1. Insights of the week
Founders must have a roadmap for each stage of investment
When planning for investment there needs to be a close correlation between the stage of the business as assessed by the founder and that assessed by investors. It may sound odd that such a difference can exist, but in our experience this is quite common. A clear awareness of stage is important as often investors will specialise in investing at different stages and have specific investment criteria aligned with those stages. Some will say they are Seed investors, whilst others say they will invest at Series A or Series B. This can be confusing as Seed is more a phase whilst Series A and B are rounds. As VC Hunter Walk says: “..now more than ever, we believe Seed isn’t a round, it’s a period of time where you are starting, learning and iterating to a business that has proven its core value proposition and raises a Series A to begin scaling.”
Founders must also be in tune with the fact that investment criteria will not just vary with stage but sector (e.g. Tech, Pharma, BioTech..), business model (B2C, B2B, marketplace..), as well as type of investor (VC, Corporate VC, Family Office, Government Funds..). Plus, criteria are also shifting with the macroeconomic environment; for example, the impact of Covid, the meteoric rise of cloud software, and the accumulation of record amounts of dry powder in VC coffers. Finally, we must also identify who the true conviction investors are versus the momentum investors. Conviction investors are driven by the cause, whilst momentum investors (the majority of VC) are driven by hard evidence that the business is moving at pace and has true 'outlier potential'. This is increasingly the case at Series A, where the bar is constantly being raised and that final stride to exit Seed stage (sometimes referred to as 'the chasm’) seems to widen. All these factors will have an important bearing on funding strategy.
Founders must therefore develop a roadmap for each stage: How critical business milestones will align with funding events; How they will develop momentum to achieve Seed stage escape velocity to Series A; The number of Seed stage rounds that will likely be required; Which investors will have the capacity to invest multiple times and support them through the entirety of that stage, given that the boundary conditions will likely move out again. Then, building relationships with the right investors for future stages that will appreciate the operating vehicle that has been built and its future value potential. Founders that link stage objectives with the key funding points will be able to plan ahead with greater confidence.
Product Led Growth – on every investor’s radar
Datadog closed a Series B in 2014, went public in 2019, hit a $25 billion market cap and continues to exceed expectations as a public company. Today they’re worth more than Slack. Datadog, a cloud infrastructure data analytics platform, is a classic example of how product-led adoption scales to the enterprise and how public PLG companies outperform their peers. Product Led Growth is an approach we discussed back in September but we revisit again given its rising significance. Remember, product led growth is an end user-focused growth model that relies on the product itself as the primary driver of customer acquisition, conversion and expansion.
So, what makes PLG businesses like Datadog, Zoom, Shopify and many others so successful? US VC OpenView Partners has studied the topic more than most and breaks this down into what they call the 3 pillars of PLG: 1. Design for the end-user, 2. Deliver value before capturing value, and 3. Invest in the product with go-to-market intent. End users are now the most important constituents in buying software. Whether you look at changes in usability expectations and attention span based on how people make purchasing decisions at home and apply those to work (consumerization of the enterprise), or the internet’s influence in lowering the barriers to entry to build and distribute software (rise of the developer, SaaS and open source), end users are in the driver’s seat. Investors have really latched onto this.
The key insight is to allow users to access some or all of the product before they need to pay (often via self-serve free trial, freemium model or open source model). But the emphasis must be on delivering value quickly. As product usage is the primary driver of user acquisition, this capability has to be ‘designed in’. A hot area here is replacing professional services (e.g. to assist product deployment) with software. This is one reason why PLG businesses tend to grow faster, more consistently and profitably at scale than their (human) sales-led counterparts. Every software company must evaluate how to leverage the PLG phenomenon. Every investor will also want to know this answer.
Services startups should not just automate manual flows
Services businesses have a unique opportunity to deliver customer value. Yet, too many focus on automating existing manual flows. Serial service business entrepreneur Joe Procopio says: "When you build tech to suit existing customer flows, no matter how many flows you lump in or how flexible you make that tech, you’re still going to run into multiple scenarios in which you either have to serve the customer manually or turn away the business." The strategy should be to disrupt and automate at the same time. The key is to develop an MVP that delivers incredible value by shifting customer expectations and creating Minimum Viable Happiness. The disaggregation of the financial services sector provides many good examples: think how Stripe has totally disrupted and automated payments processing.
In shifting expectations and creating lots of MVH you also stand a better chance of avoiding outliers. These are customers that think they primarily need automation of existing processes and will harangue you until you modify your solution to suit these processes. In established sectors - financial services is a classic - the big banks initially focused on automation but the challengers wanted innovation too. They were the new hustlers that did not have the drag of legacy systems and wanted themselves to be a disruptive force. In a model where too many early customers (some would say 'any') are outliers, the cost of acquiring and serving additional customers can outweigh the price point. Ultimately, the business may not be scalable.
In the early stages you are not trying to be all things to all people (all types of customers). This is just as true for product businesses at it is service businesses. Before Amazon sold everything under the sun, they sold books and CDs. There are two very important reasons for this: Books and CDs are flat and rectangular, making them easy to stock, easy to pick, and easy to ship. They were (and DVDs even more so) very high margin items. As Procopio says: "Start with the lowest-hanging, easiest-to-master, highest-margin aspects of the service. Once you perfect that, fold in another part, and conquer the additional complexities that come with that."
Design your Zoom investor pitch for interactivity
The Zoom pitch meeting can be a graveyard moment. Investors, having spent hours on video calls already that day, will easily zone out if they get distracted. Notifications, emails and other messages will be arriving constantly, vying for their attention. Caitlin Bolnick at OpenView Venture says: “The worst thing you can do is throw up a pitch deck and walk them through it for an hour straight. This actually encourages them to give way to all those distractions…Create an interactive setting where you can engage with the VC.”
It’s your job to perk them up, grab their attention and keep them engaged right the way through. But how? If you’ve already established a relationship ahead of the call this will really help. Your pitch will be an extension of an earlier conversation and you’ll probably feel more relaxed – so will they, and the discussion will just roll. But if this is all being done cold, you’ll need to draw on some basic techniques: Ask questions, prompt discussion, and pose thoughtful debate. Don't rely on finding inspiration in real time: Prepare in advance, do your research on those attending and work out where in the deck the best places are to open things up. Have a list of talking points ready.
Send the deck in advance so they can preview, but open by saying you have some important updates. This creates an air of expectation and drives attention. Obviously, you'll need to have held something juicy back. If there are two of you presenting this will add in some further variation. Rehearse your roles and decide who will cover what. Don't collide on a slide and talk over each other. Keep the tempo up, keep it light, and remember to look straight at the camera. In sum, engineer a conversation not an information dump.
2. Other pieces that are really worth reading/listening to this week:
Is EIS Still Relevant?
This week, Beauhurst analysed the latest instalment of EIS figures from HMRC to see what proportion of investments are utilising the scheme. They showed how trends have changed over time and discussed the future of EIS in the UK's high-growth economy. "As with last year, we are continuing to see a decline in the proportion of investments using EIS, starting from a high of 46% in 2011-12, and falling to a new low of 13% in 2018-19."
A new era for software: the rise of the Cloud
Accel's 2020 Euroscape Report provides some powerful insights into how cloud computing has become the powerhouse for growth in software businesses across Europe. “The entire amount invested in private cloud companies in Europe and Israel in 2020 has grown close to 30% so far to $9-9.5 billion, which is nearly half the $20 billion invested in US-born cloud companies,”
Building tech teams
A report by Sifted that takes a behind-the-scenes look at Europe’s fastest growing startups, from Seed to Series C. The report reveals how successful startups built their tech teams at each stage of their rapid growth. 30 pages of insight from some of our most successful startups.
Lessons from a first-time CEO
Steve El-Hage is co-founder and CEO of Drop, an electronics company that creates products powered by feedback by a massive community of enthusiasts and experts. Reflecting on his 8-year, heads-down grind since becoming a first-time founder at 22, Steve shares the lessons that he figured out the hard way, from revenue dropping off a cliff and painful pivots, to hiring blunders and severe burnout.
US VC fundraising hits record $69B in 2020
As reported by Pitchbook, US venture capital funds have already raised a combined $69.1 billion in 2020, edging past a 2018 record and defying the odds amid a pandemic-rattled economy. "The news reinforces the dominant theme of fundraising in 2020: Big investors have gotten bigger while smaller firms have struggled. The 2020 year-to-date fundraising total was set by just 287 funds, compared with 589 funds in 2018."