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


Weekly Briefing Note for Founders

18th March 2021

This week on the startup to scaleup journey:
  • February Monthly Recap: VCs invest $35B in startups
  • Building negotiating leverage in the fundraise
  • Selecting a VC that is a fit for your startup
  • Expanding to the US - go early

1. Insights of the week

February Monthly Recap: VCs invest $35B in startups
Global VC funding in February 2021 continued at a strong pace. So far, December 2020, January 2021 and February 2021 have been the three peak funding months of the past two years, according to the latest figures from Crunchbase. February followed a record funding month in January 2021, and came in just shy of December, the next-highest month for global venture funding. Rounds $100 million and above represented a greater share of investment in the first two months of 2021, at 64 percent — contrasting with 56 percent for all of 2020 and 48 percent in 2019. February 2021 also represents the third-highest month for amounts in these so-called 'supergiant' rounds over the past two years. 

22 new unicorns were minted globally in February, down from the unprecedented 38 new billion-dollar startups the month before. The most highly valued of the these was London-based cryptocurrency company Blockchain, raising $120M. According to figures just reported by Dealroom, VC investment into UK companies so far this quarter is already €4.6B, which is an all-time quarterly record. This from a total of 327 rounds, down from 375 in 4Q20 (although this will increase as many smaller rounds get reported late), with a slew of huge rounds from the likes of Checkout.com, Hopin and Starling Bank.

Venture backed global M&A activity is up so far in 2021, but well short of monthly exit amount peaks in 2020. Social content platforms that create revenue opportunities for 'creators' led in exits for both M&A and public debuts. The Creator Economy is front and center in 2021, one year into the global COVID-19 pandemic. It has also given rise to innovation in payments for artists, as seen with non-fungible tokens (NFTs), or digital assets that can be verified and sold. The tokens have recently become a massive phenomenon, with big name artists selling digital art for millions of dollars and Jack Dorsey, CEO of Twitter, even offering to sell his very first tweet as an NFT!

Building negotiating leverage in the fundraise
It often seems that the fundraising process is tilted in favour of investors. When demand (number of startups) exceeds supply (number of potential deals investors have appetite for) this is always going to feel like a buyer’s market. But experienced founders know that if they can tap into the investor’s biggest fear, the Fear of Missing Out (FOMO), they can swing the odds back in their favour. By developing a compelling investment proposition that makes their success appear inevitable, they can create the prospect of becoming an investment return 'outlier'. The seeds of FOMO are then planted. But to get these to really take root and grow fast enough to produce a timely offer requires a fundraising process that creates leverage.
Too often, founders are forced into fitting fundraising activities around other pressing priorities. As a result, investor pitch meetings end up being arranged over extended periods of time, meaning that investor interactions happen in series. This puts the leverage in the hands of the investors. As Aaron Harris of US startup accelerator YCombinator says: “As a founder meets with each new investor, chances are that some information about the company has reached the incremental investor before the meeting. This is because the network of investors is relatively small and often collaborative. Each investor that meets the company therefore has an information advantage and knows that either a) this company has been passed on before or b) this company is gaining momentum.”
The greatest leverage is therefore created by a tightly managed funding campaign, where initial investor meetings are clustered over a short time window. Information then flows out to investors in parallel, and no investor builds up an information advantage. Valuation information travels particularly fast, so never tell a prospective investor your price expectations. At best, doing this will set a ceiling on your valuation. At worst, an expectation which is too high will scare investors away before they make an offer. If asked, just confirm the last price and say you are expecting a uplift that fairly reflects with the progress that has been made. Experienced VC Kent Goldman says, “Never negotiate before you have a term sheet. Be disciplined. Set the hook and wait until commitment bias has had a chance to kick in. It will work in your favor. Investors hate to lose out — especially after their partners have told them to go win an investment — but they can’t fear losing if they’ve already decided not to play.”

Selecting a VC that is a fit for your startup
Transitioning the cap table from private to institutional investors is a pivotal moment in the development strategy for any high-growth startup. Big choices need to be made. Over 500 VC funds have been active in the UK over the past 5 years. This is a very diverse investor class and a real mixed bag of capabilities, value-add, and aspiration. However, all VCs are out to learn, so will often be happy for you to educate them about your tech and/or space without any intention of investing. Carefully selecting those to approach is therefore crucial to avoid wasting time. Experienced founders use two primary criteria: relevance and relationship. Relevance means they are a good fit for your type of business - your interests will be well matched. Relationship is all about the individual VC Partner that will likely sit on your board for many years. This is someone you will need to get along with - someone you will be able to trust and respect.
During the funding preparation phase, founders should first look at relevance. The easiest elements to assess are sector and stage focus. Many VCs take a strongly thematic approach to investing so will focus on a particular sector or sectors to the exclusion of all others. The deep vertical knowledge acquired enables them to make informed investment decisions and add value post investment. When investigating sector preferences, don't forget to check for competitors in their portfolio - this will usually be an investment blocker. VCs will also have strong stage preferences, e.g., Pre-Seed to Seed, Seed to Series A, Series A only, Growth. This particular stage-specific knowledge is critical in their risk/opportunity assessment. With sector and stage sorted, you are halfway there. Experienced founders then assess the size of the fund and the age of the fund. This information is often harder to dig out, but is vital. Founders must really do their homework here as these factors can trump all others.

The size of the fund must align with your expectations of future valuation, which will be linked to market potential. As we described in our blog, Understanding the VC mindset, VCs make their big returns by investing in potential outliers. For example, a $200M fund is going to be a unicorn hunter, searching out businesses that one day could be valued at over $1B. If your Total Addressable Market is going to be $1B or less, then this won’t be you. You will need to be targeting smaller funds. New funds also have an ‘initial investment period’ - often no more than 3 to 4 years - during which time they are looking to invest a portion of the fund in new opportunities. The balance, their 'reserve allocation', is going to be exclusively earmarked for portfolio follow-on investments. Targeting a fund that is outside their initial investment period is probably a waste of time. Many will be happy to take the meeting, but will have no capacity to invest in anything new.

Expanding to the US - go early

It has become a case of 'when' not 'if'. Entering the US market is now an essential part of the growth strategy for many tech businesses. Success there is now seen as a landmark of global success and often critical in attracting top tier investors. But, after the UK, many startups eye European markets next and this is not always the right bet. In many respects it can almost be easier to gain a foothold in the US than execute a country by country expansion plan across Europe. A key attraction is the large homogeneous market where growth can accelerate with extraordinary speed. Gaining a first mover advantage into the US market can also send a much stronger signal to VCs, who may be more likely to support this ambition. 

In Balderton Capital's B2B Sales Playbook, the risks and opportunities of US expansion are well documented and chime with our own experience as former operators. The challenges are clear: Customers will be very demanding and the competition will come from all angles. Above all startups should not make the mistake of thinking that superior tech on its own will win. You'll not only need a solid product, but an outstanding sales, marketing, and customer support capability. This will all cost, so US expansion must be properly funded. The rewards though can be huge: Things generally happen much faster, US corporates are more startup friendly, and deals can be (a lot) bigger. Operating effectively in the US will help you raise your game across the board, which will pay dividends as you look to exploit other markets.

A US footprint also puts your business much more clearly on the radar of US investors and, longer term, potential acquirers. One of the first decisions we made when setting up Duet was to establish a partnership with US Tech M&A firm, Harvest Management Partners, to support our clients on this very journey. Whilst US market entry should only occur when the business is ready (most likely Series A, B..) you will even find Seed stage investors now probing on this question. They will be testing the founder's ambition and where the US market fits on the roadmap. Thinking carefully about this milestone and where it sits in the priority stack has become increasingly important. And if the founder doesn't have direct personal experience of operating in the US, investors will expect this to be an early hiring consideration as the exec team is grown.

2. Other pieces really worth reading this week: 

Tech Nation Report 2021
The latest report on the UK Tech scene in 2020 has just been published, with many useful insights. "UK tech VC investment is third in the world, hitting a record high of $15bn in 2020 in the face of challenging conditions. [But] investment in seed stage companies is decreasing as a proportion of overall tech VC investment (14% to 6% over 5 years), and series B and C investment is rising in the UK."

From The Attention Economy To The Creator Economy
A thought-provoking piece in Forbes on the emergence of the Creator Economy. "If the community is the Creator Economy’s equivalent of an audience, then what is it worth and to whom? As a heuristic, top-earning writers are making $500k a year on Substack, the streamer Ninja earns over $500k a month on Twitch, eight-year-old Ryan is making $26 million a year reviewing toys on Youtube, and Kylie Jenner turned her Instagram fan base into a cosmetics empire becoming the world’s youngest self-made billionaire..."

Pressure Doesn’t Have to Turn into Stress
An enlightening article in HBR this week that many founders will appreciate. "Pressure is not stress. But the former is converted to the latter when you add one ingredient: rumination, the tendency to keep rethinking past or future events, while attaching negative emotion to those thoughts. To break this stress-inducing habit, [here are] four steps.."

'Hope isn't a strategy'
A thread from Yuri Sagalov, serial founder and investor, on why founders must learn how to sell: "It's been almost 10 years since one of my most embarrassing fundraising moments as a founder. A moment so embarrassing that I couldn’t talk about it for years. It taught me the difference between raising a Seed round and a Series A, as well as some well needed humility."

Decoding the no-code / low-code startup universe
An article by VC Pietro Invernizzi in Medium that is a great primer for understanding the 'no code/low code' universe and its players. "The investment world seems to have noticed this trend too: in the last month alone (!), very large funding rounds were announced in the space: Zapier’s secondary at a $5 billion valuationOutSystems’ $150M round at a $9.5B valuationCreatio’s $68M first raiseRows’ $16M Series BOribi’s $15.5 million Series B, and more… The momentum is so strong that some see it as a craze, comparable to the chatbots, ICOs, and cannabis-related explosions we saw in recent years…".

Happy reading!

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