A Conversation with London Business School about its Forward Partners case study

Gary Dushnitsky is an Associate Professor at London Business School and recently wrote a case study examining how Forward Partners’ unique approach is helping entrepreneurs succeed. We spoke with him at the launch about the trends he has seen with startups, and where he expects things to go next.

What are the big trends you have seen in investment and startups in the last 5 years?

There are a couple.

Fundamentally we see a dramatic drop in the cost of starting up. People have been talking about this for the last 3-5 years but it has been affecting the entrepreneurial landscape for about 20 years.

What used to take £5M to rent servers, offices, employees now costs £500k with AWS and distributed workers.

And this affects both entrepreneurs and investors. It allows much more experimentation. 20 years ago, the main thrust of my class was business planning. Because you needed to do a lot of analysis before you raise and commit £5M.

But then we started teaching lean startup. Within that, you much more closely accept that the unknowns are greater than the knowns. And you embrace experimentation.

That actually means more people of different backgrounds can get involved too. Solo founders can get involved. Some may bring a deep domain hypothesis, even if they don’t have all pieces of the puzzle -- the tech side, the marketing side, and everything else.

You can immediately see how this translates to the current world of investment.

The truism of diversification carries through. But if you want 10-15 companies in your portfolio, at 5 million a pop, you needed at bigger fund. At 500k a pop, you need a smaller fund.

So you see more seed, more angels playing into the VC realm.

More excitingly, you also see that what’s missing isn’t just capital but the support.

If a person who is a domain expert comes up with a hypothesis but lacks technical knowhow, it would be a shame to leave money on the table by sending them on their way.

Where investors have lived up to this opportunity is creating these platforms and Applied VC techniques that recognise it properly.

What are the current challenges for investment and entrepreneurship from your perspective?

A major factor is that there is often only one “number one” position in some markets. So whether you have a hundred, a thousand or a million people going into entrepreneurship, there can only be one winner. That means competition becomes more intense.

So the democratisation of entrepreneurship also implies you need to stand above the noise. Your test is not with a placebo, it’s with the other competing founders who are increasingly out there.

The skills and capabilities these entrepreneurs need are not just about creating the platform but the strategy to leverage it. And equally, the type of support and nature of capabilities that are needed to overcome this “Red Queen” effect are much greater.

Related to that, investors start reaching entrepreneurs earlier and earlier. 20-25 years ago, top VCs sat in their office and waited for best deals to come to them. But today you might embed yourself where startups exist.

And other investors are at those events as well. So maybe you go to the students. Maybe you create vehicles to solicit solo entrepreneurs before they have formed the team.

One challenge is managing the dealflow and finding proprietary quality dealflow. It used to be traditionally through relationships but I think we are also seeing it move toward AI-based and an increasing reliance on data.

The second observation is about managing the economics. If you put 500k into a relatively low valuation business, and you know multiple rounds will take place, you need to think more meaningfully about the steps that come next.

Do you use a side pot for follow on? How do you manage the process with discipline?

We are seeing a lot of experimentation with how investors are treating these relationships that include greater longevity.

You have written about entrepreneurial optimism, talk to me about what you found here.

We recognise that what is optimal and what is actually done are two separate things.

Many studies show humans in general tend to be over-optimistic. There was a sociology study in North America, where the majority of the people said they are in the top 20% in height. Which is obviously unlikely.

This confidence tends to be particularly common in entrepreneurs. Inevitably there’s are others who identify an interesting opportunity but are more cautious and so don’t pursue it.

Because of the way people select into entrepreneurship, the share of optimism is particularly high.

Not to say they are all optimists (or beyond redemption) but there’s a pattern in this process that implies they are optimistic.

Part of this is taken care of with what we talked about earlier. Now that it’s easier to get further faster, more entrepreneurs try out an idea with wireframes and prototypes, find it doesn’t work and move on.

That being said, there are many trials and trepidations on the journey. And persistence is a big element -- we know the word of the day is determination. So many persist where others may say they shouldn’t have.

In academia, they have shown the average entrepreneur earns less money than the average employee. So they say all things being equal, you will end up closer to the average, and it’s not profit-maximising.

The question also becomes: what should an investor do in this environment?

Should they walk away? Say they don’t want to give their money to a daydreamer? Or should they bite the bullet, invest in just anyone and hope it will work out well.

We have heard of that in “spray and pray” -- giving 50k to any Stanford grad with an idea. If you are only giving it to these grads, you’re building in some quality control, especially if they got in and chose to leave.

Then you have the bulk of investors trying to work out how to do better. And we see various ways. One is bringing in experimentation. So give entrepreneurs the structures, rigour and experience of how to use systems properly for experimentation.

They are doing this both for themselves as investors and for the entrepreneurs. If I give you a pile of bicycles and tell you to learn to ride, you’ll probably get there eventually with a lot of crashing. But if I give you a tutor, it will be less painful.

The other method is to try and be clear about which are failing because they are lack the toolkit, and which would fail regardless of support.

We know you have been working on a case study about how Forward Partners approach works, what did you find?
I have seen how it brings more rigour to investment discipline. It brings the support, the scaleup, the growth mentality.

You can hear how the trends we discussed above suggest there was a gap for an investor to target early stage, but bring support at the scale and dimensions that any single VC or Angel cannot.

There are many highly experienced people but their ability to give intense support on multiple dimensions with hands on application is unlikely.

You need to put a system in place.

Where the conversation becomes more complex is that people might not fully understand when and how such an applied VC is most valuable for them.

In analogy, if you buy a new camera, you might focus on one or two statistics. How many megapixels does it have? Is it 5/10/12?

But it’s actually irrelevant after a certain point -- after a threshold, it’s about more technical concepts like the size of the lens, aperture, and other details. Yet humans tend to focus on one.

In the case of entrepreneurs, it understandably often comes down to valuation.

The younger they are, and especially on their first business, this becomes the core thing. And in focusing on that, they might miss what’s important: it’s not the valuation *today*, it’s the likelihood of success and your equity stake later down the line.

We did the case study because I want to make sure my students fully understand that balance and trade off.

In the case of <Forward Partners portfolio company> Patch, the support and speed and advice offered meant it was worthwhile going with a lower valuation, because of the higher likelihood of success.

That nuance is the learning point I want people to take away.

Gary Dushnitsky is Associate Professor of Strategy and Entrepreneurship at London Business School.

About me: Chris previously founded data science platform growthsquared.io, enabling e-commerce businesses to apply advanced analytics to their data. Before that, as Head of Analytics at Swoon Editions, he championed the "zero stock, zero lead time” model in online furniture retail. He has a PhD in organisational economics from Imperial College London, where he worked with the Grantham Institute to incentivise institutional investment into renewable energy infrastructure.   

He also worked part-time on the London Stock Exchange ELITE programme, supporting UK scale-ups - including brands such as Skyscanner, graze.com, Vision Direct and MedicAnimal - with the exciting nightmare of rapid growth. He has coached early stage tech entrepreneurs and deep science spinouts from Imperial College, and produced a series of case studies on common startup challenges. 

What Chris loves about FP: "Working with super bright people who are passionate about creating value for entrepreneurs, consumers and society."

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