrah"!     That happened to me last week when I was rushing around getting ready on Thursday morning, and heard on the BBC Breakfast show that Ali Parsa's Circle Partnership has taken over the running of a failed NHS hospital in Cambridge.

What do we know about Circle Partnership?     They have a unique model of incentivising their staff by giving them 49.9% of the ownership of the company.   They have set up their own private hospitals which seem to be run incredibly well with "Mandarin Oriental" chefs in some situations.   They are founded by two entrepreneurs who refuse to believe we have to settle for bad care in certain hospitals.   They appear to have guaranteed that the debt that the Cambridge hospital had run up would be repaid within 10 years.   In short, they are bucking the trend on several points.

I have to admit - I love excellence.    I want to support people who lead their lives by believing in delivering excellence in every situation - not just for the wealthy, but who believe everyone deserves great care, great service, great responsiveness.

Now is not the time to be ideological.    Those who would spout ideological arguments about what's wrong with this situation need to force themselves to accept that the NHS has failed in many ways.

That failure is one of not grasping human psychology.   People do what it is in their self-interest to do.    That self interest needs to be understood in the broadest sense.    People want to do excellent work.  They want to help their fellow man.  They want to be proud of a day's work, and the fruits of their labour.   These things bolster their sense of self, and contribute to a great community.    People also want to win.   They want to be a part of things with momentum, which are making a difference, which are coming out on top.

It strikes me that the Circle Partnership gets that fundamental psychological make-up much better than the NHS.

Because we tend to be very ideological about the NHS in this country, and people say things like "profit must never have anything to do with healthcare", we end up with a health system which is chronically wasting money, delivering poor care for a section of its constituency, and making decisions without thinking about whether they are sustainable.

Case in point:   caesareans.   On the 30th of October, the Sunday Times reported that all women in the UK will soon have the right to give birth by caesarean.    However, they are £800 more expensive than a natural birth.    If we reduced the current rate of the procedure by 1 percentage point a year from the current level of 25% of annual births, the NHS would save £5.6 million a year.   But unless you have a stake in the outcome, you don't consider the cost implication of decisions you take.   It's human nature to spend your own money differently than you would others.   And therein lies the flaw.    Until we have every patient understanding that it's "their money", and that it's in "their interest" for them to consider the cost of healthcare decisions, we'll be on a one way ticket to bloated spending in the NHS, and not necessarily the best care through the service either.  

If the average Occupy Wall Street protestor or Occupy St Paul's equivalent knew how much money is wasted in public services, they might quickly turn their anger from the bankers to the government and public services.    In a word, they'd probably go "apeshit".

The Daily Mail on the 11th of November reported that "Brussels squandered £3.7 billion".   In the article, it was reported that the European Court of Auditors had refused to sign off the spending in the EU's accounts for the 17th year in a row.   "In total, 3.7 percent of the £101 billion annual budget was 'materially affected by error", according to the auditors.

17 years in a row?    If auditors refused to sign off on accounts of a UK PLC or SME for 2 years in a row, the company would be struck off, closed, or made bankrupt.   Why do we tolerate this level of irregularity with "our money"?

Somethings are actually very simple in life, and don't need to be complicated.    In every system whether that is a household, company, country or a eurozone, there are revenue centers and cost centers.    The net is the profit or loss.    If the former outstrips the latter, you're ok.   You build through time, a surplus.    We seem to act as if we're trust fund children sometimes when we are so uninterested in saving the £3.7 billion of wasted European money or the £5.6 million that we could save by not giving women the right to have caesareans.   Are we so wealthy?   Turn on the BBC or CNN and watch the news.

But the real damage is to the psyche of the 4.8 million SME's in the UK who have to fight the good fight of building their sustainable businesses.    They are the ones who are creating a lot of the top line revenue which will fill the country's coffers through tax revenue.   As NESTA, the UK's Innovation Agency shows, the 6% of all UK firms who are described as high-growth create 54% of the new jobs.   How must it feel to have someone maxing out your credit cards faster than you can pay them down?

Time to wake up.   There is no global sugar daddy in the sky.    People, businesses, and countries choose to be rich or poor.   Their actions of investing in themselves, living within their means, working for the group win, and not imagining that someone will bail them out create wealthy structures - whether families, firms or trading areas.

What is Ecosystem Economics?

Why Ecosystem Economics (TM) is Key to Business Success 

Whether you are a start-up or a Fortune 100 corporation, your success is tied to your ability to understand and partner with your Natural Allies in the market and how to create growth in a network world.

 

By understanding the landscape of business in 2011, you can gauge your readiness.    Here are the 5 departure points:

 

1. There is a fundamental network-orientation to all business and life today that goes much further than just the Facebook phenomenon.   If one is still thinking hierarchically or linearly, one should update one's thinking.
2. The consumerisation of technology has changed how new products and services are adopted.  Skype, which sprung into the market in 2004, and which my firm Ariadne Capital advised at that time, offered free calls on the web.    Before then, you would adopt IT in the office, and perhaps bring it home.  After that, it became common that you adopt an online service and force your work environment to deal with it.   Now everyone buys their iPad, iPhone as consumers first, and enterprise environments have to be accomodating to this individuality.
3. Each 60 years or so there is a moment of disruptive technology.  The raise of the commercial Internet was one of these in the early 1990s.    We can, however, go back throughout history to review these from the printing press hundreds of years ago to the microprocessor in the early 1970’s.   Today is not a period of disruptive technology.   Today, social and economic institutions are embedding the disruptive technology of the web in our lives.   Even through the dotcom bust of 2000, the telecoms downturn of 2001 and the financial crisis of 2008, broadband and mobile technologies continued to penetrate our lives.
4. Technology operates exponentially (and has network effects) while our minds operate linearly.  It took 89 years for the fixed line telephone to achieve an adoption of 150 million users, but only 38 years for the television to get to the same point.   The mobile phone achieved this in 14 years, the iPod in 7, and Facebook in 5.
5. There are 5 stages of company development, and strong norms for milestones achieved for valuations expectations.
   1. concept; I call this the "dinner party stage" as many people have ideas that they share with friends over dinners, and they never do anything about them.
   2. product or consumer behaviour insight; A smaller group of people put together a beta product.   The success here comes down to whether the consumer insight that the entrepreneur has is a good one.
   3. business model validation;  The business model - or how you tax the product - must be separated out into a separate stage.   You could have a good insight into consumer behaviour but not have figured out how to monetise it correctly.   Isolate to get to accuracy.
   4. scaling on the back of corporate partnerships, app stores or innate virality of application; the big difference today versus 12 years ago in terms of high-growth businesses is that no venture capital firm is going to give $30 million to acquire 30 million customers.    You have to do that on the back of building the right partnerships with corporates - either existing app stores like Apple/iOS, Android, Amazon, Facebook, Salesforce or others.
   5. exit or sustainability; this is where after 10 to 15 years of growth typically a company becomes so cash positive that they are simply sustainable.   They may get acquired here for strategic reasons or they may go public.

 

With this landscape in mind, we can then observe what has made companies successful over the past 20 years of the technology industry.    In addition, we can note the fundamental reason why companies like Apple and Google have created dominate market positions, and what this means for your journey as a captain of your ship.

 

Successful technology firms in the 1980’s  and 90’s created alliances and early ecosystems.   They attempted to create lock-in through hardware/software tie-ups like Wintel (Microsoft/Window and Intel’s long-running dominance of the PC space.)    Their interoperability made them a de facto standard as developers flocked to the dominant place where their applications would get traction.   Many tried to dethrone Wintel including the early attempt by IBM, Apple and Motorola in the Power PC alliance in the early 1990’s by creating new ecosystems.    The PowerPC alliance failed because of the dominant standard of Wintel.   New OEM's wouldn't adopt a new chip or system without the assurance of the software developer community following.  

 

Many formerly successful technology firms, Lotus and Sun Microsystems created other niche ecosystems (think solar systems for the alignment of bodies from developers to OEM’s to ISV’s).    QualComm did the same in the semiconductor arena, and has been one of the most effective ecosystems ever created in the technology and telecoms worlds.    Many tech firms' 15 minutes of fame were tied intricably to how well they built and locked in their ecosystems.

 

These dominant positions arose through standards and compatibility, and effective monopolistic positions arose as a result, particularly in the situation of Wintel.   While the young Apple of the 1980s and 90s had an early ecosystem and cult following, they functioned as more of a silo as it wasn't compatible with the Wintel standard in the PC world.

 

Today, the behemoths are Apple, Amazon, Google, and Facebook have achieved their dominance because of several factors.    They understand that consumers are adopting their products and services - not enterprises - even if ultimately the consumers import their phones and tablets into the office.    More importantly though, they are winning because they are organising the economics of the markets and industries in which they operate.  

 

Steve Jobs' legacy will be equally about the beautiful products his team created as well as the fact that he took on two industries where innovation was stifled in the early part of this century - music and mobile carriers.   Large companies (record labels and mobile carriers) were dictating the economics, and Jobs/Apple cut a different set of economics for the industries.   He cut in the little guy (the artist, the publisher, the consumer of music, the developer), and reworked the business model for the industry, with Apple winning as a result.    Now the new music industry goes to MacWorld as a result. 

  

Similar lessons can be learned if we analyse Google’s market position.    Google say that they organise the world’s information.   Actually, they do a lot more than that.   They organise the economics of the world's information.    They use our data - albeit anonymously and in aggregated form - to cut a set of economics for the search and advertising transaction, and give no consumer any economic benefit for the use of  their personal data.   They have organised the business model to their exclusive benefit.    While they cut those who advertise in and the advertisers, the lion's share of the profits go to Google.   The individual is invisible to the economics of the transaction, and yet they are fundamental to it as well.   Their biggest Achilles' heel would be if another party came along and cut a different, more inclusive set of economics for the advertising transaction.  

 

I found that entrepreneur in John Paleomylties who ran BeatThatQuote, a financial services price comparison company, who was challenging the business model of the advertising industry with his cashback deals - giving the individual a share of the economics which the use of his personal data was generating.  Ariadne Capital, my firm, was the sole financial advisor on the sale of BeatThatQuote to Google for 122 EBITDA multiple on the 4th of March 2011.     Why would Google buy a company that had £250,000 of EBITDA for £37.7 million unless its proposition threatened its business model?

 

Ariadne Capital understands networks perhaps more profoundly than most investment firms as my previous firm, First Tuesday, was a network of entrepreneurs which became a dominant place for Internet 1.0 entrepreneurs to meet in the late 1990s across Europe – with numbers soaring to 500,000 each month at First Tuesday events at its peak.

 

That heritage provided us with a headstart to recognise the emergence of ecosystems and their importance in the early part of this century.

 

So when we met Alastair Lukies, the founder and CEO of Monitise, then part of the Morse Group in March 2004 with his vision for building the ecosystem of mobile money, we were open to the idea that it might work.  This despite a competitor’s demise at the same time – that of SimPay which had been favourably seen in the market.

 

Monitise enables you to access your banking from your mobile phone – agnostic on all levels to bank, carrier, device.   This is – I would argue – the most natural way of checking your balance, transferring funds, remitting cash - not interim services like PayPal Mobile, or cash cards.

 

The genius of Monitise was not to attempt to disrupt the banks, but to enable them.    Lukies helped the banks get into the world of mobile money.    His partnerships with VocaPay in the United Kingdom, where Monitise originated, gave him a rail into the bank’s systems.   From there, he was able to get any mobile banking transaction to be treated as “just another ATM transaction” – a piece of both technology and business brilliance.

 

Lukies also felt that if mobile money was going to be an industry, it would have to “work for everyone” – the banks, the mobile carriers, the users.    That simple “win, win, win” attitude has created a monster firm.

 

So while many of Monitise’s peer group focused on selling software to banks, Monitise built the tracks for a mobile banking ecosystem.   Lukies thought long-term – very long-term.    He dared to believe that he could create an industry.

 

Today, Monitise power more than 250 financial institutions, and every 20 seconds, a Monitise service is used by someone in the world.   VISA have backed Monitise 4 times, and other institutions such as Standard Chartered Bank, PCCW, Flemings and Co have also become shareholders.

 

Why are they winning?    Simply put, Monitise and Lukies have organised the business  model for the industry even while creating the industry.   More than that though,  they have organised a set of economics in which each of the parties in the mobile banking transaction win - the banks, the carriers, Monitise, and the individual who gets a much lower cost of capital than a substitute, Western Union, would give them charging them upwards of 25% to transfer money abroad.   As a result, the industry embraced and validated both Monitise’s ecosystem and “Ecosystem Economics” TM, Ariadne Capital's horizontal industry framework for understanding why companies win. 

 

Monitise’s market capitalisation is now north of $400 million due to the fact that they are growing the industry, not just extracting value from it.    While they sit in the middle of each transaction, and take a cut of the transaction’s value, the network effects of the ecosystem mean that there is a growing significant disadvantage to being “outside the Monitise network”.    Banks will receive a share of the new digital revenues flowing through the mobile phone as Monitise and their partners launch the Mobile Money Network with partners BestBuy in late 2011.

 

“Ecosystem Economics” explains why Monitise is winning as well as Apple and Google’s dominance.    The winners of any industry are those companies who build the business model for the industry so that all of the parties in the transaction can participate in the economic upside.   In a world of multiple dependencies – which is what networks imply -  consumers, developers, and users will flock to the systems which incentivise them to participate.

 

More importantly, though, “Ecosystem Economics” is a set of glasses for looking horizontally across any industry and assessing the players in that market, and determining their capacity to win.

 

Let’s go back to the 5 Stages of Company Development.

 

Many of the start-ups who are building enabling technologies will be funded by the venture capital community and will offer applications which consumers want.   The entrepreneurs behind these “digital enablers” will have an insight into their vertical (whether healthcare, travel, leisure, music or something else) and consumer behaviour, and understand this fundamental network-orientation or world of multiple-dependencies in which they’ll have to get any deal done to take their company to market.   As start-ups, these insights help them to overcome the asymmetrical nature of their position vis-a-vis the established industry.

 

The established players in every vertical need to identify and secure the new digital revenues which come from the digital enablers.     This tends to happen best by partnering with smaller, more high-growth firms than innovating internally.   But this doesn’t mean, necessarily, that these established firms, or Goliaths, need to buy the digital enablers, although many times they do.

 

Depending on how switched on the Goliath is in terms of understanding the landscape of networks and ecosystems, and depending on how far the “digital David” (digital enabler) has travelled through the 5 Stages of Company Development, when David and Goliath do a dance, the transaction can be more or less expensive for either party.

 

Goliath sometimes feels that he can choose the moment he engages with digital business models.    We’ve seen companies die from this fatal delay – such as Borders, many newspaper groups, car companies, fashion retailers, record labels and telecoms firms.

 

Skype was acquired as they were scaling rapidly in 2005 by Ebay (their first acquisition).    Because they had successfully traversed 4 phases of company development in 2.5 years, there was a huge premium to their acquisition.    The strategic value of what they promised to Ebay was massive despite the lower financial value at that time.

 

There was a lot of amazement when LinkedIn went public earlier in 2011 at a $10 billion valuation.    And yet why should we be amazed?    The company had a transformational insight into consumer behaviour:    everyone is always looking for new opportunities or a job.   They may not want to send their CV to a recruitment to be actively on the market for hire, but they will passively promote themselves through LinkedIn.     They clearly understood that the world had "gone network", and they made it all the way through the 5 Stages of Company Development.   For people who have never worked in a start-up, they may not realise how fraught they are with near death experiences.   At many stages along the way, LinkedIn, Monitise, Apple or Google - in the very early days -  could have been squashed like a mosquito on the sidewalk.     Companies could have taken them over if they had not underestimated them as Goliath tends to underestimate David.   But when LinkedIn makes it to its IPO, part of the premium is a Darwinian "fittest survive" premium for having crossed the finish line into sustainability.

 

So what does this mean for how you build your firm?

 

The fundamental question to ask (whether you are David or Goliath) is - "In whose interest is it for me to be successful?"    There are always Natural Allies for your success, but you may have to think laterally, and find the adjacent, non-obvious players for your game of chess.    One of the advantages that the "Digital David's" have is that they know - if they are smart - that they are playing an asymmetrical game, so they are very focused on finding their Natural Allies.   Goliath tends to not realise that the game can change as quickly as it can.   At the time that Skype was climbing towards 10,000,000 million users daily, (late 1994), I sat at a lunch with the CEO of a major incumbent telco who failed to grasp that the telecoms world was in freefall due to this young upstart, Skype, of which he was dismissive.

 

But companies have to not only find their natural allies, but they also need to organise a set of economics for the transaction in their industry if they want to become dominant.    This may come in a variety of ways.    Companies can share investment into building an ecosystem and the exploitation of that.    If they keep the customer top of mind, and focus on growing the pie as opposed to defending existing revenue, they have a good chance to win.

 

Ecosystem Economics (TM) refers to the business model design and implementation in a network where the economics are inclusive/shared such that the consumer and each party shares in the upside.  This happens because of a digital enabler ("powered by" enabling technology application), and a brave management team.

 

The next decade will see the emergence of new business ecosystems in smart cities, mobile money, digital health and broadcast media and entertainment.    Europe and the UK, who have had many fewer ecosystems in the technology world than the US, have a unique opportunity to pull ahead through business model design and implementation.   European companies such as LivingPlanIT, Monitise, and Rovio are companies which have the capacity in terms of leadership and market position to be at the center of those ecosystems.

 

 

 

Entrepreneur Country * Angry Birds

Great week last week - we hosted our Entrepreneur Country Forum with fantastic speakers - Lloyd Dorfman, Austin Healey, Martyn Dawes, Will King, Lara Morgan, Duncan Cheatle, Hushpreet Dalliwal, and then had our bi-annual "Entrepreneurs Backing Entrepreneurs" dinner at the historic Royal Institution on Albemarle Street.  

Since then I've been to Helsinki and back, meeting with the Angry Birds of Rovio, one of Finland's finest exports.    With revenues clearing €100 million, they are poised to become a global leader in entertainment.   It's great to see a European company become a game-changer and a consumer tech firm out of Europe clean up.

Many of Ariadne's own portfolio companies were at Entrepreneur Country:

• Jonathan Lakin, Global Dawn - customer experience management
• David Courtier-Dutton, SoundOut- objective, reliable, rapid music insight
• Ade Shannon and Simon McGee - LabelSneak- the private sales club for leading fashion brands
• Gavin Littlejohn - MoneyDashboard- Your free UK online money tool
• Nasir Zubairi and Peter Davies - EuroTRX- The European Trade Receivables Exchange
• Azam Zaka - eProspects- Performance Marketing
• Hirander Misra, Cyril Theret, Gerry Tucker - Plus Trading Solutions - Global exchange Platform-as-a-Service (PaaS), providing automated fully operational execution and compliance for trading venues, to meet the demands of new and existing regulation.  
• Dawid Konotey-Ahulu - Mallow Street - the online community for the pensions industry

We believe they are game-changers as well, and global leaders in the making.

That's the thing about the start-up game.   You have to be an early believer.  Both because the entrepreneurs really hate the people who show up after they've survived the 3,179 near death experiences to get to sustainability or exit where they can breathe out.   But also because when you are there before it's obvious, when the world would call the entrepreneur a nobody, and you start to connect the dots with him or her, and realise that our job is to follow the entrepreneur, and stand shoulder to shoulder with him/her, and support and accelerate, then we create more global leaders, more game-changers, more economic growth, a growth story for Europe and the UK.

The Vickers Report Will Never Be Implemented

The recently released Vickers Report on Banking Reform in the UK is a dodge.    Carving up banks is decidedly NOT what the nation should be focused on currently.

At a juncture where the economy is so dire, where jobs are so scarce, and growth is not on the horizon, can we afford to take our eye off that ball?    If I had to choose between strong banks and a strong economy, I'd have to chose the latter.     Curiously, there is no correlation between the two.    You can make banks infinitely strong if they don't lend.    But access to capital actually is one of the defining characteristics of a first world country.   Entrepreneurs in Zimbabwe, Philippines, Peru, Mexico struggle to get bank debt.    This shouldn't be the case in the United Kingdom.   

As NESTA the Innovation Agency in the UK has shown through their research, 6% of all high growth businesses create 54% of all new jobs.    So we know that getting the economy back on track requires us to give a lot of attention to those SME's in the 6% category.    They need capital right now.    I'm very skeptical that all of the lending targets which the banks are saying have been met have indeed been met.   Particularly with those banks that the UK taxpayer owns, we should be providing forensic evidence to the citizenry on how they are tracking to these lending targets.

What we should be focusing on is getting our house in order.    If we are in a position of strength, then we can withstand whatever shock comes our way.   The real tragedy is that during the sunny days of 1997 to 2007, we didn't build a national surplus.   That's why the banking crisis of 2008 hit the UK so hard.

There will always be up's and down's in capitalism.    However the next crisis hits us - what we know - is that it will be different than the last one.  On the 16th of September, Kweku Adoboli, a rogue trader apparently in UBS, was accused of fraud and illicit trading.    This appears to be a massive failure of management at UBS.   These kinds of awful situations will not go away just because we ringfence retail banks from investment banking.     They need to be dealt with by strong and forensic management.

You  can't regulate a global financial services industry at the national level.    This is not to say that we are powerless in the face of a dangerous banking industry.

But the current attempts to ringfence retail and investment banking will fail to stop banking crises for several reasons.    The Vickers Report will be discussed for another couple of years in an attempt to put an execution plan in place.   By 2019, the date at which these changes are to be implemented, the world will have changed so dramatically, that the directives will no longer bear any resemblance to the world that they were concocted in.

Innovation always trumps regulation.   For these reasons, I doubt that the new banking world that the Vickers Report has put forward will ever see the light of day.   What concerns me greatly is how much time and energy will be spent talking about the complexity of this new world while SME's are failing to get funded, and the economy stays in a slump.

There's no question that the financial services industry in the UK is one of our largest industries and one of the best in the world.    But I do tire of it constantly being put forward as if it were the only thing we can do at a world-class level.      We have a huge wealth of entrepreneurial expertise in the creative industries, pharma/biotech, IT, and we need these industries to be as strong as the banking industry.    Until we reshape our vision of finance as a service industry to the real industrialists building out the new markets of media, telecoms, health, construction - many with digital business models at their core, then we won't have a mindset which is shaped to withstand future shocks.

The best way to accomplish this is to enforce serious lending targets for SME's throughout the UK at this time, and allow those SME's to drive tremendous top line revenue into the coffers of the UK Treasury.  This growth in the economy will have the neat effect of correcting and rebuilding the UK's balance sheet.

So in a nutshell, we should be doing the following:

• Diversifying as a nation into digital-enabled industries, and losing our obsession with banking
• Stop wasting time considering how to implement Vickers when innovation will render it irrelevant
• Recognise that the SME is the engine of growth in the economy and society, and that we must create the conditions for them to fly; I believe tax policy is under-utilised here, and that SME's should receive significant tax breaks for themselves as well as for their employees to encourage them to hire
• Hold UK taxpayer-owned banks to strict lending targets

***  

What does the sale of Autonomy to Hewlett Packard mean to the UK?

The recent sale of Autonomy to Hewlett Packard has got an opinion out of just about everyone who cares about the high-growth SME sector in the UK, or who has been involved in a tech start-up, whether on the entrepreneurial side or in a venture capacity.

Mike Lynch is an extraordinary entrepreneur.    He has built a headquarter company with revenues in the billions out of the UK which has dominated a market, indeed he created a market, and became a global leader.

To state that Lynch has inspired a generation of entrepreneurs along the way would be an understatement.    He's the one that many hold up as an example of the UK's finest tech entrepreneur.

I heard him speak at a recent event of The Information Technologist's Company, and loved one of the things he said that evening from the stage:  "Always bring a gun to a knife fight".   I thought - now there's a man who understands that being an entrepreneur, no matter how big or small your company is, is a game of asymetrical warfare, and you better know how many rounds of ammunition, and how to trump your competition.   I imagine Lynch has not lost too many battles with competitors.

But what does his acquisition by HP mean?

First of all, it means - as if it were ever in question - that the UK's entrepreneurs are just as capable of building world-class businesses as those from any other neighbourhood.    The fact that the business software unit is going to be based out of Cambridge speaks volumes about the importance of Autonomy to HP.    The fact that they are jettisoning their PC business at the same time triply underscores the centrality of Autonomy to HP's strategy.   

While many of the senior management will want to stay and build out the next phase of Autonomy, many of the Autonomy top brass will leave.    Many of those who leave will go on to set up their own businesses.   Many of those who go on to set up their businesses will become successful.   Many of those may even rival Autonomy in terms of influence and profits ... down the line, another 16 years away perhaps from their founding to billion dollar exit .. just like it may have been difficult to predict at the beginning of Autonomy that it would become one of the biggies.

The point is that these supernova exits are part of the success of a start-up ecosystem.    When you have tasted the drug of working in a successful start-up, you realise that there is nothing better.    You become hooked; it really is an addiction.

These ripple effects of tremendous exits yielding the next generation of entrepreneurs demonstrate that everything is alright in the "entrepreneur country" that the UK is becoming.    These ripple effects have driven the power of Silicon Valley and Israel as well.   

Everytime we have a lastminute.com, Skype, WGSN, Espotting, Kashya, or SpinVox (the explosive growth companies that I've personally been involved with since I came to the UK 13 years ago) go through the rapid growth to become acquired by a "better parent", we create another group of business builders who say to themselves, "I played a role in that success, but I can do it myself next time".   

So the Supernova effect is part of the process.

Entrepreneurs like Lynch and the rest of the millionaires that he created then go on to back other entrepreneurs with their millions.   Again and again, tech entrepreneurs tell me that the more money they make, and they can make more money with lower capital gains tax, the more they put into backing the next generation of emerging entrepreneurs.    Ariadne Capital, my firm, pioneered this at an institutional level in 2000 when we aggregated 58 leading entrepreneurs to channel their capital and networks into backing our portfolio companies.

Round and round it goes.... the Autonomy's, the BetFair's, the Coller Capital's, the Element 14's and thousands of others .... These outstanding British firms weren't the product of enterprise zones.    But they are making Britain into a leading enterprise zone itself.  

So I say it's really pretty simple - Follow The Entrepreneur.    He or she has the market insight.   He or she has the obsessive drive.    He or she is the hero.

INSEAD Nr 2 out of 12 Business Schools outside of US

The bi-annual Forbes MBA ranking, published  at http://www.forbes.com/lists/2011/95/best-business-schools-11_land.html ranks INSEAD #2 out of 12 schools which offer a one-year programme outside the US.  IMD is ranked # 1.  In 2009, our positions were reversed.

Forbes presents three separate rankings:

*   A ranking of schools in the US offering a two-year MBA programme

*   A ranking of schools outside the US offering a two-year programme

*   A ranking of schools outside the US offering a one-year programme (in which INSEAD participates)

The rankings are based exclusively on the return on investment (ROI) that alumni five years out received (MBA Class of 2006).

The Top-12 schools for ROI are:

1. IMD

2. INSEAD

3. IE Business School

4. SDA Bocconi

5. Cambridge (Judge)

6. Oxford (Said)

7. Lancaster       

8. Warwick

9. City U (Cass)

10. Cranfield

11. EM Lyon

12. HEC-Montreal

How the methodology works:

The Forbes survey is bi-annual and measures the return on investment (ROI) of the MBA programme for alumni who graduated five years ago i.e. the Class of 2006. For each school, Forbes calculates the average 5-year salary gain in US dollars made by the MBA graduates, minus tuition fees and forgone salary (opportunity costs).

Forbes also applies a non-disclosed formula to adjust for cost of living and exchange rates.

The data upon which the ranking is based comes from the schools and their alumni (the Class of 2006).

Ben Hookway of Vidiactive on to another winner with Videobee.tv

Our friends at Vidiactive, led by Ben Hookway [who sold his last start-up to Mentor Graphics] has launched www.videobee.tv which went live on Friday - coverage in  http://thenextweb.com/apps/2011/07/22/videobee-a-centralized-viewing-hub-for-all-your-online-video/