Weekly Briefing Note for Founders

21st January 2022

This week on the startup to scaleup journey:

  • Crossing the Chasm - from Seed to Series A
  • Storytelling is the essence of fundraising
  • Build a reputation as a rapid course corrector

1. Insights of the week

Crossing the Chasm - from Seed to Series A

The startup world has changed out of all recognition over the past 10 years. The explosive growth in venture capital and the ecosystem that it supports has been a major driving force. Capital deployed globally last year was up more than 10x over what it was a decade earlier. As a result, VC has now become the funding mechanism of choice for ambitious entrepreneurs that aspire to build global category leaders of real scale and enduring success. As the 2021 State of European Tech Report revealed, "..the number of companies that have raised venture capital to fund their journey far exceeds those that take alternative paths."  On the face of it, with funding at record levels, there has never been a better time to be a startup founder.

But not all boats have risen on this tide. The 10-year spending boom has not resulted in a similar increase in the number of startups being funded, up just over 2x for the same period. In fact, for the past 3 years, the number of new startups closing rounds at the formative Seed stage has actually been in decline. And whilst the graduation rate of European Seed stage businesses to Series A did see some improvement in 2021 (even though it is still well below US and Asia levels), making this critical transition remains one of the biggest hurdles for founders. Usually associated with attaining product/market fit and the beginning of early scaling, many other stars must also align. As a result, founders are spending a disproportionate amount of their time trying better understand the changing needs and aspirations of the VC asset class. It's simply not enough to assume that by hitting a few key metrics a startup will 'qualify' for funding.

Even on the back of a record year of investment in 2021, almost one-fifth of European founders say it has become harder to raise capital. But the good news is that support for founders in the formative stages of the journey is increasing. There is more analysis of where the choke points are in the system. More money is being recycled back into the funding stream by founders with successful exits. Numerous incubators and accelerators are helping startups take early shape. At Duet, we have our own role to play in helping UK founders successfully prepare for and execute Seed and Series A deals. According to McKinsey research this is where a disproportionate number (77%) of startups fail or fall off the high-growth funding pathway. By ensuring founders become increasingly savvy at crossing the Seed to Series A chasm, our mission is to help more startups maximise their full growth potential.

[For more on this topic, read the full article in our blog here]

Storytelling is the essence of fundraising

James Clark is a Silicon Valley legend. He was founder of Silicon Graphics (1982) and co-founded Netscape (1995), together with Marc Andreessen. The Netscape browser launched the internet boom of the late 1990’s, making Clark a billionaire following the acquisition by AOL. In 1995 Clark was diagnosed with a rare blood disease, hemochromatosis, which subjected him to the chronic inefficiencies of the US healthcare system. This life-changing experience became the genesis of his most ambitious project, Healtheon. Clark’s vision was to eliminate the paperwork and bureaucracy associated with medical care, an undertaking of enormous scale requiring unprecedented investment. Yet Clark’s investor ‘pitch deck’, described in Michael Lewis’s book, The New New Thing, was no more than a drawing on a whiteboard. The story of how he used this diagram to secure the backing of two VC titans, Kleiner Perkins and New Enterprise Associates, is an exposé of both the VC mindset and the true power of storytelling.

Storytelling as a means of securing audience engagement is now widely recognised. Founders preparing their investor pitches may not have the credentials of James Clark, but they do have access to the same techniques. Yet often in the haste to create the perfect pitch deck, founders lose sight of the fact that it’s the narrative that really counts. The slides are merely a backdrop to support a presenter-focused story. Why? Research has shown that audiences are more likely to engage with and adopt messages that make them feel personally involved by triggering an emotional response. Clark’s compelling narrative, supported by his own personal experience, had VCs lining up to invest. Founders that develop a strong 'origin' story can also draw upon this as an ice-breaker in almost any forum, especially with investors. This is not just an asset in the first pitch meeting but in other interactions: elevator pitches, email approaches, teaser decks, and Investment Committee meetings.

The most powerful presentations are open and honest. Great exponents don't just talk about their mission, they talk about their journey, their sacrifice, and their failures. They explain what it means to them and, critically, what they have learned. If you can create a human context, this will make the story highly relatable. By doing so you will create a connection. This will make you and your story more credible and alluring. Investors often say that the greatest pitch meetings have also been the most memorable. The story felt real, it came alive, and they felt moved. When they reflect on such meetings, they will also say things like: They felt engaged, they really bought in, and they could sense an exciting outcome. Crafting an atmosphere of eager anticipation is a skill that, once mastered, can be called upon over and over again.

[For more on this subject see our blog article: The power of storytelling in the investor pitch]

Build a reputation as a rapid course corrector

Entrepreneurs are often cast as visionaries. They can see a different future for the world, a country, a market. Some are able to harness their personal charisma and energy to build amazing teams and products that reshape or create entire industries. But in the formative stages of company building, investors are wary of founders that claim to be driven by a particular vision. The vision-obsessed startup can miss the real problem to solve. The risk is that the starting thesis becomes no more than a solution thesis: 'Build it and they will come'. All eyes become focussed on the product rather than the customer. The product is 'released' but there are few, if any, takers. USPs that appeared relevant at the beginning of the development are ignored by the market.

This haste to focus too quickly on solutions is not confined to early stage. Frank Slootman is one of the tech world's most accomplished executives in enterprise growth and led Snowflake to the largest software IPO ever. In his new book, Amp It Up, he says "In meetings, I often object to presentations where 90% of the content is about the solution, not the problem. My co-workers find it frustrating that I always want to walk back to the beginning rather than rubber stamp a program or project. They want to jump right into the action phase, so they see in-depth discussion about possible explanations as a waste of time. Of course, when you end up being wrong about the problem and therefore ineffective, that's a much more serious waste of time."

To be clear, being passionate about creating a solution is not in itself a weakness. It is about having the courage to alter course when things aren't working. This also creates a more credible narrative for investors to buy into. VCs, in particular, know that the bedrock of a successful startup is a clear problem/solution thesis. Those that are then able to prove the thesis and generate real traction - even if it takes several pivots to get there - are then well on the way to product/market fit. This cycle repeats as the company expands its offerings. Slootman says: "Build a reputation as a rapid course corrector. You don't need to be right all the time to succeed if you can admit quickly when you're wrong. This will set you apart from the majority of people who get wedded to narratives too quickly and then refuse to revisit the analysis for fear of looking bad politically."

2. Other pieces really worth reading this week: 

Do Things That Don't Scale
A timeless essay by Paul Graham (written when still at Y Combinator) on the need for founders to do things that don't scale to get their businesses off the ground. "A lot of would-be founders believe that startups either take off or don't. You build something, make it available, and if you've made a better mousetrap, people beat a path to your door as promised. Or they don't, in which case the market must not exist......Actually startups take off because the founders make them take off."

8 Product Hurdles Every Founder Must Clear
Before becoming a founder Ryan Glasgow was founding product manager at 5 startups. In this insightful article, Glasgow shares the tactics and questions he leaned on most in his '0 to 1' days. He also outlines the consistent mistakes that founders tend to make on the voyage to product/market fit, digs deep into how he approached pre-Series A founder-led selling, and offers up advice for expanding beyond the initial product.

Sarah Tavel is General Partner at Benchmark and formerly Product Manager at Pinterest. In this excellent article Sarah provides a running list of frameworks she's written on a range of startup topics. "A successful framework distills the complex, and in that synthesis, gets to a timeless insight. That’s always my aspiration, to varying degrees of success." So many takeaways to glean. If you want a great starting point go to The Hierarchy of Engagement - How to build a consumer software product that endures.

Happy reading!

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