What did we learn from 2018 Office Hours?
In 2018, we had an average of 140 applications per month. Given that we held 10 sessions over the year with 20 slots each, that’s a 12% acceptance rate. From those 200 startups we met, we made two investments, giving each successful applicant a 1% probability of fundraising success. In this post, we collate some interesting trends, useful tips and exciting changes for 2019 to kick off our Office Hours programme with a bang!
Office Hours startups continue to face challenges around “funding-market fit” and achieving product differentiation, particularly in crowded sectors.
Changes to our dealflow tech stack in 2019 will provide greater clarity on why founder applications were not successful to help them iterate and improve their ideas.
Founders are still not maximising their chances of funding success by concentrating their fundraising efforts consistently in Q2 and Q4.
SaaS and marketplace startups are highly indexed in overall applications, Applied AI is on the up whilst e-commerce is in decline.
Founders seeking ‘funding-market fit’ and credibility in crowded markets
While 5 out of our total 50 investments have come from our Office Hours programme, the majority of opportunities lost last year were due to the following reasons:
The top three loss reasons of 2018 were:
Market not venture scale (28%);
No clear user case (27%) and
Undifferentiated offering (27%).
The first point relates to “funding-market fit”, specifically sectors or segments that are not capable of generating the large-scale outcomes expected by VCs.
Indeed some (if not, most) business models don't have the 100-200% or so year on year growth that VCs expect. That's fine. However there's a lot of mindshare from VCs and founders should think about what is the right option for them.
It’s worth noting the likes of Indie.vc talk about alternative fundraising models. At the start of 2019, we are also seeing similar articles suggesting more startup founders are saying no to VC investment.
Rather than this being the start of a “#notoo” movement in venture capital, it’s more like savvy founders self-selecting themselves out of an incompatible growth trajectory.
Giving founders greater clarity on the reasons why we passed
Those founders who were unsuccessful will be familiar with the stock response...
“We had a look at X and I'm afraid it's not one for us at present. Whilst we can't offer individual feedback, here are the most common reasons why proposals don't make it to the next stage…”
We thought about our goals for 2019 and the role of The Path Forward in helping founders on their journey. So we decided to do better… we came up a more specific set of loss reasons and implemented a tech solution that provides nearly 3,000 annual inbound leads with some personalised closure on why we passed.
It goes something like...
While there are a number of factors that inform our decision for passing, the main reason in this case was concern over…
… and here’s a quick run-down of our loss reasons, including links to Path Forward articles that can help you understand them (those with * are more relevant at seed stage):
Market size (we passed because the addressable market you are targeting is not venture scale i.e. £1bn+ in the UK alone)
Go-to-market strategy (we passed because there are insurmountable barriers or potential frictions to do with getting your product in the hands of customers)
Competition (we passed because there is no shortage of well-funded, well-established competitors attacking the same space with a similar or identical proposition)
Product vision (we passed because your product vision is unclear, hasn’t been adequately tested or doesn’t meet the perceived needs and wants of customers)
Technology risk (we passed because the technology is not yet developed, is hard to develop or unproven that it can actually work)
The sector being off strategy (we passed because we only invest in ecommerce, marketplace and applied AI startups)
Stage of the business (we passed because the business is too late stage. We only invest in pre-seed and seed stage startups)
*Business momentum (we passed because the business looks to have plateaued or not demonstrated a month-on-month increase in growth metrics, product development or customer engagement)
*Traction (we like the idea but the overall proposition is too risky without seeing some initial signs of traction or leading indicators of customer demand)
*Gaps in the team (we like the business but the team lacks the right people and skills that bring either product, market or tech expertise to bear)
Conflict of interest (we passed because we have a similar investment in our portfolio and therefore it wouldn’t make sense to invest)
HQ outside of the UK (we passed because we only invest in UK registered startups where the team are living and based here too)
Understanding the reasons why VCs pass can be insightful, both for founders and investors -- as suggested by this great post by The Frontline Ventures team.
Hence our promise for 2019 is that our investors will provide more specific feedback to help founders improve their pitch and tailor their offering.
Our door is always open.
Founders are still not maximising their chances of seasonal success
As is the case each year, after a relatively quiet summer, we had a busy Q4 signing term sheets and closing deals.
Given that founders applying in August or September could nearly double their probability of being accepted into Office Hours, it is clear that founders are still not maximising their chances for success.
This year we are keen to bust the startup myth that VCs all go on holiday over the summer, and buck seasonality trends for Office Hours -- so why not make the most of the time everyone else is missing?
Making each application better than the last
We appreciate it’s difficult to get everything you want to say about your startup in a simple Typeform. Founders can also waste a lot of time and effort by second-guessing the right thing to say for each question.
To ameliorate this, we also put together a short guide on how to write better applications.