THANK YOU FOR SUBSCRIBING
The startup industry went through major shifts in many dimensions over the last couple of years.
Not only did the VC industry provide proof of strong financial performance, but the industry also matured in many countries around the world - from the recent perception of supporting a few tinkering students in a garage to a serious and impactful industry.
Startups have impacted cities and industries in massive ways and are addressed regularly by Heads of State, as seen impressively for example in France where President Macron announces every year the La French Tech 120 and “Next 40” to recognize the important economic impact of startups.
Indeed, startups have demonstrated their ability to partner with Governments in providing essential digital know-how and products. For instance, with the Covid19 outbreak, we have seen how countries have relied on startups to come up with better ways to communicate, run medical trials, power contact tracing, and provide visibility across supply chains, manufacturing, and other important sectors.
Big enterprises have also accelerated their startup initiatives, investments, and acquisitions over the last couple of years recognizing the value startups can bring to their innovation and acknowledging the lack of in-house skills and resources. In fact, according to Bain and Company’s 2022 Global M&A report, corporate venture capital (CVC) investments into startups and scale-ups represents more than a fifth of all global venture capital investment value — up from 11 percent a decade ago.
Maybe the most important point is that culture has evolved over the last couple of years around the world making the path to work at a startup a real option. Today, former large corporations’ executives join Venture Capital funds, serve on the boards of startups, or launch startups themselves. We have seen these developments before in regions like Silicon Valley or Israel, but it was not yet a global phenomenon.
With the evolution and positive developments, I described above, there are challenges too.
Expensive startup talent and cash focus: As more startups are created, the war for talent heats up, and salaries are sky-high. This can attract talent that is more focused on short-term monetary rewards rather than those aligned with the companies’ vision and values of an early stage startup. The appreciation of stock options over cash is an easy test to see where the motivation lies. The same is true with cash bonuses for founding executives. The equity of a founder should be enough to incentivize the right behavior and ambition for the company. Founders should diligently build the right culture early in their startups focusing on these fundamental values while VCs should champion the right financial incentive structure for founders and startup employees.
Founder Payouts in Fundraising rounds: It’s an open secret between VCs that this is becoming a challenge. Some founders in early-stage companies expect big payouts in the earliest phase of their company. Naturally, some VCs use this tactic to win a deal and to sweeten the package for the founders. Don’t get me wrong; a financial payout as part of a financing round is an important tool and I have done this many times in the past. However, it’s important to keep this on a reasonable level and to do this at a stage where there is already revenue and a good level of product-market fit. There is no easy formula, but I recommend doing this when the company is revenue-generating, raising >$20m round and keeping it at less than 10% of the round or $500-$1m per founder depending on the stage and maturity.
Lack of Deep Tech and “real innovation” investors: In my opinion Venture Capital is well-positioned to invest in the real-world changing innovation and deep tech that will cure cancer, solve world hunger, and provide unlimited energy. Over the last decade, investments in proven business models has skyrocketed while unproven technologies have had less attention. Especially in Europe, I see a lack of “brave capital” that doesn’t follow the beaten path. Coincidentally, I believe Europe has great research and technological talent, however, they aren’t given the same opportunities as those in markets such as the US or Israel.
"Startups have demonstrated their ability to partner with Governments in providing essential digital know-how and products"
Despite the many strides of entrepreneurship globally, the need for new technologies and solutions to drive societal changes has never been more pertinent.
Climate Tech: This isn’t just a category for companies, but it should remind all startups of their obligation to save resources and build sustainable companies. It doesn’t mean every company is a climate tech company, it means every company should have this as the building block of their business.
Data privacy to scale AI: We are in a very transparent world today and governments are reacting to the power and data big tech has accumulated on most people in the western world. This creates opportunity, but also a need to find ways to train AI inclusively and openly with data that is created synthetically instead of leveraging private data with or without the consent of the people in question. This might sound self-righteous; however, I believe there is a big opportunity in developing algorithms and AI that can scale in a non-linear way.
In terms of best practices for starting a business today, I don’t think that changed too much over time. Find the most talented people to work with, identify an industry and a problem that you are passionate about and find customers that are willing to pay for it. On a more tactical level, I would always recommend businesses to apply focus on the things that work well and run focused experiments constantly in areas that are not clear yet with a fixed scope, time, and understanding of what success looks like.
Rather than advice, I like to share attributes that I have seen in successful founders that I enjoyed working with: Self-awareness, understanding of what you know and who can help in areas you don’t know, working hard but planning breaks and not taking no as an answer.