Getting Funding is NOT a Strategy

Money is always a con­sequence, not the root cause. You work – you get paid. You sell – cus­to­mer pays. You roll the dice and get luc­ky – you get rich. You have a busi­ness (plan) that works – you get fun­ding.

But get­ting fun­ding is not the end goal, not even for a star­tup. The end goal is to be able to pay all that fun­ding back, and some more. To reach that you need to have a busi­ness that works. For get­ting the­re, you need the right stra­te­gy. The stra­te­gy should be all about your busi­ness: who is your cus­to­mer, what is your offe­ring, how you plan to win etc.

The jour­ney from whe­re you are today to whe­re you need to be one day is typical­ly so long that you may need to top up some fuel on the way. Fun­ding is your fuel, hel­ping you to get whe­re you need to go. But it’s just a means to an end, not the rea­son your star­tup exists and defi­ni­te­ly not your Nort­hern Star. It should not be the dri­ver for your thin­king and acti­vi­ties, do not let  “what do I need to do to get fun­ded” to mis­lead you.

Experimenting vs implementing

Cor­po­ra­te way of thin­king: We care­ful­ly pre­pa­re a plan. Then we imple­ment it preci­se­ly. The results will be as sta­ted in the plan. Fai­lu­re is due to bad execu­tion.

Star­tup way of thin­king: My plan is not real­ly a plan, it’s just a sum of my hypot­he­sis. For sure it will be wrong but I don’t know whe­re and how. I need to run lots of struc­tu­red expe­ri­ments to test my hypot­he­sis. When I have vali­da­ted my assump­tions, I may have a plan that is worth somet­hing. Fai­lu­re is due to not run­ning enough dif­fe­rent “tests” with cus­to­mers.

Many star­tups beha­ve like cor­po­ra­tes in this regard, assu­ming their plan will work – just throw in money and people and voi­la. No. Be very awa­re that until you have vali­da­ted your assump­tions you do not have a plan. Then you can not be imple­men­ting a plan (read: sca­ling), all you can do is run expe­ri­ments.

The result of an expe­ri­ment is to inc­rea­se your know­led­ge – does this work, Yes/No. The job of a star­tup is to run expe­ri­ments. A good star­tup learns a lot whi­le spen­ding very litt­le effort and money. A bad star­tup spends a lot and doesn’t learn much.Cost efficiency of your lear­ning should be a key objec­ti­ve whi­le in the expe­ri­men­tal pha­se (=all pha­ses befo­re sca­ling, by which time you should have a vali­da­ted plan you can just imple­ment). Cost efficiency of run­ning your ope­ra­tion should be your key objec­ti­ve once at the sca­ling pha­se.

What are (G)OKRs ? - measure what matters

Most modern lite­ra­tu­re refers to just OKRs (https://www.perdoo.com/the-ultimate-okr-guide/) but I pre­fer adding Goals to it as well – as Mic­ro­soft did back in the 90´s. You need to have defi­ned a clear Goal first befo­re Objec­ti­ves makes sen­se. Anyway, the ope­ra­tio­nal stuff is cap­tu­red in the OKRs (wit­hout the G) so no need to split hair on seman­tics, both work.

The power of the OKR dri­ven ope­ra­tion is explai­ned well in (https://www.amazon.com/Measure-What-Matters-Google-Foundation/dp/0525536221). If you google “mea­su­re what mat­ters” you find a lot of mate­rial, You­tu­be videos etc to give you a crash cour­se. Though the examples in the book are very big com­pa­nies, the met­hod works well for star­tups as well. Actual­ly they may be even more cri­tical for a star­tup, as “what mat­ters” is depen­dant on the sta­ge of the J Cur­ve you are at. As you make progress, “what mat­ters” should chan­ge. The thing to dri­ve your eve­ry­day acti­vi­ty is the Key Result. The name is a bit mis­lea­ding, it should rat­her be “Key Acti­vi­ty”, but this is the stan­dard term so we stick with it.

How do I know if I have product/market fit ?

The­re are no strict rules for that as the who­le PMF concept is somew­hat abstract and vague. But the­re are (semi)objective ways to assess it. What exact­ly works is depen­ding on the con­text so you need to iden­ti­fy the rele­vant cri­te­ria for your case.  Howe­ver at the end it boils down to this (by Eric Ries)

If you have to ask if you have found it, you haven’t.”

Some things to monitor/measure that are indica­tors of PMF (more preci­se­ly, the “cus­to­mer love” or “mar­ket pull” part of PMF):

  • A wide­ly used mea­su­re is pro­vi­ded by Sean Ellis, who coi­ned the term Growth Hac­king. He sta­tes you’­ve reac­hed Pro­duct/­Mar­ket-Fit when at least 40% of the res­pon­dents answer the ques­tion “How disap­poin­ted would you be if this pro­duct no lon­ger exis­ted tomor­row?” with “Very Disap­poin­ted”.
  • Is Word of Mouth hap­pe­ning? Are your cus­to­mers tel­ling about you to 3rd par­ties, with no invol­ve­ment from you, which results in win­ning new busi­ness?
  • Do you get inbound leads that you can not track back to your own acti­vi­ty?
  • Are cus­to­mers trying to buy befo­re you even tried to sell?
  • Are your sales cycles get­ting shor­ter?
  • Do cus­to­mer requests gene­ra­te so much workload that you have no time to pur­sue your own deve­lop­ment ideas?

Our own for­mu­la­tion of a lit­mus test to deter­mi­ne whet­her the­re might be PMF:

Pro­vi­de evi­dence of 3 sepa­ra­te mea­su­red tests of your cus­to­mer beha­viour that demon­stra­te your product/service is sig­ni­ficant­ly (=order of mag­ni­tu­de) bet­ter than the exis­ting solu­tion.

Pro­duct Mar­ket Fit is when cus­to­mers sell for you”.

Glim­mers of fal­se hope is not the same as cus­to­mers wan­ting to rip it out of your hands. Pro­duct Mar­ket fit feels like a land­mi­ne going off.” Peter Rein­hardt

The num­ber one problem I’ve seen for star­tups, is they don’t actual­ly have product/market fit when they think they do.”Alex Schultz

80% of SaaS com­pa­nies never make pro­duct mar­ket fit.” Peter Rein­hardt

Star­tups need 2–3 times lon­ger to vali­da­te their mar­ket than most foun­ders expect. This unde­res­ti­ma­tion crea­tes the pres­su­re to sca­le pre­ma­tu­re­ly.” (Star­tup Geno­me Stu­dy)

You are able to articu­la­te your dif­fe­rent problem/solution fit(s) in detail”.

Befo­re you can achie­ve product/market fit, you need to unders­tand and be able to articu­la­te your problem/solution fit(s) in detail - not in “gene­ric” level or in gene­ric terms (https://gorillacapital.fi/problem-solution-fit/).

Problem/solution fit

Problem/solution fit needs to inden­ti­fied & veri­fied prior you can start loo­king for product/market fit or sca­ling. Here is a pre­sen­ta­tion that can help you on iden­ti­fing the problem/solution fit.

Typical­ly ent­repre­neurs feel pres­su­re - both “inter­nal” and exter­nal - to rush to sca­le. Many time even wit­hout unders­tan­ding their problem/solution fit and how it dif­fers between seg­ments.

This results in not fin­ding product/market fit or in inef­ficient and pre-matu­re sca­ling (read was­te of money).

The aim of problem/solution fit process is to be able to iden­ti­fy the best oppor­tu­ni­ty to pur­sue furt­her.

Startups have different stages

Star­tups have dif­fe­rent sta­ges. Howard Love has well articu­la­ted the dif­fe­rent sta­ges and we have inclu­ded the problem/solution fit, product/market fit and sca­ling “fit” for you to unders­tand how the­se sta­ges over­lap each other.

Whe­re is your star­tup ? What are the KPI’s rele­vant for the sta­ge you are in ? Have you “over­lea­ped” one of the sta­ges ? What kind of veri­fica­tion and facts do you have ?

Do you not want companies to realise their full potential, beyond the early trade sale opportunity?

Abso­lu­te­ly we want eve­ry­one to reach as high as their abi­li­ties allow them to! A unicorn would be fan­tas­tic! A lot of what we say should be prece­ded with “until pro­ven otherwi­se”. As we belie­ve in data and sta­tis­tics, we assu­me the median type outco­me as the place­hol­der – UNTIL PRO­VEN OTHERWI­SE. I.e. once you have evi­dence that you can do bet­ter and reach hig­her than the typical/median case, then rai­se the bar! But you need to pro­ve you can walk until you try to run. And until you have pro­ven your abi­li­ty to run, you should stay on a rou­te whe­re run­ning is not man­da­to­ry.

Why are you so negative?

One rea­son is our per­so­na­li­ty – we are all “glass is half emp­ty” people, so we look at eve­ryt­hing from that angle. But we don’t intend to be nega­ti­ve or jud­ge­men­tal, we are simply ana­ly­tical and fact dri­ven and we belie­ve in sta­tis­tical math, not fai­ry tales. We are ult­ra-curious and we always want to unders­tand. When we ask ques­tions people have no good answers for, some people take it as a nega­ti­ve. Sor­ry, then we clear­ly do not have an align­ment in the basic phi­lo­sop­hies and we are not meant for each other.

You talk a lot about “start with why”. What is your own why?

The ove­rarc­hing hig­her cause for us is about making the who­le star­tup com­mu­ni­ty awa­re of an alter­na­ti­ve to the ste­reo­ty­pical “how to rai­se as much money as pos­sible” thin­king (which results in having to tell a real­ly bold sto­ry to pump valua­tions up, and eve­ryt­hing that forces you to do). We want to help build more success­ful star­tups, which reward the foun­ders and inves­tors for the risk-taking. One cor­ners­to­ne of that is the accep­tance of basic facts such as sta­tis­tical pro­ba­bi­li­ties of success in dif­fe­rent sce­na­rios. Hence we favour a ratio­nal approach to risk and fun­ding, as on ave­ra­ge the sur­vi­val rates are much bet­ter when your plan does not depend on win­ning-the-lot­te­ry type odds.

Should I plan to be a unicorn (like everybody else, and what many advisors are pushing me to do)?

(People who have alrea­dy done seve­ral exits at tens of mil­lions – you can skip this part)

If you want to make an infor­med deci­sion you should unders­tand the odds – some basic sta­tis­tical math. What mat­ters are not paper valua­tions on which money has been rai­sed, but rea­li­sed exits whe­re foun­ders and inves­tors recei­ved money back. So lets look at some exit facts:

  • Median exit value in tech­no­lo­gy com­pa­nies in Nor­dics hovers around 12-15m€ (disclo­sed exits - public com­pa­nies have to disclo­se mate­rial tran­sac­tions, so lar­ger deals tend to be disclo­sed). The­re is a lar­ge num­ber of non-disclo­sed exits that are typical­ly less than this.
  • In the who­le of Euro­pe the­re are only a few >250m€ tech­no­lo­gy exists eve­ry year (half a dozen or so).
  • Trying to build a unicorn takes a lot of time (>10 years) and mul­tiple invest­ment rounds, resul­ting in big chan­ges on cap table. Mar­kets chan­ge, people chan­ge, pre­fe­rences chan­ge, tech­no­lo­gies chan­ge…
  • The­re are hundreds of com­pa­nies who have rai­sed money at Unicorn valua­tions, but only a few which have been bought (or IPO’d) at Unicorn level
  • Your odds of get­ting a Unicorn exit are much MUCH lower than your odds of hit­ting a hole in one in golf (regard­less of your HCP)
    By all means dream big and set the tar­get high, but learn to walk befo­re trying to run. How about being worth 10M first, and then deci­ding whet­her you want to rai­se the bar or not.

You don’t need to be unicorn to be a success

What do you mean with an “early stage trade sale”?

Tra­de sale = someo­ne big­ger than you buys your com­pa­ny out­right. For the buyer, your company/it’s busi­ness are a nice comple­men­ta­ry add-on to what they alrea­dy have (they have a brand, cus­to­mers, chan­nels, sales­people etc – but they have a cri­tical hole your com­pa­ny could fill)
Ear­ly Sta­ge = this refers to the sta­ge your busi­ness is at, not to the calen­dar age of the com­pa­ny. The sweet spot is that you have found (at least v1.0) of your product/market fit and demon­stra­ted suf­ficient proof of it wor­king in real life, but you have not yet built “real” busi­ness of it.
In essence, in an ear­ly sta­ge tra­de sale the sel­ler sells a reci­pe for growth for a buyer who belie­ves they can do the baking of that growth based on that reci­pe.

What gives Gorilla Capital knowledge of the things you talk about ?

We have been the­re our­sel­ves. 

Goril­la part­ners have foun­ded com­pa­nies, sca­led them (up to 100m€+ tur­no­ver) and exi­ted them. We have wor­ked hands-on with star­tups for 10+ years, of our 2 funds we have to date inves­ted in 50+ star­tups (+ our own per­so­nal angel invest­ments). We have scree­ned thousands of star­tups, ana­ly­sed clo­se­ly hundreds and wor­ked hands-on with 100+. We have an ana­ly­tical mind so we have seen what works and what doesn’t. Eve­ryt­hing we belie­ve in is based on eit­her our own first hand expe­rience, or objec­ti­ve data avai­lable to any­one.