1. Insights of the week
Assessing VC value-add at Seed stage
Bringing a VC onto your cap table at Seed stage is a special moment. This is the beginning of a very important and long-term relationship. As they will almost certainly be given a board seat, a VC's influence will extend way beyond the capital they invest. This partnership has to work. But unlike a hiring mistake, you can't just remove them from the business if things don't pan out. They are there for the duration. To reduce the potential for disappointment, it's critical that founders do their homework, as we have highlighted before. This means undertaking reference calls with other founders - both from within the VC's current portfolio as well as some that have fallen out. These 'ex-portfolio' founders are likely to give you a less guarded appraisal, so should take priority. Remember, you are checking out the individual partner as much as the VC firm. It's important that they can bring the skills, experience and network you believe necessary to help propel your business to the next level. This is also a person who will be a very regular touch point, so it's vital the chemistry is there.
Our anecdotal insights suggest that most founders would prefer this partner to have operational experience. Someone who has lived the startup journey. Someone that will have true empathy with the founder's lot. But this requirement is a tough one to meet. In the UK, just 8% of investors have experienced first hand what it’s like to work in a startup, according to the DiversityinVC Report. Instead, venture professionals typically have prior experience in consulting (20%), general finance (18%) or investment banking (12%). This contrasts with top-tier venture capital firms in the US, where 60% of investors have experience working at - or running - a startup. Partners that have a finance rather than operational background will be more likely to fixate first on the numbers, such as revenues and other key metrics, which is often not the first priority at Seed. Former operators generally have more sensitivity to 'stage', so their initial focus for support will be the journey to product/market fit, then the go to market plan. When all this is working, then the numbers will receive greater attention.
Healthtech founder, Napala Pratini, spoke to 100 angels and VCs across Europe and the US for her Seed round. She says the higher quality investors at Seed (the ones founders would want to work with rather than just a source of capital) look for signals before hard metrics. "We’re a consumer business, so investors are naturally curious about numbers like customer acquisition cost (CAC) and lifetime value (LTV). But the investors who know what they’re doing also know that these numbers are anything but certain (what startup in its first couple of years can accurately predict LTV?) and therefore look elsewhere to build conviction." She adds that in her experience, the best investors both understand what you’re building and can help guide you in that journey. It’s nearly impossible to do that effectively in the early stages without some strong theses around the market. VCs that bring these insights, together with stage-specific expertise, can provide real value-add.
The first 'growth model' is based on intuition
One of the most important organisational additions for startups over recent times is the 'growth team'. This capability is a rocket booster to the functional teams (sales, marketing, product management, etc.) and is aimed at driving aggressive growth cycles in rapidly expanding markets. In particular, growth teams are responsible for developing and executing strategies for customer acquisition, monetisation and retention - aka, the 'growth model'. They design these strategies around the primary 'growth motion' associated with the core business model, e.g. product-led growth, marketing-led growth or sales-led growth. Their job is to maximise product distribution into the market and to understand every factor that can impact this. Growth teams are therefore fundamentally data-driven, so begin to take shape as data from market engagement flows in - post product/market fit (as we have discussed before). They are experts at analysing and optimising the 'user journey', helping the rest of the organisation identify and smooth out any points of friction from 'cold lead' to 'recurring revenue'. Their objective is to ensure predictable, sustainable and defensible growth.
But the development of the initial growth model must begin before product/market fit is found. At this stage, well before the formation of the growth team, it is the CEO/founder that must develop this first 'growth hypothesis'. This will be a set of assumptions about the early go to market strategy. This must be based on intuition alone as no data is yet available. Just as the journey to product/market fit is one of experimentation, so too the journey to the first optimised growth model. Even in the very earliest stages, investors will want to understand the founder's growth hypothesis. Founders that rely on describing a killer product alone will come unstuck. Killer products can be the key to success, although many winning business have very mediocre products - but awesome growth models. We know that successful founders are not just innovators but are also masters of experimentation. They understand what levers to pull to test all these early assumptions and the growth model is high on the list.
Elena Verna was SVP of Growth at Survey Monkey and has since advised many high growth organisations including HP, MongoDB, Netlify, and Maze. In a recent interview she describes how some of the leading growth businesses she has worked with, such as Slack, have developed growth models. One significant insight into managing the experimentation process is the power of pre-mortems versus post-mortems. Post-mortems investigate why the unexpected happened. Pre-mortems capture all the things that might go wrong with an experiment or other growth initiative, before it is launched. The team brainstorms the workarounds that could be used to fix these. Ideas created in this low pressure environment have been shown to have significantly greater impact than those created in the heat of live execution. The development of the growth model has become an essential chapter in the startup story. Founders that embrace this topic early give themselves more time to develop and test ideas. As a result, they accumulate important insights that not only rocket boost their growth plans, but enhance their credibility in the eyes of investors.
Weekly 1 on 1s are a power tool for founders
'1 on 1' meetings are the regular, scheduled meetings between a manager and each of their direct reports. It has special value in the startup, yet founders often say they simply don't have time for them given their crazy schedules. The ad hoc approach is preferred. But as the leader, one of your primary responsibilities is to build a team that executes the vision of your startup. 1:1's uniquely provide a forum to teach and reinforce this vision, strategise on execution of plans/provide feedback on results, and provide coaching. This is a moment for you to also receive feedback. It may be the only dedicated space all week where key contributors have your undivided attention. In the current battle to acquire and retain top talent, the weekly 1:1 now takes on even greater significance. In fact, it becomes the meeting founders don't not have time for.
In most businesses, culture and vision tend to be topics for larger meetings. The culture, like the vision, is 'handed down'. The reality is that reinforcing culture and vision works best one on one, using tangible examples. And a powerful and empowering culture trumps strategy every time. In the famous words of Peter Drucker, “Culture eats strategy for breakfast”. With the cultural anchor secured, strategising on execution can more effectively take place. The 1:1 then provides a unique coaching opportunity and empowerment is the essential method.“One of the biggest values of 1 on 1s is discovering where employees are struggling or stuck, and helping them find a path forward. Not by telling them how you’d do it, but by guiding them to come up with their own solution.” - Jon Plax, Senior Director, Customer Centric Engineering, Salesforce.
Above all, the 1:1 ensures that team members don't go unnoticed and shows that you care. This is foundational to the development of trust and the culture of openness that underpins it. This openness allows founders to sniff out issues at an early stage before they get bigger and take a reading on the 'happiness factor'. Mathilde Collin, CEO/founder of Front, says: "One of my favourite 1:1 questions: On a scale from 0 to 10, how happy are you working at Front right now? Follow up question: "What could bring you to 10?" This type of positive attention has been shown to be thirty times more powerful than negative attention in creating high performance teams. Such personal development conversations happen best in environments where you can provide undivided attention. The 1:1 meeting is the perfect setting.
2. Other pieces really worth reading this week:
How to Be a Good Board Member
VC Mark Suster has written extensively on the subject of startup boards - how they get selected, who sits on them, and what to avoid. In this excellent article he discusses what it takes to be a good board member; "Put your electronics away and be present; Understand the role of listener, enquirer & sparring partner; Avoid micromanagement of non-essential items; Push for others to speak; and don’t audition for smartest person in the room."
Global VC Funding Continues On A Tear
More than $54 billion was invested in over 2,000 companies around the world in October. That marks the fourth-highest funding month in 2021, with year-over-year growth of 84 percent. Crunchbase provides the latest breakdown and says "there’s no slowdown in sight."
2021 European SaaS benchmarks
French VC, Serena Capital, has rolled out their second edition of this excellent survey into the SaaS market. This provides peer benchmarks across the metrics that matter most for SaaS companies including ARR, YoY growth, retention, and CAC payback. Many great insights.