Duet Partners
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Weekly Briefing Note for Founders

17th June 2021

This week on the startup to scaleup journey:
  • Big markets require a narrow focus
  • VCs and founders have mismatched expectations
  • Could Someone Be a Better CEO Than You?
  • Founder skills - language comes first

1. Insights of the week

Big markets require a narrow focus

Demonstrating that there is a big addressable market is essential for any startup seeking funding. As average deal sizes and valuations soar, investors are looking for huge market opportunities in the companies they back. In the bid to paint a big growth story, founders must first describe the TAM, the total available market. Due to the limitations of any business model, such as geographic reach or regulatory requirements, the SAM - the serviceable available market - must also be calculated. This is a more objective estimate of the portion of the market can be acquired. But TAM and SAM alone rarely tell the full story of a startup's true potential. First, they can both be significantly underestimated, and second, they can obscure the starting point for reaching product/market fit - the beachhead market.

Independently sourced market data should provide a reliable assessment of TAM. But the combination of macro market events (e.g. Covid) and accelerating technology trends (e.g. the Cloud) is forcing analysts to revise projections upwards - often dramatically. Even companies with hundreds of billions of dollars in revenues that everyone thought were already mature businesses have seen astonishing CAGRs over the last 3 years. Amazon: 30%, Facebook: 29%, Google: 18%. Apple posted 54% year on year growth in the first quarter of this year. High growth startups too, across Fintech, Virtual Events, Edtech and many others have seen even more rapid growth as markets have been disrupted and accelerated through 2020. Software businesses, in particular, are now taking over huge swathes of the economy. We are in an environment where founders have much greater latitude than ever before to put forward more bullish analyses for their own 'emerging' market sizes.

But no startup expects to take 100% market share, even in a nascent market. Experienced founders start off by identifying the specific segment or subsegment they believe they can rapidly acquire and then dominate, often referred to as the beachhead market. This is where product/market fit will be found, enabling early scaling to begin. Founders should not worry if the beachhead only represents a small portion of the ultimate market. The objective here is to demonstrate early commercial traction and operational capability, not market size. The beachhead is often elusive to start with but once the ideal early adopter profile is found this sweet spot of pent up customer need acts a springboard into adjacent user cohorts and segments. Such narrow focus is nearly always essential in the very early stages: the MVP will have restricted functionality and resources are naturally constrained. Chasing every lead is just not an option - nor will investors give you credit. The 'hope value' of big markets on the horizon, combined with a laser focus to start, is a more compelling combination.

VCs and founders have mismatched expectations

In research undertaken by European VC firm Creandum, 98 VCs and 121 founders were surveyed on the topic on VC value-add. Respondents covered every financing stage and institutional investors with $30M to $2B in assets under management. As expected, the differences between how founders perceive this relationship was different than for VCs. Founders reported less frequent contacts, less operational support received than VCs reported giving, and — perhaps more intuitively — quite different priorities. One of the starkest contrasts was the way each group scored how impactful and helpful the VC had been for portfolio companies on a scale of 1 to 10. The average VC scored themselves a 7 while founders perceived them as a 5.3 — a 32% difference.

The study showed founders and VCs both reported personal relationship and chemistry with the counterpart as the single most important decision-making factor. This supports the theory that startup financing is a relationship business. The biggest differences between the two samples were between speed and reputation. Founders ranked speed as their 3rd most important criteria and VCs ranked it as the least important one. That’s consistent with the serious constraints that a founder’s fundraising timeline faces - but it’s surprising to see VCs don’t seem to really recognise it. In contrast, VCs assumed founders put far more emphasis on the brand of the partner and the experience of its leadership. VCs often believe their brand is what allows them to win deals but research interestingly shows that if you offer compelling deal terms with speed you are likely to outcompete even the strongest brand firm.

The role of US VCs in Europe has increased in recent years and this has demanded a greater awareness of cultural differences. European founders place the importance of deal terms above their US counterparts to the extent that VCs that focus on deal terms in Europe may be able to edge out their competitors. US VCs in particular may search for deals by leveraging their brand, however, this indicates that focusing on incentives for the founder may be more effective. This is especially true for early stage businesses. As companies get into the later stages of financing, experience, and track record become more important, perhaps reflecting a stronger position of negotiating power. VCs today spend a lot of time explaining their value-added services. In the end, only a small number of companies actually leverage them. This may indicate such services are more of a marketing tactic for VCs to differentiate themselves in a competitive market, rather than a belief these services will have a game-changing impact on their portfolio.

Could Someone Be a Better CEO Than You?

An uncomfortable truth about the CEO role is that not every founder is suited to it. In fact for some the risk of eventual burn out is real if the early symptoms are left untreated. This doesn't just apply to first-time founders who may find themselves ill-equipped for the journey. It also applies to serial entrepreneurs that have built real revenue engines, but have underestimated the mental strains involved. A study by the Columbia Business School revealed that even after a successful exit entrepreneurs are highly likely to suffer from depression. No-one is immune. As Jason Cohen, founder of WP Engine reveals in his brutally honest and insightful talk on the subject, many founders struggle with managing expectations, even as the company grows. This builds up into a "balloon payment of emotional toil." CEOs must ask themselves what preventative measures they should be taking now. Ultimately, are they indeed the right person for the job?

For many founders, figuring out the CEO role is about learning in real time. Astute founders quickly seek good counsel to draw upon for advice - to help figure out the hard emotional choices that need to be made for the business and themselves. Such advice could come from a chairman, NED, or an experienced private investor in the very early stages. The role of such a sounding board evolves with the stage of the business. On the journey to the first major milestone of product/market fit, whatever your possible shortcomings, no-one is going to trump your capability in this 'experimentation phase'. As VC Jason Lemkin puts it: "For a long while, you probably aren't a great CEO. But you know the customers. The software. The feature gaps. The roadmap. The competition. How to sell it. How to market it. How to build it. So maybe as flawed as you are.....You are still the best CEO."

As the business starts to scale the role of the CEO Founder changes. You are no longer 'searching' for the business model but 'executing' the business model. You must now build an organisation that can drive sustained growth and avoid all the classic operational failure modes. This means hiring people that are more capable than you are in almost every function, and then managing them effectively. The problem is that almost every founder thinks they can do this, but the reality is that this is one of the hardest scale-up skills to master. Highly self-aware founders may see this as the moment to bring in an experienced COO or even a CEO to take the company to the next level. As you will see from Cohen's story, the 'founder as steward' rather than 'founder as leader' can then be an equally compelling route to personal fulfilment.

Founder skills - language comes first

Investors will say that world-class Founders embrace a common set of skills. When they see these skills in Founders, they take special notice. The most basic skill is the use of language. Most people say, “We’ll build a product, and then put language on it to explain it to people.” This is backwards. Even if you don’t have a product yet, you can get a long way just with the right words. The central question always is: What are you to your customer? For them, what’s the promise of what you’re doing? That is communicated with language. This sounds easy but many founders will stumble when presented with the most basic test of all: to explain what their business does in one or two sentences. Graduation to full competency then requires you to effortlessly articulate variants of this to audiences that have different levels of knowledge about your industry.

As the 'Storyteller-in-Chief', telling your story in compelling ways and adapting that story to the audience and the moment, is your most important job. It’s what gets you all the resources to build your company. It is the skill that is most instantly recognisable. Your story is a narrative that everyone wants and needs to hear. It tells your customers what you can do for them. It tells your investors what they’re investing in and what they can brag about. It tells your employees what they’re getting involved with — why they’re turning down a whole lot of other opportunities to join and stay with you. Again, it sounds easy, but confidently delivering a compelling 'elevator pitch' requires practice - it rarely just comes naturally. The best CEOs will spend many hours and often days perfecting this, testing it out on a variety of 'tame' recipients until it becomes almost second nature.

Language also manifests itself in the written word. In one sense this is easier to perfect, as there is always the opportunity to edit and refine. But this is also a skill that must be developed and honed. Great writers are often great readers and will seek out those that practice the art of powerful composition, devouring their work. Readers will know that the essays of David Perell are often cited here. His mastery of both the short-form and long-form (not to mention the ultra short-form tweet) through many excellent examples and coaching forums, provides constant inspiration. When you reach these levels on a consistent basis you may claim that you have all this nailed. Until then, remember that the value you are creating is much greater than the product you are delivering. What someone will ultimately pay for your business will be as much about perception as reality. Your ability to articulate a vision - the promise of what you will do for future customers - will then have its ultimate payoff.

2. Other pieces really worth reading this week: 

Research and data to make progress against the world’s largest problems
An incredible resource for founders developing solutions to address global issues. Our World in Data provides 3158 charts across 297 topics. All are free: open access and open source. Key topics include Demographic change, Health, Food and Agriculture, Energy & Environment, Technology and many more.

Zoom Presentation Mistakes to Avoid when Pitching your Startup
Some good, basic advice to help founders deliver effective zoom investor pitches, courtesy of Peter Dolch. Use this as a checklist ahead of your next meeting.

State of Chief of Staff in Tech — 2021
The Chief of Staff Network is a collective group of operators serving a unique function of their respective businesses; the Chief of Staff. This recent article, by Vedika Jain, analyses a new survey where Chiefs of Staff speak frankly about what it’s like to be in the most hotly trending role in Tech. Also see this practical guide to the CoS decision.

EIF Annual Report 2020
The European Investment Fund is vitally important to your startup, even if you don't know it. The EIF is the largest LP in VC funds across Europe providing over 50% of the capital deployed into private businesses. In 2020 the EIF deployed 26% more funds compared to 2019, and generated financing opportunities for more than 370,000 SMEs. Here's how they did it.

Happy reading!

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