Duet Partners
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Weekly Briefing Note for Founders

9th September 2021

We're away this week, so bring you our 4 top insights of the year to date on the startup to scaleup journey:
  • The transition from Founder to CEO
  • Execs need to be 'owners' not just 'helpers'
  • Customers must not hijack your product
  • Revealing the true intent of an investor

1. Insights of the week

The transition from Founder to CEO

Founders know that as their business grows from fledgling startup to high growth scaleup, their role will change. The words of Pete Flint, former entrepreneur and now Partner at VC NfX, capture this transition perfectly:"In my experience, if you’re a Founder of a company that reaches real scale, there are two distinct phases you go through. Phase One (which is the Founder phase) is all about building a great product and finding clear product-market fit. Phase Two (which is the CEO part of your journey) is about building an enduring, sustainable company."  The transformation requires a clear awareness of how priorities evolve and how the role must evolve alongside. Investors at Series A will pay particular attention to how a founder is undertaking this critical transition.

Through Seed stage, a Founder's primary role is that of product manager. The focus is on who you are creating value for and how you are creating this value. The product, or MVP, encapsulates this. In the early stages you are undertaking experiments to discover your most ideally matched customer type. Even as customer engagements increase and early revenues grow, the 'founder as product manager' is not distracted by revenue per se. The goal in this phase is product/market fit; identifying the specific user demographic or market segment that derives the greatest value from the MVP. Early investors can sometimes unwittingly steer the founder off course by prioritising revenue as the sole indicator of progress. But VCs and other institutional investors will view such a narrow view of progress with caution.

Series A investors will evaluate how deeply a founder understands the needs of the growing number of constituents essential for growth. Customers are the most important constituent, so investors will probe every facet: the supply chain, the end users, channel partners, and the relationships that bind them all together. But by now there are now a growing number of other important constituents including employees, investors, and partners. Each of these stakeholders will have their own needs and objectives. The 'founder as CEO' must understand these so their contribution can be orchestrated and aligned with the growing business. Investors will give credit for systematic approaches in the management of all these relationships - especially those that involve clear KPIs to monitor and improve. This demonstrates a core capability for sustained growth, which is now the priority.

Execs need to be 'owners' not just 'helpers'

Building out the executive team is a critical undertaking for any startup CEO. The timing will vary depending on the type of business model, but for most it will begin during early scaling. Up to that point the founders will have relied on a handful of individual contributors - especially in product development - to build the MVP and engage with early adopters. At this stage you are designing and running experiments - not (yet) building a company - so flexibility is just as important as specialism; early hires end up wearing multiple hats. But at the point where clear commercial traction starts to bite and the organisation needs to ramp up at executive level, inexperienced CEOs sometimes stumble.
Executives are the functional heads - sales, marketing, product, customer success, HR, etc., that report directly to the CEO (in the US, ‘VPs’).  In his recent blog, VC Jason Lemkin says founders often take too long to decide on these critical hires. Founders will either prevaricate over the possibility of promoting one of the ‘incumbents’ (sometimes out of misplaced loyalty), or believe they can simply get away with a more junior role. But this is a time where you need ‘owners’ not just ‘helpers’. As Lemkin says, “Help is terrific, and appreciated, of course.  But a great VP of Marketing or Customer Success does so much more.” They will take full responsibility for implementing systems and processes that deliver consistent growth, and, as 'owners', will expect to be held accountable.
For founders that have worked for high growth business in the enterprise, none of this is a surprise. They will know the types of operators being described here and the amazing impact they can have. These VPs not only pay for themselves with the growth they unlock but will unburden the CEO from operating minutia. Investors at Series A and beyond will expect the use of funds to cover such critical scaleup roles. These new hires will be leaders in their own right (some will potentially be future founders), capable of filling out teams beneath them over time. Above all they are 'accelerators'; they make things happen faster because they are truly proactive. They understand that momentum is everything and are able to ‘pull’ the company towards the next milestone. Who are your 'owners'?

Customers must not hijack your product

Revenues are evidence of commercial traction, the key care-about for early-stage investors. But not all revenue is equal. For any startup, engagements with early adopters that are not strongly representative of the particular problem focus will at best be a distraction. Worse case, they could pose an existential threat to the business before it even begins to scale. It won't take prospective investors long to figure this out in due diligence. Experienced founders know that by focusing on solving one problem really well, momentum can be developed by finding more customers with the same problem. We now accept that such 'cohort analysis' is critical in developing SaaS businesses, but it's just as important in other business models. 

Refining the exact qualification criteria for the initial target cohort can be a lengthy, iterative process. And every month, dwindling cash balances put founders under ever greater pressure to pursue potential revenue opportunities where the cohort fit may seem dubious. In business models that require deep engagement with each new customer, for example where technology or product integration is required, it may take months to confirm viability. Here the immediate qualification criteria must be willingness to pay, right from the outset: pay for the initial feasibility study, pay for the proof of concept, pay for any joint development, and so on. Customers that are not sympathetic to the enormous opportunity cost for a startup should not be allowed to hijack your product to solve their own unique problem.

Some founders, often those with limited sales background, can be nervous about seeking such early cash commitments. Worse, by initially trying to paint their startup as a more established business - for example, by adopting the behaviour patterns learnt from earlier experience in the corporate world - they can undermine their own pitch. In fact startups are uniquely positioned to leverage their often tenuous cash position to negotiate for early payments. And if you don't ask you certainly won't get. Where deep engagement is an essential, willingness to pay (early) is also a sign of intent. Accessing cash from operating budgets can take time, so the sooner you make your case the better.

Revealing the true intent of an investor

Most institutional investors, especially the major VCs, provide clear signalling on their investment thesis. Many will prefer certain stages (Pre Seed, Seed, Series A, Series B, etc.), or certain market sectors, or even specific business models (B2B, B2C, B2B2C...). What is often less clear is their investment horizon: In what timeframe will they be seeking a return? For a typical 10-year VC fund, where the initial investment period is usually the first 3 years of the fund, the return period will often be stated as '5 to 7 years'. But this is not information investors feely offer, so founders must ask. This is a crucial piece of information when selecting an investor, as having investors with non-aligned goals on the cap table often leads to trouble. It also explains why investors that are coming to the end of their initial investment period seek more mature businesses than they did when the fund was initially minted.

When developing target investor lists, founders must therefore pay particular attention to the age of the fund. But there is another tell tale sign in how a fund is likely to evaluate a potential investment opportunity, and that is who the Limited Partners (LPs) are. The LPs are the investors in the fund and these can typically include pension funds, sovereign wealth funds, insurance companies, family offices, university endowments, and high net worth individuals. Certain LPs are institutional investors themselves and set out their own investment criteria for the investors that they are accountable to. Other LPs such as Family Offices are accountable only to themselves. Research into Europe’s 1,200 venture capital and private equity funds has shown that the types of LP significantly influence fund behaviour. "Beware of venture funds that present themselves as 'founder friendly', but whose limited partner list is a roster of investors who seek short-term rent."

It is well known that different LP types will have different aspirations depending on their investment horizons. But it is also apparent that they also differ in financial sensitivity or the magnitude of how their funding cash flows are affected by changes in underlying financial or economic factors. For example, many institutions are restricted by a set of predetermined rules, such as being able to invest only in funds with a clear exit plan or being forced to reduce their contributions, or drawdowns, below certain public equity valuation multiple thresholds. As a result, 'patient capital' is more likely to come from VC funds that have a strong element of strategic (e.g. Corporate or Government) or Family Office backing. When developing a relationship with lesser-known VC fund for example, it is therefore important to do some research into their LP base as part of your own due diligence. If you can't find the answers easily, ask the VC partner you are dealing with. If they are not immediately forthcoming, this should raise a flag.

2. Other pieces really worth reading this week: 

A Path to the Minimum Viable Product
Steve Blank, 'The Father of Modern Entrepreneurship', publishes a compelling essay this week on the concept of the MVP Tree. "During the crucial mission-to-MVP planning phase, the objective of a startup is to solve one job for one customer group such that customers consistently use your minimally viable product for an important part of their work or personal lives. In other words, you prove retention. It’s really all that matters at the earliest stage. The tool for doing this efficiently and effectively? We call it an MVP tree."

The CEO’s Guide to Hiring Executives
From the blog of OpenView Partners this week: "Over a thousand CEOs were interviewed about the #1 threat to their business and 80% said: a scarcity of skills in the job market. While hiring all talent is tough, hiring executives can be particularly excruciating. Competition for top talent is fierce. Employers’ demand far outpaces the talent pool. And the specter of making the wrong decision looms large—one wrong hire is all it takes to poison a culture."

Focus on Your First 10 Systems, Not Just Your First 10 Hires
A chief of staff shares his playbook on First Round Review:“While I definitely agree that people are your most important asset, I’ve noticed that most content doesn't talk as much about the systems. What I don't come across as often is a read about how the systems that those first hires build are the manifestation of the culture.”

Happy reading!

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