Duet Partners
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Weekly Briefing Note for Founders

4th March 2021

This week on the startup to scaleup journey:
  • 2 founders are not always better than 1
  • US corporate investment still most attractive to UK Tech startups
  • SaaS companies are giving away their products
  • The operating systems of your startup

1. Insights of the week

2 founders are not always better than 1
Many investors will claim that companies with solo founders are less backable than those with two or more co-founders. They will qualify this by saying “..starting a company is just hard. Having a great co-founder is also an early sign you are good at selling. Selling the story at least.” One study based on extensive research by Jason Greenberg from the University of Pennsylvania, Wharton School, identified that founding teams take the spotlight because many believe that “Starting a business requires a variety of skills that few people possess all on their own, so having several founders would make representation of that entire skillset more likely”, and “...that early research on solo founders suggested they underperform against teams.”
But contrary to popular belief, Greenberg's research found that companies started by solo founders survived longer than those started by [co-founder] teams, generated more revenue than organizations started by founder pairs, and did not perform significantly different than larger teams. “Disagreement, stress, and conflict are inevitabilities during the startup journey, and questions arise about how to address both opportunities and challenges,” the research stated. “When such disputes result in significant distractions from organizational development it becomes far from clear that a [co-founder] team is preferable to a solo founder.”
Changing investor perceptions is hard, but in our experience the most effective mitigating factor for solo founders is the presence of a strong executive team operating under clear leadership. And for co-founder teams, once early scaling begins and clear operational processes become embedded, the risk of failure due to ‘social frictions’ diminishes. The ‘hired team’ then provides the necessary resources, diversity of thought, and social support required to navigate the optimum growth path. Investors will want to see this in action and will probe for evidence of such cohesion during due diligence. Any sign of cracks will cause alarm.

US corporate investment still most attractive to UK Tech startups
European VC deals with Corporate VC (CVC) participation hit €19.4B in 2020, up 24% from the prior record in 2019, according to Pitchbook. As a result, founders are looking more closely at CVC as part of their funding strategy for 2021/22. Synergies are a crucial aspect of finding the right partner as corporates are more likely to invest in startups that align with R&D efforts or complement existing operations. But the financial appetite for investment is also a critical factor. Only those corporates that are building solid balance sheets will have the capability to support startups over the long haul. And in Tech, there seems to be fewer and fewer of these companies close to home.
The most active CVC funds belong to US tech companies, such as Alphabet, Softbank, Salesforce, Tencent, Amazon, Intel, Microsoft and Qualcomm, most of whom have had a strong performance through the pandemic. In Europe however, CVC funds are spread across a wide variety of sectors from fast-moving consumer goods to financial services, automotive to life sciences, pharma and manufacturing. And whilst Tech stocks outperformed the broader global market last year, in the UK they actually fell. The value of Tech companies trading on the London Stock Exchange through 2020 hit £158.2B, a £12.9B drop year on year. Some would argue that this is because UK analysts don't understand the drivers of value in high growth businesses. The number of tech companies trading on the LSE also decreased in the last two years from 152 in January 2018 to 144 as of November 2020. 
The contrast between US and European markets is demonstrated most starkly by M&A activity. As reported by Dealroom, nearly 68% of acquisitions of tech startups globally were made by US companies in 2020. The magnetism of US markets continues to attract many of the most successful European tech companies, who realise that not all acquisitions are created equal. It's not always about cashing out. Selling to a larger, faster-growing tech company on its path to 'becoming an empire', could have incredible upside - but only if you are paid in stock. Next to a US listing, this could be the most exciting outcome for any tech founder.

SaaS companies are giving away their products
2020 was the ‘year of free’. A wave of B2B SaaS businesses introduced free (freemium) options to help businesses through the pandemic. Mimicking DTC (Direct to Consumer) or B2C pricing models, these B2B businesses looked to take advantage of the continuing market shift to product led sales within the enterprise. Employees - rather than IT departments – have increasingly been driving early adoption as we have reported before. Through 2020 this phenomenon was accelerated by Covid. 2021 is now the year of reaping the rewards.
US VC OpenView Partners recently analysed the impact of new freemium offerings on a dozen high profile SaaS businesses. Freemium terms varied considerably but the results were overwhelmingly positive, driving a big growth in signups and strong conversion rates from free to paid. Some, such as GitHub, have pursued an aggressive land grab strategy, providing ALL core features for free to ALL users. Charging only begins when certain enterprise level features are added in. CEO Nat Friedman says this will propel the company from serving 40 million developers today to 100 million by 2025.

Many B2B founders have found it easier to put the majority of their focus into a conversion strategy rather than an acquisition strategy. As a result there has been an incredible amount of innovation around freemium – including B2C – as hundreds of companies have jumped on the bandwagon during 2020, providing many different pricing tactics to fuel a ‘winner takes most’ market strategy. Investors have taken note of how these bold moves have boosted adoption during this unique period of rapid digital transformation. As Covid tailwinds fade, this provides an important new topic to discuss with founders when early scaling plans are presented.

The operating systems of your startup
In successful companies, the systems that guide the operating model of the business provide the framework for growth. They include the strategic planning process, the sales forecasting process, the product development process, and others. With their inbuilt review points – annual, quarterly, monthly or even weekly – they become a regular forcing function for progress. Most importantly they expose managers to the scrutiny of executives, and executives to the CEO. In turn, these systems ensure the company maintains clear alignment between strategic goals and day to day operations. They also help define the 'performance culture' of the company.
Kevin Fishner is Chief of Staff at HashiCorp, a cloud infrastructure automation startup that achieved unicorn status in 2018 and closed its latest round in 2020 valued at $5B. In a recent article, Fishner shared his playbook on the core systems that have been fundamental in driving growth. These systems rely on ‘sources of truth’ (key metrics and analysis) and the ‘ritual’ of consistent practice (a regular time frequency for review). This includes the use of scorecards to set and monitor objectives. The method is similar to Management by Objectives (MBOs) which remains one of the simplest but most effective performance management tools for businesses at any stage.
In early stage startup companies, such ‘formality’ is often shunned. When you are running rapid experiments to find product/market fit, flexibility and adaptability are surely key? But experienced founders know that performance management begins on day one. In particular, any activity that burns cash must be first agreed then monitored for efficacy. If results don't materialise, changes must be made. Ultimately, everyone must be accountable. Institutional investors expect CEO’s to employ systems that enable the business to operate in an expedient, informed and decisive way. MBOs are a great place to start.

2. Other pieces really worth reading this week: 

The Rise of Creator Platforms 
There is a revolution underway in software development that has not yet entered mainstream thinking, but has investors very excited. Rex Woodbury is an Investor at Index Ventures and in his latest blog, opens up the vast new world of 'no code/low code'. "In the 1970s, kids grew up tinkering with personal computers like the Commodore 64; this lay the foundation for a generation of entrepreneurs like Bill Gates and Steve Jobs. Today’s kids grow up building in Roblox, mirroring the rise of low code / no code in the startup ecosystem and signaling how everyone is now able to manipulate and create software. The 12-year-old who spends her free time building games in Roblox will become the 22-year-old who builds her company’s business apps in Airtable. Roblox is minting teenage millionaires: this year, it will pay out a quarter-billion to its network of 345,000 paid developers..."

Finance As Culture
From the wonderful blog of John Luttig, Investor at Founders Fund, a deeply thought-provoking analysis of how 'financialization' is no longer purely institutional. It has seeped into our culture. "2020 accelerated finance culture: stimulus checks, nothing to spend money on, and lockdown boredom drove people to the stock market. But the driving forces behind the financialization of culture have been accumulating for years. We need to look at interest rates, tech maturity, inequality, and social media to understand the full picture...."

How entrepreneurs can recognize the signs of imposter syndrome and overcome it
From Dan Sullivan's blog on overcoming Imposter Syndrome Anxiety. "Imposter syndrome is the feeling that you’re not qualified to be doing what you’re doing or that you’re not the person that people perceive you to be. Everyone might view you as an expert in your niche, but you don’t feel like you are. Imposter syndrome is common in entrepreneurs and anyone who has risen to a high level in their field..."

How VCs make decisions
Although heavily based on a US perspective of VC, this HBR article provides a great overview of how these investors operate. "Few VCs use standard financial-analysis techniques to assess deals. The most commonly used metric is simply the cash returned from the deal as a multiple of the cash invested."

Ex-LSE head urges London to join SPAC 'revolution'
Further insights from Pitchbook that reveal growing momentum behind SPACs in Europe: "So far, SPAC activity in the UK and Europe has been negligible when compared to the US, with just €1.9 billion (around $2.3 billion) raised by European vehicles last year versus $56.5 billion in the US, according to PitchBook data. But that is changing,...Already this year there are several SPACs either looking to file in Europe or go public in the US with a view to targeting European investments..."

Happy reading!

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