July 12, 2021
Onto the grand finale which I have been working towards in this blog series. Now that we know the results of 7 years of impact investing, it's interesting to look at the key lessons we learned with the team of start-ups on their way to growth. Lessons that I want to pass on to both fellow impact investors and entrepreneurs to increase the chances of successful scaling up
#1. A mission-driven team, with the right people in the right place
People, people, people. The buyer for successful scaling is without a doubt a good team, as any investor will confirm: 80 percent of the success of start-ups is about people, only 20 percent about what fascinates all these people, the technology and the company. Half of all scale-ups are founded by a group founders, rather than a single founder. From my own entrepreneurial and investment experience, I recognize these statistics and I therefore pay attention to whether all the necessary qualities are present in a complementary group of entrepreneurs. More specifically, I have learned to take the time to analyze whether the right people have demonstrably found their niche in the right place, by (repeatedly) making progress and correctly applying the principles of scaling up (see lesson #4).
Apart from these generic analyses, in my experience the enthusiasm of entrepreneurs the #1 success factor. The management team must be willing to go all-in, with maximum skin-in-the-game (both in terms of savings and time!), with nothing less than the goal of building the world's best scale-up in your field. Good founders are social, but I see them continuously sacrificing themselves (unsolicited!) in the social field. When the left fails, they resolutely move on with inexhaustible stamina and energy and then turn the right to tackle the problem. These entrepreneurs can also expect the same attitude from me as a shareholder.
#2. The founder's dilemma
Fact: in only 25 percent of start-ups with an IPO, the founder is still the CEO. Where I find ambitious entrepreneurs an absolute must and I applaud it when entrepreneurs put everything aside to become 'the next Elon Musk', I consider the flexibility and willingness to let go of control even more important. The simple truth behind this is that founders are rarely still the most suitable CEO when the organization has the limit of approximately 25 people exceeds. See this Harvard Business Review article for a good explanation about this. In short, the required qualities of a leader are different in the research phase of a young tech company than those of a scale-up with 50 FTE.
From my own experience: in a number of companies in our team this has not yet been discussed at all, in some cases the founder himself indicated that he saw himself in a different role in the future (fantastic!) and in other cases has this transition required the necessary push from us as shareholders. When this proved necessary, the transition from founder to a new CEO was the most challenging hurdle to overcome. On the other hand, in almost all cases this has brought the desired change and has clearly helped companies over important hurdles towards scale-up status.
My advice to investors:
- As an investor, be clear and honest in advance about the view of the qualities sought in management and how these can change in the different phases that a successful company goes through (R&D, first traction, scaling up). Have this conversation before making an investment and not post closing as part of the 100-day plan.
- Invest in entrepreneurs who are intelligent and empathetic enough to hire people who complement themselves, who don't shy away from recruiting better – or at least proven more experienced – people than themselves. Invest in real teams, where there is not too much dependence on one founder.
- do all the time an in-depth management due diligence. Even though you have so much people knowledge, take the time to analyze the qualities of entrepreneurs from different contexts and do not shy away from incurring (high) costs by engaging professionals in order to get multiple perspectives on the management team.
My advice to tech founders:
- Have a conversation with investors about their view on management and the expected development in the coming years. Even if they do not bring it up themselves, it is wise to broach this potentially difficult subject.
- Before you start working with venture capital, take a good look in the mirror: is it really necessary for you to remain CEO at all times? Think about where you get the most passion from. Is people management what you really dream of as a tech founder? Is the ego – being CEO – really important to you? My advice: you already have the founder title, so make sure that the company you have founded can become as large as possible. As long as you keep the reins too tight, a well-known saying in my circles applies: ''The world's largest sole proprietorship is still a sole proprietorship'. So stay close to your passion and in your strength, and hire managers and business developers who accelerate the processes surrounding your product as much as possible.
#3. Committed and complementary partners
Start-ups benefit greatly from engaged shareholders and partners. They can open doors, act as a sounding board for the (go to market-)strategy and being keen on finances and tactics towards follow-up investments. From StartGreen, as one of the largest impact investors, we can offer a lot of expertise and a large and diverse network on the themes of energy transition, circularity and diversity, and often also achieve good 'cross-pollination' from a broad portfolio of participations. The size of our portfolio also poses a challenge: having 25 portfolio companies in one fund (as with PDENH now) means that we cannot spend one day a week on one company, as PE's with larger tickets regularly do. To compensate for the latter, our philosophy is to always co-invest with a party that is hands-on and ideally has additional expertise. For example, Newion's software expertise at Dexter Energy, Shell Ventures' commercial strength at Asperitas or simply broadening the 'impact network' from co-investors through contacts at Rubio Impact Ventures, SHIFT Invest, PYMWYMIC, DOEN Participaties and Enfuro.
#4. To scale fast, keep it lean first
As an investor, I make sure that entrepreneurs already apply the principles of scalability successfully in the start-up phase. To be specific, I follow the principles of my 'biblical' Erik Ries' The lean startupVerne Harnish' Scaling Up and Gino Wickman's traction: I want to see that entrepreneurs have a well thought-out 'bottom-up' strategy plan, with the right depth and based as much as possible on hard facts instead of assumptions. Measuring is knowing. Where there are still assumptions in the business plan, the hypotheses must in any case already have been examined 'by getting out of the building'. Too many startups fail to grow because there is simply too little demand for their service and product. This is usually because many startups are tech-driven, with extremely intelligent people, who unfortunately mainly understand technology and R&D, but who make mistakes in two ways as a result. They surround themselves in their company with like-minded techies instead of complementary marketing/sales people who challenge them. Or they are too hesitant to launch the product and thus develop way too far, and thus miss the opportunities to adjust their value proposition in time and, above all, opportunities to learn valuable lessons. It's not called a for nothing minimum viable product.
'If you are not embarrassed by the first version of your product, you've launched too late' – Reid Hoffman.
Research by Deloitte showed that successful scale-ups take twice as long from inception to market launch. Logical too: it is important to take the time to create the necessary preconditions for success. For example, make sure you value proposition completely in order and that you have thoroughly tested the various sales channels before you open the tap with major growth investments. As soon as every marketing euro repeatable leads to significantly greater value of the customers it attracts (basically from CAC:LTV = 1:3), you are ready to launch the rocket and follows good scaling without too many surprises.
#5. cash is king
Despite rapid progress, the Netherlands still has a difficult investment climate when it comes to ticket sizes. Techleap gives into her 2020 action plan indicates that there are several structural bottlenecks in the Dutch start-up ecosystem in terms of funding, including: (i) venture capital in the Netherlands is fragmented and sparse compared to UK/US, and (ii) a smaller ticket size limits the possibility of long-term growth. It is all the more important that startups and investors take heed of the following lessons learned in this area:
- Raise early: actually are startups all the time engaged in funding. Therefore, make sure that you start preparing for a (follow-up) investment in time, or even better: make sure that you are continuously able to raise funding through your internal materials (financial reports, strategy plan; financial model, etc.). so tight that investors could step in on this basis. Prevent this negative spiral: the shorter the runway, the higher the 'distress level', the less efficiently all processes run, the more difficult choice decisions become, which means that you are less busy are with long term value creation vs. survive in the short term, making it more difficult to raise funding. Argued the other way around, there is the positive spiral of scaling up: by always being 'investor-ready', you are able to show to the right parties at the right times that you are 'in control' and have the helicopter view. a clearer picture of the bottlenecks in your scaling up, you do not miss out on commercial opportunities due to a lack of cash/time, your startup generates more cash and you therefore need less financing and you are less likely to dilute.
- With a funding round, ensure that you attract funding for approximately 18 months of runway, which should clearly enable the company to enter the next phase.
- Larger tickets/runways do not provide the entrepreneur with sufficient incentive to take a leap (certainly in R&D-type companies, where the technical entrepreneurs are often inclined to develop further technically unnecessarily, instead of testing in good time whether there is a demand for their product).
- Smaller tickets/runways cause too much distraction: funding rounds take a lot of time (minimum 3-6 months), too much uncertainty and therefore a poor basis for hiring or retaining good people. Result: less value creation.
- Capital-light propositions attract funding much more easily and for good reason. As an example, one of my portfolio companies where a wrong assumption was made about when bank working capital financing could be attracted. Because this was only possible 1 or 2 years later than expected, millions more in equity were needed, money that was simply not available with existing shareholders. With a heavy cash flow negative profile it was not easy to attract external money. An pivot a less capital-intensive earning model was therefore necessary in order to still become competitive.
In addition to the above lessons, lesson #6 that venture capital is always tailor-made and that careful consideration should be given to the scope of the due diligence process on a case-by-case basis. And finally lesson #7 Lucky Number Seven. As an investor and entrepreneur, you also need a healthy dose of luck, because no matter how in-depth you perform due diligence, you cannot anticipate some situations. People make mistakes, people get sick, market conditions can change quickly, et cetera. If anything has taught us that lately, it is the current corona crisis. That is why I conclude with a return to lesson #1: Provide a team that can respond to changes smartly and in good time.