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Silicon Valley Tech Venture Capital

VCs in seed rounds: signaling theory

One of the economic theories that I learned during my studies at the University of Leuven and that has always sticked with me is the signaling theory. It’s the bedrock of behavioral economics and it’s the theory that explains a big chunk of all human behavior. In fact, you don’t need a degree in Economics to be confronted with this theory on a daily basis. I still remember, when we were on holidays at the Dalmatian coast with the family, our mother would insist we would dine in the most crowded restaurant. Bonus points if it was crowded with locals. Of course, from a pure rational economic point of view this didn’t make sense at all. All other variables remaining constant, you can expect longer waiting times, slower service and more restrictions on the menu; Yet, this strategy proved to be very successful very fast (and obviously the other variables were no constants). It’s a fair assumption that people -and especially locals- would prefer the best restaurant and thus the most crowded restaurant would be the best one.

Signaling theory wasn’t only useful for our family to find the best Croatian goulash, but is also used by VCs to find the best investment opportunities in the startup landscape. The signal they follow is the investors that covered the seed round and their behavior when the new funding round is announced. Signaling theory is useful in cases where participants in a market have asymmetric information. The theory assumes that when there is asymmetric information, the behavior of the market participants will reflect what they know. When you’re playing poker and your opponent suddenly goes all-in, you know it reflects very favorable odds from his side. You might not be able to see his cards, everything he does will reflect his position.

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When you raise your seed round with angel investors, you are largely protected from signaling risk. After all, these investors are not expected to (or able to) lead or even join in on the A-round. It’s a smart move since you keep all options open, however it can also be beneficial to have an investor from the beginning that can lead the A-round as well (signaling can work in your favor too). When a VC looks at a startup, they know that -even with thorough due diligence- they will never have perfect information. The investor that invested in the seed round has worked extensively with the founding team, knows about all the roadblocks and how they handled disappointments early on. He knows the story behind the numbers and knows the vision behind the strategic decisions that have been made. Consequently, when the founders start raising the A-round, every VC will look at the seed investor.

When the seed investor is a VC that is also active in post-seed/A-rounds, whether or not they lead the follow-on round is very important. After all they have the most complete information and can best assess the opportunity. Additionally, how fast you complete raising the round matters as well. The word spreads fast once you start talking with investors. When a house is for sale and it’s not sold after a year, people will get suspicious and assume there are a lot of hidden problems. The same happens with startups. Once you publicly start raising, you better close the round fast. Convincing the seed investor to lead the follow-on round enables you to almost close the round before the fact that you’re raising becomes public knowledge.

The numbers seem to confirm the signaling theory. Research by CBInsights suggests that startups that raise a seed round have a 35% chance of raising an A-round as well. When the seed investor is considered ‘smart money’ (VC) and this investor follows in the A-round, the chance increases to 51%. If this VC doesn’t lead the follow-on round the chance of an A-round drops to 27%.

The reason I decided to write this article is that I meet a lot of founders that don’t really realize the consequences of their decision which investor to work with in the seed stage. With Micro-VC funds popping up left, right and center (more than 200 VC funds have raised > $4bn to be deployed in early stage startups), this has become more relevant than ever. I suspect that with seed-focussed VCs booming and A-round VCs remaining the same, startups not being able to secure a follow-on round from their seed investor will become more common.

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Growth Hacking Marketing Tech Venture Capital

NoCode: a gamechanger

This week, I sat down with a founder of a startup that was raising funding and wanted to give my fund allocation. To give you some background, I work for a fund that participates in rounds between €50k and €250k at valuations between €0,5M and €2,5M (pre-seed and seed rounds). I agreed to have a meeting with him because I liked the problem he was working on and the industry size (enterprise software).

Big was my disappointment when he elaborated on the amount of funding he was looking for and -what’s more- the use of funds he had planned. He was looking for a €450k round just to complete his product. Apart from some interviews he had conducted with potential clients, no market research had been done. When challenged on his approach, he told me he felt insecure about going to market with a product that is not perfectly polished and free from glitches. This is completely the wrong mindset to start a business. With the tools out there, it’s so easy to test the market while keeping your burn rate at a minimum.

I actually know great companies that started out as a Whatsapp or Facebook group and worked from there. Was it perfect? Not by a long stretch. Were their customers happy? Happy with the solution but frustrated with the implementation. When the problem you’re solving is a pain point big enough, the pull factor from the market is often so big that an imperfect product doesn’t stop customers. Many startups even prove the market before having a complete product, by building a waiting list and charging customers to sign up. The opposite also holds true. When you’re building something nobody is waiting for, a super polished product won’t save you.

It has never been easier to build
NoCode solutions, where building a landing page or website is as easy as drag-and-dropping whatever it is you need, have completely leveled the playing field and have enabled everyone to start on online business. This has caused a shift in the investor community from looking for people that can build (app and web developers) to looking for people that know how to execute.



Common wisdom states that it takes 10,000 hours of practice to excel at something. This is factually incorrect. Do 10,000 hours of the same thing and you won’t improve a lot. It actually takes 10,000 iterations. With this in mind, it’s impossible to build a startup by relying on third parties for building your product. The time it takes to get customer feedback, communicate it clearly to a web development agency (that has no background information on your industry), wait for a price and time estimate, agree to the proposal and then wait for them to find the capacity to build it is simply too long. Even if you have the financial resources to outsource this development, you should still consider NoCode solutions.

Additionally, a NoCode solution signals to investors that you know how entrepreneurship works and handle your resources strategically. When a founder walks in and tells me he got 1000 customers to signup for his service and charged them already (proving willingness-to-pay), it blows my mind and makes me curious to see what that founder can achieve when he has substantial resources to build his product and launch a marketing offensive.

I could compile a complete list of services that can get you started, but the guys from Nocode.tech pretty much nailed it here.

I have seen founding teams pull off some pretty incredible stuff with the following tools:

Webflow for building complete apps
Stacker to build apps based on Google spreadsheets
Bubble for web applications
Voiceflow to build voice apps
Wix, Tilda, Squarespace to create websites

There are plenty of options to integrate payments and social media, find your first users, translate your website to test new markets, etc.

A bit of research can go a long way in creating your MVP in a matter of moments at almost no cost. Combine it with growth hacking tactics and you can go to investors with a lot of valuable data already.

Categories
Growth Hacking

5 steps to find your “North Star Metric”

As previously explained, finding your North Star Metric can help you and your startup find the right focus and goal to stay on track. It’s also the key to long term growth. But how do you find your North Star Metric? Here are five steps to help you out.

1. Your NSM is the succes of the customer

Pleasing the customer is key for this metric. Your product or software is helping your client with a certain problem, and you want to measure how good of a job you’re doing. Airbnb want their clients easily book a night. Spotify ables its users to listen to the biggest collection of online music. Your NSM will be somewhere in this core mission.

2. Your NSM expresses the value for the customers

With a good North Star Metric, you still have to keep an eye on the other metrics as well. Don’t forget retention and referrals, but don’t just focus on your marketing KPI’s as well. The answer is somewhere in the middle. “placed orders” for example, is way too marketing-specific, and says nothing about client satisfaction. Your client might not like the order, so focussing on this one metric might lead you down the wrong path. A good NSM would be “delivered packages without complaints”. This metric is perfectly balanced between customer satisfaction that is still measurable.

3. The NSM is measurable

Talking about measurable: “satisfaction” is not something you can measure. Make sure your NSM is something you can see: number of times an order is placed, amount of minutes someone used your service.

4. The NSM is timebound and within your control.

Don’t choose an all-time metric. “Total subscriptions” will give you a false idea of growth, and the realisation that the ship is sinking will come too late. Choose a number that updates frequently, not even yearly. It’s also about you and the customer, so pick a number that’s not a subject to external factors. “amount of booked holidays/month” for a travel organization would be a bad idea, as you can’t control the weather, delays, locals, …

5. The NSM is a direct reflection of your growth.

This might be the most important rule, which makes the NSM a metric to worship. Make it undeniable, make it absolute. If the number is going down, so is your startup. Make sure you have no excuses. It should be impossible to say “yes, but…”. 

If you choose “amount of time my software is downloaded” as your NSM, you might be happy with the results. But what if people keep downloading it, because the download just keeps failing? You have no way to track this whatsoever, so it makes for a pretty shitty North Star Metric.

Hopefully these steps help you to find your North Start Metric. Once you have it figured out, you can prove your growth to employees and investors. Time to grow!

Categories
Venture Capital

How to calculate unit economics

In the article I wrote a couple of days ago, we discussed how increasingly more scale-ups are fundamentally unprofitable and don’t have any perspective on a change since their companies are build on unhealthy unit economics. Their future is highly uncertain, because if your growth is artificially subsidized by VC’s how can you ever be confident in the consumer’s willingness-to-pay for your product or service?

Unit economics matter more than most people -even in tech- realize, and for reasons other than simply determining whether your business model and pricing is sustainable in the long run. It helps you to make better judgements regarding what products or services you should be offering and for what segments over which channels. Every decision you make can be evaluated with regards to how it impacts your unit economics. Measuring and keeping track of unit economics is a good way to estimate your profits. Additionally, it’s a great feedback loop regarding your value proposition. You might be able to capture a substantial chunk of your serviceable attainable market. However, if it’s at prices below the total cost of service or costs of goods sold, you are building an empire on quicksand and you didn’t really test the market.


There are two ways to work with unit economics and in my opinion, both are strategic exercises you should continuously conduct in your startup. The difference is in the way you define a “unit”. You can either define it as “one extra unit sold” or as “one customer”. In the previous article, we were mainly talking about one extra unit. If you calculate unit economics based on extra units sold, you will learn if your business model is sustainable. You simply calculate this by subtracting the variable cost of one sold item from the price you charge for this. Important to note is that this doesn’t include overhead costs such as marketing. It’s okay to operate at a loss as a fast-growing startup. The entire point of venture capital is to facilitate fast and aggressive customer acquisition. The problem arises when you’re losing money on every item you sell. In theory, your startup decreases in value for every customer you acquire. The case that you could simply increase your price should never be made without having tested this assumption thoroughly.

The second way of measuring unit economics is by assessing the total net value an extra customer contributes. It’s important to segment your customers here. The value is derived by subtracting the customer lifetime value (LTV) from you customer acquisition costs (CAC). Both the LTV and the CAC differ between customer segments. Conducting this exercise requires some assumptions regarding the churn rate. You might find out there are customer segments that will never be profitable. You need to fire these customers. If the costs of servicing them is more expensive than what they generate in revenue, you should stop the contract and refocus your marketing efforts on segments that are profitable.

Unlike unit economics with regards to extra units sold, unhealthy unit economics with regards to customers can keep under the radar for a long time. The reason is that problematic unit economics for certain customer segments don’t necessarily surface because costs are often not accounted for on a ‘per customer’ basis and the losses made on these segments are made up by profitable segments.

With what’s going on in the world right now, I expect VC’s and angels to care more and more about your unit economics. Making your case and showing you at least have a roadmap towards healthy unit economics will make all the difference.

Categories
Growth Hacking

Introduction to the “North Star Metric”

The North Star Metric is a powerful, and often misunderstood product strategy framework. Growth hackers can lose themselves in their mission to grow as fast as possible. Ofcourse, rapid growth can be rewarding, but it’s not always equal to maximal growth. If you want to utilize your maximal growth potential as a startup, you will need a North Star Metric. Let me tell you why this relatively unknown term should be the center of your growth strategy.

What is the North Star Metric?

The North Star Metric (NSM) is the key measure of success and growth for the product team in your startup. It defines the relationship between the problems of the customer that the product team is trying to solve, and the revenue that your business aims to generate by doing so. It also gives direction to the growth of your startup in the long term. 

Some examples of the NSM:

  • Spotify: time spent listening.
  • Airbnb: nights booked.
  • WhatsApp: Number of messages a user sends.

The idea behind the NSM is this: if your company brings more value to your customers, it is growing. Your customers, in return to the added value, will stay with you longer and buy more. Needless to say they will refer their friends and colleagues to your product. The NSM will help you understand your customers, and build a long term relationship with them.

How the NSM will influence your startup

If you ask Buckley Barlow, the reason Myspace failed and Facebook succeeded has mostly to do with the North Star Metric they were focussing on. Facebook was quick to realize they had to focus on Monthly Active Users as their NSM. Meanwhile, Myspace was still focussed on Registered Users – a vanity metric. Now, Registered Users is not an unimportant number. It just doesn’t tell the whole story. If the customer doesn’t receive enough value from the product, he won’t continue to use the platform. By tracking Monthly Active Users, Facebook could easily monitor the changes in user numbers and see which users found value from using their platform.

The NSM will clearly help your startup in a lot of different ways. First, it creates a main focus. Every team will focus on different numbers, but the endgame is crystal clear. The NSM also makes the growth of your company easily trackable. With just this one metric, everyone can see how well the company is doing. Lastly, it puts the customer in a key position. By focussing on the NSM, you’re automatically bringing value to your customers. Results: your startup is more focussed, efficient, and ready for long term growth.

The following weeks I’ll be digging deeper into this subject, providing tools to find your own North Star Metric, and some useful do’s and don’ts to stay on track.

Categories
Silicon Valley Tech

Doing things that don’t scale

There’s a huge misconception among founders of early-stage startups that everything you do must be scalable. This idea holds many founders and their startups back. In fact, many founders attribute their massive success (at scale) to the actions they took in the first stages of the startup.

The brothers behind Stripe would talk to anyone that would listen to them, and not only invite them to try the beta but also do the setup on the spot. Their strategy of aggressively going after te first customers in beta phase is still a tactic that is being taught at Y Combinator (according to this essay from Paul Graham).

In fact, doing things that don’t scale is considered to be such a fundamentally important step founders must take that Reid Hoffman opens with it in his -now legendary- podcast Masters of Scale. In this podcast, he starts with the story of Brian Chesky. When Brian cofounded Airbnb, they would do literally everything themselves. They would meet with the house owner, write the advertisement and even take the pictures of the place.

He describes how doing everything themselves enabled them to gain a deep understanding of their users. Additionally, they would get familiar with all the barriers, frictions and touchpoint users faced on both sides of the platform. A good argument that wasn’t directly touched upon in the podcast but that makes the case even more compelling for bootstrapping founders, is that by controlling the entire value chain you maximize the share of the total value added and you avoid unnecessary costs.

That the Airbnb founders didn’t have a budget to hire professional photographers to finetune the ads on their platform, is easy to derive from the fact that they had to resort to selling cornflakes during the presidential election in 2008 in order to survive (see picture below). Fun fact: when they applied at Y Combinator, this survivor instinct is what got them in on the program.

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Doing the things that don’t scale in order to gain in-depth knowledge on your customers, the process flows, the market, etc. and at the same time to avoid unnecessary costs and being frugal with your limited funds is the way to go to make substantial progress in the first phase of your startup. However, something that most great startups that truly made it big have in common is that they have a great way to create incentives for other parties to deal with the parts that don’t scale.

Shopify, Ebay, Bird, Lime, Airbnb, Uber, etc. all have in common that they empower individuals to become an entrepreneur themselves (and earn a lot in the process). Freefloat kickstart scooter companies such as Bird pay locals to collect, charge and distribute the scooters every day. Ride hailing apps such as Uber and Lime enable people to make an extra income by transporting users. Airbnb enables home owners to rent out their homes or even for long-term renters to sublet it using their platforms for more money than they pay in monthly rent (for better or for worse).

Even more international successes such as McDonalds and Marriott might seem very traditional at first, but when doing some research you’ll quickly find out that it’s often local entrepreneurs who are the driving force behind the impressive growth. Often these multinationals are established branding powerhouses that have created a uniform customer experience across the globe. They empower ambitious individuals to become entrepreneurs while taking care of a big part of the hassle that comes with it.

If there is one trend that I believe in and that will always work regardless of what happens, it’s the trend of empowerment. Create the right incentives for the right people and there are no limits to what you can achieve.

Categories
Tech Venture Capital

Unit economics: why they matter

Interesting times

Something seems off in the tech landscape lately. Nobody seems to be able to really pinpoint what’s going on but there is a general consensus that a bubble is forming and that the collapse might be imminent. In a world of continuous supply of cheap money facilitated by central banks (a trend that even accelerated post-Covid), we can’t help but notice that money has become a commodity. With increasingly more money chasing fewer opportunities in venture capital, we see venture capitalists pushing for growth at all costs. This growth at all costs is disrupting the basic economics that have basically been the driving mechanism behind several industries. Not only is this destruction harmful, it benefits absolutely nobody in the long run. Think about this pizzeria restaurant owner that ended up buying their $24 pizza’s themselves for $16 using DoorDash.

These stories might seem funny but what it actually signals is how VC and tech is completely disregarding unit economics and are destroying incentives and balances that have driven the local economic ecosystems for decades. What’s even crazier than the tactics that are being used to aggressively acquire customers, are the justifications of these actions. Like Sam Altman pointed out these practices are justified by claiming infinite retention, complete robotization of their labour costs or the claim that the acquisition costs will ultimately drop to zero.

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How do you measure success?

It’s as if VC’s nowadays are willingly ignoring unit economics in plenty of cases. Companies like BlueApron and WeWork are companies that will probably always keep losing money. Yet they managed to secure funding rounds that enabled them to grow to giant corporations. How can companies with weak fundamentals make it this far? Are VC’s 10 steps ahead of everyone and indeed betting big on technological innovations that would decimate the costs? It wouldn’t be the first time that visionary’s in Silicon Valley are way ahead of the curve and are indeed anticipating certain game changers. Autonomous vehicles in the case of Uber or drone deliveries in the case of food delivery services would indeed change the game instantly and in that moment the first mover advantage would be so powerful that the big players that are now losing money on every delivery would come out as monopolists. Yet, ignoring unit economics is a dangerous practise and the question remains how long you stay operational when you lose money on every order. It makes your company fragile and completely dependent on radical innovations that might take longer than you expect.

“Nothing can give a startup the illusion of success like negative unit economics. This occurs when a startup is selling a product for less than its variable cost. Hypergrowth is easy when you’re selling dollar bills for 90 cents.” — David Sacks, Craft Ventures

The quote above by David Sacks underlines that fast top-line growth at the expense of poor unit economics is unsustainable. Stay tuned for an article on unit economics and how you should apply some basic management accounting to make sure your unit economics are healthy and growth is sustainable.