Call ahead to the summit, but climb the mountain
Gil Dibner

Startup CEOs (and VCs who love them) are operating in a very tough environment right now. For VCs deploying capital, there has never been a better time, but for founders that are already funded and working to get to the next milestone, things are tough. What makes this period particularly challenging, I think, is that the bar for the next financing round is rising very rapidly.

Beyond burn rate. As has been written and argued in many other places, the best secret weapon these days is a low burn rate. Nearly every company I talk to is considering some sort of hiring freeze or reduction in force. I know very few CEOs who would not take additional capital right now at the price of their previous round. But beyond the obvious (lengthen runway by cutting burn and raising more capital), how can founders respond to this much more challenging financing environment?

Focused milestones. One pattern I’ve seen recently across a number of companies is a dramatically sharpened focus on defining the right milestones for the next round and a narrowing of activities that do not contribute to proving those milestones. This makes sense. If survival depends on financing (and, let’s face it, for any loss-making business, it does), then survival depends on convincing potential funders to finance a business by achieving results that will convince them to invest.

PLG companies face a tough choice. For a lot of PLG companies, the need to focus on a narrower set of milestones forces them to make a very difficult choice: PLG companies traditionally pursue a two pronged approach. They (1) chase top-down leads with large accounts for strategic reasons at the same time as they (2) try to build a scalable repeatable bottom-up self-service PLG funnel. This is very challenging, and very few companies can pull it off. But in the previous era of easy capital, companies didn’t have much reason not to try. They could convince themselves that they could raise enough capital to attempt both challenges simultaneously and at an early stage. Today, that is no longer the case. PLG companies today need to make very tough and decisive decisions around which GTM motions to pursue in order to hit the milestones necessary to get their next round done.

PLG now or PLG later? There are two types of early-stage PLG companies: (1) PLG Now and (2) PLG Later. (1) PLG Now companies are companies that can demonstrate meaningful repeatable bottom-up adoption from the earliest days. Many open-source companies are good examples of this. (2) PLG Later companies are companies that will one day be mostly (or significantly) PLG, but for any of a variety of reasons choose to delay the launch of the PLG activities to focus on top-down in the early stages. There are, also, of course traditional top-down software companies that should not really rely on PLG at any point in their growth (“PLG Never”).

Is PLG Later a thing? In my view yes. If a company is clearly planning for PLG as a big part of their growth story, but for whatever reason is choosing to delay that and focus on something else — then it is a PLG Later company. The most common reason to do this is simply because getting PLG right is so hard. There are many companies that believe that some other proof point (technical breakthrough, very high ACV, etc.) is the right milestone to focus on and, thus, they elect to postpone the PLG phase of their operations. For highly technical companies, this can sometimes happen because the founding team does not have a PLG skillset and can not yet hire the right people. It can also happen, for example, when the self-serve MVP is so much more complex than the top-down MVP that it makes sense to start top-down.

Know your PLG type. It’s critical that founders develop conviction as early as possible as to which type of PLG their company is: PLG Now, PLG Later, or PLG Never. Getting this wrong can be disastrous because it can lead founders to waste precious capital and time on the wrong GTM and/or the right GTM at the wrong time. It can also lead founders to confuse investors by focusing them on the wrong type of metrics or milestones which can totally derail a fundraising. In today’s constrained fundraising environment, it’s more critical than ever to get this right.

If you are PLG Never, do not waste any time on PLG-style activities or product features. You just don’t have the resources to burn on anything extraneous. It doesn’t matter how fashionable the PLG GTM is, if it’s wrong for your business, don’t attempt it.

If you are PLG Later, stay focused on top-down. If you have good reasons for being PLG Later (but not PLG Now), it’s important to avoid the temptation of attempting PLG Now. Legit reasons for PLG Later can be (1) securing essential technology or product design partners, (2) securing essential reference customers to help you break into an industry, (3) proving the ROI on key parts of the product instead of focusing on building a complex self-service flow, (4) securing early validation of ROI/pricing, or (5) generating meaningful revenue from early large customers. If this is the gameplan, running a PLG strategy too early can be distracting at best or devastating at worst. For example, throwing open the doors on a GA (or “open beta”) for a product that is not really ready for self-service adoption when your engineering team is busy responding to integrations requests and bug squashing to serve your first three large accounts is a fool’s errand. Stay focused.

If you are PLG Now, go all-in on PLG Now. This one, for me, has been the real kicker recently — and it can be the hardest advice to give and to take. Many companies have good reason to be PLG now — and, if so, that is the investment thesis for the next round. For these companies, if they can not prove the beginning of the PLG bottom-up GTM, the next round is not happening. The critical point here is that for these companies it does not matter how many “successful” top-down deployments you have. You’ve set it up that you’ll get judged on bottom-up GTM metrics — and you will. If you really are a PLG Now company, PLG is the hill you are going to die on and top-down success will not save you. That’s the harsh lesson I am re-learning in this climate. Founders of PLG Now companies are often tempted to focus on top-down stuff because they have more control of it. But next-round VCs are not going to be moved by this. I’ve seen this play out again and again, and that’s the reality.

Some nuances for PLG Now founders. PLG Now founders need to accept that they will have to prove bottoms-up success in some form in order to raise the next round. (If you can not accept this, then you are PLG Later.) Consequently, PLG Now founders must invest in things like content strategy, landing pages, social media, onboarding, pricing pages, engagement metrics, etc. Key metrics can be things like engagement rates, conversion rates, referral rates, increased usage within a logo, etc. Revenue is not necessarily critical for PLG Now companies (hence, closing top-down dollars is often of little value). However, PLG Now founders will still find themselves talking to customers in what feels a lot like a top-down motion. The trick is to not get confused. Don’t automatically turn those top-down conversations into top-down sales with the goal of proving you can generate revenue. Instead, use them to learn more about how to get your bottom-up machine working well, how to iron out product/tech problems, and how big your ACV could be if all goes well. Resist the temptation to sleepwalk into a PLG Later mindset if you need to remain PLG Now. For most very early-stage teams, these top-down relationships to C-level executives at your larger target accounts should be thought of as side project commando missions, not the main event. If any of them turn into big dollars or reference accounts, that’s helpful, but it’s not necessarily critical to a corporate objective. If a business is really PLG Now, it can only truly “succeed” through bottoms-up activity — and in today’s constrained environment, focus is critical.

Climb the mountain. As they climb the mountain towards the next financing round, PLG Now founders should be in constant communication with the “summit” by having conversations with as many C-level and senior executives as possible. But there is no substitute for building some real life PLG proofpoints. If your claim is that you are a mountain climber, climb the mountain one painful step at a time. What I see a lot of founders doing today is the equivalent of saying: “This climb is difficult, so I’m going to take a helicopter straight to the top of Mt. Everest!” That might prove you can breathe at altitude, but it doesn’t prove anything about your mountain climbing ability. Similarly. If you are a PLG Now company, landing a major account or reference customer probably will not make much of a dent in your next round fundraising process. Call the summit as much as you want, but keep climbing step by step. The right investor will value the hard work of building a PLG bottom-up business and — with a little luck — fund the next leg of the climb.

EVENTS

Sep 7 / The Evolution of Collibra’s Product Positioning & How They Created a Category
Stan Christiaens, Co-Founder & Chief Data Citizen, Collibra

Sep 21 / Lessons Learned From Investing Early in Over a Dozen SaaS Unicorns Including Salesforce, SuccessFactors, Box, Gusto, SalesLoft, ServiceMax, Veeva, Bill.com, Doximity, Yammer and Zoom Among Others
Jason Green, Founder & General Partner, Emergence Capital

FROM THE BLOG

For Early-Stage Venture, It’s Go Time
Don’t tell anyone, but this is the best venture market in years.

The Right Stuff
How to build a commercial team.

Mapping the New World of Business Collaboration
Why we invested in Reco.

What do a 2003 BMW and Microsoft Excel have in Common?
Leaving users feeling empowered and energized, rather than managed and disconnected.

EUROPE & ISRAEL FUNDING NEWS

Denmark/Climate Materials. SecondCircle raised $45M for its It carbon capture technology. It captures CO2 from industrial emitters at the point of emission using “synthetic biology” to develop biocatalysts (bacteria). These then convert the carbon dioxide into chemical compounds that are sold back to industry.
Denmark/SME Financial. Ageras closed $45M for its financial marketplace platform and integrates its solutions into a single cockpit for invoicing, accounting, payroll, and banking.
Israel/Retail Systems. Shopic closed $35M for its smart cart self-checkout solution for businesses. It features clip-on touchscreen hardware for shopping carts that identify items to display promotions while acting as a self-service checkout window.

WORTH READING

ENTERPRISE/TECH NEWS

Why AlphaFold won’t revolutionize drug discovery. Derek Lowe at ChemistryWorld has a more muted opinion on AlphaFold and its potential impact on drug discovery. “Drugs fail in the clinic because we have picked the wrong targets or because they do other things that we never anticipated. Protein structure by itself does nothing to mitigate either of those risks”.

Cloud 100. The seventh annual Cloud 100 list of the world’s top private cloud companies recognizes standouts in tech’s hottest category, from small startups to private-equity-backed giants. This year’s group is bigger and maturer than ever before — with a combined market cap more than $100B greater than 2021. Stripe, Databricks and Canva return as the top 3 — but there’s a surprise at №4.

Can you copyright your NFT? Michael D. Murray of the University of Kentucky has written a paper exploring the issue. The short answer is, ‘it depends’. “Why does generative art fail in the copyrightability analysis? As discussed below, it is because the work might lack a human author. And at present, the U.S. Copyright Office says that a non-human origin and creation narrative disqualifies the art from copyright protection.”

HOW TO STARTUP

First GTM Hire. OpenView has a great discussion on the hard choice of who to hire first in your GTM team. “For an early PLG business, I could make the case for two potential first hires:

GTM lead (sales): A Jack/Jill of all trades working with customers across sales, customer success, and support. They become the customer advocate for the product org and are looking for ways to “replace themselves” by putting what they learn into videos, FAQs, guides, and etc. Ideally they have four to 10 years of experience in different roles, starting as an individual contributor.

Growth marketer (marketing): PLG companies need to find scalable ways of reaching users, ideally through referrals, viral loops, and organic discovery. Without enough users, it’s impossible to collect consistent product data or run meaningful experiments. This person has a strong grasp of the product as well as the target user, and can use that knowledge to generate an initial pipeline of prospective users.”

Funding doesn’t equal success. It is important to remember as Tanay Jaipuria, PM at Instagram, points out in his tweet. “Calendly got to $70M in ARR on just a $550K seed round. Super impressive!”

HOW TO VENTURE

Bridge loans. With the frequency increasing in today’s fundraising market, Fred Wilson, the founder and partner of Union Square Ventures, shares his lessons learned on bridge loans. “First, bridge loans are a bridge to something else. Most commonly they are a bridge to a round of financing with new investors (outsiders). They can also be a bridge to the sale of the company. Occasionally, but not often, they can be a bridge to getting cash flow positive. If none of those things is going to happen in a relatively short period of time, then it is a bridge to nowhere and you really want to avoid that. A bridge to another bridge is never a good thing and should be avoided at all costs.

Here is how I like to structure a bridge:

• All material existing investors should participate, ideally “pro-rata”, meaning the investors participate based on their respective ownership interests. When you have an existing investor that owns a large percentage of the business and they won’t or can’t participate, you have a problem. You can get a bridge done in these circumstances but it will be painful because nobody likes to “carry” a large existing investor who can’t support the business.

• The ideal structure is a convertible note, with nominal interest, and a discount upon conversion into the next round of financing.

• I like the discounts to be based on the amount of time the bridge note is outstanding. This creates an incentive to get the round done quickly, which is what everyone wants in this situation. It is also easier to explain the discount to the new investors in the next round when the discount is small if the bridge has not been outstanding for long. And it is understandable if the discount is larger when the bridge has been outstanding for a longer time period.

• I like to start with a 5% discount and cap the discount at 25%. The ideal discount is between 10% and 20% and so the time frame for the various discounts should be set with that in mind.

• A very important consideration in structuring a bridge loan is what happens if the company is sold when the note is outstanding. If the bridge documents do not specify anything in this situation, the noteholders will only get their money back, plus interest, in a sale. That is not really appropriate given that they are providing the capital to get the company to a sale, and so I like a premium to be paid in the event of a sale. I like somewhere between 2x and 3x depending on the circumstances.”

PORTFOLIO NEWS

Candu’s CEO, Jonathan Anderson, led a Startup Breakout session on the main stage at Collision Conference where he spoke about building meaningful in-product customer experiences without code.

Forter was named to the 2022 Forbes Cloud 100.

Front was also named to the 2022 Forbes Cloud 100 and their CEO, Mathilde Collin, was featured as one of the only eight women who led companies on the list.