Words Tom Hulme
February 13th 2023 / 10 min read
Many founders-turned-investors like to tell a story of their journey into venture capital, and how everything’s linear. In Tom Hulme's case, that couldn't be further from the truth.
In his own words, he ‘stumbled into venture’. A physicist by background, he launched his first business (a magnetic filtration system) in 2001. So convinced his venture would fail, he had a safety net in the form of a place in Harvard’s prestigious MBA program. Each year the business survived, each year he pushed back his place on the program.
Two exits (and an eventual MBA) later, Tom carved out a second career as an angel investor, through which he’s now backed over thirty startups. The success of these investments caught the eye of GV (Google Ventures), where he now sits as General Partner and Head of Europe. Since launching the London office in 2014, GV has invested over $500 million in 40+ startups across Europe and Israel, including Nothing, GoCardless, Multiverse, Snyk, CurrencyCloud, Vaccitech, and Lemonade.
In a recent fireside chat with Founders Factory founder & chairman Brent Hoberman at the Founders Factory Founders Day, Tom shared some of his top lessons for founders, which include:
Growth vs profitability isn’t a binary choice
Consider how to improve your ‘clock speed’
Early stage investors aren’t thinking about your product
Cash is a commodity; advice is a value add
Approach data-driven investing with scepticism
In the current fundraising landscape, founders are being forced to change their mindsets—switching from a ‘growth at all costs’ mindset to finding a path to profitability for their startup.
The mistake founders might make here is thinking that it's binary. In reality, the two are rarely zero sum. For example, many startups will see their profitability shift as they reach scale. This is often a result of a network effect. Take your standard two-sided marketplace: you need to grow both sides of the marketplace, and once you’ve done that, you’ll start to see a network effect on the supply side. From that point, your unit economics will improve significantly.
So when speaking to investors, avoid the binary of ‘growth vs profitability’. Instead, focus on how things are trending, and what’s the change you’ll expect to see. Show that you can actually deliver growth with improving profitability and unit economics. This will demonstrate that you have more resilience which will help you reach profitability over time. Remember that investors, perhaps more than at any other time in the last 10 years, are asking if this opportunity can be highly cash generative in the future.
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Clock speed—the rate at which you can deliver products, test, and iterate—is one of the most valuable notions for any startup founder.
The ability of a startup to deliver on its mission is governed in great part by its runway. The issue is, the limitations differ so much from one startup to the next. Two years of runway for a nuclear fusion startup might be just a quarter of an iteration, meaning it's very hard to reach an inflection point in this time. Conversely, two years of runway for a native app, which can push releases on a daily basis, is an unbelievable number of iterations. Lemonade would push on average more than one release per day for the first couple of years of its life! Instead of runway, your focus as a founder should be on the rate at which you can iterate and churn through ideas, so that by the time you come to raise again, you’ve done enough to prove progress.
As an investor, I’m thinking, “Has this business got a fast enough clock speed and will it therefore have enough shots on goal?” This is significant when it comes to fundraising: my advice to founders is to raise a little more than what you need in order to prove enough.
Having had the benefit of working both as a founder and an investor (as an angel and a VC), I’ve got some understanding of both perspectives. At the early stage there is one key point of disconnect that I see between founders and angels.
Early stage founders mistakenly come away thinking that investors really care about their product at a pre-seed stage. The truth is, even if your company survives, there is an extremely low possibility that your product will end up resembling anything like it does at pre-seed.
If I have shown interest in your business and your product, then it’s more likely that I’m actually trying to understand how the person sitting opposite me (e.g. the founder) is actually thinking about the problem. Or more importantly, how much empathy they have for the end customer and how willing they are to modify their assumptions. I love to see founders with strong opinions, weakly held and those that care deeply. After all, giving a damn may be the best performance enhancer.
Watch Tom’s TED talk on having empathy for your customers
I still remember a piece of advice one of my first investors gave me. He said that there are three types of angels:
Those who are smart and know they’re smart
Those who are dumb and know they’re dumb
Those who are dumb but think they’re smart
His advice: take money from numbers 1 and 2, and avoid number 3.
When you’re raising, it’s worth remembering that cash is the same from any two investors. What really makes a difference is what the investor themselves can offer you. As an angel investor, my job is to be really clear with the founders where I might have a point of view where they can draw upon. Sometimes that’s general life experience, sometimes that’s your network, sometimes that’s a strategic input (from the pattern recognition of having studied hundreds of companies close up).
Often, this is just being a shock absorber when something bad happens. I’ve seen a lot happen, and I know that things are usually not as good as you think, but almost certainly not as bad as you think.
There’s a growing trend towards data-driven decision making in venture capital—in particular, using data points to indicate future success of companies. But I’m sceptical about any system that can do this reliably, particularly when I’m not sure the data is valid. When machine learning systems break most often is when there is a significant regime change, and when the data overfits to history. For instance, look at the last two years—I’m unconvinced there is any precedent for that in history.
What you can do is use data to inform biases you may have towards certain founders. For instance—do I have a bias towards technical founders, or towards second time founders? That’s something you can easily filter for through data. In fact, ask any angel or VC for the 100 things that get them excited about founders in a first meeting, and it’s likely there are proxies for most of them in data.
I’ve written on my blog before about ‘weiji’, the Chinese word for crisis. This word combines the symbols for “danger” and “opportunity”.
The next 18 months will certainly contain a high degree of danger for many startups and scaleups. Cost of capital will remain high, meaning growth as an investment class will remain very challenging. Valuations are reverting the norm - the last 3 years were the anomaly - I dont think their will create a mass extinction of startups but it may be a mass dilution event. And yet, there are some very exciting opportunities for startups. In the last few years raising capital has been easy and everything else has been challenging — that is reversing now. And that is OK given that capital, in the long term, is not a moat.
For instance, with respect to talent. Every person building a great company needs 5 to 10 people around them to really scale it. That's been really difficult over the last decade: but now those people are available. This time last year, you’d have struggled to pull people out of top companies at a late stage (SPACs that were publicly listed, Series C or later companies). Everyone in those companies today realises they're underwater, so they’re willing to hedge in ways that they didn't before.
It will also encourage extreme focus: after all the word ‘and’ is the enemy in Strategy and Vision statements.
And fundraising is relatively favouring early stage companies at the moment. The best investors will continue to participate in the market for the best companies. Late stage VCs (growth) are investing in earlier stage businesses, because they want to keep their firms ticking over without investing too much capital. I’m seeing firms doing seed/series A that they wouldn't have done 12 months ago.
Tom Hulme is General Partner & Head of Europe at GV. As well as founding two businesses, he’s also an active angel investor.
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