Founders take stock after a frantic first half

These long hot August days have provided something of a lull after a frantic first half. Founders have a rare moment to take stock. The fundraising landscape has experienced a dramatic global readjustment over recent months as deal volumes and valuations have been pushed down. European startup funding has - so far - remained remarkably resilient compared to North America and Asia. In Q2, €25.7 billion of venture investment was recorded across Europe, representing a modest decline of 10.6% over the first quarter of 2022, according to Pitchbook. This compares very favourably to an overall global decline of 26% for the same period. Even so, the sea-change in investment sentiment and weakening macro-economic environment has forced founders to reassess funding plans. This is not because there is a lack of capital in the system. In fact, the amount of dry powder remains at record levels. It is the reluctance of investors to write cheques at the same pace they did in 2021 until they have greater clarity on how this market 'correction' might play out.

The record-breaking investment years of 2020 and 2021 fuelled an almost endless sense of optimism amongst founders starting new businesses. Many that are now coming to market for Seed and Series A financing rounds find they are in a logjam with many other startups with exactly the same objective. Even for smaller early-stage tech funds, deal flow (the number of pitches they receive) is off the charts. One well-known fund that makes around 3 investments per quarter as the first institutional cheque, saw 2,018 new opportunities in Q2, up from 1,404 in 1Q22. These are staggering numbers. With fewer deals being done, only exceptional propositions are being considered. For Seed-stage startups in mainstream sectors such as enterprise software, investors now expect to see a launched product with compelling traction and a well-defined scaling strategy. Series A rounds in these sectors are now essentially growth rounds: Pitch decks must demonstrate a solid track record of fiscal responsibility and a pathway to profitability. Startups in these mainstream sectors must clearly be on their journey to category leadership.

This was all so different just a few years ago. One consequence is the number of rounds being undertaken at each stage of company evolution, as the criteria for passing though each stage 'gate' have been elevated. Multiple Seed rounds were always the case, but now every deal seems to be a "bridge round to the Series A" that appears ever further away. This is putting untold pressure on existing investors as new investors have an aversion to funding bridge rounds. You know a startup is in trouble when the founders are out looking for new investors and are positioning the round as a bridge. We are also seeing multiple Series A rounds, sometimes labelled as A1, A2, A3. These companies are often making progress but not to the heights necessary for Series B investment in this much more challenging environment. Trend data over prior years is somewhat useful in looking for financial comparators, but now the focus is on quarter by quarter data as the market is changing so quickly. 3Q22 investment levels will likely drift further from 2021 highs but the best propositions will still be eagerly sought after as we head into Q4.

Developing a writing culture in the startup

In the startup world, speed is key. Creating a time advantage over emerging competitive threats is always front of mind. The small team advantage plays out in the very early stages. Quick and informal discussions, few meetings, and a big emphasis on action. As early scaling begins and growth becomes the driving force, the team expands. The experimentation phase is almost over - company building has started. 20, 30, then 40 or more people are suddenly trying to work effectively together. The communication challenge grows exponentially. The notion that writing more and speaking less can now provide a formula for success might seem a bit misguided. Yet this is the path that some of the most successful startups adopt. Books have been written about Amazon’s writing culture. There’s an entire section in their 2017 Shareholder Letter dedicated to espousing the benefits of the Six-Page Narrative. At Stripe, the writing culture has also been firmly embedded since the formative years. In 2013, when headcount stood at 45, Greg Brockman wrote openly about this culture and why Stripe even makes email public within the company.

To many outsiders this seemed as if it could be a recipe for disaster. Now, with headcount exceeding 4,000, Stripe has become one of one of the most feted growth stories of recent years. Former Stripe employee Brie Wolfson provides some remarkable insights in her highly practical and informative blog. She says, "I’ve come to believe that Stripe’s culture of writing is one of the organization’s greatest superpowers. Half of the story of what makes this so would be obvious to onlookers – Stripe has always treated documentation as a first-class product. People from every corner of the company author blog posts. The company publishes a magazine about building and operating software (Increment) and books about technological and economic progress (Stripe Press). But what most people don’t see is the massive library of content produced inside the company for Stripe-employee-eyes-only. And that’s where I think the real magic happens."  Former Stripe employees that go on to found companies often make writing a core part of how their new companies operate. Some embed this within their values and even state this explicitly on their jobs page.

Founders that embrace the writing culture do so in part because of the great efficiencies it delivers. This may seem counterintuitive - taking the time to write something up might appear more like a braking rather than an accelerating action. But a good paper-trail can supplant and improve meetings, for example. When there is good documentation around a meeting (briefs, meeting notes, etc.), meetings can be leaner and more productive because people don’t have to be in the room to know what’s happening. Only those who are actively contributing to the discussion then need attend. But as Wolfson comments, documentation only gets organisations half way to building the system of knowledge shared. Nailing distribution (i.e. ensuring the right people can find the information) gets organisations the rest of the way. Now, as remote work further encourages writing-centric companies instead of speaking-centric ones, founders have never had a better moment to embrace the writing culture. Many believers will say it's a great proxy for the open door policy, makes companies less political, and above all, is a forcing function for thinking and communicating more clearly.

2022 summer reading guide for CEOs

When McKinsey senior partners Carolyn Dewar, Scott Keller, and Vikram Malhotra conducted detailed interviews with high-performing CEOs for their book CEO Excellence, they discovered that some of the best leaders—despite the “always on” nature of their roles—take the time to read books on various topics. And the payoff is worth it: Books can educate, inspire, and motivate even the busiest leaders. McKinsey asked global CEOs and founders to reveal which books are on their bookshelves this summer. The full list is here: 2022 summer reading guide. The guide is usefully segmented into sections for easy access. In 'Business & Economics' our favourites are: Capital in the Twenty-First Century  (Thomas Piketty), and No Rules Rules: Netflix and the Culture of Reinvention  (Reed Hastings and Erin Meyer). In 'Personal Development' we really like Don't Trust Your Gut; Using Data to Get What You Really Want in Life (Seth Stephens-Davidowitz) and Thanks for the Feedback (Sheila Heen and Douglas Stone).

Having a back catalogue of great business reads is always useful when you want to reprise some of the fundamentals. They may not necessarily be beach fare but they will re-invigorate in their own way. With founders in mind, our own 'go to' classics include 3 all-time greats that should really inspire. First, is Crossing the Chasm by Geoffrey Moore. Initially published in 1991 and since substantially updated, this is a masterwork and essential reading for early-stage business builders. Moore shows that in the Technology Adoption Life Cycle, there is a vast chasm between the early adopters and the early majority, where many businesses fail if certain critical actions aren't taken. Second, is Zero to One by Blake Masters and Peter Theil. This describes how startups can create enormous value but must operate very differently to established businesses. It is considered to be one of the most influential books on the startup mission. Third, is the High Growth Handbook by renowned entrepreneur turned investor, Elad Gil. This highly acclaimed guide is for founders who are starting to scale their businesses and are seeking a framework for expansion.

And if you are looking for something off the beaten track, a little more unusual and thought-provoking, here are 3 mind-stretchers. First, What Do You Want Your Customers To Become? by MIT innovation expert and thought leader, Michael Schrage. "Successful innovators don’t just ask customers and clients to do something different; they ask them to become someone different." Second, Amp It Up by the uncompromising growth leader, Frank Slootman. Legendary investor Doug Leone, Global Managing Partner of Sequoia Capital, says of Slootman: “In my 30+ year experience as a venture investor I have never seen anyone rival Frank's operating know‐how. With Frank, it all starts and ends with hardcore and focused execution...". Finally, The Age of Surveillance Capitalism by Shoshana Zuboff. "A chilling exposé of the business model that underpins the digital world...", John Naughton, The Observer. This is a deep and often disturbing examination of the expropriation of the personal data we freely give to vast corporations. Heady, spooky stuff.

Happy reading!