Duet Partners
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Newsletter

Weekly Briefing Note for Founders

19th November 2020

This week on the startup to scaleup journey:
  • Founder/Market fit will confirm your competitive edge
  • Go where you can win: find Minimum Viable Happiness
  • Corporate partnerships can make or break
  • Don't miss this unique PR moment

1. Insights of the week

Founder/Market fit will confirm your competitive edge

One of the biggest risks a founder can take happens at the very genesis of the business. This is especially true for second-time founders. Investors at Seed stage will be wary of founder overconfidence and the danger that they miss the trip wires. There are three big ones to look out for: 1. They find a business opportunity to potentially make a lot of money but there is poor alignment with their background or skill set; 2. Someone else gives them the idea and they do it because they'd like to work with this person; 3. they were superficially interested in the idea and a VC said they would fund them if they did it.

As VC James Currier says "In any of these cases, the trap is a lack of authenticity." Experienced investors have seen this all before. A year in you realise you’re not actually that interested in the idea because you pursued it for the wrong reasons. Investors will therefore look for a blend of key attributes: Obsession - this will enable you to endure for the long haul that it takes to build a company without burning out or losing faith; Founder Story - Customers have to identify with the founder’s story and believe that there’s a compelling “why” inside the founder; Personality - Are you the kind of personality that can fit in and make connections with your peers in your market? Experience - is vital, but too much experience is not always a good thing and can even be a blocker to innovation.

The business model being pursued is also a critical determinant for many investors. B2B/enterprise is considered by many to be the hardest to learn. If you don't have this background, investors will be very circumspect. Prior sectoral knowledge can also be crucial in those markets that are highly complex or specialised such as Pharma, BioTech and to a lesser extent Healthcare. Passion and determination are vital but will be unlikely to trump these key factors. Why? Investors will expect you to identify and exploit critical insights in your chosen market that underpin a compelling problem/solution thesis. Without an almost unnatural ability to sniff these out you may not have the edge that your competitors will.


Go where you can win: find Minimum Viable Happiness
 
Choosing a viable beachhead market is critical for any startup. You're searching for a high density of early adopters that will love your product. This is your test bed for initial scaling. Monitoring progress in the early stages to determine if you are onto a winner - i.e. heading towards product/market fit - before spending too much is vital. Marketplace businesses provide some of the greatest uncertainty for founders as well as investors, so choosing the right metrics to monitor is critical. For example, if you’re pitching for a Series A on the back of $1M GMV (gross merchandise value), you may well fall short of the mark. Why?

Sarah Tavel, General Partner at Benchmark Capital puts it well: “Much like MAUs is a vanity metric for consumer social companies, I believe GMV is a vanity metric for marketplaces. GMV does not get to the heart of whether you are creating enduring value or not. No matter how large an incumbent may be, they are always vulnerable to a new entrant that makes buyers and sellers happier. In other words, happiness — not scale — is your moat.”  Sometimes the more constrained the problem the easier it is to solve, so happiness is often heavily correlated with market focus. The art is not refining the solution you have built but refining the market segment that has the matching problem. Go where you can win.

Some argue that an NPS (net promoter) score is the critical measure but more and more investors aren’t convinced. A Sean Ellis analysis has become increasingly fashionable: “How disappointed would you be if you couldn't use [company/product name] anymore?” Adding in a Minimum Viable Happiness (MVH) metric when revenues start to build can be very powerful. The best MVH metric for Marketplace businesses is net revenue retention, but this will vary by sector. What’s your MVH metric?


Corporate partnerships can make or break 

Despite the pandemic, Corporate investment into private businesses looks set to break all records in 2020. This is great news for founders seeking new sources of capital. A strategic investment can also bring more than cash, it can cement an important commercial relationship. Corporate investors therefore have the potential to be amongst the most valuable participants on a startup’s cap table. But there are some key considerations and these vary depending on the stage of the company and the type of commercial arrangement. If founders get this wrong it can undermine the value of the business, particularly in the eyes of financial investors such as VCs. In some cases it can render the business unfundable.

The current increase in Corporate investment across Europe is being heavily driven by deals at Late stage. For example, Swedish battery developer Northvolt just completed a €508.6 million round with participation from automotive conglomerate Volkswagen. But we are also seeing some strategic investments at early stage (Series A, B) where corporates want to keep abreast of disruption, staying close to technological developments improving the functionality, efficiency, and cost of key innovations. Investment at this stage can act as a serious endorsement of the startup's approach, especially if the investment is accompanied by a commercial deal. This can range from becoming a strategic vendor, a supply chain partner, a distribution partner, a co-marketing partner, to a technology licensing partner.

During due diligence, financial investors will scrutinise the commercial and investment terms associated with existing corporate relationships. They will weigh the benefits of commercial expediency against the likely impact on exit potential. For example, if commercial terms grant any form of exclusivity, especially in a licensing model, this could turn them off. Equally, if the corporate has preferential investment terms, especially the right of first refusal in an acquisition scenario, this will be a big red flag. Founders must therefore seek to negotiate investment terms that both endorse the commercial viability of the business in the short term and elevate the value of the business over the long haul. 


Don't miss this unique PR moment 

The immediate benefit of closing an investment round is not the money. Of course that's important, but the value of this will play out over time. There is something else that will provide an immediate adrenaline surge of opportunity that founders must grasp, otherwise the moment will be lost: the PR opportunity. This is a unique moment to boost your company profile, accelerate your recruitment pipeline, and illuminate the radar of future investors. The sad thing is that most founders miss this opportunity completely. 

Before deal completion, take the initiative and write a draft press release. This may be the time to engage a suitable PR firm. Coordinate with your investors so this has everyone's buy-in. Put together a short list of publications that you would love to cover your story. Wait until the deal is inked, then starting at the top of the list offer an exclusive as that will guarantee you placement. Photography is critical, so get some professional shots taken with your team. On publication, hit social media and get the word out as widely as possible. Write a blog post and link to the press release, expanding on your thoughts for the future.

This 'all guns blazing' approach is part of your land grab. If you've been lucky enough to bring in a top tier fund this will help scare off other investors from investing in your competitors. It's also part of your recruitment drive, and provides the perfect backdrop to filling the hiring funnel. One of the less obvious benefits is that it also boosts team morale. Employees will get a rush when they see their company's profile being raised and they will spread the word too. Growth often depends on network effects - don't miss the opportunity to ignite this one. 


2. Other pieces that are really worth reading this week: 

A shortage of investment-ready startups is creating VC anxiety
In our most read blog post of the year so far, we discussed how strong investment trends in the VC asset class are disguising a steep decline in investment deal numbers. Lack of quality deal flow and increasing competition is starting to cause investor anxiety and may pose a threat to the very existence of certain funds over the longer term. This presents an opportunity for founders.

Britain introduces rules to protect tech firms from overseas takeovers
As reported by CNBC, the U.K. government introduced new rules this week that are designed to protect Britain’s best and brightest companies from being gobbled up by other, potentially hostile, nations. Some have pointed out that the new rules could potentially make it harder for founders and their investors to sell companies. The new bill will ask companies to seek approval for any potential deal - from takeovers to asset and intellectual property sales - involving a range of sectors, such as defence, energy, transport, artificial intelligence and encryption.

Enterprise software is recession proof
An article in Business Insider: Cloud-based enterprise software companies seem recession-proof, according to a new report from OpenView Venture Partners with data from over 1,200 enterprise cloud software firms between 2018 and 2020, with 400 respondents this year. This is based on US market data but many of the insights - especially on product-led growth, which in our view is a must read for any SaaS business - have global significance.  

What LPs are looking for
On the eve of ALLOCATE, Europe's leading tech VC to LP pitch and networking event, a report - The Capital behind Venture 2020 - reveals what Limited Partners (LPs) are looking for in VC funds. The report surveyed 63 LPs, including big names like the European Investment Fund and the British Business Bank. We are reminded that it's not just founders that need to play the long game. It's the same for VCs too. Just 20% of LPs surveyed invested in a fund they’d known for less than a year. 50% say it takes them one to two years to build a relationship with fund managers before investing, while 30% say it takes more than two years.

ScaleUp Annual Review 2020
Just published by the Scaleup Institute, the 2020 report provides deep insights into the UK scaleup scene. Headline findings are 1. Selling to markets at home and abroad has become scaleups’ biggest challenge. Not enough scaleups are getting the opportunities to supply large corporates or work with government, and 2. Scaleup leaders rated access to growth finance as the second greatest hurdle to growth alongside recruiting the right talent and skills. Four out of ten scaleup leaders say that they currently do not have sufficient capital to meet their growth ambitions. This echoes our own concerns highlighted in last week's newsletter.


Happy reading!

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