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


Weekly Briefing Note for Founders

25th June 2020

This week on the startup to scaleup journey:

  • New Business Models: The road to Product/Market fit
  • Future Fund Update: almost £240m now issued
  • Early stage insight: Covid raises awareness of Impact Investing
  • Venture Funding Insight: Fintech - a mixed scene coming out of Covid
  • US early stage funding insights: 'Painkillers versus vitamins'

1. News & Insights

New Business Models: The road to Product/Market fit

Some great sessions with clients this week on the journey to Product/Market fit. Different business model types (e.g. B2B v B2C, Offline v Online, physical products v virtual products) require very different methods to navigate through the process. Investors will want to see the key metrics that are being monitored and how they are revealing the hottest target customer segment – the 'beachhead' market.
Some aspects of this process are counterintuitive for founders coming from the corporate world where there is often a ‘build it and they will come’ ethos. In established businesses, iteratively adjusting the product to appeal to the broadest market makes sense. In a startup, ‘adjusting the market’ to find the most relevant user cohort for the solution, is the essential mantra.
Building a process to define, measure and systematically increase Product/Market fit requires just as much science than art. Investors are looking for leading indicators that show you are truly on the path to scaling. Early revenue alone is not enough.

This is not a new concept. The defining essay on this topic was published by Marc Andreessen back in 2007. "Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don't want to, telling customers yes when you don't want to, raising that fourth round of highly dilutive venture capital -- whatever is required." 

Future Fund Update: almost £240m now issued

The British Business Bank has now published diversity data of companies receiving convertible loan agreements. As of 23rd June and following 623 applications so far: £236.2m worth of convertible loans approved for 252 companies, 45% of funding to companies outside London worth £106m; Almost 80% of management teams are mixed gender, and 50% of management teams are mixed ethnicity.

Also, some encouraging words in the announcement: "Government has said it will keep the size of the scheme under review and consider increasing it if needed." More detail here

Early stage insight: Covid raises awareness of Impact Investing

Impact investing - the intentional use of technology and science to benefit people and the planet - is becoming a mainstream topic in the Tech investing world. Covid is accelerating the adoption of new investment strategies for VCs and other institutions, including some major family offices and CVCs. Just announced today, Amazon has committed $2 billion to The Climate Pledge Fund, a venture vehicle that will invest in companies addressing sustainability and low-carbon challenges. 

Alongside this, the Global Impact Investing Network has just published its 2020 Annual Impact Investor Survey. This estimates that the impact investment market has reached $715 billion in 2019, with an estimate of about 1,720 organizations now involved in managing funds for those who want to make a financial return from investments that also have beneficial social or environmental outcomes.

In a piece for VC Cafe on 19 June, Sir Ronald Cohen, chairman of the Global Steering Group for Impact Investment and the man known as “the father of British venture capital” discusses how technologies that intentionally tackle social and environmental issues are becoming a greater focus for investment. This is an expansive piece with many excellent references. If you are looking for additional reports on the topic also check out Good Tech Labs, who are about to release a new report into 'How investors, incubators, corporates and development institutions across the world partner with impact tech entrepreneurs and reinvent themselves.'

“This is part of a process taking place in the world in the past decade,” writes TechForGood CEO Omri Boral, “in which the approach of organizations, investors and countries towards social and environmental issues is changing from seeing them as a problem to becoming an opportunity.”

Venture Funding Insight: Fintech - a mixed scene coming out of Covid

The fintech sector has become one of the success stories of the UK investing scene over recent years. As it has grown, new segments have emerged, from payments to trading, infrastructure, insurance and many others. The impact of Covid though has not been uniform - we have seen acceleration in adoption in certain segments while others have slowed. For example, one of the biggest long-term beneficiaries of Covid-19 will be payments companies enabling the e-commerce sector. Real estate, on the other hand, has been hit hard.

But the story for fintech is now more nuanced and investors are cautiously trying to pick the winners as we emerge from Covid. Analysts are starting to sift through the latest market data to see which sectors are going to thrive and those that may only just survive.

Some great insights over the recent week have been provided by CB Insights in the US and In an article in altfi this week. The transition to digital across many sectors will be accelerated as with this comes the potential to cost cut and improve services. Insurance is a key opportunity according to CB Insights: "Digitizing key value chain operations (like underwriting and claims management) will be essential to improve operational efficiency as insurers look to cut costs. Successful insurers will likely have to rely on B2B insurtech startups more in order to improve their digital capabilities."


US early stage funding insights: 'Painkillers versus vitamins'

We regularly keep an eye on US investment activity to spot new trends that may be coming to Europe. As the overall pace of investing continues to slow, VCs are applying more rigour in assessing prospective investments across the board. The biggest shift in the post-Covid landscape is the emphasis on capital efficiency rather than growth at all costs.

For example, when assessing unit economics of business in the early scaling stage, investors now want to drill deeper into gross margins. In SaaS models, CAC (customer acquisition cost) in particular is being scrutinised more closely, as well as its relationship to LTV. Any business that has an LTV/CVC metric of less than 3 in early scaling is going to have a tough sell to VCs. Plus, a breakdown of CAC by channel, rather than 'blended', is also now essential to understand where the most capital efficient growth strategies lie.

Investors want to invest in mission critical solutions, or as David Sacks of Craft Ventures says: "Painkillers rather then vitamins." His key SaaS metric of 'Burn Multiple' is gathering adoption. Burn Multiple = Net burn in the period/Net new ARR in the period. In other words this assesses burn as a multiple of growth. In early seed stage businesses where revenues may be zero this can't be applied, but in Venture or Growth stage companies where ealy scaling has begun, VCs are looking for burn multipliers of less than 3 (i.e for every $1 of burn $3 of revenue is generated). Those with burn multiples of less than 1 will be strong investment prospects.

An excellent assessment of the SaaS market by McKinsey looks at the profitability question in some detail. Margin-focused initiatives must receive the right attention. Software leaders need to look function by function and identify areas where even modest restructuring can improve efficiency and the customer experience. 

Investors also expect to understand the impact of Covid and what adjustments have been made to the operating model. Founders that have been slow to react or are trapped in legacy thinking that may limit scaling will struggle to engage investor interest.

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

Following on from last week's piece "Standing on the shoulders of giants" by Benedict Evans, this widely read independent analyst provides an excellent synopsis of Apple's WWDC 2020 in his newsletter. This covers all the most controversial announcements and a very useful insight for anyone developing products as part of the Apple ecosystem. The biggest announcement was that Apple will move the Mac from Intel CPUs to the proprietary ARM-based chip family that it already creates for iPhones and iPads. Many other insights including news on their contact tracing app for Covid, now to be adopted in the UK.

For those developing mobile products and are seeking to understand what is happening in the mobile comms world through the impact of Covid, the Ericsson Mobility Report June 2020 just released provides excellent insight and analysis. The report looks in detail at how 5G will play a significant role in restarting economies.

How Europe can dominate the next decade of tech. We attended an excellent briefing organised by Sifted and Dealroom for the launch of its EuropeanStartups data platform. This initiative is curating all European startup data in one place with the aim of facilitating informed conversation and collaboration across the continent’s different ecosystems. An excellent panel including Saul Klein from the venture capital firm LocalGlobe; Klaus Hommels from the venture capital firm Lakestar; Megumi Ikeda from the corporate venture capital firm Hearst Ventures; Roxanne Varza from the startup hub Station F; and Peteris Zilgalvis, head of the digital innovation & blockchain units at Digital Single Market in the European Commission. The full write up is here.

Happy reading!

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