2023 was a roller-coaster year for venture markets. We hope in some small way our weekly newsletter helped founders make sense of it all.
Here are snippets from the top 10 most commented on pieces we published. They led to some of the most interesting and insightful follow-up discussions with founders. For more, just follow the links.
- A collapse in venture funding levels brought great news for some. Most analysts are predicting that deal value for 2023 will be around half the level of 2022. But the bleak headlines through 2023 also created a number of misconceptions about what was going on across different stages and sectors. The pull back was mainly in big, late stage deals. Early stage deal sizes and valuations, especially at pre-Seed and Seed continued on a firm upward trajectory (at least through Q3). Some boards missed this trend and stepped back from priced rounds, potentially at great cost. But for those 'in the know' it led to securing investment rounds well above the deal size and pre-money valuations they had anticipated.
- After a peak in bridge rounds, startups must now find new investors. Research just published by Sifted has revealed that 51% of European startups need to close their next funding round within six months. Many have already been back to the well of existing investors during the downturn. A big focus has been bridge rounds, especially at Seed and Series A stages, but this seems to be changing as many incumbent investors have now over-extended themselves. A whopping 94% of founders now say they are planning to raise the next round from new and existing investors. This will be a huge step for some who have not yet experienced the challenging dynamics of the current market.
- Develop your customers, not your product. Selecting the right early adopters is vital, especially in B2B models. The best targets will share the founder's vision - they are living in that future now and can already feel the pain. Experienced founders don't try to convince customers to buy from them. They pick their customers based on their fitness to the different future they are designing. VC Mike Maples puts this so well; "You are building what's missing for them in that different future. It's going to give you a huge learning advantage and an acceleration because they tend to be bellwethers for other customers." And those are the very customers you should seek in 'beachhead' market.
- Your Board is probably going to fire you. The biggest misconception that founder/CEOs have is that the VCs they bring onto the board are there to 'add value'. As Jerry Neumann puts it in his blog: "The VCs are not on your board so they can help you, they can help you without being on the board. They are on your board for one reason: to monitor their investment so they can do something if things aren’t going how they want." He offers 5 pieces of advice. The most controversial: "Do not make your board members think in the board meeting". Above all, "Make it clear the company is doing the things that will make it quickly increase in value. If this is not (yet) the case, present them with the bad news but couple it with the actions you are taking to fix the problem......Of course, you have already told them all this 1/1, so you know how they will react....no surprises."
- Not all revenue is equal. Founders should think about the early stage of their company as having two distinct phases: finding product-market fit and finding go-to-market fit. During the first phase, the goal is to build a sticky product that solves a real problem. VC David Peterson says: "Charge enough to learn what you need to learn (e.g. will people pay for your product), but don’t try to maximize your value capture." In other words don't focus on revenue growth per se before you know you have product-market fit. This is a classic premature scaling mistake. Only in the second phase should the goal shift to iterating on the go-to-market motion and proving that the business can grow.
- What we have learnt from serial founders. In a recent study using our internal database of 'Investment Analysis' projects, serial founders scored higher in making their startups investment ready compared to first timers. This was underpinned by 3 areas where their experience was regularly brought to the fore: 1. Clear economic vision aligned with a mission to get to a particular destination, 2. Relentless focus on enterprise value creation, not just customer value creation, and 3. How to interpret and leverage investor relationships over the long haul. These insights helped create the framework we use in our recently launched Founder to Funder coaching programme.
- Founders must replace themselves. To enable the business to drive sustainable growth, founders must eventually replace themselves in functions they're both good at and enjoy. When you're both good at something and enjoy it, you feel like you are most productive, the most energised. It quickly becomes obvious to anyone around you that this is your 'zone'. But trying to stay in this zone too long can be of great detriment to the organisation. To have truly 'crossed the chasm' you must get to the place where most of your time is spent doing the things that only you can do. Prime examples for the CEO: vision and strategy, organisational development, fundraising.
- Writing is the number 1 founder skill. Leading investors claim that world-class founders embrace a common set of skills. When they see these skills, they take special notice. You might think that the top contenders for this list would be vision, execution, persuasion, perseverance, grit or resilience. But you'd be wrong. The most highly ranked skill is the use of language. As the 'Storyteller-in-Chief', telling your story in compelling ways is your most important job. Your plan is only as good as your ability to articulate it. Writing is the place to start. Why? Often the frustrating process of constructing concise and efficient prose is the best way of revealing limitations in our thinking and holes in our logic.
- Avoid poorly-matched investors. When founders reflect on failed campaigns they often say about investors: "They just didn't get it". But the real reason for the fail is often more fundamental; poorly-matched investors. This problem is on the rise due to; 1. The investor's current inability to invest in new startups (until they raise a new fund). 2. Not approaching the most appropriate partner (and others not diligently forwarding the opportunity on, which is more common than people imagine). 3. Getting the right industry/vertical match but not the right segment match. This really came into focus during the Valuation trend analysis initiative in recent weeks and will be the subject of a special piece we are writing for January.
- Founders are ignoring their own wellbeing. A recent study shows that the startup grind is taking a major toll on founder mental health. Against the backdrop of the most uncertain markets faced for years, 54% of founders say they are very stressed about the future of their startup. They accept the mantra of ‘no pain, no gain’ in pursuit of the long-term goal, but the impact is severe. 37% of founders say they suffer from anxiety, 36% suffer burnout, 13% have depression, and 10% say they have panic attacks. The main source of stress is the ability to fundraise. This topic sits at the core of our Founder to Funder coaching programme launched back in October.
Happy reading!