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


Weekly Briefing Note for Founders

15th July 2021

This week on the startup to scaleup journey:
  • Can you describe your company in one sentence?
  • Build your investor deck around facts not feelings
  • The investor question that few prepare for
  • Solving the employee equity conundrum

1. Insights of the week

Can you describe your company in one sentence?

The one sentence summary is a key part of the CEO's tool kit. It is the foundation of your story, designed to draw your audience in - employees, customers, suppliers, partners and of course, investors. Used in almost every communication from your website to a fleeting conversation (the cocktail party answer to "What do you do?"), this simple statement is every founder's consistent go-to message when put on the spot. It's the 'one minute pitch', the abbreviated form of the 3 minute 'elevator pitch', designed to capture attention. Given that it's so central to how a founder positions their company, it's surprising that so few startups really have this nailed.

In the investor setting it's crucial. It's the hook that makes them look further - the reason they will review your teaser deck or take the initial meeting. As Hunter Walk of Homebrew Capital says, "It should be something intriguing, something insightful, or something that asks a question, something that I want to answer."  The purpose is not to try and summarise your entire business in 10 words. You are looking for a way to create a vivid picture with words. One technique is to use a comparator. For example, you can anchor your statement in something of proven value. VC Reid Hoffman suggests one-liners like: “it’s like Airbnb, but for workplaces” or “it’s like LinkedIn, but for doctors”. This anchor method can be really powerful, but there has a to be a very tight mapping between your business model and that of the comparator.

Your one-liner should also be memorable. The key here is to make it an emotional statement not a literal description. Trae Vassallo, Managing Director at Defy, says that engineering-centric founding teams in particular tend to be very literal in conveying what their company does, and this isn’t always the most effective strategy. When the iPod first launched, the pitch was “a thousand songs in your pocket”, not a description of its memory space, hardware, or even what the device looks like. “A thousand songs in your pocket” is an emotional construct that makes you think “yeah, that’s a need I have, and I want that.” For startups, eliciting a response like that is really important and can’t be achieved with a literal description of what you’re building.

Build your investor deck around facts not feelings

One of the most onerous exercises in preparing a company for an IPO is the creation of the 'verification notes'. This is the documentary evidence supporting claims made in the prospectus. Every claim, no matter how small, must be traceable - and the lawyers must be happy that this is so. In early stage funding, the process isn't quite as daunting, but applying the same mindset is a great discipline. Any material matter in your pitch presentation will eventually get checked during due diligence, so you want to be sure that what you claim to be true is true. In new or emerging markets there is often a lack of good, reliable data. So what is the truth when so much is unknown? Founders that use this as an excuse to 'oversell' the proposition run the real risk of damaging their credibility as well as investor trust. Those that maintain a more humble narrative can still be awesome at the same time.

There are certain things you really never want to say to an investor, no matter how bullish you feel about your business. Even if they are true, you run the risk of simply appearing arrogant. For example, "We have the best technology" or "We don't have any competition" are both going to be a red rag to a bull. By all means state your claim, but better to be specific and use the words of a customer to substantiate each point. Let the evidence do the talking - customer testimonials are hard to beat. Claims about what might happen in the future are impossible to substantiate but some rational justification is still necessary. Exit potential is a particularly tricky subject, as belabouring it can give the wrong impression. VC investors are unlikely to invest in a founder who just wants to get rich quick.

Predictions of future revenues and valuation are also places to easily come unstuck. Hockey stick revenue growth forecasts with little or no historic revenue to base these on need to be presented with care. That means clearly setting out your assumptions and probably being a little more modest with the growth rates - unless you are on the cusp of a transformational deal! In which case, better to close the deal first. Valuation, as we have said before, is for the investor to offer - certainly when you are dealing with VCs. If you start slinging numbers around in the first meeting you are going to appear naive at best. A deft, self assured and substantiated presentation will do more to convey belief than a string of outlandish claims.

The investor question that few prepare for

One of the biggest advantages startups have over established businesses is speed. Small means fast - or should do. A key startup power is speed of iteration; the ability to plan, execute and learn fast is at the core of everything a startup does. So a teasing investor question is often: "What are the lessons you have learned so far?"  If the founder is unprepared, there is a greater likelihood that the answer will be guarded, unsure whether this is a trick question planted to uncover weaknesses. But this is more likely to be a genuine question and must be treated as such. Investors are looking for founders that learn quickly - an essential survival skill on the startup to scaleup journey.

Confident founders proactively lead the investor discussion with this topic. Rather than trying to sketch a story of consistent success, they paint the reality. The ups as well as the downs. Mistakes will get made at every turn, in product development, the go to market strategy, business model choice, and not least, hiring. Early hirings don't always work out and how the founders dealt with them will speak volumes about mission focus and the culture being developed. Persuasive founders weave their story around setbacks as well as breakthroughs. In particular, the journey to product/market fit is often defined by iteration; a gradual zeroing in on the customer 'persona' that is the ideal early adopter. The market insights gained are seen by investors as an essential part of the investment proposition.

The willingness to be open about the big learnings says a great deal about a founder's character. Those that hold back or become defensive will struggle to develop trust. Instead, think about how you would openly answer this most telling of investor questions. Consider two levels of response: What the business learned, and what you have learned at a more personal level. The latter is often much harder to articulate but this could be a critical ingredient in figuring out what team gaps you need to fill. Building a startup is an infinite learning curve for any new founder and investors know this. Be prepared for this discussion by rehearsing your answers in advance. This will not be a wasted effort.

Solving the employee equity conundrum

It is well known that US startups deploy a greater amount of equity to new hires relative to their European peers. Research by VC firm Balderton shows a near 7x difference in new hire equity in early-stage startups in San Francisco compared to Europe. in the Bay area, more than ~70% of companies have an equity compensation program for every employee. In Europe, just ~30% of companies offer equity to every employee. In an ever shrinking world, where competition for the top talent is becoming global, this disparity is an increasingly hot topic. For startups with limited financial resources, stock options can be a powerful attraction. They also provide the means to retain and motivate top talent as the business scales. But there are two major forces at work that must be overcome:

The first is legal complexity. There are varying degrees of regulation and tax schemes across European countries that make offering equity to employees as a substitute for salary less advantageous. Now, European tech companies are coming together as a community to drive change. Not Optional is an open letter to policymakers urging them to reduce the regulatory hurdles in offering compelling employee option plans in Europe. Not Optional has reviewed and compared employee stock offerings across 20 European countries and created a ranking system based on overall ‘friendliness,’ as well as, summarising various rules and regulations. Of the 20 countries ranked, only 5 European countries were ranked more attractive than the US in terms of stock option ‘friendliness’.

The second force at work is an unintended consequence of the current venture funding bubble. In the last decade, venture deals greater than $100m have increased 5x in the US and 3x in Europe. Partly as a result of this, the typical time from Series A to IPO has lengthened: Companies listing between 1995 and 2005 typically went public within 5 years of founding. In recent years this has more than doubled, postponing the imperative for an IPO, one of the key liquidity events for stock option holders. In response, certain VCs such as Balderton, are launching new funds to provide pre-exit liquidity to early shareholders, including founders and employees. This specific type of fund has the ability to revitalise the attraction of the stock option model and looks set to become a new feature of the VC landscape in Europe.

2. Other pieces really worth reading this week: 

Three questions startup CEOs should ask before filing lawsuits
A thought-provoking article by Brittany Brody in Founder Collective"Big companies have the means to extend lawsuits indefinitely and the know-how to minimize damages they pay even if they lose. Small companies or individuals might not be able to pay, even if you win. Do you want to get paid, or just make a point?"

The Venture Capital Secret
Omar Billeh of Beyond Capital captures some great takeaways from “Zero to One: Notes on Startups, or How to Build the Future.” by Peter Thiel. "Even though I knew about this secret, I realized a lot of founders did not know about it or if they did, they never kept it in mind when talking to investors. Hopefully after knowing this secret, you can approach Venture Capitalists with a stronger argument of why they should invest in you."

Why Amazon, Google, and Microsoft Are Designing Their Own Chips
From Bloomberg Businessweek, a revealing perspective on the hardware powerplay that is disrupting the semiconductor industry: "All the biggest tech companies are prioritizing custom designs, which adds to the growing problems facing the incumbents."

How To Write Like Apple
10 copywriting tricks from a multi-trillion dollar company. An insightful article by Putu in Better Marketing. "As a copywriter, I’m impressed by how Apple persuades its consumers with copywriting. Here are ten ways Apple persuades readers with their words."

Happy reading!

back to newsletters

Subscribe to our Newsletter

Stay informed. We will email you when a new newsletter is published.

* indicates required

To subscribe to our Blog Articles click here