Going for growth: The dotcom boom was brutal for those that couldn’t make it, but now life is even tougher
Lastminute.com was a poster child of the dotcom boom. In the space of two years, the online bookings site went from a broom cupboard start-up to a listed company briefly worth £800 million before the bubble burst at the turn of the century.
“Lastminute.com happened at a very unusual moment in time,” Henry Lane Fox says now. “We were one of the first ecommerce services that were available in the UK. That put us in a fortunate position, where we were able to attract an enormous amount of credible partners and a very large customer base in a short period of time. That model is now largely [unrepeatable].”
That may be so, but 17 years on there is an argument that overnight success stories such as Snapchat are fuelling even more unrealistic expectations among founders and investors alike. Expansion rates seem to be increasing. Data shows that venture capital-backed start-ups in the United States lifted sales at 85 per cent a year in 2014, compared with 63 per cent in 1998.
Mr Lane Fox is watching all this more closely than many. He was part of the original founding team at Lastminute.com, together with his famous sister Martha, now Baroness Lane-Fox, and Brent Hoberman. And he remains at the coalface as chief executive of Founders Factory, an outfit that aims to build up 200 new technology businesses over the next five years.
While companies no longer enjoy the lack of competition for customers and investors that benefited Lastminute.com, the rate at which they can develop products has accelerated dramatically. “The pure engineering cycle can be much, much shorter than it once was and it’s much lower-cost. That’s because of open-source software cloud computing power. There are a lot of standard technical components that you can now bolt together in a way that previously wasn’t possible.”
Social networks amplify any success, meaning that even moderately successful start-ups can be catapulted into the limelight overnight. According to Andrew Fisher, executive chairman of Shazam, the music recognition service, “you get these stratospheric growth rates because of word of mouth.
“As a young company, it would have been very difficult to envisage raising enough money to do enough advertising to make people aware of your product in the past without this notion of virality. That is one of the big game-changers in terms of how companies can achieve very rapid development at fairly low economic cost.”
Speed is not everything and handled badly it can be ruinous, but Mr Lane Fox says that pace of growth will be important to those with investors and yet to reach self-sufficiency. “A start-up is a race not to lose money and not to run out of money. At its most basic level, it is a search for a profitable and scalable business model before you run out of cash.”
The technology businesses that he deals with rarely turn a profit in the early days, so companies must seek external funding. Mr Lane Fox says: “To be doing that, you need to be maintaining momentum against a big vision that you have defined clearly and can articulate both to people who come to work with you and to the outside world.” Maintaining momentum involves acquiring advisers, senior staff and strategic partners who can add to the start-up’s credibility and help to build an audience. “All of these things, coupled with very robust and fast technical development, is what lets companies maintain a funding pattern that stops them getting into that death curve and running out of money.”
Founders Factory is about to launch Hellocar, an online platform to buy and sell cars. Cars on the site have been inspected by the AA and are delivered to a buyer’s door. Customers can then return cars within seven days or 250 miles for a full refund.
Mr Lane Fox argues that this is the type of company that needs to achieve very rapid growth if it is going to get anywhere. “If the business can [achieve] credibility, I think you have some defence against your competitors, but it inevitably may become a bit of a land grab.”
The same is true of many of today’s technology companies because the idea at the heart of the business is rarely novel. A lack of originality makes pace more important. Michael Jackson, partner at Mangrove Capital Partners, a venture capital firm, says: “Most products don’t have that much defensibility at the intellectual property level. They’re about building a brand and a name for themselves faster than anybody else.”
Mr Jackson, who was chief operating officer of Skype as it grew from start-up to a global telecoms giant, highlights Deliveroo and Just Eat as companies that have cornered their market largely through rapid growth. “These days, where we have a globally connected market, it’s important to assert yourself quickly as being the leader and you can only do that if you’re faster than everybody else.”
That, too, requires investment and companies are now seeking vast amounts of money at earlier stages of development. Hellocar has raised £1 million in funding before its service has even launched.
Mr Jackson says that the venture capital community must take some responsibility for this ever-increasing pace. “We have a tendency to see something that is growing and suddenly there is a certain herd mentality around a lot of the opportunities, fintech [financial technology] being one of them at the moment.”
This approach has resulted in some spectacular failures. He points to Powa Technologies, the notorious mobile commerce company that raised more than $200 million of investment in less than three years and supposedly was worth $2.7 billion at its peak. It collapsed last year with nothing much to show for the money it had burnt through at an alarming rate.
While the demise of Powa is an extreme example, trying to grow too quickly has been identified as a leading cause of failure for start-ups. A Startup Genome report, based on data from more than 3,200 companies, found that 74 per cent of high-growth internet start-ups failed as a result of premature growth.
Mr Jackson recognises the contradiction in founders being advised to rush to market to beat the competition, but at the same time avoid running before they can walk. He suggests that companies should stay under the radar as far as possible until they are ready to hit the accelerator. Then, however, the race is really on.
Timing is everything, or you risk a fatal false start
While most ambitious small companies feel the need for speed, some of Britain’s biggest success stories have taken many years to reach their goal (Josephine Moulds writes).
Skyscanner, the travel search engine, was launched shortly after the dotcom bubble burst, and initially made slow progress.
Gareth Williams, its chief executive, says: “No one wanted to invest in a new internet start-up, so we bootstrapped the business, which was a great foundation; when we failed, we failed fast and it made us leaner and more innovative.”
Skyscanner joined an elite group of private companies worth more than $1 billion, known as unicorns, in January last year, when it raised £128 million before its sale to a Chinese travel group.
Another of Britain’s unicorns, Shazam, was launched in 2002, arguably around a decade too early. It could identify music via a user’s mobile phone, but it was not until the explosion of digital music, smartphones and unlimited data tariffs, which meant that users could identify a song and buy it straight away, that its business model really took off.
Andrew Fisher, Shazam’s executive chairman, says: “One of the big challenges in consumer-facing companies is that things often take longer to develop than you imagine them to.” Shazam benefited from having investors willing to play the long game and let companies keep their powder dry.
Mr Fisher says: “If you are able to preserve a cash runway, it just gives you more time in your business to allow the market to develop and factors that are beyond your direct influence can come into play. You then are very well-positioned when that segment starts to mature.”
Whether it’s a sprint or an endurance race, it’s all a question of timing your run.