???????? Hi friends!

I’ve been taking a bit of time over the last few weeks to hone my (pretty basic!) sketching skills in preparation for the shift in focus for Off Balance from the New Year.

As with everything in life, writing this newsletter has taught me a bunch of things, not least that there is not easy route to building an audience!

It’s always difficult to see all the ‘success’ stories on social media without feeling a bit like whatever I’m doing isn’t hitting the mark. But then I just remind myself that all we see on socials is the outcome, never the journey ???? 

(p.s. anyone who wants to give me some lessons in sketching, I would be very open to it ???? ).

Now let’s get down to business…

In this weeks Off Balance, I’ll be chatting about:

????‍⚕️ Mentorship vs Coaching
???? Down rounds and recapitalisations

Also, in this week’s Nothing Ventured, I spoke to Antonio Avitabile, MD of Sony Corporation Ventures for Europe ???? We talked about Sony’s move from building it’s own tech to investing off balance sheet into interesting companies to finally setting up its own fund investing in entertainment, fintech, image sensors and other forms of deeptech ????️ 

As always, our Primer episode gives you a bit of background on how he got to where he is today ???? 

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

If you like what I’m putting out, do give me a follow on LinkedIn, Twitter and Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Off Balance” and, more importantly, tell me why you’d like to connect ????????)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing – you can find links to these (and more including my Office Hours) right here!

Now let’s get into it.

How can did I add value?

Last week I took another step to further my desire to add value to the tech and venture ecosystem by applying to be a mentor at Techstars.

As well as this, I had a long conversation with a coach last week at the 9Others Winter Party and I thought it would be valuable to explore the value, and difference, between the two.

Firstly, I think it’s worth saying that I have been fortunate enough to benefit from a lot of informal mentoring throughout my life.

This has come from a variety of places; from those I’ve worked with, industry leaders and people within my wider network – investors, founders and subject matter experts.

One could argue that a lot of the conversations I have on the podcast borders on informal mentoring – the topics we discuss and the strategies many of my guests talk about helps me inform what I may (or may not) do in the future.

I’ve only really had a coach once in my life, in the uncertain period when I moved from Melbourne back to the UK, and had some great results.

So let’s understand a bit more about mentorship and coaching, shall we?

Mentoring
A mentor is someone that uses their experiences and knowledge to guide someone (the mentee) through their journey.

They provide advice, share expierences and assist their mentee to navigate them through their career or business challenges and goals.

As I mentioned earlier, I’ve benefitted from informal mentorship – a less structured and defined process but I have also mentored in a more formal way – specifically as part of the Virgin Startup programme where loan recipients have to commit to a period of mentoring as part of the terms of receiving the loan.

In a formal mentorship relationship, the mentor and mentee will often set up a broad framework to follow, discussing what it is that the mentee wants to achieve and then going through a process to help them get to where they want to get to. Even then, the way the relationship works is still quite loose and rarely follows any strict protocol.

Coaching

Coaching, on the other hand, is a much more structured process where the coach helps an individual achieve specific personal or professional goals.

Typically, coaching is far more focussed on specific issues and is more often than not time-bound with coaches employing a variety of techniques and methodologies to help an individual unlock their own potential.

It tends to be much more formal and goal oriented and often revolves around developing a particular skill or overcoming a specific challenge.

Comparing and Contrasting
People often conflate the two, assuming that coaches are mentors and vice versa. In reality, coaching is a much more formal, business like relationship whilst mentorship is far less formal and structured.

I have often had the difference described to me as follows:

Mentors tell you what you should do based on their experience, whilst a coach will help you to figure out what you should do yourself, essentially holding a mirror up to yourself.

From that perspective, coaches don’t necessarily need domain expertise in the area you’re trying to resolve, as they use their tools and knowledge to draw the answers out of yourself, whilst mentors almost always will have had specific experience in the problem space that allows them to give you the benefit of that experience to navigate the problem.

Essentially mentorship is a more organic relationship whilst coaching is far more structured albeit that broadly speaking they attempt to achieve similar outcomes – the furthering of someone’s progress towards achieving a desired outcome.

You may be asking yourselves why I’m talking about this given it’s a general discussion about the two disciplines rather than a specific example, but in reality, this is a distillation of many conversations I’ve had with people struggling how to take things forward.

In some instances, I can help them directly because of the specific experience I’ve had (i.e. mentoring), whilst in others, they would benefit greatly from someone that can guide them through a process and unlock their own abilities along the way (coaching).

One thing is for sure, I have rarely met a single person that couldn’t benefit from either a coach or a mentor (or both) at various points of their life and journey – whether personal or business – and if you’ve never experienced how useful they can be, I highly recommend you find one!

As always, my office hours are open, if you’d like to chat about this or anything else, just grab some time ????.

Off Balance

Let’s face it, we’re entering a pretty rocky period in the venture backed ecosystem.

Funding at later stages is drying out as oversized valuations come back to bite and founders (and investors) are finding themselves in a position where they are having to make pretty difficult decisions on the future of their companies and portfolios.

The most desirable outcome for founders is obviously finding an investor that will continue to fund their growth, or if this is not possible, restructuring the business so that they can grow without external capital, driving towards profitable expansion.

But the reality for many is that, absent investment or an acquisition approach, they are going to have to make a decision between three equally tough outcomes: at best taking on capital at a discount to their last round, navigating the famous ‘down round’, going through a full recapitalisation, essentially wiping out existing shareholders or, at worst, shutting down the business altogether.

Down Rounds and Recapitalisations

Introduction
As previously discussed, a down round is a financing event when incoming investors invest at a lower valuation than the last round.

This has the net effect of diluting existing shareholders more significantly than they would have if the investment had happened at a higher valuation than the last round.

For example:

Let’s say existing investors had all invested $20m at a $100m valuation, they would have owned 20% of the company.

In a normal situation, the next round of investors may have invested $30m at say, $150m, leading to 25% dilution (i.e. existing investors would own 15% of the company).

But let’s say the business isn’t able to raise an up round, and have to take in capital at a lower valuation, new investors may only invest their $30m at a $80m valuation

This dilutes existing investors by 37.5%, meaning their shareholding drops down to 12.5%.

Not only that, but as investors revalue their portfolios against the new valuation, it will show a significant drop in performance.

For founders and employees, having to suffer through a down round can be massively painful, the reputation of the company might suffer as it suggests that they weren’t able to perform strongly enough to warrant a higher valuation.

For employees, it is possible that their stock options are now worthless (i.e. the strike price per share is higher than the current price per share of the venture meaning they would actually be taking a loss if they were to exercise them).

A recapitalisation, on the other hand, is a more existential event where new investors essentially invest as if the business was worth zero, wiping out existing shareholders altogether.

This typically happens when the business is facing the risk of closure and no-one is willing to invest further capital into the business even close to previous valuations.

In these instances, some investors may step in, fund the business but only on the basis that the pre-money valuation (the value of the business before the new investment) is reset to nil.

As part of the process, they may carve out a substantial share pool so that founders and employees continue to be incentivised. But based on the fact that existing investors aren’t willing to put their hands in their pockets, they will either be pushed far down the capital stack or removed altogether.

Recapitalisations often go hand in hand with a restructuring of the capital stack with debt being introduced into the mix as well (hence reducing risk to the new investors whilst pushing the business to optimise its processes) and often require a different kind of approach by the incoming investors.

I’ll try to explore the implications from the viewpoint of various stakeholders in more detail below whether that’s founders, employees, existing or new investors.

New Investors
For new investors, there is clearly an opportunity to enter a business’ capital structure on preferred terms and at a lower price than the company and its existing investors would like.

But there are clearly a number of risks with this strategy, the main one being that there is no guarantee that despite having invested at a lower valuation, the business can actually get to a successful position.

They run the risk of further down rounds and dilution themselves (though are more likely to put in defensive anti-dilution provisions to protect their positions) because they are ultimately taking a bet on a business that no-one else wants to in the moment.

Investing at these lower valuations means that the approach to investment almost always needs to change as compared to the more ‘traditional’ hands-off approach VC funds are famous for.

They may need to restructure the management team, push for and execute lay-offs whilst still ensuring that remaining team members are motivated enough to push forward.

This tightrope of making the business efficient whilst maintaining momentum is a tough one to tread and incoming investors need to hold a high level of conviction in the investment to take it forward, otherwise it would be ‘easier’ to not invest at all.

Existing Investors
As already discussed, the impact on existing investors of either a down round or a recapitalisation can be quite substantial.

The immediate effect is, of course, the enhanced dilution (or absolute removal) of their ownership stake in the business, but the implications go much further.

The first is on the overall valuation of the investors’ porfolio, whilst unlikely, but if a significant enough number of the portfolio are valued downwards, they could find that they the overall value of the portfolio is less than the amount of capital deployed.

Whilst, until their investments are realised (turned to cash), these remain paper valuations, given that funds are constantly raising investment into new funds, presents a large problem for them as LPs (limited partners) will look at existing fund performance to understand whether they want to invest into this particular fund or fund manager again.

Given how much of the venture ecosystem is built around reputation and ‘signalling’, it isn’t just the company going through the down round or recapitalisation whose image gets tarnished.

Larger, more established funds are more likely to be able to weather this storm, but for emerging managers or smaller funds this presents a large challenge for their survival.

Founders
For founders, the most significant impact, which should not be brushed aside, is the impact these events can have on their morale and mental health. They are essentially going to have to juggle and manage the competing interests of the various stakeholders in their business whilst still trying to keep the business itself running.

This means dealing with existing investors who don’t want to take the significant dilution a down round or recapitalisation entails – in fact in certain instances, some investors may prefer to see the business wound up. This is more likely to happen where they have made a tax incentivised investment and allowing the business to fold can help them recover some of those tax benefits versus allowing the business to continue operating where they don’t.

It means dealing with employees who may be uncertain about the future of their roles or the value of their stock based compensation, dealing with clients who may have become aware of the uncertainty facing the business as well as suppliers who equally may be concerned about the company’s ability to pay off their debts.

At the same time they are having to navigate the new investment, balancing the need for investment with the sort of punative terms that may start cropping up in a down round or recapitalisation scenario.

With this said, more specifically, one of the most substantial impacts these events have on founders is the impact on their ownership of and control over the business. Incoming investors may stipulate that founders’ shares must vest over time locking them in farther for the journey which, in lockstep with the enhanced dilution they will have taken might be a bitter pill to swallow.

The incoming investors are more likely to exert more significant control over the board and hence the direction of the company and in extreme circumstances may remove the founders altogether.

For some founders, it may make more sense to wind up the business and go again rather than trying to raise the phoenix from the flames.

Employees
The obvious problem for employees when they realise that the company is going to go through a down round or a recapitalisation is the uncertainty that this entails and the impact it has on morale.

Employees conscious that the business is going through pain may well feel that their jobs are at risk and this leads to a compounding effect of talent leaving the business when maintaining a level of retention might be critical for the ongoing viability of the business.

Beyond that, they may well find, as previously mentioned, that their stock options no longer have any significant value. As, in most startups, stock based compensation forms a significant part of the overall package of an employee (who will often have taken a lower salary based on the upside potential of the stock), employees may well find themselves significantly out of pocket compared to where they assumed they may be.

Again, there are ways of resolving this by reissuing or repricing stock options but that can be a tough sell when an employee has seen the business so significantly impaired.

Navigating a down round or a recapitalisation is not a simple task for anyone involved.

For founders, they must balance the consequences of taking in capital at a lower valuation not only for the business, but for themselves and other stakeholders, they need to make the incredibly difficult decision of taking the pain and continuing the journey versus deciding to strategically shut down.

For incoming investors, they have to consider whether the investment makes sense given the business hasn’t performed well enough to continue to grow and raise further capital on good terms and, importantly, whether they will be able to influence performance enough that they can push the business back onto a positive trajectory.

Existing investors will have to consider the impact on their reputations and their portfolios of having had one of their investments have a less than desirable outcome and, for those that are tax incentivised, whether they would prefer to allow the business to close altogether.

Finally, employees need to consider whether they still buy into the mission of the business under the new structure and whether they should consider looking at other options in terms of employment. They will need to understand the impact on their stock options and whether they are in a position to negotiate for more options or better terms.

The reality is that resilience and adaptability are always going to be required in the ever-changing venture capital landscape, and as we enter this next period of difficulty, it is that resilience which will no doubt separate the ventures that survive, versus those that die.

I hope you found Off Balance #22 useful. As always, I’d love to get your feedback and understand the sort of topics you would love to hear about.

Just hit reply to this mail or drop me a line at [email protected] and let me know ????

????And that’s a wrap for this edition of Off Balance – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish

???????? Hi friends!

As a tech enthusiast, I’m always left incredibly disappointed when tech fails.

Well today, I was reminded that even the richest (and possibly one of the smartest) people in the world can build products that don’t work as you expect them to.

In this instance, I’m talking about the Tesla.

Only a year in and a pretty significant failure which means I’m going to be spending most of my day today at the service centre. Sigh.

But on a more uplifting note, this week on Nothing Ventured I spoke to Fatou Diagne and Stephanie Heller. They’re the founders of Bootstrap Europe, a fund providing growth debt to high growth scale ups.

Here’s what you can expect:

➡️ Fatou and Stephanie discussed their ‘origin’ story: From boarding school in France > travelling across the dessert in Africa > ultimately founding Bootstrap Europe

➡️ We discussed how startups can use venture debt alongside equity investment to scale

➡️ How, despite being massive underdogs, Bootstrap Europe was able to acquire SVBs European venture debt portfolio (at a discount no less!) and continue to support great ventures in Europe.

Check it out!

This week there have been a few things that have caught my eye in the tech and venture ecosystem and what we’ll be talking about this evening, namely:

???? Friend of the podcast, Hussein Kanji, joins the Midas List Europe
???? Venture funding in Europe slashed in half this year
???? ChatGPT one year on

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

If you like what I’m putting out, do give me a follow on LinkedIn, Twitter and Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Lowdown” and, more importantly, tell me why you’d like to connect ????????)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing – you can find links to these (and more including my Office Hours) right here!

Now let’s get into it.

The Lowdown

Midas Touch
Given the state of venture at the moment (which I’ll discuss below), I thought it would be worth taking a moment to celebrate friend of the podcast, Hussein Kanji’s ascension to the Midas List Europe ???? 

According to Forbes, the Midas List Europe is:

With VCs being scored on a number of KPIs including deals done, valuations and exits, it’s one of the gongs that many VCs aspire towards.

For anyone paying attention, you may well see glimpses of the podcast throughout the article (though they did interview Hussein too!) – glad to have played a teeny tiny part in the article, if not the achievement!

Congrats to Hussein ???? 

Market go up, market go down
Now for the bad news.

Venture funding in Europe has dropped dramatically this year against a backdrop of tight markets, high interest rates, US investors exiting the continent (funding from US investors has dropped 14 percentage points).

There’s also been a general realisation that many businesses probably shouldn’t have raised venture in the first place.

Funding into AI has remained – unsurprisingly – the bright spot whilst a number of scale-ups have had to suffer through the pain of down rounds (raising at a lower valuation).

The article below suggests that funding at seed remains strong.

This is unsurprising because at seed you are not necessarily investing on stable metrics, it’s much more of a punt on the potential of the business.

But once you start getting into Series A, B and beyond, investors are much more brutal in their assessments of performance, requiring solid metrics and ongoing growth for them to continue to pour capital into these companies.

ChatGPT One Year On
Now that the dust has settled on the crazy happenings at OpenAI last week, it’s worth noting that yesterday (November 30th) marked the one year anniversary of the launch of ChatGPT.

It feels incredible that it is only one year in given how ubiquitous generative AI feels within the tech ecosystem and how pervasive the use of ChatGPT has become over the last 12 months from students to employees to startups and beyond.

ChatGPT had 1m users within the first 5 days post launch and is now up to 100m users according to the company and is visited almost 1.5 BILLION times every month ????

It’s launching brought the terms Generative AI and LLMs into the general lexicon and it is pretty hard to imagine a world without ChatGPT (or it’s challengers) moving forward.

The pace of change in this space has been incredible and, I’m excited to see what the next 12 months bring us ???? 

And finally, this meme has been doing the rounds and, I gotta say, it had me giggling out loud (yes I know I’m a geek!) ???? 

Tech company profitability

— BuccoCapital Guy (@buccocapital)
Nov 30, 2023

????And that’s a wrap for this edition of The Lowdown – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish

???????? Hi friends!

The end of November is always a bittersweet for me. It is the period when I am excited by the advent of a new year, whilst also being really conscious of what I have achieved – or failed to achieve – over the course of the last year.

It’s also the time of year that there are waaaaaaay too many events on, so many so that I inevitably have to turn a bunch of them down even if I would love to attend.

On a separate note, I recorded a live show with Eghosa Omoigui and Jonathan Sun last week. We dived into what we thought the real story behind the OpenAI craziness was and what we thought was in store for the venture ecosystem over the next 12 – 24 months (spoiler alert, it’s not great news).

It was super fun to have done and I’m planning on doing a lot more of them in the future ???? 

Now let’s get down to business…

In this weeks Off Balance, I’ll be chatting about:

⚔️ Non Dilution Shares and why they’re a No No
????‍???? The CFO Tech Stack – my take on what’s in the market and what’s to come

Also, in this week’s Nothing Ventured, I spoke to Fatou Diagne and Stephanie Heller, founders of Bootstrap Europe. We talk about how they built their relationship taking road trips in the dessert and how they ultimately came to found Bootstrap Europe and, as underdogs, manage to buy out SVB’s Western European venture debt portfolio.

As always, our Primer episode gives you a bit of background on how they got to where they are today ???? 

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

If you like what I’m putting out, do give me a follow on LinkedIn, Twitter and Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Off Balance” and, more importantly, tell me why you’d like to connect ????????)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing – you can find links to these (and more including my Office Hours) right here!

Now let’s get into it.

How can did I add value?

Times are a changing people. The startup and venture market look like they’re going to go through a fair amount of turmoil over the course of the next few months (and beyond) and what this may well mean is the return to founder unfriendly terms.

I got my first glimpse of this when a founder I had been speaking to pinged me to ask a question.

He had managed to secure a decent (close to 7 figure) investment from an angel (so not an institutional investor) but, almost as an afterthought, the angel had asked if the founder would, on top of the investment, consider non-dilution shares.

It was a good job the founder reached out to me, because it would have been a very bad idea for him to have considered offering this type of shareholding to the angel – and here’s why.

Non-Dilution Shares are a class of shares that don’t get diluted in any future funding round.

Let’s slow down and think this through for a second. Let’s say you as a founder own 100 shares and offer 20 non dilution shares to an investor. This means on the face of it, you own 83.3% of the business whilst the new investor owns 16.7%.

No problems so far.

But let’s say you then raise an additional round and issue a further 30 shares to the incoming investor. In a “normal” funding event, this would mean that you now own 66.7%, the original investor owns 13.3% and the new investor would own 20%. That feels ok right?

But because of the non-dilution provision, the new investor would essentially end up buying shares for the existing investor so that they can maintain their shareholding (i.e. they would invest the same amount but get less equity for that same investment).

So what the shareholding would end up looking like would be 100 shares owned by you, 25 shares to the original investor and a further 25 to the new investor meaning you own 66.7% but each investor now owns 16.7% but critically the new investor has invested the same amount as they would have to have achieved their 20% share under normal circumstances.

Now imagine you want to create an employee option pool… ???? 

This really has a couple of main effects:

You (and any other investor without non-dilution shares) take all the dilution.

Incoming investors are essentially paying for the existing shareholder’s shareholding which would be a huge red flag for most investors.

In effect, it penalises future investors making raising new capital harder for the startup.

If I were to be a little considerate to that initial investor, I would say that their request for non-dilution shares might be ‘fair’ compensation for the risk they are taking at the very early stages, but as it has the net effect of making subsequent fundraising much more difficult, it would be pretty shortsided for an investor to demand this type of share structure (unless they are going to commit to fund the business on an ongoing basis).

The other (arguably more common) form of protection that investors might ask for is anti-dilution.

This is much more common when taking on VC investment, and essentially structures shareholding such that in the event that a future round is at a lower valuation than the valuation at which they originally invested, their shareholding will be maintained.

This would seem like a more palatable situation as most businesses would anticipate an increase in valuation on each subsequent round, however, especially in the current market where many ventures raised capital at inflated valuations over the last several years, it’s much more likely that some will have to go through the pain of a down round as they seek out capital to keep the lights on.

The good news (for what it is worth), is that if the investment is substantial enough and critical for the survival of the business, investors can be negotiated with to waive their non-dilution / anti-dilution rights taking the view that a smaller percentage of something is better than a larger percentage of nothing.

What all of this means is that as founders in this environment, you are likely to come up against all kinds of unfriendly terms in term sheets as the balance of power shifts back towards investors (having been pretty founder friendly for the last several years) and you need to be prepared for it.

The same advice I gave the founder is what I’d give here:

Take the time to familiarise yourself with investment terms – obviously by reading this newsletter but also by reading books like Venture Deals by Brad Feld and Jason Mendelson (this book is the gold standard for understanding the various types of terms around economics and control in venture fundraising).

If you’re not sure, don’t bluff. Tell the investor you’ll come back to them once you have understood the implications more fully.

Talk to a CFO or a lawyer – do not fall into the trap of false economy. A bit of money (or none for that matter if you’ve got someone friendly like me in your network ????) today, may save you a huge amount of time, energy and money in the future ???? .

Off Balance

As we run (crawl?) into the back end of 2023, I’ve been thinking about the future format of this newsletter – I’m pretty sure of the direction I’m going to be taking it in (less dense, more personal and potentially less frequent ???? ) but for now, I thought it would be good to give you a bit of a guide to the CFO Tech stack as we move into a world where there is a ubiquity of tools out there and it can be quite confusing to know what to use – and when.

If you’ve got a tool in your CFO or finance tech stack that you couldn’t live without, I’d love to hear back from you and add it to my list to explore ????.

The CFO Tech Stack

I am frequently asked whether there’s a product out there for some part of the CFO tech stack but, whilst there often is, that doesn’t mean you should actually be using it.

I tend to see a lot of the tools out there that have ‘democratised’ access to operational (and to some extent strategic) finance as being quite useful for non financially minded founders or teams, but they often fall short when a finance pro gets their hands on them.

First of all, it’s worth understanding how finance moves from the transactional to the strategic layer. This is something I thought about quite deeply when I was building Projected and continue to think about at EmergeOne now that Projected is pretty much done and dusted, but drawing from one of the slides in our deck you can see what are the broad layers within finance:

Transacting – This is about ‘doing stuff’, making and receiving payments, issuing documents and pretty much BAU activities.

Record Keeping – This is everything from accounting records to purchase orders, recording and reconciling ledgers and more.

Reporting and Compliance – Getting management reports out, getting financial statements and tax returns out of the door, ensuring that you have adequate insurance and other compliance activities.

Financial Planning – Normally financial planning and analyis, this is about forecasting, scenario planning and using data to better understand the business.

Strategic Finance – This was the holy grail from my perspective and what is currently entirely done by CFOs like me. It’s taking all that information and tying it together to help the business make better long term decisions.

From my perspective, most of the bottom half of this stack has been productised in various ways, whilst the upper half is still being figured out.

From a market perspective, the bottom half is high volume and low value (from the perspective of decision makers inside the business, for investors in that transaction layer of the stack it’s valuable because there is such a large market!), the upper half is lower volume but, in theory is where the value lies.

Let’s put it this way, no business failed because someone didn’t automate how invoices are processed, they did fail because someone didn’t understand the impact not processing an (or several) invoices might have on cash flow and business sustainability.

With all of this said, I don’t think anyone could argue with how much ‘easier’ existing tools have made the lives of small finance teams in small and growing businesses so it is worth understanding the landscape.

Payment Processing Solutions

These were some of the first tools to have been developed (naturally given the volume of transactions processed on a daily basis) and have become for most of us an integral part of our experience either as consumers or customers and as finance teams building out payment infrastructure fit for the businesses we work with.

Examples: Stripe, PayPal, Square, GoCardless, neobanking.

Pros: These products facilitate seamless online transactions, support multiple currencies and offer robust security features. With the explosion of open banking, payment processing has become seamless in some jurisdictions and the ability to take payments via Stripe or GoCardless, for example, mean that business are no longer reliant on chasing customers for their payments, freeing up their time for other value add activities. (And let’s not forget in the US you still have companies ‘cutting checks’ – that’s writing cheques for us Brits – so there is a huge amount of opportunity yet to be disrupted in one of the biggest markets in the world). But it would be hard to argue against how much positive impact these products have had on streamlining revenue operations and opening up the opportunity for a cambrian explosion of online propositions all able to take payment over the internet.

Cons: But in order to take advantage of the payment infrastructure, companies are hit with transaction fees which can be substantial and, depending on how your product is placed, may eat into already thin margins. Coupled with this, you have the potential for chargebacks and the costs that those can imply along with compliance with varying international regulations as you operate across borders.

Advancement: We have seen various attempts at the integration of blockchain for enhanced security – though with limited breakthrough thusfar (and let’s not forget that one of the biggest use cases for Bitcoin is the creation of infrastructure that allows for the seamless transfer of funds cross border), AI for fraud detection (I still recall someone in the space telling me that in the past, one of the major credit card issuers used to use ‘charge attempted in Canada’ to flag fraudulent use of a UK credit card – we’ve come a long way), and expansion into banking services as we have seen with the (ongoing) explosion of neobanks in various jurisdictions.

Accounting and Bookkeeping Software

It would be hard to argue how impactful cloud based accounting and bookkeeping software products have been on early stage businesses. They have allowed non-financial founders to start taking control of their accounting in a way that simply wasn’t possible in the past. Whilst I would never recommend doing your own accounting (I’ve seen it go wrong too often), it remains possible, and even more importantly means that founders, CFOs and decision makers have instant access to their numbers.

Examples: QuickBooks, Xero, FreshBooks.

Pros: The biggest unlock brought by these tools is the automation of routine tasks such as invoice and expense processing, increased accuracy and, as mentioned above, cloud-based access. Previously, this all remained within the domain of ‘the accountant’ with your business’ numbers being gatekept by the people who booked them – often not the same people as those that need to make decisions about the future of the business. Let’s not also forget that these tools can be quite ‘cheap’ based on their SaaS pricing so don’t require a large upfront cost to implement.

Cons: Most CFOs who use Xero and similar tools will tell you that there is limited customisation available, you often have to build from within the constraints of the product – for example if you run a manufacturing or stock holding business Xero can be quite painful to use and you may find yourself having to use any number of plugins to solve for your specific needs. Scalability can become an issue quite soon though, I have seen tools like Xero stretched way past breaking point – mainly because the jump to a more sophisticated tool can be incredibly costly.

Advancement: As the space evolves, it is likely we will see greater AI and ML integration allowing for smarter categorisation and reconciliation which means there will less need for human input (and hence human error) in these essential processes. I don’t think we’re at the point where there will only be need for minimal intervention from a human, but I for one would be incredibly happy if there was a tool that raised invoices, recorded bills and reconciled itself in real time and flagged any inconsistencies or potential gaps in the data (ok, I appreciate that’s a sad thing for someone to be happy about!).

Expense Management Systems

Just as how Xero has opened up access to accounting to non finance types, so have tools in the expense management space to the wider employee base. Rather than having to seek approval on spend manually, these tools allow companies to set limits, issue virtual cards and submit expenses easily. My first job out of university was in a shared service centre running Accounts Payable and, more importantly here, Employee Expenses for a multinational company across the whole of EMEA. To put it bluntly, we would receive paper claims with paper receipts attached to them and have to run them manually through the system ???? 

Examples: Expensify, Concur, Zoho Expense, Spendesk.

Pros: These tools allow for streamlined expense reporting, policy compliance and mobile accessibility allowing for closer and better reporting and approval mechanisms.

Cons: Some of these tools can be a little complex which is a deterrent to user adoption challenges and, importantly, can lead to challenges when trying to integrate with existing systems.

Advancement: As OCR and AI improve, there is more opportunity for automated receipt scanning technology as well as real-time policy violation alerts allowing teams to flag and deal with issues as they arise rather than (often) well after the abuse has occurred.

Payroll and HR Management Solutions

As companies scale, ensuring that employees are paid accurately and on time can be quite challenging. Until recently, ensuring that tax codes were updated and that bank details were maintained accurately was often a highly manual process, but as automated payroll software solutions have come to market, they have greatly reduced this large pain point for growing organisations.

Examples: Gusto, ADP, Paychex, Pento.

Pros: The obvious benefits of these systems are simplified payroll processing, enhanced tax compliance and employee self-service portals. In theory, they also reduce the likelihood for error in payroll calculation (which, if you’ve ever been at the wrong end of an incorrect pay cheque can be quite upsetting).

Cons: These can be relatively easy to work in a smaller organisation, however they can quite quickly become costly and complex in larger scale multi-jurisdictional operations – even in the US, state tax laws can be quite different, but imagine you had staff in the US, Europe and the UK, it can be quite hard to find a one size fits all solution.

Advancement: Over time, we are likely to see further automation to assist with things like tax filing alonside more integrations with HR systems to give a seamless end to end experience for employees and HR teams alike.

Financial Planning and Analysis (FP&A) Tools

This is where we start getting into the more strategic part of the CFO Tech Stack, but also where the tools are less widely adopted and often harder to solve. Having tried to build in this space myself, there are numerous challenges, not least of which is the fact that every organisation is incredibly different, and the minute you try to productise something as complex as forecasting, you naturally constrain some of the nuance in any given operation. Think about it this way, how you record invoices, run payroll or make payments will largely remain quite consistent across most businesses, but how you forecast revenue or plan headcount will be vastly different even in two businesses that ostensibly do the same thing.

Examples: Anaplan, Adaptive Insights, Vena Solutions, Casual, Abacum,

Pros: When the tools manage to solve some of the obvious problems associated with FP&A, they can be incredibly powerful providing real-time data analysis vastly improving forecasting accuracy and can handle quite complex scenario planning. Given that most of these tools are collaborative, it means that you can bring different team members into the forecasting process on platform meaning you can update and challenge changes in real time from key budget holders from within the company.

Cons: There are several issues with these tools, however, that can mean adoption is limited. Firstly, it’s whether or not they are able to integrate with existing systems – ensuring that data is clean and consistent all the time. As finance pros are wont to say: ‘garbage in = garbage out’. There is also, often a high level of complexity in setup making onboarding a challenge for finance teams as well as wider users and, finally, these tools can be quite expensive making them cost prohibitive for most startups meaning they are only valuable for mid cap businesses and beyond.

Advancement: The obvious opportunity here is for further integration of these tools with AI to provide predictive analytics. Essentially this means that the tools will learn from the real time data being fed in and update the model in real time in turn. This will give businesses a huge opportunity to course correct as new data surfaces on the go rather than waiting to see results after the fact before changing tack.

Business Intelligence (BI) Tools

Business Intelligence tools are essential for CFOs, especially when navigating scale. These tools help leaders make data-driven decisions by transforming raw data into actionable insights. These tools are used in conjunction with FP&A tools to give decision makers an ability to look deeper into the data, spot trends and inform business strategy on an ongoing basis. Tools like Tableau and Power BI offer powerful data visualization capabilities, allowing CFOs to create interactive dashboards and reports. And because BI tools can integrate data from various sources, including accounting software, CRM systems, and market data, they can provide a comprehensive view of the business.

Examples: Tableau, Microsoft Power BI, Looker.

Pros: By providing real-time data insights, BI tools help CFOs make more informed decisions about financial strategies integrated with business growth. Automated reporting and analysis reduce manual workloads (ever spent hours trying to run analysis on an Excel workbook?!), allowing CFOs to focus on the strategic initiatives that are critical for growth.

Cons: Similar to FP&A software, some BI tools can be complex, requiring significant time to learn and implement effectively, though this gives an advantage for those that can get their heads around them. I’ve seen businesses hire in data scientists and analysts to try and ensure they are able to really get to the bottom of the data and what’s happening in the business. Advanced features and scalability can come at a high cost, which is (as always) a huge consideration for startups.

Advancement: Modern BI tools are increasingly incorporating AI and ML for predictive analytics, offering forecasts and trend analysis meaning that they will become further integrated into other FP&A tools over time.

Treasury and Cash Management Tools

It is interesting that many startups did not even think about how they needed to manage where their cash sat until earlier this year when SVB went under. Most founders had their cash sat in one or two bank accounts and hadn’t thought about the risk that this could entail (and also the opportunity to take advantage of higher interest rates). But as people were once again reminded of the fragility of some of the financial system and the fact that there was now an opportunity to earn yield on their cash, we see increased interest in and adoption of treasury and cash management tools.

Examples: Kyriba, TreasuryXpress, CashAnalytics, TreasurySpring.

Pros: These tools allow for enhanced liquidity management, risk assessment and management as well as real-time cash visibility. Some of these products allow you to spread cash across a variety of products yielding different returns over different periods rather than having to settle on one fixed term deposit as would have been the case in the past.

Cons: Again, for smaller companies, there is a challenge that arises due to complexity of integration and there can be a high learning curve as teams have to reorient themselves in a world where cash not only comes at a cost, but can earn a return. Some of these products also require you to have a minimum amount of cash on the balance sheet (or raised) and a minimum amount of cash deployed into the products.

Advancement: At the risk of repeating myself, the main opportunity here is to integrate AI into the products to provide predictive cash flow forecasting so that CFOs and others can manage runway much more closely.

For me, the pinnacle will come when we see the next generation of CFO Co-Pilots driven by generative learning with fine tuned LLMs.

I’ve been playing around with some things in this vein and I’ll be sure to share my findings as I continue to dive into what is possible.

This landscape is going to keep evolving as more pain points are identified and solved and, critically, as we see machine learning and AI continue to add opportunity and differentiation in the way we think about and handle finance within organisations.

One thing is for sure, many finance pros who have lived in a world of ‘just’ excel are finding themselves having to understand the value that technology can bring to their business and allow them to increase their efficiency and value to the organisation.

I hope you found Off Balance #21 useful. As always, I’d love to get your feedback and understand the sort of topics you would love to hear about.

Just hit reply to this mail or drop me a line at [email protected] and let me know ????

????And that’s a wrap for this edition of Off Balance – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish

???????? Hi friends!

Well it’s been quite the week for the tech and venture ecosystem this week and in the UK’s answer to the All In Pod (OK, sans besties and billions) I’ll be exploring LIVE all sorts of things that are happening in the venture ecosystem with friends of the pod Eghosa Omoigui and Jonathan Sun ???? 

Join us at 6pm UK time today with a glass of something nice and some popcorn and feel free to send us your spiciest takes and questions in the chat ???? 

Here’s the link to join – hope to see you there!

This week on Nothing Ventured I spoke to Sam Beni. If you want to hear a real hero’s journey, you definitely want to check this out.

From arriving in the UK as an asylum seeker and not being able to work, to co-founding a business he couldn’t take a salary in, or hold shares in and where he lived on the office sofa for years to founding and exiting multiple startups all culminating in his role as Head of Innovation at Tech Nation, Sam’s story is absolutely incredible. Check it out!

This week there have been a few things that have caught my eye in the tech and venture ecosystem and what we’ll be talking about this evening, namely:

???? What the hell is going on at OpenAI?
???? Softbank and Tiger Global’s fall from grace
????️ What’s the future for venture according to Sam Lessin

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

If you like what I’m putting out, do give me a follow on LinkedIn, Twitter and Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Lowdown” and, more importantly, tell me why you’d like to connect ????????)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing – you can find links to these (and more including my Office Hours) right here!

Now let’s get into it.

The Lowdown

Revolving Door at OpenAI
Unless you’ve been hiding under a rock, you will have come across the news that Sam Altman was sacked from OpenAI, hired by Microsoft, returned to OpenAI and sacked half the board.

This evening we’ll be talking about what might have been the story behind the story and what this all means for the future of not only OpenAI, but the pace of development in the whole space.

first and last time i ever wear one of these

— Sam Altman (@sama)
Nov 19, 2023

Softbank and Tiger Global say goodbye to the good times
These two behemoths became a byword for excess in the private markets, with Tiger Global at one stage sending out one termsheet every single day.

But as the chickens have come home to roost with Softbank having had to deal with the fall out from WeWork, the sale of ARM and all sorts of other problems and Tiger Global having just lost Scott Shleifer, the head of the PE business and seen a $30bn drop in the value of their assets – what happens next for these two investors that at one point were the most courted in the ecosystem.

Sam Lessin’s view on the Future of Venture
Sam’s deck on his view on the future of venture is a must read, Eghosa, Jonathan and I are going to be digging into some of the nuggets that came out of it and what this means for startups and VCs alike.

And finally, back to memes from our favourite meme master, unsurprisingly around the OpenAI shenanigans again!

Ilya Sutskever be like

— Dr. Parik Patel, BA, CFA, ACCA Esq. (@ParikPatelCFA)
Nov 20, 2023

????And that’s a wrap for this edition of The Lowdown – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish

???????? Hi friends!

OK, 20 editions in, how the heck did we get here!?

I have to be honest, I wasn’t sure where I would get to with this newsletter, but am enjoying putting it out there and seeing where it goes.

As with so much of my life, it’s about overriding my ADHD to get to consistency and building ‘muscle’ around writing regularly and trying to improve a little more every time ???? 

Now let’s get down to business…

In this weeks Off Balance, I’ll be chatting about:

???? What it takes to be a startup CFO
???? Startup boards – what you need to know.

Also, in this week’s Nothing Ventured, I spoke to Sam Beni; Sam was the Head of Innovation at Tech Nation where he continues, post acquisition by Founders Forum, as Strategic Advisor and has just dived into his umpteenth startup Platin. We talk about coming to the UK as a refugee, not being able to take a salary and having his shares held by a cofounder in trust and much more besides.

As always, our Primer episode gives you a bit of background on how he got to where he is today ???? 

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

If you like what I’m putting out, do give me a follow on LinkedIn, Twitter and Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Off Balance” and, more importantly, tell me why you’d like to connect ????????)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing – you can find links to these (and more including my Office Hours) right here!

Now let’s get into it.

How can did I add value?

I had some unexpected and really great feedback on last week’s section where I discussed small cheque investing, it turns out there are other people out there facing a similar conundrum who found the ‘advice’ really useful in terms of getting off the ground as an angel.

One of the other things I am consistently asked about is how to get into CFO’ing at startups, most recently by someone who has been in large corporates and PE backed businesses in FP&A roles before launching a couple of startups of his own.

The problem is that whatever role you’ve held in a larger business, the likelihood is that you will have been one of a team of several people delivering a specific outcome for your division.

However, a startup CFO is a leadership role. One where you are expected to have the answers, and it’s unlikely that you’re going to be able to rely on someone else to give you the answer (because let’s face it, the most likely scenario is that it’s just you in finance.

So I started thinking about codifying what it means to be a startup CFO, not only so people can use it as a checklist to see if they’re ready, but one that I can use myself as I continue to grow my team of fractional VC backed CFOs too.

I am fond of saying that becoming a CFO is not something that you qualify towards, rather it is built from the experience you have built up. So this is not just a list of knowledge you need to have, but skills you have acquired over the course of (probably) one to two decades working in finance and startups – and I would argue whatever you might have done outside a startup counts very little once you get into one!

???? Strong understanding of capital flows from revenue, investment, debt, working capital and impact on business.
This is the essence of being a CFO. If you don’t understand how cash flows and feeds the venture you’re working in, and how movements in cash can drive outcomes in your business, then you are unlikely to be ready for the CFO slot.

???? Ability to identify, define and set KPIs / leading metrics to track and course correct.
Knowing what drives the business (outside of pure financial metrics) is a critical role of the CFO. You are the person that founders (and leadership teams) come to to help them understand how the business is performing and how they can scale further.

???? Ability to build out data and metrics driven financial models and scenario plans.
Lots of CFOs who have come out of larger organisations tell me that it’s been several years since they spent any time in an excel model, they have FP&A teams for that. Sadly this is one of the primary things a startup CFO is asked to do – I think I would have spent more time messing about with models than in any other area of any of the ventures I have worked with. Again, it goes back to the fact that you likely won’t have a (large) team, so you need to be able to do the work.

???? Strong understanding of growth playbooks – market, product, geographical, acquisition etc.
Your role as CFO is to help build the systems, processes and financial strategy that allow the business to scale. In order to understand that, you need to understand other areas of the business, the playbooks they use, or, will use to scale so that you can feed that back into your cash planning – all of which impacts runway, burn, capital needs and hiring plans.

???? Experience raising capital both equity and debt.
You can be a CFO if you don’t have an accounting qualification, but you can’t really be one if you don’t have experience raising capital. This doesn’t mean that you need to have personally found the investor / debt provider and closed the deal (in a startup it’s always the founder / CEO that is responsible for ‘selling’ the vision); what it means is having experience raising large amounts, understanding term sheets, looking at economic and control factors and more.

???? Experience of M&A.
Whilst not essential in my opinion, having an understanding of mergers and acquisitions is incredibly valuable as a startup CFO. You will likely be involved in discussions around acquisitions at various stages of the company’s life (heck, I just spoke to founders of a seed stage venture who have already completed one strategic acquisition!), again, understanding how to review and assess other businesses and their fit as an acquisition is really valuable.

???? Experience of exits to a strategic acquirer.
This and IPO experience are not pre-requisites as a startup CFO at the earlier stages (pre late growth, i.e. Series C and beyond), but obviously having that experience and understanding how the process works will be really useful to the leadership team if they get to the stage where a strategic exit is on the table.

???? Experience of IPOs valuable.
Obviously this is the pinnacle of a CFO’s journey, getting to ring the bell at a significant stock exchange having navigated the successful listing of the startup. But let’s face it, again, not only is it less neccessary at the earlier stages, but there is only a narrow cohort of CFOs that are likely to have had this experience at all.

???? Good network of liquidity providers (VCs, angels, debt etc.).
Whilst I said that it wasn’t necessary to be able to close the funding, you definitely want to be seen as someone that knows where to go to get funded. Whether you have networks of investors or financiers able to provide debt financing, this is something that most founders will look for in a great CFO.

????????‍???? Strong board management and governance skills.
As we’re about to see below, navigating boards can be tough (Open AI anyone?). CFOs are often critical in the provision of information to directors and more often than not may sit on the board themselves, even if only as an observor. Understanding how to manage a board as well as understanding the duties of a director so that you can provide guidance to founders is a huge part of being a good CFO.

???? Strong investor management skills. 
Having raised the capital, you need to know how to manage investors (and debt providers). This is about regular communication, providing the right information without necessarily providing too much and balancing ensuring that investors have full knowledge of progress without necessarily opening the door to a tonne of questions, remembering all the time that you may be back at their door soon enough looking for additional funds…

???? Data / BI knowledge.
The office of the CFO has moved beyond ‘just’ finance. CFOs are often the custodians of the business’ data operations. Therefore having a good understanding of how to find, clean, use, process and present data are essential skills for modern CFOs. Which means that there are some up and coming finance folk that have the edge on some of us slightly more ‘advanced in years’ ???? 

???? Understanding of accounting + policies around revenue recognition etc.
As I said at the top, you don’t need to be a qualified accountant per se, but you do need to understand key policies as, more likely than not, you’re going to have to ensure you are on solid ground when talking to auditors, investors and even internal stakeholders – many of whom won’t understand why accounting is so quirky – because any shocks to the system could have dramatic consequences.

???? Strong communication skills across all stakeholders, ability to translate Numbers into Narrative and guide strategy.
If you’ve followed me for any length of time, you will know that I am a strong believer that being a CFO is strongly skewed towards your ability to communicate, not just be numerate. Why is this? Because CFOs are part of the exec team. Collectively the exec team is responsible for selling, whether to investors, to employees, to clients or to any other stakeholder that may land on the doorstep. It would not be particularly useful to have a CFO who could do the numbers but couldn’t sit in front of an investor and explain not only what the numbers are telling us today, but where they could go tomorrow.

⚒️ Systems and Tech.
Let’s face it, in today’s environment – and especially when working in a tech venture – a critical skill is understanding what tools are out there that can make your business more efficient. Whether that’s at the transactional level looking at cloud based ERPs, payment gateways, spend management platforms or at the more strategic end of the scale looking at FP&A, forecasting, cash planning, cap table management or even building internal tools to help the business grow.

So there you have it, my attempt to codify what it is to be a great startup CFO operating in the venture ecosystem. Do you think I’ve missed anything? Just hit reply and let me know!

Off Balance

There has only really been one piece of news that everyone in the tech ecosystem has been talking about since last Friday.

No, it’s not about the ex Klarna COO getting sacked from his new role as CEO as I tried to joke about on LinkedIn the other day; it is very much about OpenAI and the extraordinary drama that unfolded when four board members essentially engineered Sam Altman’s departure as CEO and resulted in the resignation of Greg Brockman as Chair.

Bearing in mind this is the company behind ChatGPT, the AI chat technology that has led to an explosion in generative AI startups, that was about to go into another financing round mooted at $80bn, that has probably led to the first true platform shift in technology since the proliferation of the smart phone, it is hard to see how this saga unfolded the way it did and how it is possible that the board got it so wrong. (Even the person they originally wanted to take over as interim CEO from Sam – Mira Murati – signed an open letter demanding his reinstatement).

So are we going to dig into everything that happened in this fast paced corporate drama?

No.

We’re going to talk about boards – because this issue was essentially triggered by the board which, is not the board of a traditional corporation but rather of the non profit that controls the corporation (aren’t you glad we looked at Corporate Structures last week?!).

Corporate governance is all yawns, until it’s not, so if you’re a founder, CFO or even an angel or investor, understanding how it all works is pretty essential.

Boards and Governance, what you need to know

As we have seen from the OpenAI debacle, the nature and composition of your board can have dramatic impact on both the founder as well as the business. In OpenAI’s case, it has not only ousted the CEO but has probably destroyed a huge amount of value in the business as employees, investors, partners, users and customers reacted in real time to the news.

As with much in the world of startups, the role of the board has evolved over time moving from purely governance to highly strategic imput into the growth and future of the business.

It goes without saying that your board will look different depending on the stage you’re at as well as the nature of your investors.

Who sits on a startup’s board?

There are normally two documents that will govern the makeup of your board of directors – your articles of association or incorporation and your shareholders’ agreement. Each of these are likely to get updated as your venture grows, but it is essential to understand what it means for who can sit on your board and what powers they have.

At the very early stages of a startups life, it is quite likely that there won’t be a formal board, rather the directors of the company are likely to be one or more of the founders of the business and there will probably be little formality around meetings with board matters being dealt with as they arise.

As the startup grows, founders may well bring in advisors though it is quite likely they will sit outside the formal board of directors. Occasionally, when one of them is hugely value additive (they have connections from within the industry or access to capital for example) they may be invited on to the board more formally.

But it’s normally only when a startup raises it’s first large institutional round (typically at seed and typically from an institutional investor) that the board starts getting more formal.

At this point, you will normally see a board composed of the founder(s), another senior executive from inside the business, an independent Chair (though not always), for every institutional investor you will likely have one board member or board observer (a board observer has no voting rights, cannot make decisions and is there to observe and input if necessary). It is also not a given that every institutional investor will have a board seat. This will depend on what has been agreed in the term sheets and what has previously been stipulated in the articles or shareholders’ agreement.

It is essential that there is a good balance at board level. You need enough people from within the business that understand what is happening in detail alongside members from outside the business who can probe or even challenge some executive decisions and acting in the best interests of the business and the shareholders.

If the board is skewed towards the executive, then it is likely going to be a weak board rubber stamping whatever the founder(s) or CEO put forward. If it is skewed too far the other way and non-executive board members have too much power, you may end up with indecision and / or the management team feeling like they don’t have the ability to execute meaningfully.

It feels like OpenAI fell foul of this latter situation.

What should your board be doing?

Strategic Guidance: The board should set or at least sign off on the strategic direction of the business. Non-executive board members (i.e. those not involved in the day to day running of the company) will likely have been through significant journeys in other businesses and will provide valuable insight into the strategic direction of the company. This may involve setting longer-term goals, understanding when it might be appropriate to hire new senior team members or when it might be sensible to raise additional capital.

The board will often act as an enabler of conversations with larger companies where they may have significant relationships, allowing a small startup to accelerate their sales process within these corporates, or even help identify the best talent to help the company get to its next milestones and beyond.

Financial Accountability and Planning: The board is ultimately responsible for overseeing the financial performance of the company which means they should be making sure that the business is being run responsibly. If a director doesn’t understand the numbers then they have no place sitting on the board at all. This does not mean they need to be able to give chapter and verse on every number (that’s the CFO and / or founders’ role), but they should have confidence in the numbers and be able to pick up on anything that looks untoward.

The board should also be involved in the setting and signing off of forecasts and budgets. They should hold management to account on hitting milestones and understanding why when they don’t. In fact, there are often board reserved matters such as setting founders’ remuneration, hiring senior staff, entering a contract or series of contracts that will cost over a certain threshold, entering into debt and, ultimately, whatever goes into the articles or more likely the shareholders’ agreement.

Fiduciary Duties: Directors’ fiduciary duties stem from the requirement to act in absolute good faith acting as responsible custodians of the company on behalf of others. This means acting in the best interests of both the company and its shareholders.

These duties (in the UK) form part of the law governing how Directors are expected to act and it is very important to understand that these apply to you whether you are formally recorded as a director at Companies House or not.

So what are these duties?

Duty to act within your powers, as set out in the articles, shareholders’ agreement, constitution or other corporate document.

Duty to promote the success of the business for the benefit of all shareholders and stakeholders.

Duty to show and exercise good and independent judgement.

Duty to exercise reasonable care, skill and diligence; to not take on the role if you’re not qualified or capable to do so.

Duty to avoid conflicts of interest.

Duty to not accept benefits from third parties.

Duty to declare an outside interest.

How these duties are defined in law will change from country to country (if they are defined at all) and the penalties for not upholding your fiduciary duties can be quite severe.

And of course, directors must always act within and comply with corporate laws and regulations – in the UK these are set out in the Companies Act.

The Board’s Role in Fundraising

Whilst it is not the board’s responsibility to raise capital per se, it obviously is part of their broader remit.

From a startup’s perspective this often involves the board leveraging their wider network, introducing potential investors as well as scrutinising or even assiting in the negotiation of new investment terms with incoming investors.

In fact, given how important fundraising is for startups and growth companies, one could argue that at the earlier stages, founders should index towards finding board members that can either open doors for investment or for revenue (especially important in enterprise solutions).

Building and Maintaining Effective Boards

OK, so you know the sort of things that board members have to do and where they may add value to your business, but how do you actually go about finding them?

There are two schools of thought on this, you can advertise the role and treat it very much as you would any other role you’re recruiting for but I think this is the wrong way. The better way is to not wait for inbound interest, but instead search yourself.

You will be looking for people with certain industry experience or professional skills (legal or finance), people with experience operating on boards at your stage and, importantly, people with networks that you can leverage – be that for investment, for recruitment or anything else. Go to LinkedIn, look at boards of similar businesses to yours, find equivalent people and reach out to them directly.

And as these board positions are not ‘output’ driven, but are about how people interact with each other, often the soft skills they bring to the table and how they are able to digest and synthesise information to make ‘the right’ strategic decisions, it is imperative that as part of your process you spend as much time as you can with prospective appointees so that you can really get to know them (and they you).

Of course, some of your board members will be appointed by your investors so you may not have much of a choice, but you should still speak to founders whose boards they already sit on and get a feel for how they operate.

You may wish to include specific terms into each directors’ contract so that you can rotate if necessary (and allow for changes in the growth profile of the company), but really great board members can stick with you for the whole journey.

Best Practices

There are some ways to ensure that your board works efficiently rather than being a bit of a free for all.

Figure out a cadence that makes sense for your board to meet. I would suggest that at early stages, quarterly is more than sufficient, as you progress you may require monthly board meetings – and certainly if the business is facing headwinds or has some large milestones it’s about to cross, more regular board meetings are going to be a necessity.

Ensure you have a board pack that goes out in relatively the same format every meeting – I like to include an executive summary, recent financials (often with a focus on cash), KPIs / progress against agreed milestones, specific (important) business updates, key personnel changes, any wins the company might have had and, importantly any recent or upcoming issues the board should be aware of. You should clearly state any matters you need the board to resolve (and provide any backup required).

This should be in the form of a deck or a doc if in long form and, most importantly, should be sent to the board at least 2 – 3 days prior to the actual board meeting (a week would be ideal but may be difficult to achieve).

During the meeting itself, stick to the agenda as far as possible. First going through minutes from the previous meeting and checking if there are any matters arising. Thereafter, don’t re-explain what is already in the deck, but ask if there are any questions that the board have on the information presented. Discuss those matters and wherever possible and necessary, make sure that you are clear about what actions need to be taken on any particular matter.

Bear in mind, professional non-executives and board members are likely to incredibly busy so it’s a good idea to try and stick to timings as far as possible – though allow for the fact that there may be some issues that you hadn’t expected to come up that require discussion.

After the meeting, get minutes out within the next couple of days so that matters are fresh in peoples’ minds and check if anything needs to be changed or updated.

Remember, the board has to act in the best interests of the company and all stakeholders, so make sure it’s operating on those principles.

Challenges and Common Pitfalls

One of the biggest challenges is having a board that is too big or is poorly composed. As discussed previously, getting the right balance of people on it is critical. Too many people often results in inaction or lots of talk without any outcomes so keeping numbers tight is really important.

If the board is too weighted towards the executive or to non-executives, it will not function as you need it to, so make sure there is a good balance.

Ensure that there are no conflicts of interest at a personal level (though of course, directors should disclose these upfront). Where they exist, if there are matters that would bring that conflict into light, it’s better for a director to recuse themselves.

Founders and the executive are often focussed on the short term and dealing with a multitude of operational pressures (are we going to make payroll on time every month this quarter, when can we reasonably make that critical hire we need to make, what happens if we don’t close this client in the next 30 days). The board, on the other hand, needs to be mindful of these operational challenges but also be focussed on the bigger picture and longer term strategic planing.

Wrapping it up

There are plenty of other issues to be mindful of when thinking about the purpose, composition and operation of your board, but what I have covered here should give you a good start in getting yours set up the right way.

Let’s face it, Sam Altman isn’t the first founder or CEO to get removed by their board (anyone remember Steve Jobs’ ousting in 1985?), but in the current market where traction and performance are imperative, I think we will see a lot more of these corporate reshuffles (though they are unlikely to be this public every time).

So if you’re a founder get to checking your articles and your shareholder agreements and know what your board can – and can’t – do.

I hope you found Off Balance #20 useful. As always, I’d love to get your feedback and understand the sort of topics you would love to hear about.

Just hit reply to this mail or drop me a line at [email protected] and let me know ????

????And that’s a wrap for this edition of Off Balance – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish

???????? Hi friends!

I’m about to have my next batch of Office Hour guests(?) / patients(?) turn up to see if I can help them out with whatever ails them.

I’ve been really blown away by the number of people who have reached out to book some time, and the sort of diversity of problems they’ve come to the table with. I’m looking forward to seeing not only how I can help, but what I can learn ???? 

This week I spoke to Dom and Elliot Chapman, two brothers who seem to have done it all – from sports, to startups to agencies to now their own buy and scale agency roll up strategy via Chapman Capital. We had a candid conversation about burning out, building and exiting an agency and how they manage, as brothers, to present a united front in public, even if they disagree in private. Check it out!

This week there have been a few things that have caught my eye in the tech and venture ecosystem, namely:

❓️ Is PE the new VC?
???? Pitchbook’s Q3 League Tables
????️ Are LPs running shy?

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

If you like what I’m putting out, do give me a follow on LinkedIn, Twitter and Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Lowdown” and, more importantly, tell me why you’d like to connect ????????)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing – you can find links to these (and more including my Office Hours) right here!

Now let’s get into it.

The Lowdown

Is PE the new VC?
As the VC market continues to face headwinds, it is not crazy to think that we are going to see a lot of businesses face closure or pressure to find a way of realising some cash for existing shareholders.

Indeed, as we saw from the recent pod I did with Peter Walker from Carta there has been an ongoing uptick in the number of business closures across their data set of 40,000 startups.

But, there also exists opportunity.

It’s not as if Private Equity hasn’t been around for some time (though it feels like people are only just (re)discovering it), but as the FT reported earlier this week, there are a growing number of investors raising funds to strategically buy out venture backed startups that are simply not continue in their current state.

Unlike (most) venture backed businesses, a PE strategy would involve hands on management and potential leverage in the business meaning the key to growth (and survival) becomes strong revenue coupled with greater operational efficiency.

There will be founders and investors that wonder whether selling out is the right thing to do (because it is quite likely any sale will be at a discount), but in this market one has to ask whether you’d rather have some return now or a strong possibility of no return ever.

I, personally, think that this was an inevitable destination once the markets started pulling back. We’ll see more funds and businesses focussed on roll up strategies (buying businesses in similar verticals to create a larger overall entity), more turnaround specialists being engaged and the capital that has been sat on the sidelines finally being deployed.

Pitchbook’s League Table
Pitchbook has just released it’s Q3 league table, an interactive tool where you can see the most active firms in both PE and VC over the last quarter.

Below are the top ten VCs by deals done in Q3 in the UK and Ireland (yes, I was surprised too), and if you’re a founder that is either about to start or already mid fundraising, it’s always a good idea to see who is active in your space, who’s been deploying recently and at what stage (and ask yourself the question will they continue to deploy if they’ve been very active already?).

Unfortunately, you can only get limited data back on any individual firm unless you are a Pitchbook subscriber, but there’s plenty of ways to research further, hopefully this is a good starting point ???? 

Are LPs Running Shy?
You will hear a lot about how difficult it is to fundraise at the moment, whilst also hearing some incredible successes as companies close out large rounds (ok, many in the AI space) and may be asking yourself what’s driving that.

Well one of the reasons it’s so difficult to raise as a startup is because it has become that much harder to raise funds as a VC.

There are lots of reasons why LPs may have pulled back from investing in VC funds recently, interest rates will have played a part. Drops in the market may have led to being overexposed to venture as an asset class. Or maybe they’re suffering from a lack of liquidity themselves.

But one reason has to be that they simply haven’t seen enough capital being returned to them over the last year.

As this article from Sifted states, 56% of European VCs haven’t sent a dime back to their LPs in the last 12 months. Now there’s some nuance here, obviously venture is a relatively long term game (you’re never going to get real returns on day one or even year one, returns happen later in a business’ life cycle, either by way of a secondary fundraise – where someone buys out your stake – or a full exit) so the fact that capital hasn’t been returned by over half of VCs needs to be taken with a pinch of salt.

But, as with startups, VC funds are measured on their performance, of which returns to LPs is a big one. So if you aren’t able to create liquidity to your investors, they’ll likely be hesitant to double down any time soon.

And finally, back to memes from our favourite meme master… Hands up if you’ve ever been this guy ???? 

Finance bros after using “bps” instead of percent

— Dr. Parik Patel, BA, CFA, ACCA Esq. (@ParikPatelCFA)
Nov 15, 2023

????And that’s a wrap for this edition of The Lowdown – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aaris10

???????? Hi friends!

Wishing everyone who celebrates a Happy Diwali and Prosperous start to the New Year ????

Here’s a glimpse of me in my full regalia dancing the night away this weekend ???? 

On a separate note, I’m really pleased to announce a small investment I made into Ashore which aims to allow you to work from anywhere – think AirBnB meets WeWork (ok maybe not WeWork ???? ).

As someone that does travel a great deal and uses AirBnBs more often than I would like to, I’ve had numerous experiences of WiFi not working, a lack of work spaces and all sorts of things that make them less conducive to getting any work done.

Aled and the team at Ashore decided to focus on the growing number of businesses – and individuals – looking to run offsites or take a beat and work from somewhere different for a while.

Super excited to be backing them and look forward to using one of their sites in the near future!

Now let’s get down to business…

In this weeks Off Balance, I’ll be chatting about:

???? Getting started as a small cheque angel investor
???? What company structure you should establish in the UK or the US

Also, in this week’s Nothing Ventured, I spoke to Dom and Elliot Chapman, founders of Chapman Capital. We talked about founding, building and exiting and the move from building their own agencies to rolling up others’ and how they bring replicable processes to help them scale.

As always, our Primer episode gives you a bit of background on how they got to where they are today ???? 

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

If you like what I’m putting out, do give me a follow on LinkedIn, Twitter and Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Off Balance” and, more importantly, tell me why you’d like to connect ????????)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing – you can find links to these (and more including my Office Hours) right here!

Now let’s get into it.

How can did I add value?

I was blown away by the take up for my office hours which kicked off in earnest last week.

The first few folk to have signed up had a wide ranging spread of questions which I tried to help them work through – in some instances it was pretty simple, in others a little more complicated.

The first conversation was pretty crazy – I was speaking to someone who manages a family office. They wanted to understand how to get into early stage investing.

Now the reason that felt a bit crazy was because when you’re managing a family office, your job is literally to invest. But it soon became clearer why we were having the conversation!

By way of background, the family office invests in a pretty diverse range of assets (as most family offices will). But more specifically with technology businesses it’s investing at much later stages, from the late letter rounds (Series D and beyond) all the way up to IPO.

The way those deals work is very different from the sort of earlier stage startups that come across my table.

You have to think about building deal flow as well as making a decision on what to invest in – especially when you’re doing this as an angel can be very different from doing it professionally.

Here’s what I talked about.

Thesis
When you are getting into angel investing, it helps to have some sort of structure around what you are looking to invest in. This may change substantially over time, but you want to have some idea as to what makes sense for you.

For example, I pretty much won’t look at anything in the D2C / eComm / FMCG space because I just know that these are so dependent on large amounts of capital to fuel marketing that breaking through can be quite difficult.

But at the same time, I have invested in a D2C high end fitness product – less because it’s consumer, more because of the tech that they’re building and the fact that one of the core pillars I want to invest in is health and wellness.

You also need to figure out the sort of cadence of investments you want to make and how much you’re willing to invest.

As it happens, like me, this individual is looking to make small (£1 – 2k) investments in around 10 startups every year.

Given the fact that we’re capital restricted, you have to get better and better at saying no to most things so that you can put your money to work in the startups that you really want to back.

As a side note, I also recommend that those getting into angel investment consider the following:

Your first few investments should be treated as for learning only. You will get lots of things wrong but if you accept that and bake that in to your thinking, those first cheques become the price of admission to learning what works for you.

It’s pointless having only a few investments – portfolio construction still holds for angel investing so you want a relatively large spread of investments in order to have the potential to capture value from one of them.

Make sure you speak to your significant other (if you have one) about what you’re planning to do. At the end of the day, you’re going to be tying up your cash for several years, if not a decade or more. It’s always wise to ensure you’re both on the same page – it won’t make a difference to what you invest in, but it may make life a little easier as you grow your portfolio!

Deal Flow
One of the first things you need to figure out as an angel is where your deals are coming along with the sort of deals you actually want coming to you.

For me, given how much I am present online, over time I have been able to increase the number of deals that are coming across my table.

With that said, it doesn’t necessarily mean that these are the deals I want to be investing in. There’s a high degree of filtering I have to go through.

For this individual, it’s likely that they actually come across a bunch of deals that are too early for their family office. In this case, they have the opportunity to look at those from a personal perspective rather than discarding them as too early for the FO.

But ultimately, a lot of deal flow is also about reaching out directly to founders building companies you’re interested in – whether they’re raising a round right now or not – and generally getting your name out there.

Syndicates and Angel Groups
Notwithstanding generating your own deal flow, it’s normally a pretty good idea to get involved with a syndicate – either formal ones as can be found on AngelList, Odin or informal ones like a couple of the WhatsApp groups I’m on.

The reason for this is that:

a) you will likely be presented with a lot of deals you would ordinarily not have seen

b) a lot of the people behind and within these syndicates will have been investing for longer periods of time so may have honed their skills much more than you will have by now. They allow you to ‘outsource’ some of the due diligence you would otherwise need to go through and just get used to putting your money to work.

With that said, part of learning to invest as an angel is by going through the pain of sourcing and vetting a deal.

In my opinion, you should balance out investing as part of a group with finding the sort of deals that really interest you for yourself.

As a side note, I have FOMO’d myself into investing in a deal through a syndicate that was neither in my core thesis nor something I was particularly excited about.

That business, sadly, was not able to build traction and raise again despite the best efforts of the founders. The lesson for me was not to rely on syndicates unless I had also allowed it to pass the gut check on my own thesis and framework.

Crowdfunding Platforms
An extension (or maybe a precursor?) to syndicates, is investing through a crowdfunding platform like Seedrs or Crowdcube. Be wary though, the types of deals that come onto platform can fall into a couple of categories that may not suit your needs – either they are using crowdfunding as a proxy for marketing or they have struggled to raise externally already (bear in mind there is quite a lot of heavy lifting involved in trying to raise on one of these sites).

I personally use them to teach my kids about investing and we throw £100 or so into a deal from time to time, but I wouldn’t use them to source (many) deals I am really interested in investing in.

Diligence
Having found a deal that might be interesting, what next? Well this is where things at the early stage get fairly murky.

There is usually not much data to go on so you cannot perform a DCF or some other traction based framework to figure out whether a deal is worth investing in.

For me, over the short period I’ve been angel investing, I’ve narrowed down my final decision to the following:

Do I WANT to invest? (i.e. is this a product / service I really believe in).

Is there a sufficiently large market?

Do I think the founder can execute in that market?

(Tangentially, I also think about whether I can be valuable beyond – or maybe given – my small cheque).

At the earlier stages, so much of what you’re going to invest in is an unknown, so there is limited diligence you can really do. But here’s some examples:

Interview users or customers if relevant

Try the tech out yourself (assuming it’s a tech product)

Check if there are competitors in the space

Talk to other investors

Terms
If you’re investing £1 – 2k cheques, you’re going to follow the terms that have been already set by the founder or a lead – no point trying to argue on this, though, you may consider whether coming in with a small cheque at a huge valuation makes sense.

Often at this level of cheque size, you’ll be investing with SEIS or EIS on the table and under an ASA (Advance Subscription Agreement) if you’re in the UK, so it’s unlikely you’ll be able to influence terms too much in any case.

Cadence
As I mentioned earlier, if you’re investing small cheques and have budgeted an amount you want to invest every year, you need to be pretty stringent with yourself around how many deals you invest in and over what period.

It’s pointless investing in 3 deals in one month for example, if that means you’re going to potentially miss out on something exciting a few months later (unless those deals are really ????).

Post Investment
It is worth remembering that, if you are able to, it is always good to continue to add value to a founder – even if that’s just checking in to see how they are – on a regular (but not naggingly!) basis.

Founders talk to each other, and if they have found you, your advice, network and support valuable, that’s a great way to increase the deal flow coming to you.

Wrapping it up
Whatever advice I can give on the matter, I’m still learning myself so I have no doubt that my approach and understanding will morph and change over time.

The best piece of advice I can really give is to just get started – start talking to founders, looking at decks, joining angel groups or syndicates and, most importantly putting money to work.

If you’re just getting started as an angel, I’d love to understand what your experience has been – drop me a note on LinkedIn or reply to this mail ???? 

Off Balance

I’m occasionally asked what the right structure of business to use when setting up for the first time and this can be quite daunting for a new founder.

Whilst for the most part, they’ll be best served (especially if they’re looking to raise investment) with a simple Limited Company structure in the UK, I thought it would be worth looking at the terminology, pros and cons of different structures both in the UK as well as the US.

And though it isn’t the sexiest of topics to be writing about, I definitely think it’s well worth understanding what’s in front of you before you make an ultimate decision.

Remember though, if you’re unsure, always speak to an accountant or lawyer to understand what structure makes most sense for whatever it is you’re trying to do.

Corporate Structures in the UK and the US

I’ve chosen the UK and the US because a) I’m based in the UK as are many of the people that read the newsletter, but have also included the US as many companies – especially if the have or our looking to raise from VCs – may need to either expand into or, incorporate in the USA.

It’s important to figure out what is best for you for day one, things may change over time, but remember that it can be quite costly to change things around further down the track.

Having seen a number of companies go through a US topco flip (when you change the principle entity from the UK to the US) this can be quite a costly and time consuming exercise, requiring investor consent and board resolutions throughout.

So let’s start close to home in the UK and check out some of the most common structures used in business (whether VC backed or not).

United Kingdom

Sole Trader

The Sole Trader structure is typically used by individuals who are either self-employed, or are small business owners.

Setting up as a sole trader is pretty simple and operating as a sole trader is not particularly complex. It allows you to maintain full control and there are vastly fewer reporting requirements making it a far less onerous structure to adopt.

Unfortunately, unlike other structures, setting up as a sole trader means you have unlimited personal liability and it can be challenging (if not next to impossible) to raise capital from external sources – be it debt or equity.

In the US, the strong equivalent is the Sole Proprietorship.

Partnership

Partnerships are normally used by professional service companies such as law firms or accountancy firms.

The good thing about partnerships (not to be confused with limited partnerships or limited liability partnerships below) is that they are easy to establish. You are also not on your own and share responsibility with your partners as well as benefiting from the expertise of multiple owners’ as opposed to just one.

Unfortunately, partnerships also have unlimited personal liability for the partners and there can be a high potential for disputes to arise amongst the partners – especially where one might be considering leaving the partnership.

In the US, Partnerships act in much the same way.

Limited Partnership (LP)

Limited Partnerships are typically used in investment ventures (funds) as well as real estate companies. You will have seen me write about the GP / LP structure when talking about how VC funds establish and run themselves and, whilst it’s unlikely you’ll establish such a structure unless you’re building a fund, it’s useful to know how they work.

Limited Partnerships mean that there is limited liability for the limited partners and you can create a relatively flexible management structure which is typically run my the general partners.

Again, general partners have unlimited liability and setting up a GP / LP structure is far more complex than the simpler Partnership model.

Limited Liability Partnership (LLP)

LLPs are normally used by larger professional services firms and we see them a lot with the bigger, well known legal and accounting practices (think Bird and Bird, PWC and others).

One of the biggest benefits of an LLP is again the limited liability protection that partners get (i.e. they are only liable to the extent they have contributed) and again provides flexibility in management of the company.

But LLPs, again, bring more regulations than a simple partnership, and there are various requirements to disclose financial information.

Private Limited Company (Ltd)

Private Limited Companies are by far the most ubiquitous type of company structure amongst SMEs (small to medium-sized businesses).

If you are launching a startup in the UK, it’s pretty likely that this is the sort of structure you are likely to adopt.

Not only are Ltd companies quick and cheap to set up, liability is limited for shareholders (owners) and, under law, Ltd companies are treated as a separate legal entity (in fact a separate legal person) to the individual shareholders.

Because Ltd companies are able to issue new shares or sell existing shares in the business, it makes it much easier to raise capital from external investors into them.

There are a lot more regulatory requirements than with simpler structures, and there are requirements for the public disclosure of financial statements though, the smaller a company you are (based on turnover, balance sheet size etc), the simpler the disclosure requirements in terms of what is publicly available information.

Public Limited Company (PLC)

A PLC is established when a company lists its shares on a public exchange like the FTSE. Most typically these are ‘large’ businesses (large revenues and often profitable), though with the establishment of alternative exchanges such as AIM, you also see smaller businesses listing as a means of creating more visibility in the market or as a way to raise capital from the public.

Clearly one of the main benefits of publicly listing is the ability to raise capital through the sale of shares via public share issuances. They also provide a way for both management and investors to allocate a value to the business as shares are also traded (rather than new shares being issues) which establishes a market clearing price. Again, one of the other main benefits is the limited liability that owners have.

With that said, there are significant regulatory requirements including frequent publishing of financial data, disclosures of significant events and more, all of which leads to a much higher level of scrutiny from the public and shareholders than other structures..

United States

Limited Liability Company (LLC)

Whilst the LLC is very similar to the Ltd company in the UK, and is one of the most typical company structures a startup will establish there is one issue (which stands for pretty much any entity in the US) that makes things more complicated.

That issue is that each state acts differently and will have their own specific state laws governing company requirements.

For most startups (whether US based from day 1 or whether establishing a US topco or even subsidiary), the most common place to establish is in the state of Delaware.

The reason for establishing in Delaware is that their laws on the governance of companies has been well established and tested over the years meaning that investors (as well as founders) know what they are getting in to.

In my conversation with Daniel Glazer, we talked about why for many investors it’s just too much hassle to try and understand the requirements in other jurisdictions so will only invest (at least at the earlier stages) in a Delaware corporation.

C Corporations vs S Corporations

Within LLCs you can choose to designate as a C Corporation or an S Corporation, the letters refer to the specific parts of the tax code they fall under.

Many startups will elect to be a C Corporation as they retain the limited liability and ability to sell stock or shares in the company.

S Corporations on the other hand are more suitable for companies that want to retain limited liability but also have the tax advantages of a partnership.

This tax advantage comes about as a result of the ability to ‘pass-through’ profits and losses to the ultimate owners who then deal with the taxes on their personal returns.

There are, however, strict eligibility requirements and S Corporations are limited to 100 shareholders who must be US citizens, the company must operate domestically and the company can only issue one common class of shares.

Nonprofit Corporation

This is the last type of corporate structure in the US and is predominantly used by charitable organisations and educational institutions.

The benefits of incorporating as a nonprofit is that they hold tax-exempt status and provide limited liability but on the flip side, there are strict operational limitations and relatively onerous public disclosure requirements.

So there we go, the main types of corporate structures, who uses them and why.

Remember that setting up any kind of business is not something you should undertake lightly. It’s always worth speaking to someone in the know to ensure you’re getting it right – remembering always that you may well be able to change your structure in the future, but this may be a costly and time consuming exercise to undertake.

I hope you found Off Balance #19 useful. As always, I’d love to get your feedback and understand the sort of topics you would love to hear about.

Just hit reply to this mail or drop me a line at [email protected] and let me know ????

????And that’s a wrap for this edition of Off Balance – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish

???????? Hi friends!

It’s been a busy week for me, lots of calls as I get back into the swing of being back in London and building.

I did a live interview with Peter Walker, Carta’s Head of Insights yesterday evening where we took a deep dive into the data on the state of private markets driven by the 40,000 startups using Carta’s platform.

If you didn’t get a chance to join the live session, you can check it out here:

And I was also really excited to sit down with my good friend, and Head of Fuse – Allen & Overy’s legaltech incubator – Shruti Ajitsaria where, amdist a bunch of cheeky banter we talked about the future of the legal profession given the upsurge in legaltech, how her and her husband started angel investing by inviting founders over for a pizza and much more, check it out here:

But let’s get down to business, what are the things that have caught my eye in the tech and venture ecosystem this week?

We’re going to look at:

???? Open AI releases GPTs
✖️ X releases Grok – it’s answer to ChatGPT
???? Fred Destin takes a breather

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

If you like what I’m putting out, do give me a follow on LinkedIn, Twitter and Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Lowdown” and, more importantly, tell me why you’d like to connect ????????)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing – you can find links to these (and more including my Office Hours) right here!

Now let’s get into it.

The Lowdown

Open AI Launches GPTs
The big news taking up everyone’s attention this week is that Open AI, the business behind ChatGPT has launched GPTs which are a way of creating tailored versions of GPTs which you can use for much more specific use cases.

This is big news, (not necessarily good news) for lots of startups that have been building on Open AI over the last year or more as GPTs will allows pretty much anyone or any business to tailor their GPT to their use case whether that’s in legal, finance, marketing or something else altogether.

Not only that but they have also opened up their app store so that the best GPTs can be published there and participate in revenue share with Open AI.

The pace of change in the AI world has been incredible to watch over the last 24 months and this is a pretty big step change that everyone will be keeping an eye on.

X.AI’s Grok Enters the Arena
Sticking with the AI theme, Elon Musk this week released Grok, X’s answer to ChatGPT.

Supposedly modelled on The Hitchhiker’s Guide to the Universe, the LLM apparently has a much more jocular and cheeky way of communicating with users.

For someone that has also said that AI poses a massive threat to humanity, it’s interesting that Elon has released this tool – albeit in beta – and I wonder whether we’re about to see the sort of fanboi wars we used to see between hardcore Apple vs Samsung users at the peak of the smartphone market in the late noughties.

The stated aims of Grok are to:

Things are definitely going to start getting hot(ter) in the AI space, that’s for sure.

Fred Destin Takes a Break
In a pretty heartfelt post on LinkedIn, Fred Destin (founding partner of Stride.vc) announced to the world that they will be pausing and not pursuing raising a new fund – at least for the time being.

It’s an interesting moment for UK venture as Fred and Stride have become incredibly well known in the ecosystem, not least because Harry Stebbings partnered with him in Fund I, and Fred has had some great input and advice to founders over the years.

I don’t know Fred personally despite trying to get him on my podcast (don’t worry I’ll keep trying!) but this definitely felt like an inflection point both for him as well as the wider seed VC ecosystem in the UK.

We create narratives around the brands that have influenced and shaped the early stage startup landscape and Fred has done his fair share to create some of those very narratives.

In an environment where fundraising is hard whether you’re a VC or a startup, to hear of a well known investor such as Fred calling it quits (though maybe not forever) is quite jarring.

With that said, he and the remaining team at Stride will continue to deploy their second fund and to keep a weather eye on the startups already in the portfolio.

It will be interesting to see what comes next for him, but for me, it certainly feels a little bit like it’s the end of an era – I’m just not sure which one.

And finally, back to memes from our favourite meme master (coming off the back of a bit of a man flu, this made me lol)…

Men when they catch a cold

— Dr. Parik Patel, BA, CFA, ACCA Esq. (@ParikPatelCFA)
Nov 7, 2023

????And that’s a wrap for this edition of The Lowdown – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aaris10

???????? Hi friends!

Been a busy return to the UK since I got back from my break in the Maldives – from catching up with the team, getting ready for my first live show with Peter Walker (Head of Insights at Carta), to recording three back to back podcasts last week ⚡️ 

Here’s a sneak peek behind the scenes of what, I can assure you, is not the bridge of the Startship Enterprise ???? 

In this weeks Off Balance, I’ll be chatting about:

???? The grey world of fundraising brokerage
???? Financial modelling Part III

Check out this weeks Primer where I sit down with my old friend, Shruti Ajitsaria, Head of Fuse, Allen & Overy’s legal tech incubator where she tells me a bit about how she got to building Fuse, what it does and who it’s for ????????‍????

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

If you like what I’m putting out, do give me a follow on LinkedIn, Twitter and Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Off Balance” and, more importantly, tell me why you’d like to connect ????????)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing – you can find links to these (and more including my Office Hours) right here!

Now let’s get into it.

How can did I add value?

I had a chat with someone that had a couple of companies they were involved with that were looking to raise some external capital but didn’t feel like they had the experience or the network to make that happen.

They were essentially looking for a broker that would make a bunch of introductions with a contingent fee in either equity or cash post fundraise.

I have some quite strong feelings on this subject and won’t do ‘introductory / broker’ work which I explained in a fair amount of detail.

Here’s what you need to know:

Brokerage is a ‘grey area’
The FCA in the UK has rules around ‘promotion’, that is, the promotion for sale of financial products (of which equity is one) especially to retail investors. Now the case is often argued that most people investing in early stage businesses are sophisticated investors and should be aware of the risks of investing, but the reality is, if a deal goes south, the ‘broker’ could leave themselves open to issues down the track.

Skin in the Game
I run a team of CFOs that work with venture backed businesses. There is a level of trust that is placed in us as individuals as well as collectively. When we recommend a course of action, implicitly we are putting our name to that action. But in the introductory / brokerage game, you are typically not involved in the business in any kind of deep capacity (financially it would not make sense – see below). What this means is that you are creating reputational risk should things not work out and, as most of you will know, it takes decades to build a reputation and only seconds to demolish it.

Contingency is for suckers
One man’s opinion, but let’s say I get over these issues and spend time understanding the business, refining the model or deck, reaching out to investors, providing updates, following up and all the rest of activities entailed in raising investment. At that point, I’ve put in substantial time and effort into a business which is only going to pay me if I secure them investment. And, whilst the numbers may seem sexy, let’s break it down:

Standard fees in this space are 5%. So let’s say a business is raising $1m, that means you have the potential to earn $50k right? Well kinda.

Firstly, you only earn the $50k if you raise the whole $1m.

Secondly, it can take 6 months+ between starting a fundraise and cash hitting the bank.

Thirdly, only the founder can raise the money (I can make an intro, but it’s the founder that has to sell the opportunity) so I have no control over outcomes.

Fourthly, it’s unlikely that as a broker you raise the full amount, much more likely that you raise a portion of it – and here’s the kicker – it requires just as much time and effort to raise $200k as it does to raise $1m (often more)

Finally, there are enough stories in the market to suggest that it is not uncommon for these agreements to not be honoured.

Founders are the front line
When asked to assist in these situations my first question is why can’t the founder do it themselves? I mean, it’s kinda their job isn’t it?

And the reality is that investors get so much direct deal flow, when they see a broker in the arrangement (especially if they are VC investors) they are likely going to red flag it.

Because the reality is that great founders (and great businesses) get funded – so what does that leave.

Now don’t get me wrong, there may be some legitimate reasons the founder thinks they can’t raise (no access to networks of capital, don’t know how to approach term sheet negotiations) but these are solveable (i.e. just read this newsletter, use LinkedIn or other tools and start building a network).

More likely, it’s that the opportunity is just not interesting enough for people to sit up and want to invest. (As a side note, I get very frustrated when I see people trying to ‘engineer’ FOMO when raising a round – you can’t engineer it, it happens because your product / business / fundraise has momentum).

So, at this stage, I’ve no doubt you’re saying ‘this doesn’t sound particularly helpful Aarish, you’ve just told this person all the reasons why you won’t do it’, and you’d be right.

But I didn’t stop there.

I offered to speak to the founders, review what they’ve done and give them a bit of guidance (pro bono of course) on how they might want to move their fundraise forward.

After all, that’s why I set up my office hours, precisely to help founders like these struggling to figure out a way forward.

So no, I won’t be a broker. But I will try to be helpful. Always 🙂

Off Balance

So in Financial Modelling Parts I and II I gave you an overview into financial modelling it’s value and use to CFOs followed by the core components of a model, from inputs through to calculations and outputs.

Today I’m going to wrap up the topic with some of the best practices as well as common pitfalls I see with financial modelling as well as what’s happening in the software space right now and where I think that’s heading.

Building a Robust Financial Model: Best Practices

Start Simple

The biggest problem I see when people build a financial model is that they overcomplicate them right from the start.

The first thing to do when building one out is to focus on where the business is today, and to understand all the various elements of the business. I would normally do that on a discovery call with the founders and other key internal stakeholders in the business to figure out exactly what the business is, does and how it does it, namely:

Products
What is the product suite of the business? Are you selling one, two or three products? How are they priced? Are these going to change in any way in the period under consideration for the model you’re building?

Business Model
How does the business make money? Is it a SaaS business or a market place? Is it a mobile application or a services led business? Is it mass market or D2C? What, in short, is the business model?

Demand Generation
How does the business find customers? You will have a very different model if the company runs a B2B enterprise SaaS model than if they are a D2C eCommerce brand. Does the business rely on outbound sales activities or is it more reliant on digital acquisition marketing?

Lifetime Value
How long do those customers continue to buy? Is it a one off purchase followed by some repeat rate, or is it an ongoing service with some churn? Will there be the potential for up sell or cross sell of products / services and how does that profile tend to look?

Margin and Contribution
What are the costs associated with servicing that revenue? If it’s a D2C product business this will likely be the cost of purchasing the physical product whilst for a SaaS business this may include elements of hosting costs or client onboarding activities as well as ongoing customer success activities. There may well be delivery costs (of which customer success is one) or actual physical delivery of getting a product from warehouse to customer.

Staffing
Staff costs are important to understand in depth.

One of the biggest failures I see in models is under-assuming the level of staff required to deliver on the business’ objectives. For software businesses, it’s understanding how increases in engineering costs may impact efficiencies in either sales or efficiencies (and hence gross margins). For a physical goods business it may well be the operational staff required to receive, monitor and then deliver the product.

Of course there are other staff that are going to be necessary to deliver on the company’s objectives as well, whether they be finance teams, marketing teams or sales support teams.

Making sure that you neither under-assume who will be required nor over-assume the impact that they will have on growth is essential so understanding when to layer in growth in the team is essential.

One thing worth thinking through is what the additional payroll costs are, but also the costs of hiring new team members, as well as the cash flows that come from paying out wages followed by costs to state and central tax coffers.

Operating Costs
Other opex costs beyond staffing costs are critical; there are other big ticket items it’s always worth looking out for, things like rent which may need to increase as headcount increases (you will rarely pay the same amount on rent for a 10 person team as you do for a 30 person team), marketing costs (outside of direct acquisition) such as brand, content and online presence are often one of the largest ‘discretionary’ areas where cash is spent so it is critical to look at where that money is being spent.

For example, you may found that there are substantial travel costs in the business either as part of business development efforts, operational requirements or even attending conferences and other significant events.

Legal Costs
There are often more legal costs to the business than one would anticipate so understanding both operational as well as extraordinary legal costs is important. For example, there may well be costs associated with fundraising that can be quite substantial, so understanding when these are likely to flow can have a large impact on the overall cash profile of the business.

Debt
If the business has debt, then modelling in repayments of principal as well as interest costs is incredibly important.

Most early stage businesses won’t have these considerations, however as a business scales, the likelihood of having some debt in the capital profile grows and will have substantial impact on the cash flows of the business so it’s worth understanding what plans there are to raise external debt.

Even in smaller businesses today you will find some working capital facilities in place which will impact how the the business is funded as well as the cash profile.

And speaking of working capital, it’s also useful to understand the sort of terms a company works on with both debtors (customers owing money) and creditors (service or product providers to the business to whom you owe money). If you are paying creditors within 30 days but only collecting debts within 45 days, you will have a working capital gap that needs to be modelled in.

The point here is that before you even open your spreadsheet, you will need to know and understand the business in a great deal of detail to be able to model it well. So whilst I’m advocating to start simple, the detail you will need to get into is quite complex.

Use Consistent Assumptions

Once you have gathered information, you need to start thinking through how to build these into assumptions that will then drive the rest of the model.

I always try to break things down into constituent parts and build out the model in a consistent way. This means not changing the way revenue is booked half way through the model (or if you need to, creating a separate revenue calculation for it).

If your model contains inconsistencies, it will be harder for users to ‘audit’ the model and the potential to allow errors to creep in increases with the more complexity you try to build in.

It’s worth using the same periods for each driver in your assumptions so that you’re always changing everything on a monthly or a quarterly basis rather than trying to build revenue on a monthly basis whilst you’re modelling out opex on an annual basis.

The other point here is that however you build your assumptions out should be consistent with how you report your numbers already (assuming you have numbers to report).

For example, you want to be able to look at why your actual performance varies from what you have modelled and if you have not been consistent throughout, you will run into issues in analysis.

Sensitivity Analysis

Wherever possible, you want to build in multiple scenarios into the model so that assumptions can be viewed in a best case / worst case manner. Not only this, but you may want to include things like breakeven analysis (at what level of revenue you are able to cover your costs). Though, admittedly, this is less critical in an early stage business.

The point is always that financial modelling is not an exact science and neither is building a business.

The likelihood that you don’t hit numbers can be quite substantial and so you want to understand what happens when you fall short (or for that matter when you exceed them) as this will impact the range of investment you might look for or indeed how quickly you might hire additional team members.

Regular Updates

At early stages financial models should be dynamic, updated regularly to reflect new data and changing circumstances. They should be reviewed and ‘rolled’ on a regular (at least quarterly) basis to take into account what has changed in the business since the last time the model was reviewed.

This is particularly important in early stage businesses where the things can move quite fast.

In an enterprise SaaS business, just having one client delay by a few months could leave a substantial 6 figure gap in your cash flow which you will need to figure out how to plug. In a D2C business, if you assume a repeat rate of 50% but this actually turns out to be 30%, you could similarly see a substantial hole in your numbers.

The point is that if you are using your model the way it should be, it can provide a really useful map to help you navigate your business as it grows. The more information you capture up front whilst leaving room for adjustment in the future, the more value you will get from it.

Common Pitfalls and How to Avoid Them

Over-Complexity

Whilst a business will likely be complex, it is not wise to transfer that complexity into your model. By this I mean that you cannot replicate the business fully and neither should you try. People often think that it is the complexity of the model that signals its usefulness, instead it is the quality of the output and the ease of adjustability.

While detail is crucial, an overly complex model can be hard to understand and maintain and, in my experience just leads to multiple rounds of rebuilds over time. KISS is your friend (Keep it Smart and Simple).

Static Modelling

A model is not a one off output that should be built, circulated and then left in someone’s inbox.

It should be updated and maintained on a regular basis as I have already argued. Not updating the model regularly can lead to outdated and irrelevant insights.

Tangentially, it is important to avoid hard coding figures into the model. The value is in the ability to test the assumptions, so each element of the Income Statement, Cash Flow and the Balance Sheet should all be traceable back to the assumptions you have made as opposed to being a number that someone has ‘decided’ to enter and hard code for a reason that may have made sense to them, but is unlikely to make sense for anyone else.

Over-Optimism

We’ve all seen the hockey stick models showing revenues climbing from $1m to $100m over a couple of years.

Reality is rarely that good, and all these sorts of models tend to show is naivety in the person building it or signing it off.

Does this mean you shouldn’t be ambitious?

Of course not, especially if the model’s primary purpose is to raise investment you need to show an achievable path to scale. However the point here is to avoid overly optimistic projections that lack a testable and provable grounding in reality.

The Role of Technology in Financial Modelling

Modern Software Solutions

For many finance pros, Excel, and latterly, Google Sheets have been the main tools used in modelling. However with the growth in platforms offering modelling capabilities, I think we’ll see a portion of financial modelling moving over to some of these products.

However, as I have already explained, every business is unique and uniquely complex.

The problem with many of these platforms is that they have been built to abstract away complexity which means that you are unable to achieve the sort of flexibility you can achieve in a spreadsheet.

Conversely, spreadsheets are limited by the users ability to build out formulaic relationships between different dimensions in their assumptions. Productised modelling tools are far more able to cope with these types of complexity.

What I typically see is that for businesses over a certain size with strong FP&A (financial planning and analysis) teams and requirements, these tools are starting to be used more frequently.

One of the reasons they tend to be used in these sorts of businesses is also because they carry a relatively significant cost that most earlier stage businesses cannot support.

Check out my conversation with Julio Martinez, Co-Founder and CEO of Abacum where we explore this in more detail.

 Automation and AI

The explosion of generative AI has led to a lot of companies scrambling to build predictive modelling tools, these tend to be quite expensive and niche however as the cost of building continues to fall, it’s likely we’ll see some really interesting things in this space.

With that said, currently I would say that it is tools that allow you to extract, clean and use data from various systems (accounting platforms, ERPs, CRMs, payment providers, open banking and more) that are providing a lot of value to people focussed on financial modelling – at least in those businesses that have the data to feed into their assumptions.

And that’s it (for now) on financial modelling.

Remember, modelling is not a static. As businesses evolve, so do the tools and methodologies that CFOs like me and my team employ.

Staying updated, embracing technology, and continuous learning are the keys to leveraging financial modelling to its fullest potential.

And if you’re feeling a little like this????️? Just give me a shout ???? 

I hope you found Off Balance #18 useful. As always, I’d love to get your feedback and understand the sort of topics you would love to hear about.

Just hit reply to this mail or drop me a line at [email protected] and let me know ????

????And that’s a wrap for this edition of Off Balance – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish

???????? Hi friends!

Back in bleary London after a wonderful trip to the Maldives with my better half and quite a lot seems to have been happening in the world of tech and venture.

So here’s this Friday’s Lowdown to give you a taste of what’s caught my eye this last week.

We’re going to look at:

???? WeWork looks like they’re WeDone
???? Carta’s State of Private Markets report for Q3 2023
???? UK hosts AI Safety Summit

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

If you like what I’m putting out, do give me a follow on LinkedIn, Twitter and Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Lowdown” and, more importantly, tell me why you’d like to connect ????????)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing – you can find links to these (and more including my Office Hours) right here!

Now let’s get into it.

The Lowdown

WeWork is WeDone
A couple of days ago news broke that storied scaleup WeWork may be filing for bankruptcy protection as early as next week.

From it’s $47bn valuation some years ago, it’s aborted attempt to IPO (community adjusted EBITDA anyone?), Adam Neumann’s departure, debt restructuring to this latest news, one cannot help but think that WeWork’s journey is one for the text books.

It is also a strong case study in why business models matter and how, if you aren’t a software business, it does not pay to pretend you are one (at least from a valuation perspective).

But whilst WeWork may be in its final death throes, Adam Neumann certainly rose as a phoenix does from the flames, securing $350m in funding from Andreessen Horrowitz last year.

I’ve said it before, and I’ll say it again – don’t be surprised if there are more large scale closures over the coming months. The markets are still unsettled and lots of businesses simply haven’t been able to hit the milestones they needed to in order to survive.

Carta’s State of Private Markets Report Q3 2023
Next week, I’ll be doing a live YouTube interview with Peter Walker, Carta’s Head of Insights – I’ll circulate details as to how to access closer to the time.

We’ll be talking through some of the key findings from their Q3 report on the state of private markets.

Here are some of the key takeaways:

The downturn has continued into Q3 2023 and startups on Carta saw a 38% decrease in capital raised from Q2 to Q3, and the number of venture fundraising rounds fell by 27%.

But despite the downturn, the median pre-money valuation in venture deals increased at nearly every stage, suggesting that founders are retaining more ownership when raising new cash (i.e. less dilution).

Investor-friendly deal terms such as liquidation preferences and cumulative dividends also saw a sharp decline in Q3 and early-stage valuations, particularly at the seed and Series A stages, have risen for the second consecutive quarter.

Startups are having to ensure that they have sufficient fuel in the tank between rounds as it is taking longer to move from one round to another however, deal count and capital raised are expected to increase as more transactions from Q3 are reported.

The number of Series A rounds fell significantly, indicating a gap in the market for startups seeking to raise their next round.

Late-stage venture activity has declined, mirroring a major decrease in the IPO market.

So it would seem that there is relatively mixed news coming out.

On the one hand, the number of deals and dollars invested have decreased, but on the other, Carta is reporting less predatory deal terms.

This suggests that we are indeed seeing (potentially) a reversion to quality as only the strongest of businesses get funded.

Check out the report here and, of course, tune in to hear what Peter has to say next week.

UK Hosts an AI Summit
There has been a lot of talk (especially on Twitter) about whether or not regulation of AI is a good thing.

This week the UK took on the reins by hosting its first AI Safety Summit to start discussing and potentially tackling some of the (perceived or actual) challenges countries, businesses and people are likely to face as AI continues to change the way we live and work.

UK Prime Minister Rishi Sunak emphasised the “responsibility” of world leaders to address the dangers of artificial intelligence.

While acknowledging AI’s potential for “transformative” change, he also pointed out the risks of social harms such as bias and disinformation.

The summit, attended by 28 countries, tech leaders, and academics, resulted in the Bletchley Declaration—a joint statement calling for global cooperation to tackle AI risks.

This declaration, signed by countries including the US and China, as well as the European Union, advocates for AI development that is “human-centric, trustworthy and responsible.”

The summit’s focus is on mitigating AI risks, including privacy breaches and job displacement, while maximising benefits. Sunak highlighted AI’s potential to enhance economies and societies but also cautioned against new dangers it brings.

The UK’s initiative comes alongside significant moves by the US, including Vice-President Kamala Harris’s announcement of the US AI Safety Institute and President Joe Biden’s executive order to ensure America’s leadership in AI.

Despite concerns about the absence of some key leaders and the inclusion of China amid tense relations, the summit has been hailed as a “diplomatic coup” for the UK.

Whatever your feelings on regulation, the fact that this event took place is a strong signal that nation states are both enthusiastic as well as concerned about where AI is heading.

I have no doubt we’ll be seeing more of these events as technology continues to progress.

And finally, back to memes from our favourite meme master…

The tinder bio vs real life

— Dr. Parik Patel, BA, CFA, ACCA Esq. (@ParikPatelCFA)
Oct 30, 2023

????And that’s a wrap for this edition of The Lowdown – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish