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


Weekly Briefing Note for Founders

17th September 2020

This week on the startup to scaleup journey:

  • European startups need corporate support
  • Angels rising in significance
  • Rolling Funds are changing the private investor landscape
  • Complementary co-founders - footnote 
  • Every Company Will Be a Fintech Company

1. Insights of the week

European startups need corporate support

Corporate investment into European startups has been increasing at pace over recent years. As reported by Pitchbook, VC deals with Corporate VC participation reached €8.2 billion through H1 2020 in Europe, keeping pace with the tear away record set in 2019. For public companies this is most commonly through a fund operated at arm’s length from the business so investments can be insulated from day to day operations. For private companies it is more likely they will invest straight off the balance sheet. Motivations can also vary as we explained in our blog.

But it's often US corporates that have been making the moves, especially at later stage. European companies are not as involved with startups and many wish that they would unleash more investment to drive greater entrepreneurialism closer to home. As pointed out by Sifted, it doesn’t need to be through venturing, it could be through partnerships or acquisitions or pension funds becoming limited Partners (LPs) to funds. Pension funds could also invest more. Public pension funds contribute 65% of the capital in the US VC market but just 18% in Europe. The UK lags even further with just 12%.

The other problem is that the volume of 'local' M&A is much lower in Europe than in the US. Corporates in Europe are not buying startups. One of our most prized tech companies, ARM, was acquired by Japan's Softbank 4 years ago. This week US company NVIDIA announced that it was acquiring ARM from Softbank.

Unlike VCs, corporates can provide patient capital that allows startups time to develop their ideas into growth stories. For hardware startups that have moved beyond the Government grant stage but still have significant development work ahead this is desperately needed. It is particularly critical for capital intensive Deep Tech businesses in the UK that will not appeal to mainstream VCs until growth stage.


Angels rising in significance

As we reported earlier, the number of first time financings (by institutional investors) in the UK continued their steep decline through 1H20. Many Seed stage businesses have only survived due to the continued support of their private investors. In some cases, bridge rounds have been extended to incorporate investment from other high net worths keen to participate in exciting opportunities where valuations are (temporarily) depressed.

Although there are many avenues for angels to invest in startups, individual investment and investment through an angel group provide the most direct access and exposure. Angel groups help alleviate many of the time and capital restraints angels face by agglomerating networks, capital, and sourcing capabilities to bring higher-quality opportunities to the group. As the VC industry has grown, angels have likewise adapted their strategies through the development of angel groups, syndicates, and super angels.

In response to this we have extended our own investment research capability so we can more effectively identify angels that may be a great fit for an early stage round. We are now able to analyse all historic investments in the same way we would for a fund to build a 'suitability profile'. For each angel this includes any fund positions held (they may also be an LP in a fund), directorships, estimated paper wealth, whether or not they have been a founder themselves, and many other parameters. We can also identify informal networks of high net worths that often co-invest together. This helps flag where we may find warm introductions to speed the process along.


Rolling Funds are changing the private investor landscape

In the US a highly innovative syndication phenomenon is emerging in the private investing space enabling a new type of VC fund to appear - the 'Rolling Fund'. Driven by changes in legislation (the JOBS Act) we are seeing a new breed of General Partner (GP) who pools contributions from so called 'micro LPs', primarily other private investors. The AngelList funding platform acts as fund administrator, freeing up the GPs to market the fund and identify prospective investments.A Rolling Fund is a series of consecutively-formed, privately offered pooled investment vehicles (each, a fund) intended to allow fund managers to share their deal-flow with investors on a quarterly, subscription basis. This open-ended venture capital fund allows a GP to start by raising a small amount of capital and begin investing immediately, then scale up over time while allowing LPs to invest on a quarterly subscription basis requiring less of an upfront commitment and the option to opt in or out any time. The term 'Funding as a Service' comes to mind.Sahil Lavingia, CEO of Gumroad, has made waves launching one of the first rolling funds on AngelList with his being $6M per year. He has produced a short guide on how rapidly such a fund can become operational. The AngelList blog provides a basic introduction to the concept. What If Ventures has produced a helpful Q&A and investor/blogger Paul Andersen has produced a great backgrounder. The Rolling Fund looks like becoming a real game changer at early stage in the US. Will we see the same in Europe?


Complementary co-founders - footnote 

Last week we talked about how 'having a complementary co-founder is correlated with success'. Much of the research that has been done on founding teams tends to focus on skill sets and how these need to dovetail. In discussions with investors this week we have been discussing some additional aspects of the relationship that also comes under scrutiny, especially in the initial pitch and due diligence phases.

In Zoom pitch meetings some investors are having one of their panel pay specific attention to cofounder interaction during the call. They are looking to get a deeper take on the emotional component of the relationship. Non verbal cues are better tell tale signs of any tension than verbal ones, so body language, facial expressions and emotional engagement are being monitored. Pre-Covid this was all more natural. Through multiple face to face meetings these dynamics were easier to spot, but on video calls it becomes harder. Hence the need to have someone focus on this specifically.

The 'cofounder as coach' has also come up as a related topic. This looks at how how cofounders support each other both in their mutual self development as well as through periods of stress. Alex Tew is co-founder of Calm, the #1 App for Meditation and Sleep. In an interview this week he spoke about his relationship with co-founder and fellow Brit, Michael Acton Smith. Together, they have raised over $143M in funding and act as coaches to each other!


Every Company Will Be a Fintech Company

One of the most jaw-dropping VC rounds in Q2 was the $600M Series E extension by Stripe on an astonishing $36B valuation. Stripe is a payments unicorn, founded by Irish entrepreneur brothers John and Patrick Collison in 2010. It is one of a cadre of fintech 'core infrastructure' companies that are transforming the financial services sector. Stripe is backed by a number of heavyweight VCs, notably Andreessen Horowitz (aka 'a16z'). Any fintech founder with their ear to the ground keeps close tabs on what a16z are prophesying about fintech markets across banking, lending, insurance, real estate, and investing — both on the customer facing side and in the core infrastructure.

Angela Strange is a General Partner at Andreessen Horowitz, and her presentation at the a16z summit in November 2019 quickly became a 'must watch' for fintech founders. Her provocative statement, 'Every Company Will Be a Fintech Company', is born out of the observation that “as a service” infrastructure is coming to banking. To understand why this is such a big deal, she looked at how complex the banking stack is today and how this is being disrupted. Her analysis provided some interesting examples from core systems to fraud and how this is spawning a plethora of new startups that are leveraging the infrastructure players like Plaid, Synapse, Comply Advantage, Sentilink, as well as Stripe.

Opportunities across the financial services space are growing like crazy. Regulation and payment systems differ around the world and in some cases the financial services stack is entirely different. As a16z points out, what’s so unique about this disruption is that, with most large industry changes, often there’s one winner and many losers. But in this case, everyone has the opportunity to participate and improve significantly. New infrastructure startups are still emerging and there are even more opportunities in the thousands of experiments that are yet to be unleashed on top of this infrastructure. In the UK, investors widely believe that fintech will continue to be one of the hottest sectors for venture investment for years to come. 


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

Guide through license-royalty models for early-stage founders
A license-royalty model can deliver massive scale — but it’s harder than ever. Here are 6 tips to help you on the way. An excellent article by Mina Samaan at MMC Ventures. 

Moonshots and Marketing
An inspiring interview with Rory Sutherland on marketing. Rory is Vice Chairman of Ogilvy & Mather Group, which is one of the largest and most renowned advertising agencies in the world. "At Red Bull, there's no evidence whatsoever and there's no logic to suggest that there's a massive gap in the market for a drink that tastes worse than Coke, costs more than Coke and comes in a smaller can." Love these insights for investors and founders.

High Leverage Time Management
An insightful essay by Pete Flint, Partner at Seed stage venture firm NFX. He uncovers; methods to reduce cognitive load, how to run high level meetings, behavior patterns that generate laser focus, and why your ability to delegate is pivotal.

The Global Unicorn Club 
The latest list of 494 global unicorns (private companies valued at $1B+) by sector and investor in searchable (excel) format. Fun fact: Every unicorn COMBINED is worth less than Apple, Amazon or Microsoft. Thank you to CB Insights.

European Tech Valuations - Not all Recurring Revenue is Created Equal
Great perspectives on what's happening on valuations in Laura Connell's blog. Laura is a Principal at Balderton Capital and specialises in SaaS, fintech, marketplaces and healthcare.

Happy reading (and watching)!

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