Duet Partners
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5 Lessons in resilience for startup founders

4th August 2020

Some founders were better prepared than others when Covid hit. Was this down to luck or good planning?

No one could have predicted this crisis. Yet aside from having the good fortune to have recently raised funding or perhaps be in a ‘Covid-friendly’ sector, we believe that other important factors have also heavily influenced the prospects of many early stage businesses.

Our insights reveal that whilst in one sense everything has changed, nothing has changed.

Businesses built on solid operating foundations have shown real resilience, even in the face of this exceptional disruption. Yet it sometimes takes a crisis to reveal what these true assets are.

To prepare for the recovery, what lessons can we draw from those startups that successfully weathered the storm through the first half of 2020? Looking back at the businesses we have advised over recent months, here are our top 5 takeaways.

Lesson #1: Choose your investors wisely

They say you find out who your true friends are in a crisis. As Covid suddenly impacted the revenue outlook for many startups, founders eagerly sought investor support for emergency funding rounds to protect cash runways.

Some investors quickly stepped up to the plate, cheque book in hand, almost before being asked. Many private investors, and some of the smaller VC funds in particular, moved quickly. In the hour of need they unflinchingly supported founders with quick top-up rounds, enabling leadership teams to then focus 100% on steering the ship through shallow waters.

However, a small minority of investors have taken advantage of this crisis by demanding punitive terms on internal rounds, such as full ratchet anti-dilution rights and highly restrictive controls. Driven by either greed or pure short sightedness, we have witnessed some truly dispiriting investor behaviour in the first half. As a result, the time and energy wasted in negotiating final terms on capital raises has put some companies in peril.

Founders must learn from this and choose their future investors with greater care. It’s almost impossible to remove an investor from the cap table once they are in. So up-front due diligence is critical, not only into the fund but also into the individual partner who will manage the relationship with your startup.

Do your homework. Talk to their portfolio companies and find out how founder-friendly they really are. Make sure they pitch you on why they will be the right fit for your business over the long term.

Not all money is equal.

Lesson #2: Funding is a process of lines not dots

Even though funding into UK startups collapsed by 47% in 2Q20 (v 2Q19), deal count was down only 17%, as we highlighted in our recent blog. This reflected many unscheduled top up rounds, but some planned rounds led by new investors were successfully completed during lockdown.

How did founders pull this off and manage to lure in new investors during the developing crisis?

Within our own circles we observed that founders who closed rounds with new investors during lockdown had been building those relationships for some time. They didn't go from cold call to deal done in a few months. They had been developing a ‘history of progress’ with target investors well before Covid.

In Mark Suster’s seminal article ‘Invest in Lines, Not Dots’, he describes how investors like to build a picture of a business over time, well before they invest. They want to see positive patterns emerging during this ‘courtship’, so when the moment comes to tie the knot interests are truly aligned behind a shared long-term vision.

This approach requires multiple interactions over a period of many months – well before formally seeking capital. Not only does this benefit the funds but it gives founders the opportunity to really get to know individual investors. And as we mentioned above, due diligence on investors is now more important than ever.

Founders should think of funding more as a continual process that requires a small amount of time every month, rather than a big bang event that wipes out your time for weeks or months on end.

Which investors are you going to warm up ahead of your next round?

Lesson #3: Storytelling is a critical skill

Great leaders are nearly always great storytellers. Founders that are able to create a compelling narrative around their vision will attract customers, talent and investors. Why is this?

Stories engage our emotions. Research has shown that audiences are more likely to engage with and adopt messages that make them feel personally involved by triggering an emotional response. Storytelling is a powerful vehicle for this.

Stories help us transport the listener to a place where we are more inclined to embrace the belief and worldviews the story presents. Every interaction in the investor courtship process should reveal a new chapter that supports the narrative. The investor pitch should finally bring the story together.

Founders with the most effective pitches in recent months have brought Covid into the narrative arc. This is the backbone of the story that provides a clear beginning, middle and end. Covid has impacted everyone’s story, so not dealing with this proactively will make investors very wary.

The mistake that founders sometimes make is that they think the pitch tells the story. It doesn’t – it is there to support the story that you will tell. This requires careful planning and consistency of delivery. In particular, it requires mastery of the narrative arc.

Storytelling is a critical skill. It requires training and practice.

Lesson #4: Hire the very best talent

Successful founders have a knack of surrounding themselves with exceptional talent.

At early stage, the team is one of the most critical factors that investors assess. The calibre of the leadership team sends the earliest and most powerful message: All these highly talented people have forgone other opportunities to be here. Something truly great must be happening.

The most ambitious founder/CEOs (also amongst the best storytellers) have the ability to hire way above normal expectations. Certain members of their leadership teams will themselves be clear CEO material with amazing ability to go broad, not just deep.

But it’s not all about experience. Research shows that the most successful top teams have the greatest experience diversity. Combining highly proven startup execs with talented but much younger leaders is a powerful recipe.

Ambitious founders will also implement a professional HR function much earlier than most. Here the emphasis is on building a first-class recruitment capability to support growth, helping the founder manage the often-fraught transition from early scaling to a team of 50+, and truly leveraging the diversity of exceptional talent that is now flooding the market as a result of Covid.

Lesson #5: Have a framework for decision making

Covid has had a devastating effect on many businesses. Some have folded, some have been left reeling, yet others have pivoted swiftly to grasp new opportunities.

What distinguishes these companies from one another?

Most of the talk has been about sectors - some have been accelerated and some have just stalled. If you were in the wrong place at the wrong time, then that was just bad luck.

Well, that's part of the story. The fact is that founders who came to terms with the new reality and quickly adjusted their business models burnt less cash through the pivot than those who clung to old plans in the hope of a quick return to normal.

Our observations were that the fast movers had an established framework for decision making that was in use well before Covid struck. With many of our clients this was likely to be a combination of a Business Model Canvas, an Investment Analysis checklist, and a robust Financial Model.

By using these (or similar) tools to calibrate the company’s position on the Customer Development journey, leadership teams could see how radical the pivot needed to be, where costs could then be cut, and how this could be effectively communicated to staff, customers and investors.

Any CEO must now be confident that when the next crisis happens, they have a framework for rapid decision making through a pivot that not only optimises cash but quickly shows the way ahead.

In summary:

Not all money is equal. Choose your investors wisely – do as much due diligence on them as they do on you.

Funding is a process of lines not dots. Which investors will you warm up ahead of your next round?

Storytelling is a critical skill - it requires training and practice. Remember to bring Covid into your narrative arc.

Hire above any normal expectations. Leverage the diversity of exceptional talent that is now flooding the market.

Employ a framework for decision making that enables rapid assessment of new business model ideas - before the next crisis breaks.

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