The new reality

Currently it’s not for the fainhearted to follow the developments on the worlds stock exchanges. 15 years of bull market has been replaced by an ugly bear which seems to send anything with an incling of tech down, down, DOWN in the market. Well, it pretty much sends everything down to an extend where it can resemble a stock massacre. 

The development in stock quotes is not interesting in itself – things go up, and they come down again. What’s interesting is the shift to a new reality that the movements are an indicator for; the end of ‘free’ money, rising inflation, rising costs of production and a shortage of both key components and talent. It is truly challenging times. 

In the face of such adversity, you can be forgiven for giving up and just wanting to bury your head in the sand until this whole things blow over. Because how do you cope, let alone adapt to this new reality? Most of us have never tried anything like it, so we’re in uncharted waters trying to learn how to swim before we drown.

But it’s exactly when you have to develop a key ability in an instant that you’re perhaps the most capable of doing so. There is just no workaround. So when the immediate shock gives way, it’s time to assess where you are, and what all this means for you and your startup and start adapting to the new normal. And I think there are a couple of things, you need to address and get used to.

First of all, you need to control your burn and your business fundamentals. The good times where it was growth at all costs, and nobody cared about the cost are over, as far as I see it. Going forward there will be much more scrutiny on your commercial model, and whether its viable or not. If it is and you can prove it to investors, you will still be able to attract funding to grow and seize opportunities (more on that in a bit) that may present itself. Furthermore you avoid getting into a situation where you need to raise new funding with your back against the wall. That’s a bad situation to be in in general – now it’s just plain terrible for you. So don’t go there. 

Second, be aware that a lot of the ‘smart’ growth tactics you have deployed in the past and probably semi-automated probably won’t have anything near the same effect anymore. Your customers don’t have the same spending power or urge to spend, as they had before, and you will most likely see cutbacks towards skipping things that are considered non-essential. And let’s be honest; a lot of what’s available out there are non-essentials that few customers would truly miss, if they had to cut it. 

With that there is also an opportunity. An opportunity to put your automated growth machine on the back burner and instead spend some time and energy on talking to customers face-to-face, listen and really understand where they are at, what they truly need and how your product applies to those things. You wan’t to ensure that you truly understand how your product is truly – and please don’t blow smoke in your own eyes here – essential for them, so you’re still considered valuable and thus they will continue using and paying for your product. 

Willingness to pay is going to be the only metric that matters here. Forget about most other metrics right now. If you can’t get your customers to pony up the cash for what you provide and have them continue doing so, you have a serious challenge. It’s that simple. 

The benefit of this simplicity is that once you get this right, you will know that you have the strongest possible foundation that will pretty much insulate you and your startup from market turmoil. You will know for a fact that what you do and deliver is essential to your customers, and that any future downturn will hurt a lot of others before it hurts you. 

Knowing that is priceless. It allows you to get a bit out of the crisis “all hands on deck”-mode and start thinking about the future and pursue interesting opportunities. What do I mean by that? Could be that one of your competitors don’t have the same stamina that you do and suddenly provides an opportunity to consolidate. Consider it. If it makes sense, and you can get the financing right, consider doing it. Exploit the crisis of others for your own benefit. 

Do whatever it takes. And understand down to your very core that this is a new reality we’re looking and have to operate in.  

(Photo by Tobias Bjerknes on Unsplash)

The complexity trap

One of the great privileges of my job is that I get to meet a lot of different startups and their founder teams and hear about their ideas, and how they have the ambition to take on the world and conquer it.

Among these great people are also seasoned veterans trying to turn great insights into new startups with, based on pure logic, really interesting potential, but who still seem to struggle raising the necessary funding to take off. And when I come across them, I wonder why it is that they struggle, when everything else seems to check out?

Of course there can be an element of timing. They can be too early for the risk profile, an investor has, or they can be doing their work outside the field of interest to the investor. That all makes a ton of sense. But I think there is something much more fundamental at play.

When I look at what make investors tick, it is things that either cater directly to the particular interests or experience of the investor in question or just seems like a super easy sell in the pitch deck; a story which everybody can understand and relate to.

Let’s face it: As investors we look at a lot of different pitch decks, and I think it’s fair to say that it’s easier to remember and get excited about those with a really compelling, easy-to-understand story that seems like something you have heard about before, than it is connecting to a complex pain and an even more complex solution for something, you have little personal relationship with.

Remember, investors are not experts in everything. Some aren’t even experts in anything except investing (which is also an essential skill, to be sure). And they are not particular fond of being put in a position, where they are reminded of all the things that they don’t know.

When that happens, the lack of insight by experience translate directly to a feeling of increased risk, and instead of getting into a complex discussion, it’s just easier and less painless for the investor to say ‘No’ before the discussion move too far.

And it makes a ton of sense too. Because when you look at startups trying to solve complex problems for complex customers, there is a myriad of questions presenting themselves:

How will you position the product towards the customers? How will you engage in the dialogue and show that you can be of value? How will you onboard users? How will you make them stay? How will you facilitate the necessary changes to the way the customer works in day-to-day operations in order to have the full impact of your product (if it’s a B2B related product, of course) etc. etc.

There are just so many complex moving parts that it more than compensates for any great team or idea. Because as an investor you know that a lot of things have to go the right way in order for this startup to be truly successful. And we are generally not looking for cases where a lot of factors align in the right way, before the startups, we invest in, can become successful.

It’s perhaps a bit brutal and to some extend a crying shame. And the obvious risk of it all is of course that brilliant startups founded on the ‘wrong’ complex pain and solution won’t get the funding they need and thus won’t be able to have an impact on the world and ultimately be successful.

But I just think it’s collateral damage to the way that a lot of investing in startups happen; unless you’re lucky and you have that influential person on the investor side, who has insights gained through experience and just knows that the solution has real merit, you as a founder can have a hard time of getting your startup funded.

So, in essence, the best piece of advice, I can give you, if you’re a founder with a less compelling ‘simple’ story to sell is to really spend time on finding investors – angels, VCs – whatever who has the hands-on background and experience that will make them truly see the potential in what you’re doing and sign off to help you achieve your vision.

Because for complex solutions to complex issues you not only need investment – you also need real hands-on help making it happen.

(Photo by Timo Volz on Unsplash)

The end of free money

Few things have been such an important catalyst for entrepreneurs and startups over the last 15 years as the availability of basically free money. Not only has it been associated with low costs of borrowing. It has also provided investors with a higher appetite for risk as they have lacked other more ‘safe’ alternatives for placing their abundance of cheap capital. 

But now all of that is changing. Central banks led by the US Federal Reserve are looking to increase interest rates in order to curb rising inflation, and with that entire generations of primarily young people will need to learn and come to terms with what interest rates actually mean and how they impact the financial choices they can make for both themselves and for their businesses.

One of the more interesting parts of this major shift of fortunes (pardon me) is to get a sense of just how much of the economy is essentially built on the premise of access to cheap capital. How many startups and service companies do we have that would struggle or perhaps not even exist, if they didn’t have access to cheap financing? I don’t think anyone really has a clue. 

The rising interest rates create two major challenges and one major opportunity, as I see it:

The first challenge is the viability of various businesses and startups, which is likely going to be put to the test. If free money is no longer an option, does it make sense to keep the same burn to grow user/customer base? That’s just one question. And what will happen once you come to the conclusion that it doesn’t, and you start raising prices, and customers start walking away? Continue ad nauseam. It is a whole new both strategic and operational reality, many of these companies are looking into to. 

Following on as a close second is what the added cost of debt is going to do to founders and executive teams. Especially for the ones who have never experienced higher interest rates before, getting to know them and their impact will likely take some time and require a great deal of painful acceptance. Can that be gained without running the risk of making less thought-through decisions out of sheer panic? We humans seldom make the best decisions, when we feel we have our backs against the wall. 

Overall the declining access to cheap funding is going to be a ‘tour de force’ in the ability to adapt, which my gutfeel is many will struggle with – simply because they don’t have the tools or the experience to deal with it. 

From an investor point of view, it will also be a reckoning but at the same time also an opportunity to once again be less persuaded by the narrative and look more at the business fundamentals when making decisions on where to make investments; i.e. is there any indication of a viable business model in its own right or not? Maybe, in all fairness, it is as much a hope as its a gutfeel, as I have always been an advocate for businesses proving their fundamental viability without it requiring a 5 year plan. But we will see. 

Finally, there is also opportunity in the not so great news. Opportunities to innovate. Because God knows there are going to be a lot of people who will require help and various sorts of tools to navigate safely in the new reality. Those who can solve that and make people and businesses feel better of or safer despite the new realities on the ground, will be able to make it big. 

As the old saying goes, it is a terrible shame to let a good crisis go to waste. So let’s focus our efforts on how we learn to navigate and prosper in a world, where interest rates are once again a thing to be reckoned with. 

(Photo by Jason Leung on Unsplash)

Short term joy, long term agony

One of the things that I have been spending a lot of time on these last couple of years is the subject of university research and how to transform the best of it into viable spinouts that can go on to solve real problems in the world.

There is no doubt that the potential within this space is huge. There is a lot of very good research coming out of universities, and there sure are enough big problems to creatively deploy that research towards.

However, there are various pitfalls that make it hard to create spinouts that are truly viable and have the potential to conquer the market and solve the problems that were envisioned at founding.

In a series of posts, I will be trying to address these, based on my experience. And what better way than to start out with one of the real kickers:

Ownership. Now and in the future.

Whenever you start a company, who gets what is always a solid discussion and potential point of contention. And it is no different when it comes to building spinouts.

Often the research team will have a pretty strong idea about what their research is worth, and of course that value assessment is going to skyrocket the more breakthrough the innovation is.

This self-valuation also leads to outsize demands on ownership, and you can argue it is a valid point. I mean, if a team has spent years doing great research, and outsiders only come in to take it to market, shouldn’t the original team get the brunt of the equity?

That depends.

If the goal just is to create a spinout, get it registered and give it a go, sure. But if the goal is to build a viable company that will be here for long term, grow and deliver on the mission, it is by no means a sure thing.

Basically the reason for that is that you need ressources to grow and succeed. Ressources come in two main shapes and forms: People and funding.

People – great people you need to build your spinout and make it successful – will only join if they’re incentivized to do so. Especially if they are to have a key role in the early team. That means for founders – ie researchers – that they need to reallocate up front a sizeable portion of their equity for incentives, ex a warrant programme.

Failure to do so will leave you with a spinout that will have nothing but the original team, lack muscle and knowhow for important tasks and never go anywhere.

The other type of ressource is funding. And it is tied to the talent doing the actual work that will ultimately ensure commercial success and deliver the investors a sizeable return on the risk, they’re taking by investing.

If investors – especially sizable ones who can deliver the size of checks needed to make it big – see that early team members, ie researchers, are insisting on sitting on equity for doing nothing in the day-to-day business, while those who are supposed to do the work either get to little or get nothing at all and thus won’t join, it is a walk-away.

The result?

The spinouts run into a wall. It will be absent of needed talent and absent of funding. And its changes of converting promising, potentially breakthrough, research into market success and ultimate contribute to solving the core problem, the company was founded on, will be slim to none.

And it will be primarily because the founding team – predominantly the researchers – confused short term success with long term success.

The lesson here?

Think about the long term and think about what is needed to get to the success that you envision. Think about the things you will have to do to ensure you get to that point and make a decision:

Am I in this for the long haul to affect a change where my research solves a big problem? Or am I in this purely for myself and my own retirement?

(And yes, I know it can be a combo, but that’s beside the point here).

If the answer is the latter, be aware that you will struggle and – most likely – fail before you get to where you want to be.

If the answer is the former, come to peace with the fact that you have to sacrifice something to get a bigger reward.

Not only will your equity be worth something rather than nothing (in the above example). You will also be far better positioned to achieve success because you enable those factors that are absolutely necessary for you to succeed.

(Photo: Pixabay.com)