1. Insights of the week
VC investment breaks records in 2020
By mid-December Pitchbook had recorded $46B of VC investment across Europe and Israel, beating last year’s record of $41.8B. Part of the reason for this is that many startups have flourished at a time when remote digital services—from food delivery to ecommerce—have been in greater demand than ever. VCs have continued to pile capital into hot sectors, and like their public market counterparts have favoured growth stories over profitability. In contrast, deal count has plummeted. By December 14th, deal numbers had dropped almost 22% from 7,502 to 5,883 this year.
In the UK, British companies had raised $13.7B by mid-December, almost 30% of overall VC investment across Europe. However, deal numbers fell sharply and were down 27% year on year to 1,791. Average deal sizes have thus risen dramatically reflecting an overall shift towards more developed propositions at growth stage and beyond. Five new British unicorns were minted in 2020, more than any other European country. Investors have been eagerly pursuing the hottest startups, offering substantial and unsolicited sums only a few months after closing large rounds.
These trends look set to continue into the New Year. The market is awash with capital whilst interest rates look anchored at rock bottom. Investors that have seen huge valuation jumps in both private and public markets want more of the same. But they will be discerning and deal count looks set to slide further. Only the most compelling propositions will attract investment. Founders must stay in tune with market developments and key investment criteria for each stage of funding. Those that are bringing forward well prepared opportunities will be rewarded.
Startup predictions for 2021
Predicting what’s in store for 2021 may seem like a mug’s game. But if current economic trends continue, we’re likely to see some incredible milestones reached. Across Europe, analysts are predicting over $50B in startup funding, up from $41B in 2020 and a meagre $16B as recently as 2016. Many foresee more investment coming into Europe from the US where the competition for deals is intense and valuations are much higher. Entrepreneurs are obliging with alumni from recent exits spawning many new businesses. Many of these are in the hottest technology areas that emerged in 2020.
Europe is now producing unicorn companies at the same rate as the US, so successful Seed funded companies have about the same 1 in a 100 chance of scaling to a $1B+ valuation. This frothiness will produce a wave of public exits, an increasing number of which will be SPACS (special-purpose acquisition companies) following a major trend that has developed in the US in 2020. The benefit of a SPAC exit is it avoids much of the regulation and red-tape that comes with going public normally – without depressing valuations.
The hardest prediction to make is when (and if) the transition back to office working will begin. Whilst studies are showing that remote work can increase productivity, workers feel more isolated and less connected to the world around them. Founders making capital raising plans will be increasingly dependent, as ever, on key staff to backfill on operational aspects, so there should be significant opportunity for aspiring leaders to step up. In such an uncertain environment the words of leading investor Howard Marks come to mind: “You can’t predict. You can prepare.”
Beware VCs bearing gifts
Founders with the most compelling propositions are increasingly being courted by investors. VCs chasing after the hottest deals are sharpening up their own pitches and, in some cases, clearly overselling their impact. The age old questions come to the fore: Do VCs really add value? What do founders consider as investor value add? And how do founders evaluate their investor when they choose whom to raise capital from? The most recent and reliable study on this topic, undertaken in 2018, surveyed 98 VCs and 121 founders. Founders and VCs across the spectrum responded to a mirrored set of questions about their perspective of their counterpart.
As expected, the differences between how founders perceived the relationship was different than for VCs. Founders reported less frequent contacts, less operational support received than VCs report giving, and — perhaps more intuitively — quite different priorities. One of the starkest contrasts was the way each group scored how impactful and helpful the VC had been for portfolio companies on a scale of 1 to 10. The average VC scored themselves a 7 while founders perceived them as a 5.3 — a 32% difference. Similarly, VCs reported that they made weekly contact almost three times more often than founders reported receiving that level of contact!
The survey also detailed the most telling aspects of how investment decisions between VCs and founders are made. Both reported personal relationship and chemistry with the counterpart as the single most important decision-making factor. The biggest differences between the two samples were between speed and reputation. Founders ranked speed as their 3rd most important criteria and VCs, in fact, ranked it as the least important one. In contrast, VCs assumed founders put far more emphasis on the brand of the partner and the experience of its leadership. VCs often believe their brand is what allows them to win deals but the research showed that if you offer compelling terms with speed a VC is likely to outcompete even the strongest brand firm.
3 quick wins for investment preparation
On the investment preparation checklist, it’s often the most obvious items that get missed. These are the things that seem so basic, so easy to do, and hardly special at all. But these tend to be the things that get forgotten in the fog of preparation and are often the first things investors will look at when assessing your business. There is absolutely no excuse for not having these nailed as they should take no more than a few hours to have them all in great shape. In order: your LinkedIn profile, your website, and your CrunchBase profile.
One of the first things an investor will do when checking out you and your team is to look at LinkedIn. You may be diligent at keeping your profile up to date, but make sure that also applies for the rest of your team. In a recent review we discovered several members of the leadership team had not updated their profiles since joining the company. One still had their employer as their previous company! Make sure the ‘About’ section matches your elevator pitch, and your company profile is consistent across all employees.
Updating your website is also crucial for obvious reasons. A good time to do this is when you have a solid draft of your investor pitch. Does the website reflect the pitch, or is it describing an out-of-date version of your company? Take a few moments to also create a Crunchbase profile for the company. More and more investors, especially from the US, will check this out. This is a quick, zero cost way of boosting your credentials and raising your company profile. You are in control of the narrative here and this further underscores transparency and confidence in your public story.
2. Other pieces that are really worth reading this week:
14 VC & Founder Predictions for 2021
In the closing weeks of December 2020, US VC NFX surveyed 526 Founders & Investors in the startup community about their predictions and sentiments for the 2021 year ahead. Their answers provide an inside view to what private companies and investors really think about Big Tech, upcoming IPOs, hot tech sectors, remote work, personal and startup HQ relocation, and hiring trends. One notable insight: Even after a reliable vaccine is deployed, founders & investors both predict they will take at least half of their meetings by Zoom, and most of them state they will conduct the majority (80%+) of their meetings by Zoom.
A masterful analysis of Europe's standing in tech, by Benedict Evans: "For the last couple of decades Europe has often seemed to punch below its weight in tech, despite a bigger population and a huge single market, some great computer science schools and plenty of entrepreneurs. Maybe Europe just couldn't do tech? No! But, how is that changing? And what does ‘Europe’ mean in tech?"
You Don’t Know Your Values
An insightful definition of success by Nir Eyal in Medium: "There’s a difference between “values” and “things you value". Your values are attributes of the person you aspire to be. You can take action every day to be that person. The things you value — they come and they go. Sometimes, you’ll do everything possible to get something you value, and you still don’t get it. Bad luck happens; that doesn’t make you a failure any more than winning the lottery makes you a success. Real failure is failing to live by your values, and real success is becoming the person you aspire to be."
Here are 5 skills researchers say employers are looking for right now
An article by the World Economic Forum on the soft skills now in demand. "The equivalent of 305 million full-time jobs have been lost globally since COVID-19 hit, according to ILO figures. But there are signs recruitment is increasing in some markets. LinkedIn has analysed millions of job adverts to find what employers are looking for. So-called ‘soft skills’, including communication and problem solving, head up the list."
Technology Entrepreneurship and the Disruption of Ambition
A thought-provoking article from Matt Clifford, CEO & Co-Founder of Entrepreneur First: "Moving from the J.P. Morgan model of ambition to the Mark Zuckerberg model shifts the balance of power from capital to talent. Ambitious people have gone from writing cheques to writing code. Today the most ambitious individuals don’t own the means of production, if they can write code they are their own means of production (Marx would, perhaps, be surprised). This gives ambitious people unprecedented power."
You Are Not Alone
You Are Not Alone: time to cancel the ‘hustle culture’ and for founders to invest in mental health. A timely piece in tech.eu this week on the mental health challenges founders face and the myths around the ‘hustle culture’. This takes us back to an excellent article in HBR from 2016: Resilience Is About How You Recharge, Not How You Endure.