Duet Partners
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Weekly Briefing Note for Founders

28th October 2021

This week on the startup to scaleup journey:
  • Clinging to the vision often ends in failure
  • Scaleups require different leadership to startups
  • Solo founder versus co-founder outcomes
  • Record exits are changing the face of VC

1. Insights of the week

Clinging to the vision often ends in failure

The difference between an Olympic sprinter and a founder is that the sprinter knows where the finish line is. The sprinter's vision is clear and unwavering. They can hold true to that vision, no matter what setbacks they encounter. The problem is well defined, so it's all about execution. At the beginning of the founder's race, the problem is not well defined. The finish line is somewhere vaguely in the distance, whilst the conditions and competitors are still unknowns. The athlete must stick to their vision, but this approach could be fatal for the founder. As Paul Graham described in one of his historic blogs, "Startups are more like science, where you need to follow the trail wherever it leads."  Founders shouldn't get too attached to their original plan, as it's probably wrong. "Most successful startups end up doing something different than they originally intended — often so different that it doesn't even seem like the same company."

Successful founders are masters of experimentation. Through their work, they reveal better ways to crack the problem, or in some cases better ways to redefine the problem. They are willing to discard old ideas in favour of new ones where the evidence is more compelling. They are passionate, committed and determined but not obstinate. When the evidence mounts they take note, test, and adjust. With each iteration they try to re-use as much as possible from what they have built before. In rare cases they are forced to start again almost from scratch. This is the full pivot, undertaken when the evidence 'against' just becomes overwhelming.

In times of uncertainty, when the original vision isn't working, founders search for new insights and new inspiration. This may come from a multitude of places - the team and the board can often be the first to offer advice. But the best advice usually comes from customers; those who have the pain you are trying to relieve, or those who can help you see where the pain truly lies. This constant process of customer discovery and customer validation is the central story of the early startup. It's imperfect, sometimes frightening, and hopefully - in the end - enlightening. But most of all it's authentic. It's the real life narrative investors love to hear.

Scaleups require different leadership to startups

The transition from startup to scaleup begins when you find product market fit (PMF). You shift from running experiments to building a company. This is often the moment for the Series A round. In the current market, investor expectations of what happens next have risen as deal sizes and valuations have rocketed. This is a period of major transition, not just for the business but for the leadership style of the founder. Much of this is driven by team size. In the small startup huddle, ideas - and the execution of those ideas - take priority. The team, as well as the founder, are all goal-oriented domain experts that need little management. As the team grows, not everyone will be such independently minded individual contributors, and 'softer' management skills will be required. For the founder whose highly self-confident 'take no prisoners' approach to finding PMF has been validated, this can be a particularly tough transition. Just being aware that a change of gear is now needed can be a huge help.

But the first problem is often the hiring itself. Many founders have never hired big teams, managed large organisations, or set up international businesses. This can all be daunting. As a result this whole process moves forward too slowly. In the hunt for the 'perfect fit' candidates, inertia sets in. This is deadly. Experienced founders know how to build a recruiting engine - how to go from 10 heads to 50, then to 100 in 1-2 years. This engine requires a 'driver', someone to manage the process, funnel in candidates, lead the interviewing steps, and even close the deal. The founder has the final say, but sometimes needs cajoling. The driver can come in many forms (Head of HR, Head of Recruitment, Chief of Staff, COO etc.) but the title doesn't matter - the seniority does. Someone who can spar with the founder and debate each candidate's suitability. They may not be a fit for the role, but if they're awesome, a role should be found for them. The driver can help you make this happen.

The next challenge is practicing real delegation. Most founders will have been into every detail of getting the company started and it's really hard to let go. Inevitably, as the team grows - especially as you add a layer of management - things seem to slow down. The reality is that with some particular tasks it's often true that no one else can do them as well as you. The temptation is to bring things back under your control, but this is a trap. Founders must work out how to delegate, coach, and empower. VC and former operator John Danner says, "Surround yourself with people who are as good at execution as you are with ideas. Hopefully they are good enough with ideas and you are good enough with execution to give each other rigorous feedback."  Founders often get in the way of progress by becoming the bottleneck. Back yourself to hire the right people. Then step out of the way.

Solo founder versus co-founder outcomes

There's no denying that creating and running a startup is an extremely stressful undertaking. For solo founders this is a particularly challenging road to travel. Co-founding teams of two or more collaborators would seem to have an advantage: They can share the burden, challenge each other along the way, and create a startup that is more than the sum of its parts. But it's never quite so simple. An analysis of different 'success outcomes' by Crunchbase revealed that solo founders could have the advantage. A deep dive into 7,348 companies looked at 2 measures; those companies that had raised over $10M in funding and those that had successfully exited. The figures showed that startups with a solo founder fared somewhat better on both counts. This might suggest that the solo route is the path to follow. But there is a hurdle here that founders must jump over first, and that is investor perception. The evidence may suggest that single founders have better outcomes, but other evidence suggests that investors are more wary about backing single founder startups at the very beginning.

Y Combinator is one of the most prolific and highly respected Seed investors in the US. In their 2020 Startup School, Partner Harj Taggar provided some great insights into why the cofounder model is so strongly favoured. The first is basic productivity - you can get a lot more work done if you have someone to divide the work up with, especially someone with complementary skills. The second is moral support to even out some of the highs and lows of the emotional rollercoaster that is the startup. The third is pattern matching to success. The likes of Apple, Facebook, Google, Microsoft and many others all had cofounders. This last point may be debatable, given the more extensive analysis by Crunchbase - but it's perception that counts. Until someone undertakes a full cohort analysis from founding moment to exit we will not know what proportion of each 'category' survives this far. Single founder startups may appear to have better outcomes but if they have much higher mortality rates along the way, the investment risk profile may work against them.

In the meantime, solo founder startups have a a perception issue that they need to be alert to. These founders must take additional steps to offset the perceived risk profile. For example, by bringing in high calibre early hires to share the load, and recruiting seasoned NEDs and/or advisors that they can seek counsel from. Whilst these positions will never match the partnership of a real co-founder, they do have some advantages: They can be easily 're-profiled' as the needs of the business evolve or if you find a particular relationship has run its course. Also, you never need to have the tricky discussion about who the CEO is ultimately going to be. This topic takes on increasing significance when negotiating with major customers and institutional investors. Once the business starts to scale, investor anxiety over solo v multi-founder will gradually start to fade. The results will do the talking.

Record exits are changing the face of VC

Pitchbook's analysis of European venture funding activity in Q3 reveals new market insights. On the back of the three largest ever quarters for venture capital investment, the YTD figure now stands at a remarkable record of €73.7 billion. The prior record was €45.7B in 2020. This astonishing growth has been enabled by a dramatic shift in the sources of capital. We already know that the big VC growth funds, as well as non-traditional investors (e.g. hedge funds, PE), have fuelled a surge in Late-stage (typically Series C onwards) investments. This now accounts for 74% of overall venture capital deal value so far in 2021, with Early-stage (typically Series A and B) at 21%, and Angel & Seed at 5%. But it's the appetite for increased cross-border deal making that is helping fuel this torrent of investment in Europe, despite the challenges of meeting founders in person. In particular, US investors have participated in deals totalling €50.8 billion through Q3 2021 (up from €24B in 2020). A record 21.2% of all deals in Europe YTD have had some form of US investor on board. US investors have shown keen interest in backing startups with new ideas in emerging ecosystems that are seen as less costly than their home market.

But it's not just that US investors can see more attractive valuations - the returns are mouth-watering, too. An astounding €115.6 billion in VC exit value has been generated across Europe during the first three quarters of 2021. This is almost 3x the previous record of €42M for the whole of 2018. Venture capital exit activity has been relentless in 2021 as venture-backed companies, amid surging valuations, have fast-tracked exits to generate maximum value and outlier returns back to investors. Record earnings for Big Tech companies, despite the pandemic, have helped the overall technology sector flourish, and venture-backed tech companies have been enticed to list to take advantage of pandemic induced growth. Consequently, a glut of public listings, including IPOs, direct public offerings (DPOs), and reverse mergers via SPACs, have taken place in 2021. Through Q3, a record 135 public listings have produced a staggering €99.5 billion, representing 86.1% of the year’s overall exit value, the balance largely being acquisitions. This domination is expected to continue for the remainder of the year.

Capital being raised by venture funds continues to rise with LPs eager to keep their seat on the high returns bandwagon. European venture capital funds have raised €15.3 billion YTD—on pace for €20.0 billion by year end, which aligns broadly with figures from the past four years. The big shift here is that more and more capital is concentrated in fewer places. 128 venture funds have closed in 2021 so far, and, if the current pace continues, we could see the lowest annual fund count since 2013. But in the US the picture is very different. VC fundraising has remained extremely robust throughout Q3 as LPs commit record levels of capital to new funds. With 161 new venture funds closing in Q3 alone, VC fundraising activity for 2021 has already shattered last year’s record, notching a YTD total of $96.0 billion across 526 funds. At its current pace, US VC fundraising activity will easily break the $100 billion mark in new capital. Founders that have bagged huge exit proceeds are becoming active LPs in many of these funds. Some are going further, setting up their own VC funds that offer not just cash, but deep operator know-how. The scale and structure of the venture market continues to shift with incredible pace. 

2. Other pieces really worth reading this week: 

Back to Basics: My VC Manifesto
As mighty multi-stage funds crush down on the early-stage investing space, specialist Seed funds are going to great lengths to set out their stalls. Much of it is questionable, but this from Gil Dibner's blog rings true. A great piece on an experienced VC's outlook on life.

The Path to Conviction
Kauffman Fellows has published an excellent synopsis of recent podcasts with leading VCs that digs into how they gain conviction. Some of the most successful VCs have conviction on a deal when others don’t. They see opportunity in markets that others are not looking at. This is how some of the top investors approach the biggest question of all.

The podcast playbook 
For founders who would love to reach a wider audience, this in-depth article on the First Round Review provides 'The Playbook This Startup Used to Get Their Founders on 100+ Podcasts in 6 Months'. Some powerful insights and a great checklist for how to excel in this growing medium.

Happy reading!

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