Duet Partners
Tel: +44 (0) 20 7416 6630 / Email: partners@duetpartners.com

Weekly Briefing Note for Founders

29th August 2022

This week on the startup to scaleup journey:

  • A framework for positioning your startup
  • Why is HardTech so Effing Hard?
  • Critical Mass Theory of Startups

A framework for positioning your startup

When we were setting up Duet back in 2009, we met with a number of leading VCs. We wanted to find out more about their investment strategies and what made startups appealing to them. One of the most profound insights came from a well-known DeepTech VC (who subsequently invested in our first client) who said: "When you're advising founders on their pitch make sure you get them to state what they do". This was an intriguing comment. After digging a little deeper they added: "You'd be amazed how often we get half way through a pitch and we still don't know what the company does."  It seemed incredible to think that something so basic was somehow being overlooked. But as we met with other investors, we heard remarkably similar things. The best explanation we had for this came from a partner at one of the UK's leading early-stage VC funds. His thesis was that founders become so close to their proposition that they lose sight of what this might look like to someone from the outside world - someone who is approaching the business completely cold. This led us to the importance of the company positioning statement and how this could be used with investors.

A positioning statement is a sentence or two that clearly defines the problem you're setting out to solve and why your solution is compelling. The statement usually remains internal, but it’s critical to everything that follows: Aligning teams (especially multi-founder teams), hiring the right people, developing the best product, communicating the value of your work — the list goes on. One of the great modern thinkers on tech business positioning is Arielle Jackson“You need to position your product in the mind of your user,” says Jackson. “And that requires taking your potential users into account, assessing the product’s strengths and weaknesses, and considering your competition. There are so many products out there, and people are busy. You have to know who you are.”  A basic framework for this statement is as follows: For (target customer) Who (statement of need or opportunity), (Product name) is a (product category) That (statement of key benefit). Unlike (competing alternative) (Product name)(statement of primary differentiation). The trick is to stick to plain English (no buzzwords or acronyms), so the statement is accessible to anyone.

Jackson cites a couple of great examples that we can all relate to. First, Amazon's early positioning statement: "For World Wide Web users Who enjoy books, Amazon is a retail bookseller That provides instant access to over 1.1 million books. Unlike traditional book retailers, Amazon provides a combination of extraordinary convenience, low prices and comprehensive selection." And another, from Harley-Davidson: "The only motorcycle manufacturer That makes big, loud motorcycles For macho guys (and “macho wannabes”) mostly in the United States Who want to join a gang of cowboys In an era of decreasing personal freedom." The exact format can vary as long as you hit the key components. Note that the positioning statement is different to the punchier 'tagline' that is used externally. For Harley this is: “American by birth. Rebel by choice.”  The tagline is designed to be evocative and highly memorable. But a tagline won't communicate enough substance for an investor, so consider using the positioning statement instead. If it appears early in the investor deck there will be absolutely no doubt about what you do. [For those who want to go deeper on this topic, a great read is the foundational marketing guide, Positioning.]

Why is HardTech so Effing Hard?

This week we are indebted to entrepreneur and angel investor, DC Palter, for his article Why is HardTech so Effing Hard? This lifts the lid off one of the trickiest subjects in the venture world - why hardware startups are so difficult to fund. DC compares the relative ease with which software startups find favour within the VC community. A review of the 1000+ unicorns listed on Wikipedia reveals they are nearly all software companies. And just last week, as if to hammer this point home, Wiz announced that they’d reached $100M ARR just 18 months after launch, making them the fastest growing software company of all time. Less than 2% of successful startups actually build physical things and most of those are electronics that are easy to outsource."Want to make a better battery electrolyte or invent a way to recycle plastic? You’ll need all kinds of specialists, you’ll need a lab, you’ll need capital for inventory, and you’ll need to ship a product. You’ll need to build a friggin factory. A FACTORY!!! Ever done that before?", says DC.

It's not difficult to work out why software businesses are more attractive to VC's. In the hardware world, the costs and risks of getting the first MVP into customers hands are often very high, not to mention the scaling challenge, especially if you need to build the product yourself. Everything takes longer and there are many more interdependencies and potential points of failure. Yet the irony is the world needs hardware. Without major innovations in the hardware domain - think advanced materials, semiconductors, quantum computers, new forms of energy and energy storage, electric vehicle technology and many more - the platforms for this software simply wouldn't exist. And it's often the truly renegade startups that pioneer these new disruptive technologies. So is the venture funding route a non-starter for hardware companies? The short answer is 'no', but the way to unlock it is not straight forward. HardTech founders have to be so much more creative in funding strategy development. This requires a longer term view, not just "How do I fund the next round?" but "How do I fund this through to a business that can truly scale?"

Aligning key milestones (evidence) with each funding point along the way is crucial in managing the risk/opportunity profile. This then opens up (or closes down) certain types of investor at each point. Each must give confidence to the next by their very presence on the cap table. Deferring equity investment to the latest possible moment can be key to avoiding heavy dilution, at least until the core R&D phase is over. Funding the very early stages with University spin-out financing and/or government grants is a common path for many UK startups. Joint development agreements and NRE projects with corporate partners can be the next step. Corporate investment may then be appropriate but not to the extent that it represents an 'early exit' - this will put off other equity investors, especially VCs. Debt at early stage is never easy given the absence of operating profits to cover repayments, so the equity providers must be willing to pay - very difficult. As one recently successful founder put it, "start with the end in mind and work backwards". Seek out the lessons that others have learned to increase your chances of success. Above all, "..start now, you probably have less time than you think."

Critical Mass Theory of Startups

Visionary Founders do more than solve industry and market problems. They create solutions to problems that people didn't even know they had - until they saw the solution. As VC James Currier says"Market needs are often a lagging indicator of technological progress. In many cases, like the iPhone, we didn’t even know that we needed a thing, until the thing made us want it."  Visionary founders can see the opportunity for a new technology, a new approach, a whole new market. Critically, they can see the change coming years before others can. They can see the tipping point for this change - when technology, economic and societal trends converge - where exponential growth can be realised. Predicting this moment of inflection, and then enabling this moment, is the domain of the truly visionary founder. This tipping point gives rise to what VC Pete Flint calls the 'Critical Mass Theory of Startups'. He says: "What we see in many great founders is a clear understanding of the trajectory of emerging technologies, and when these technologies are on the cusp of a transition that will enable transformational product experiences." 

Whilst we live in an era where software is eating the world, the core enabling technology - as we highlight above - is the hardware upon which this runs: semiconductors. One of the most fundamental insights of the past 50 years is Moore's Law. In 1965 Moore observed that every couple of years the number of transistors you could fit on the same area of silicon was roughly doubling. And that would make those chips effectively twice as fast for the same cost. This enabled multiple generations of founders to exploit predicted advances in semiconductor technology years into the future. But according to researchers from Stanford and MIT, "The number of researchers required today [to maintain this trend] is more than 18 times larger than the number required in the early 1970s. Across a broad range of case studies at various levels of (dis)aggregation, we find that ideas — and in particular the exponential growth they imply — are getting harder and harder to find." Raw economics are now fighting against the further progression of Moore’s law. Is this a new inflection point?

This quest for fundamental breakthroughs in enabling technologies continues to inspire visionary founders across many DeepTech sectors. In the UK, pioneering developments in areas such as quantum computing, silicon photonics, advanced organic and other new materials are transforming the world of electronics with the potential for game-changing impact on major industries. The vision of these DeepTech entrepreneurs is to push society towards new paradigms through invention and inspiring innovation. To do this they need to be master persuaders as well as inventors. They need to persuade co-founders, employees, early adopters and a whole ecosystem of partners and other supporters (including Government) to join the movement - often before there is any real evidence to show. Not least they must persuade investors, used to the lower risk and faster ROI of software-enabled businesses, that the prospect for enormous value creation is now there. This is a heady task as we have noted above. But like a surfer who rides the wave, the visionary founder can feel the gathering power of the technological, economic, and societal forces beneath them. If they can convince investors that the tipping point is coming, they will be in for an amazing ride.

Happy reading!

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