Weekly Briefing Note for Founders

30th May 2023

This week on the startup to scaleup journey:

  • Overcoming founder loneliness and isolation
  • Serial founders vs first-time founders
  • Are VC's overselling their value-add?

Overcoming founder loneliness and isolation

The startup journey is often characterized by ups and downs, creating an emotional rollercoaster for founders. The highs, in particular the potential for outlier success, provide the incredible draw. They dominate public discourse on entrepreneurship and create the underlying narrative of the startup story. But this journey, whether a founder is ultimately successful or not, also has its extreme emotional lows. This is a topic that receives relatively little airtime as it is only truly understood by founders themselves. As a result, there are far fewer sources of support for the emotional challenges compared to the plethora of 'how to' advice when it comes to business building. We are not just talking about the classic stresses and strains associated with other high pressure jobs, such as the 'fear of failure', 'imposter syndrome', and 'work-life balance'. The Founder-CEO role seems particularly prone to high degrees of loneliness and isolation due to the unique and immense responsibilities involved in running a startup. Unless you have sat in that seat, others, even those who would love to help - including the majority of investors - will find it impossible to fully relate. For first-time founders that haven't yet built up scar tissue from prior experiences, the pressures can sometimes feel overwhelming, obscuring the path to potential solutions. Sadly, there is no off-the-shelf 'survival manual' for this role but from over a decade of working closely with founders, we have 2 key insights to share.

The first is the importance of establishing a support network. This is one of the best kept secrets of successful founders who quietly, but often with great determination and resolve, build a trusted circle of confidants that they can go to for guidance and support. In "Founders at Work: Stories of Startups' Early Days", Jessica Livingston reveals through interviews with some of the best-known founders of modern times, how developing the personal support network is crucial: Caterina Fake (co-founder of Flickr) emphasizes the importance of building a supportive network of peers and seeking out communities of like-minded individuals. Similarly, Paul Graham (co-founder of Y Combinator) discusses the significance of building a network of fellow founders and entrepreneurs where experiences can be shared. Max Levchin (co-founder of PayPal) describes how he actively sought out mentors and advisors who could provide guidance and support. He recognized the value of having a trusted network of individuals who could offer advice, compare insights, and provide emotional support during challenging times. There are many other examples and it becomes clear that there is already a peer-to-peer network operating - it just depends how and where you will plug in. Each person in this network will perform a different role but they share two core attributes: They are picked personally by the founder and the discussions they have with the founder are private. These confidants aren't 'place-men' recommended by boards or investors whose allegiance may then be questionable. They are solely there to support the founder, not the company.

The second insight relates to how founders, as well as other business leaders, are becoming much more aware of psychological 'tools' that can help address various emotional challenges. Sometimes these are recommended by coaches and mentors, and sometimes they are discovered by founders through their own research. There are many excellent examples but some that we draw upon have also found their way into print in recent times: "The Hard Thing About Hard Things" by Ben Horowitz: This book delves into the emotional rollercoaster that founders often experience and provides practical advice on managing tough decisions, building resilience, and leading through challenging times. "Start with Why" by Simon Sinek: Although primarily focused on leadership and purpose, this book helps founders explore their personal and organizational motivations, providing a foundation for emotional well-being and resilience in the startup journey. And finally, "The Tools" by psychotherapist Barry Michels and psychiatrist Phil Stutz. The subject of a recent Netflix documentary, this is about managing personal growth and emotional well-being. A particular value is in how actionable the big takeaways are, thanks to Stutz's hand-drawn visual images that bring each tool to life. Assembling a set of 'tools' like this, as well as building an effective support network, takes time and personal commitment. But once established these resources can really help smooth out the emotional rollercoaster journey that lies ahead.

Serial founders vs first-time founders

In the Big Funding Slowdown, investors are looking to make safer bets. If they follow their instincts then serial founders will be favoured over first-time founders. But why should this be and what can first-timers do to balance the scales? Based on their collective experience, VCs know that serial entrepreneurs have higher success rates. They are more likely to achieve successful exits, such as acquisitions or initial public offerings (IPOs), compared to first-time founders. They use this to develop a track record of building and scaling companies, which attracts more investors and then potential acquirers, creating a virtuous circle that repeats. Through this process, their network of relationships grows, with a widening pool of investors prepared to bet more (and earlier) on this person with each new venture. Risk is mitigated because they have learnt from their past mistakes and they are more experienced in setting priorities and making decisions in a very resource-limited and information-scarce environment. They may also bring a ready-made core team, all loyal to the leader who may have helped secure their financial independence through a prior exit. All these 'assets' enable serial founders to move with a speed and certainty that first-timers find hard to match. It's not surprising that investors would favour them.

But it's not so all one-sided. First-time founders have some advantages too - it's just that often they don't appreciate how powerful they are. The first is raw passion, driven by their unique insight and the belief that this will enable them to change the world. They believe in this so much that they may well have given up a well-paid role at a great company to pursue their dream. Their personal risk is typically much greater than serial founders. This underscores their passionate belief and commitment to the cause, which radiates to investors. Second, is their domain expertise and knowledge from having worked in a specific industry or market. Investors value founders who demonstrate a strong understanding of the problem they are solving, the market dynamics, and the competitive landscape. In a rapidly evolving macro-market, such expertise can have a limited shelf life, so it's often harder for serial founders to have such an edge if their last venture was in another sector. Third, is the early team members that join the leader. They too have been willing to take a similar risk, not just on the vision but on the founder themselves. It is much harder for a founder with no startup track record to convince highly talented individuals that they possess a winning ticket. But that is what they must do to bring them on board. Those early core-team hires say as much to investors about the prospects for success as anything else.

These advantages create a foundation. First-time founders can build on this by adopting certain behaviours and strategies that are used as accelerants by their serial-founder peers. There are many, but we believe the top 3 focus areas that have the greatest leverage are: 1. Aggressive focus on market validation. This is the most significant early-stage tipping point that starts to open the door for growth and valuation upshift. Serial founders know that their first assumptions about the market will nearly always be wrong and will require some adjustment. This eats time and resource, so finding methods for cheap and quick iterations often proves critical. 2. Take calculated risks, faster. Optimising for rapid feedback and information acquisition is key, but you will never have all the data. Successful founders don't delay by getting stuck in analysis. They focus hard on execution, and maintain a constant sense of urgency. They are equally impatient for success or failure. They want to know if they are onto a winner sooner rather than later. Time is their most precious resource. 3. Build a support network. As we describe above, this is one of the best kept secrets of serial founders. The sooner you start on this the more value it delivers. These behaviours are not guarantees of success, but they will help first-time founders balance the scales. At the very least they will send positive signals to investors that you are operating way past your years.

Are VC's overselling their value-add?

VCs are generally known to pride themselves as being 'value-added investors'. In addition to their cash, many offer advice, connections and professional services of various kinds to their portfolio companies. if they are on the board, they will contend (probably fairly) that they are bringing even more to the table, but how much of this is what founders really want? A few years ago, research undertaken for Kauffman Fellows provided some clear insights: Bottom line, VCs think they add about 30% more impact than founders do. This study has recently been updated with responses from 71 VCs (76% early stage, 13% late stage and 11% multi-stage) and 88 founders (Stage: 96% Early (Seed, A), 4% late. 65% EU, 31% US). As before however, VCs overestimated their level of impact and helpfulness. Founders rated the average impact of their VCs at 5.2 out of 10, whereas VCs believe their impact to be rated a decent 7.1 — a 35% difference. The largest gap in perception comes in recruitment — 69% of VCs think they’re making a real difference here when nearly 79% of founders state that VCs don’t. Similarly, with introductions and marketing, nearly three-quarters of VCs see an important impact, whereas only 44% of founders agree.

These latest figures are particularly interesting because, in the 4 years since the first study, the conversation about VCs offering operational and strategic support has only grown. Yet the gap in perception is widening. One particularly key area where expectations diverge is in 'Growth & Management' advice. Here, 76% of VCs think they're making a real impact, whereas only 43% of founders agree. On a positive note, one area where both founders and VCs agree that VCs have a significant impact is on follow-on financing. But, almost to contradict this, when asked, "What more can VCs do to help your company?" the answer unequivocally was, "Fundraising" (39%). Perhaps the most revealing question of all was whether founders would take VC money again. 49% said they would and 51% expressed some doubts. Of this larger cohort, around 14% said they had an experience which meant they would not take that VC’s capital again, and 38% "would be more selective next time". The researchers then asked founders and VCs to rank what they thought was most important when deciding which VC firm to partner with. Both ranked "Personal Chemistry" very highly but the biggest disconnect was on "Brand & Reputation of the VC", which was ranked 1st by VCs but just 5th by founders.

Some founders said their VC's contribution had been critical across several areas, whereas others said the overall impact was insignificant. It seems there is a wide disparity depending on the investor. This research underlines how important it is for founders to assess the suitability of investors before they take their money. This isn't easy. The fact is that the range of investors now active across the venture space is incredibly diverse. Pitchbook now segments these into 11 main investor types and 22 others! Different types will each bring different things to the table; some will bring just cash and others, such as CVCs for example, can bring strategic guidance, market insight and an industry network. It's also not about size. From our own experience, some smaller VCs can put the larger VCs to shame with the level of support they provide - and often they are not even on the board. When preparing the investor target list, founders should carefully consider the key investor attributes they believe will be important to the relationship and the future of the business. And when narrowing in on a final selection, deeper due diligence on both the fund and the individual partner becomes vital. This all takes time so must be planned into the funding schedule. If done well - meaning the impact truly does meet expectations - the ROI will be worth all that upfront effort.

Happy reading!

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