Duet Partners
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Weekly Briefing Note for Founders

3rd September 2020

This week on the startup to scaleup journey:

  • Startups shouldn't launch products
  • Platform businesses - find a compelling use case if you want funding
  • The core ingredient in your pitch for growth capital 
  • The era of Product Led Growth
  • NDAs and investors

1. Insights of the week

Startups shouldn't launch products

Some great sessions over recent weeks with companies beginning their product developments. Determining how to use the MVP (minimum viable product) to gradually reveal product/market fit is one of the most exciting phases at early stage. But there continues to be a misconception here about using 'product development' as the method to lure in early adopters. As we said in our article What is a Minimum Viable Product?startups that emulate the product development model of established companies will fail. The 'customer development model' is a far better route for startups.

Product development is the process of revising (or even customising) the product to fit the needs of specific customers you want to sell to. Customer development is the process of revising the customers you target to find a fit for the product you want to sell.

The MVP is the enabler of customer development. It is the first version of the product to embody the core USP. It is not designed to satisfy the mainstream customer. Instead it’s aimed at selected early adopter customers who’ve already bought into the startup’s vision. They are desperate to alleviate their pain, or gain a significant competitive edge. They will be happy to take a leap of faith and even pay for what is essentially an unfinished product. The objective is to obtain feedback from these customers who want to be ‘first’.

The next step is to double down on this cohort - putting all other prospects to one side - all the time gaining deeper insights into which specific customer types respond well to the value proposition enabled by the USP. Hence the term 'customer development'. This approach does not revolve around a big 'product launch' to the entire sector, but rather a gradual and deepening engagement (via MVP1, MVP2..) with an ever growing group of these specific customer types - your beachhead market. When they love the product enough to happily recommend to all their friends, you will have found product/market fit. From there you can then start to expand.


Platform businesses - find a compelling use case if you want funding

As founders navigate their way through the customer development journey, the spectre of premature scaling is kept in check by a disciplined approach to exiting each phase. Our article Why is premature scaling the biggest startup killer?, describes the characteristics of each phase (Customer Discovery, Customer Validation...) and how these align with key funding points. This is an essential primer for any startup on the pathway to product/market fit.

The pursuit of where the value proposition reaches its peak is a particular challenge for platform businesses. Octopus Ventures talk about this in a blog piece by Philip Lay: The advice for platform business here is “In strategic terms, your first job is to identify a compelling use case — preferably in the form of a broken business process that causes your target customers unacceptable levels of grief — and then to make sure the problem is fixed with as complete and repeatable a solution as possible.”

Top tier VCs understand this phased approach. Prior to the first scale up round - Series A - they will look for repeatable, target customer engagements that validate the key business model assumptions.  This journey to gain use case knowledge and insight is everything, so a key metric is the number of customers, not just revenue. Building a cohort of users that is representative of your early market will trump outsize revenues from one single engagement every time.


The core ingredient in your pitch for growth capital 

Whether its a Series A round to support early growth or Series B for full-on scaling, the core ingredient that underpins your credibility is customer insight. Many other things are important - see our article on What do investors want to see in your pitch deck? - but if you cannot profess deep customer insight, your story will fall flat. Having reviewed several investment pitches for early scaling over recent weeks, this is a timely reminder.

If you're pitching to VCs you must be able to articulate what your ideal clients desire and what their deepest needs are. You must understand down to the most granular detail what motivates them, how they feel, think, and react, and how your product fills this gap perfectly. You must then link this to early traction and explain how this is scalable through the business model.

If you're pitching to a Corporate who is investing straight off their balance sheet, perhaps also looking for a commercial relationship in parallel, things will be different. There will likely be more appetite for digging into the product as the top priority. But if its a Corporate VC with a structured fund, the focus will be back again on customer insight. The key thing is to know exactly the type of investor you are pitching to and adjust accordingly.


The era of Product Led Growth

The shift to home working has provided an unexpected accelerant in the consumerization of IT - a trend where employees have an increasing influence in the technology they use at work. Think Zoom, Slack, Twilio, Eventbrite.... This important transition in decision making within the enterprise, away from IT departments and execs to end users, is profound. Investors are truly aboard this bandwagon as high growth companies explode in value.

Blake Bartlett of OpenView Partners, a leading VC in this space, has written a great piece, What is Product Led Growth? that explains how we arrived here and is a must read for any software business:"Product Led Growth (PLG) is an end user-focused growth model that relies on the product itself as the primary driver of customer acquisition, conversion and expansion.... It used to be hard for a company to adopt new software. Long sales processes, complex implementation, formal training and certification—the list goes on. All this took a lot of time—months, quarters, sometimes even years. But today, software just shows up in the workplace unannounced. End users are finding products on their own and telling their bosses which ones to buy. And it’s all happening at lightning speed."

Product Led Growth is now a term used by public market analysts, and it's easy to see why. Jon Ma's blog on Public Comps reveals some key financial comparators between PLG and non PLG companies, showing how PLG companies win out on almost all metrics including valuation. He also sets out what actions can be taken to make your company more 'product-led'. PLG is a key go to market strategy now for startups. The question is whether the major incumbents are nimble enough to change to PLG before they are displaced.

NDAs and investors

New clients will sometimes ask if prospective investors will be willing to sign a Non Disclosure Agreement. We can relate to the sensitivity that startups may have in divulging confidential information about their businesses. But the reality is that investors are very unlikely to entertain the idea. VCs will almost universally say 'no'. Some Corporate VCs may consider it following the initial meeting when they want to dig into the tech, but even then it's quite rare. If there is a commercial relationship developing alongside the investment discussion then this may tip the balance.

It's important to understand why VCs will simply refuse. Their perspective is: i) They don't need to. It's a buyers market and if you want them to consider your company for investment then it's a risk you are just going to have to take. ii) They are in the trust business and would not risk their entire reputation by disclosing sensitive information, and iii) If they signed an NDA ahead of every pitch meeting this would hamper the rate at which they could meet companies, plus they would need a big legal department to administer. Whether you agree with this or not is, unfortunately, moot. They aren't going to play ball.

Does this mean that we can trust them? In the normal sense, yes. They generally aren't in the business of wanting to steal your business ideas. Reputation is critically important, especially for the big guys. If you are talking to a smaller VC that is not well known, try and do some homework before you meet them. Talk to other founders or your advisor first. Employ good practice in divulging sensitive information - do it gradually. For example, don't share your financial model in the first meeting (if they ask then be wary!).

The best approach is to start meeting investors well before you need to raise capital. Get to know those that should be on your radar, develop the relationship, then follow your instincts.  

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

European VC Valuations Report
In Pitchbook's latest report, European VC valuations were healthy amid COVID-19 as software and late-stage rounds set an outstanding pace. The number of unicorns has grown in H1 2020, but Pitchbook believes the rate of newly minted unicorns could slow as it becomes challenging to capitalize on growth opportunities. The adoption of technology in everyday life has been accelerated by COVID-19 and could encourage dealmaking and valuations to flourish. Late-stage and nontraditional capital infusions may prevent exits in the near-term; however, a dearth of events and pent-up investor demand may entice startups to evaluate liquidity options.

A $44B unicorn stampede hits Wall Street
Ever since Spotify pioneered the direct listing as a new route for unicorns to go public in 2018, a growing number of venture capitalists have proselytized the deal type as a superior alternative to an IPO. There was only one problem: Companies couldn't raise new funding in a direct listing, making it an unrealistic option for businesses in need of growth capital. 
This week - as reported by Pitchbook - the SEC removed that barrier and together with several more traditional IPO filings, almost $44 billion worth of startups are now planning a shift from private to public. 

Zoom: Second quarter total revenue of $663.5 million, up 355% year-over-year
To provide inspiration for what is possible we just have to mention the results posted by Zoom yesterday. As reported by TalkMarketsZoom Video Technologies (ZM) stock soared higher still yesterday after revealing a staggering jump in revenues on Monday night after market close. The video conferencing firm has taken the business world by storm since the pandemic hit, with its revenues up 355% in the three months to end of July, smashing forecasts. The stock rocketed more than 40% higher on Tuesday, with its one-month return now at 71% and its year-to-date figure at 572%.
Almost $130B market cap on $146M raised! This is why investors are piling into SaaS.

Knowledge Workers Are More Productive from Home 
Fascinating research from HBR that reveals:
Lockdown helps us focus on the work that really matters. We are spending 12% less time drawn into large meetings and 9% more time interacting with customers and external partners.
Lockdown helps us take responsibility for our own schedules. We do 50% more activities through personal choice — because we see them as important — and half as many because someone else asked us to.
During lockdown, we view our work as more worthwhile.  We rate the things we do as valuable to our employer and to ourselves. The number of tasks rated as 'tiresome' drops from 27% to 12%, and the number we could readily offload to others drops from 41% to 27%.

6 Small Steps for Handling the Emotional Ups and Downs at Work
An insightful article this week in The Review from highly respected First Round Capital. "Teams should be actively having conversations about how to manage emotional ups and downs and mitigate burnout right now, especially given remote work will continue for ostensibly the next year." @dvasishtha .

Can you tell a story?
We regularly come across great insights into how effective founders communicate. One we share over and over is the power of telling a story. We most recently talked about this in our blog, Maximising the value of your startup. This week we watched a great video from Brendan Baker of Greylock Partners on how to communicate in the investor pitch meeting. It's over 5 years old but the messages are evergreen. This amplified many of our earlier points ( the story arc, 'why now?', 'excite not educate', 'specifically differentiate' ...) and is well worth a watch. The link is here.

Happy reading (and watching)!

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