Will GDPR kill small M&A in European TMT?

It can be cheaper, on a cost per acquisition basis, to buy a company that has customers who could also be interested in buying your product. That thesis has driven a lot of small M&A, not just in Europe but around the world.

With GDPR just around the corner, I'm sure like me you've been asked to renew your opt-ins for many email newsletters. I like it for the same reason I like when my credit card expires: it feels nice to be asked once in a while. And to be able to reset all that stuff.

But if that a new opt-in needs to happen when you buy a company, and the conversion rate of consumers opting in again is low (30%? 50%?), you won't be able to move a lot of the customers over. And consequently the math stops working for a lot of the smaller M&A transactions that work on the customer acquisition logic.

I'm sure there are lawyers working on this. Maybe it's not a real, real problem. Maybe there's a way to stay compliant (we're advising all our companies to err on the side of caution). But I've now heard it mentioned several times so thought I'd flag it here. 

Ivory Ella

I learned about Ivory Ella today (showing my age again), a three year-old Connecticut-based company that donates 10% of its net profits to Save The Elephants. And since I'm a sucker for elephants, especially the baby ones, and this is one of my favourite charities, I thought I'd give the company a shout-out. Which they really don't need because they're amazing at Instagram

(Photo by Kiana Eyestad). 

Here's the backstory on Ivory Ella in Forbes. Now go buy some clothes and save some elephants. And then think about what else could be a good product x charity collab and be an entrepreneur who makes this world just a little bit better. 

P.S. My EWR-CPH flight was cancelled. I'm sitting in an airport hotel in Newark. Yay. 


Let's raise the bar together - Europe should be competitive in DTC brands

I'm writing this at 35,000 feet from the confines of a Wifi-enabled SAS Airbus. I just watched Blade Runner 2049 which was visually uh-mazing but sadly didn't have a Tears in the Rain type moment... C-beams glittering in the dark off the Tannhäuser gate. Totally improvised nonsense but some of the strongest scifi poetry ever. 

I know I said I bleed blue and gold, but really at my core I'm not big on patriotism. On the other hand, I also don't believe in no nations, no borders (or sumsuch nonsense) because I'm not an anarchist and I actually enjoy the freedom that comes with security. I grew up as a Third Culture Kid in Canada, Germany and the UK, so I really have no home and few roots. Except cyberspace, really, but even that place has changed beyond recognition in the last 15 years.

As I was leaving Schengen, the new automated gates scanned biometric passports and took portrait photos. That did feel pretty Blade Runner and had me wondering how long I'll feel comfortable in Europe. It does feel like we're continuing to surrender freedoms on the continent.  

We're about to start our descent into Newark and going through my notes I'm struck by how massive the DTC segment has become in the US over the last few years. That Inc article mentioned 400 active companies. I don't quite understand why it should be so much bigger in the US than in Europe... once again. This isn't really out of a sense of patriotism as much as healthy competition. 

We have such a strong history of building luxury brands. That said, my theory is that many European companies have been competed upwards - meaning they've become luxury brands not necessarily by choice but because they couldn't keep up with the commoditization of their markets. They retrenched to what they were good at (making pretty stuff in small batches). 

When I compare companies like Horizn Studios and Away, part of Europe's losing ground again is a continued lack of access to capital. We just don't have the funds that do a fast-follow $10-25 million in an early-stage company. We desperately need a set of more aggressive, conviction-driven Series B investors in Europe. Which requires doubling or tripling the $6 billion or so invested in European venture per annum. 

But there are other reasons as well (this will probably get me in trouble): often European management lacks experience - domain expertise, prior entrepreneurship, strong corporate experience, etc. Or they don't have great advisors (there are some truly awful advisors in European venture). Some European companies - compare e.g. the European shaving startups to DSC or Harry's - also just seem to be OK with making decidedly worse product. And others yet seem strategically inept or much more shortsighted than their US competitors. I often also sense a pervasive lack of optimism and a lot of risk aversion. When in doubt, Europeans prefer to run lifestyle businesses. 

So I guess I'm here to remind you that we owe it ourselves to stretch. Reach higher. Raise the bar. If you and I don't do it, who the heck will? 

If you want someone to coach you on the journey of reaching your full potential, we're very much looking for aggressive DTC teams in Europe. We're fine if you're still in stealth or looking for pre-seed. All we ask is that you have an idea or part of the supply chain figured out. And the desire to build a really, really big company with us. 

Just leave a comment or send me an email to max@sunstone.eu.

The Meta of DTC - investing in the pickaxes of DNVBs

We're continuing our big push in direct-to-consumer (DTC), digitally-native vertically-integrated brands (DNVB) at the moment with trips to New York, Copenhagen, and Stockholm this week. On the back of a few trends (easier to access supply chains, ecommerce logistics, variable marketing channels), there's a Cambrian explosion of these types of companies.

I'll write a post soon about what we look for in a DTC investment, but in the meantime I'd like to draw your attention to the meta layer of the secular trend of DTC: i.e. "selling pickaxes during the goldrush."

As you may know, this is an allusion to the California Gold Rush and entrepreneurs such as Levi Strauss selling supplies to miners, which turned out to be the better business.

Of course these are very different markets: there are orders of magnitude fewer people buying pickaxes and than people buying gold. But while gold is a commodity (and a non-zero-sum market), if your pickaxe is a lot better at helping people mine gold, then you're going to corner the pickaxe market pretty rapidly. And if your pickaxe business has network effects, e.g. you get better at helping people find gold the more people are using your pickaxes, then your position can become unassailable.

So what's the meta or "pickaxe" layer in DTC investing?

The big play here has been Shopify. The stock has been doing very well and we think it will continue to outperform relative to market. Incidentally, it makes me sad that we still don't run a hedge fund on the back of the insights we derive from private market investing.

I would not be surprised if the Shopify toolchain, like plugins and associated businesses like Printful, yield a few good DTC infrastructure investments. As with any "tools" business, there's a question whether it can meet venture investment criteria.

Logistics: while these are typically the same fulfillment providers as in retail ecommerce, we have seen a few businesses that lend themselves to DTC brands, e.g. by allowing businesses to start selling internationally at low volumes. Seven Senders in Berlin is an example, but we think there will be other ones. As Amazon increases customer expectations to same-day or overnight, we will see multiple attempts at building out competing infrastructure.

Packaging: we have seen a few businesses that innovate around packaging, making high quality, custom packaging accessible at smaller lot sizes. A good example is Packhelp in Poland.

Wholesale/Retail Aggregation: this has been a horizontal function that has seen relatively little innovation. Indigo Fair aggregates DTC brands and offers stock to relevant retailers. We love the concept and would like to see it in Europe. Let us know if you're working on something similar.

Marketplace/Shop Aggregation: next to operating your own shop, a lot of DTC brands are doing experiments on Amazon. For a whole bunch of reasons this might not be a great idea. We think there is space in the market for several non-Amazon marketplaces for innovative DTC brands, a little concept stores with distinct demographics. Think Farfetch for DTC. For example, I think an Outdoor Voices, a Cotopaxi and a Mafia Bags could very well sell alongside each other while increasing conversion and boosting AOV for everyone.

Marketing/Branding: of course these are mainly services and some design agencies have done much to help the DTC phenomenon (in Europe: Otherway, Proxy). But arguably the largest driver is variable online marketing costs (FB/Insta, Google). We've seen scaled influencer campaigns that are working and while we have not seen an influencer marketplace that we've liked, we think e.g. what Harper from Berlin is doing is very interesting.

Sourcing: it's not a secret that many DTC brands are using the same factory infrastructure as e.g. private label or even luxury brands. Making this a more transparent, even more accessible market could be an interesting business. Right now the approaches here mostly consist of classifieds type listings databases.

Have we forgotten something? Do you have an interesting company to suggest we look at? Leave a comment or send me an email to max@sunstone.eu.

Truth is a pathless land

If what we seek is Truth, the only thing we should let guide us is an unflinching readiness to admit that we're wrong. 

If we follow a teacher, are we following truth? 

If we can look at the world only through the images we have made of it, only through all our learnings and our memories, are we seeing, really seeing it? 

What space between the observer and the observed?

Some of us are so proud of our intelligence, it traps us. We are abstract people leading abstract lives. 

The final barrier to Truth, of course, is truth itself. But surely truth is not a barrier to Truth? To which the sages say, the donkey that brings you to the door is not the means by which you enter the house.

Happy Sunday. 

P.S. Lots of Krishnamurti and Anthony de Mello in there. Somehow I doubt they'd mind. 


  

Europe's vexing lack of legitimacy - deficient democracy and over-constitutionalization - and what to do about it

The Foundation Humboldt-University had its bi-annual meeting yesterday and the dinner speech was by Professor Dieter Grimm, a former law school professor and German Supreme Court judge, on just this topic: why the EU has a deeply rooted legitimacy problem. The following is based very loosely on his thoughts, though I've added some of mine + am sure to have omitted some of his. 

First off, while we elect Members of the European Parliament (MEPs), we do so by national election rules and we vote for members of national parties. Hence the elections are essentially national elections by proxy and are reported as such by the media. European issues are barely discussed. This is the first break with typical representative democracy. 

However, once those MEPs hit Brussels/Strasbourg (remember: the parliament moves every few weeks) the national parties they belong to don't actually make European policy. That happens in the parliamentary groups (EPP, S&D, etc.). Generally there's no program/platform before the election - that gets negotiated after. There are over 200 national political parties represented in the European Parliament. So there's your second break for a typical representative democracy. 

But the legitimacy problem goes further. While the EU doesn't have a constitution as such (remember the referendum that failed in France?), what we do have is "constitutionalization" of the EU by European courts. In a first decision in the late 1960s, the European Court of Justice decided that a common market implied the free movement of goods, services, capital, and labour (people, really). In a second decision of the same decade, the court decided (get this) that European law takes precedence over national law in all cases, always. 

And so suddenly all European law that was enacted essentially had the primacy of a constitution: it supersedes national law in all cases. And the subsidiarity principle, to which both the EU and national governments continue to pay lip service, was essentially voided. Let that sink in: anything Europe legislates has constitutional weight for the member states. It's the ultimate assault on national sovereignty. And it's the ultimate silliness from a legal point of view: constitutions should be lightweight, they should be things of principles that are very rarely subject to change. 

The power thus concentrated in Brussel is no longer derived from the sovereignty of the member states, which are represented in the European Council. Nor does the power derive from the sovereign directly, i.e. the people, because of the flaws of European representative democracy. And thus we begin to see the problem of the legitimacy of the EU and its threat to the sovereignty of member states and democracy in Europe as a whole.

The solutions are obvious: create European parties and run European elections on European issues. Implement the subsidiarity principle to de-constitutionalize the body of European law. Give the European Union a proper, thin constitution. And let lower-level problems be addressed by national or regional or local legislation. 

Alas, as in any existing power structure, the existing complexities and incentives seem to work against change. Getting all 27 member states to agree to anything has become a nightmare. There is no interest in creating European parties. Nor is there an interest in making Brussels less powerful. Catch-22. 

In my view it will take nothing less than a revolt of the most powerful member states to significantly alter the European system. Brexit and the Visegrad dynamics are the perfect storm. We need a renewed vision for a strong, united Europe with strong member nations. Alas, there's little indication that this will happen in our lifetimes unless we tear down the EU edifice first. Which is the type of restructuring to the European system that, my father and grandfather do not tire of telling me, has always resulted in war.

P.S. Book by Professor Grimm in German: Europa ja - aber welches?

P.P.S. If you want to be invited to the next afternoon meeting of the Foundation Humboldt-University in Berlin, let me know in the comments. The event is in German. 

We're conviction investors - what does that even mean

We’re conviction investors. That means we rely on our own judgement to make decisions. And when we really like something, we're ready to pounce.

We don’t wait to see who else is investing. We don’t ask you to come back in a few weeks with social proof or other numbers. We don’t equivocate. We make you an offer as soon as we can, because we’re respectful of the entrepreneurial process and see you as our customer.

That doesn’t mean we don’t do our diligence. In fact, diligence is crucial for developing conviction. How do we know what to like if we don’t know what it is? 

So sometimes we’ll need more time than other investors in the market who are technical traders – and who will invest because of other folks in the round, because the segment is hot, because the founders are pushy, and so on. We feel we owe it to the founders to be more thoughtful than that. Our investment is a recommendation to the rest of the market and we take that role seriously.

The flipside of conviction investing is passing with conviction. We strive to avoid FOMO. We like saying No clearly and as early as we can. We want to be respectful of your time. Again, you’re our potential customer and just because we choose not to work with 99% of the customers who come through our door, doesn’t mean we think less of them. We’re just not the right investor in these cases.

Like everyone, we will sometimes be a little vague about why we’re passing. Mainly that’s because we don’t want to hurt your feelings. It’s awkward telling someone that our judgement of their capabilities or character is the main reason we’re not investing. And it’s not like people don’t change over time. Leaders and teams evolve. So when you feel our reasons aren’t super clear, frequently it’s a team issue.

When passing, we may tell you that our decision is often wrong – because it really is. Of course in the vast majority of cases we should have passed. But the false negatives are significant (we saw e.g. Zendesk, Spotify, Deliveroo at seed and failed to invest in any of them). Mistakes of omission in venture tend to get bigger over time.

We’ll also often tell you that we’d like to revisit our decision at the next financing round. Yes, that’s an option to change our mind. Because see above – we’re frequently wrong. But it’s also an invitation for you: at the next financing round, get back in touch and we’ll take a look. Just because we’ve passed doesn’t mean our door is closed forever.

What it isn’t, however, is the invitation to send us an email every two weeks to tell us how it’s going. If we wanted you to do that, we’d tell you. Assuming you’ll raise every 12-18 months, an update once every six months is the right sort of frequency.

 What most people don’t realize is that venture is very much a head, heart and gut kind of investing – more so than any other investment activity I’ve seen. And once the decision is made, I recommend dignity – you won’t win someone over at that point with rational arguments. You may if your metrics go gangbusters, you’ve added significantly to the team, or made other changes to the business. But explaining to us why we’re wrong when we already know that we're often wrong is mostly a losing tactic. 

That brings me to my last point: work with the nice VCs – and I don’t just mean charisma. Work with the folks that don’t posture, that aren’t overly aggressive, that aren’t pushy. You want to have calm, steady, wise people on your cap table – because it’s a long, long journey and the guys that let themselves be guided by fear before the investment will do so while they’re on your board, too. And the aggressive and greedy ones will be a nightmare when you have to sell the business.

Do we live up to all of these principles all of the time? Of course not - we're human, we make mistakes, we veer from the plan, we get busy and shortsighted and fearful. But as a statement of intent, this is how we see ourselves and what we try to live up to, every day. 

Rethinking the scale-up organization: leadership is not an ego game

When you're five or ten people or even twenty, purpose takes care of the organization. Things happen organically. Everyone collaborates. There's the excitement of a new beginning (see Hermann Hesse's Steps). Product gets built fast.

But as you start to scale the business and hire more people and things start being a little chaotic, there's this one moment. I call it the "now it's time to become a REAL company" moment (I am not great at naming stuff). Usually it's a founder who contracts that feeling and then starts spreading it like a virus. 

 This is a moment of fear. Fear contracts and people contract it.  It's often the moment the company adopts a traditional domination hierarchy. Reporting relationships are set up. The first deterministic processes, foreshadowing the onset of the great bureaucracy, are introduced. Overnight the business becomes a less wonderful place to work. What most VCs don't see: this is often the point the business starts to lose its full potential.

 And the true insanity is this: as the company scales headcount to 100 and beyond, hierarchy as an organizational model ceases to work well. Instead, the founder/CEO realizes we need a variety of small, cross-functional teams. Responsibility and the power to make significant decisions needs to be devolved to the edge of the organization. Alignment should happen at the lowest possible level (subsidiarity principle, anyone?).

So why do most companies have to go through this phase? And why do many not make it across this "organizational chasm"? It's egoic leadership, a leadership that's driven by fear, the wish to retain the success that has been achieved (attachment to outcome), and a lack of trust. Most founders instinctively hire phenomenally well in the beginning, but then destroy that achievement by withdrawing trust and seeking control just as things start to scale.

My favorite (radical) book in this context is Reinventing Organizations by Frederic Laloux. I'm not saying adopt all of that - just be aware of the principles. And know that the very first step is _not_ to force things in your company, but to gently use the momentum that exists to guide things to their natural outcome.

*Leadership is not an ego game.* 

 

Rocking the 'Gram: read this if you want to become Instagram famous!

I don't know whether you've ever seriously faced the issue of why your heart is so empty? I guess that's for another post. In the meantime, you're here because you clicked that baity link about becoming the new Insta sensation. Do you have a mirror? Look in it. Now back to me. Now... jk. 

Seriously I read a lot of books, some of them very silly. So here's my key learnings from the wonderfully titled "Read This If You Want To Become Instagram Famous." Which is a real thing and I read (well, skimmed) it. The things I do for you! But seriously, it makes for a great coffee table book. It's so pretty: 


I took these notes while browsing through the book. Here's how to become a God(ess) on the 'Gram: 

  • Hard Work. There's no overnight success. Insta is hard work and it has become super professional. Behind every great account, there's "a super snazzy snapper" (haha) who knows exactly what they're doing. Even if they kind of stumbled onto the formula (yes, there's a formula), they're now an execution machine. They probably live in that influencer house in LA. Good luck keeping up with their passion for themselves. Narcissus has nothing on them. 

  • Nail the Basics. Your @handle is obviously superimportant. You'll have to be creative nowadays to get something that isn't fugly long. Your picture is your brand identity aka logo and should be recognizable in thumbnail, so don't make it too subtle/detailed. Your bio should be English if your audience is global. Keep it short and add some emojis for personality. Or, you know, don't. Because emojis are so 2017. 

  • Technical Proficiency. Insta is all about the visuals. So there's a measure of being able to take an objectively good shot. Read about light - fresh shades make for fresh photos. Look at the lines - visuals where the lines lead from the edge into the photo draw in the viewer. Train your eye - see the hidden details in common things. Wait for the right light. Use colors to great effect. Just google photo composition and do that.

  • Consistency. You have to stand for something and then you have to keep delivering that. Change up the mix too frequently and you'll lose loyal followers. True for content. But this also means sticking to the same editing tools. Trust me, I screw this up all the time. I mean, I'm writing a blog post about being awesome on Instagram. Yesterday I wrote one about the market for something to believe in being infinite. Be less random than Max.  

  • Be Yourself. But Then Be Different, Too. The world wants your conformity. Your parents want your social respectability (you do, too, but from other people). Instagram wants you to be different but also not too different. Yourself, but not too much. You know what I'm talking about, weirdo. 

  • Think Omnichannel. While the 'Gram may be your main channel, other social platforms can push traffic and hence new users to Instagram. So check for the same handle on Snap and Tumblr. And maybe FB and Twitter if you're an oldfag like me (is 4chan language still cool? Showing my age here). 

  • Participate. Comment with care. And empathy. Treat people like people. This is generally very solid advice. 

  • Use Tactics to Get Noticed. Break-out accounts do break-out things - new and memorable and category-defining. To drive engagement, use poppers - pics that stick out. To increase retention, take a mini-series. From a composition point of view, getting down low or up high changes scenes dramatically. 

  • Editing Apps: use 'em. VSCO, Darkroom, PicTapGo, Snapseed, SKRWT, Cortex... and obvs Glitché (haha)

  • Be Human. Let your photos speak volumes. Tell true stories. Put yourself in your shots (partially). Be enthusiastic. Be relatable. 

  • Go for Geometry. Shoot straight on symmetrical architecture. Shoot flat lays (preferably food!) with lots of natural light. Full frontals. Create breathing space with powerful borders. People want order. 

  • Hashtags. Use them, but sparingly. No need to be so desperate. Don't copy generic ones - do your research. Also: you can hide hashtags in a comment that will disappear with volume. Also, don't forget about the weekend hashtag project! 

  • Geotags. Massively under-rated. Geotags lift engagement by like 80%. Even more so than a person or face or another user's handle (which are other good predictors of engagement). 

  • Become a suggested user. Don't over-cook your photos (Insta loves it au naturel). Keep it pure. Post consistently but not too often. Follow the zeitgeist.

  • Hot. The book doesn't talk about this, which is weird, but it is good to be attractive. More attractive people with exhibitionist tendencies tend to be more popular on Instagram. Just don't take off too much (that'll get you banned).

So if you're anything like me, at this stage you're a little disappointed in this beautiful book. Because it turns out the formula is pretty much the same as being successful online in any other way: make beautiful stuff that has meaning. Which just goes to show (we've known this for a long time) that you can't learn much about the internet from printed materials. It's better to just, you know, use the internet.

Thanks for letting me be silly today.

Much love,

Max

The market for something to believe in is infinite

This year marks my tenth year in VC, and the fifth year co-running our own firm, Sunstone Capital. I've backed a good two dozen companies at this point. And yet there's one lesson it took me a long time to learn. My friend Hugh Macleod sums it up well on this Hughcard, my absolute favourite of his work: 

Copyright Gapingvoid/Hugh MacLeod 

Hugh posted about his 2004 Hughtrain manifesto (2004 ChangeThis PDF here) a few days ago: The Hughtrain (2018 version). It's just as fresh - maybe more so given all that has happened in the last decade - as it was 15 years ago:

"We are here to find meaning. We are here to help other people do the same. Everything else is secondary... great branding is a spiritual exercise."

Go read it. It touches on a lot of things that we're going to talk about soon in our direct-to-consumer investment thesis.