Duet Partners
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Weekly Briefing Note for Founders

1st October 2020

This week on the startup to scaleup journey:

  • How to shift from Founder to CEO
  • Funding at Seed stage starts with relationships
  • Boards need a shake up
  • Inside the mind of a leading Deep Tech VC
  • 'No code' - the latest cloud trend gaining investor interest

1. Insights of the week

How to shift from Founder to CEO

Not all founders become CEOs and there are plenty of CEOs of high growth businesses that have never been founders. But understanding these roles and the pathway to transition effectively from founder to CEO needs to be better understood if we want to see more founders becoming the best long-term CEOs. The roles are different, not just in the technical sense but more so in the mindset required. Understanding this mindset transition and the personal development opportunity that accompanies it is vital for both founders and early investors who want the best for their promising startups.

Founders of companies that reach real scale say there are two distinct phases. Phase One (which is the Founder phase) is all about building a great product and finding clear product/market fit. Phase Two (which is the CEO part of the journey) is about building an enduring, sustainable company. As a startup Founder/CEO, you also begin with two different tasks that may seem like one but are actually different - being a manager and being a leader - and you must excel at both to succeed. Understanding how these two aspects evolve through each phase is essential, yet this is often poorly understood by early stage boards that should be supporting and developing founders.

Early stage investor NfX has studied this topic and produced some great insights: 5 Mental Models to Shift from Founder to CEO. The starting point is about understanding the one thing you’re trying to achieve (your North Star) so that you won’t be distracted or led astray when things get tough or when there’s pressure from different constituencies of your company to change course. To hold the ship together, and to keep everyone moving in the direction of your North Star, you need to learn how to gain their enduring trust. This is the linchpin for everything else. No trust, no transition.


Funding at Seed stage starts with relationships

The biggest difference between Seed and Venture stage funding is that in the early stages you will have less evidence that your idea will gain traction. Once your business begins to scale, things change. You will have real customer validation points to share. Armed with a killer story you can then go out and drive a strong (Series A, B..) campaign. You may only get one shot with some investors, so you need to line up your evidence and be pitch perfect. But in earlier rounds investors will be placing a big bet on you, your vision and your promise. That's why at Seed stage you have to sell yourself first - and this takes time.

Developing the key investor relationships well in advance is therefore critical; without these you simply won't be able to build the trust that is so essential. Don't forget, this cuts both ways. You want to be assured that any Seed investor - especially an institutional investor like a VC - is the right match for the multi-year journey ahead. So you must start early, well before you have crafted your pitch deck. We are already helping several founders prepare for funding events scheduled for next Spring and target investors are already being quietly 'warmed up'. This is why we provide Guided Campaigns at Seed stage as well as Managed Campaigns for later rounds.

For an investor take on this relationship-building phase read this excellent piece by Sequoia. Founders are often nervous about starting the courting process too early, but these interactions can be casual — no presentation necessary. There's an art to the tease and this can be planned and rehearsed - you mustn't just stumble into it. In particular, know what to hold back for later. You should expect that some of these casual engagements deepen while others will taper off — but that’s the nature of any marketing and sales process. And when the time is right, you’ll be able to quickly identify who would make for a valuable long-term partner.


Boards need a shake up

A big response to last week's comments on board management. We've hit a nerve and there are a lot of frustrated founders out there! The contribution of investor directors has been the biggest talking point. Aline Eibl seems to have been listening as her article in Sifted really hit the spot this week. "Investors are mostly capable and experienced people, but rarely do they meet the main criteria for a board member: relevant, diverse and independent." Independent directors are a critical counterbalance, yet only a quarter of startups have them. As Eibl says, "Independent advice is critical — to deepen perspectives and find new ones, for conflict resolution and building bridges, mentoring and, most importantly, bringing in a set of diverse viewpoints." Independents can also help keep investors in check and ensure debates focus on the company's interests, not the narrow self interests of the investors. 

As the business grows, so too the role and composition of the board must evolve. The pressure is to increase the number of board members as a function of the amount of capital raised i.e. by adding more investor directors, but this is where the problems start. Instead, the board should increase only as a function of stage. At Seed stage the board must be kept small (3-5 max) to be able it to cope with the very dynamic circumstances and high communications frequency. At Venture stage, it will inevitably need to expand as major Series A institutional investors will expect a seat. Independents remain vital and those that have specific stage experience (in particular the next stage you are targeting) can be hugely valuable. They will understand how to set and measure progress that is relevant to the maturity of the business, and this will help keep board meetings on track.

Founders setting out on their journey have a unique opportunity to shape the board they want. But through various Seed rounds, especially unplanned rounds that depend entirely on incumbent investor support, plans can go awry. For founders to keep the upper hand on board curation, the secret lies in being able to drive continuous growth and thus the need for further investment as the fuel for this growth. This will almost certainly require new investors with much greater firepower. Institutional investors (e.g. VCs) that lead these new rounds will often use their investment as leverage to clean up the board to properly serve the future needs of the founders and the business. For some founders we have advised this has been almost as valuable as the cash itself!


Inside the mind of a leading Deep Tech VC 

Josh Wolfe is co-founder and managing partner at Lux Capital, a US fund that invests in the true frontiers of technology. He is an advisor to the US Government on emerging technologies, and a lecturer at MIT, Harvard, Yale, and other top institutions. His mantra “The best way to predict the future is to invent it”  leads him to find entrepreneurs and scientists across the globe that will make this happen. His insights on the future of tech are eagerly followed by many within the Deep Tech venture ecosystem and for a taster, just listen to this inspirational interview he gave back in April '19.

His perspectives on startup leadership are worth listening to as they remind us how much store investors put in the ability of the founder(s) to communicate effectively. This is not always a trait associated with inventors and scientists, but is a key item on his checklist of founder attributes. He talks about the art of building the narrative around the mission, not just to make the story memorable but to convey meaning and create an emotional reaction. “People who understand people, and are really influential with people, are almost always predictive of great success...Somebody who’s a great storyteller is perfect for a startup because they can recruit really well."

One of the things that goes through his mind during a first meeting is will this person be able to raise again? In other words, can he visualise them pitching for the big scale up round that will (hopefully) come? He says, “At root, we are trying to find brilliant people and back them, and get really, really lucky...Technologies change, businesses change, and markets change, but human nature is a constant”. To underline his belief in investing in the person as much as the idea he quotes Schopenhauer: “Talent can hit a target that nobody else can hit, and genius can hit a target that nobody else can see”.

For more perspectives from the Lux team see their excellent Medium page, and for more insights into Wolfe's mind read these podcast notes.


'No code' - the latest cloud trend gaining investor interest

No code startups - or perhaps more accurately low code - are creating applications without needing developers to create code. This is all being made possible through the convergence of three different capabilities in the cloud: API frameworks, pay per use cloud based services, and drag and drop UI frameworks. The benefits can be significant: Developer efficiency goes up as the task is essentially one of integration rather than origination; there is less need for experienced developers as non developers can now create basic workflows; and this also gives rise to a thriving app store economy for cloud based components.

Whilst not a sector in itself - no code it is essentially an implementation methodology for SaaS companies targeting the enterprise - many players are getting categorised in this way. There is real investor buzz around the area and we are regularly seeing funding announcements under the no code banner. Techcrunch estimates that no code startups are on pace to raise around $500 million at the very least in 2020. "In the same way that PCs democratized software usage, APIs democratized software connectivity and the cloud democratized the purchase and deployment of software, no code will usher in the next wave of enterprise innovation by democratizing technical skill sets."

There is also a strong M&A trend emerging: Google just acquired AppSheet, AWS has Honeycode, and Microsoft Azure has PowerApps. As we have already seen, Salesforce made a bonus play in this area - by buying Vlocity, they gained a verticalized version of Salesforce, and they also got a no code platform. Low code and no code tools are expected to continue growing in popularity this year, and the market could be worth $52 billion by 2024, according to analysts at RBC Capital Markets as reported by Business Insider.


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

Future Fund hailed a success
On 24th September, the Chancellor extended the government’s three Coronavirus business interruption loan schemes and the Future Fund. The extension aligns all the end dates of the schemes to 30 November, ensuring that there is further support in place for those who may need it. The British Business Bank has also just published Future Fund data that gives a detailed picture of the 711 companies that have been approved for £720m worth of Convertible Loan Agreements since the scheme was launched on 20 May. There have been 1,073 applications in total since the scheme was launched. 40% of funding has gone to companies outside London worth £291.1m. 82% of funding to mixed gender senior management teams, and 65% of funding to mixed ethnicity senior management teams.

Key trends in the health & wellness tech industry
Venture investors funneled around $2B to retail-oriented companies in the health and wellness industry during Q2. The biggest global health crisis in a century has VCs ready to back startups offering telehealth tools and much more, according to Pitchbook's latest tech research.

Structural Problems In The European Venture Capital LP Landscape
critical assessment of the European VC landscape from a high-profile Limited Partner. "With fewer sophisticated LPs in Europe and more focus on career risk mitigation, less emerging managers with unusual backgrounds will succeed. For LPs, backing another prior investment banking or consulting professional is the venture equivalent for “Nobody ever got fired for buying IBM.” I’m convinced change needs to trickle down from the LPs’ mindsets to GPs, to the rest of the tech ecosystem." 

IPO market frenzy could be just the beginning
After several years of staying private longer, more tech companies finally see an opening to go public or safely test the IPO waters. This week we see a pair of closely watched venture-backed companies make their debuts on the New York Stock Exchange. Data-mining specialist Palantir Technologies and project management platform Asana are both testing out the still-novel direct-listing process. Scores of other contenders in the tech industry are waiting in the wings to go public, and many are business-focused software providers that private investors have valued at $10 billion or more. Is this a major sea change in the making? Some great analysis here.

New $1B Deep Tech fund for Europe
Spotify CEO Daniel Ek pledges $1Bn of his wealth to back Deep Tech startups from Europe. At an online event this week, Daniel Ek, the founder of Spotify, said he would invest 1 billion euros ($1.2 billion) of his personal fortune in Deep Tech “moonshot projects”, spread across the next 10 years. Ek indicated that he was referring to machine learning, biotechnology, materials sciences and energy as the sectors he’d like to invest in.

Happy reading (and watching)!

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