1. Insights of the week

Handling investor rejection

Experienced founders are used to handling rejection. It's not unusual to have dozens of 'nos' from investors before finding the one where it all gels. Kissing lots of frogs is just part of the process. It's not that your proposition has any deep flaws, it's just that timing matters a great deal. It only takes one thing to be a poor fit and they will pass - and that might just be that you don't rank into their priority stack right now. This is going to make you feel deeply frustrated, so what to do?

First-time founders are more likely to see this rejection as something they need to fight. Perhaps coached on objection handling techniques from their corporate years, they try and debate the issue over email. If this was an VC you really wanted to bring on board, you may feel that giving in is a sign of weakness. Don't. This is one case where persistence will work against you. Experienced founders know the drill. If the VC has been good enough to respond and set out their rationale, send a 'thank you' email. They aren't going to change their mind. Explain why you would have loved to work together and keep the door open for next time. 

As respected VC Beata Klein says: "Building relationships is all about figuring out how you fit together. Stating why you liked them is a good way to continue forming that bond. When founders take a rejection in a good way it sends the signal that they are confident enough in what they are building and don't need someone else's endorsement to keep pushing. Since VCs bet on people in the long-term this is always an attractive trait." In short, keeping the door open for the next round is just smart. Send the 'thank you' email - you will have the hooks ready for that future conversation. 

 

Top investor criteria - TAM, Team and Timing

Listening to Brad Gerstner (founder of Altimeter Capital) and Rich Barton (founder of Expedia, Glassdoor, and Zillow) spar on a podcast this week was exhilarating. Gerstner, who has backed some of the best in the business, says one of the key litmus tests in assessing an investment is the size of the prize. "Let's assume everything you are telling me becomes true - how big is the outcome? How big is the impact on the world?" If this doesn't meet his particular threshold of interest then he passes, irrespective of any other factor. All investors have their threshold, so it remains one of the most critical questions that any founder must be able to address in the initial approach.

Barton, now a Venture Partner at Benchmark Capital, goes further. TAM, Team and Timing he says are the three critical ingredients to assess. Founders have to show how all three are aligning. TAM, or Total Available Market, is the first gate. Team starts with the founder and Barton describes the three key characteristics: Courage, Brains and Heart. He talks about courage as the conviction to change, to adapt and move towards the opportunity as the market evolves. This is a reminder to factor into investor presentations how the pandemic has impacted our own market and how we have reacted to find the (new) growth path.

Understanding how the market is shifting to align with our proposition (timing) and using these unique insights to steer the investor conversation is an incredibly powerful device. If you are opening an investor's eyes you are on the way to opening their wallet. But this is all about first-hand knowledge, not just what you have read. At early stage, discoveries about customer behavior - how they are actually using your product and the value this is releasing - are vital steps on the route to product/market fit. Founders that measure customer success by the number of transactions or revenues alone are missing the mark. They, of course, are key metrics. But the deeper insights into why customers are truly falling in love with your product are worth so much more.

 

Preference Shares - not all are equal

Preference shares ('prefs') are common in institutional investment rounds into private companies, especially at Series A and beyond. On a sale of the company, the investor with such shares gets their investment back first, then the remaining proceeds are divided amongst all the other shareholders. This provides downside protection for pref holders if the final sale price falls short of the big returns expected. If the price exceeds a certain threshold the holder of the prefs can opt to convert into ordinary shares before any distribution of proceeds, so they can fully participate in the upside.

But there is a type of pref share that founders need to be very wary of - the Participating Preference Share (PPS). This allows holders the right to get their investment back first and also participate in the remaining distribution in proportion to the number of shares held. This ‘double dipping’ by investors was common in the unstable markets of the early 2000's, but we now hear of these terms creeping back in, especially from less scrupulous VCs looking to take advantage of market conditions. This can get even worse in the case of 'liquidation multiples'. This means that they don’t just get their money back (a 1x multiple), they get 1.5x or 2x their money back!

The big problem here is that Participating Preference Shares from large rounds can dramatically limit the returns for ordinary shareholders - including founders - when it comes to an exit. Founders will find it hard to avoid basic prefs on institutional rounds, but must do everything to avoid PPSs. Astute senior management hires who have been around the block before may well ask about PPSs during the interview process. If you have these on the cap table, bringing in top talent is going to be significantly harder. For a deeper dive on this topic read this excellent article by Charles Yu.

 

Competitor comparisons - a classic mistake

Competitive positioning is an important part of any investor pitch. The objective is simple -  show clear differentiation between your business proposition and the major alternatives. A feature comparison table is the conventional approach but this can quickly get you into the weeds where it's too easy to get tangled up in the details. This is not what investors are interested in anyway. They want to see the big picture differences - the ones that will mark out your winning strategy. The mountain top where you will place your flag and control a highly defensible position for years to come.

The quadrant chart is therefore the perfect graphic to use. Simple, visual, and immediately clear. By choosing the appropriate axes you can show your business up in the right, the wannabes relegated to the other quadrants. You can give the competition some credit and show you have a good handle on all the other contenders, whilst ensuring that your logo stands out as the compelling choice. But care must be taken - there is a potential pitfall here and investors are getting wise. The issue is what the axes represent.

It's vital that the axes reflect the key decision criteria of your customers. If your axes plot say, cost of ownership v performance, but the key customer criteria are ease of use v reliability, you are going to get found out.Your logo bubble may stand proud on the chart but not against the criteria that actually matter - and they certainly won't be the criteria investors will care about either. The competitive quadrant chart is therefore a truly big reveal - sketch your's out early in the journey to make sure your positioning is really going to end up on the money. 
 

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

The authentic founder
Eoghan McCabe is a technology entrepreneur. He’s started a number of companies, the most notable of which is Intercom, the conversational relationship platform. He was CEO of Intercom for nearly 10 years, during which he grew the company to hundreds of millions in annual revenue, nearly 700 employees, and raised nearly $250M from the likes of Kleiner Perkins, Index, Bessemer, and ICONIQ. He’s also invested in dozens of companies including Stripe, Figma, SuperHuman, and Coda. Listen to this interview on 20VC about founder authenticity, integrity and vision. Some great personal insights for founders.
 

SPAC IPOs have taken off in the US but may falter in the UK
SPAC mania has taken hold of public markets in the US. A special purpose acquisition company (SPAC) is a “blank check” shell corporation designed to take companies public without going through the traditional IPO process. Even though SPACs have been around for decades, the financial manoeuver has gained traction in recent months as more private companies eye exit opportunities and as the Covid-19 pandemic creates uncertainty in the IPO market. A great analysis is available from CB Insights. But the UK faces hurdles, as explained by Pitchbook. 
 

Pivot Strategies and Technology to Master Sales Digital Transformation
In the last few months, endless sales teams have gone remote and learned to depend more consistently on digital tools. Consumers are starting to avoid face-to-face interactions, and companies that want to thrive are searching for strategies to help them stay ahead of the curve during and after COVID. So, how do teams adjust to the digitally transforming sales landscape? Some great insights from Crunchbase.
 

How to present in a video conference
Giving a presentation on camera is very different from presenting in the room with your audience. A few tips—and a few rehearsals—will make you a video star. A great checklist of all the essentials you need to transform your video presentation from BBC correspondent Richard Taylor.
 

The three deadly sins of writing
From our favourite writing coach, David Perell, more simple yet powerful advice on the art of writing effectively.
Don’t write “Eddie was a kind, generous, and thoughtful person” when you can call him a “saint.” 
Don’t write “He passed away early in the morning, and people all over America cried” when you can write “He died at dawn and the nation wept.” 
Wasted words slow the momentum of your writing. They’re like a pointless movie scene which makes you want to shout at the television and say: “Get to the point!”

Happy reading !