Duet Partners
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Weekly Briefing Note for Founders

18th February 2021

This week on the startup to scaleup journey:
  • The Guided Fundraise
  • An investor framework for valuation growth
  • Why are people leaving your startup?
  • Services revenues have hidden value

1. Insights of the week

The Guided Fundraise

As a founder/CEO the more awareness you have about the limitations of your startup fundraising experience compared to VCs and other institutional investors, the more empowered you will be throughout the fundraising process and beyond. Mastery will come from leveraging the knowledge and experience of those that have trodden the path before, then putting this into practice your own way. But who can founders learn from?

Serial entrepreneurs that have hung up their boots as operators, perhaps after an exit, are eagerly sought after by startup boards. But as the number of first financings collapses (down 35% since 2014 across Europe), so too the number of entrepreneurs that have recent first-hand experience in leading companies through the private to institutional capital transition. This particular talent pool is receding. For first-time founders looking to tap this knowledge bank, this is a growing problem.

The Guided Fundraise, described in our blog, The talent pool of early-stage capital raising expertise is shrinking, addresses this need. The core framework covers all aspects of investment preparation, investor outreach, navigating the process, and closing. This includes checklists for each phase to ensure nothing is missed. But the most valuable aspect is often the one most underestimated at the very beginning - having an expert sounding board available 24/7. Like any complex sales cycle, the unexpected will undoubtedly happen and will often require urgent attention when it does. Having an advisor on hand who’s been down this road many times before can help you save valuable time.

An investor framework for valuation growth
When investors ask "How big could this get?" founders often take this as a cue to talk about growth plans. But experienced founders approach this a little differently. They know that the investor is really asking, "How valuable could this be?". Even an average sized VC fund of $200M will be hunting unicorns, so in setting out the vision, experienced founders start with the end in mind and work back. They divide the journey into the big milestones and link them to the major funding events. Founders may even assign a notional valuation target for each milestone. Whilst these valuation musings shouldn't be shared, a milestone driven narrative will enable investors to more confidently model their own valuation outlook. And, if they like your initial pitch, this is probably the very next thing they will do. 

Fred Wilson is head of US VC Union Square Ventures, the firm he started in 2003. He has backed some of the most successful tech startups, with a long string of billion-dollar exits. One of his most popular blog posts, 'The "Doubling Model" For Fundraising', describes his framework for capturing a milestone-driven valuation approach. He uses a simple spreadsheet to work back from a $1B exit, showing the classic funding points and associated valuations. Note, this is not a prescription, it's just a framework for thinking backwards, keeping the end in mind. Founders can play with this framework to consider potential funding points for different valuation outcomes.

The most searching question the framework poses is, "What will it take to double valuation at each funding point (Series A, B, C...)?" This reinforces bold thinking, driven in part by the desire to minimise dilution to founders and early investors. Given that founders usually focus so much of their attention on just delivering the next step, having this view of the endgame helps set goals and manage priorities.  Otherwise this could simply be a voyage of discovery that will not appeal to VC investors. It's true that much will change along the way, but provided the destination is a valuation rather than a location, investors will enjoy (and pay for) the ride. 

Why are people leaving your startup?

Attrition is not just something that happens in big companies, it happens in startups too. But whilst personnel changes can impact any business, they can pose an existential threat at early stage. Investors will therefore be wary about investing in a business that has had senior management leavers, especially co-founders, in the formative stages. It doesn't mean they won’t invest, but it’s going to be a hot question you must be fully prepared to answer. Remember, investors have access to comprehensive information on company history. Many of the leading investment data platforms will flag anyone who was previously a key person or director. Hoping that leavers will go unnoticed is unwise.
So, why do people leave startups? First Round Capital recently interviewed HR leader Carly Guthrie, who has studied why employees build up the desire to move on. Counter to popular belief, the biggest reason for employee disaffection is that companies don’t respect their time. “A really good CEO realizes people have lives outside of work. That’s the number one way to prevent people from feeling like they might want to be somewhere else. You [also] have to be proactive about cultivating happiness and good will.” This starts with recruitment itself, hiring people who will be a fit – not just looking for a skills match but a culture match. But the most compelling insight is that bringing in good HR management early can make a decisive difference. This is one of the most critical leadership hires a CEO/founder can make as the business starts to scale. 
The role of HR is often misunderstood in startups, but for those that embrace this function there are huge dividends, including many that positively impact retention. A crucial element is coaching the founders and other managers in becoming more effective people managers, as well as acting as a sounding board on wider matters. As a CEO this is the person you want in the bunker with you when things get jumpy, so they must measure up to this expectation. And there are less obvious benefits, as Guthrie says: “Being a founder can get extremely lonely. I think it’s easy to forget that. But bringing in someone who sees the things you don’t, and who puts your people front and centre can make it a little less lonely.”

Services revenues have hidden value
Subscription business models have been highly prized by investors for decades. The recurring revenue generated providing high levels of predictability – easier to plan, fund and grow. The SaaS era has taken this to new levels, converting one time software licence sales into highly valued future revenue streams. Today, just about any product is available ‘as a Service’. But if you take a closer look at how many high growth tech companies have propelled themselves into market leading positions, you will find that services (in the classic sense) have also been instrumental.
VC firm Blossom Street Capital recently analysed the revenue mix of over 100 SaaS businesses at the point of going public. On average 20% of their revenues were non-SaaS (non-product) related, i.e. services. For many businesses, services form a critical part of the user experience aimed at driving up stickiness - in other words, reducing churn. Some will bundle the service costs into the product to reduce friction, but the aim is the same - user delight. For example, Superhuman, a $30/month premium email client, provides every new user with a personally delivered 30-minute onboarding programme that engenders incredible user loyalty. And you currently have to join a waitlist of over 275,000 people for the privilege!

But it’s at early stage where the value of services can have a disproportionality positive effect on the company’s fortunes. They enable ‘high touch’ customer contact, providing valuable insights to help shape the product, They can accelerate the 'land and expand' strategy whilst at the same time making it harder for the customer to switch. But perhaps most importantly of all, while the business is still burning money, services can provide a vital source of cash. VCs will give you real credit for financing the core business like this at early stage, rather than depending solely on new equity. And the less equity you give away the more you will keep for yourself.

2. Other pieces really worth reading this week: 

24 Industries & Technologies That Will Shape The Post-Virus World
In industries from healthcare to education to finance to manufacturing, the pandemic has forced companies to use technology to reimagine nearly every facet of their operations. CB Insights analyzes the industries poised to thrive in a post-Covid world. Report here.

How to Identify and Tell Your Most Powerful Stories
Nancy Duarte, is a best-selling author and CEO of Duarte, Inc., the largest design firm in Silicon Valley. In HBR this week she reveals new insights and her (excellent) new book. "Leaders often shy away from sharing personal stories in their talks and presentations. Why? Because they’re afraid of exposing their flaws or struggles. But this is such a missed opportunity to connect with your audience. Instead of keeping your most impactful stories hidden, dig them up and use them."

Are Startups Overvalued?
An insightful analysis of valuation drivers in the current market by Jeff Bussgang at Flybridge VC. Key topics include: How public markets affect private markets; the significance of interest rates; and why early stage valuations are more 'Cap Table Math' than 'Comparables Math'. Written around the US market but much can be read across.

7 Innovation Frameworks To Navigate Disruption
Thought provoking stuff from CB Insights in a new report: "To see innovation for what it is, we need to move away from catchy narratives and dig into the details of how people and companies developed their concept of innovation. Here, we analyze 7 of these different ideas about innovation from some of the most prominent thinkers in business, technology, and culture."

Happy reading!

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