Duet Partners
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Weekly Briefing Note for Founders

24th September 2020

This week on the startup to scaleup journey:

  • Direct to Consumer favours startups
  • Board management is a critical success factor
  • Pivoting insights several months on
  • Expanding to the US
  • 'Warm intros' undermine diversity

1. Insights of the week

Direct to Consumer favours startups

Some revealing discussions over this past week with consumer product startups. The pandemic period has forced many to re-evaluate channel strategies. Direct to Consumer (DTC) is being prioritised by many startups seeking to simplify their go to market plans and raise margins, as we have seen with recent case studies. Established brands can be unwilling to 'go direct' fearing they may upset existing retailer relationships, so new entrants with strong consumer propositions can outflank incumbents.

For those looking to scale up initial sales the DTC model has several key advantages: It enables a better understanding of the customer; it provides a faster route to market; and there is increased control over brand, product, and reputation. Investors are particularly keen that startups gather extensive data on their consumer relationships to enable behavioral insights, so will often favour this model in the early stages. 

The challenge as ever is brand awareness. How does a startup bring its first product to the attention of consumers? How to avoid the ecommerce graveyard? Part of the answer lies in creating an 'online community' where consumers can find and share knowledge. Commonly, this is an authoritative blog site that is the landing zone for consumers, combined with 'shock and awe' launch storytelling. This can establish a high degree of mindshare very quickly when compared to a more subtle, slow growth strategy. Once established and generating revenue, a more diversified channel strategy can then be developed.


Board management is a critical success factor

Board management has become a hot topic with founders over recent months, especially with drastic strategy adjustments and rapidly constructed bridge rounds to extend runways. Many CEOs have said that this period has really tested the capability of the board and, in particular, how it interacts with investors. However, without a 'playbook' to create and develop an effective board at early stage, mistakes get made that are very difficult to remedy.

Board size should gradually increase as the company matures and transitions through each stage of evolution (Seed, Venture, Growth,...). The biggest anxieties have been expressed by founders of Seed stage businesses that have already taken institutional investment and along with it the appointment of an Investor Director. In some cases investors become board observers (rather than taking on the more onerous director position) but can effectively exercise similar control on strategic matters through their investor rights. If such control is practiced insensitively - to purely protect the interests of the investor rather than the Company - this can effectively neutralise the board's authority.

A reminder to all startup founders that the terms under which institutional money is procured are as important as the money itself. Unless you have clear leverage to negotiate terms that will allow the board to operate relatively unencumbered, your board runs the risk of being hampered in its effectiveness. Serial founders often say that curating the composition of the board is one of the most critical factors in their success. 


Pivoting insights several months on

We have been reflecting with several founders this week on the pivot process. Whilst the jury is still out on whether some pandemic-induced pivots will ultimately succeed or fail, we already have some useful insights. The most unlikely is that the crisis highlighted shortcomings that were already looming, but had not been proactively dealt with. Most notable being early product diversification before product/market fit had been truly nailed down ('premature scaling'). Strains of the famous Winston Churchill quote, “Never let a good crisis go to waste.” 

Many also talk about the biggest challenge being the human element - how difficult it is to have everyone let go of the old idea and start moving forward with the new. Rapidly undertaking a change to the business model can leave employees feeling lost and uncertain. Founders that have managed to keep the team on task and motivated stress the importance of weaving a compelling story around the revised vision.

As we highlighted in our recent blog, effective communications with all stakeholders becomes almost as critical as the operational side. This reminded us of some great advice from Stewart Butterfield, co-founder and CEO of Slack back in 2018. Slack started out as an online video game company before pivoting to a replacement for email. In an interview with legendary VC Reid Hoffman, Stewart talked about storytelling being the most potent tool in a pivot: "If there was one piece of advice I wish I could phone back and give to myself was just concentrate on that storytelling part, on convincing the people. Because if you can’t do that, it doesn’t matter how good the product is. It doesn’t matter how good the idea was for the market, or what happens in the external factors if you don’t have the people believing.”


Expanding to the US 

New research from Index Ventures reveals that less than 1 in 5 (50 out of 275) European tech firms are choosing to relocate their engineering base as they expand to the US, in stark contrast with the general strategy 10 years ago.

Instead, Europe’s top tech start-ups are managing to get the growth gains they need out of the US with a much smaller ‘on the ground’ footprint. Between 2008-2014 almost two thirds (59%) of European startups expanded, or moved entirely, to the US ahead of Series A funding rounds. However, between 2015-2019 this number decreased to a third (33%). 

Index has used this research to create an innovative guidebook for European entrepreneurs that uses a multi-choice questionnaire to help zoom in on successful tactics deployed by the research cohort, including their portfolio companies. It also includes a ‘personality test’ for startups to figure out at what stage they need to prepare for a US launch, as well as interviews with founders that have taken the leap.

At the same time, however, Index found that European corporates invest three quarters (76%) less than their US counterparts on software, and this is normally on compliance rather than innovation. This means European startups are likely to continue to look to the US for exits to corporates.


 'Warm intros' undermine diversity

Research has shown that approaching a VC through their network is of vital importance. So-called 'warm introductions' are 13 times more likely to reach Investment Committee and be funded than cold submissions. The same research showed that women were also far less likely to have a warm introduction. As we have regularly highlighted, the movement to support more diversity within the founder population is gathering real pace. Several big VCs, notably Atomico, are blazing the trail here.

“We’d love to hear from you. The best way to reach us is through someone we mutually know.” is a phrase that can still be seen on some VC websites, but this is changing. We are starting to see more contact information appearing and VCs going out of their way on twitter to solicit direct contact from founders. Is this window dressing? Sadly, we think a lot of it still is. The 'warm intro' requirement is going to be very difficult to remove entirely as it is an engrained methodology - a filter that many VCs believe only allows through the most resourceful and the determined.

In the meantime, founders can do a lot more to help themselves when they make direct approaches. The most obvious is to only reach out to those VCs whose investment criteria align with your business profile. This will never be an exact science as VCs don't often publish this information, but it can be determined by studying their portfolio. If you explicitly tell a VC that you have done this homework first, that will very much count in your favour.

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

5G and IoT: ...how next gen mobile connectivity will unlock new opportunities
A very useful primer in UKTN on the impact of 5G. “The main benefits of a 5G rollout will be realised by machine to machine communications – systems where the latency change from 0.2 seconds to 0.02 seconds is critical. Any system which is requiring near-instantaneous feedback will benefit from this, whether it is traffic signal control, autonomous driving, or remote surgery robots.”

Birdie Series A pitch deck
Social care platform Birdie raised €7 million ($8.3 million) in Series A funding from French insurance provider AXA in 2019, having previously netted a €2.5 million ($3 million) seed round from AXA's startup studio, Kamet Ventures. Here are the core slides from their teaser deck. What we love: Simplicity (powerful use of graphics and icons); the slide headings tell the story on their own; well articulated Problem/Solution thesis; and great evidence of progress scattered throughout.

The Cloud 100
Here is this year’s Forbes Cloud 100 list, the annual ranking of the world’s top private cloud companies, where this year's standouts are keeping businesses surviving—and thriving—from real estate to retail, data to design. Covid-19 hasn’t slowed this group down. With a record combined value of about $270 billion and at least 87 companies valued at $1 billion or more—up from 65 a year ago—the Cloud 100 list is bigger and stronger than ever before.

IPO frenzy nets billions for VCs 
In the midst of the pandemic, the IPO market is providing staggering returns for VCs, filling coffers once more for further investment. The headline act last week was Snowflake that IPO'd at $33B, the biggest software IPO ever, then gained almost 100% to $64B in a day! As recently as January 2018 the company was valued at a meagre $1.5B. Snowflake is a cloud data warehousing firm that helps blue chip companies analyze and share data in the cloud. The company is still loss-making but racking-up huge top line growth. A full round-up of 2020 tech IPOs is here.

Diversify your vernacular
As more founders and investors become bloggers, the power of the written word continues to rise in significance. Yet this is a skill that doesn't come easily and we could all use some help. One of my favorite coaches on the subject is David Perell whose own website and blog is a treasure trove of ideas and guidance. I try and find time every week to read one of his works and this week found fresh inspiration in his latest piece, Diversify Your Vernacular.  

Happy reading (and watching)!

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