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Berlin - September 2015

As mentioned in my previous post, TechStars Berlin is fairly unique in attracting global tech-intensive startups that go beyond Berlin’s commonly established startup clusters.

As a mentor, I was particularly interested in how TS can facilitate a structure for startups with particular tech focus to come in and learn - be it with the 100 local mentors or people from the global TS network. If successful, this means that TS can become a facilitator for significant innovation.

The TS Berlin program is fairly structured. There’s a co-working space where the teams are expected to come and work and hang out with all other teams in the batch on a daily basis. There are also classes, seminars and workshops covering various topics almost on a daily basis: customer development, marketing, PR, and more.

Techstars’ program structure is as follows:

Month 1 – customer development and mentor madness
Month 2 – product development and gaining traction
Month 3 – honing your pitch to investors & practicing for Demo Day

During the first month the startups are pushed to understand theirs customers deeply. They are asked to stop writing code and “get out of the building” to talk to people to make sure they are indeed building something people want. They are also asked to take advantage of the TS network in an activity called mentor madness - this is when the mentors get involved.

Mentor madness works as follows: In weeks 2 and 4 (10 days total), startups spend each day talking to 10 mentors. It’s an intense process - they get feedback from 10x10=100 mentors.

I talked to some of the more tech-intensive startups - shared space for teamwork SaaS startup Treev & infrastructure for DevOps startup datapth - and asked them how they made the process a success for them.

Here’s the five lessons with some added commentary.

# 1 They research the mentors and how they can help

“Every morning we went through the list of mentors we were going to meet and made notes on how we could get the most value out of them. We wrote down specific questions for each based on
- their experience and
- who they might know /
- companies they had invested in.”

“As we have a very technical and niche business, we had to prepare 3 different stories in order to respect the different knowledge of each mentor. Preparation is needed: we looked up every mentor and quickly checked their background to get a feeling in which parts of our business they could give tangible feedback.”

Preparation ahead of a meeting is key, yet rarely happens - especially with the inventor founder types who prefer (cliche, I know) working on the product instead. This results that “meetings for coffee” without any stated goal that rarely go anywhere. Therefore hardly any founder I know and respect accepts this type of meetings. If the person who wants to meet you does not know how you can help them, how can you?

#2 - They put mentors into buckets of help

“As we have a very technical and niche business, we had to prepare 3 different stories in order to respect the different knowledge of each mentor. Preparation is needed: we looked up every mentor and quickly checked their background to get a feeling in which parts of our business they could give tangible feedback.”

But how do you go about knowing what you want as a startup team?

For most teams this is a skill they pick on their way. A good way to figure this out is to create categories of mentors and advisors and come up with an initial set of needs for each field.

Your initial sets of questions and wording does not matter that much. Your mentors will push back and help you learn.  This means that, once you have talked to 100 mentors, you should have iterated your needs and have a better feel in which of the buckets what type of help is effective.

Also, you can ask people only for a couple of things. If you put a mentor in a single bucket, even if he or she wears multiple hats well, your communication with them becomes clearer and “easier” for them to manage.

 

#3 - Once they’ve put a mentor in a bucket, they ask for specific, simple deliverables

“We followed up with every mentor to thank them in the afternoon immediately after the meeting, and reminded them of any introductions or other follow-ups they had offered.”

Even if they want to be helpful, mentors have only so much time. Asking them for specific, simple deliverables and making it easy for them to help is key.

#4 - They make really good intros and become good at intro management as they develop their potential customer base

“We kept track of who responded and were tenacious about making sure that we got a response, sometimes sending a couple more reminder emails. You can rarely get to a deep insight in a 15 minute meeting, so second meetings (especially about the product) and introductions to other people (customer development, e.g. intro to CTO from a big company) were the most helpful.”

“Intros, intros, intros.... Most of the time, the second level of the mentors' business network was good enough to provide a intro to a person, that was either
a) a potential customer, or
b) a potential business partner.
It took some time to follow-up with all the people, but once we figured out how to use a CRM, it became a bliss.”

My friend Raj Singh recently wrote about his introduction workflow and the value of such system. Also adding a CRM, even if the initial one is in Google spreadsheets, is key. The process quickly becomes even more extensive and time-consuming, if not managed well. Most engineer founders I know complain about this part of doing a startup and for them it’s a choice between this being a pain or a big pain.

#5 - The proof is in the pudding - they use the mentor market dynamics to their favour

“An ideal mentor was trying to understand our problem instead of pitching their own company and looking for a potential business or investment.”

There’s 100 mentors + TS network. There’s only 10 startups. This imbalance creates dynamics where the batch companies have a very high supply of mentors and can weed out the ones they don’t want. There's many mentors who like the sound of their own voice, have low value or ask (too) much for help. The setup in TS allows for startup founders to weed out mentors that aren't a fit easily. This should be enacted forcefully - #givefirst.

Berlin - September 2015

 

Accelerators are programs that provide startups financing for equity, mentorship and access to networks. These programs usually last a couple of months. For founders going through an accelerator, it’s all about getting a lot of things done in a short period of time. In recent years there’s been a glut of startup accelerators that have been created in Europe. From what I heard in conversation there’s over 100 of them active in Berlin alone.

Personally, I’m not a big fan of accelerators. Most of the accelerators are not deeply interested in technology itself. In most cases they focus mainly on the adaption of existing technologies to markets. This is why their programs all too often prioritise for customer development and operations.

In contrast, my interest is in tech-intensive early stage startups. I like startups that have worked on a product for more than a year before engaging with them and are clearly exceptionally product-driven.

However, when I first met Jens over a year ago and heard his vision for Techstars Berlin and later saw that Brian joined him (whom I knew from his previous role at Web Summit), I decided to make an exception and gave mentoring at TS Berlin a chance. Techstars fosters ecosystems within different cities, as opposed to a lot of ecosystems outside of the Valley which are both less open and less entrepreneur-friendly. Adapting this thesis locally, Jens and Brian had all kinds of good ideas on how to help Berlin become more founder-friendly. Some of these ideas were later subsumed under the #givefirst ethos.

To my positive surprise, apart from SAAS and markteplace teams that fit the clusters in the Berlin startup scene there were also many tech-intensive startups that I liked in the top 10 batch, including security, platform and infrastructure startups. The equivalent sub-ecosystems within the broader Berlin startup scene for these kind of startups are yet to evolve. It’s remarkable that they can now find support within Techstars. This type of support did not exist when we were pitching Xyo (“better app search than Google’s”) in the community. Techstars’ success is a function of the high demand and TS’s global brand awareness. For the Berlin program 820 startups applied. Over 100 of them were Israeli - who tend to be strong on the tech and weak on the product-market-fit side, just as I like them.This sets Techstars aside from other accelerators in town, with an average of 200 applications.

What remains to be seen is how the startups will capitalise on the Techstars experience post-program, where they will suddenly find themselves without structured mentoring or daily support from their peers. Demo Day on Thursday poses an excellent opportunity for the founders to pitch in front of 250 selected investors on stage. Yet the real challenge will be scaling both locally and internationally after Techstars - possibly with newfound pockets of support while at Techstars.

 

Berlin/Tel Aviv/Singapore/Kuala Lumpur - August 2015

A selection of observations on the weaknesses of US startups in internationalisation - with initial theses on how to exploit or defend them. Seed startups from Berlin or Tel Aviv - who need to need to make internationalisation part of their game plan for Series A are increasingly able to exploit the structural weakness in US VC startups that tend to internationalise at Series B. There's some ways within this structure for a US unicorn to defend and they will increasingly gain adoption.

US startups looking to expand internationally, especially in the B2B space, usually have a rough time doing that (1). Tech media often assumes that unicorns that have made it in the US will move on and be successful in Europe. This is, more often than not, not true. Who would guess that, say, the European revenue leader in file sharing (2) is not Dropbox or Box - but  SSP Europe which is pretty much unknown in the tech media?

Explaining the weaknesses of US startups in internationalisation

There's multiple structural reasons why this is the case. Based on discussions I had it seems there are two main ones.

Above all, internationalisation is a very late challenge in the US VC playbook - usually at B Series - and this makes US startups structurally bad at it.

Above all, internationalisation is a very late challenge in the US VC playbook - usually at B Series - and this makes US startups structurally bad at it. At B Series many US startups turn "stupid" - they gain a lot of the traits of the incumbent companies they despise and claim to be "disrupting": at this stage much of the product as well as process to market has become stable - with a US market bias. The B series cash comes in and this product and process is then scaled. The head count doubles and triples. External agencies are hired for each country and managed centrally.

People on these jobs often have low reputation within their organisations, but most often it's not them, but the their job structure to blame. Unicorns tend to hire corporate and consulting people to run additional markets, not entrepreneurial types. Instead of giving people room to play as advertised in the job section of their company website, they hire people that like rules and templates. (3) I have many war stories from friends in related losing job positions as this happens. Friends spending their day with 10 marketing/PR agency calls per day of 30min each, none of them doing a good job and them not having the time or power to tweak the process. Friends in BD positions not able to get an essential local feature on a product roadmap for months that would have taken a single engineer to tweak a day when the company was younger.

These problems tend to be significantly bigger if the first stop for internationalisation is London/the UK - a location which allows startups to continue to speak their language and where most of the business is in a single city.

The second reason - and the main explanation or line of defence why this structure is right for US B Series startups - is that non-US consumers are much less important for them to exit.

The second reason - and the main explanation or line of defence why this structure is right for US B Series startups - is that non-US consumers are much less important for them to exit (4). Most of the US acquirers most often value US consumer bases or BD partnerships only. For them distribution deals with AT&T, Sprint, T-Mobile or Verizon are more valuable than the ones with Telefonica, even if the consumer spend on the product may be similar.

This focus towards the US only changes if the startup IPOs - Wall Street is less discriminating and appreciates dollars wherever they may come from.

Related, I wonder what impact of the “private IPO” phenomenon has on the discipline of the US-backed unicorns in becoming international companies. Josh Kopelman recently pointed out that "if there’s one thing we can learn from the public IPO market, it’s that the VC industry isn’t always good at pricing large companies...Public companies reprice daily. Private companies don’t have to reprice for years on end." I also suggest private IPOs have the effect of putting much less organisational discipline on Unicorns becoming international than Wall Street would. The structural weakness I describe in this post, more often than not, is not priced in their valuations. Unicorns, on their internationalisation flank, are more vulnerable than their investors think they are.

How to exploit it

Famously, I am not the first one in Berlin who understands this weakness and how to exploit it.  What was new to me, even as a Berliner entrepreneur, was to see the size of it on a recent trip to Singapore and Malaysia. According to Andreas von Maltzahn from Delta Partners Group, in 2013 80% of all digital investments in ASEAN was Rocket Internet. In 2014 the figure was still 60%. This effect has also moved beyond Rocket. On the ground, specifically in Malaysia with its foreigner-friendly immigration laws, I met multiple ex-Rocket teams.

The structure was always similar: a mix of 10-30 Berliners and a multiple of locals who were being trained with the relevant know-how.

The structure was always similar: a mix of 10-30 Berliners and a multiple of locals who were being trained with the relevant know-how. The results, at least the ones I saw, are impressive: multiple of them had found local product-market fit and raised A rounds, not seldom with US (Sequoia, Golden Gate Ventures, to a lesser extent 500 Startups) backing. Local unicorn representatives were mostly playing defence, their mere presence often mainly justified by Singaporean tax and law structures.

Multiple regional players (both internet corporations and VCs) I've met had also noticed, even though their organisations are early in the process of figuring out how to react.

Multiple regional players (both internet corporations and VCs) I've met had also noticed, even though their organisations are early in the process of figuring out how to react. Traditionally most of their operations and their corporate thinking has been geared towards the Valley. Multiple of them are now Rocket shareholders. From my observation, there's around 5 Japanese / 4 Chinese / 2 ASEAN funds either scouting in or looking at deal flow from Berlin now, many more in Tel Aviv. (5)

When we were looking at these options in the region with Xyo 18 months ago, these doors were (mostly) closed. Now things have began to change.

Going forward it will be interesting to see how seed startups from Berlin or Tel Aviv - who need to need to make internationalisation part of their game plan for Series A - will be able to exploit this structural weakness in US VC.

Going forward it will be interesting to see how seed startups from Berlin or Tel Aviv - who need to need to make internationalisation part of their game plan for Series A - will be able to exploit this structural weakness in US VC. European and Israeli playbooks are much more applicable to Asia than the US and here European and Israeli entrepreneurs have more chances to succeed. My guess is that we will start seeing regional heavyweights with global ambitions going more and more aggressively against their US brethren, even though they may have a couple of 5x or 10x more funding.

How to defend

I don't expect much fundamental change in the current US VC playbook structure.

The trend I am describing in this piece, admittedly, is not as important to the US as it is to us outside of it. US unicorns most of the times will prevail against their international counterparts, but they will so because of their superior access to capital - not their better skills, code or product.

Within the structure, as a simple step on how to defend, I would suggest not to start with London/the UK as one expands abroad. As mentioned it's too easy. With London/the UK your organisation will not face the hurdles it has to face and learn from when it internationalises at scale. Whenever I hear of internationalisation expansion announcements from my friend's companies and see that London is the first step, I worry for them. Very rarely even the most powerful CEO can start tweaking his organisation's playbook or personell when the organisation hits international market #2 or #5.

Within the structure, we have seen some of the more forward-looking startups run more of their internationalisation from outside the Valley.

Within the structure, we have seen some of the more forward-looking startups run more of their internationalisation from outside the Valley. Some of them invested into a B series tax by cutting local entrepreneurial teams in (e.g. Groupon - Rocket, Airbnb - Springstar). Some of them have established regional offices or have even bought regional startups that have done well in internationalisation. Here in Berlin the case of Applovin and Moboqo comes to mind, for example. I see more of that happening going forward.

Additionally I see the rise of more and more middle-men companies that pick up both sales as well as customer care functions.

Additionally I see the rise of more and more middle-men companies that pick up both sales as well as customer care functions. Companies like Global Dots (one of the world’s largest independent cloud and performance optimization integration partners, eg the largest seller for Akamai in Europe; Israeli-owned and based with their Head of Sales in Berlin) are doing very well and we will see more of them.

Interesting times ahead as we will see this play out.

 

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(1) Like each diagram or model, also this model has assumptions and elements which it uncovers as much as it hides. The single counter-trend lately is possibly the rise of app stores and Facebook as a distribution platform. In a way these platforms offer plug and play internationalisation for a very specific type of startups that is much easier to deal with for US B series startups than described in this article.

(2) According Dieter Schneider, the CEO of SSP Europe, at a lunch a week ago.

(3) Thanks to Olga Steidl for point this out.

(4) Thanks to Raj Singh pointing this out to me.

(5) In the context of this piece I should have discussed the regional rise of other powers, specifically the Chinese internet corporations and various of the non-Google Android players who are now getting out of China, but this will happen in separate pieces down the road.