Hello there 👋 I’m Dylan, part of the Seed investment team at Frontline Ventures.
I’ve spent my career in and around innovation, from founding my own sports tech startup (MatchDay) and academic journal (Trinity Student Scientific Review) to directing global innovation budgets for a large multinational (Accenture).
I bear the scars of failure from many of these endeavours, and know first-hand the difficulty in setting up a business.
As such, one of my goals is to help demystify venture capital and provide transparency and support for budding fundraisers to give them a better chance of success. This piece is my first attempt at that.
Here are four lessons I have learned as early indicators of success in companies, as I have transitioned from startups to venture capital.
Lesson 1: Team Trumps All
Investing at Seed stage is exciting because it is the perfect mix of science and art. Science in the sense that you can write on a piece of paper the things we look for in a business (and I have written some of those things below in lessons 2-4); and art in the sense that, at early stages, you don’t really have any data points to assess that reliably, and the decision almost entirely comes back to an assessment of the founder.
From Frontline’s experience, an exceptional founding team is the absolute number one early signal of success. This is backed up by data we’ve tracked over time (See our analysis of past deal data to shorten VC learning cycles). Products change. Markets change. How founders like to operate typically doesn’t.
It isn’t possible for a business to have every answer and data point to give you confidence in an investment decision at Seed stage, but it is possible to have a founder with the competency, resilience, and ambition to figure it out along the way. With the right team, the rest often comes out in the wash.
Ultimately, if a startup ticks every other box but doesn’t have the right team, we won’t invest. If a startup ticks the team box but hasn’t quite figured out the rest, we may still invest, on the basis that good founders will figure it out.
The qualities this VC looks for in founders
If you are to take one thing from this piece about how Seed investors assess opportunities it is this point. And what are those qualities we look for in a founder? It’s a combination of competency and traits. If starting a technical company it is critical to have a competent team of engineering talent, for example.
And the traits we look for at Frontline are typically:
- High level of ambition and strong motivation for starting a company
- Clarity of vision — not just what you will do but what you won’t do
- Deep thought on answers i.e. you have novel insight and a high level of rigour when challenged
- Fast rate of learning — we refer to these founders as “learn-it-alls” in Frontline i.e. those that can demonstrate an ability to absorb learnings from customer interactions, and clearly describe them
- Ability to pivot and persevere i.e. while you have strong opinions, you hold them loosely and are willing to ride with the punches of the market to achieve product-market-fit
As you read through the next three lessons, read them through a “founder” lens. It’s not about the business having all of the below answers, but more so: Does the founder have the ambition and credibility to scale a business of size relevant to the fund? Can the Founder build a product that delivers step change value to a customer? Can the founder implement a business model that repeatedly wins customers in a differentiated way?
Lesson 2: Articulate a vision that is precise and big
After the team, this is the second most important thing we consider at Frontline. Total addressable market (TAM) defines how big an opportunity can be, and the team defines how big an opportunity will be. The more clarity with which you can demonstrate that the market you are competing for can sustain venture-relevant returns, the easier it is for us to say “yes”.
So “what are venture-relevant returns?”, you might ask. This is the formula for how VCs will assess whether your business can become big enough:
- Step 0: Check the investment thesis of the fund you are pitching. In Frontline Seed’s case its European B2B Software business with US ambitions. This is our first sniff test, and we fundamentally believe that to be a category leading software company, you need to be a great US software company.
- Step 1: What is the fund size? In our case we are currently investing out of a $100m seed fund in Europe. (Clarification: this doesn’t refer to a fund’s total assets under management (“AUM”), rather the size of the current fund they are investing out of.)
- Step 2: What is the VC fund underwriting to? Most VCs make an investment under the assumption that it has the potential to return the fund at least once (sometimes more).
- Step 3: What will the ownership percentage be at exit? Many early-stage VCs will aim to own 15-20% at Seed stage. After some standard dilution through Series B, that would imply about 10% ownership at exit.
- Step 4: What is the required exit size? Assuming the VC will own 10% at exit, and each individual investment needs to return the size of the fund, that implies the exit size needs to be at least $1B for a $100m fund.
- Step 5: To become a $1B business, what conditions do I need to meet? Again, this is sector dependent but let’s keep the maths simple: assume a 10X multiple on ARR for exit value i.e. I need to reach $100m in ARR.
Congratulations, you now have the answer of the exact number VCs are assessing your business against when reviewing your company. The challenge is describing the path to get there with clarity and credibility.
How to better articulate your vision
To help tell your story, consider this point: the fewer things a VC needs to believe are true to reach that point, the better. For example, if you have a multi-dependency business to reach that scale (i.e. crack this market, then build a whole new product to crack a different market) your chances have just diminished as the low probability of success of each new pivot compounds. It often helps to list these “things that need to be true” assumptions and figure out how to systematically de-risk and validate each one as part of your business plan.
E.g. To believe you can reach $100M ARR a VC needs to believe:
- You can build a product that delivers the value you say it will
- You can win clients at the “ACV”s (annual contract value) that you say in the business plan (lets say $500k per year per client);
- There are enough of those customers in the market to sustain a $100m ARR business (e.g. If ACV is $500K I need to believe you can win 200 customers, you probably need 5-10 times that amount in the pipeline).
The clarity and precision of this articulation of vision is often how we make our decision. The best founders tell a story of how they reach 100m ARR that is logical, and outlines both what they will do (and in what sequence), but also what they will never do.
Lesson 3: It’s not enough to be solving a customer problem
Most people can repeat the sage wisdom that starting a business should usually begin with identifying a customer pain point to solve. This is true, but I would add two addendums to that:
- It has to be a top priority pain point; and
- You have to be able to solve it in a way that is at least 10X+ better than the status quo.
Otherwise it’s too easy for customers to stay with the status quo or give an answer of “this is really interesting—come back to us in 6 months”. The customers probably aren’t lying—they likely do think it looks interesting. But if you have really hit product-market-fit, there should be such a pull from the market that they will be doing everything they can to sign up ASAP.
The first point was my number one learning from founding MatchDay (a fan engagement tech company). Towards the end of MatchDay we had pivoted the business several times, and ended up pitching Over-The-Top (OTT) sports broadcasters about ways to make their live streams more interactive, sticky, and drive revenue opportunities. We knew this was the way the industry was heading (look at the success of companies like DAZN since).
When we spoke to those customers they agreed that our proposition made sense. But it was only when we probed further and asked them to list their top three priority pain points they invariably said:
- Negotiate licensing agreements from rights-holders (a big challenge)
- Improve latency of streams to make the viewing experience palatable (highly complex)
- Acquire viewers (extremely difficult in a highly competitive space with fickle users who just want to see the game anywhere they can, ideally for free)
In summary, though we were solving a real problem, it wasn’t going to be a priority problem for 5-10 years. If we had focussed our customer discovery research on “just solving any problem” we would have missed this critical nuance.
Additionally, the reason something should be a step change improvement is to overcome the momentum of the status quo (using excel etc.) You may well be able to do something 10% better but as an old colleague of mine once said “I can get 10% improved performance by shouting louder”.
Every successful business has a unique view on the world
VCs like competitive markets. It mitigates some of what we like to call “market risk” if there is already a large cohort of your potential buyers spending money on alternative solutions. There is obviously a real problem to solve if customers spend money on it, and it’s often easier to fight for budgets that are already allocated to a solution.
This often leads to an area of questioning you’ve probably encountered if you’ve ever pitched to an investor: “what is your differentiation or moat?” i.e. how does your solution uniquely satisfy customer needs and why is that hard enough to do for you to maintain that advantage over time?
Founders (myself included) sometimes get bogged down on these points and think to have sufficient differentiation or defensibility they will need protection in the form of patents. However, Frontline’s experience is that patents typically aren’t necessary, or enough, to protect from alternatives (competitors will find a way to do what you are doing in a way sufficiently different that will avoid breaking the patent).
Instead, what we are looking for is a unique view on the world, that is both compelling and logical, and that will afford your company certain advantages in gaining market share. These novel approaches typically are across the dimensions of product, business model, or distribution. For example:
- Pointy (acquired by Google)—A Frontline portfolio company that was addressing a problem we had seen countless startups try to address (how to make local stock visible online for small retailers). The company’s unique product insight of a hardware device connected to a barcode scanner to get the data, and software to predict stock levels, allowed them to effectively collect the data and surface insights, which was the difference in them succeeding in this space.
- Klarna—The “buy now pay later” giant’s unique business model charges retailers fees and commission for the uptake in sales of goods bought through the service. This avoids consumers having to pay costly interest fees unlike credit cards, and supercharged their user adoption.
- Noloco—A no code app builder that has a unique distribution strategy through a prominent partner program for youtubers influential within developer communities. This incentivises viral growth of the product, as well as serving as effective customer success and education through third party product videos.
Large incumbents typically find it difficult and time consuming to pivot across these dimensions, so your unique insight really is a competitive weapon!
So, are you a killer team, solving a top priority pain point, in a unique way, with a well described path to your north star vision? At Frontline, we are always looking to partner with the most ambitious founders as early as possible.
Feel free to get in touch at [email protected] (just make sure to use the above as a cheat code to your story first).
