Duet Partners
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Weekly Briefing Note for Founders

23rd September 2021

This week on the startup to scaleup journey:
  • Pitching to US investors
  • Expanding to the US
  • Critical Mass Theory of Startups
  • Picking the right early adopters

1. Insights of the week

Pitching to US investors

In 2020, US investors ploughed more capital than ever before into European startups. VC deal activity with US investor participation hit a record €23B across 1,149 deals, according to Pitchbook data. US investors participated in five out of the six largest deals in Europe, attracted by the maturing VC ecosystem and more palatable valuations than the US market. This investment activity represented a 19.4% year over year uptick and the signs are this growth is continuing in 2021. Founders are finding that they are pitching to US investors with increasing regularity. Whilst this presents greater opportunities for startups to access new and significant sources of capital, it also brings fresh challenges. Founders must now develop a greater understanding of what US investors are looking for. An awareness of the US investor mindset is vital. Whilst this varies from coast to coast, two factors are constants: First, the CEO as an industry thought leader. Second, the prospects for global growth, with the US market a vital element.

Study the profile of just about any CEO of a high growth US startup and the thought leadership aspect quickly becomes apparent. US startup CEOs actively orchestrate their public profile. In particular, writing regular blog posts, speaking at prestige industry events, being interviewed by high profile industry commentators (there are many great podcasts now), and developing a presence on social media. Twitter is the platform of choice, especially due to the fact that this where the big VCs are most active. 'VC Twitter' is itself a huge phenomenon. We might shun this degree of apparent self-promotion, but founders without a public profile will be seen as less open and more of an unknown quantity. Having a public image is now almost a necessity, particularly as the competition for new hires also intensifies. CEOs are now regularly writing articles on leadership, culture, diversity, and even their own hiring practices, amongst many others. "Come and work for our great, progressive startup that is going to the moon" is the message. VCs read this stuff too and it makes an impact.

US investors are also keenly looking for the growth mentality - founders that are eyeing global markets, not just the UK or Europe. Narratives must more vividly paint the picture of enormous potential, optimism, and ambition. As US VC Bethany Crystal says: "Many European-based founders want to present the full picture, including the bad stuff — and it’s good to be able to look at your business and see those things. But that’s not what investors want to hear all the time, and it’s not necessarily the image you want to be putting out. The best founders have those honest conversations, but they’re happening with their investors either one-on-one or in smaller groups."  US investors first want to hear the dream, what could be possible if money was not the limiting factor. Those founders that can confidently articulate a big vision will grab the most attention. The secret is then to align with the right VC partner, ideally one with investment history in the UK or European market, and start building that relationship as early as possible.

Expanding to the US

Fifteen years ago, building a major tech business in Europe was extremely difficult. Founders often chose to relocate their businesses to the US as early as they could. Here they could find tech-savvy customers and huge pools of talent and capital. Today, as a recent report by Index Ventures highlights, conditions are very different. Access to both capital and talent have dramatically improved. The State of European Tech Report confirms that "A Seed-funded company building from Europe has the same probability of scaling to a $1B+ valuation as the average Seed-funded company building from the US."  Now, US expansion is primarily for commercial roll-out; the market in absolute terms is just so much bigger. The Index survey of European and Israeli founders who have expanded to the US validates this, with 78% ranking ‘access to customers’ as their number 1 reason. Access to capital ranks 5th. As a result, startups that make the move are much more developed and better prepared than they were a decade ago. Attacking the US market is now part of the strategy for global leadership, often building on success in the 'home' market.

However, for startups with business models that are more dependent on enterprise sales, or whose funding strategy requires corporate investment, the European market can be an impediment to growth. The Index report does not hold back: "European corporations are still too conservative when it comes to innovative technology. They invest less in technology, and when they do, it is too often focused on compliance, rather than on business transformation. European software companies selling into enterprises are therefore forced to succeed in the US, before they are given the chance to do so in Europe. Until this changes, we will continue to see entrepreneurs crossing the Atlantic to scale and to list software companies."  And it's not just software companies, but hardware companies too, especially those in capital intensive DeepTech sectors. Here, corporate collaboration and investment are often the bedrock of the validation process for new technologies. If your startup is not somehow linked to the Pharma, Automotive or Telecoms industries, you will likely be looking beyond Europe for collaboration.

The roadmap for pulling off a US move can be complex. There are many important considerations, not least when to go, where to set up, and how to start operations. Then there are questions over US incorporation, legal and tax matters, as well as raising capital and hiring. In addition to the Index guide, pan-European VC, Speedinvest, which also has offices in San Francisco, has recently developed its 'US Expansion Guide for Founders'. This provides much useful advice on these subjects as well as highlighting important cultural variations within the business world. One of the most empowering differences here for European founders is the perception of failure. 'Fail fast, fail often' is the US mantra for founders, but in many parts of Europe it's unforgivable to make mistakes. In the US, failure is seen as an essential part of the learning process and those with these battle scars are often seen as more proven, resilient and backable.

Critical Mass Theory of Startups

Visionary Founders do more than solve industry and market problems. They create solutions to problems that people didn't even know they had - until they saw the solution. As VC James Currier says, "Market needs are often a lagging indicator of technological progress. In many cases, like the iPhone, we didn’t even know that we needed a thing, until the thing made us want it."  Visionary founders can see the opportunity for a new technology, a new approach, a whole new market. Critically, they can see the change coming years before others can. They can see the tipping point for this change - when technology, economic and societal trends converge - where exponential growth can be realised. Predicting this moment of inflection, and then enabling this moment, is the domain of the truly visionary founder. This tipping point gives rise to what VC Pete Flint calls the 'Critical Mass Theory of Startups'. He says: "What we see in many great founders is a clear understanding of the trajectory of emerging technologies, and when these technologies are on the cusp of a transition that will enable transformational product experiences." 

Whilst we live in an era where software is eating the world, the core enabling technology is the hardware upon which this runs: semiconductors. One of the most fundamental insights of the past 50 years is Moore's Law. In 1965 Moore observed that every couple of years the number of transistors you could fit on the same area of silicon was roughly doubling. And that would make those chips effectively twice as fast for the same cost. This enabled multiple generations of founders to exploit predicted advances in semiconductor technology years into the future. But according to researchers from Stanford and MIT, "The number of researchers required today [to maintain this trend] is more than 18 times larger than the number required in the early 1970s. Across a broad range of case studies at various levels of (dis)aggregation, we find that ideas — and in particular the exponential growth they imply — are getting harder and harder to find." Raw economics are now fighting against the further progression of Moore’s law. Is this a new inflection point?

This quest for fundamental breakthroughs in enabling technologies continues to inspire visionary founders across many DeepTech sectors. For example, areas such as quantum computing, silicon photonics, and a whole range of advanced materials that are transforming the world of electronics, will potentially have game-changing impact. The vision of these DeepTech founders is to push society towards new paradigms through invention and inspiring innovation. To do this they need to be master persuaders as well as inventors. They need to persuade co-founders, employees, early adopters and a whole ecosystem of partners and other supporters to join the movement. Not least they must persuade investors, used to the lower risk and faster ROI of software-enabled businesses, that the prospect for enormous value creation is now there. This is a heady task. But like a surfer who rides the wave, the visionary founder can feel the gathering power of the technological, economic, and societal forces beneath them. If they can convince investors that the moment of confluence is arriving, they will be in for a great ride.

Picking the right early adopters

As the MVP takes shape, founders seek out the first early adopters. The objective is to test the core elements of the value proposition, to obtain feedback, to learn. The proposition is built from the special insight the founders have and the MVP is the first serious test of this proposition. Selecting the right early adopters is vital, especially in B2B models. Some will share the founder's vision - they are living in that future now and can already feel the pain. The MVP provides the pain relief they so desperately seek. But some early adopters will not necessarily share the founder's vision. They may be more conventional thinkers that live in the present. Their mindset is to provide the shopping list of enhancements they want to see before they will consider the MVP. Many of these requests won't relate to the creation of the new future that the founders seek. They don't flow from the special insight that the founders have. In that sense, these customers will just become a liability and should be avoided. This selective approach is the essence of the Customer Development process. For some founders this can feel totally counterintuitive: After all, we were brought up with the notion that customers select us, not the other way around.

Mike Maples Jr. is co-founding partner at Floodgate, one of the most prolific seed and early stage VCs in the US. Before becoming a VC Mike himself was a founder. In a recent interview, he describes how he would approach prospective early adopters. He calls this 'going for the no'. "This may not be a good use of your time, but we do this [explain what we do]. If you don't need software that does this then I can save you 45 minutes of your time." Unless the customer then tried to pull him back in, to sell him on why they should work together, he would step away. He says bluntly, "You can't waste any of your energy on people who don't value your advantage."  Qasar Younis is co-founder of Applied Intuition, a Floodgate portfolio company. Maples cites Younis as a CEO that fully embraces this counterintuitive approach. His thought process is: "We're not going to try to convince customers to buy from us, we're going to pick our customers based on their fitness to the different future we are designing. We're going to select them and convince them to move with us."  Maples adds; "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."

As a VC, Maples is drawn to founders that espouse the customer development credo. In his evaluation he starts with the 'secret', the special insight the founders have that underpins the customer proposition they are building. If this is utterly compelling - he describes the moment he gets 'the shiver' - he interrogates the inflection points; the points of convergence that demonstrate the timing is now. He then wants to see which early adopters a founder has chosen to target. What research has been undertaken? Why have they been selected?  Why do we believe they will share the same vision of the future? Picking the right early adopters is not easy. A direct conversation is needed to carefully qualify and often it requires more, such as a demo. But then their intent must be clear and they should be starting to sell you on working together. The real test is will they pay for the privilege, for a product that is far from complete? If they are, then you are over the first major hurdle. As Maples would say, "You have started to bend the arc of the present to a different future". 

2. Other pieces really worth reading this week: 

The Ultimate Guide to Running Executive Meetings
From the First Round Review, 25 tips from top startup leaders. "What follows is a list of can’t-miss frameworks, tips and tactical ideas, from the C-suite folks at top startups like Superhuman, Asana, Lattice and more. Collectively, these leaders have decades of experience running executive meetings and are eager to share their hard-won lessons."

The Global Startup Ecosystem Report 2021
The 2021 Global Startup Ecosystem Report (GSER) from Startup Genome and the Global Entrepreneurship Network has just been released. With data from over 3 million companies across 280 ecosystems, the Report ranks the leading 140 ecosystems in the world, breakdowns by continent with regional insights, and founder-focused articles from thought leaders and experts.

The Exponential Age
Azeem Azhar, former VC-backed founder, creator of The Exponential View blog, and author of the new book The Exponential Age, gives founders specific hooks and non-obvious ways of explaining how quickly something’s going to change — right before it does. Follow this guy!

Happy reading!

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