29 May’18

Lessons learned from 2 years of startup surveys: Key observations about founders and the companies that they build

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In 2016, we launched a startup assessment survey, aimed at analyzing startups that approach us for services and scoring them on the Product/Execution Quadrant map.  This analytical tool provides a useful framework for early stage startup assessment (Pre-Series-A) and for identifying areas of weakness on either the Product or Execution side that should be addressed in order to take the company to the next level.

More on the Product/Execution Quadrant map can be found in this article.

 With over 2 years of data, we have seen some interesting trends in the responses we get to our 20-Question assessment survey.  Below are a few observations that can shed light on early stage founders’ motivations, products, competitive advantages and other factors critical to success:

  1. Founders who are experts in their industries are often targeting problems based on personal pain

There is strong evidence in the market that in instances where entrepreneurs are addressing a personal pain in an industry they know well, they are more likely to succeed.  Our survey results show a high concentration of founders who fit this profile, and we believe that the two are actually correlated: the more experience you have in an industry, the more likely you are to stumble upon a problem that is rampant in that industry.  When asked about the problem they are trying to solve, 50% of respondents indicated that the ‘Idea came from personal frustration’, and 53% further responded that it is a ‘Problem in an industry where I know the customer needs’.  These answers bode well with the responses to another question about relevant industry experience, where 58% of respondents indicated that they have ‘Significant experience (over 5 years)’, and another 18% indicated ‘Some experience (under 5 years)’.

  1. Most founders in the software industry have self-funded a product to minimum viable product (MVP) and beyond

Software products are easier to self-fund to a relatively advanced stage of product development, as opposed to products in hardware, materials or life sciences which require large amounts of R&D and depend on grants or other type of early stage funding. This correlation is clearly supported by our survey results:

  • 76% of the respondents identified their product as ‘Software’ related, while close to 50% specifically identified a Software-related industry (Mobile, Social media, Enterprise software or FinTech).
  • 65% of the respondents characterized their stage of product development as MVP and beyond (31% at the ‘MVP/Proof of Concept built’ stage, 24% at the ‘Initial Release’ stage, and 10% have already released a product to the market).
  • Finally, 88% of respondents have self-funded their venture to-date (29% each also indicated Friends & Family or Angel Funding), and only 2% took in VC funding.
  1. While many founders have some form of patent protection, an overwhelming majority mention ‘Superior product features’ as their competitive advantage

While approaches to patent protection vary in our survey, there is almost a unanimous consensus about ‘Superior product features’ being the most important competitive advantage. This finding makes sense in light of the large concentration of software companies in our survey.  Software companies grow in valuation by gaining user traction, and user metrics are often the most important metrics analyzed by investors.  It is therefore no surprise that 92% of respondents indicated a user-facing metric such as ‘Superior product features’ as their competitive advantage (some of these may be overlapping since there was more than one possible answer to this question).  The next popular answer, at 50% of respondents, was ‘Intellectual property’.  When specifically asked about methods of protecting their idea, founders’ answers seem to be all over the place: about a third of respondents (34%) indicated having a pending patent, 27% of respondents indicated they have not protected their idea at all, 15% had a granted patent and 12% had a portfolio (more than one) patent (some of these may be overlapping since there was more than one possible answer to this question).

  1. First time entrepreneurs seem to overestimate their addressable market and/or underestimate the competition

As we have learned throughout our work with hundreds of startups around the world, many founders (especially if it is their first venture) are overly optimistic in that they overestimate the addressable market, and/or underestimate the competition.  Both of these biases are present in our survey results: when asked about the size of their addressable market, 67% of respondents indicated the market was larger than $2 billion, and another 17% indicated the market was between $500 million – $2 billion.  When asked about the state of competition, 68% responded that there was only ‘a handful of competing products’, and only 12% felt like they were entering a ‘crowded market’.  We expect these biases to be correlated with lack of experience, and indeed, when looking at the makeup of our survey respondents: 38% of respondents are first time entrepreneurs, only 19% have raised money before, and only 10% have had a previous exit.

  1. While most founders operate as a team, the definition of a ‘team’ is subject to interpretation

A strong team is a critical factor in our Execution score, and we collect a lot of information about the startup’s team and its makeup.  59% of our respondents reported having a full-time team working on this project, and 35% of them also reported that they have worked with key members of the team before.  This combination is highly sought after by investors, as past work experience is a factor likely to reduce personal frictions in the team, a problem that is considered one of the top growing pains of early stage ventures.  Having said that, perceptions of what constitutes a team varies among founders, and could be subject to interpretation: while 7% of our survey respondents reported that they have no team, 29% of them indicated in a different question that they are ‘Sole entrepreneurs’.  This seemingly conflicting answer is actually typical of startup founders, especially those with little experience, who sometimes include in the team people who are contractors (17% indicated their team is comprised of independent service providers) or advisors (38% reported that they have an advisory board).  While these two groups can fill in the gap in the early stage, they are often only a temporary substitute to a real, dedicated team.  Finally, while 43% of respondents indicated that they were looking to build their team, only 19% indicated ‘Access to talent’ as a major challenge to scaling the business in a different question.  We attribute this pattern to lack of experience, as seasoned entrepreneurs fully understand the challenges involved in putting a team together.


We will keep monitoring the trends as more startups take our survey.  As previously mentioned, our sample of survey respondents over the last 2 years constitutes primarily of early stage ventures developing software products.  We use this survey to map each company on a Product/Execution quadrant map to figure out their readiness for Series A funding. Founders in our survey often fall into the ‘Rookie’ quadrant (scoring low on both Product and Execution) or ‘Visionary’ quadrant (scoring high on Product and low on Execution). This seems consistent with both the industry they are in (Software) and their stage of funding (seed, pre-Series A).  Our goal is to move them to the ‘All Star’ quadrant (high on both Product and Execution) and get them ready for Series A funding.

Full article here
17 Jul’14

Living in a Bubble? Demystifying Startup Valuations

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Just when it seemed as though start-up valuations had peaked in 2013, the year 2014 has started with an opening shot in the form of the reported $3.2 billion acquisition of Nest Labs by Google, followed with Facebook’s $19 billion acquisition of WhatsApp. It now looks as if this year continues the perfect-storm conditions, which will sustain the trend of high valuations for exits (M&A and IPOs) and transactions in coveted markets such as the Internet of Things, where Nest has a strong foothold.

From my vantage point in Silicon Valley, I am frequently asked whether we are in the midst of a ‘valuation bubble’. The answer to that goes back to the definition of a ‘bubble‘, which inherently involves some irrational behavior driving otherwise rational participants in the marketplace to stray from reasonable prices that could have been anticipated under similar circumstances. Understanding the factors driving business valuations hinges on understanding the valuation framework, access to capital, liquidity conditions and the overall technology landscape. With that in mind, let’s look at some of the major trends that are shaping startup valuations in order to establish whether current valuation levels actually represent irrational, bubble-like conditions.

1. Demise of Financial Fundamentals: Rise of KPI-Driven Valuations

Valuations in certain high-growth industries are undergoing a paradigm shift, with financial fundamentals making room for valuations based on key performance indicators (KPIs) such as user stickiness, churn and conversion rates. A common pitfall involves trying to benchmark valuations of pre-revenue companies against traditional financial valuation fundamentals, such as revenues and profit multiples. This might give people a false sense of irrationality when they try to justify the valuation. This may sound like a radical idea, but it is the only way to explain the price parity between Instagram and Ducati, two companies purchased on the same week in April 2012 for around $1 billon. Instagram, a high-flying social media start-up with no revenues and 50 million users, commanded the same price as Ducati, a century-old Italian motorcycle manufacturer with €500 million in revenues. Last year saw a proliferation of KPI-driven valuations, with pre-revenue start-ups such as SnapChat and Pinterest valued at billions of dollars.

2. JOBS Act and Crowdfunding: New Platforms for Funding Innovation

Reward-based and equity-based crowdfunding platforms are emerging as prominent means for funding innovation, with over $2.7 billion raised in more than 1 million campaigns across all types of crowdfunding platform in 2012. Equity-based crowdfunding was made possible by the Jumpstart Our Business Startups (JOBS) Act, which lifted the 80-year ban on public solicitation in the United States. The long-awaited equity crowdfunding Title III Securities and Exchange Commission regulations are expected to be released later this year, marking the full launch of equity crowdfunding in the United States (which is currently limited to accredited investors only). At the same time, reward-based crowdfunding is becoming increasingly popular, with major platforms such as Indiegogo and Kickstarter helping start-ups to raise millions of dollars and bring new products to market.

3. Supply and Demand: Cash is Abundant

The consensus in US investment circles is that there is a lot of cash on the sidelines waiting to be deployed. Several factors are at play here: corporate cash levels are at an all-time high, creating shareholder pressure; high liquidity is fueling private equity investors, which are moving into growth equity; and venture capital investors are increasing their funds, resulting in higher investment rounds. The abundance of cash for investment is pushing up valuations to higher levels across the board – a trend that is expected to continue in the near future.

4. Multiple Paths to Liquidity: Intense M&A and IPO activity

In 2013 the NYSE reported a total of 230 IPOs with a combined value of over US$55 billion across all major US stock exchanges. Companies going public in the United States are generally more mature and are staying private longer. Subsequently, pre-IPO liquidity in secondary markets is very important, especially to early shareholders and investors. M&A activity saw some decline in 2013, with slightly over 10,000 deals reported overall, including about 2,200 technology deals with a combined value in excess of $100 billion. IPOs and M&A deals represent alternative paths to liquidity, which drive valuations up as companies have several options. These pricing pressures are expected to continue through 2014.

5. Hot Technology Sectors: Major Disruption Ahead

Some technology sectors represent particularly high-growth opportunities, and are expected to rise above the tide and generate M&A activity and higher valuations in 2014. One such sector is the Internet of Things (IoT). The IoT represents the vision of a connected universe where objects, devices and people will all share a common network of communication. IDC estimates that the number of connected devices will grow to 212 billion by 2020, with about 30 billion devices smart enough to operate without human control. A study by GE concluded that the IoT market over the next 20 years could add as much as $15 trillion to global gross domestic product, which is roughly the size of the current US economy. The Internet of Things is gaining momentum with industry leaders such as GE and Cisco, which adopted it as a key element of their corporate vision in 2014 and beyond.

So, are we living in a valuation bubble? The answer is probably somewhere in the middle, and perhaps we could characterize current valuation levels as “somewhat inflated, but mostly expected” under existing market conditions. These are exciting times, when disruptive technologies finally meet the right market conditions and capital infrastructure that allow for the kind of unprecedented valuations witnessed in recent years.

Full article here

Business Model Innovation: Why Building a Better Mousetrap is Not Enough

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What do solar energy and personal communications have in common? While energy and communications seem unrelated industries, they have significant similarities if one considers the role of business model innovation as a precursor to success in bringing new intellectual property to market. Take, for example, two companies:

  • SolarCity Corporation (Nasdaq: SCTY), a solar panel installation company, which is publicly traded with a market cap of over $7 billion; and
  • WhatsApp, the text messaging company which was purchased in February 2014 by Facebook for $19 billion.

In a playing field littered with the corpses of failed ventures, these two companies point not necessarily to cutting-edge technology, but rather to filling the gap in a business model as the key enabler of their success. SolarCity had one of the only initial public offerings (IPOs) in the solar industry, an industry known for high failure rates, due primarily to its successful solar system financing program which allows it to distribute a product with a negative return on investment to millions of households. And the recent WhatsApp acquisition is largely attributed to the lack of revenue model agility on the part of incumbent carriers, which created an opportunity for WhatsApp to tap into its user base – and grow to 450 million subscribers worldwide.

SolarCity: making solar systems affordable
In late 2007 I was on the founding team of a residential energy efficiency start-up in Silicon Valley, engaged in developing a data-driven analytical platform for homeowners to understand their energy consumption and savings opportunities. The residential sector has always been a tough nut to crack when it comes to energy efficiency: homeowners are motivated by a complex set of incentives (saving energy, saving cost and reducing their carbon footprint) that often seem at odds with their actual energy consumption behavior. Utilities have been experimenting for years with all types of initiative, ranging from handing out free energy-efficient light bulbs to installing smart meters that would balance off the load during peak hours. Successful IPOs are the exception to the rule in an industry that has grown accustomed to a steady stream of bankruptcies, poor earnings reports and dwindling funding resources.

SolarCity was founded in 2006 and was originally backed by Elon Musk, the maverick Silicon Valley entrepreneur, who is also the founder of successful electric vehicle company Tesla Motors. The company designs, installs and maintains photovoltaic (PV) solar systems on residential rooftops. Solar panel installation is a lucrative business. Most of the money being made in the solar industry does not come from making and selling solar panels, where the market is flooded with cheap PV panels from Asia. A recent Massachusetts Institute of Technology study found that in residential systems, solar panels typically account for only 20% of the overall cost of the system. The rest includes the cost of electricians to install the panels and hardware to connect the systems to the grid. Most of that money goes to companies like SolarCity.

From an economic standpoint, residential solar systems are expensive to install and do not actually pay back in energy savings over the duration of typical home ownership, which creates a major hurdle to adoption. The key difference between SolarCity and many other solar companies is that its strategy is not based on innovative new PV panel technology; rather, its competitive edge lies in utilizing existing solar technology with an innovative approach to financing the panel installation. Instead of asking for a big upfront payment, the company created a financing program whereby it leases the systems to homeowners. The lease payments are offset by power savings from reduced electric bills and the surplus electricity that can be sold back to the local utility. By doing that, SolarCity has managed to convert a product with a negative return on investment to an affordable energy-efficiency solution.

WhatsApp: picking up the slack in messaging services
Telecom research company Ovum Ltd estimated that service providers worldwide lost about $32.5 billion in 2013 in text messaging revenues to free social messaging applications like WhatsApp, a loss that is projected to reach $54 billion by 2016. Internet-based messaging services have particularly increased outside the United States, where carriers charge high fees for texting on top of the regular voice and data plans. In order to protect their text-messaging subscribers, US carriers began to offer flat-rate, unlimited text messaging in many of their plans. However, carriers in other parts of the world are largely affected by the proliferation of free social messaging apps: in Mexico, for example, it is estimated that about 90% of all instant messaging goes through WhatsApp.

For much of the past three decades, voice has dominated the revenue streams for almost all telecoms operators. The changing face of the mobile industry affected the business models and revenue structure of service providers. In 2013 voice revenues were expected to fall below the 60% threshold globally for the first time. The drop in voice revenues has been compensated by the rise of messaging and data revenues, as service providers try to keep the overall average revenue per user (ARPU) at stable levels. A ‘perfect storm’ set of circumstances created the fertile ground for WhatsApp to take over the market: the ubiquitous broadband internet access, the proliferation of mobile devices and the gap in business model on the part of the service providers. These circumstances pushed subscribers to adopt free personal communication applications at increasing rates.

One might argue with the price paid by Facebook for WhatsApp’s massive user base, but this acquisition was definitely triggered by the global accelerated growth of WhatsApp, which would not have been possible but for the gap in revenue model that caused telecoms companies to lose users that they already own, due to the wrong billing model. It remains to be seen how WhatsApp’s 450 million users will be monetized by Facebook, but this represents a missed opportunity for the service providers whose focus on maintaining their ARPU metrics and existing billing structure is causing them to lose sight of some of the new revenue opportunities in telecoms services today.

In some industries it is not enough to build a better mousetrap. Often, the key to product or service success in the marketplace hinges on coupling intellectual property with the right business and revenue model.

Full article here