big dog economics
#133
Hello and welcome to Sunday CET. This week I am doing a practical go-to-market exercise for investors looking to open up a new market.
Have a good one,
Dragos
Big dog economics
Say you’re a VC investor who wants to establish itself in a new market segment, at the early stage side of it. Let’s also say you make available a 100 million fund to be deployed in 5 years, with a tentative 50/50 ratio for new cos/follow-ons. 50 million in 5 years - say you go for a 20-10-10-5-5 structure and if things go well you can go in the market for supplements. You settle for a check around 1M, until you take the market temperature and calibrate later in the cycle as the business is building out.
Furthermore, in order to proceed, conventional GTM thinking says that:
#1 it’s wise to hire boots on the ground of the said market, preferably seasoned guys who know the ropes and the lay of the land. True, it’s a more expensive and time consuming approach, but you’re in for the long run, you’re committed to building out not just testing the waters. As a newbie in a competitive market, you will pay more for a seat at the table - you need to poach top people, provide a good compensation scheme and a flexible operational structure that gives them support for grabbing market share.
#2 You also need to create a network fast, schmooze, wine and dine the key market people - good deals are usually shared deals, relationships are not built over night and you need time to figure the peer VCs you have chemistry with and would like to collaborate with.
#3 Thirdly, you need to do PR and signal the market you being open for business - work the media, create marketing content, make sure it is shared and reaches the right audience.
That should lay out the basic foundation, you’re doing GTM 101 after all, but it is a process that takes time. Speed and timing are important, you also want to jump right in and take advantage of the market momentum - building pull mechanisms on top of your fundamentals can turbo-boost your velocity.
One way to do that is deploying a scout system - sales reps working the market at the edges. You settle for 10 guys and 100k to deploy for each, that should reward you with awareness, intel and, if you’re lucky, a few interesting deals too. If each guy puts a couple hundred names in the CRM, they got you covered for screening some 20% of the market. This effort requires also some operational costs, as you provide those guys with support and an equity cut for sales closing.
Another pull mechanism is creating a startup accelerator. You put a $ for equity chunk as bait and use your PR muscles from #3 above to bring in business. If you execute correctly, this should get you access to some 15-20% startups from the market - you select the best of the best, you de-risk the hell out of them and get them ready to raise more from your fellow VCs you have worked out at #2 above. It’s both a marketing and operational effort, with their related costs - you start with a big size equity check, because big bait attracts attention and want to make a bang in the market, and later on you can work through the economics to scale it decently i.e. adjust on the check, batch size and frequency, based on what you learnt from the pilot. If you put, say, 1 million per accelerated startup and accept 10 in the program, that’s another 10 million out of the 20 planned to be invested in the first year.
Adding the scout program and the accelerator in the mix, this leaves you with 9 million to deploy in some 10-12 startups you invest in by working the market in a conventional way. How much do you spend by the end of year 1? Fixed costs aside, it’s probably somewhere at 1 to 2 million, less if you know how to be scrappy. It’s all marketing costs, which btw can be turned into a profit centre if your strategy is sophisticated enough.
YMMV and it’s easy to model it out, in year two for example you can adjust down because you have 10 mill to deploy etc. Once you’ve achieved your objectives, you can also sunset one or both mechanisms and/or replace them with other smart tactics, be them pull or push - your play is a combo dictated by having a grip of the market and the image you want project. But assuming you continue to spend at par, in 5 years this effort adds up to less than a 10% spend from, say, an estimated average 2.5x return of a 100 million fund for building a pull system that most of the market won’t, can’t or have no idea how to implement because it’s an edge play outside its comfort zone. And you’re on top of it from year one, that’s called building competitive advantages and is one way to become a big dog in a new market fast.
I know a few VCs think that being good at portfolio building and consulting startups is what makes them special and doing differentiating strategy for their own op is beyond them. This is a bit like saying CocaCola is being bought because it’s a good soda - alas so do all other thousands of investors think and act in the same uniform way, and the marketing in the industry reflects exactly that, you rarely see an exciting move done by these guys. Winning is done by game changers not by conformists usually and otoh, any above resemblance to reality is not exactly a coincidence - please reply with your best guesses of who’s doing that blueprint and pointers to other smart GTM practices. Wrong answers only. :-)
Interesting Euro deals
🇩🇪 InCirT, producer of next-gen microchips, raised seed.
🇫🇷 Jitter, which does a tool like Figma for motion design, raised seed.
🇬🇧 Klink, building a consumer investment platform, raised 500k.
🇫🇷 Carbonx Climate, yet another carbon removal SAAS startup, raised $900k.
🇩🇰 Kvantify, a quantum computing startup, raised an additional $2 million.
🇨🇭 Cysec, developer of security SAAS, extended its seed round w/ $2 million.
🇩🇪 crowd.dev, developing an open-source suite, raised $2.2 million
🇫🇮 Hyperion, manufacturer of industrial robots, raised $3 million.
🇩🇪 Ninetailed, providing personalization for headless CMS, raised $5 million.
🇸🇪 Grafbase, doing a data platform for developers, raised $5 million.
🇫🇷 Evy, selling an AppleCare-like product to retailers, raised $6.5 million series A.
🇬🇧 Daye, building a D2C selling CBD tampons, raised $11.6 million.
🇫🇷 Neoplants, producer of bio-engineered plants that fight air pollution, raised $20 million as it expects to go to market next year.
Source: N9
More intel bits
💲 Fresh powder: Nordic Capital (€9 billion), Market One Capital (€80 million), Human Impact Capital (€50 million), byWiT (€28 million), Female Founders (€20 million)
++ At the edge:
XAnge, the French VC fund, launched a Climate Fellowship, a one-year accelerator for climate startups run by and on Techstars terms (€100k for 7%).
Station F from France pivoted to a vanilla startup accelerator, with a 12 weeks program against 1% equity.
🏃♂️ On the move:
Rainer Hepberger joined Houlihan Lokey as MD for European healthcare deals.
David Vismans joined Balderton Capital as an executive-in-residence.
Angelika Vlachou and Stefanie Grüter - promoted as partners at HTGF.
Investors jumping ships for startups: Johan Svanström - EQT to Rightmove.
✍️ Also notable:
eBay Ventures poached João Duarte from Verve Ventures to join Henri Jaanimägi in the Zurich office, opened earlier this year. They both report to a Spanish corporate lady also based in Zurich.
Lego Ventures was incorporated into the core of Kirkbi, the family office of the Kirk Kristiansen family, who owns Lego. Kirkbi has been traditionally acting as an LP, with recent forays in the retail market - it notably invested $1 billion in Epic Games earlier this year.
🇨🇿 Exits: Czech-headquartered Alter, doing a plug-and-play platform helping game and app developers put avatar systems into their apps, was acquired by Google for $100 million.
🔀 Random intel: What’s a better startup name for Butter? All Gravy. Butter was taken anyways. 😆
🗣️ Cheat sheets ($):
Active investors in Europe: Americans, French, Brits, German, Swedes.
Interesting Euro startups: climate-focused, marketplaces, cybersecurity, web3.
Super founders from Europe: a list of 100.
Good to know basis
👉 How to calculate the value of your startup - some basic rules.
💲 Family offices - in Sweden, in Germany.
ℹ️ Startup coaches for hire - list
✍️ Term sheets for early stage - unpacking them
Have you created useful resources for the community? They can be events, reports or tools - send me an email with submissions at drnovac@gmail.com
Reality checks
🤓 Debt sellers bashing VCs VCs acting like snowflakes these days is a PR opportunity for alternative money providers. Doubt they’re willing to take the risks VCs are not but, for example, the competition among the revenue-based providers (VC-backed too) is pretty fierce, what will they do to survive?
📈 Coatue published a white paper on fintech, coz that’s what you do when momentum investing is turning corners. TLDR: there’s shitloads of money to be made in the space and crypto is a thing now.
😔 Europe is one entrepreneur short The co-founder of Red Bull, Dietrich Mateschitz, has died at age 78. Dude built a media and sports empire by selling a drink that helped him overcome his jet lag during a trip to Hong Kong in 1984.
💰 Dog eats dog in the music business Spotify says Apple is making it harder to sell audiobooks, calling Apple’s practices anticompetitive and saying it was choking competition. Otoh, a musician with roughly the same amount of streams (4 mill.) on each platform, is getting $24k from Apple and $800 from Spotify (video at 3.30 min).
⚽ The Germans finally did it Adidas is said to lose €250 million in revenue by cutting ties with Kanye West. Don’t buy the morality rhetoric plastered by the PR though, they were set to lose more otherwise, it’s just basic math and corporate calculations.
🍔 A job well done While most of the corporations cut expenses and lay off people, adjusting to the harsh economic realities, McDonald’s is getting it done as its earnings beat expectations and hit an all time high.
🔚 Elon Musk closed the Twitter deal on Thursday night by merging the company with Delaware inc-ed X Holdings, delisting from NYSE, dissolving the board, and moving to cash-based employee compensation. X Holdings is controlled by Musk and part of its equity money includes $800 million from Sequoia, $700 million from VyCapital and $500 million from Binance. Largest shareholder after Musk though is Saudi Arabia, which put in $1.9 billion.
😎 Trolls trolling the trolls First day after the Twitter purchase, two trolls calling themselves Rahul Ligma and Daniel Johnson posed as fired Twitter employees outside company’s HQ, though no staff layoffs have actually been announced. Media bought it.
Closing notes
🚀 If you could only invest in one venture firm over the next 10 years. Which firm would it be? Vox populi
🤯 VC great resignation VCs are now quiet quitting.
🇬🇧 The UK is a ‘has been’ now How the U.K. became one of the poorest countries in Western Europe.
🙈 The EU be hatin’ on America - part 20362
🗣️ You are your echo chamber How influencers become brainwashed by their audiences.
🥕 The crypto story Where it came from, what it all means, and why it still matters By Matt Levine.
👖 Trick or treat What are your go-to moves for finding nice clothes?
🎃 Europe is cool, bro Rumour has it that Elon Musk, Peter Thiel, Sergey Brin and other rich boomers rented Dracula’s Castle in Romania for throwing a Halloween party this weekend. A few Euro investors too on the 140-guests list.
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