What investors can provide for growth companies – and where you need support from others

Packing dusty rock wool wasn’t a dream job, but in retrospect, that experience helped me to form my first understanding of effective incentives and teamwork in a work community.

In this blog post I will shortly go through my personal learnings that I use when investing in and developing early-stage businesses.

Expectations for the investors

The main task of the venture capital fund manager is to identify a number of potential “hyper-scalers”, get the opportunity to allocate capital in and build portfolio of those to enable power-law distribution where few winners drive the entire portfolio’s success. In addition, we provide some support to founders and entrepreneurs who are responsible for developing and running the business.

During the years in the venture capital business, I have learned to articulate clearly what we venture capitalists do and what we don’t do and what is expected from founders and entrepreneurs. At best our experience-based support enables the company to build strong foundation for growth in terms of good team composition, right incentives and functioning structures. However, early-stage companies need much more support than venture capitalists can provide.

To make sure that the company has world-class resources in use, founders need to be ready to expand the team with new members and incentivize them properly and include also advisors and outside specialists for the journey. Stubbornly trying to control everything and be the jack of all trades will slow down progress and eventually lead to wasting away.

We are wired differently and so should be the incentives

Early-stage business is not so money centric as one might think. Great first-time founders are excited about the possibility of getting their ideas and innovations available to the public and to put a dent in the universe, and financial success may be seen as a happy byproduct. Great, successful and experienced founders also have this main driver, but they are better equipped to evaluate also the potential of financial success.

Some early team members may have seen the possibility to earn a buck by leveraging their previous experiences while others may be excited to join this specific team or journey, that they consider important and impactful. Younger team members have different goals than founders and senior team members. Their main concern is to get the first job, learn new skills, become respected professional etc.

As the rock wool factory workers were not at all interested in and incentivized by the possibility to buy discounted shares of the company offered for them, similarly same incentives do not work for all startup or growth company team members. Incentives that are too distant compared to the daily output of one’s own work are useless and can be even harmful for the company.

Upside potential is exciting at the beginning but alone will not carry through tough times. Options and shares are always liked, especially if received for free or at very cheap price, but they are not the best incentives alone. Combination of cash (bonuses) and maybe some options / shares work best for team members and for board members as well.

To understand the main driving factors of the team, we try to get to know the founders and early team members well before investing and still we won’t really know. When the tough times start – and they always do – then we learn the real driving factors and see whether the chosen incentives were right.

Providing growth opportunities, showing appreciation and good behavior is always a good choice for getting and keeping a good team.

It’s all about the team

Individuals with superior technical skills do not alone form the best team to build business – not even deep tech business. A homogeneous team can prevent conflicts from arising, but at the same time limits the company’s ability to develop and change. Many different skills are needed and these changes as the company develops.

As all of us who have played teams sports know, in every team you need to have clear roles for all team members and leaders who know how to handle “superstars” that are valuable for the team. This clarity enables team members to give their best and learn while preventing “superstars” destroying the teamwork required for success.

We too often talk about manager skills and forget so-called subordinate skills including, for example, accountability, adaptability to change, willingness to learn and self-assessment. Sometimes the existing team does not have suitable role and it may not be possible to wait for one to develop new skills. This kind of self-assessment rarely leads the team member to find a new team for himself, and the decision to make changes is left to leaders. It is as difficult to let not suitable team members go as it is to stop investing more into non-performing portfolio companies, but it needs to be done to protect the remaining team and company.

Encouraging open discussion, organizing 360 evaluations and taking the early signals very seriously helps in finding suitable roles for team members and building the functioning team. Comments outside the team can be valuable information but shouldn’t dictate how the team and company are developed.

Structures enable and disable

Some years ago, I was listening to a fire side chat where Supercell founder Ilkka Paananen and former CEO of Nokia Jorma Ollila talked about building and leading companies. Ilkka was telling how Supercell is organized around independent teams or cells without top-down leadership and Jorma was commenting that when the company grows there is a need to have that top-down management structure. Ever since Ilkka has challenged his original thinking that these independent cells need to be small, but the winning formula of “independent cell structure” was validated in the study published by Harvard Business Review regarding the fastest growing companies.

It is good to really think what structure is best suited for the development stage and target of your company instead of just copying models that worked somewhere else. Unfortunately, this thinking requires some time that most people are not willing to take.

When you are developing new business, leaner, smaller and agile structures are must and hierarchy will prevent radical new inventions and agile business development. Even too rigid processes will limit the company’s possibility of developing and finding new business. Some processes are needed at the time of growth and when trimming your organization to make better profit, but even the best processes will not bring and maintain paying customers without superior offering.

Too often founders start to focus on processes and governance too early and outsource their most important tasks – customer acquisition and sales. My promise to our portfolio companies is that I will help them to develop governance when the company has got first paying customers and we have real business to govern.

At the end only numbers matter

Markets will do the final judgement and sooner you accept this better you will succeed.

In peripheral areas like Finland some government support and grants for developing new (tech) business is vital, as those are used and available also on the main markets. At best this support and grants will enable us to compete with the main market players that have better access to capital, customers etc. At worst, on the other hand, they enable bringing uncompetitive products and businesses to the market.

We understand that same metrics do not work for early-stage science-based companies and mobile games, but relevant metrics are available even for pre-seed stage science-based MedTech cases that need to go through tedious acceptance process to get permission to sell their product.

As you need to sell your idea, MVP, clumsy first product, growth opportunity etc. it is always wise to focus on measuring sales. Metric for sales in some cases might be the letter of intent and in other cases very fine-tuned churn analysis but always get real and quantified market feedback when developing your business. Running the company too long on conviction without real market feedback will end up in wasting lot of time and money.

One of my role models, previous chairman of Bittium Plc. Seppo Laine, was famous for not accepting any excuses on being on top of the numbers of the business that you are responsible – if the organization or accounting system cannot generate the data that you need, then you go and gather it by yourself.

Follow your North Star

Whether you have previous success or not, it is good to take some time to clarify your own goals.

For me my professional goal started to crystallize when I was first year associate in  the leading law firm of the Nordics, and my North Star has directed me into building venture capital funds. In between there were about 10 years of learning relevant skills in entrepreneurship, tech business and investing and building the opportunity. Now, another 10+ years have passed in growing into and carrying out the original professional goal and many new goals have emerged during the run. For example, realizing that wider set of services to growth companies than just capital is needed.

Most people are not as slow learners as I was but being a believer of disciplined entrepreneurship, I also believe in disciplined goal setting. Once your goal is clear the journey with all twists and turns will be easier. Life is too short not to pursue your goals and dreams but long enough to think about what you want to achieve and where to use your time.

-Ville Heikkinen-