1. Insights of the week
Stories are the key to investor engagement
Research has shown that audiences are more likely to engage with and adopt messages that make them feel personally involved by triggering an emotional response. Storytelling is a powerful vehicle for this. Stories in fact make us use our brains differently. Powerful cognitive processes occur when we become immersed in a story. They call that feeling — of being so lost in a narrative that we hardly notice the world around us — ‘transportation’. And they discovered that when we’re transported by a narrative — whether it’s true or imagined — we tend to view the protagonist more favourably and embrace the beliefs and worldviews the story presents.
In our latest blog, The power of storytelling in the investor pitch, we look at both the science and the art of storytelling. The science is rooted in understanding how the brain reacts to certain narratives by releasing a neurochemical called oxytocin, which then motivates cooperation with others. The art is then applying this knowledge by using the concept of the ‘narrative arc’. This provides the 'backbone' for the delivery of character-driven stories to help visualise mental images. Founders can use these images to frame their investment thesis, to stir curiosity, to challenge received wisdom, and to set out an alternative vision.
The most powerful presentations are open and honest. Great exponents don't just talk about their mission, they talk about their journey, their sacrifice, and their failures. They explain what it means to them and, critically, what they have learned. When investors reflect on such meetings, they will say they truly felt engaged (‘transportation’). By connecting with your audience at an emotional level you will appear more credible and your vision will be more believable. This is the basis upon which trust can be developed. No trust, no investment.
When CEOs make sales calls
In B2B startups, founders are often the first salespeople. Customer relationship development and the insights this brings, is essential in cultivating early adopters and ultimately reaching product/market fit. Even with the trend towards product led growth there comes a point where a classic enterprise sales process will be required, as we discussed in our earlier piece: When should enterprise startups transition to top-down sales? As the business starts to scale, large corporate deals will become a critical accelerant. Founder CEOs will then face a quandary – what role should they now play in the sales process?
In a recent study, HBR identified five distinct roles played by senior executives in relation to strategic customers - hands-off, loose cannon, social visitor, dealmaker, and growth champion - and examined the risks and rewards of each type. Finding the right customer-centric role continues to be an essential part of growth and a fundamental driver of success. They can boost revenue and strengthen ties, but they can also damage or even rupture customer relationships. The role of growth champion where there is a keen focus on both relationships and revenue building to unlock growth opportunities, will have the highest impact. It also serves as role model for others in the organization as the business develops.
For founders that come from a technical rather than sales background, this can be a difficult role to fulfil. Hiring an experienced head of enterprise sales can unlock the answer. Topflight operators will understand exactly how to leverage the CEO (and other execs) in strategic customer relationships, and this should be worked out on a customer-by-customer basis. Some customers will have clear expectations about the collaborative nature of the relationship at the top level. Their views must be carefully taken into account. Companies that don't listen may push such customers towards those competitors that do.
The follow-up investor email we forgot to send
Somewhere along the line, maybe it was the shift to relentless zoom meetings, we started to forget our manners. Investors really notice when founders don't send a follow-up email after a call, especially a pitch call. Common courtesy apart, founders are missing a trick here. This is a golden opportunity to capture what was agreed and the next steps. At a minimum this provides a date stamp on the dialogue for future reference. When you are looking back over the flurry of investor interactions during a campaign this can be a vital reference. But most of all it shows investors that you operate with good commercial awareness, and as the company's chief salesperson, this inspires confidence.
Sitar Teli is Managing Partner at VC firm Connect Ventures. She says, "Don’t send an essay — just a quick note with the key bullet points, takeaways from the meeting and additional answers to any questions you might not have been able to adequately answer during the meeting." Sending this email also enables you to develop a certain cadence to your interactions that will bring you to the front of the investor's mind more regularly. By summarising the agreed next steps you are also putting some gentle pressure on the investor to come through for you; to involve their colleagues, or perhaps arrange the next call. A professional reminder that the ball is in their court.
Don't forget to copy ALL those who attended the meeting, especially any junior team members that accompanied the VC Partner. Zoom pitching tends to narrow down the attendee list and in some cases it may just be 1/1. But when others attend, forgetting to copy in VC Associates, Principals or Researchers is a no-no. They are going to have an important role to play in assessing your business, so don't inadvertently put noses out of joint. And when that "sorry, we're going to pass this time" email arrives, as it will 9 times out of 10, that also deserves a polite follow up. This time a 'thank you' email. You may not feel it's deserved but this is the email that says most about you. That will get recorded in the CRM for next time. And there often is a next time.
Exit momentum increases as markets offer more listing options
Despite market volatility, total European VC exit value rose 13.9% YoY in 2020 to €18.6 billion. After a lethargic Q1, the European exit market gained momentum as the year progressed, closing on €7.6 billion in value in Q4, according to Pitchbook. The resurgence of public equities and lack of listings in the second and third quarters created pent-up demand for IPOs through Q4. The total number of VC-backed IPOs grew slightly to 50 in 2020 from 46 in 2019. With the backdrop of increasing IPO momentum in the US, listings are expected to be buoyant in 2021. European Tech businesses will continue look to NASDAQ in particular for listings, as we witnessed in 2020.
Post IPO valuations for many companies surged through 2020 creating a dilemma for VCs looking to provide returns to LPs. In a recent interview, Roelof Botha, who leads the US business for Sequoia Capital, one of Silicon Valley’s oldest and most respected VCs, says the firm will often wait years before it disperses shares to its shareholders from a portfolio company that has gone public. “The analysis we ran a couple of years ago is that if you bought every software company at the IPO and held it until today, you’d have made more money than if you bought when we did and sold at the IPO”. For example, when Sequoia first invested in Square in 2011, it paid 95 cents per share. The IPO price was $9 in 2015. When it distributed shares in December 2019, the price was $71.95.
A further consideration for European listings is the emergence of the special purpose acquisition company or SPAC. Only four European SPAC listings closed in 2020, while the US closed over 220. European exchanges and regulators are working hard to change rules around SPACs that allow vehicles to look and feel like a US structure. Among the key differences, U.S. investors can vote to approve the acquisition the SPAC proposes or redeem their funds in the event that they do not approve of the proposed deal. Those requirements are not in place in parts of Europe. This means that investors may be able to exercise relatively less control over SPAC acquisitions here than abroad. With a thinner investor base in Europe and a perceived lack of credible managers, European companies will continue to move into the US SPAC market until they see material changes closer to home.
2. Other pieces really worth reading this week:
UK to launch new research agency, ARIA
Big news for DeepTech. The UK government will launch the Advanced Research & Invention Agency, a new independent research body to fund high-risk, high-reward scientific research. Legislation to create the new research agency will be introduced to Parliament as soon as parliamentary time allows. The aim is for it to be fully operational by 2022. The Press Release stated: "ARIA, backed by a £800M fund will be led by prominent, world-leading scientists who will be given the freedom to identify and fund transformational science and technology at speed. The new agency will help to cement the UK’s position as a global science superpower, while shaping the country’s efforts to build back better through innovation".
Proposed changes to Capital Gains Tax will impact startups
A special report from Beauhurst, Balancing Risk & Reward, follows a survey on the proposed changes to Capital Gains Tax (CGT) to allow a more informed approach on the discussion of these proposals and their potential effects on the UK entrepreneurial ecosystem. The findings indicate the proposed changes could be potentially catastrophic for the UK economy. More commentary in Business Leader here.
How to overcome the challenges of switching to usage-based pricing
Hot on the heels of our article on usage-based pricing, a great article by Extra Crunch this week in handling the transition. "The shift from pure subscription to usage-based pricing is nearly as complex as going from on-premise to SaaS. SaaS companies exploring a usage-based model need to plan for both go-to-market and operational challenges spanning from pricing to sales compensation to billing."
When executives break
An excellent piece from Elad Gil's blog this week on the perils of key execs not scaling with the business. "When your company is scaling rapidly due to product market fit, one of the biggest impediments (or boosters) to growth will turn out to be the composition of your executive team. If your executives are not able to scale with the company, entire functions may be thrown into disarray and your adoption or revenue may stop scaling."
Why startups should hire an HR person sooner rather than later
In support of last week's insight on the critical role of HR, a great blog post from the archive of investor Christoph Janz on the subject. "If you can hire only one or two handful of people with your seed round, hiring anybody who doesn’t either code or sell is hard to justify. Being willing to invest in an internal recruiter or talent manager (or more broadly, an HR person) early on requires a lot of confidence. The right time for making that hire obviously depends on a variety of factors, but I would argue that most startups should hire an HR person sooner than they think."