Blog 3. From start-up to scale-up: lessons for entrepreneurs and investors

July 12, 2021On to the grande finale I have been working towards in this blog series. Now that we know the results of 7 years of impact investing, it is interesting to look at the most important lessons we have learned with the eleven start-ups on their way to growth. Lessons that I want to share with both fellow impact investors and entrepreneurs to increase the chances of successful scaling. #1. A mission-driven team, with the right people in the right placePeople, people, people. The obvious key to successful scaling is undoubtedly a good team, as every investor will agree: 80 percent of start-up success is about people, and only 20 percent is about what fascinates all these people—the technology and the company. Half of all scale-ups are founded by a group of founders, rather than a single founder. From my own entrepreneurial and investment experience, I recognize these statistics, and I therefore pay attention to whether all the necessary qualities are present in a complementary group of entrepreneurs. More specifically, I have learned to take the time to analyze whether the right people in the right place have demonstrably found their feet, by making (repeated) progress and correctly applying the principles of scaling (see lesson #4).Apart from these generic analyses, in my experience, the drive of entrepreneurs is the #1 success factor. The management team must be willing to go all-in, with maximum skin-in-the-game (both in terms of savings and time!), with nothing less than the goal of wanting to build the world’s best scale-up in your field. Good founders are social, but I see them (unsolicited!) continuously sacrificing themselves in social areas. When things don’t work one way, they determinedly continue with inexhaustible stamina and energy to tackle the problem another way. These entrepreneurs can, incidentally, expect the same attitude from me as a shareholder.#2. The founder’s dilemmaFact: in only 25 percent of start-ups with an IPO, the founder is still the CEO. While I consider ambitious entrepreneurs an absolute must and I applaud it when entrepreneurs set everything aside to become ‘the next Elon Musk’, I consider the flexibility and willingness to let go of control even more important. The simple truth behind this is that founders are rarely still the most suitable CEO once the organization exceeds the threshold of approximately 25 people. See this Harvard Business Review article for a good explanation of this. The required qualities of a leader are simply different in the research phase of a young tech company than those of a scale-up with 50 FTE.From my own experience: in a number of companies in our eleven, this has not been an issue at all; in some cases, the founder himself indicated that he saw himself in a different role in the future (fantastic!); and in other cases, this transition required the necessary push from us as shareholders. When this proved necessary, the transition from founder to a new CEO was the most challenging hurdle to overcome. On the other hand, in almost all cases, this did bring the desired change and clearly helped the companies over important hurdles towards scale-up status.My advice to investors:

As an investor, be clear and honest upfront about your view on the qualities sought in management and how these may change in the different phases a successful company goes through (R&D, first traction, scaling). Have this conversation before you enter into an investment and not post-closing as part of the 100-day plan.
Invest in entrepreneurs who are intelligent and empathetic enough to hire people who complement them, who do not shy away from recruiting better—or at least demonstrably more experienced—people than themselves. Invest in real teams, where there is not too much dependency on a single founder.
Always always perform in-depth management due diligence. Even if you possess great insight into people, take the time to analyze the qualities of entrepreneurs from different contexts and do not hesitate to incur (high) costs by engaging professionals to gain multiple perspectives on the management team.

My advice to tech founders:

Have a conversation with investors about their view on management and the expected development in the coming years. Even if they don’t bring it up themselves, it is wise to address this potentially difficult subject.
Look closely in the mirror before you get involved with venture capital: is it really necessary for you to remain CEO at all times? Think about what you are most passionate about. Is people management what you really dream of as a tech founder? Is the ego—being CEO—really important to you? My advice: you already have the founder title, so above all, ensure that the company you founded can become as large as possible. As long as you keep the reins too tight, a well-known saying in my circles applies: ‘The world’s largest sole proprietorship is still a sole proprietorship’. So, above all, stay close to your passion and your strength, and hire managers and business developers who maximize the acceleration of the processes around your product.

#3. Engaged and complementary partnersStart-ups benefit greatly from engaged shareholders and partners. They can open doors, act as a sounding board for the (go-to-market) strategy, and keep a sharp eye on finances and the tactics for follow-on investments. From StartGreen, as one of the largest impact investors, we can offer a lot of expertise and a large and diverse network in the themes of energy transition, circularity, and diversity, and from a broad portfolio of participations, we can often achieve good ‘cross-pollination’. There is also a challenge in the size of our portfolio: having 25 portfolio companies in one fund (as is currently the case with PDENH) means that we cannot spend one day a week on a company, as PEs with larger tickets regularly do. To compensate for the latter, our philosophy is to always co-invest with a party that is hands-on and ideally has complementary expertise. For example, the software expertise of Newion at Dexter Energy, the commercial power of Shell Ventures at Asperitas, or simply broadening the ‘impact network’ from co-investors through contacts at Rubio Impact Ventures, SHIFT Invest, PYMWYMIC, DOEN Participaties, and Enfuro.#4. To scale fast, keep it lean firstAs an investor, I pay attention to whether entrepreneurs successfully apply the principles of scalability already in the start-up phase. To be specific, I follow the principles from my ‘bibles’ Eric Ries’ The Lean Startup, Verne Harnish’ Scaling Up, and Gino Wickman’s Traction: I want to see that entrepreneurs have a well-thought-out ‘bottom-up’ strategic plan, with the right depth and based as much as possible on hard facts rather than assumptions. Measuring is knowing. Where there are still assumptions in the business plan, the hypotheses must at least have been investigated ‘by getting out of the building’. Too many startups fail to grow because there is simply too little demand for their service and product. This is usually because many startups are tech-driven, with incredibly intelligent people who, unfortunately, mainly understand technology and R&D, but who consequently make mistakes in two ways. They surround themselves in their company with ‘like-minded techies’ instead of complementary marketing/sales people who challenge them. Or they are too hesitant to launch the product and therefore over-develop it, thus missing the opportunities to adjust their value proposition in time and, above all, opportunities to learn valuable lessons. It’s called a minimum viable product for a reason.‘If you are not embarrassed by the first version of your product, you’ve launched too late’ – Reid Hoffman.Research by Deloitte showed that successful scale-ups take twice as long for the period from founding to market introduction. This makes sense: it is important to take the time to create the necessary conditions for success. For example, ensure that you have the value proposition completely in order and that you have thoroughly tested the various sales channels before opening the tap with large growth investments. As soon as every marketing euro repeatably leads to clearly greater value from the customers attracted by it (basically from CAC:LTV = 1:3), you are ready to launch the rocket and good scaling will follow without too many surprises. #5. Cash is kingDespite rapid progress being made, the Netherlands still has a difficult investment climate when it comes to ticket sizes. Techleap indicates in its 2020 action plan that there are several structural bottlenecks in the Dutch start-up ecosystem in the area of funding, including: (i) venture capital in the Netherlands is fragmented and sparse compared to the UK/US, and (ii) a smaller ticket size limits the possibility of long-term growth. This makes it all the more important for startups and investors to observe the following lessons learned in this area:

Raise early: in fact, startups are always busy with funding. Therefore, ensure that you start preparations for a (follow-on) investment in time, or even better: ensure that you are continuously able to raise funding by tightening your internal materials (financial reports, strategic plan, financial model, etc.) to such an extent that investors could step in on this basis. Avoid this negative spiral: the shorter the runway, the higher the ‘distress level’, the less efficiently all processes run, the more difficult decisions become, meaning you are less focused on long-term value creation vs. short-term survival, making it harder to raise funding. Conversely, there is the positive spiral of scaling: by always being ‘investor-ready’, you are able to show the right parties at the right moments that you are ‘in control’ and have the helicopter view; you also see more clearly what the bottlenecks in your scaling are; you don’t miss commercial opportunities due to a lack of cash/time; your startup generates more cash and you therefore need less financing and dilute less quickly.
Ensure that you attract financing for approximately 18 months of runway with a funding round, which should clearly enable the company to reach the next phase.
- Larger tickets/runways provide the entrepreneur with insufficient incentive to make a leap (especially in R&D-type companies, where technical entrepreneurs are then often inclined to over-develop technically, instead of testing in time whether there is demand for their product).
- Smaller tickets/runways cause too much distraction: funding rounds take a lot of time (at least 3-6 months), too much uncertainty, and thus a poor basis for hiring or retaining good people. Result: less value creation.
‘Capital-light’ propositions attract funding much more easily and for good reason. As an example, one of my portfolio companies where a wrong assumption was made about the moment that bank working capital financing could be attracted. Because this was only possible 1 to 2 years later than expected, millions more in equity were needed—money that was simply not available from existing shareholders. With a heavily cash-flow-negative profile, it was not easy to attract external money. A pivot to a less capital-intensive business model was therefore necessary to remain competitive.

Conclusion In addition to the above lessons, lesson #6 is that venture capital is always custom work and that the scope of the due diligence process must be carefully considered on a case-by-case basis. And finally, lesson #7: Lucky Number Seven. As an investor and entrepreneur, you also need a healthy dose of luck, because no matter how in-depth your due diligence is, you cannot anticipate some situations. People make mistakes, people get sick, market conditions can change quickly, et cetera. If anything has taught us that recently, it is the current corona crisis. Therefore, I conclude by referring back to lesson #1: Ensure you have a team that knows how to respond smartly and timely to changes.