Duet Partners
Tel: +44 (0) 20 7416 6630 / Email: partners@duetpartners.com


Weekly Briefing Note for Founders

24th February 2022

This week on the startup to scaleup journey:
  • Investment research lets founders level the VC playing field
  • Funding references must work both ways
  • 'Stealth mode' and why NDAs don't work

1. Insights of the week

Investment research lets founders level the VC playing field

In multimillion-dollar B2B sales, one fundamental principle underpins the selling process; understanding customer need. Without a deep appreciation of the customer problem, you won't be able to build a compelling proposition. Experienced B2B sales people also know that this understanding operates at multiple levels; there are company-level needs as well as the personal needs of the customer executive driving the deal. In the capital-raising process there are remarkable similarities. Founders that are selling $M's in equity must understand the needs of investors. This starts with knowing what kind of deals are in their sweet spot. Not only will this vary depending on the type of investor (VC, Corporate VC, Family Office ...) but also on the particular mandate of each fund. For example, company stage, sector, business model, geographic focus and typical ticket size can all be key criteria. It's also vital to know the most relevant partner to target as this enables strong personalisation of the approach. Such sales processes therefore require careful preparation. Whilst perfection may be the enemy of progress, this basic intelligence provides edge over others vying for the same capital.

The good news is that in the fundraising process, today's advanced investment research tools enable efficient discovery and screening of investors - both at the fund and partner level. This is at a degree of detail that was just not possible only a few years ago. As the investment world has become a smaller place, the scale of the most powerful datasets has mushroomed, some now detailing millions of companies and deals, hundreds of thousands of investment professionals, and tens of thousands of funds across the world. With cross-border investing becoming common at all stages, such global information is of increasing value. And with conventions over which types of fund would invest in certain deal types being shattered through 2020/21, datasets that incorporate every investor type and every transaction type - both private and public - are coming to the fore. Advanced data analytics and machine learning are also enabling new levels of analysis on this data. For example, being able to easily pivot datasets between companies, deals, and investors (including their individual funds and even Limited Partners) can lead to important, time-saving insights when identifying well-matched investors.

VCs and other institutional investors use these very same datasets to arm themselves with intelligence on companies of interest. To level the playing field it only seems fair that founders have access to equivalent information about investors. But the cost of the most powerful datasets, such as Pitchbook and CB Insights, puts them outside the budget of early stage businesses, especially when they may only be used occasionally. That's where professional advisors that use these platforms on a day-to-day basis can really assist. As a key campaign tool they are not only effective in identifying highly qualified investor prospects, but they help inform the overall funding strategy. They also enable other high value investment and M&A research including emerging market trends, financial comparators (e.g. valuations), and competitive analysis. Just as in every other facet of business life, data analytics is revolutionising how we research, develop and execute business strategy. Every company is looking for an advantage. In the competition for capital, information is power.

Funding references must work both ways

During the due diligence process, prospective investors will ask for references. These will be both customer references as well as personal references for the founders. The customer references are to validate the main 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 3 or 4 customer references on hand, and if you don't have these yet, backfill with the next best thing - for example, a credible prospect or partner who has 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-level contact (if this is B2B), and, most importantly, the need you 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 one or two 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 previous boss and sometimes other senior figures you may have worked closely with. They will also talk to current investors, especially VCs that know the company well. It's even been known for prospective investors to track down former advisors and executive-level leavers to get more of an inside track. 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 leading the deal, before any offer is agreed. When investors ask for references, this is the time to ask for theirs in return. After all, you 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 founders undertaking 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.

'Stealth mode' and why NDAs don't work

'Stealth mode' is a term used by startups to describe a period of secrecy prior to launch. Often the idea is to keep potential competitors in the dark to gain the advantage of surprise. The company works away quietly developing the product and will seek to execute NDAs with any 3rd parties necessary for essential collaboration. During this time the IP will be developed, patents will often be filed, and copyrights secured. Every week that passes gives the startup a potentially bigger first-mover advantage at launch. And so with few external distractions, all efforts can be focused on the core development. This approach can work for a while, but unless the company is internally funded through the initial product, the need to raise capital will likely dent secrecy ambitions.

A funding campaign usually requires a company to get out and shake the bushes. Startups create a buzz in the funding market, pumping up investor excitement and driving FOMO. For companies in stealth mode, fundraising has to be done discreetly and this makes an already difficult process 10x harder. For serial founders that may have already developed a roster of relevant investor contacts, 'stealth funding' may be possible. But two major factors will conspire to undermine such a plan. First, the concept of 'launch' is now regarded as something that only established companies do. They already understand the needs of the market and their customers. Startups don't have such relationships and must pursue an iterative process of early customer feedback to eventually arrive at product/market fit. Going to market blindly with no sense of product/market fit readiness could be a suicide mission that investors will simply not fund.

The second factor is the belief that the NDA can also be used with investors. This might just be possible for certain DeepTech companies in the technical due diligence phase. But for 99% of funding rounds, an NDA is an absolute no-no. Very few VCs will entertain the idea of signing an NDA for a whole host of reasons, not least the practicalities of ensuring confidentiality on the dozens of insights that are shared with them every week. They simply aren't going to expose their funds to such risk, at least not through the initial meetings. Even asking for an NDA can appear naive and be a mark down. Corporate investors will be more willing to entertain an NDA, especially if they want to dig deep on the tech. The challenge then is often the delay in executing the agreement itself, as corporate legal departments will want to demonstrate their 'added-value'. This may be a bridge worth crossing if there is a big prize in sight.

2. Other pieces really worth reading this week: 

How European software can play to its strengths
"A relative lack of top software companies threatens Europe’s economic competitiveness. To turn that tide, the private sector has to stop trying to play catch-up and take an altogether new approach." In this latest report from McKinsey, research points to three areas where Europe could take a lead and build large players by playing to the continent’s strengths: vertical B2B software, software platforms for digitizing small and medium-size enterprises (SMEs), and horizontal platforms built on European R&D excellence.

Founders vs. Operators
From the Sequoia blog, an interview with Frank Slootman, the legendary Snowflake CEO, who's developed a pattern of defying the imagined limits of what a specific company could possibly do. Sequoia’s Carl Eschenbach remembers, “When we brought Frank into Snowflake, at our first board meeting he said, ‘Let me tell you how I’m running the board meetings and how you’re going to participate. We’re going to keep this very simple. I’m not even gonna tell you anything about the good stuff that’s happening because you already know that—I’m going to dive into the shit that’s broken and how we’re going to fix it.'”

A different kind of leadership style
From The Observer Effect, an interview with Daniel Ek, Founder and CEO of Spotify, who does things very differently from other business leaders. About his board: "I don't think that they're there only for me. I think that they're there for my extended executive team: my direct reports and their direct reports. I will often pose strategic questions to the board, “Hey, I'm really struggling with this.” Rather than having them interact solely with me, I actually ask them to go figure out problems with the people directly involved in that project."

Happy reading!

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