Duet Partners
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Newsletter

Weekly Briefing Note for Founders

19th August 2021

This week on the startup to scaleup journey:
  • Bridge rounds don't need to send a negative message
  • Are your funding references ready?
  • Marketing the written word
  • Founder traits that VCs love

1. Insights of the week

Bridge rounds don't need to send a negative message

As investment criteria at each funding stage get tougher, founders seek ways to extend their cash runway. You haven't done quite enough to attract new investors yet, but a bridge should give you that extra time. A 'bridge' is a round of venture funding from internal investors, so should be much easier and faster than going outside. The problem is, VCs don't like doing bridge rounds. VCs like to see new rounds carry a strong uptick in valuation (validated by a new external lead) and a bridge is often done at the price of the last round. But experienced VCs know that bridge rounds can sometimes be necessary and they make an allowance for this is their 'reserve' holdings - the cash they allocate for follow-on rounds in their most promising investments. If a VC led a prior round and took a meaningful slice of the equity, it's most likely they will have set money aside for subsequent investment. But if the lead investor isn't willing (or able) to step forward for the bridge, other interest may not as easily coalesce.

To increase the chances of a successful bridge round, founders must know where they stand with all investors, especially the prior lead. This means having a regular dialogue, ideally outside the board. This is to garner unvarnished feedback and assess the level of support for future funding. Some founders shy away from this and leave it until it's too late. These aren't discussions you want to be initiating just as you're running out of cash. In the same vein, it's vital to keep all investors in the loop on progress between rounds. For those that don't attend the board or have information rights, experienced founders make sure they feel connected by sending out regular investor updates. The most crucial data point for any investor, especially in the early stages of the business, is the 'cash out' date. Any founder that doesn't publish this in the update is just storing up a potential surprise for later. And we know how much investors hate surprises.

The most important document that any founder should have on their desk is the cash flow forecast. But a cash flow that doesn't 'link' to the next funding milestone provides only half the story. This more holistic view is a key part of funding preparation and when incumbent investors see this fuller picture, they can immediately see the purpose of the bridge. A call for an urgent funding injection to avoid a looming cash out event is a very negative message to deliver. It inevitably raises a question over the CEO's grip on the business. On the other hand, a 'runway extension' to hit more stringent investment criteria in the market, will likely be seen as just astute planning. Once you have corralled the current investors into the bridge plan, you must be certain the bridge cash will last. You will likely only have one chance to do a bridge on reasonable terms. The biggest trap is asking for too little and not extending the runway far enough. A few months is probably just asking for trouble. Adding 6 to 9 months is likely to sound far more credible, even if you have to trim some costs to get there.


Are your funding references ready?

During the due diligence process, prospective investors will ask for references. These will be both customer references and personal references. The customer references are to validate the core claims you made in your pitch. The personal references are to check out your suitability for the startup challenge. The key thing is to be prepared. When they ask, have them ready. First, this says a great deal about who you are as a person; organised, efficient, prepared. Second, it says that you are not just putting this information together for them - there are other dogs in this hunt. Ideally you want 5 customer references on hand, and if you don't have these yet, fill in with the next best thing - for example, some credible prospects who have evaluated your product and ideally the competition as well. And don't just hand the investor the contact details; provide a short synopsis of the customer, a brief profile of your senior contact (if this is B2B), and, most importantly, the need your are fulfilling. Then make the intro.

You personal references need to be ready too. Not all investors carry them out, but you can bet if you don't prepare, they will ask. It's highly likely that a new lead investor on a major round will want to talk to at least 2 people from your past that can answer some questions about your character. There is an art to this kind of reference and experienced investors know what they are looking for. This is not the run of the mill evaluation of skills, strengths and weaknesses etc. They are looking for the presence of founder traits - not if you were good at your job or showed up to work on time. Investors will hope to talk to your last boss and sometimes other senior figures you may have worked closely with. They will also talk to current investors and quite possibly any executive level leavers from your current startup. Investors may even put in a call to former advisors. Expect major funds to do a thorough job.

But founders shouldn't forget that the risk assessment plays both ways. Experienced founders will also do due diligence on the fund and in particular the partner, before any deal is agreed. When investors ask for references, this is the time to ask for theirs in return. After all, your are about to enter into a long term agreement with what is essentially a new boss. Remarkably, some founders simply don't consider reference checking investors a priority. This is particularly the case with inexperienced founders on their first institutional raise. But this is a unique opportunity to talk to other founders, learn what their journey has been like with this partner, and use this insight to set up a relationship that is going to work for you. The single biggest regret we hear from founders that have become disenchanted with their current investor is that they wished they had done greater diligence at the beginning. Don't let that be you.


Marketing the written word

In a world that is shifting from analogue to digital with increasing pace, the power of the written word seems to rise ever higher. Mediums might be changing, but content is still king. This is an era where a short, well conceived tweet can have as much impact as an essay. For marketeers, writing great material is essential, especially for content driven growth businesses. In B2B models, the cost of customer acquisition through outbound sales is under constant scrutiny. If innovative marketing can drive more demand creation, the go to market strategy becomes much more efficient. The core messaging must radiate through all channels from PR, product education, customer stories, all the way to the website. The narrative you build is the backbone of your content marketing strategy, aimed at simplifying the decision making process for new prospects. For example, if the first step in the sales process is a demo, how can we entice a prospect into a demo without a live (expensive) sales conversation?

Authenticity is everything. For startups building software products for developers the bar is particularly high, so engineers are often drafted in to help. This could be writing the occasional blog post or newsletter article. But as Olivier Pomel, CEO of DevOps pioneer Datadog says, having engineers writing is really not a scalable proposition. "Most people are super excited about the idea of doing it, but then most people actually don’t want to do it. So people spend days going “I need to write this article”, and nothing comes out. So you end up killing people’s productivity and they feel bad. We’ve tried having marketers do it, it doesn’t work great because ..  an engineer can tell if it’s been written by a marketer. "  Pomel ended up hiring full-time engineers who are also interested in journalism. This team is dedicated to content creation and reports into engineering - not into marketing. 

The reader meanwhile is becoming more discerning. It's not enough to know your audience but to think like your audience. Any founder that has written an investor deck will know just how important (and difficult) this is. Even just creating a simple sentence that crisply describes what your company does can be a mind bending and time consuming exercise. Whilst capital raising is perhaps the ultimate test of the written word, the day to day requirement links to the only other big priority - revenue. But this doesn't mean all marketing must have an immediate connection to sales. Experienced CMOs know that the top of the funnel starts way above the first step in the sales process. It begins with awareness. If a prospect doesn't know you exist, or doesn't understand your purpose or your views, you aren't even in the game. Thought-leadership has become one of the most powerful founder attributes for that very reason. Being able to convey your thoughts using the written word has now become an essential founder skill.


Founder traits that VCs love

Superfounders, is regarded as one of the most well-researched books on what makes founders successful. It's most startling revelations, supported by an extensive dataset of insights, have debunked many of the myths around the founder journey. The research reveals that: 1. Most unicorn founders had no (relevant) industry experience. 2. There's no disadvantage to being a solo founder or to being a non-technical CEO. 3. Less than 15% went through any kind of accelerator program, and 4. Over half had strong competitors when starting - being first to market with an idea does not actually matter. These counterintuitive insights have spurred investors to recalibrate how they assess founders. The latest research show that VCs are just as interested in evaluating a founder's character as their particular career path. Featuring highly in this diligence are; Self awareness, Ambition, Execution, and Leadership. 

Self awareness is a foundational issue as this feeds into all decision-making. It is particularly important in team building where the collective capability must surpass that of the individuals. Shared entrepreneurial passion and shared strategic vision are required to get to superior team performance. This requires a deep appreciation of strengths and weaknesses of each person, and the founder must start with themselves. One well-known VC says in the report, "I will look for examples and ways the entrepreneurs have proven self-awareness in every meeting and if I don't think that they show that, I won't invest in the company."  The fact that ambition, grit and determination rank highly should not be a surprise. But the bar on ambition seems to have risen. Founders are expected to be reshaping the future of their industries and have global designs. In many industries, the UK or Europe just isn't big enough any more.

Execution is tied to getting things done, and done quickly. Investors want to know the founder can develop the growth plan and then show quick progress. AlbionVC, for example, now uses a proprietary framework that builds a "holistic picture of a founder's ability to scale." This is used during due diligence. Leadership is naturally a key attribute that investors seek. The ability to recruit and align a team behind a shared strategic vision is recognised as being key to unleashing superior team performance. This reinforces the leader's credibility, which provides the real moral authority. “Credibility is a leader’s currency. With it, he or she is solvent; without it, he or she is bankrupt.” - John Maxwell. Credibility can be a slow build process, hard to win and easy to lose. VCs say that fastest way to lose credibility is to miss deadlines for simple tasks. If you do this then "Apologise, don’t make excuses, and don’t do it again. If you do it again, it’s hard to continue to recover."

2. Other pieces really worth reading this week: 

The 2021 Mid-Year Global CVC Report
The latest CB Insights CVC report is out, providing further insight into corporate investment activity by region. CVC-backed funding to UK-based companies grew 178% year on year and has already surpassed 2019’s annual record of $3.4B.

How to Avoid the “Valley of Death”
An insightful article by VC, Allen Miller of Oak HC/FT: "As a growth stage SaaS founder with $5–10M in ARR, you have much to be proud of. You have made it to a point <1% of all startups make it to. You have achieved product-market fit, real customers find value in your software....But in the back of your mind, there is the next big looming hurdle to get through — the so-called “Valley of Death” that many a great SaaS startup has succumbed to.."

How to nail your product positioning
On the Orbit Shift podcast, April Dunford author of Obviously Awesome talks about how a company can identify problems in its positioning and how it can get its positioning right. A great listen, or for a 'quick start guide' click here.

How to find your zone of genius
Some great productivity insights from one of our favourite founders, Mathilde Collin, CEO of Front. "If you do what you hate, you’ll be miserable every single day. Yet a lot of people find themselves in that very situation, spending their time on tasks that drain their energy, fully convinced that there’s no other way. There is another way: to find your zone of genius..."

Happy reading!

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