Duet Partners
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Weekly Briefing Note for Founders

3rd December 2020

This week on the startup to scaleup journey:
  • Every startup needs a single miracle
  • Scaling up: the Navigating Model and the Operating Model
  • The power of the written word
  • Is honesty the best policy when fundraising?

1. Insights of the week

Every startup needs a single miracle

Setting out to build a business that needs to overcome a giant obstacle might seem odd. But that is what ambitious founders do. If it were easy, someone else would have done it already. Talking on the challenge is the essence of the startup mission, so the sooner you can define what this is the sooner you can get to work. But if there is a convoluted, multi-step approach required to achieve success, you might be biting off more than you - or investors - can chew. In a recent podcast, prolific angel investor Elad Gil, put this more dramatically: “If your startup needs zero miracles to work, it probably isn’t a defensible startup. If your startup needs multiple miracles, it probably isn’t going to work — with every miracle, you are multiplying in another low probability event to get an even smaller expected outcome.”
The word miracle may seem a little overstated, but if you are setting out to conquer a series of low probability events this may not seem far from the truth. When evaluating an early-stage business, investors will spend a great deal of time assessing risk. Any potential low probability events will be examined. For example, Technology risk – will it work? Market risk – will there be demand? Execution risk – can the team make it happen? Regulatory risk – will there be operating restrictions? Of course, not all risks are equal, and the job of the investor is to weigh these carefully to see just how many ‘miracles’ do indeed need to happen to achieve success. The job of the founder is to therefore dispassionately weigh these risks first, before pitching to any investor. Getting your ducks in a row is essential.
At the genesis of the business investors may have little to go on other than their belief in the founder(s) and their vision. But as the business progresses through Seed stage, experienced investors - both private and institutional - will apply greater caution. Gil says: Most early-stage investors would say the thing that they care about most is the founders. I think the market is even more important because I’ve seen great founders repeatedly get crushed by a terrible market. And I’ve actually seen some pretty mediocre people do incredibly well if there’s very strong product-market fit.” An early priority for any founder is therefore to scale the size of the problem they are setting out to solve. If the market opportunity is not truly compelling, it will take more than a miracle to entice investors.

Scaling up: the Navigating Model and the Operating Model

At startup, creativity and discovery are the order of the day. The team is very small, roles and responsibilities are fluid, and the operating environment is very dynamic. You don't need systems and processes that might constrain you as you ‘search for the business model’. At early stage a Business Model Canvas provides the perfect template for capturing the core ingredients that need to work in unison. The Canvas is designed as a one-pager so it’s very easy to create, modify and share. Even as roles and responsibilities start to take shape, you are still essentially running an experiment and are not yet concerned about scaling. Keeping things simple so they can evolve quickly is essential.
But when you have found a repeatable and scalable proposition you must become a little more sophisticated. The team is growing and it’s likely to be more dispersed. To maintain focus and momentum it now makes sense to deconstruct the business model into two components: The Navigating model and the Operating model. The Navigating model addresses: Where do we want to go? What are the big milestones for future growth? What will we do and why will we do it? It defines the company’s Purpose, Vision, Strategy and Values. It captures the ‘true north’ for the business. It is a touchpoint for the team if there is ever uncertainty about intent. In contrast, the Operating model addresses: How will we get there? How will we deliver the milestones? The day-to-day things related to the people, and the systems and processes we will use. Critically, it determines performance measures, such as objectives and KPIs. The Operating model will evolve rapidly as the organisation grows.
It is vital that the Navigating model (which is set top-down) is clearly established before the Operating model (usually a top down/bottom-up collaboration). If you don't know where you are going, you will likely get lost. You can immediately sense if a company doesn't have a clear Navigating model – operational meetings meander and people don't have a clear sense of purpose. Having a fit-for-purpose Operating model is particularly powerful when it comes to setting strategies for company expansion. Scale-ups use operating models to drive their growth - a useful case study can be found here. They can become the blueprint for establishing new markets or geographies, usually with some local customisation. The combination of the Navigating and Operating models provides a strong framework around which the growth strategy can be delivered. 

The power of the written word
“I originally wanted to be a YouTuber, but I switched to writing when I realized it’s the activity that generates the fastest rate of learning.” These are the words of one of our favourite writers, David Perell. The sad thing is for many entrepreneurs, writing in long form is becoming a lost art. The immense time pressure that founders operate under and our move as a society to short form, bullet point, tweet-level interaction is impacting the learning process. When CEO of a VC-backed tech startup back in 2009, communications were slightly less staccato, but there was still the relentless time pressure. The antidote was one guaranteed moment of ‘sanctuary’ every month. A time to stand back and take stock, to capture - in long form - my key insights and learnings about the business. The Board Report.

I looked forward to taking myself off for a day to reflect and write. I didn't fully appreciate it at the time, but these were invaluable moments. Almost therapeutic. The process enforced a discipline of careful assessment and critical review. Setting this all down in words rather than just bullet points led to finding greater clarity in my own thinking. This obligation to explain, to rationalise in clear terms, was a moment to educate myself, not just the board. For me, writing became essential to the learning process. It still is. In recent times I have come across more founders reverting to this approach. The skills then developed (because great long form writing is a skill) pays further dividends when writing blogs, articles, and essays, now essential elements in how companies spread their narrative. Writing can truly be turned into a competitive advantage. At Amazon, Bezos has ingrained it in the culture for that very reason.
For founders seeking a starting point on this journey, David Perell offers some simple but effective guidance in what he calls Business writing 101. No apology for bullet points on this occasion: ∙ Shorten your sentences ∙ Make your point fast ∙ Shorten the introduction ∙ Use simple words ∙ Add graphs and statistics ∙ No buzzwords ∙ Use more periods, fewer commas ∙ Write for skimming, not deep reading ∙ Bold the main takeaways. This 'laid bare' approach is humbling because you realise how often you're wrong about things you were once 100% sure about.  Once you embrace these basic concepts your confidence in writing efficiently (and quickly) will increase. You will feel the power of the written word start to emerge as you educate and draw in your audience. Try it.

Is honesty the best policy when fundraising?

One of the most revealing points in the investment readiness process is the preparation of the investor Q&A. The aim is to predict the toughest questions an investor could ask and then craft and rehearse the answers. Why have sales been dropping off? Why did it take so long to reduce costs and pivot when Covid struck? Why did a key hire leave? Why was the last round a down round? The revelation is not that CEOs would rather dodge these questions if they could, but the belief that 'positioning' to try and diminish the importance of these points will placate investors. It won't. As veteran VC Ben Horowitz says; “It seems like telling the truth is like committing corporate suicide. How do you ever tell the truth given what’s at stake? The answer is that the truth must be told but told in such a way that it doesn’t destroy your company." This is the real craft.
First, you must accept that you cannot change the truth. Being dishonest can be fatal because it will kill trust. If you’re already in the process of investor engagement, get any bad news out fast. Advising on a Series A process a few years ago, we were at an advanced stage. The Term Sheet had been signed and final legal documents were only a week away. The CEO suddenly informed us that he had been quietly negotiating a resolution to a potential patent infringement, but the process was not converging. This was the first we knew, and we immediately advised him to inform the lead investor - a topflight VC. A week passed before he made the call, still hopeful that he could find resolution. The VC immediately withdrew leaving all parties with months of wasted effort and the company in peril. If the CEO had acted sooner, he could have averted this crisis. It wasn't the potential patent infringement itself - the investor had no issue with that - it was the fact that the CEO thought he could get away with not disclosing it.

So how do you tell the truth in such a way that it doesn’t destroy your company? The answer is to assign meaning to it. As Horowitz explains:
1. State the facts clearly and honestly (before someone else interprets them for you, which they always will). Don't hedge, just tell it like it is. If an investor is in the process of committing to you, get the news out without delay.
2. Explain why this thing occurred. What was the decision process that was used? What have we learned that will prevent it from happening again?
3. Explain why taking a new course of action is essential to the larger mission and how important that mission is. In other words, make sure something good comes out of this moment.
As a leader, all your stakeholders expect this of you. Be it a deal gone bad, a product failure, or a legal dispute that’s turning against you, this may be your chance to define not only the event, but the character of your company.

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

UK M&A deals could slow under new foreign takeover rules
Foreign takeovers of British companies could be subjected to added scrutiny under new legislation proposed by the UK government. An update from Pitchbook on this key topic. 

Can Europe lead Industry 4.0?
Venture capital investment into Industrial Tech — technologies like artificial intelligence, robotics and 3D printing that can help digitise the industrial process — has increased nearly ninefold in the past six years in Europe, according to a new report by Dealroom. We’re entering Industry 4.0, say the authors of the report — and Europe looks well placed to lead it.

How long it roughly takes to close a deal in SaaS. And why.
A great blog post by Jason Lemkin on how long It typically takes to close a deal in SaaS and how it depends on deal size. Good insights for anyone in enterprise software sales. His top tip: Specialize the sales team early.  Do this earlier rather than later.

Family Offices can propel the EU Venture Capital ecosystem
An article in Forbes is an excellent primer for those looking to understand the Family Office world. Two-thirds of newer family offices (created post-2015) now make direct investments in private companies, compared with only just over 50% of those founded between 2006 and 2010, with 61% of direct investments made in technology companies. Additional link here to the UBS Global Family Office Report 2020 for further insights.

Preparing for the EU exit
With the UK set to leave the EU Customs Union and Single Market on 31 December 2020, businesses must take action now to prepare. The British Business Bank has published a great checklist to review, plus some very useful guidance so you don't get caught on the hop.

Happy reading!

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