Duet Partners
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Weekly Briefing Note for Founders

11th March 2021

This week on the startup to scaleup journey:
  • How investors assess founders
  • Corporate culture affects long term economic performance
  • US VCs are the pathway for growth rounds
  • Execs need to be 'owners' not just 'helpers'

1. Insights of the week

How investors assess founders
The founder assessment is a key part of any investment decision. The earlier the stage of the business, the greater the weighting VCs will place on this element. And as average deal sizes grow, investors are becoming ever more discerning. Each VC will have their own set of questions that help reveal the founder mindset: What is driving the founders to pursue this venture? What have they seen that others haven’t? What is their special advantage over others who may uncover the same opportunity? Experienced founders anticipate these questions and prepare. They understand that transparency on these matters is essential and by confidently setting out their worldview they will build trust.
Ann Bordetsky is a Partner at US VC NEA and in a recent article, described what she looks for in early-stage founders. She explores key aspects such as motivation, the level of curiosity, the ability to learn quickly, the capacity for resilience, and the founder’s ‘superpower’. A vital factor is the ‘unique insight’ the founder has for the mission ahead. “Some people just see the world differently or see things the rest of us don’t see at all. I’m interested in what is the “secret” that the founder knows that no one else does, what’s their unique perspective?” Founders tend to gloss over this insight – maybe because it’s so obvious to them – so must remind themselves to carefully articulate their ‘genesis moment’ early in the investor discussion.
The easiest prompt is to anchor this moment in the narrative arc. As founders share their story of discovery, they can reveal their unique perspective, their special insight. This fosters a greater sense of authenticity and makes this ‘light bulb moment’ more memorable. But insight alone is not enough, it's the ability to convert this insight into a commercial proposition. Founders must therefore demonstrate that they are pressing their special capability - their superpower – to gain unfair market advantage. This requires founders to sell themselves a little. In Bordetsky’s words: It could be functional expertise (product + UX), industry experience, deep customer networks, creative vision, or something else. If there’s 5 copycats tomorrow, why does this person win?

Corporate culture affects long term economic performance

The number of people employed across Europe in tech startups has grown 43% over the last 4 years, according to the European Startups project. But as the competition for the best talent heats up, the recruitment process can get rushed. Mistakes can get made. When CB Insights analysed why startups fail, the two top reasons were lack of market (42%) and running out of cash (29%). But in third place was having the wrong team. In the rush to build, the ‘default’ mode for hiring is to focus on skills or capabilities. i.e., Will this person be able to get the job done? But an equally critical aspect can get overlooked: Will this person be a cultural fit?
Carl Fritjofsson is a Partner at VC firm Creandum. In his recent blog, Scaling Culture, he says, “Don’t hire people who don’t fit into your culture. If in doubt, don’t hire, even if you want to fill the position quickly. It will come back to bite you in the long-run”. Founders will gradually - often subconsciously - put a 'cultural stamp' on the business. In the very early stages, this will simply be a reflection of their own values, and they will typically hire people that share those values. But this is not enough. As the team grows and the pressure to ramp up key positions increases, these values need to be captured and shared. A written description of the company culture, setting out the key values, becomes essential. It need only be a few paragraphs, but it leaves no room for doubt or confusion.
It is especially important that all hiring managers live this credo. There comes a point, usually between employee 50 and 75, where the founder can no longer participate in every hiring decision. Experienced founders appoint a delegate, usually a senior member of the management team, to interview specifically for cultural fit. This allows the hiring manager to focus on the ‘job to be done’. This emphasis on values is vital, as it has been shown that a company’s culture affects long term economic performance. Cultural fit must therefore trump all other selection criteria in the hiring process. For this reason, shrewd investors will ask about company culture when they are assessing the business. What’s yours?

US VCs are the pathway for growth rounds
Experienced founders say that the journey to Series A is the hardest stretch of the funding marathon. Once the business starts to scale, things improve - every investor wants to become your friend. But before then it can feel like a very lonely road to travel. Headlines declaring huge rounds, VC funds brimming with cash, and new unicorns being minted, create the impression of a buoyant venture market. Investment levels indeed reached a record high in 2020 but, as we know, deal numbers are lagging way behind as average deal sizes soar. First time (institutional) financings are at their lowest point since 2014, underlining the challenging odds founders face in the early stage rounds. But the prize for those 'crossing the chasm' to the other side has never been greater.

According to VC Gil Dibner, "The best VC investments barely manage to raise seed, struggle to raise their Series A, but the Series B and beyond are over-subscribed." London-based online events platform Hopin is a classic example of the feeding frenzy at growth stage: they completed a £5M Seed round in February 2020, a Series A of £32M in June 2020, a £95M million Series B round in November 2020, and this week announced a $400M Series C - valuing the business at $5.65B. The pace of growth propelled by VC cash has been astonishing, reaching $70 million ARR today, up from $20M just a few months ago. It's notable that the Series B attracted big US investors, including CVC Salesforce Ventures. The Series C was carried almost exclusively by heavyweight US VCs including Andreessen Horowitz, General Catalyst and IVP.

US VC funds are increasingly eager to exploit overseas markets as the competition for deals intensifies at home. According to Pitchbook, large multistage funds continue to invest earlier in the venture lifecycle in the US, thereby increasing competition for the top targets. 'Seed to Series A' funds are increasingly being shunted out of opportunities by these multi-stage funds muscling in on their turf. The amount of deployable capital available to VCs is at an all time high and this amount doubles when you add in other nontraditional sources like CVC - not to mention the torrent of new capital flowing into the market via SPACs. With the low numbers of new US startups currently entering the pipeline, the VC landscape has shifted the scarcity factor from capital to ideas. Startups with an idea that is attractive to VC investors are now rarer than the capital available to execute on those ideas. Will we see this phenomenon in Europe anytime soon?

Execs need to be 'owners' not just 'helpers'
Building out the executive team is a critical undertaking for any startup CEO. The timing will vary depending on the type of business model, but for most it will begin during early scaling. Up to that point the founders will have relied on a handful of individual contributors - especially in product development - to build the MVP and engage with early adopters. At this stage you are designing and running experiments - not (yet) building a company - so flexibility is just as important as specialism; early hires end up wearing multiple hats. But at the point where clear commercial traction starts to bite and the organisation needs to ramp up at executive level, inexperienced CEOs sometimes stumble.
Executives are the functional heads - sales, marketing, product, customer success, HR, etc., that report directly to the CEO (in the US, ‘VPs’).  In his recent blog, VC Jason Lemkin says founders often take too long to decide on these critical hires. Founders will either prevaricate over the possibility of promoting one of the ‘incumbents’ (sometimes out of misplaced loyalty), or believe they can simply get away with a more junior role. But this is a time where you need ‘owners’ not just ‘helpers’. As Lemkin says, “Help is terrific, and appreciated, of course.  But a great VP of Marketing or Customer Success does so much more.” They will take full responsibility for implementing systems and processes that deliver consistent growth, and, as 'owners', will expect to be held accountable.
For founders that have worked for high growth business in the enterprise, none of this is a surprise. They will know the types of operators being described here and the amazing impact they can have. These VPs not only pay for themselves with the growth they unlock but will unburden the CEO from operating minutia. Investors at Series A and beyond will expect the use of funds to cover such critical scaleup roles. These new hires will be leaders in their own right (some will potentially be future founders), capable of filling out teams beneath them over time. Above all they are 'accelerators'; they make things happen faster because they are truly proactive. They understand that momentum is everything and are able to ‘pull’ the company towards the next milestone. Who are your 'owners'?

2. Other pieces really worth reading this week: 

Semiconductor Startups – Are they back?
Semiconductor startups used to rule the roost in Silicon Valley. The very name, Silicon Valley, comes from the birth of the semiconductor industry in the San Francisco bay area 60+ years ago. A large percentage of venture financing used to go to semiconductor startups...not so much in the last 10 years. But in the last few years, we have seen a slow but steady resurgence of semiconductor startups and witnessed blockbuster financing and acquisitions. So, are semiconductor startups on the comeback trail? From the blog of Karthee Madasamy, DeepTech VC at MFV Partners.

European VC Valuations 2020
European VC valuations across all financing stages maintained 2020’s strong pace and finished the year above 2019’s figures, according to Pitchbook's latest report. "Growth in 2020 was astonishing as valuations rose despite macroeconomic disruptions such as rising unemployment and stagnant economic growth. Various startups across financing stages demonstrated both pandemic-proof and pandemic-induced growth in sectors reliant on technology."

How founders see the world
"It always starts with the founder, their story, how they see the world, and how they describe the vision for the world and the company they are building." An interview with Julia Hawkins, General Partner at LocalGlobe & Latitude. "We want to help the most ambitious founders build the company of their dreams. So I want to understand what that dream is. All founders where I have gotten to conviction are mission-driven and fiercely ambitious. They all have an incredible itch about the problem they are solving."

The transition from founder to CEO
On the 20VC podcast this week a revealing discussion with Spotify founder Daniel Ek on optimising decision making, structuring effective learning processes, the trials and tribulations in the transition from founder to CEO, and the future of building Prima Materia with Shakil Khan. Quick takeaways on Threadreader, courtesy of Fred Destin, if you don't have time to listen.

Corporate culture at Netflix
Referring back to our item above on corporate culture, here is an example to ponder. The Netflix jobs website sets out in great detail the culture of the business for all new employees. Much longer than most, it covers their entire value system plus the full rationale. The section on 'Informed Captains' provides real insight: "We are clear, however, that decisions are not made by a majority or committee vote. We don’t wait for consensus, nor do we drive to rapid, uninformed decision making. When the captain of any particular decision is reasonably confident of the right bet for us to take, they decide and we take that bet....Silent disagreement is unacceptable and unproductive."

Happy reading!

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