Weekly Briefing Note for Founders

6th February 2023

This week on the startup to scaleup journey:

  • How to become a 'Super Founder'
  • Writing is the number 1 founder skill
  • Measuring Capital Efficiency

How to become a 'Super Founder'

Contrary to popular belief, a founder's age, educational background and number of co-founders are not predictors of success. Research reveals that the most significant factor is startup experience. Ali Tamaseb is a Silicon Valley VC veteran. His firm, DCVC, holds investments in almost 20 startups valued at over a billion dollars. His acclaimed book, Super Founders, offers an in-depth analysis behind the success of billion-dollar startups. After crunching through 30,000 data points, it unravels the multitude of false notions surrounding tech unicorns as well as the key predictors of success. One of Tamaseb's major findings was that roughly 60 percent of unicorn founders had previously launched startups. Their experience left them with industry contacts from which to find employees and investors to help get their startups off the ground. Critically, they were more likely to have learned from their mistakes. But short of having this lived experience, what can first-timers learn from the serial founder playbook?

Successful founders focus hard on first developing a deep understanding of a market. They look to solve a big hairy problem in that space. But contrary to popular belief, most good startup ideas don’t come as eureka moments. Instead, they’re the result of a painstaking process of 'ideation'. The critical market insight takes shape gradually. As this forms, competitive positioning is a constant touchpoint. Tamaseb found that in his random group of startups, only 40 percent were highly differentiated, while among unicorns that number was closer to 70 percent. Not only does a highly differentiated idea grab attention and interest, it’s also the substantial difference that helps convince customers to make a change and try a new product. Experienced founders move quickly to validate their problem/solution hypothesis and confirm high differentiation. If they can't satisfy themselves that their proposition has legs they will pivot well before their startup runs out of cash. They know that customers are ultimately more important than the idea. If something isn’t working, they know how to listen to the market and when to move along.

But what about industry contacts? First-time founders may not have the same investor network to draw upon as unicorn founders, but they can leverage their own industry network. For example, founders that were previously 'builders' and 'operators' in the corporate world, can use previous networks to quickly find star recruits, industry advisors, and partners for design, sourcing, manufacturing, distribution etc. Founders that lack a solid network to lean on can be at a huge disadvantage. The data shows that very few founders achieve success without a highly capable team, and this is often assembled from the founder's immediate network. The importance of the team is underlined by the fact that more than 50% of unicorns have had to face off against giant competitors in a David v Goliath strategy, before prevailing. The strength to win comes not just from the idea itself but from a sense of purpose. Successful founders build teams that are heavily mission-driven, so are better able to withstand the many pitfalls that await down the line.

Writing is the number 1 founder skill

Leading investors claim that world-class founders embrace a common set of skills. When they see these skills, they take special notice. You might think that the top contenders for this list would be vision, execution, persuasion, perseverance, grit or resilience. But you'd be wrong. The most highly ranked skill is the use of language. As the 'Storyteller-in-Chief', telling your story in compelling ways and adapting that story to the audience and the moment is your most important job. It’s what gets you all the resources to build your company. It tells your customers what you can do for them. It tells your investors what they’re investing in and what they can brag about. It tells your employees what they’re getting involved with — why they’re turning down a whole lot of other opportunities to join and stay with you. US heavyweight VC, NfX, says “Language is at the core of your company, even before product.” Most startups think that they'll build a product, and then put language on it to explain it to people."This is backwards. Even if you don’t have a product yet, you can get a long way just with the right words."

Writing competently is a technical skill. It's not something that just comes naturally unless you are uniquely talented. Dave Girouard is CEO of AI lending platform Upstart, and former President of Google Apps. He’s known for leading the business now called Google Cloud through its first billion in revenue. It would be difficult to find a founder more passionate about writing. His recent list of tips on how founders can boost their writing skills is well worth a read. His top tip: Use short, simple words and let the verbs do all the work. Structure also matters. Girouard's guidance on sentence building, followed by paragraph and then whole essay building is utterly compelling and yet seems so obvious once you've tried it - in a slap your forehead kind of way. The power tool for then checking the readability of your text is the Gunning Fog Index (GFI). The output of the GFI can be interpreted as the age at which your reader could have left formal education yet still understand your writing! Girouard uses some of Churchill's most moving speeches as a benchmark. You are immediately tempted to test your own writing and then you discover just how awful your 'readability' truly is.

Regular readers will know that the essays of David Perell are often cited here. His mastery of both the long-form and short-form (not to mention the ultra short-form tweet) through many excellent examples and coaching forums, provides constant inspiration. Perell reminds us that the ultimate test for leaders is the ability to reduce the complex into the simple: A business plan into a 20-slide investor deck. An investor deck into an elevator pitch, then into a one sentence strap-line that says all that and more. This demands real clarity of thought. Often the frustrating process of constructing concise and efficient prose reveals limitations in our thinking and holes in our logic. Big companies employ expensive copywriters, but founders must own this task themselves, for only they can fill in the gaps. Those that write regularly and publicly, perhaps a blog, will develop a confidence in their own style. Above all they will develop an empathy for the reader. As Girouard says, "If you can read your words not as you wrote them, but as your reader will experience them, you can become a great writer."

Measuring Capital Efficiency

Capital efficiency is now the hot topic in startup land. Investors have long ditched the 'growth at all costs' mantra of 2021 and early 2022. The focus for founders has now shifted to maximising the value of every $ invested - to keep the runway as long as possible until the tipping point of growth emerges. Even then, startups whose burn is too high relative to their growth will find it difficult to raise more capital. So, how do investors measure capital efficiency? In a pre-revenue startup it's about resourcefulness - just getting a lot done with a small team. But once revenues flow, it's about metrics. The Efficiency Score used by Bessemer Venture Partners and others, is the key metric for SaaS businesses. Some flip this ratio to create what is known as the ‘Burn Multiple’. Burn Multiple = Net Burn / Net New ARR. In other words, how much is the startup burning in order to generate each incremental dollar of ARR?

Highly respected VC, David Sacks of Craft Ventures, provides great insight into the value of this metric. The higher the Burn Multiple, the more the startup is burning to achieve each unit of growth. The lower the Burn Multiple, the more efficient the growth is. Investors will also use the Burn Multiple to help assess the quality of product-market fit. The startup that generates $1M million incremental ARR by burning $2M (2x burn multiple) is more impressive than one that does it by burning $5M (5x burn multiple). In the former case, it appears that the market is pulling product out of the startup, whereas in the latter case, the startup is pushing its product into the market. This may be needed for a short spell whilst the 'go to market engine' kicks in. But If the startup believes it has already achieved product/market fit and is in growth mode, this is time for a rethink. The startup should probably be cutting costs immediately.

The beauty of the Burn Multiple is that it's a catch-all metric – it illuminates issues with gross margin, CAC, churn, and sales efficiency. Of course, a startup needs to be consistently generating revenues for this metric to even work, but at the point of initial scaling this will start to apply for SaaS. (For non-SaaS businesses, ‘annualised revenue run rate’ is sometimes used as a proxy for ARR). Investors will have their individual expectations of Burn Multiple by funding stage, but it should be clearly improving as the startup progresses. The consensus through 2022 was a Burn Multiple of <3-4x for company approaching Series A. For Series B, it was <2x. After the Series B, when the sales team should be operating at scale, the expectations for efficiency increase even more. Eventually, for a company to become profitable, net burn must reach 0, which implies that the Burn Multiple should also approach 0 over time. As we move into 2023, it looks likely that these Burn Multiple metrics will come under even further scrutiny.

Happy reading!

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