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


Weekly Briefing Note for Founders

10th September 2020

This week on the startup to scaleup journey:

  • Founder mental health - who cares?
  • Complementary co-founders
  • Diversity becoming a key factor for investors
  • Fake Product/Market fit
  • The big shift from Public to Private equity

1. Insights of the week

Founder mental health - who cares?

Leading a startup is a stressful business. Having been a CEO of a tech startup for 7 years in my prior life, I can attest to the relentless mental pressure that founders have to deal with every day. The events of 2020 have just added to this and burnout is all too common. Not that anyone wants to talk about it. The press and social media usually depicts the startup fraternity as a group of entrepreneurial heros closing deals and saving the world on a daily basis. The reality is very far from this.

major study in 2019 confirmed that founders really feel they are going it alone. 81% have sought ways to improve their wellbeing, yet self-reported levels of distress are still very high. 78% are lonely. 96% suffer stress effects, with an average of 4.7 symptoms per founder. Physiological (70%) and mental (78%) symptoms of stress are extremely high. More than half of founders report feeling depressed (69%), anxious (51%), sleep deprived (68%) burnt out (56%), irritable (54%) or unable to focus (51%).

Investors are starting to talk about this more openly but like other stakeholders, they primarily view this through the prism of 'performance management'. That's not what founders really want or need. Often they just want someone at peer level to talk to, someone who has trodden the path, someone they can trust. A sounding board who is always there for them. At Duet, we are increasingly playing this role (and see it as an important aspect of our future work), but we also see independent non execs stepping in very effectively. Executive coaches are also becoming more common, taking a lead from the US. The most important thing is that founders find a pathway for support before burnout hits.


Complementary co-founders

Basis Set Ventures published a seminal piece of research in December 2019 entitled: What makes a successful founder? This incorporated data on 60+ founders and their early stage investors. One of the biggest takeaways from this research was: Having a complementary co-founder is correlated with success. Feedback showed that 68% of co-founders with complementary traits were doing well, compared to 38% of co-founders without complementary traits. In other words, the best founders know their strengths and weaknesses and recruit a complementary team that maximizes the company’s chance of success.

In our recent article, Founders are now testing the true resilience of their teams, we identified two adjacent insights: The first is that it is often assumed that the success of a Tech startup is linked to the technical prowess of the founder/CEO. The research revealed that whether a founder/CEO is technical or not isn’t a factor in the company’s success. However, having a complementary cofounder, often a technical one, is correlated with success. The second insight is that solo founders have a much harder journey. Investors are often initially wary of sole founders, and will look very carefully to see if they have built a complementary and diverse team around them. This is a positive sign of deep self-awareness.

The Founder Dating Playbook just published by Gloria Lin in the First Round Review is a useful guide for finding a great co-founder. In it she says, “...two of the most common causes of startup failures are not finding product/market fit and co-founder issues. The former is top of mind for every budding entrepreneur, but I don’t think people consider the latter as much when they’re crafting their pitches," she says. "We just finished our fundraising process and I can’t tell you how many seasoned investors told us about how a co-founder situation blew up one of their companies. But even so, there’s not much guidance out there on how to pick the right co-founder.” Her playbook is a great first step.


Diversity becoming a key factor for investors

This week, Atomico, one of Europe's largest VC investors at Series A and beyond, published an important paper on its commitment to diversity. The paper echos a significant shift occurring across the investment ecosystem that we have highlighted before and is gathering pace. Atomico is very influential across the tech scene, not just as a major VC but as a Limited Partner in several early stage funds as well as through its Angel Programme.

Founders take note; investment criteria are changing. "..we at Atomico are looking again at our approach to diversity and inclusion. We recognise that we need to be more open, more intentional and redouble our efforts and actions....The biggest impact a VC can make is where to invest its money and how to support those investments. We at Atomico know we will only deliver sustainable, systemic change for our business and the ecosystem by focusing on how we source our investments, what we invest in and the support we offer to those in our portfolio and beyond." 

Atomico began monitoring diversity and inclusion data from across the whole European technology ecosystem in 2018 and publishing it in their annual State of European Tech report. Since they made this a focus, their data has been used globally in more than 400 media articles from more than 20 countries and helped to accelerate a conversation about diversity and inclusion in European technology. They are running a survey again this year covering diversity and inclusion in the ecosystem: click here to participate.


Fake Product/Market fit

Many great insights from investors presenting recently at SaaStr Annual 2020. Michael Seibel, Partner a Y Combinator, talked about why 70% of the startups they fund at Seed stage die; they are unable to find any form of product/market fit. He uses the term 'Fake product/market fit' as one of the most common symptoms of impending startup death. Understanding the causes and learning how to spot them early is vital, as no one is immune. He highlights 3 in particular that plague startups:

1. Placing too much belief in their brand name investors rather than themselves. 'If they have chosen me I must be doing it right. I must be on to something'. The reality is that even the great investors have many failures, so they aren't that great at picking the winners. That why it's a portfolio play for them - they only need a small percentage of successes to hit their target returns. For founders, there is only one company in your portfolio.

2. The demise can be accelerated after an 'early' Series A, where the investor moved to lock in a deal before true product/market fit had been cemented. This can easily lead to premature scaling and a shift to company building rather than still pursuing product/market fit. Typical signs are lots of hiring before the business model is validated.

3. Not measuring or taking action on key financial metrics that monitor progress towards product/market fit. No 'dashboard' that captures the critical KPIs, especially in SaaS business models where many metrics must be continuously monitored.

For further insights into this topic see our blog posts on premature scaling and product/market fit.


The big shift from Public to Private equity

Michael Mauboussin, is head of consilient research at Counterpoint Global and a leading voice on trends in public v private markets. In a recent interview with Patrick O'Shaughnessy, he reveals some eye-catching stats:

There are about 3,600 public companies in the U.S. today, about half as many as there were in 1996. The drop reflects active M&A activity and a low level of initial public offerings (IPOs). Pre-2000, the vast majority of successful VC exits were through IPOs and they were done quickly after the company was founded. Now most VC exits are through M&A while the minority of companies that do go public are doing so much later.

M&A has led to more concentration in most industries. The value of US public markets as of year-end 2019 was $38 trillion. (As an aside, the assets under management for the U.S. VC was about $450 billion. So public AUM was about 80 times the size of the VC industry). Roll forward to today and we see even further concentration; across 5 tech stocks: Facebook, Amazon, Apple, Microsoft and Google, through July 30th 2020, their combined market cap alone went up by roughly $1.8 trillion!

Buyout activity has been up in the last few years, albeit still below the peak of 2007. On average, deals are now larger and more expensive than those of the past. Exits for buyouts are dominated by strategic sales to other companies. In recent years, there has also been rapid growth in sales to other private equity (PE) firms.

In summary, exit routes for private businesses have now shifted dramatically away from IPO towards strategic M&A and PE buyout.

If you would like to dig further into this topic, Michael Mauboussin's recent paper on Public to Private Equity in the United States: A Long-Term Look, is available here

2. Other pieces that are really worth reading/listening to this week: 

Low-Cost User Acquisition Strategies
On the subject of diversity, we are hearing more and more from amazing female founders about their startup journeys. In Crunchbase this week some great insights to share and reflect on regarding low-cost user acquisition strategies"Typical user acquisition strategies may not be the most effective route for a variety of reasons — budget constraints, of course, being a big one. For these eight female founders, the tactics they chose to deploy were more creative and out-of-the-box..."

14 Tech Trends To Watch Closely In 2020
report from CB Insights. Unicorns buying unicorns. The $8T opportunity in wellness tech. Empathy in design. Killer robots. Here are the top tech trends poised to reshape industries in 2020.

Your startup valuation, explained simply.
A tutorial from Fred Destin, Partner at Stride VC, on the basics of how to create a simple cap table.

A new Corporate VC
Stripe has become one of Silicon Valley’s most prominent startups, valued at $36 billion thanks to its technology powering online purchases for clients like Target and Amazon. In the background, its founders have also been building another business: venture capital. The company has invested in more than 15 startups. Leveraging its success as a private company and the reputation of its founders Patrick and John Collison, Stripe has won deals, sometimes by outbidding traditional VC firms. That’s helped it emerge as a growing force in corporate venture capital, just as Google and Salesforce did in years past. 

Future Fund case studies
The British Business Bank has been publishing case studies of recent investments by the Future Fund, You can find 6 of them here. To date more than 650 companies have benefited from £640 million of investment from the fund.

Happy reading (and watching)!

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