Why now?
Timing can make or break a company. A pitch should include the broader market shifts that create tailwinds for the business.
Greetings! After a little bit of a false start with spring, I think we have almost made it through winter, at least in the Southeast.
đ Thought Bubble: Why now?Â
If you spend enough time in the startup ecosystem, itâs inevitable youâll come across companies solving the same types of chronic problems, such as care coordination or food waste. These seem like pervasive, near universal problems in dire need of a solution. Yet, they remain largely unsolved.Â
In the storytelling around successful startups, one of the critical elements that often gets underemphasized is the role timing can play in making or breaking a company. A company might have an amazing founding team with a well-thought out solution, but the likely outcome will be much smaller if theyâre too early or too late to market. For example, AlchemyAPI, which was building a deep learning platform, started in 2005 and was acquired by IBM in 2015. From what Iâve been told, the outcome was modest compared to AI valuations today. This is pure speculation, but had they started a decade later, I suspect the outcome likely could have been very different.Â
When investors talk about market analysis, one of the key points theyâre trying to understand is the âwhy nowâ. This is an even more critical question if the investor has seen other companies fail to solve the problem. An investorâs pattern recognition can be positive and negative, but if there is a graveyard of companies that have come before and have not found success, an investor is likely to be biased from past failures and will want to understand what is different now that makes a solution feasible.
In a previous newsletter, we discussed the importance of founders describing the hair-on-fire problem a startupâs customers have, but it shouldnât stop there. If this is such a massive problem, founders need to explain why it hasnât been solved before and what makes this moment unique for doing so. It could be technological shifts, cultural changes, regulation, or something else entirely, but the burden of proof is on the founder to demonstrate that there are enough tailwinds to break customers free from the status quo.Â
This is exactly what Liz Giorgi, CEO and co-founder of Soona, discusses in episode 198. Market context; i.e., the timing and bigger picture of why your business should exist, is one of the three pitches founders should hone. The analogy she uses is that of a world-class surfer. It doesnât matter how good the surfer is if there are no waves to ride.Â
Ultimately, successfully answering the âwhy nowâ question comes down to being able to articulate differentiation. For founders to stand out to investors, they have to effectively communicate why the timing, team, and insights are different enough to succeed. Otherwise, investors will infer from past experiences and pass.
đž How VCs Are Approaching Valuations in 2024
Kathryn OâDay, Partner at Atlanta Ventures, discusses the why and how behind investorsâ valuation expectations. By working backward from existing market comps, it provides a framework for founders to do quick back-of-the-napkin math to get a sense of what a realistic, palatable valuation would be for investors. Depending on where this number lands, Kathryn provides some questions founders can think through to determine next steps.Â
STV Take: Because companies are so nascent, the impact of valuations at the early stage can feel a bit divorced from reality. As Kathryn explains in the article, shooting for a 10x return on investment is the absolute bare minimum and assumes a founder doesnât raise any more money. At SpringTime, the multiple we are aiming for is much higher. We do an analysis for every potential investment on what it would take for that company to return our fund size, which, when dilution and other factors are considered, usually means the company has to 80-100x our investment. The other way to think about it is the following: The difference between an investor investing at a valuation of $10M or $20M might seem inconsequential, but it means the exit value an investor will need to achieve the same outcome is double.Â
đ”â How Did a Founder Sell Their Business for $500M But Get Nothing?Â
A good follow-up to the above is this article from Fundable Startups that discusses how a startup was sold for half a million dollars but the founders and most employees walked away with nothing. How did this happen? The lead investors had significant liquidation preferences that meant founders and employees would only make money if a deal was in excess of $559M.Â
STV Take: Even though this article is from 2021, itâs as relevant today as it was then. While liquidation preferences greater than 1x can be signals of bad investors, excessive liquidation preferences can also be the result of founders optimizing too much for valuation. In other words, if founders raised at too high of a valuation in a previous round; e.g., 2021, and find themselves needing another round of financing when the market has corrected; e.g, 2024, some might be reluctant to take on investment at a lower valuation for fears of what it would do to employee morale and signal to the broader market. One way investors might still get comfortable with investing at a higher valuation is to protect themselves with liquidation preferences. We have said this before, but valuation is only part of a deal. Terms, such as liquidation preferences, can have an equal or greater impact in the long run.Â
đŻ Elevate Your Startupâs Finances & Accounting
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STV Take: Outsourcing your finance function is a no-brainer for startups. Weâve known AVL Growth Partners for over a decade and they have a stellar reputation.
đ©âđ» State of Startup Compensation, H2 2023
Carta released their latest report on the trends in startup hiring for the second half of 2023. Not surprisingly, there were more job exits than hires. Hiring in engineering, sales, and operations continued to be prioritized, in addition to a change in compensation strategies that saw salary levels rise for entry-level and C-suite positions but decline for senior individual contributors, managers, and VPs. Additionally, the amount of equity new employees are receiving has significantly declined.
STV Take: Itâs no secret that the startup hiring market has changed in the last couple of years, and this Carta report provides specific data points that tell us how. I was surprised to see the substantial decline in equity for new employees, which was especially pronounced for employees in sales, marketing, engineering, data, and HR roles. The other interesting trend Carta calls out is the reduction in out-of-state hires for unicorn companies and the number of companies (~83%) that adjust an employeeâs salary based on where that employee lives.
đŽ Decompression Zone
Iâll be honest, I find many self-help/productivity hacking podcasts and books to be too prescriptive, which is why I was a little reluctant to listen to Mark Masonâs podcast. His latest episode, âHow to Accomplish Far More While Working Lessâ, though, gave me a lot of food for thought. In it, he interviews Cal Newport, a computer scientist and author, about how distractions and taking on too much, largely enabled by remote work, causes burn out. One of the interesting, and somewhat obvious takeaways (still important to call out!), is not to sacrifice quality for quantity. It can be easy to say âyesâ to projects or events without thoroughly thinking through how much time theyâll actually take and the opportunity costs of pursuing them. Focus is critical!