Duet Partners
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Weekly Briefing Note for Founders

18th November 2021

This week on the startup to scaleup journey:
  • European valuations smash all records
  • Founders must show higher levels of operational competency
  • Should B2B startups focus on Enterprise sales first?

1. Insights of the week

European valuations smash all records

Venture capital (VC) valuations in Europe hit new highs in Q3 2021, according to Pitchbook. Records have been smashed in the European VC ecosystem with each successive quarter through 2021, as robust valuations have been tied to outsized rounds across all funding stages. Although not evenly distributed, pandemic-induced growth has enabled tech-based businesses to prosper. For example, capital has been pouring into mobility startups focusing on food delivery and workplace management tools that offer solutions that can be used remotely at home or in the office. The feeding frenzy has been heightened by nontraditional and international backers pumping capital into VC in search of outlier returns. Nontraditional investors (including PE firms, hedge funds, pension funds, sovereign wealth funds, investment banks, and corporate VC (CVC) arms) have been attracted to strong return profiles in VC, as volatility within other investment strategies and low interest rates have persisted.

Valuations and deal sizes are up at every stage year to date: At Seed, pre-money valuations hit €3.8M, 22.5% higher than the record set in 2020, with median deal sizes now at €1.0M. At Early Stage (typically Series A and B), median valuations are at €7.5M, with median deal sizes at €2.1M, 50% higher than the figure for 2020. At Late Stage, median valuations have soared to €20.6M, 67.9% higher than the record set in 2020, with median deal sizes hitting €5.8M, 76.9% higher than the record set in 2020. The quality of startups seeking backing has remained elevated, and this has been illustrated by the willingness of existing, new, and nontraditional investors to deploy record sums of capital. In the UK, the VC ecosystem appears to be coping well in the post-Brexit era. Numerous records have been broken in 2021, as the region has been able to develop new startups, retain talent and draw in capital, without missing a beat.

The prospect of exciting returns continues to attract record amounts of capital into VC. Post-money exit valuations at the upper quartile sit at €248M through Q3 2021, an increase of 148% from 2020. 135 public listings have produced a record €99.5 billion in 2021, triple the previous record set in 2018. As high-growth companies target exits, competition between investors and exchanges has intensified, pushing up valuations to record levels. European exchanges including the Euronext Amsterdam have become popular for SPACs. Meanwhile, the London Stock Exchange has loosened listing requirements, including the use of dual class share structures, to attract European tech listings. VC-backed companies that have been able to capitalise on pandemic-induced growth have quickly consolidated and accelerated towards exit. Some have taken longer than others and further waves will continue to roll in over the coming months. Founders have a window of opportunity that, at least for now, remains firmly open.

Founders must show higher levels of operational competency

As average deal sizes continue skyward, founders are deploying ever larger amounts of investment cash to secure their growth ambitions. And increasing deal frequency means the speed of this deployment is also quickening. In DeepTech, where a long road of cautious investment has historically been the norm, hot sectors are being driven forward aggressively by hungry investors. Take Quantum Computers: 2 of the leading players have zipped through large Series A , B and C rounds, followed by $500M+ SPACs, all within the space of 5 years. More and more of these rounds are 'pre-emptive', exhibiting only tenuous alignment with their conventional funding stages. This is not just land grab for new markets, but a land grab for the best global talent. If you can vacuum up the leading minds in an emerging sector, you also stymie the capability of others to compete.

VCs increasingly view such recruitment initiatives as giving strategic edge. In certain markets they are encouraging these moves even before product/market fit is clear. Founders must therefore become organisation builders from a far earlier point than they might have expected. Renata Quintini and Roseanne Wincek are co-founders and managing directors of US VC, Renegade Partners. In a recent interview they describe some of the early scaling challenges that founders often stumble through. One of the biggest errors they see inexperienced founders make is underestimating how top candidates will assess the opportunity. The recruitment experience is the first taste of the company culture and values. Potential recruits pick this up very quickly. Whilst salary is important, it isn't going to be the number one consideration for the top execs. Stock options are where the real leverage lies, so candidates must therefore believe in the potential for significant stock price appreciation. Here, it's up to the founder to sell the vision, culture and values that will combine to create the prospect of life-changing financial outcomes.

With round sizes jumping, investors have more to lose if things don't turn out. They will want to carefully diligence the founder's expansion plans before writing the big cheque, especially at Series A. Does the founder have the superpower to attract the best? What is the 12-18 month hiring plan? Do we have job specs and a hiring pipeline underway? Do we know how to onboard effectively to ensure high retention and commitment, especially through the first 30-60-90-day period? With average tenures dropping, the days of "Here's your laptop, let's go." are long past. Astute founders now realise that HR has become a strategic function, not just a process. Founders that grasp this shift will start building this capability at an earlier stage. Similarly, the finance function. Huge bank balances and spending plans require greater financial stewardship. In short, high growth startups need to show operational competency that is beyond their years. Founders that get ahead on these fronts will inspire greater investor confidence.

Should B2B startups focus on Enterprise sales first?

B2B startups looking for initial customers will often target big enterprise accounts first. If a prestige logo can be secured this sends a signal to the market. It endorses the product and the capability of the team. Investors will take note. But this usually comes at a cost, and that is time. Big companies can take forever to finally sign on the dotted line. And in the startup world, time is the killer. In the formative stages, the journey to product/market fit demands speed more than scale. Quick decision making, quick feedback, quick product iterations. These are attributes more aligned with SMEs (Small & Medium-sized Enterprises) than large enterprises. In fact, they are most closely aligned with startups themselves. In the words of veteran investor David Sacks, there is a strong argument that "velocity trumps size", whilst on the road to product/market fit. B2B founders must weigh up these factors when setting the initial go to market strategy.

The lure of the Enterprise sale is of course compelling. Big companies have big spending power. If they like what you are selling they can really accelerate your sales growth: More users and more up-sell. They generally seek to standardise on solutions, often embedding or integrating them into workflows. This commitment confers huge credibility and impresses investors. By contrast, dealing with SMEs often brings uncertainty: Do they have the spending power? Will they switch easily when something else comes along? How to pick the right ones when there are so many of them? But even with this uncertainty, SMEs bring something that enterprises cannot: they are generally more willing to be early adopters, being far less risk-averse than large corporates. They are looking for immediate edge over their competitors. The sales cycle is faster. No 6-month evaluation projects here. The decision-making tree is more obvious and shorter. And, above all, they are less demanding - they won't want you to up-feature the product before they will even start using it.

Sacks says that in recent years, the 'sleeper category' in B2B software has been SME. Even more specifically, startups selling to other startups have seen explosive success. Stripe, Slack, Twilio, Brex, and Airtable are all examples of this trend. In SaaS, the benefits seem clear cut, but for hardware startups where meaningful engagement of almost any type bears real cost, founders must take a more considered approach. The answer may lie in a blended go to market strategy - several smaller customers plus one or two bigger corporates. Placing all the chips on one big bet may be far too risky. There may be some target accounts that even sit somewhere between the SME and the Enterprise. They may offer better dependability but still have the ability to move relatively quickly. Founders must achieve the right balance in the sales funnel. This will change depending on which side of the product/market fit line their business currently falls.

2. Other pieces really worth reading this week: 

Seed Rounds At $100M Post Money
From the blog of legendary VC, Fred Wilson, of Union Square Ventures. A great perspective on his concerns over outsized seed rounds and why they will likely lead to failure for a VC fund.

Balderton raises $600m for early-stage European startups
Yet another huge early-stage fund is minted this week, as reported by Sifted. Balderton has historically been known as one of Europe’s most prolific Series A investors, but has transitioned to a multistage strategy, launching its first later-stage fund earlier this year.

The Best Leaders are Feedback Magnets — Here’s How to Become One
Some great actionable insights in this article by Shivani Berry, founder and CEO of Ascend. "After interviewing dozens of top executives in fireside chats  ... I started to notice a pattern. Even though they were all well-practiced with tons of public speaking experience under their belts, every single one of them asked me for feedback after the event. That’s when it hit me: The best leaders are feedback magnets. Getting actionable feedback is a skill, and the top performers have excelled largely because they’ve never stopped honing it."

Happy reading!

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