Systems of Curse and ZAM

The World of Warcraft ecosystem saw the final “big fansite” acquisition this week, with MMO-Champion bought by Curse Inc. Big meaning something that attracts millions of users each month. Curse have been using some of their $11 million of venture capital to buy up a variety of gaming fansites, including many popular WoW sites. But MMO-Champion is significant for 3 other reasons:

  • Corporate deal, not the “founder buy-out” traditionally commonplace among gaming fansites. MMO-Champion was previously owned by Major League Gaming, already a multi-million dollar enterprise (by comparison, $46 million funding).
  • Completes a duopoly (2 dominant businesses) in the core World of Warcraft “fansite” market – Curse and ZAM. While there are other large businesses and specialist niches on the fringe, none of those appear to be growing into the core WoW market.
  • Exposes an intriguing driver of this market structure: Systems costs – the underlying technology and support costs. Intriguing because these were crucial in determining the market structure of far more traditional sectors of the economy, like groceries.

This article analyses the latest acquisitions and discusses the unseen importance of systems costs. Read More

Financing Hyper-Virality in the Clouds

This article probes the implications of cloud computing for financing very rapidly distributed internet-based services and products. It contains rough, inadequately researched thoughts, sparked from discussions at the recent CloudCamp Scotland. Read More

Bill Joos on Pitching

Bill Joos (or William Wallace Joos, as he prefers to be called in Scotland) spoke at a Edinburgh Entrepreneurship Club/Edinburgh-Stanford Link event on 11 March 2008. Bill experienced plenty of pitches while with Garage Technology Ventures, and shared the top ten mistakes for early stage/startup company business plans and pitches. While his focus was on pitching to venture capitalists, much of what he said is applicable to any business planning process. This article summarises his talk. Read More

Scottish Innovation: Designs without markets?

Why is Scotland creating a fifth of the UK‘s patents, but only gaining a tenth of UK venture capital? David Farquhar, CEO of 2in10, argues that in the technology sector at least, we don’t build the right things: We are not focused on marketing and selling. These are rough notes from David Farquhar’s talk to a Edinburgh Entrepreneurship Club/Edinburgh-Stanford Link event.

What’s wrong with technology innovation in Scotland?

First there is a tendency to focus on Intellectual Property (IP). Then focus shifts to the customer, but by offering services – a different product for each customer. That creates a lot of small businesses that struggle to grow.

What’s keeping CEOs awake at night? Lack of revenue from sales. And their investors? Lack of plans for making sales.

80% of firms are targeting the US as their main market, yet most lack basic knowledge about how to sell to the US market. If you don’t know how much you’re going to need to pay a US sales-person, how robust really is your business plan?

Market focus

Two thirds of the most highly valued technology comes from the US, so why not adopt their core philosophy? Build around a market problem, and sell the way customers want to buy.

To misquote Ben Holmes (Index Ventures):

“For every £1 invested in building, spend £5 on marketing and selling.”

Practices and structure

There is not a lack of sales talent in Scotland, nor a crisis of confidence.

There is a need for more best practice to be adopted, specifically:

  • Build the right thing.
  • Talk in the right language.
  • Understand how people like to buy things.
  • Drive revenue.

Most startup firms are structured poorly. Typical startups contain a CEO (who can talk) and a CTO (the brainy one). A structure then develops with engineering and sales/marketing separate.

Instead, sales and marketing should be separate functions, with a “healthy” tension between the two. Product development should reside within the marketing function, not with engineering. This often marginalises the original brains behind the operation (CTO) within the structure, but is necessary to keep market focus.


Wolfson Microelectronics is one of the best known Scottish-based technology firms. Its audio technology is used in products such as the iPod and XBox. It was started in 1984, but by 2000 only had revenue of £6 million per year. To prepare for floatation (IPO) it strengthened its board, including people who had worked in the US. They introduced concepts such as product managers, which fundamentally changed the way the business operated. By 2007 revenue had risen to £180 million.

Still marketing

Failing to understand the buying cycle is a key criticism of selling: For example, a new product might only be purchased as part of an existing product – selling the new product separately to consumers might not work.

A market can be defined as, “a group of customers with the same pain and money“. Money or else they cannot buy. Pain because they have to have a reason to buy. And a group because they have to talk to one another (markets follow a few lead individuals).

It is important not to make assumptions about what the market requires. Chances are the market isn’t how the startup team envisaged it, or has different priorities.

Lumigent was highlighted as a good example of how one technology could be pitched to several different audiences.


David showed how Thomas Siebel‘s Customer Relationship Management software was developed.

It starts with a given idea, in this case based on exposure to the problems of potential customers. The IP stems from that given idea. IP is important for product differentiation. A market segment is identified (again from the given idea) that both has pain and money. From the pain and IP, develop a product. If there is competition, it is necessary to address a specific category. Finally, from the product and category emerge a position – the claim on which the product will be sold. And from that, revenue is generated.

Further reading


This pattern is not entirely restricted to Scotland. It seems a common complaint that the UK and Europe is much better at creating things than commercialising them, in contrast to the US, which is good at commercialising them. In subsequent discussion it was noted that in the US engineers are often taught how to commercialise ideas within universities, which rarely happens in the UK.

Bart Balocki on Practices of Venture Capitalists

Or, how “big bets” are made on “incomplete data”. Bart Balocki, an alumnus of Stanford University, researched the practices of Silicon Valley (US) venture capitalists. These are rough highlights from his talk to the Edinburgh Entrepreneurship Club/Edinburgh-Stanford Link gathering on 17 October 2007. Bart covered the history of US venture capital, outlined how venture capitalists operate, and developed a model of how perceptions of value change over time.

Brief History of US Venture Capital

A simplified time-line:

  • Prior to 1946, high-risk investing was done informally by wealthy families.
  • Post-war, government led the commercialisation of new technology.
  • In 1957 DEC (Digital Equipment Company) was successfully developed using a venture capital model. This was probably the first evidence that venture capitalists could earn a return. Other successes followed during the 1960s, notably Intel.
  • In the 1970s Federal regulations were eased to allow large investment funds (such as pensions) to support venture capital. Successes such as Apple encouraged greater venture capital investment, and led to a growth in scale. In this period many venture capital firms moved away from the traditional hub of banking/finance, to the Sand Hill Road area of Silicon Valley. Sand Hill Road is close to the university, the area from which most ventures were emerging.
  • 1973 marked the first tangible peak in venture capital investment: The first of several “bubbles” – short term booms in venture capital activity (measured both as number and value of investments). The 1980s saw a bubble around personal computing (121 Initial Public Offerings (IPOs) in 1983, compared to 22 the year before), finally crashing with the stock market in 1987.
  • The best known boom was for “dot coms” around 2000, however bubbles continue to emerge, notably “Web 2.0” (user-generated content websites) currently.

Although venture capital activity continually cycles through boom and bust, the overall trend over time is increasing real terms investment through venture capital.

Venture Capitalist Practices

Venture capital firms are typically small – about 20 people, primarily consisting of partners (who make deals and control the money), associates (who make deals), analysts and support staff. Firms may also have an “entrepreneur in residence” (a budding entrepreneur within the firm – termed “micro co-location”), and venture partners (sector specialists).

Firms run several funds concurrently. Funds typically run for a 10 year period. They raise money from investors (such as pension funds), and invest the equity in many different entrepreneurs’ ventures. Most ventures will fail, but a few will succeed. The successes should offset the failures within the fund. Successful ventures are sold – either as a merger/acquisition or (rarely) as an IPO. The performance of funds is commonly referred to by year “vintage”, indicating the value of returns from funds started in that year.

Venture capitalists typically take 2% of the fund as a setup fee, and 20% of the value of the final sale – colloquially a “2 and 20” structure. Within the firm, partners take most of the 20% as a bonus to their salary.

Finding deals tends to be quite labour intensive: “doing lunch”, maintaining networks of local contacts, hosting events. Evaluating deals involves a combination of pattern recognition, due diligence, hiring in expertise, or even just following the crowd. Historically firms would invest in any sector of the economy, however there is now growing specialism, making venture capitalists “faster and smarter”. Typically each associate or partner will complete just 2 deals per year.

Venture capital firms can be characterised as passive or active in their involvement with the ventures they have backed. Active investments might involve a partner or associate as board members. Passive investments might simply stage the financing (not provide all the money up front).

Perceived Value over Time

A particularly interesting aspect of Bart’s research was the graph below (a simplified version, redrawn from my notes). It shows how “perceived values” (y-axis) change over time (x-axis).

Perceived value graph.

Each line indicates the threshold which must be reached for a deal to be considered valuable by each stakeholder.

Line D (green) shows how a new associate venture capitalist (the “deal champion”) perceives value: At first they are still learning, so the line rises in the first few years.

Line P (dotted red) shows how the value of the deal champion’s work is perceived by partners: At first they are not trusted, so it will be almost impossible for the deal champion to convince her partners to commit to a deal.

Line H (dashed blue) shows the first deal the deal champion is able to convince the partners to invest in – the first to exceed line B. The “home run”, this venture becomes the focus of the deal champion. It is highly successful, and eventually its value exceeds the public market perceived value (pink line M): The venture is sold as an IPO at point 1.

Now the deal champion appears to be able to “do no wrong” – she just earnt back the entire value of the fund in one deal! The partners’ perceived value drops below that of the deal champion (at point 2) – the partners are prepared to back ventures with far lower perceived value in the belief that the deal champion knows more than they probably do. Simultaneously, the pre-dot com bubble encourages the deal champion to invest with far less care than before (line D has a far lower perceived value threshold).

Unfortunately, endlessly repeating success in such a high-risk environment is difficult. The deal champion makes many rash investments, none of which repeat the success of their first “home run”. By 2000 both deal champion, partners, and public markets have lost much of their confidence, and lines D, P and M rise again.

Patrick Chung on Games Venture Capital

These are rough notes from an Edinburgh Entrepreneurship Club/Edinburgh-Stanford Link lunch event. Patrick Chung is a partner with NEA (New Enterprise Associates), focused on internet technology, including video games.

Video games trends

A summary of his current trends in video games:

  • PC.
  • Casual. Fishing is really popular, apparently. (I know!)
  • Platform. The development of platforms, instead of specific game titles, spreads the risk. Mainstream games titles are expensive to develop, take a long time to build, but often don’t sell well – ergo, as high a risk as almost anything. Parallels my earlier musings on games industry innovation.
  • Virtual goods and alternative revenue models.

Nothing terribly unexpected there. But he made some interesting points on venture capital and funding.

When to consider venture capital

At the outset of a venture, consider venture capital only when you really need it. He used the example of Loopt. The two young founders needed the approval of major US mobile carrier networks. They simply would not have got in “through the door” of those organisations without the backing of a major venture capitalist.

In most cases, find angel investors (individuals with private money to invest) to get started. Specifically angel investors that don’t make too many demands. Those demands both go against the spirit of angel investing (the woman in the pub writing a cash cheque on the back of a good idea and little else), and can make it far harder to progress once the enterprise grows (i.e. selling part of it to venture capitalists).

The valuation of a “typical” Silicon Valley consumer internet enterprise will change over its development:

  • Start – an idea, no real plan, people without previous experience: ~$2 million.
  • Experience – a plan, a capable team, perhaps some rudimentary code: ~$4 million.
  • Product – tangible product, not yet launched or perfected: ~$6 million.
  • Users – people are actually using your product: ~$10 million.

If users are growing rapidly, valuations can also grow rapidly.

Why are these changing valuations important? An enterprise still at the first (starting) stage, will probably need to sell half the business to a venture capitalist in return for funding. The further one is down the valuation chain, the more bargaining power an entrepreneur will have. The advice is simple: Don’t sell right at the start unless you really need to.

Location and culture

Geographical location is particularly important for early-stage enterprises, or when the people involved have little experience: The venture capitalist will want/need to be involved day-to-day, almost hour-to-hour. That’s a problem if there is a 9-hour time difference: A crisis in London at 10:00 is likely to stop someone in Silicon Valley getting a good night’s sleep. (Games are somewhat easier, because developers tend to work very long hours…)

Later-stage enterprises can be managed more effectively from the other side of the world. Realtime Worlds (Dundee, Scotland based) is a good example. The business was already established with 100+ employees, including some of the people involved in the original creation of franchises like Grand Theft Auto.

Culture is also important: All venture capitalists are not the same. For example, some will invest based on the people involved in an enterprise. Others will look more at the idea.

Funding application stages – what’s expected

Patrick highlighted a series of stages in the pitching/evaluation process:

  1. You – what are you trying to do, how, how dedicated are you to that aim? They look for problems to be solved – “painkillers, not vitamins”.
  2. Market and returns.
  3. Uniqueness of solution.
  4. Competition and team.
  5. How much money is required, and how will it be spent? Avoid running out of money: Ask for more than you think you need – perhaps twice as much. If you run out of money before completing an initial product, you won’t have any bargaining power when trying to raise more.