Duet Partners
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Weekly Briefing Note for Founders

4th February 2021

This week on the startup to scaleup journey:
  • The scaleup question that founders underestimate
  • "Why Now?" must reveal the inflection point for value creation
  • Corporate Venture Capital investments at an all time high
  • The hardest hiring decision founders have to make

1. Insights of the week

The scaleup question that founders underestimate

How do you define a scaleup? The Scaleup Index, an in-depth report on the UK scaleup scene, defines this as business with growth in turnover or employees of at least 20% per annum over a 3-year period. Revenue growth makes sense; that's what founders naturally strive for and it's what investors love talking about. But revenue is a lagging indicator, so the key scaling question that investors will dig into first is the how. How will you scale? The marketing channels, the sales channels, the key geographies, and critically, who will execute this plan? In other words scaling is very much about your team, the 'employees'.

Even in Seed Round pitches, investors will want to understand your vision for scaling. You will be so focused on the pathway to product/market fit that the 'go to market plan' will have likely had little attention. For SaaS businesses, where the potential exists to scale quickly and efficiently even with modest funding, this will be seen as a major oversight. The Scaleup Index found SaaS companies provided the most scaleups in the UK, with almost 100 more than any other sector. Being able to at least articulate your scaling vision at Seed stage stage is therefore expected.

Series A investors will dig even deeper and, in particular, plans for geographic expansion will be a hot topic. The UK market will be seen as just a launch pad at best. Phillipe Botteri, Partner at global VC Accel, says: “It’s important to have a strong understanding of the US market as this is where the majority of SaaS companies need to be successful. Be prepared to talk about how you plan to do that”. As you assemble ideas about how you plan to scale geographically, make sure you do this from both a sales and human capital perspective. For example, who on your team understands the US market and has been down a similar path before? This quest should not be a total voyage of discovery, so don't plan on using investor money to invent this particular wheel. Hire one instead.

"Why Now?" must reveal the inflection point for value creation

"Why now?" is always a critical element of the VC investment decision. In VC Chris Paik's recent essay on his worldview of Venture Capital, he says: "Venture capital is a very specific instrument that is purpose built to fund companies that are capable of explosive value creation over compressed periods of time". Determining the starting point of this value creation period is the founder's art. The spark of an initial insight should ideally coincide with some big shift in market dynamics, regulation or technology, that provides an accelerant to the flame. Maximum enterprise value potential is often discovered at such inflection points.

Venture Capital investment is aligned with the concept of customer building, which occurs in stages. At Seed stage, we first talk about 'customer discovery' followed by 'customer validation'. At Venture stage, we talk about 'customer creation' as the business begins to scale. Company building comes later, when the business is more mature. Inexperienced founders are sometimes guilty of premature scaling; they slide into the 'company building' phase before the 'customer building' phase has achieved commercial momentum. Paik says: "Without a sufficient answer to the question of “Why Now?”, any venture capital invested into the company ... is subsidizing company building that would be better served by alternative capital instruments (with a lower cost of capital, i.e. debt, etc.)." 

Timing of external accelerants is thus a critical factor in the VC's evaluation. If early funding points appear misaligned with the market, investors will step back. This is especially true for a late Seed round. In particular, startups that have had an extended lead-in period to this point (4 or 5 years or more since company inception) will need to present a clear rationale why commercial momentum has remained elusive. Perhaps there was an R&D phase that preceded initial customer engagement ('invention' before 'innovation'), or perhaps a major pivot has been undertaken. Founders must proactively address such topics before they emerge as investor concerns, then confidently paint a picture of the 'dam-breaking moment' that lies ahead.

Corporate Venture Capital investments at an all time high 

European VC deals with Corporate VC (CVC) participation hit €19.4B in 2020, up 24% from the prior record in 2019, according to Pitchbook. Corporates across industries that have fared well through the pandemic, such as e-commerce, online recreation and remote-working tools have been the most active. Synergies are a crucial aspect of CVC strategies as corporates are more likely to invest in startups that align with R&D efforts or complement existing operations. They will leverage the expertise of startups instead of developing their own in-house solutions that could be more costly and time-consuming to launch, build, and roll out. 

Whilst overall investment is up, CVC deal volume across Europe is down from 1,417 transactions in 2019 to 1,325 in 2020. This pushed average deals sizes up in line with the rest of the market. For example, London-based online events platform Hopin, completed a £95M million Series B round with participation from CVC firm Salesforce Ventures in November. This followed a Series A of £32M in June 2020 and a Seed round of £5M in February 2020. In the space of 9 months ARR exploded from $0 to $20M. In Q4, London-based commercial electric vehicle maker Arrival completed a €100.4 million financing with participation from UPS Ventures. This investment cements a commercial collaboration where UPS will order 10,000 of Arrival’s vehicles. 

As we have said before, any CVC investment must be carefully considered. Incoming VCs will scrutinise the commercial and investment terms associated with any corporate relationship. They will weigh the benefits of commercial expediency against the likely impact on exit potential. For example, if commercial terms grant any form of exclusivity, especially in a licensing model, this could turn them off. Equally, if the corporate has preferential investment terms, especially the right of first refusal in an acquisition scenario, this will be a big red flag. Founders must therefore seek to negotiate investment terms that both endorse the commercial viability of the business in the short term and elevate the value of the business over the long haul. 

The hardest hiring decision founders have to make

Founders agree that when it comes to executive level hiring the hardest decision they have to make is the Head of Sales. Deciding when and who to hire for this critical role are questions that first-time founders, in particular, will wrestle with. In enterprise B2B, founders that don't have the relevant commercial background will find this a particularly daunting challenge. The first pitfall to avoid is not to to confuse Business Development with Sales. The art of Business Development (BD) is to sell what doesn't (yet) exist - for example your product in MVP form to a small number of early adopters. The art of Sales is to sell mountains of what you do have (a 'finished' product or service) to the fast followers and then the mass market. These are two different skill sets and are driven by very different personal motivations.

The timing of the 2 roles is also different. BD is required as soon as you have something to demonstrate to an early adopter, hence a role often fulfilled by the Founder/CEO. Once you have found product/market fit and are starting to see clear evidence of market pull, it's time to start scaling. Time for the Head of Sales. This is a specialist, highly skilled, high value role you should be hiring in, rather than developing within. Unless you have a great little black book of highly relevant candidates from a former life, don't try and do this hiring on your own. This is an occasion where a top notch recruiter can really earn their fee. Finding a solid candidate fit will take real time and effort, so anticipate this and don't cut corners. This person is going to be your rainmaker-

Serial founders are well networked into top recruiters and know who to approach for different types of role. First-time founders should seek introductions from trusted sources. Experienced executive recruiters will also help you formulate the job spec. Don't rush this critical step - it may be the first time you have seriously thought through all the key aspects of this role. The Head of Sales is the most common startup mishire. Take advice, be clear on the job spec, formulate your key interview questions and make sure you undertake thorough due diligence on the final candidate. As ever, you are hiring for expertise, so track record is key.

2. Other pieces really worth reading this week: 

Creating the biggest IPO in software
An insightful profile piece on the formidable Frank Slootman by Alex Konrad in Forbes"Snowflake's Frank Slootman doesn’t start companies. But no CEO has a better track record of turning the ideas of others into jackpots. Now the 3x IPO veteran is exclusively sharing his playbook."

What makes a SaaS product viral?
OpenView Partners assess 5 Examples of SaaS Products With Viral Loops. "Think about the first time someone sent you a Zoom link. Odds are that once the meeting ended, you wound up registering for an account so you could start setting up your own meetings. The people you invited to those meetings were then exposed to Zoom—and then, like you, they signed up and started to set up their own meetings. This viral loop was of course accelerated when the pandemic hit, as we saw them go from an average of 10 million daily meeting participants to more than 200 million daily meeting participants."

Do higher valuations imply more employees?
A thought-provoking article in Crunchbase News: 'Tech Companies Going Public Aren’t Getting More Employees, They’re Just Getting Bigger Valuations'. "It’s not unheard of for startups with a staff that could fit into a single bus to be valued in the billions. Take WhatsApp, the poster child for high value-per-worker startups. The messaging company employed just 55 people when Facebook bought it for $19 billion in 2014. That works out to nearly $350 million in valuation per employee."

20 Lessons on Leadership
From a tweet thread by Romeen Sheth (collated here in Thread reader), serial entrepreneur and angel investor: "Here are 20 (non-fortune cookie) lessons that made me a 10x better leader." Excerpt:
"15/ The real risk in hiring is hiring too many Bs
There are 3 types of employees: As, Bs and Cs.
Conventional wisdom says Cs are a big risk. I think that’s wrong. Cs are easy to identify/fire.
Bs are the ultimate passenger and they burn out your As (the drivers)." 

The SaaS takeover of the software industry
A powerful retrospective on the software industry and the emerging strength of SaaS as Covid has accelerated adoption curves, by Jos White of Notion VC: "Generally companies will see this crisis as an opportunity to make a change and no longer rely on their legacy way of doing things. Coming out of a crisis is also a time when a disproportionately high number of new companies get created and they can start with a blank slate and choose the very best products available at the time. This is especially true of this situation. Pretty much the entire world was forced into working from home. No-one wanted this moment to happen but the SaaS form factor was built for it."

Happy reading!

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