Duet Partners
Tel: +44 (0) 20 7416 6630 / Email: partners@duetpartners.com


Weekly Briefing Note for Founders

3rd March 2022

This week on the startup to scaleup journey:
  • As valuations soften, investment criteria harden
  • Learning how to pitch in person - again
  • Don't forget that follow-up investor email

1. Insights of the week

As valuations soften, investment criteria harden

Investors are getting twitchy. The precipitous slide in the value of many tech stocks, added to rising inflation and interest rate hikes, is providing pause for thought. For VCs, who are anxiously studying an increasing gap between public and private valuations, the exuberance of 2021 is fading quickly. Many companies that went public in recent months have seen valuations tumble. The bigger VCs, those that also have huge growth funds that are heavily invested in public markets, are now reassessing investment strategy. For instance, Bessemer Venture Partners retained some of its stake in the cloud communications platform, Twilio, after it went public. Twilio's stock has plummeted more than 50% in the past six months. The domino effect in VC means that where the big funds head, the rest of the market inevitably follows.

Market volatility has now slammed the brakes on new IPOs. For late stage VC deals, where public markets may be the next natural step on the funding pathway, the risk of valuations being misaligned is forcing private valuations down. VCs that are getting jittery have started to look for better value opportunities at the Series A end of the market. But even here, investment criteria are tightening as VCs seek higher revenue and growth metrics than we witnessed in the frothy 2021 cycle. There is a sense of a more 'back to basics' mindset in evaluating early-stage businesses. Despite more funds being available for deployment than ever before, diligence cycles are set to lengthen. VC reputations were previously at stake for not getting a slice of a big valuation growth story. Now, reputations are stake again, but this time for the exact opposite reason.

As a result, Term Sheets are starting to look less favourable. Some VCs are also likely to slow dealmaking until they can get a better read on how far market conditions will deteriorate. If prices are declining why rush to offer? Startups that are progressing strongly in this less certain environment will still command premiums as VCs search for greater quality. Everyone else will feel the pinch. On a positive note, there is a potential silver lining to this darkening valuations cloud, and that's hiring. As those who recently joined big tech companies see their stock options drop in value or even disappear completely underwater, they are going to be feeling a little looser in the saddle. This becomes a great moment to lure them away. Recruiters that were having to cast a wider net to find top candidates in a buoyant job market, are already starting to seize this unexpected opportunity. Who do you need to hire next?

Learning how to pitch in person - again

Over recent weeks, face-to-face investor meetings have gradually been coming back. Founders are pitching in person once again - and it feels odd. For those who set up business for the first time during the pandemic, they may have never pitched to an investor in the flesh before. For others, dusting off the old skills and smarter clothes (pyjama bottoms only work on zoom calls) has presented some challenges. We may think that a 2-year hiatus would not blunt our skills, but according to investors, many of us have become very rusty. Lack of body awareness is a common investor gripe. This is a big concern as your body says a great deal about your confidence. Swaying, nervous gestures like hair twirling or thumb twiddling, and lacking eye contact are all getting mentioned. But the biggest sin of all is trying to deliver the whole pitch sitting down. This is driving investors crazy. Pitching is a performance and body language is a big part of communication. Stand up, go to the front of the room and take charge.

Pitching your story is fundamentally an exercise in building trust. As veteran pitch coach Peter Coughter says in his book, The Art of the Pitch: Persuasion and Presentation Skills that Win Business, “When we are selling our ideas, the audience must first buy us.”  In the face-to-face pitch, YOU must be the focus of everyone's attention, not the slides. They are there only to provide a backdrop. As Coughter reminds us, “The words on the screen are usually a distraction to the audience. If you’re reading the words, by the time you’ve gotten around to mouthing the words, the audience has finished reading them and is getting bored by hearing you say them.” So an important shift for the 'face-to-face deck' over the 'zoom deck' is less (wordy) content - and thus less need to keep looking for your place on the slide. Every time a presenter looks at the screen this creates disengagement. To develop trust, you need eye to eye contact. That means starting each of your sentences by looking directly at someone, not at the screen.

Investors have been keen to remind founders, especially those that are pitching for the first time, of some common misconceptions. On the subject of being genuine and selling yourself first: "This does not mean you need to be an extrovert. You need to let us into the passion and purpose behind your startup idea by being genuinely you. People are not investing in the next Elon Musk, but we want a founder who lives and breathes and believes in their startup’s mission." The deck therefore has to be an extension of the founder's personality, so the whole story feels authentic and triggers your inner passion. On the subject of what to wear, don't fall for the 'just wear what you feel comfortable in' approach. VC James Currier says, "I’ve seen people come in with sweatshirts and frumpy pants, and they sit down with their coffee and their snack and their laptop, and it’s just a mess down at their end of the table. It doesn’t look professional."  Wear something nice, sharp, and crisp that shows you’re serious. Signal you mean business even before you open your mouth.

Don't forget that follow-up investor email

Somewhere along the line, maybe it was the shift to relentless zoom meetings, we started to forget our manners. Investors really notice when founders don't send a follow-up email after a call, especially a pitch call. But common courtesy apart, founders are missing a trick here. This is a golden opportunity to capture what was agreed and nail down the next steps. At a minimum, this provides a date stamp on the dialogue for future reference. When you are looking back over the flurry of investor interactions during a campaign this can be a vital reference. But most of all it shows investors that you operate with good commercial awareness, and as the company's chief salesperson, this inspires confidence. 

Sitar Teli is Managing Partner at VC firm Connect Ventures. She says, "Don’t forget to follow up straight after the meeting — poor manners don’t look good on anyone. Don’t send an essay — just a quick note with the key bullet points, takeaways from the meeting and additional answers to any questions you might not have been able to adequately answer during the meeting." Sending this email also enables you to develop a certain cadence to your interactions that will bring you to the front of the investor's mind more regularly. By summarising the agreed next steps you are also putting some gentle pressure on the investor to come through for you; to involve their colleagues, or perhaps arrange the next call. A professional reminder that the ball is in their court.

Don't forget to copy ALL those who attended the meeting, especially any junior team members that accompanied the VC Partner. Zoom pitching tends to narrow down the attendee list and in some cases it may just be 1/1. But when others attend, forgetting to copy in VC Associates, Principals or Researchers is a no-no. They are going to have an important role to play in assessing your business, so don't inadvertently put noses out of joint. And when that "sorry, we're going to pass this time" email arrives, as it frustratingly will 9 times out of 10, that also deserves a polite follow-up. This time, a 'thank you' email. You may not feel it's deserved but this is the email that says most about you. That will get recorded in the CRM for next time. And there often is a next time.

2. Other pieces really worth reading this week: 

European VCs examine Russian ties
In Sifted this week, an analysis of how European VCs are now scrambling to assess the impact that unprecedented sanctions could have on how they do business. “If a fund had a Russian LP investor who is not targeted by sanctions, the fund could continue to accept investments from that person from a legal perspective,” explains Mike Casey, from law firm Wilson Sonsini, “although the fund may encounter both commercial and reputational challenges by doing so."

The Company-Building Cornerstones Every Founder Needs to Focus On
In this exclusive interview in the First Round Review, Dharmesh Shah, Founder of HubSpot, traces back the 15-year journey from startup. He highlights five company-building cornerstones that founders face and shares his advice — from choosing a co-founder, architecting your role and bringing aboard the early team, to getting feedback as the company grows and crafting a culture that will scale.

LP Expectations vs. VC Realities
From VC Finn Murphy, an article that reveals one of the biggest investor anxieties. "The power-law always determines VC returns. So while getting a 5x here and there was nice, it wasn’t going to put you on the Midas List. Now with even higher expectations, investors are much more inclined to want to take a higher likelihood of a zero with a low likelihood of a 50x, than a guarantee of a 5x on their money....The biggest fear investors have isn’t losing money. It’s their best investment selling long before they should."

Happy reading!

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