This week on the startup to scaleup journey:
1. Lessons for founders from 1H20
Lesson #1: Choose your investors wisely
They say you find out who your true friends are in a crisis. As Covid suddenly impacted the revenue outlook for many startups, founders eagerly sought investor support for emergency funding rounds to protect cash runways.
Some investors quickly stepped up to the plate, cheque book in hand, almost before being asked. Many private investors, and some of the smaller VC funds in particular, moved quickly. In the hour of need they unflinchingly supported founding teams with quick top up rounds, enabling founders to then focus 100% on steering the ship through shallow waters.
However, a small minority of investors have taken advantage of this crisis by demanding punitive terms. Driven by either greed, short sightedness, or sometimes pure incompetence, we have witnessed some appalling investor behaviour in the first half. As a result, the time and energy wasted in agreeing final terms has put some companies in peril.
Founders must learn from this and choose their future investors with greater care. It’s almost impossible to remove an investor from the cap table once they are in. So up-front due diligence is critical, not only into the fund but also into the individual partner who will manage the relationship with your startup. Talk to their portfolio companies, find out how founder friendly they really are.
Covid has provided a big test for investors, and some have failed.
Lesson #2: Funding is a process of lines not dots
Even though funding into UK startups collapsed by almost 50% in 2Q20 (v 2Q19), deal count was down only 17%, as we highlighted in our recent blog. This reflected many unscheduled top up rounds, but some planned rounds led by new investors were successfully completed during lockdown.
How did founders pull this off and manage to lure in new investors during the crisis?
Within our own circles we observed that founders who closed rounds with new investors during lockdown had been building those relationships for some time. They didn't go from cold call to deal done in a few months. They had been developing a ‘history of progress’ with target investors well before Covid.
In Mark Suster’s seminal article ‘Invest in Lines, Not Dots’, he describes how investors like to build a picture of a business over time, well before they invest. They want to see positive patterns emerging during this ‘courtship’, so when the moment comes to tie the knot interests are truly aligned behind a shared long-term vision.
This approach requires multiple interactions over a period of many months – well before formally seeking capital. Not only does this benefit the funds but it gives founders the opportunity to really get to know individual investors. And as we mentioned above, investor due diligence is now more important than ever.
Founders should think of funding more as a continual process that requires a small amount of time every month, rather than a big bang event that wipes out your time for weeks or months on end.
Lesson #3: Develop your storytelling
A key leadership attribute is an exceptional ability to tell a story. Founders that create a compelling narrative around their vision will attract customers, talent and investors. Why is this?
Stories engage our emotions. Research has shown that audiences are more likely to engage with and adopt messages that make them feel personally involved by triggering an emotional response. Storytelling is a powerful vehicle for this.
Stories help us transport the listener to a place where we are more inclined to embrace the belief and worldviews the story presents. Every interaction in the investor courtship process should reveal a new chapter that supports the narrative. The investor pitch should finally bring the story together.
Founders with the most effective pitches in recent months have brought Covid into the narrative arc. This is the backbone of the story that provides a clear beginning, middle and end. Covid has impacted everyone’s story, so not dealing with this proactively will make investors very anxious.
The mistake that founders sometimes make is that they think the pitch tells the story. It doesn’t – it is there to support the story that you will tell. This requires careful planning and consistency of delivery. In particular, it requires mastery of the narrative arc.
Storytelling is a skill. It requires training and practice.
Lesson #4: Hire the very best talent
Successful founders have a knack of surrounding themselves with exceptional talent.
At early stage the team is one of the most critical factors that investors assess. The calibre of the leadership team sends the earliest and most powerful message: All these highly talented people have forgone other opportunities to be here. Something truly great must be happening.
The most ambitious founder/CEOs (also amongst the best storytellers) have the ability to hire way above normal expectations. Certain members of their leadership teams will themselves be clear CEO material with amazing ability to go broad, not just deep.
But it’s not all about experience. Research shows that the most successful top teams have the greatest experience diversity. Combining highly proven startup execs with talented but much younger leaders is a powerful recipe.
Ambitious founders will also implement a professional HR function much earlier than most. Here the emphasis is on building a first-class recruitment capability to support growth, helping the founder manage the often-fraught transition from early scaling to a team of 50+, and truly leveraging the diversity of exceptional talent that is now flooding the market as a result of Covid.
Lesson #5: Have a framework for decision making
Covid has had a devastating effect on many businesses. Some have folded, some have been left reeling for months, yet others pivoted swiftly to grasp new opportunities.
What distinguishes these companies from one another?
All the talk has been about sectors - some have been accelerated and some have just stalled. If you were in the wrong place at the wrong time, then that was just bad luck.
Well, that's part of the story. The fact is that founders who came to terms with the new reality and quickly adjusted their business models burnt less cash in the pivot than those who clung to old plans in the hope of a quick return to normal.
Our observations were that the fast movers had an established framework for decision making that was in use well before Covid struck. With many of our clients this was a combination of the Business Model Canvas, the Investment Analysis score sheet and a robust Financial Model.
By using these (or similar) tools to calibrate the company’s position on the Customer Development journey, leadership teams could see how radical the pivot needed to be and how to communicate this to staff, customers and investors.
Any CEO must now be confident that when the next crisis happens, they have a framework for rapid decision making that not only optimises capital but quickly shows the way ahead.
2. Other pieces that are really worth reading/listening to this week:
Uncovering what has changed about work
A further follow up to our focus on remote work in our 16th July briefing with this revealing piece published in the HBR by Microsoft. Researchers measured collaboration patterns across the 350-person Modern Workplace Transformation team and made some real discoveries. Some great insights here for managers supporting remote teams.
Sustainable Investing: the way forward
A great piece on the rise of Sustainable Investing by Credit Suisse. Reviews different approaches that investors employ and the key factors that are driving adoption.
Corporate investment: 'Don't be naive'
"Amazon met with startups about investing then launched competing products." Some companies regret sharing information with tech giants. A sobering piece in the WSJ for companies contemplating CVC investment.
How to Identify Underrated Markets
A framework for analyzing the catalysts of emergent demand by Brett Bivens in Venture Desktop. A thought-provoking perspective on how leading investors assess future market potential when there's not much to see. Founder question: Am I creating a product or changing the world?
Bezos, Zuckerberg are taking Tech Wealth to a whole new level
Bloomberg says the market cap of Apple, Amazon, Alphabet, Facebook, and Microsoft is now about 30% of US GDP. That’s almost double what they were at the end of 2018. Tech seems to be the place to be.
Stop Press: A masterclass testimony by Jeff Bezos, who is the consummate storyteller. His full statement to the U.S. House Committee on the Judiciary this week is here, and leaves his 'peers' in the shade.