​When we visited Estonia we heard from a young Mexican working for a company based in Tallinn. He lived in the city but travelled on business across the world. He was able to gather all the information required, enter it into his tax return and submit online in less than one minute.
 
It would not be easy to replicate Estonia’s digital government on a national scale. But this level of speed and efficiency should be an achievable benchmark for financial information within a business. The conversations I have and the things I see every day tell me that is not how things are today. 

Startups and growing businesses need better financial information. My financial information survey was the first step in a plan to tackle that problem. Nothing in the survey has changed that view. Now I am able to refine it to a small number of specific statements about what needs to change.
 
Here they are!

1.  Revenue forecasting is the hardest thing. Neither past performance nor external market views help much.
2.  Cash flows and funding needs are the biggest worry.
3.  Founders and entrepreneurs want a system to help make decisions and plans. It should be: 

• Simple - no accounting jargon or tricks.
• Compares scenarios and options.
• Real time - everything changes fast.

4.  Unpredictable targets and budgets make it difficult to understand performance. Numbers in funding projections are not a helpful way of budgeting.
5.  Lack of visibility about cash flow is the biggest worry. Lack of skilled resources to focus on finance is also a concern.
6.  Your numbers should help you understand your business. Achieving this means to integrating data from multiple sources, not just financial numbers.
7.  Founders and entrepreneurs what data to help understand how their business is doing. It should be:

• Simple and clear.
• Drawn from a single source of the truth that integrates all relevant data sources.
• Real time.
• Flexible and agile to link to different decision making horizons.

​Learning from potential customers is an exercise in humility. This survey asked some broad and fundamental questions. As you might expect, this has led to identifying some much sharper questions. Not to any definite answers. 
 
The responses came from a wide range of perspectives. Many different countries, roles in the ecosystem and levels of experience were represented. This means you have taken me further forward than I could possibly have hoped.
 
A full analysis of the survey responses is available to download in this slide deck. 

I started out on this project because startups need better financial information. Next step for me is to figure out how best to answer the challenges posed by the generous response to the survey. 
 
The job of “finance” is to make the numbers into a voice the entrepreneur can listen to and learn from. All the admin, accounting and compliance should just happen. Real time, right first time, invisible. Low cost. I know the job to be done and my aim is to find or build the tools to do it.

The many who offered to help will be hearing from me shortly. Thank you in advance for your further assistance.

​Click here to download the full survey results and analysis.

​ 
I talked in my last post about the value of numbers in running your business. For many entrepreneurs financial information looms largest when they prepare a business plan. I am still looking for as many people as possible to share your opinion on both these challenges –– final reminder I promise.
 
Some sort of financial forecast is integral to any startup business plan. There is no need to explain to founders why this matters. A good business plan can be the key to unlocking investors' wallets. I meet a lot of entrepreneurs who are focused on this stuff. Yet more often than not, they are a bit sheepish when it comes to the numbers.
 
In the glory days of amateur rugby the spirit of the game sometimes overcame the urgency for results. At these rare moments, Bill McLaren sometimes used to quote a mythical Irish wit “the situation is desperate but its not serious.”  (See origin)
 
Financial forecasts in startup business plans remind me of this philosophy. A set of financial projections is essential to the whole fund raising process. But in truth they don’t count for much. Investors make decisions based on the team, the market size, the level of innovation/ disruption and maybe the business model. 

There is a good reason that financial projections don’t figure high on this list. In early stage, innovative businesses, the link between forecasts and reality is pretty tenuous. The business has no track record to act as a guide. The risk of failure is overwhelming. Most VCs and angel groups invest in 1-3 out go every 100 business plans. Then expect only 1 in 10 of those to succeed. No-one has the expertise or experience to beat these odds.
 
Investors talk all the time about being risk takers. And they are but that is not a good paradigm for how the process works. The key factors in any investment decision are all about reducing risk. The best chance of success lies with having a great founding team. A huge market also reduces the risk of failure. And so on. 
 
Nonetheless, preparing a set of financial forecasts is an essential part of the process. You have a choice. Get lost in the process and pray that no-one asks about your numbers. Or use it as an opportunity to think about your business plan and enhance your credibility. 

The way to tackle this is not to think about getting the forecast right. It will be wrong - get over it. These numbers are different for three main reasons:
 

• They are event driven. Startups don’t prepare forecasts on a regular cycle. You do it because you are raising investment or to support other funding. Applications for grants or other enterprise support schemes for example. Maybe even to apply to an incubator or accelerator programme.
• Business plan projections represent a moment in time. As a startup founder you live in a world that changes every day. Your financial forecast crystallises things at a time. Every investor knows things will change. They just want the best guess you have right now.
• The real purpose is not for experts to do in depth analysis of the figures. Your numbers are there to support your narrative. Be clear about how they fit and you will add credibility. Present figures that contradict the rest on the other hand…

​The key to business plans is not precision. It is storytelling. A good financial forecast is driven by the business plan. The revenue numbers reflect the market opportunity and the sales model. For example, enterprise SaaS leads will take a lot longer to turn into revenue than SMB free trials.
 
Cost calculations are the same. Once you explain your business model, the structure of the cost base should be clear. Your audience will know where their money is going to be spent.
 
More important, investors want to see how that translates into growth. Its like filling up a car. Easy to do but hopeless if you don’t know where to find the accelerator pedal.
 
A lot of entrepreneurs take professional advice when producing a business plan. Nothing wrong with that. Remember you are not selecting for technical skills. These are important but easy enough to find. You pick a designer than can make your story come to life in pictures, fonts and colours. Select an advisor that can paint your business by numbers.  

I have spent quite a bit of time over the last few weeks writing a business plan. Its a bit of a retro experience for me. These days I spend much more time reviewing and advising rather than doing.
 
Apart from a long overdue return to real work, this has been a reminder of some key challenges. The business plan I am working on is for a funding pitch. Why else would you bother?
 
This is reality for most entrepreneurs. At some point you have to do one. 

​Regulars will know this is one of my favourite quotes. The meaning is clear when you are fund raising. The purpose of both planning and plan is to support a sales pitch. Selling shares in your company to investors. (Please never “giving equity away”.)
 
Because its a pitch, your business plan is much more than a technical description of how you aim to grow your company. This is about presentation and storytelling. And its about a clear message. Not a range of scenarios for debate and discussion.
 
Most often the value from planning is helping evaluate options before making a decision. In an investment pitch, that value is thinking through the best story to tell your audience. 

​Your first dilemma is aggression v realism in the numbers.
 
People and narrative sell the business but investors buy the numbers. As a struggling entrepreneur, fighting for your first few sales, can you really see $100 million revenue in 3 or even 5 years?
 
Yet that is what investors want to hear. The easy option is to offer exponential growth. Creating the forecast is remarkably easy. With no track record, your projections can be anything you like.
 
Then the dilemma hits you. Will anyone believe it? How do you convince investors that the dream is doable? 

That brings you to the next dilemma. For the numbers to be believable, there are at least three other articles of faith. Team, market and product.
 
In each case, you need to sell investors a combination of proven reality and potential.
 

• Can a bunch of bright, creative and ambitious 20 somethings get this done?
• Are there enough people or businesses (which means people anyway) who will part with hard earned cash for the benefits of your product?
• Will that product reliably deliver those benefits?
• Faster, better or cheaper than any likely competitors?

And even if you succeed, how will you defend that market against big scary giants like Google, Facebook and everyone else?

​At the risk of extending the literary metaphor, your business plan sits in a well understood genre of fiction. Investors have a set of expectations and plenty of experience looking at this stuff. And this is the true dilemma at the heart of everything.
 
Raising startup investment is a game with well established rules. They vary a bit between individual Angels, syndicates like those which operate here in Scotland, VCs and other market players. But the rules exist and they can be hard for entrepreneurs to learn.
 
Once you uncover the rule book, the temptation is to play it to the letter. And you will not be short of well meaning advisors who recommend just this approach.
 
Yet it won’t work.
 
The hardest rule to abide by is simple - surprise me. Every investor wants to see something unique. A passion or a solution or a hook of some kind that makes your business stand out.
 
Stray too far from the playing field (sorry drifted into a different metaphor) and people will think you are crazy. Stick within the white lines without deviation and the same audience sees you as boring. 

​There is the ultimate unanswerable question. How do you stand out from the crowd? Emphasise the unique genius of your business proposition while playing to the prejudices and preferences of your target investors.
 
No answers to this one.
 
But one big piece of advice. Make sure this is where you focus when developing your business plan.
 

• Don’t get caught up in detail and design.
• Don’t copy the last successful pitch.
• Don’t try to align with current trends and jargon (AI and Machine Learning at the time of writing for example).

 
Do the basics and use your thinking time to wrestle with the last dilemma.
 
Surprise me! 

Competitive pitching drives a whole lot of bullshit.

Its become one of the centrepieces of every startup ecosystem. If you want to build a reputation, grab some PR, grow your network, win cash prizes and generally just fit in, you need to pitch to win.

Founders are groomed by a whole coterie of experts and supporters. How to hone your message? How to pitch your startup? Get yourself investment ready? Business is framed as a race and only the fastest and strongest are winners. 

Only 1 in 10 startups survive (try fact checking that stat by the way!) The logic of pitching competitions says that to be in that top decile you need to beat the other nine guys on that stage.

Set down in plain English, its kind of obvious that is nonsense. Winners need to beat the incumbent competition or create new markets or change the way people shop or disrupt the value chain. Or any one of a hundred other ways to innovate.

But being better at talking in front of a slick slide deck isn’t one of them. Nor is looking a bit more promising that nine other striving entrepreneurs, in the same number of different markets segments, with different products, new business models and not a dollar of revenue between them. 

​
At one level this all seems harmless. Startups get a bit of exposure. All that coaching helps them sharpen the message. The pitch itself build confidence and presence. So why not?

If it was all just a bit of fun, I could go along with that theory. But that’s not how it works. Pitching competitions work like the beauty queen circuit. There are favourite sons and daughters. Stars are born and also rans discarded. The winners get the cash - usually small but not insignificant amounts. And investment often follows.

These competitions sit at the heart of our mechanism for picking the businesses which will be the future of our economies. Those who succeed on the catwalk are set on the road.

Angel investors and their advisors love this stuff. Of course, a fair bit of the cash sticks to the hands of advisors so its easy to see why they like the system. There are a bunch of other interested parties as well. The promoters and sponsors of contests bask in the good they are doing. Taxpayers’ cash flows into the winning companies.

All those who play the game have reputations as good guys. They are doing their bit and that builds trust and standing. We have bred self reinforcing systems based on self satisfaction and underpinned by apparently ruthless competition.

Yet its all built on sand. There is little due diligence. Facts and figures often don’t exist so they can’t be checked. Valuation models look impressive but they have no substance. So is this game really the best way to allocate scarce resources? ​​
Remember that economics is defined as “the science of scarce resources.”

A lot of hope and no small amount of political, human and financial capital is invested in startup ecosystems around the world. Technology has the potential to disrupt the old order, spark a new wave of prosperity and transform society for the better.

We are also giving encouragement to some of our brightest and best young people. Entrepreneurs surely deserve the truth. Tell them what we really think of their business idea and their potential. The pitching charade can give a business 3 years or more of life. Often on a false promise.

I think its time to find a better way to distribute our support. 

​I wonder of its time to disrupt the process part of startup fund raising. Should we turn the spotlight of the lean startup and data driven decisions onto VCs and Angels?
 
This thought hit me when I was reading Charlie O’Donnell's post explaining Why Founders are Wrong. This is a pretty good article and it covers some familiar ground. One stat appears in some form every time a VC offers advice to entrepreneurs. In Charlie’s case, he estimates that he invests in around 8 of 2,000 or so deals he sniffs in a typical year.
 
That is a paltry conversion rate of just 0.5%. Imagine the reaction of an investor if you included a metric like that in your pitch!

​We have come to accept this way of doing business. Founders I meet are a little cowed by the competitive challenge that such a low success rate implies. Investors and their advisors relish endless nights with a cold towel round their head. Buried under information overload. And they feel their finger is on the pulse. No good opportunity will escape the net.
 
The preceding paragraph shows how many cliches this process inspires. Once that point arrives, the whole affair has become routine and burdensome. It has entered the realms of "no-one likes it but that’s just the way things are." 

​Investors may be happy to live with that but I don’t see why startups should. Raising funds is life or death for a startup. Success is essential but the cost in terms of time from the founders is prohibitive.
 
It is no coincidence that the immediate transaction cost of money raised this way is also rather high. Charges and fees for both investment funds and professionals soon add up. The heavy burden reflects the high time costs of doing business this way.

​So it would be in everyone’s interest to find a better way. Making this happen needs someone much smarter than me. But in the interests of furthering the idea, here are a few modest suggestions:
 

• Investors of all types should adopt a clearer focus. Be clear up front on what sectors or geographies or other factors make a deal of interest. Better still, publish some minimum financial or track record criteria.
• This will only work if entrepreneurs respect the same principle. Don’t scattergun email your business plan. Or aim to drink a oil tanker full of coffee with anyone who will give you the time of day. Be selective.
• Wouldn’t it be nice if there was a plan for the investment process. You know something that set out the various steps and a rough timetable for when things might happen. No doubt such plans would be broken on a regular basis. But then aren’t all plans like that? No excuse not to have on in the first place.
• Spend more time on due diligence and share the results with the company. Include qualitative due diligence. And make sure that some time is spent in the place(s) where the company founders work. Even if that means having coffee with someone’s Mum.
• Get rid of pitching from the process. The ability to pitch to investors is at best tangential to being a good CEO. And at worst irrelevant. For certain, it is a terrible way to pick between companies. If you must see the team in action, find some potential customers for them and ask them to pitch to that group. At least then the process will add some value.
• Be clear about term sheets and limit the number of variations as far as possible. Most important, if an investor doesn’t believe a business is worth the risk, say No. Inserting usurious or unfair terms to mitigate lack of belief is not good for anyone.

 
Investment in startups plays a vital role in the allocation of economic capital. This money is the lifeblood of innovation and growth. All the more reason that the investment process should be efficient and effective. No-one wins if we get this stuff wrong. 
 
If you have better ideas for improving the way fund raising works, I would love to hear about them.

​If you have not already read Bill Gurley’s article on the dangers of the Unicorn financing bubble then you really should. He outlines current financial exposures. Created by the fashion for mega round private finance in the last couple of years. And sets out how each main group of stakeholders are at risk. With some excellent cautionary advice for founders and employees in startups.
 
As Bill points out, many well funded companies are still hungry for cash. Massive burn rates mean that even the largest funding rounds evaporate fast. Much of this cash goes on sales and marketing. Direct sales teams, commissions, distribution channels, advertising, content and all the rest. This creates an ongoing demand for finance. And also raises a couple of other questions.

​Everything and everyone takes it for granted that the big money flowing into startup companies is investment. Companies raise investment. Angels, VCs and institutions make investments. Governments ease and enable investments. What happens when this (implicit) assumption is jettisoned?
 
All that cash was paid for shares. Then spent on building up market presence. Customers, brand and reputation in other words. Great if those stick when the dollars stop flowing. But for many customer loyalty may fade and the revenues will drift away. Because some companies need to keep spending just to stand still. Never mind grow.
 
Turn off the spending tap and there will be real separation between the good, the bad and the ugly. Companies built on good products will survive and thrive. Those that have built a track record of value and a loyal customer base.
 
Reputations created by spin, PR and heavy advertising spend will fare less well. Expect many more well known names to be tarnished.
 
And the losers  will have nothing on the balance sheet. Nor any intangible assets of substance. Even a few lines of code will look like a solid asset by comparison. There will be some angry investors around when this emerges.
 
In more conservative investment ecosystems this could have a devastating long term impact. I already see a lot of investors who believe in patentable IP as the only solid basis for a technology business. A bunch of stories about "smoke and mirrors" startup growth will not help. The persuasion hurdle may be even harder to clear.  

​SaaS sales & marketing companies will suffer the greatest exposure. Tom Tunguz is the ultimate authority on SaaS data. He points out that Sales (=1st) and Marketing (5th) are 2 of the top 5 business functions for spending on SaaS products. In another piece he looks at the 1875 SaaS marketing companies started by 2015 (2014: 947).
 
I think we all know that every startup uses one or more of these products. They are the vehicle for all that advertising spend. The day to day tool for the sales and marketing teams. And further chunk chunk of investors cash is going to pay all  those subscriptions. 
 
This market is honestly crazy. Yes there are a handful of SaaS that I see everywhere. Hubspot and Intercom are prominent. In the enterprise space Salesforce has a strong position. And I know plenty of companies that generate real value using these products.

But I also see a new product every week. Ranging from the doubtful to the out and out flaky. On top of this I get sales e-mail from new startups most weeks. Offering services which grow more niche and less clearly defined by the month.
 
We have travelled from fragmentation to saturation to glut. Investment will soon be in short supply. Revenue will take a harder hit. There will be casualties. And desperate throws of the dice. It will not be pretty. In short, SaaS sales and marketing is a bubble waiting to be burst.
 
I will not shed many tears. The proliferation of sales and marketing “solutions” has infected the whole SaaS market. In all categories and verticals there is too much focus on sales. And not enough on delivering real value to customers. We need to rebalance. 

​If you are a startup (or indeed any company) using some of the products what should you do? I would not get too stressed about it. Keep two simple things in mind:
 

• Make sure you know how to retrieve your data. Transferring to a new system will be a pain but not a crisis. You could even operate for a while with a light touch CRM built out of Google Sheets.  Losing your data will cause serious problems.
• Try to forget the hype about new platforms. And the expert advice from the gurus on digital marketing. Do what any experienced marketing professional would tell you. Focus your marketing spend on reaching the right audience. And deliver a message that has a clear, achievable value promise for the customer.

 
Contraction in the startup funding market is inevitable. The big dollar losses will be in unicorns that have raised or are raising gigantic private rounds. These are concentrated in the US and in the startup mega clusters. But everyone should beware the ripple effects. 

The cackle and chat about a potential startup valuation bubble has risen again in 2016. I wrote 3 posts about this 10 months ago and I am not sure too much has changed. I still don’t know when there will be a correction or what the trigger will be. But there are clear risks and the outcomes are hard to predict.
 
This post is not going to pretend to be an analysis of the scene. Much smarter people than me are providing that insight. I just want to reflect on a few basics and some scenarios which seem to be missing from most of the commentary. 
 
First thing is to get real about the markets in which startup investing plays a part. The Big Short is an excellent book and no doubt a good movie. It is not a substitute for understanding. According to Fortune  funding for VC backed startups was $128.7Bn in 2015. With a sharp fall in the final quarter). By contrast the falls in Wall Street alone in 2016 so far are valued at around $1Trillion. Add in China and other markets and that loss could be $5Trillion.
 
Startup investing, even at epic levels, is a cork bobbing in the ocean of global markets. If we want to figure out what might happen next we need to think outside the closed world of the startup ecosystem. The same applies when we ask ourselves what the impact of a bust in startup valuations might look like.

Tom Tunguz is a reliable source of real data analysis in the SaaS world. This recent post  points out that price falls in public markets create some downward pressure on late stage valuations.
 
However, market movements are not as simple as this. Investor returns from public markets and many other asset classes are at historic lows. As I pointed out last year this makes startups look like an attractive option. Mahesh Vellanki has reinforced this point here.  Economic pressure on traditional investments drives startup values higher. By increasing the demand from large investors. 
 
Of course this would change if market drama turns into real economic crisis. 

Global markets are not going to be the immediate cause of a bust in the startup bubble. What about internal strains of the ecosystem? This is where most of the commentary focuses in both directions. Insiders offer a wide range of opinions. Including Jason Calacanis who believes that any bubble has already been deflated. In a controlled fashion without anyone noticing.
 
Maybe investors are not as much in control as this article implies. There are more opinions than Republican candidates. And this could be sign of internal strains. That might just lead to a bust from within the startup universe. What would the impacts look like?

• Entrepreneurs would get hurt. One point everyone understands. Cash will be king. Startups with money in the bank have the opportunity to survive and thrive. Anyone without will risk being swept away by the tide.
• In theory, angel investors will be fine. No-one should put money into high risk, early stage business unless they can afford to lose. In practice, I suspect there will be some casualties. 
• Some VCs will also be in trouble. The VC model depends on confidence. Any fund that loses confidence and has cash in the bank that investors can pull out faces a problem.
• Many large  VCs and large financial institutions are a big part of late stage rounds. They will be suffer no more than a blip. In part because the money these funds have in startups is small by their standards. And also because they are playing with other people’s money. But watch these funds nonetheless. They can affect the wider world as well.

 
As a founder the message is proceed with care. If you cash you will be in a strong position. Competition may weaken and talent could become easier and cheaper to hire. But it will take time to get out of the woods so husband your resources. And watch out for ultra lean competitors. There will be startups out there innovating with high skills and motivation but no money. 

The big risk in this internal scenario is loss of customer trust. If high profile startups with strong consumer brands fail this will cause widespread damage. For example, imagine a cloud service that holds precious family photographs disappears. Or an accommodation service goes under and leaves people without accommodation for the holidays. 
 
In these situations a high percentage of the media will be eager to blame “the cloud” and “the internet” and “ global companies that don’t pay tax”. Whatever the truth, the road will become much tougher for early stage SaaS.

The level of startup investment is small compared to global markets. You might think the internal impacts are the end of the story. Not necessarily so. There are a couple of ways a fall in startup valuations could trigger wider consequences.
 
Quoted stock markets had an indifferent year in 2015. Even before the sharp falls that have kicked off this year. This lacklustre performance two big swings. On the downside oil, mining and other commodity related stocks. Falls there have been more than offset by rapid growth in the FANGs. Another corny acronym which stands for Facebook, Amazon, Netflix, Google.
 
None of these companies has the most transparent financial disclosures. So it is tough to tell whether they have a high dependence on startups or not. On the other hand I know that a big part of the money flowing into startups is going out on marketing expenses. And a lot of those dollars go to Facebook and Google advertising. How vulnerable is the revenue growth of these companies? It would only take a small surprise to knock market confidence.

The other factor in grown up markets will be the behaviour of large investors. Remember, the guys whop play with other people’s money. Public opinion is still hyper sensitive to any hint of mistreatment for small investors. A perception that losses in high risk startups are being offloaded will be a big issue.  Small pension holders or taxpayers cannot foot the bill. 
 
Crowdfunded investments could create a special case of risk. Equity crowdfunding is quite new in the US but has been around in the UK for a while. Regulation is light and risks are high. 

Loss of trust either from customers or the wider public is a real possibility. It will present a massive challenge for fragile startup businesses. Trust can only be won back by consistent, authentic ethical behaviour. One of the things I love most about the startup ecosystem is the high standards of ethics. These are almost universal. The true test of such values will only come when they are under threat.
 
No-one knows whether or when a correction in startup valuations might happen. If it does you will need to be prepared to look after your own business. The wider effects could be no more than a ripple. Or not. Beware the signs of a gathering storm. 

Global stock markets have reacted with shock to bad economic news from China. In the tech world this has led to more comment about a possible bubble in startup valuations. And the risk of a bust. Yet tough economic times could make startups more attractive not less. High growth and possible high returns will be even more rare. The real test will come if there is a liquidity crisis.

The recent falls in US Stockmarkets have restarted the bubble debate. Triggered by the far heavier losses in China, things look bad. Lots of focus has fallen on those companies which are post IPO. That is their shares are exposed to the challenges of the market. As those prices drop, fears that the current investment boom may be about to end  resurface.

China is a big risk factor. The data is hard to read. But some of the signals could mean damage to the economic prospects for every major economy. Startup and Tech investment is at an all time high. The logic follows that an unexpected hit to the wider economy will trigger a correction.

I have no doubt that the current investment cycle will end. I also know that I don’t have the gift to predict when this will happen. Yet there are reasons why  the bust could happen later rather than sooner.

1.         When the economy is in recession businesses and the media will scream about cost cutting. But the real problem is always loss of revenue. Anything that offers prospects of growth becomes super attractive. Right now startups are the best bet.

2.        The flow of money into startups is also driven by historic poor returns. Traditional investment vehicles have struggled since 2008. This is pulling in cash from institutional and more conservative investors. Stock market losses make the alternatives to startup investment look even worse. 

3.        Lower prices in stock markets will make an IPO an even less tempting option for Unicorns than it is today. Private rounds remain the only way for investors to get a piece of Uber, AirBnB and many others.

There are still risks on the downside. But like many other factors, stock market indices do not play the role today that they did in the dotcom crash. It looks horrible for Twitter and LInkedIn. There are limits to any contagion.

Could some other global event prove the trigger? Predictions as they say are hard. Especially when the concern the future. I venture one point though. All the concern about a bubble points at the sheer volume of funds. And at valuations. These may well be the biggest source of pain  when the cycle ends. 

But I believe the trigger will be liquidity. Anything that causes a cash crisis will be nasty for big startup investors. Getting money out of Uber right now is much harder than putting it in. On a macro scale nothing is on the horizon. There will be an internal liquidity issue in China. It becomes a global issue only if China stops buying US Treasuries.

It has been clear for a while that smart leaders in tech should prepare for a day when investment is harder to find. This has not changed. But startups should be confident about the virtues they offer. Strong growth. And the potential of high returns….if an exit can be achieved.

If you would like to hear more ideas and experience about growing and developing a SaaS business, please subscribe to our newsletter. 

Building and growing a startup is tough. Underneath all the Unicorns are hundreds of companies battling for investment. The growth of Slack or WhatsApp is record breaking. It challenges founders everywhere to hustle for traction. Read the endless articles on beautiful UX design. And remember the struggles to achieve product/ market fit.

Maybe that’s why entrepreneurs often ask for more help. But the best source of help is within. Startups are the best source of innovation in business and technology. Teams also advocate powerful values. Openness, sharing and learning are at the core of the startup dream. Innovation and values lay the foundations for amazing communities. 

EIE15 - Scotland's Premier Startup Event

Here in Scotland we had the premier event for our startup community this week.  EIE 15 brought together a bunch of amazing companies. The largest gathering of investors we see all year. And every advisor and supporter in the ecosystem. From inspirational speeches to 1 minute pitches with a heady brew of networking. Its an awesome day.

Community Makes the Difference

Anyone can see that it is impossible to recreate Silicon Valley in a 1,000 cities. Hero entrepreneurs and multi billion dollar funding rounds are beyond most places. But we all have the potential to build a great community. I love following and celebrating startup communities. Some of the best ideas and the biggest changes are rooted in community efforts. For example the startup community in South Africa is tackling the problem of xenophobia @iafrikan. Or explore the incredible startup world of Trondheim in Norway @arcticstartup.

Community brings startups three things. Working together means resources, experience and connections get shared. Everyone grows faster as a result. Openness allows small teams to build on the efforts of others. Testing products, linking APIs and tackling markets. Connected ecosystems offer support and encouragement. Just knowing that others have been through the fire and lived makes a difference.     

We Can All Be Part of Something Great

“Its not a zero sum game” is a favourite mantra. This is what it means.

How often do you hear that a startup is going to change the world? Communities of startups will change the world. Groups not individuals will be the mechanism. The future of work will be self employed, networked and varied. Fewer and fewer people will work in a corporation or for a government. The skills we learn in our twenties will need to evolve or transform. Everyone will have 4, 5 or 6 “careers”. Communities will support and celebrate this lifestyle.

Work will be for a lifetime. The idea of retirement will become outmoded.  Each individual will choose to vary the pace and intensity of work. Adapting to life circumstances along the way. It has to be this way. Demographics and economics will not support the current model. Technology is busy breaking it up.

Not every startup community will be the home of billionaires and unicorns. The vast majority will consist of hard working people, co-operating and succeeding. Having fun and living life well. We all have the chance to be part of something great.

EIE15 reminded me that we have many of the elements in place here in Scotland. Structural basics include great universities and a supportive Government. Two incredible companies have reached “unicorn” status. Skyscanner and Fanduel - check them out. The exhibition hall was full of great entrepreneurs aspiring to join them.

More huge successes would be welcome. Our urgent need is to build a strong community of mid size growing businesses. Too many startups are caught in a trap of small. The billion dollar blowouts are great . We must back them with hundred or more in the $10-100million range. There are lots of companies with the potential. I could list 20 without thinking. The challenge is to make the step from early stage traction to established business easier.

The community also needs a voice. We connect through big events like EIE15. A host of meetups and other small scale events are also available. Open Tech Calendar  lists 68 right now. On a daily basis hubs like Codebase, Entrepreneurial Spark and Rookieoven (my favourite) are home to buzzing groups of founders. Someone needs to bring these stories together and tell them to the wider world.

This week reminds me to keep helping startups grow and develop. My small business consulting is all about this focus. This is a community effort. It is about answering questions not a defined formula. If you want to join those discussions subscribe below. 

A quick reminder. Private investment dominates the current boom in startup funding. Public traded stocks play a much smaller role than in the past. For example in the dotcom bubble most  big companies went to IPO. One point of view is that this will contain the impact. A lot of private investors will lose money. But the fallout for the general economy will be small.

I don’t think this will happen. I will explain at the end why this will be a good thing. But warning this next bit is a real downer.

A bigger factor is the herd mentality. Most other assets classes offer shocking performance. Big institutional investors are counting on startup investments to beef up their total returns. Much of the money derives from the same sources that piled into sub prime and the like. The problem is that institutional investment tends to adopt a herd mentality. It doesn’t matter if they are right or wrong. Too many investment adopt the same strategy. This makes the whole system vulnerable to shocks.

This factor is also amplified. In this case by a misunderstanding of portfolio risk. You will see a lot of advice about the risk of investing in early stage companies. Invest in a large number of opportunities and the big winners will offset the wipeouts. Build a portfolio they say. This is not a portfolio. This is a buying a lot of tickets for the lottery. It may well work and it has for many funds. But it is not spreading risk. Every investment just adds another high risk. Pick enough and one will pay off is the theory.

The problem arises when the lottery stops paying out. There is no balance in the portfolio. Everything turns bad. Remember this is how it will be. Even the big quoted companies destined to join the corporate elite will experience large falls in value.

Lets not forget that it is not all about finance. A downturn in startups will also have wide impacts because this stuff matters. People and businesses rely on the software startups produce. The network feeds itself and consumers love it when it does. Enterprises are creating massive value by using mobile and digital to do business better. Mobile money, mobile health and green startups are changing the world. If some of these companies fail, people will care.

Big knock on effects are possible. Many apps interconnect through APIs. Your business does not just depend on the software you have. Other applications and data sources are integrated. Sometimes these are invisible to the user. Consumers are in the same position. 

So what will the impact look like? This is harder to understand. We understand how a big bust in public markets transmits to the wider economy. Because this is a bit different, the mechanism is less well understood. In reality we don’t know. What follows is educated speculation. I have not attempted a systemic analysis just picked out some specific possibilities.

• There will be one or more serious big time scandals. These could be corporate, financial or governmental. One real possibility is that a company will go bust leaving a whole lot of private data open for predators.
• The economy will take a genuine hit.
• This will be amplified for quoted companies. Liquidity will be a disadvantage. Investors can dump public stocks with ease.
• Governments will decide there is a need to regulate the private investment market. This will impose costs and risks on funds at the worst possible time.
• Investors will lose even more money in fees to reallocate their portfolios. There will be a stampede of investment managers advising a rush to the next fad.
• People will start shouting about the importance of digital connections. And bleating for state subsidies.
• A lot of smartasses will appear on TV explaining that business hasn’t changed. The whole digital revolution is just a mirage etc. This is a certainty. Don’t bother punching them on the nose. Just laugh.
• Governments will use this as an excuse to regulate and restrict social media. This will be nasty and anti democratic. No laughing matter.
• Lots of countries offer big support for startups today. Some of these schemes and grants will disappear. Government can be as a short term as any investor. 
• Real issues of trust will arise. There will be pain if services shut down. This will be hard to combat. Teams need to take this seriously. We all owe our customers a duty of care.
• The cloud will take a battering. Some of the customers who lose out will blame the cloud (wrong). Legacy IT companies will jump in to argue that private infrastructure is safer and more secure. This will be another tough fight.
• When the dust settles the global landscape might look very different. Asia and Africa are already the wellspring of our most innovative thinking. A startup downturn could be the catalyst for developing world to overtake the West.

But the tech industry will emerge stronger and better from everything that happens. A startup valuation bust will be a beautiful thing for entrepreneurs as I wrote in part 1. It will also be great for the whole ecosystem. A downturn is a real opportunity for innovation. The best ideas emerge from the furnace of hard times. 

• Big losses will force investors and business leaders to think different about business finance. The first sign will be a more favourable climate of debt financing. Interest rates will be rising again (see part 2). There will be new instruments and access to debt will be much easier.
• Investors will also start to understand that some technology needs long term finance. Time defined VC funds will not die. But we will see more evergreen finance. A new fund called Indie VC is already leading the way.
• The quality that software delivers to customers will also be transformed. Only startups with a genuine and sustained passion for solving customer problems will survive. The get rich quick schemes and the use it because its cool apps will disappear. The reputation of the whole industry will benefit.
• A personal hope. The survivors will be scattered across the globe. Silicon Valley will still be strong but it will suffer. We will have the chance to build a more global and supportive ecosystem.

There will also be big opportunities for individual entrepreneurs and investors. Remember two basic principles:

• Buy when everyone else is selling.
• The time to grow market share is in a downturn.

The startup ecosystem will shrink a bit. Those who are left will be the people with real vision and passion. A few years after the bust the industry that emerges will be bigger stronger and better than ever before.

Writing these articles has reminded me I love startups. A real focus on change for the better and a great ecosystem of people to work with. These basics will not change if times get tough. 

I  like to share the latest ideas for building a great business. If you would like these direct to your inbox, subscribe below. Thanks for bearing with me through this series.