Duet Partners
Tel: +44 (0) 20 7416 6630 / Email: partners@duetpartners.com

As we celebrate helping clients raise over $100M, we see that a pivot in our engagement model has delivered some unexpected benefits to stakeholders.

27th January 2019

Since our first capital raise back in 2010, we’ve advised dozens of technology businesses. At the outset our engagement model was essentially transactional i.e. the execution of funding mandates. As the needs of early stage companies have increased considerably in recent years due to an ever more demanding investment environment, we decided to reconstruct our engagement model around 2 years ago. Through a more collaborative approach, clients are now achieving higher levels of investment readiness based on a clearer vision of the scaling strategy.

As we know, early stage capital raising for many companies can be a hugely challenging process; less than 1 in 5 startup businesses graduate from Seed stage to Series A [1]. Many run out of time (and cash) before they are able to convince investors that they are ready to scale. For those that do make the transition, half will then stumble prior to Series B as they hit the famous ‘chasm’ [2], trying to reach the elusive ‘early majority’ customers. Understanding these odds and how to beat them has been our passion since starting Duet.

From the beginning we have focussed on Series A and B capital raises, although over the years we have undertaken other unusual transactions that have morphed out of funding projects as a result of dramatically changing client circumstances - including turnarounds, financial restructurings, and MBO’s. 

State of readiness assessment

Even with this diversity, one thing has remained constant: the first and most critical step in the process has always been to assess the state of readiness for funding. More often than not we find that certain aspects of the investment proposition need strengthening, but under the time pressure to raise funds there is often precious little time to take meaningful action to address any significant shortcomings. At Series A this can be particularly frustrating as this is the first real scaling round and the investment criteria can be uncompromising.

One of the biggest challenges with the overall fundraising process is therefore time. Whilst 'turnaround' or 'special situations' funding can be completed in weeks - due to the very nature of the requirement and the specialisation of the investors involved - normal funding cycles with institutional investors, such as VCs, can take at least 6 months.

Early stage businesses nearly always underestimate the time it will take to raise capital from such investors and, as a result, there is often insufficient time to properly address issues found in the ‘state of readiness’ assessment. If the issues are serious they could take months to fix.

Reconstructing the model

To try and address this time pressure challenge, around 2 years ago we decided to reconstruct our engagement model: We decoupled the ‘state of readiness’ assessment from the capital raising process and instead began to provide this initial step as a standalone service, undertaken much earlier in the cycle – typically 2 to 3 months before the start of the actual funding campaign. Under the name Investment Analysis, we incorporated several proven components; in particular the assessment and critique of the investment proposition, and the development of the funding strategy, based on extensive market research as well as our own direct experience.

The principles of Investment Analysis are based on an adaptation of the Customer Development Process pioneered by Steve Blank at Stanford [3], which has been adopted by thousands of entrepreneurs since. Based on this tried and tested platform, the resulting methodology has since been employed and continuously improved during the course of over 30 client projects at Duet.

As we developed the Investment Analysis service, we not only saw the opportunity to better address the investment readiness question but also engage with a wider audience: we would also provide this to companies whose ambition was to undertake the capital raise process themselves but wanted to establish a stronger starting point. Structured as fixed fee engagement without obligation to commit to the funding process, the overriding objective has been to encourage early stage businesses to undertake this crucial preparatory step in good time - well ahead of firing the starting gun on the funding campaign.

Unintended consequences

With any significant change in business strategy like this, there can often be unintended consequences, and indeed we have found this with Investment Analysis. Designed to address the challenge of investment readiness, it has provided some other significant insights to stakeholders that we did not initially predict:

1. For the CEO/Founder:

Through the process, the leadership team develops a clearer understanding of how the key business milestones link to the major funding milestones. In particular this ensures that they avoid premature scaling, which is why a majority of startups fail [4]. As Investment Analysis is based upon the core principles of the Customer Development Process, we are able to checkpoint they key phases of startup development (Problem - Solution - Go To Market - Business Model - Scale) to ensure things are being done in the right order.

2. For incumbent investors:

By developing a clearer funding strategy well ahead of the Series A investment point, incumbent investors - often the Seed investors - have been able to undertake pre-A Rounds (‘bridge rounds’) with much greater confidence. There seems to be an increasing desire to have an independent assessment of the company’s funding prospects as part of the due diligence process for existing investors, and Investment Analysis has proven to be a natural fit here.

3. For the Board:

For companies where the business plan is simply not materialising as hoped and where there is perhaps uncertainty about the future, Investment Analysis has proved to be a valuable part of the Strategic Review process. On several occasions it has become apparent that a game plan to raise capital would be very unlikely to deliver results. As a result, the findings have been used to justify a pivot in the business strategy and on one occasion to accelerate the sale of the business – that delivered a return for all.

We’re looking forward to 2019 and engaging in further collaborative efforts with startups, using Investment Analysis to help navigate the path ahead.

About the author: John Hall is CEO and co-founder of Duet Partners, a corporate finance firm that provides specialist funding support to high growth technology companies. His 30 year tech career began with major US semiconductor and software companies, and was based in the Valley during the late '90's. Before Duet he was CEO of a VC-backed consumer electronics company, sold in 2009 following several rounds of capital raising. In the past 10 years he has advised dozens of founders on the startup to scaleup journey and is a retained Board advisor to a number of UK technology companies.

[1] https://blog.dealroom.co/the-journey-to-series-a-in-europe/

[2] ‘Crossing The Chasm’ by Geoffrey Moore, Harper Collins

[3] https://steveblank.com/startup-owners-manual-1in/

[4] http://innovationfootprints.com/wp-content/uploads/2015/07/startup-genome-report-extra-on-premature-scaling.pdf

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