Team, Growth and Efficiency: Lessons from First Round Capital’s State of Startups Report

First Round Capital is one of the best, if not the best, seed-stage venture capital investment firm in the world.  First Round was an early investor in many notable exits including, OnDeck and Square, and is currently invested in a handful of so-called unicorns such as Uber, Blue Apron and Warby Parker.    

Where First Round differentiates from the rest of the VC pack is by investing in its platform.  A typical venture capital firm might have a few partners and a handful of junior associates, with each teammate responsible for monitoring and helping the 5-10 companies that they “own.”  With 6 investors and 25 staff running platform, operations, finance and administration, First Round takes a different approach.  First Round formalized the support that its portfolio companies can access, from shared resources, to institutional knowledge, to other private community building events.  First Round’s “platform” approach is responsible for many events, conferences and other programs every year, as well as innovations like Dorm Room Fund and, of course, their annual holiday video

First Round Capital is one of the thought leaders in the startup and VC landscape.  Through its newsletter First Round Review (subscribe here- it’s great), they spread the knowledge, experience and lessons that successful founders, operators and advisors have shared with them.

Last month, First Round published a report called State of Startups, an in depth survey of over 500 venture-backed startup founders and CEOs.  Only 25% of the companies surveyed were part of the First Round community, so this report provides “an in-depth snapshot of what founders across the entire ecosystem are thinking and doing, what they're excited about and worried about, and how they're seeing the market — things that could very well change dramatically over the next several years.” 

Findings in three areas really jumped out at us: 

#1 Biggest Concern of founders:  Hiring Good People
Most Critical Hire in the Next Year:  14% said Senior Marketer
Hardest Executive Hire You've Had to Make?  15% said Marketing

Our take:  If you’re having trouble hiring in your marketing org, you’re not alone.  Over the last few years, we’ve observed firsthand how hard it can be to hire great digital marketers (P.S. we’re hiring!).  The reality is that there are more companies launching than ever before, and more of them are raising significant capital than ever before, so competition for good people is fierce.

Don’t be fooled: digital marketing and customer acquisition are technical skills. However, unlike other technical skills that can be learned in school (web dev or design, for example), the only way to learn digital marketing is by doing.  Demand for digital marketing skills is as high as we’ve ever seen, but the supply of good candidates is very, very thin.  

#2 Biggest Concern of Founders: Revenue Growth
#3 Biggest Concern of Founders: Acquiring Customers

Our take:  Should we be surprised that revenue growth and customer acquisition are near the top of the list of founder concerns?  These are people building businesses, so of course they should be concerned about revenue and customers, right?  Well, sort of.  Over the last few years, we’ve observed companies investing significant time, money and resources on things other than short-term growth, such as product, pivots, team, office space and other employee perks.  With relatively easy money, it's become tempting to drink the Kool Aid/Kind Bars and delay “turning on revenue" or "turning on growth” until the last minute.  

Times are apparently changing.  We’ve seen countless examples of every participant on the startup food chain (accelerators, downstream VCs, corporate partners, tech acquirers, talent, customers, friends, parents) focusing on traction more than in recent years.  A tangible example: Seed and Series A investors all seem to agree that hurdles to raise a seed round have gotten higher, and that’s directly impacted the Series A world, and so on.  In short: “Traction” in 2015 > “Traction” in 2011.

Maybe you don’t pay attention to venture capitalists and their impossible growth standards- you have plenty of dry powder, you’re profitable or you’re self-funded.  But here’s the thing: other people you do business with pay attention to growth.  Employees that you otherwise wouldn’t be able to recruit will take pay cuts, put in insane hours and roll up their sleeves on grunt work… all in the name of growth.  Big acquirers of smaller companies tend to buy growth or team.  Huge customers need to see growth to get comfortable around your long-term sustainability as a partner.  Prospective customers look at growth as validation of your product's appeal when comparing to the competition.  Whether you read Tech Crunch every day or not, growth is currency.

Observation:  Founders fear long-term failure, but not the short-term mistakes that lead to it.

Our take:  The report concludes that founders fear long-term failure rather than the short-term mistakes that lead to it.  Unpacking this a bit, we actually see this all the time.  In fact, you’d probably be surprised how often we encounter an iteration of this:

I want to grow, so I’ll run a few ad sets on Facebook and a few on AdWords campaigns.  When I see certain ads outperforming the others, I’ll turn off the losers, and put more money behind the winners.  I’ll make some new ads in a few weeks and see if I can beat the old ones.  Since I’m a data-driven manager, I’ll make sure to keep CPA < LTV.  All I have to do to grow in the future is spend more on my best ad sets.

I hope we don’t need to elaborate on why this is a terrible, terrible strategy - certainly for long-term sustainable growth, and almost certainly for short-term growth.

Buying growth is easy.  Anyone can do it.  

Creating efficient, sustainable long-term growth is nearly impossible.  That’s what we do.


Note: This post originally appeared on Kevin Weeks' blog and his Medium page.