Scaling the WHY - How to read your investors / customers minds

In the startup world we love our metrics 📈 . ARR, LTV, CAC, you name it. Many of them are growth related as a key element of the startup culture. Others are performance or margin oriented like EBITDA or the Rule of 40. They are a quantitative representation of our actions and the impact on the behavior of our prospects and customers.

What about the Why?

We know we should always start with the Why. Leaders need the ability to inspire (to close the big deals). But why doesn’t the investor send a term sheet? Why does the customer purchase the new IPA from the cool indie brewery? How do you know if you inspire somebody? Of course you can ask but the Why is still incredibly hard to scale.

Is there a way to measure the why, that emotional miracle that happens when your heart says: Yes, I love it! ❤️ I had the opportunity to dive deep on this with Scott and the amazing team at Immersion. They have built a neuroscience platform that allows you to measure how your target audience engages with an experience, e.g. your startup pitch 🚀 or your video ad. It’s an easy to use cloud based tool that can identify the moment the audience falls in love with your product or service.

The moment your audience falls in love

Imagine you can place a CTA right at that moment of highest engagement? Bam 💥 deal closed! As a marketer you can now test your messaging before you spend a single dollar on advertisement. In fact, you can predict the (emotional) success of your content with an 85% accuracy. How is that for startup metrics?

Talking about startups. SunRamp, an accelerator for healthtech, is using the platform to measure the performance of startup pitches. They are able to pin down the level of audience engagement for every slide of the pitch deck second by second. With that data, your next investor pitch could be like reading your investors’ minds.

Are you a founder and like to test your pitch? Are you a marketer and like to test your messaging? Sign up for a free trial or ping me and we’ll get you started.

Engagement at Investor Pitch

Unicorn Liquidity - IPOs are Back

IPOs - especially unicorns - are on track to reach new records.

Why do we care?

Well, those VCs you're after, care a lot. The cash they invest in your startup comes from investors they convinced to trust them with their money. When IPOs happen, liquidity happens. Investors get their money back and (often) invest again, maybe in your company.

US VC-Backed IPO & Post-Valuations

US VC-Backed IPO & Post-Valuations

Source: SVB State of the markets Q3/2021 report. 2021 are estimates, with 36 IPOs and an aggregate post-valuation of $313bn as of July 16, 2021.

An IPO is just one exit option for startups but a very special one: It’s the Unicorn exit. While Unicorns are often celebrated - who doesn’t like “a billion” - they come with a challenge: How to get your cash back? The average tech M&A deal is around $120m and we see about 600’ish deals a year. The average unicorn is valued $3.2bn and there are around 800 of them. As growth-stage capital has provided the means to stay private longer, every investor wants to see their money back one day. IPOs play a critical part in that story. Just in 2021 alone, 59 of 65 unicorn exits happened via IPO.

Global Unicorn Exits 2011 - 2021

Global Unicorn Exits 2011 - 2021

Source: Statista - Number of unicorn exits worldwide by type. As of July 2021.

Investors look at your startup in the context of the market and IPO valuations are steadily climbing, reaching 18.5x revenues in 2021. Which is in showing startup funding valuations, reaching revenue multiples of about 12x in the consumer internet, 20x in enterprise software and even 22x in Fintech.

US VC-Backed Tech IPO Revenues & Multiples

US VC-Backed Tech IPO Revenues & Multiples

Source: SVB State of the markets Q3/2021 report. Data as of July 16, 2021.

Which brings us back to why we care. While you still need to build your product, win those customers and get your employees motivated, it is helpful to understand how investors look at your startup. An IPO (or another exit type) is their final chapter with your startup. Since only very small group of founders achieve an exit, IPOs are serving as lighthouses for startup opportunities. They are the public display of what could happen to their investment if all stars align.

Startup M&A - Unintended Consequences

As M&A within the startup community is reaching record levels, we’d like to shed some light on potential unintended consequences of an acquisition, in particular future funding rounds.

Acquisitions are a vital tool for startups. You might close a product gap or enter a new region by acquiring a local player. And of course there is the opportunity to grow faster. To grow by acquisition is something you want to be very intentional about.

Assume you’re a $35m ARR business and you’ve just closed a nice funding round based on your stellar 50% growth rate. Your direct competitor is struggling and you’re using some of that new cash to acquire their $15m business for a very reasonable multiple. That deal is allowing you to post a 100%+ growth on the combined business. Life is awesome.

A little less than two years later you’re going for the next round of funding. Your core business has continued to grow with an exceptional 50% and you’ve managed to keep churn on the acquired business at a net 20%. A great job given that it was a direct competitor. As you approach new investors, you now find yourself in the position to explain your growth has been “only” 29%. Life is now very complicated.

Note: Simplified illustration of the impact of an acquisition (here as a Google Sheet).

What the example illustrates, is that acquisitions are impacting your business far beyond the announcement date. Especially acquiring cheap, e.g. a struggling competitor, comes with unintended consequences. A single acquisition that is not growing or adding cross selling is a short lived pleasure and your year 2 results might be painful. I emphasise single acquisition as a rollup of multiple companies might eliminate these issues, especially when timed right.

Planning to grow by M&A or like to learn more about how acquisitions shape startups? Ping me and we’ll connect you to a startup CEO that has been there before.