Dan Simmons runs Propelia, a UK platform helping investors navigate early-stage deal flow. He also hosts the podcast FounderTech Decoded.
There's a new movement emerging from within the venture capital ecosystem that could transform how early-stage business founders and investors identify, evaluate and engage with each other. It's called FounderTech and its impact could be significant.
FounderTech is essentially about ripping up the traditional startup playbook and rebuilding it with new tools and frameworks that remove the unnecessary friction that's traditionally existed in the very early stages of the investment process. The goal? To create a landscape that's fair, agile and open and, ultimately, more efficient and equitable for all involved.
But what's brought about this new movement? And why now?
Time for change
At its core, the venture capital community is fundamentally about stimulating and generating radical change – empowering often first-time founders with huge sums of early-stage capital, in order to reimagine and disrupt established business models and sectors. However, when it comes to its own business model, venture capital is largely running off a legacy framework that's about 30 to 40 years old.
The model uses tools and techniques that, in truth, would never be developed and deployed if designed afresh today. Yet they remain baked into most early-stage founder-investor conversations, often creating frustration and asymmetries that don't add value for all parties involved.
Take, for instance, the humble and much-maligned pitch deck. The pitch deck remains the central tool for communicating and evaluating most early-stage business opportunities. It's fundamentally a strategic communications tool but, for the overwhelming majority of business owners and investors, it's cumbersome and frustrating. Here's more on why pitch decks are no longer the appropriate tool to identify and evaluate early-stage founders.
Even for successful pitch decks, it takes on average three months between an investor expressing initial interest and closing that deal and funding the business – during which time fast-moving sectors, key assumptions and strategic targets will have invariably shifted. So, how is this still the main point of initial engagement between investors and founders?
For an industry that's very DNA is about generating and engineering radical market change, agency and fluidity, it's a frustratingly slow and cumbersome experience.
The impetus for FounderTech
The lazy notion that nine out of 10 startups fail is baked into the risk calculations of the venture capital ecosystem. There are, of course, many reasons why an early-stage business might fail, such as poor market timing, the wrong team, running out of cash or the lack of sustainable competitive edge.
In order to identify successful businesses and counter these risks, investors tend to herd together, follow market trends and spread capital risk across emerging technology fields that are ripe for disruption, like the property sector, banking and financial services, health and more. The logic is that, as a new buzzy tech sector emerges and disrupts the previous one, there'll be two or three winners that dominate the market. This can lead to a series of larger and larger funding rounds that end up at the promised land of an initial public offering, generating phenomenal returns.
In the process, the rest of those early-stage businesses fall and wither away – essentially written off by investors – as long as there's a small pool of winners generating significant enough returns. Yet it can be a debilitating and exhausting experience if you end up in the failure pile – saddled with the deeply unsavory taste of being feted, anointed and then disregarded by the venture world.
There's a huge impetus within both the business owner and investor communities to shift these statistics – for the betterment of everyone involved. This is where FounderTech comes in, which is aimed at disrupting the venture ecosystem itself.
The conditions for FounderTech
There are essentially three current market conditions at the heart of the dysfunction in the typical venture model.
1. How can we fairly evaluate early-stage businesses (which are often pre-product) through indicators and intangibles that don't rely on the metrics of product-market fit?
2. How can we consistently assess business owners for founder-market fit?
3. How can we reframe and recalculate the biases and assumptions that inform the ‘nine out of 10’ failure logic?
All of these three conditions must be addressed for this change to occur.
FounderTech questions the inefficiencies and underlying assumptions of the venture capital model. What if we were to start anew and redesign the early-stage venture landscape with tools and frameworks that reflect the agility, fluidity and transparency that venture capital expects to be embodied in the businesses it backs? What if we examined and reimagined the key frameworks of that landscape so that they worked differently? What if we could align the business owner and investor in an equitable dialog where they were both evaluating and assessing each other transparently and efficiently from the first point of contact?
The groundswell for FounderTech
Business owners talk to each other. They know the frustrations and problems that they experience are repeated time and time again for nearly all other business owners at some point on their journey. And they've come to realize that they want to be assessed by different criteria – based on whether they're the right person to fix the right market problem at the right time. This doesn't seem too much to ask, yet the current system struggles to do so consistently and accurately. This increasingly makes no logical or commercial sense.
Fortunately, forward-thinking investors feel similarly. They understand that all good deal flow stems from the way that they identify the right business owners early. Forward-thinking parties – in both the founder and investor camps – are becoming aligned around wanting to amplify and fast-track these needs and perspectives.
FounderTech is new, but that doesn't mean that it isn't already having an effect. There are already tools, platforms and investors laying the foundations.
• Tools like Advance Subscription Agreements, research and development grants and the UK's Seed Enterprise Investment Scheme are making the process of accessing early-stage capital more agile and efficient.
• Platforms like Landscape, Vestd and Rightfounder are tackling key problems around the transparency and fluidity of the venture capital ecosystem.
• When it comes to investment, solo capitalists and founder-driven funds are changing the framework of pre-seed and seed conversations.
All of this sets the stage for the next phase of FounderTech, which will reimagine and redesign the legacy venture landscape. The hope is that it breeds a much more inclusive, fair and open system, where the right business owner can seamlessly find, identify and be matched with the right investor.
If the venture community can engineer this type of change consistently with the other tech sectors that it's focused on, then surely it can (through FounderTech) bring about the same much-needed change to its own model.