Duet Partners
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Weekly Briefing Note for Founders

29th July 2021

This week on the startup to scaleup journey:
  • European investment could hit €100 billion by year-end
  • Culture is the real startup advantage
  • Radical Candor — The Surprising Secret to Being a Good Boss
  • The interesting people fund

1. Insights of the week

European investment could hit €100 billion by year-end

The market is on fire. European VC deal value reached €47.1 billion in 1H21 and has already beaten the annual record of €45.1 billion set in 2020, according to Pitchbook. Whist investment levels look set to more than double year on year, deal numbers are expected to remain flat. In line with global data we reported on earlier, late-stage rounds across Europe consumed 73.8% of all capital, early stage rounds (A and B) 20.8%, and angel & seed rounds 5.4%. By comparison, late-stage deals took 60.5% of capital in 2020, so it's clear where the momentum now lies. The number of first-time institutional investments has never regained its peak from 2014 (2,415 deals), but this year absolute $ levels for these 'first financings' should break all records, with 1,084 deals generating €2.7B in investment by the mid year point.

Deal value with nontraditional investor participation (investment banks, PE firms, hedge funds, pension funds, sovereign wealth funds, and corporate VC) hit €37.8 billion in 1H21, more than the entirety of 2020. "European startups showing potential in evolving sectors such as e-commerce, which has boomed during the pandemic, are now prime investment targets for international financial institutions laden with capital. Big tech companies have grown robustly in the last decade; during the pandemic, new tech solutions have emerged as potentially sticky and crucial long-term high-growth areas." International investors are now backing Europe-based startups to compete with more-developed US-based counterparts. US-based investors in particular are backing Europe-based entities, hoping to introduce and scale them in the lucrative US market to ignite rapid growth.

There is no sign of any of this momentum slowing. VC returns across Europe are hitting epic levels. 1H21 generated a record €46.8 billion in exit value, already beating the previous annual best set in 2018. Whilst acquisitions are still the most likely exit route, absolute returns are now being driven overwhelmingly by IPOs rather than M&A. Against this positive backdrop, significant amounts of fresh capital are pouring into new VC funds, easily surpassing 2020. As a result, founders find themselves in uncharted territory. As average deal sizes soar at all stages, startups must show even greater levels of maturity to capture VC attention. And this is a story that the press are finally picking up on. For those that are falling short of these new thresholds, innovative funding strategies with nontraditional investors may hold the key.

Culture is the real startup advantage

When established markets are disrupted and fragment, this spells opportunity. A window opens up where startups can rush in and make a land grab. The accelerated shift to the cloud in B2B software over the past 12-18 months has been one such example. Why are so many upstarts able to steal a march whilst established businesses struggle to respond? We often attribute this to speed and agility - startups are just able to move faster. But why should this be? Established companies will often have way more cash, people and experience than a small business. Jeff Immelt, former CEO of conglomerate GE and now startup investor and advisor, puts this down to culture. For corporates to compete in the innovation game they need to change their culture, but they just can't do it fast enough. That's why so many big companies instead look to collaborate and invest in startups.

Founder/CEOs sometimes underestimate the competitive advantage that the startup culture brings. Developing a set of core values and rituals that encapsulate the culture often plays a vital role in the growth strategy. Attracting and retaining top performers is one tangible way a great culture acts as a magnet. Two of the biggest differences between corporate culture and the startup culture are attitude to risk and trust through transparency. Startups are known for encouraging risk-taking, even at the lowest levels. For example, by employing 'fail fast' methods in solution development, where experimentation and iteration becomes a fine art. Corporates generally discourage risk taking, even at senior levels. Startups also thrive on transparency, information sharing, and rapid communications, which all support the development of trust. Corporates generally work on a 'need to know' basis.

Immelt notes that in 2000, Industrials and Financial Services together represented about 40% of the S&P 500 by value. Now it's 15%. Tech companies have become the primary value creators. "Size is a huge advantage when the momentum is going the right way, but is a huge disadvantage when the momentum stops."  Scale is still a weapon that corporates possess, but even that is under threat in high growth sectors. Every week, some major new VC fund is announced, ready to pump ever greater amounts of cash into the next scaleup. Capital resources are no longer a guarantee of scale advantage. The pressure further mounts on corporates, who are lining up in ever greater numbers to partner with - and invest in - startups, desperate to share in the innovation culture.

Radical Candor — The Surprising Secret to Being a Good Boss

Young founders have to overcome many obstacles on the startup to scaleup journey. One of the least talked about is learning how to become an effective people manager. With so many pressures at play in the formative stages of company building, the emphasis is often more on leadership, not the more touchy feely aspects of managing people. But this is a mistake. As soon as hiring starts, management begins. Founders with little or no prior management experience must step up quickly. Yet, like so many aspects of personal development in newly minted founders, investment in management skills is rarely seen as a priority. The default condition is 'on the job learning'- making mistakes then figuring out how to do it better next time. But if a key startup employee leaves due to your lack of management skills, there might not be a next time.

One of the most crucial skills is giving effective feedback. It is a core part of any business but even more critical in fast moving startups. Founders looking for advice on this topic should investigate the practice of Radical Candor, as espoused by Kim Scottco-founder of Candor, Inc. She has built her career around a simple goal: Creating bullshit-free zones where people love their work and working together. She first tried it at her own software startup, then as a long-time director at Google. Scott's method can be boiled down into a simple framework: Picture a 2x2 quadrant chart. If the vertical axis is caring personally and the horizontal axis is challenging directly, you want your feedback to fall in the upper right-hand quadrant. That’s where Radical Candor lies.

If your management behaviour lands you in other quadrants, this spells trouble. Challenging directly without caring personally results in a quadrant Scott calls 'Obnoxious Aggression'. Worst of all, not challenging directly and not caring personally can result in 'Manipulative Insincerity'. If you care personally but don't challenge directly,  the outcome is 'Ruinous Empathy'. This is where the vast majority of management mistakes seem to happen. Your caring side is dominant to the extent you can never quite bring yourself to confront the issue. Problems accumulate until they boil over and you have a crisis on your hands. If awareness is the first step towards redemption, this framework ticks the box. Scott's work provides a simple yet powerful tool for founders looking for guidance in the art of effective feedback.

The interesting people fund

The Startup of You has become a highly acclaimed playbook for entrepreneurs. Written by Reid Hoffman (co-founder of LinkedIn and now VC) and Ben Casnocha (entrepreneur, author, and VC), the book argues that we can no longer expect to find a job, instead we must make our jobs. As Hoffman says, we have to “find a way to add value in a way no one else can. For entrepreneurs, it’s differentiate or die — that now goes for all of us." One of the most fascinating topics in the book is the idea of an 'interesting people fund', where entrepreneurs are encouraged to set aside time and money in advance to keep their networks up to date. This is a 'pre-commitment strategy': by pre-committing time and money to meeting interesting people, you increase the likelihood that you actually do it. Why is this so important? Over the past 12-18 months many of the networking opportunities that we took for granted before the pandemic have all but disappeared. Now we must make a conscious effort to connect.

A founder's network eventually becomes their power tool. It is the most vital intangible asset on the personal balance sheet. It helps accelerate insight, open doors, and foster collaboration. Why? Because these are all human-made stories, where trust is the central currency. Trust requires time to develop, so taking the long-term view is essential. Rushing a relationship into a short-term transaction can jeopardise the long-term relationship potential. Nowhere is this more important than in the founder/investor relationship. Serial founders place their network at the top of their asset register. In each new round of funding, being able to leverage investor relationships developed over many months and years confers huge advantage. This may sound obvious, but many founders have slipped out of this habit in recent times. In this period of re-engagement, we should all be topping up our interesting people fund.

Hoffman and Casnocha say that every opportunity is attached to a person. "Opportunities do not float like clouds in the sky. They’re attached to people. If you’re looking for an opportunity — including one that has a financial payoff — you’re really looking for a person." Some founders, especially first-time founders, don't always have the courage to reach out to that senior person that could make the difference. But the title 'Founder & CEO' counts for something. It's a door opener in itself and with that calling card, almost anybody will give you a shot at saying your piece. But don't destroy this privilege by initially asking for help. Create trust by first giving something - your own insights, your own network, your own time. As a former mentor of mine would say, plan on giving 80% of what you know away - then you will eventually be able to harvest great value in the 20% you retain.

2. Other pieces really worth reading this week: 

Interview: Marc Andreessen, VC and Tech Pioneer
Rarely do we have such access to one of the most forward thinking minds of our time. In this insightful, wide ranging interview by Noah Smith on substack, Andreessen shares his insights on technology and its impact on our lives. "...this is an opportunity to rethink everything from what career to pursue, to what employer to work for, to where to live, to how to live. We are already seeing a huge surge in job turnover at big tech companies, driven by the employees as much as the employers, and I expect this to continue as people reconfigure their lives for the new choices of the post-COVID world."
Bonus: Andreessen's latest essay: Technology Saves the World, is here.

When Entry Multiples Don’t Matter
An illuminating perspective on valuations from major global VC, Andreessen Horowitz ('a16z'). " When speaking with founders and private growth investors, we hear countless references to “multiples paid” on current or near-term revenue; both obsess over this because a higher multiple translates to a higher valuation. For founders in particular, if a seemingly similar company to yours was ascribed 10x, 20x, 50x or 100x revenue, then why shouldn’t your company be, too? But much of the clamoring over why one company deserves a 10x vs 20x revenue multiple suggests that many see the multiple as only an input to valuation."

America Is Losing the War for Semiconductors to Asian Manufacturers
An insight into the geopolitics that threaten semiconductor supply, by Thomas Sonderman, President and CEO of SkyWater a U.S.-based semiconductor foundry. "The microelectronics industry underpins nearly every segment of the .. economy: healthcare, automotive, communications, industrial manufacturing, consumer electronics, and many others. The current chip shortage has put a spotlight on supply-chain vulnerabilities... and forced many companies to reconsider their business strategies. Although the U.S. is still the leader in technology innovation, domestic production of semiconductors has been declining for decades. Today, only 12% of semiconductors are manufactured here..."

Do Things That Don't Scale
One of Paul Graham's most insightful and timeless essays, written back in 2013. A must read for any founder seeking out the early market. "There are two reasons founders resist going out and recruiting users individually. One is a combination of shyness and laziness. They'd rather sit at home writing code than go out and talk to a bunch of strangers and probably be rejected by most of them. But for a startup to succeed, at least one founder (usually the CEO) will have to spend a lot of time on sales and marketing."

Happy reading!

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