1. Insights of the week

2021: The year of Deep Tech

The last decade has created $17 trillion of value on the NASDAQ alone, mainly driven by enterprise cloud and consumer internet. But for the 2020s, it’s 'Deep Tech' that’s set to drive technological change. According to a new report from the European Startups Project, previewed in Sifted, Europe is investing at a rapid pace. It’s a category that’s hard to define, but Deep Tech investor Nathan Benaich from Air Street Capital, has a simple definition. “If there is science or engineering risk in getting the idea to actually work, then it’s deep tech. If there is no science or engineering risk to making it work, then it is not deep tech.”
 
In Europe, Deep Tech makes up roughly a quarter of the startup ecosystem with companies valued at €150bn, up from €25bn ten years ago. And across the last ten years, VC investment into deep tech companies has increased nearly eleven-fold, reaching €9.5bn invested in 2019. Artificial Intelligence continues to be the largest sector within the industry, with notable unicorns UiPath and Darktrace. The second most valuable sector is semiconductors (think UK company Graphcore) followed by augmented reality and virtual reality (think Improbable). Across Europe, UK companies continue to attract the most investment, with €12bn invested over the past five years, more than double that of second place Germany. 
 
But the early stage funding challenge for Deep Tech founders remains significant. These startups take longer to come to market due to their much more extended R&D phases. In these early stages, Governments (e.g. BBB, InnovateUK, H2020) and Corporates are still the principal funders. Only a handful of specialist deep tech VCs tread here. Most are unwilling to take the technology risk and wait until commercial viability is more certain. The funding gap thus remains huge, and some say we need a DARPA-type entity that can fund long-term strategic technology with limited bureaucracy and a clear mandate to take risks in fields where the private sector has not started investing yet. Deep Tech startups have the potential to solve some of our greatest global challenges, so unlocking new investment pathways at Seed stage must be a priority for Government.

One of the greatest startup CEO attributes – managing people

50% of the job of a CEO is recruiting a team, leading a team, empowering a team, convincing a team. The team will not just be employees but will include investors, the public, the press, channel partners, and more. Investors know that people management skills are therefore fundamental to being a great startup CEO. Many of these skills are developed over time from direct experience, as well as watching and observing other skilled operators at work. Investors will often dig into this. “Who have you most admired in your career?” “Who was your greatest boss?” “Do you have a mentor, advisor, or coach?”
 
When investors probe your team during due diligence - when you are ‘out of the room’ - this is one of the things they are assessing. Are you someone who cares about people and shows it? This is one of the top mistakes we see in first-time CEOs. They care so much about the company, they forget to care about the people, the team. They just assume everyone should be as committed as they are. But everyone else can’t be. Investor Jason Lemkin talks about this in his blog: "Say “Thank You” more often. Give raises more often. Give spot bonuses more often. Give 20% more shares to your top 10% employees, without them asking. Do special things for the whole company when you hit [$10m] ARR and meet other key metrics." Celebrating together as a team in person has been put on hold for now, so what's your substitute?
 
Whatever you do, don’t hire executives that aren’t better than you. This isn’t a threat. It’s a way to make your equity worth 100x more. Don’t just hire your friends, and don’t hire people that make you look good. As Lemkin adds, "Hire people insanely better than you, that look, act and feel different. But that you 100% believe in. Then amazing things will happen, and you will learn so much." If you are seeking inspiration listen to the revelations of Johnny Boufarhat, Founder & CEO of Hopin, on how he built a world class startup team that are a level above him in almost every department.

What is the first thing a VC will notice when you meet?

Investors will say that the first thing they get a read on is confidence. They will quickly sense if you are confident in your knowledge of the market, the key trends, and competition. Supported by first-hand customer insight, you will be able to explain the ‘future of the industry’, your start-up, your solution, and how it will all fit together to create a huge success story. Having a vision, one that you can elaborate with passion and sound reasoning, will inspire confidence and belief. This will make investors lean forward.
 
You will know your metrics cold — revenue pipeline, MRR/ARR, customer count, burn rate, etc. You will have credible, data-driven reasons to meet your short term (18 month) financial goals. You will be confident as a team — and can finish each other’s sentences in the right way. You will know exactly the key roles to hire, and already have a few good ideas for candidates. You will use investor capital to recruit core knowledge and capabilities, not to reinvent the wheel, such as figuring out basic processes for sales, marketing, product development and so on from scratch.
 
The danger is sometimes appearing overconfident or worse, arrogant. Dismissing competition is a classic tell-tale sign that investors look for. Trying to diminish or brush aside bad news (a lost order, a senior resignation..) will only cause anxiety. Instead, be ‘confident’ in the things you don’t know. Be honest about them, your plan to address them, and show true self-awareness. Don't overplay early revenues, especially ahead of product/market fit. CEOs with great initial traction but who can’t really 'see the future', rarely produce meaningful returns. Not venture-like returns, at least.

What should a startup founder do if a potential investor is rude or difficult?

There’s no excuse for being rude, but it happens. In every walk of life, you will find people that just don't respect social norms and investors are no different. VCs can be a pretty ego-driven bunch that think they are the ones creating all the value – the internal culture within some funds encourages this. In our experience this seems to be most prevalent with investors that have no real operational experience. Occasionally, a pitch will just descend into a meaningless, agitated debate - a total waste of time. It's not what any of us want but there is only one response: Just get over it, smile, say “thank you” and move on. Don’t have a punch up. Just be relieved this person isn’t on your board.
 
But what if this person is on your board? Somehow, they were a different personality type before the investment and now they have become very disagreeable. They shoot from the hip in board meetings and offer excessive unsolicited advice. It’s 10x worse than before because they slipped through your filter and you can’t get rid of them. Veteran VC and founder coach Jason Lemkin says: “First, just listen. You don’t have to act. Acknowledge what they are saying, and say you’ll look into it. That doesn’t mean you actually do what they say. Every founder has some dumb, never used feature they built just because a VC told them to. Don’t be that guy. Second, don’t argue. Just doesn’t help with these guys. They aren’t your sparring partner. They just need to hear themselves talk and bark orders. Let it go.”

Balancing the board can limit the ‘interference’. Get someone you trust on the board. Pick an outside director you know and respect - and with a complementary personality - to join the board as an NED. He or she can be an important counterweight - and the bad cop to your good cop. A strong independent chairman can be worth their weight in gold here. They can field the incoming missiles whilst you press on with the job. The chances are the investor is wrangling with some internal grief themselves (fund underperforming, new fund not coming together, passed over for promotion…) so the awkwardness may pass. If it doesn't, and all else has failed, there is always the nuclear option of trying to replace the investor with someone else from their fund. But only consider this if you have rock solid board support, especially from the other investor directors. And let the bad cop pull the trigger.

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

We Don’t Sell Saddles Here
A landmark essay by Stewart Butterfield, founder of Slack, sent to his team way back in 2014, but still an essential read for founders: "What we are selling is not the software product — the set of all the features, in their specific implementation — because there are just not many buyers for this software product. However, if we are selling “a reduction in the cost of communication” or “zero effort knowledge management” or “making better decisions, faster” or “all your team communication, instantly searchable, available wherever you go” or “75% less email” or some other valuable result of adopting Slack, we will find many more buyers. That’s why what we’re selling is organizational transformation."

Good Product Strategy, Bad Product Strategy
A simple but powerful framework for product strategy in an article by Shreyas Doshi, product manager at Stripe. "1/ Good product strategy clearly identifies target customer segments and non-target segments. Bad product strategy either ignores customer segmentation or attempts to cater to all customer segments. 2/ Good product strategy presents an honest assessment of the market, the competition, and the product’s current position. Bad product strategy either downplays the competition or ignores these factors altogether....3/.."

Adding Top Down Sales
An article by Andreessen Horowitz examines one of the most important inflection points in many enterprise companies. "For many enterprise startups, the predominant initial go to market (GTM) strategy has been “growth + sales”, which relies on a bottom up, product-led approach to acquiring and retaining users and customers. But after successfully executing on this strategy and getting to their first $20M of annual recurring revenue (ARR), these startups inevitably face a new set of strategic questions about when and how to layer in top down sales".

The 30 Best Pieces of Advice for Entrepreneurs in 2020
From the First Round Review a synopsis of excellent advice from 2020. Our 3 favorites that are simply evergreen: 1. Invest in your writing skills., by Dave Girouard. "Words matter. At a minimum, they shape the impression you make on others — often the first impression." 2. Focus on managing the what, not the how. by HR guru, Molly Graham, "The best managers set expectations at the “what” level, not the “how” level.", and 3. Shift to asynchronous to get better at storytelling by David Cancel: "I would say our internal asynchronous communication is 80% video, 20% audio — it’s been massive for us. For me personally, it’s greatly reduced the number of meetings I have and increased the quality of my feedback."

How to Stop Thinking About Work at 3am
For all founder-insomniacs, a great article by Rebecca Zucker in Harvard Business Review that is very much of its time: "Work stress is inevitable, but it doesn’t have to get in the way of a good night’s sleep. To avoid thinking about work in the middle of the night, the author offers five strategies..."

Happy reading!