Three things I learned from the best startup investors in the world at SG Global ‘22
Last month I was flying the flag for Liverpool’s startup community during the Startup Grind Global Conference 2022 in Redwood City, California. I had the pleasure of hearing Doug Leone from Sequoia, one of the most successful venture capital firms in the world, speak about the current state of the economy, what that means for startups and how to plan for the future. If you have a spare 40 minutes, the full session is worth a watch. Alice Bentinck from ‘Entrepreneur First’ also delivered a powerful session full of insights that are particularly useful for UK startups looking to raise investment in the USA, which you can watch here.
If not, here’s my top three takeaways:
1. It’s still all about people, at the earlier stages
An ‘X Factor’ or ‘Secret Sauce’ or any of the countless other countless analogies for having an exceptionally competent founder team; it is a cliché because it is demonstrably true.
There is often little traction and not enough signal at seed and earlier to allow quantitative models to be predict growth and cashflow with confidence. A founding team that can rapidly iterate and pivot can overcome initial misses with regards to product and market. They can craft a narrative that makes a compelling case for potential investors and early employees to place a bet on the success of the business.
Being able to get into, and then leverage, networks of people in places where your prospective customers and investors are is also integral. Understanding what they are looking for and approaching this with a degree of emotional intelligence can be the difference between securing them, or losing them. The people you might be best raising from might not be on your radar, right now - and you need to be strategic and ambitious about how you construct an investment round which truly benefits your business.
The direction and scale of the business is ultimately capped by the vision and execution capacity of the founder(s) - which I think Alice captures in her talk exceptionally well with her slide that simply says “Normalise US-style ambition”.
2. Economic cycle
Where we are in the economic cycle is changing, drastically. For the past 10 years, the economic environment has been hallmarked by very low interest rates, costing around 0.5% to borrow billions of dollars. This means that it's essentially been close to free for the institutions that provide liquidity to venture capital and private equity firms to borrow money.
That cycle is over and as such, the businesses that get the investment - and what terms come with that investment - will change.
For the past decade, startups who went through VCs, especially in Silicon Valley, did not have to emphasise profitability. Big tech giants such as Uber are miles away from ever being profitable. All the focus has been on growth, scale, revenue, user acquisition and monthly active users, with founders and investors working out how to become profitable later. Users first, profit later. That’s going to stop pretty quickly. The quicker they hike the rates, the quicker it will stop.
Thinking back to my time studying geography, in nature we see the phenomenon of “extremophiles”. These are organisms that survive in their habitat but seemingly shouldn’t - for example, tardigrades can withstand extreme temperatures, moisture extremes and even toxic conditions. I believe that some businesses, especially the ones in the north and in places like Liverpool are a bit like these extremophiles. They get so used to existing without ideal operating conditions and without the luxuries that other businesses in established tech hubs have, that they have had to focus on profitability and adapt in other ways from the get go. These are the kinds of businesses that are going to thrive in the current economic conditions.
3. Web 3.0
The era of Web 3.0 is here - but only 5-10% of it will stick around - and that’s being optimistic. If you’re not familiar with what “Web 3.0” means - the iteration “Web 1.0” was the inchoate internet, static web pages displaying information that took a long time to dial up to. “Web 2.0” was the era of platforms controlled by centralised services in the form of social media giants, Amazon etc - platforms that could be taken down tomorrow and take with it all users’ data and content.
By contrast, Web 3.0 will be about decentralising, returning power, value and data to users. Many of the current businesses that have achieved scale in this space revolve around the use of blockchains as a means of attributing proof of ownership, work done or authenticity, to individual users without the need for a centralising platform upon which there is reliance on human actors to not ‘go rogue’.
There are startups who have been really quick off the Web 3.0 mark, but, like the dot com bubble 95% of it will be gone in 10 years - but the 5% left will be the new giants. A really interesting example is the decentralised social media concept - powered by DeSo coins, which users can exchange with each other depending on how useful they find each other’s content on the Twitter-like feed of the ‘Diamond’ app. This being in contrast to the incumbent social media platforms, where users’ data is leveraged to make money for the platform owners, with individual users getting nothing in return.
