Founding Team, VC & Board Recruitment | Extra Crunch Roundup

The Challenges of Startup Team Formation

Constructing a startup team presents a greater challenge than assembling even multiple pieces of IKEA furniture, and the potential consequences are significantly more substantial.

Given that approximately 90% of startups ultimately fail, and those that succeed typically require an average of six years before an initial public offering (IPO), founders must exercise meticulous judgment when selecting individuals to join the core team.

Key Considerations for Founders

Questions arise regarding potential: Will a highly skilled engineer effectively transition into the role of Chief Technology Officer (CTO)? Should the product manager be assertive and decisive, or prioritize collaboration and teamwork? Furthermore, is the founder themselves the optimal choice for the position of CEO?

Sudheesh Nair, CEO of ThoughtSpot, has offered insights into building a resilient leadership team and created a comprehensive checklist for entrepreneurs during the team-building process.

His primary recommendation centers around the preference investors often have for founder-CEOs, acknowledging that founders frequently possess the necessary qualities for this role.

However, Nair emphasizes that not all founders are suited for the position, and crucially, not all desire it.

The Importance of Board Composition

Gregg Adkin, VP and managing director at Dell Technologies Capital, has developed a framework to assist founders in establishing their board of directors, as detailed in a related article.

The composition of the team can profoundly influence critical aspects such as securing funding and attracting talent.

Adkin explains that investors frequently inquire about a founder’s board, as it provides valuable insights into their character, decision-making abilities, and openness to constructive criticism.

Growth Marketing Insights

Miranda Halpern interviewed Amsterdam-based coach Ward van Gasteren for a recent discussion on growth marketing, which is publicly available.

Their conversation addressed common misunderstandings surrounding growth hacking, the typical errors made by startups, and the distinctions between growth hacking and broader growth marketing strategies.

Van Gasteren posits that growth hacking is an effective method for initiating growth, exploring new avenues, and identifying successful tactics.

He suggests that marketers should build upon the foundation laid by growth hackers, focusing on strategy development, sustained customer engagement, and the continuous refinement of tactics to maintain relevance.

Thank you for reading Extra Crunch this week. Wishing you a pleasant weekend.

Walter Thompson
Senior Editor, TechCrunch

@yourprotagonist

The Implications of Square’s Afterpay Acquisition for Startups

TechCrunch reporter Ryan Lawler recently analyzed the possible consequences of Square’s acquisition of Afterpay for companies operating in the buy now, pay later (BNPL) sector.

His analysis included insights gathered from interviews with several key figures in the venture capital landscape.

Expert Perspectives

• Dan Rosen, founder and general partner at Commerce Ventures, contributed his views.
• Jake Gibson, a founding partner at Better Tomorrow Ventures, also shared his perspective.
• TX Zhuo, partner at Fika Ventures, provided additional commentary.
• Matthew Harris, partner at Bain Capital Ventures, was also interviewed for the piece.

The investors collectively acknowledged that offering deferred payment options can significantly boost e-commerce activity.

However, they also expressed concerns regarding the challenges of achieving profitability in the long run for BNPL startups, noting that substantial scale is crucial.

Ryan Lawler’s report indicates that while the BNPL model can be effective, maintaining healthy margins presents a significant hurdle.

Enterprise AI 2.0: A New Wave of B2B AI Innovation

For two decades, organizations have been implementing AI solutions. However, substantial improvements in both efficiency and profitability, initially anticipated with the technology’s emergence, have remained largely unrealized for many.

A significant new phase of enterprise AI is now developing, as detailed in a guest post by Eshwar Belani, an operating partner at Symphony AI.

Belani identifies that organizations at the forefront of AI advancement are transitioning to what he terms “Enterprise AI 2.0.” This next generation will be pivotal in shaping the future of big data, analytics, and automation over the next ten years.

The Evolution of Enterprise AI

The initial wave of enterprise AI often fell short of expectations. Many deployments lacked the sophistication to deliver truly transformative results.

Now, with advancements in algorithms, data processing capabilities, and cloud infrastructure, a more powerful and effective form of AI is becoming available.

Key Characteristics of Enterprise AI 2.0

• Enhanced Data Utilization: A greater ability to leverage diverse and complex datasets.
• Improved Automation: More sophisticated automation of business processes.
• Advanced Analytics: Deeper insights derived from data analysis.
• Scalability: Solutions designed to scale with growing business needs.

These characteristics are enabling businesses to unlock the full potential of AI and achieve significant competitive advantages.

The shift to Enterprise AI 2.0 represents a fundamental change in how businesses approach AI, moving from experimentation to strategic implementation.

Embodied AI, Superintelligence, and the Master Algorithm

A technologist predicts that the growing implementation of embodied artificial intelligence will pave the way for superintelligence within the next year and a half. This refers to software possessing capabilities far exceeding human cognitive capacity.

According to Chris Nicholson, founder and CEO of Pathmind, the impressive robotic demonstrations from Boston Dynamics – showcasing abilities like jumping, dancing, balancing, and running – serve as prime examples of embodied AI in action.

Nicholson notes the rapid advancements within this field, suggesting that opportunities will arise as this technological shift unfolds.

Pathmind utilizes deep reinforcement learning to enhance efficiency in industrial processes and logistical networks.

Understanding Embodied AI

Embodied AI differs from traditional AI by existing within a physical body. This interaction with the real world is crucial for development.

This physical presence allows the AI to learn through experience and adapt to unforeseen circumstances, a capability lacking in purely software-based systems.

The Path to Superintelligence

The development of superintelligence is often theorized as requiring a system capable of recursive self-improvement.

Embodied AI, through its interaction with the physical world, may provide the necessary feedback loops and learning mechanisms to achieve this.

The “master algorithm,” a hypothetical single algorithm capable of learning anything, is a key concept in this pursuit.

Implications and Future Outlook

The emergence of superintelligence presents both immense opportunities and potential risks. Careful consideration of ethical implications is paramount.

Continued advancements in embodied AI are expected to accelerate the progress towards more sophisticated and capable artificial intelligence systems.

Financial Abundance, Limited Affection: A Narrative in the Insurtech Sector

This analysis examines the valuations of publicly traded insurtech companies and assesses the implications for startups, but with a unique focus.

Typically, we analyze the shifting values of new-generation insurance companies and extrapolate potential impacts on their privately held counterparts. Utilizing public market data to gain insight into private market dynamics is a common practice within this column.

However, a different approach is being taken today.

The current market conditions present a complex landscape for insurtech ventures.

Understanding Public Market Valuations

Publicly listed insurtech firms are currently experiencing valuation adjustments. These changes are prompting a reevaluation of how similar startups are priced.

It’s crucial to understand that public market performance doesn’t always directly translate to the private sector. However, it provides valuable context.

Factors influencing these valuations include broader economic trends and investor sentiment.

A Shift in Perspective

Instead of solely focusing on price declines, this analysis considers the underlying reasons for the current market situation.

A deeper understanding of these factors is essential for both investors and startup founders.

The goal is to provide a more nuanced view of the insurtech landscape.

Implications for Startups

Startups in the insurtech space may face increased scrutiny from investors.

Demonstrating a clear path to profitability and sustainable growth will be paramount.

Companies with strong fundamentals and innovative solutions are likely to fare better in this environment.

• Focus on Unit Economics: Prioritize profitability at the individual customer level.
• Demonstrate Scalability: Show a clear path to expanding the business efficiently.
• Build a Strong Team: Assemble a talented and experienced team.

Successfully navigating these challenges will require adaptability and strategic planning.

Key Considerations for Founders When Selecting Venture Capital

The current abundance of venture capital is widely recognized within the investment community.

However, for startup founders, this situation represents more than simply increased funding opportunities, as noted by Kunal Lunawat, co-founder and managing partner at Agya Ventures.

Lunawat suggests that founders should prioritize fundamental fundraising principles when making decisions about their cap table composition.

Focus on Core Fundraising Principles

A return to basic principles is crucial in this environment of plentiful capital.

Founders need to carefully evaluate potential investors beyond the size of the investment offered.

Five Critical Factors

There are five key areas founders should assess before committing to a venture capital firm.

• Alignment of Vision: Ensure the VC understands and supports your long-term goals.
• Operational Expertise: Seek investors who can provide valuable guidance beyond financial support.
• Network Access: A strong investor network can open doors to crucial partnerships and talent.
• Reputation and Track Record: Investigate the VC’s history and relationships with portfolio companies.
• Cultural Fit: A compatible working relationship is essential for a successful partnership.

These factors are paramount to building a productive and beneficial relationship with your investors.

Careful consideration of these elements will help founders navigate the complexities of securing venture funding.

The Progression of Neobanks Towards Profitability and Potential IPOs

Recent financial reports from Starling Bank and Monzo are being analyzed by Alex Wilhelm to assess the current condition of the neobank sector.

The analysis focuses on whether these digital banks are achieving financial stability.

While not every neobank has yet attained profitability, progress is being made by several key players.

Some neobanks are successfully improving their financial standing and moving closer to, or even achieving, positive earnings.

Financial Stability and IPO Considerations

This financial improvement is significant because it opens up possibilities for these companies.

A financially sound base allows a segment of the neobanking industry to contemplate initial public offerings (IPOs).

The ability to demonstrate consistent profitability is often a crucial step towards attracting investors and launching a successful IPO.

• Key Finding: A portion of the neobanking landscape is now robust enough to explore going public.
• Implication: Positive financial results are paving the way for potential market debuts.

Wilhelm’s observations suggest a maturing neobank market.

The focus is shifting from rapid growth to sustainable profitability.

Establishing Investor Trust: A Founder's Imperative

Despite the current surge in venture capital availability, founders should prioritize building strong, trusting relationships with their investors. According to Matt Cohen of Ripple Ventures and Tony Conrad of True, the ability to depend on investors is paramount, particularly when presented with numerous options.

The Importance of Selective Investor Selection

Founders are now compelled to carefully evaluate potential investors, focusing on those who can provide substantial guidance and support. This heightened selectivity stems from a changing landscape in venture funding.

Depth Over Breadth in Investor Relationships

Cultivating a multitude of profound connections with seasoned investors during the early stages of a company is impractical. Maximum value is derived from a smaller number of genuinely meaningful relationships.

The authors emphasize that founders must actively construct and nurture these circles of trust. This involves discerning which individuals will offer not just capital, but also valuable mentorship and reliable support throughout the company’s journey.

Key Considerations for Founders

• Prioritize trust and dependability when evaluating investors.
• Focus on building a few deep relationships rather than many superficial ones.
• Recognize the value of mentorship and guidance from experienced investors.

Ultimately, a founder’s success is often intertwined with the quality of their investor relationships. Selecting partners who offer both financial resources and unwavering support is crucial for navigating the challenges of building a successful venture.

The Significance of a Board in a Startup's Initial Phase

The creation of a board of directors extends beyond simply identifying helpful advisors for a nascent company, according to Gregg Adkin, VP and Managing Director at Dell Technologies Capital.

The selection of board members can significantly influence a startup’s ability to secure funding.

Investors frequently inquire about a founder’s board composition, as it reveals insights into their character, decision-making abilities, and openness to constructive criticism.

Adkin proposes a structure known as “SPIFS” – encompassing strategy, people, image, finance, and systems for compliance – to assist founders in establishing an effective board.

Understanding the SPIFS Framework

This framework provides a comprehensive approach to board formation.

It ensures that the board is equipped to address all critical aspects of the startup’s development and governance.

Key Areas of Board Focus

• Strategy: The board should provide guidance on the overall direction of the company.
• People: Assessing and advising on key personnel decisions is crucial.
• Image: Maintaining a positive public perception falls under the board’s purview.
• Finance: Oversight of financial health and fundraising efforts is essential.
• Systems & Compliance: Ensuring adherence to legal and regulatory requirements is paramount.

By focusing on these five pillars, founders can build a board that provides valuable support and contributes to the long-term success of their venture.

A well-constructed board isn’t just a formality; it’s a vital asset for navigating the challenges of early-stage growth.

Is a Third-Place Finish Acceptable for Startups?

Following Deliveroo’s decision to withdraw from Spain due to new legislation mandating employee status for gig workers, Alex Wilhelm and Anna Heim examined the challenges of competing in smaller markets.

They questioned whether achieving a third-place position is enough to justify ongoing investment for startups.

The Exchange article explores whether Deliveroo’s emphasis on market leadership, or near-leadership, is a widespread expectation for companies vying for market share.

This raises the question: is consistently being a runner-up a viable strategy for startups, regardless of the geographic scope of the market – be it a city or an entire country?

Deliveroo's Exit and Market Dynamics

Deliveroo’s departure from Spain was prompted by legislation that required the classification of gig workers as employees.

This situation led Wilhelm and Heim to consider the broader implications for startups operating in competitive landscapes.

The core issue revolves around the necessity of attaining a dominant market position to secure continued financial backing.

The Question of Sustainable Investment

The authors pondered if a company’s continued investment is contingent upon achieving market leadership or a position very close to it.

This is a critical consideration for startups, as securing funding often depends on demonstrating potential for substantial growth and profitability.

Market position is therefore a key factor in attracting and retaining investors.

Implications for Startup Strategy

The analysis suggests that startups must carefully evaluate the viability of markets where achieving top-tier dominance is unlikely.

Remaining competitive in such environments may require a reassessment of business models and investment strategies.

Ultimately, the question becomes whether a sustainable business can be built without consistently being a market leader.