1. Insights of the week

Leaders need managers

We naturally expect founder CEOs to be strong leaders. Someone who can create a compelling vision and bring everyone with them, even on the most uncertain of journeys. Their special skill is the ability to articulate the WHY. Why are we doing what we are doing? Why we are trying to solve this particular problem? Why are we going after this beachhead market? They have the ability to tell this story and deeply inspire those around them. But not all great leaders are great managers. The special skill of managers is to focus on the HOW. Above all they are passionate about investing in people, enabling them to operate at their peak, and aligning them with the work that needs to be done.

In a startup, sole founders have a particular challenge. They must be both leaders and managers, at least in the formative stages. But unless they bring in great operational managers to drive growth, that early momentum can be lost. Successful founder CEOs not only recognise this, but are master team builders - they have an eye for picking management talent that will flourish amongst the vagaries of early stage. These are managers who will be comfortable writing their own job spec - then changing it after a few months as the business rapidly evolves. They thrive on figuring out the undefined and then creating the functional playbooks that enable great practice to become repeatable, scalable. They are the implementers of the human operating system that delivers the leader's vision - without being sycophants. This is a rare breed, and why they are sought out and cherished by serial entrepreneurs. 

This complementary pairing of outstanding leadership and management capability can create an incredible fusion, driving team performance to a new level. We've seen this happen both at co-founder level as well as amongst the broader leadership team. Investors know this too and so seek out leaders that are highly self-aware and have proven their ability to recruit and build high performance teams. But this is not something that is taught and few get exposure to this even in established businesses. First-time founder CEOs must often find their own path to enlightenment. Experienced board members, network peers and trusted advisors can be invaluable coaching resources.

[For those that want to explore this topic further, the work of Molly Graham - COO of Lambda School - provides some of the most useful, actionable insights. You can listen to her talk on the subject of leadership v. management here or a precis is here.]

 

Asking for investor help - the cruel irony

Towards the end of the pitch presentation investors will want to talk about the raise, how much you are looking for and what you are going to spend it on. "What other help will you need?" they will ask, encouraging you to talk about the challenges ahead and how you will overcome them. Naive founders think this is a signal to discuss those areas where investors claim to add value, so making them feel 'more valuable'. "Oh, yes, we'll probably need help with hiring some great people", you might be tempted to say. Be careful, you have moved onto thin ice and one misstep here and you'll be in the water. This is not because the investor is trying to catch you out, it's just investor psychology at play.

Before you ask for anything other than money it's imperative that you are sure the relationship is ready for it. Trust must be established and they must already want to do the deal. Here's how it sounds otherwise:
Founder says: "We hear you have a dedicated HR team that helps startups hire great talent". What the investor hears: "Maybe they haven't got a clue how to hire people and I don't want this responsibility yet". 
Founder says: "With the right connections and insights there's no limit on our growth potential". What the investor hears: "They don't have a network of contacts and are starting out cold on everything. I won't have the time to give them this kind of help".

To be clear, there's nothing wrong with setting out you goals, but demonstrate you have a plan or are confident in building one. Also, it's fine to ask investors what added-value they bring to their portfolio companies - they will naturally love talking about that. Many of the bigger funds have indeed invested in their own business support services for startups. But their core business and expertise remains doing deals and providing cash. Be very careful when you ask for more than this. Until then, stick to safe ground.

 

Europe: good at innovation but bad at commercialisation

A whopping 38% of all global Seed stage capital is deployed in Europe, yet this collapses as companies transition to Series A (26%), Series B (19%) and beyond. According to Dealroom data from the latest European Startups report, only 9% of global megarounds (€250M+) are raised in Europe, with 50% in North America and 39% in Asia. For Europe to play its full role in the creation of future industries the graduation rate of Seed stage startups must dramatically improve. In the current generation of startups, there are around 50,000 at pre-Seed and Seed across Europe but only 2,800 at Series A and beyond. This low graduation rate of 20-30% from the final Seed round is dramatically capping the prospects of European Tech growth and global influence.

It's hard to imagine the scale of the disparity between the European and US Tech ecosystems. Given the share of all Seed capital deployed, one would imagine Europe would be on a par. But the reality is sobering. One grim statistic says it all: The sum of the valuations of ALL European Deep Tech startups founded after 2000 is $150B. That's the same as TikTok alone. Despite record amounts of capital being raised by European VC funds, European startups need 3x more capital than that today. This becomes most stark at Series B and beyond, where the average round size in the UK is half that of the US. Across all funding rounds this year, only 62% of investment originated from European sources. For rounds over €100M this drops to 40%. How do we change this?

There's no doubt that the lack of Growth and Late stage capital is a hindrance across Europe. As the ES report says, Governments have a key role to play. For example British Patient Capital (BPC), a subsidiary of the British Business Bank and the UK’s largest domestic fund of funds investor, is trying to make inroads - although the scale is very modest at £2.5B. But entrepreneurs also have a role. If the opportunities are there, money will eventually find a way. But the report argues that in Europe there is too much emphasis on pure innovation and not enough on commercial exploitation. Tackling problems that are interesting to solve rather than those that serve a market need has been cited as the No. 1 reason that startups fail. Deep Tech discovery is all very well, but unless we are solving our biggest challenges and building things people love to use, Europe won't generate its fair share of success stories.  

 

US startups are also targeting European investment

Funding a European business is hard enough, but increasingly US businesses are also competing for the same growth capital. International VC Index Ventures says: "Mature US tech companies typically make 30% of their revenues from Europe, so expansion is a question of – not if, but when. Internationalisation most commonly becomes a strategic priority for companies post-Series B funding rounds." The advice is to make a land grab and expand quickly to take control of new markets before competitors. This indeed was my own personal experience, setting up European operations for a US tech business earlier in my career. The brief was ambitious yet simple - win the top 5 European accounts in year 1 and lock them up on multi-year contracts. The focus and financial support from HQ in Silicon Valley was unwavering and we secured our position.

This fly on the wall insight perhaps may not come as a surprise, but it is a reminder that in the competition for capital UK founders can be up against the best businesses in the world. And it's not just the funding challenge, it's the fight for the best people. A big part of the Index Ventures playbook for US companies expanding into Europe is about building up the killer team as an absolute priority. In my own case, with a small war chest for senior hires - including a generous allocation of stock options to lure in the very top talent - we had 5 countries operational inside 12 months. So, the land grab strategy will extend beyond the market, it will apply to people as well.

Founders must become more aware of the global funding picture in their target sectors. Savvy investors, especially the big international VCs, will drill into your strategy versus US competitors. If you're in a global cohort of companies reaching growth stage in an big emerging market, you'll really want the firepower of these larger funds behind you. They simply have the ability to outspend the smaller funds to deliver the land grab strategy. With one of these major players on board, others will more confidently join the party.

 

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

Where VCs source their capital 
We're often asked this question and wanted to provide some insights into the world of capital allocators. There are many great sources but the one that stands out for us is the Ted Seides podcast. For those of you who want to dig in further we hear of a great book available on preorder from Amazon that will lift the lid on how the world's big money managers (endowments, foundations, family offices, pension funds, and sovereign wealth funds) operate.
 

10X Your Career: First Principles For Outsized Success
From Pete Flint, General Partner at VC NFX, a useful framework for thinking about your career and the road ahead. It's hard to find almost any form of decent career advice in the startup world these days, so this really caught our eye. If you're thinking: What am I doing with my life? Am I doing the right work with good people? Where am I going from here?, this is for you.
 

Practice Analytically, Perform Intuitively
A thought-provoking essay from one of our favorite writers, David Perell, on how analytics can dispell conventional wisdom. This is a powerful perspective on where art meets science in the furtherance of top performance. So many parallels here between the analytical phase of investment preparation and the artistic phase of pitching the deal.
 

To sell - or not to sell your business
Many European startups get acquired too early. So when is the best time to sell your company? And how can you make the most out of a sale? Robin Klein provides some useful guidance in Sifted.
 

SaaS stocks sold sharply on good vaccine tidings, but do VCs care?
In Extra Crunch, 5 VCs discuss the future of SaaS and software after Pfizer's vaccine breakthrough. 

Happy reading!