Any investors would love to see growth with a moat in a startup. Realistic investors know the market conditions for that to happen.
Disclaimer: We co-authored this post with GPT-4 and persona X-Ray. X-Ray is generated with GPT by having it analyze our Study section. We loaded X-Ray with data from Spark Max and added specific expertise to boost cognition in certain areas. It took 102 prompts to get a result, so stick around to hear our thoughts.
Breaking Bad
Funding companies by investors has fallen off a cliff in the first quarter of 2023. Yes, it is bad but, it is not all bad. To illustrate, we created a unique view on investing in Legal. A view that looks at investors in founders. Based on this view, we generated tips for you.
This is a deep cut, so bear with us. Back in 2018, we revealed that the average number of investors per startup in legal was about five per company. Break down this number in mature and young companies, and you’ll see something different. The drop in participating investors isn’t as dramatic as the drop in the amount they invest. Moreover, we see a light increase for young companies. Better yet, fewer investors cut bigger checks at seed stage. How do we know?
The graph shows average investor count (green line) and investment amount (blue bars) for companies in the legal space. The left side shows mature companies receiving later-stage funding. The overlay chart is the same for young companies getting seed-stage funding. Swipe the image between growth and seed and see the difference. Yes, it’s deep but important nonetheless.
Five Unconventional Tips
There is more good news hiding in data and it’s usually counterintuitive. Here are five non-obvious tips:
- Identify ideal investor;
- Know your exit;
- Find better customers;
- Embrace lean operations;
- Demonstrate tangible growth.
1 Identify ideal investor
Currently, there are more investors sitting on the sidelines than at any point in human history. Institutional funds globally raised over a billion dollars a day to invest. Almost none of it is being deployed, but eventually, it has to. Remember, middlemen don’t get paid, when deals don’t get done. There is an easy way to identify the investors that match you, and you can surprise them with your pitch. So the steps are:
- Find Customers who would also be willing to be your investors;
- Locate investors Close to you and your principles;
- Identify those with FOMO, who haven’t yet invested in but understand your market.
2 Know your exit
We’re now in a slow economy where two exit options became popular: mergers and acqui-hires. Mergers are a sign of a maturing market with slow to zero growth. Our tip: avoid those areas. This leaves option number two and a possible third. Being snapped up quickly or IPO big in about seven years happens under these conditions:
- Fast exits happen when you built a feature that is hard to duplicate.
- Big exits happen when you have a customer base that is hard to replicate
In both cases mentioned above, being flexible and free in your strategy helps. So what does the above average investor graph tell us? Fewer captains make for smoother sailing. If you are bootstrapped or have only one or two investors, the decision to exit is less complex.
3 Find better customers
If you decide to exit big, then current conditions are ideal. If you can grow naturally in a slow economy, you’ll launch like a rocket when things pick up. Natural growth comes from a sticky customer base. Sticky happens when your product is essential. Real sticky happens when your product is required by law. As legal, we serve many essential industries that need to be risk-free and compliant in order for us to trust them. Those industries need trust. Our society requires trust. So what is in very short supply and in hot demand? Trust.
The saying goes: Trust takes years to Build, seconds to break, and forever to Repair. That is how we view the business of legal: building and repairing trust. Yes, most get stuck watching the hourly rates of lawyers and thinking of them as fat wallets. Once you are able to move pass this, you may discover the bigger opportunities for the legal industry. Perhaps the biggest opportunity legal has is to build and repair trust between companies and consumers. It is a way bigger market, making them both better customers.
4 Embrace lean operations
It takes money to make money. Well, get used to the fact that there is no money. Before inflation, companies grew by pouring cheap capital into companies. If you missed the memo, that strategy no longer works. Now, everyone will want to conserve capital while maintaining revenue. Here’s the paradox: everyone will spend less while simultaneously figuring out to let others buy more. Economics force us to do more with less. In one word: Efficiency.
Ingenuity is a free, yet an extremely scarce resource. If we use ingenuity to gain efficiency, the result is usually Automation. Just in case, you also missed the other memo: we can now use this tool called GPT. Ok, I took it to the extreme by making it the co-founder for our new company. I’m just embracing it out of Necessity: the mother of all inventions.
5 Demonstrate tangible growth
This brings us to our final point: will (more) people keep buying? We’ve learned that pre- and post-pandemic provided different answers to this question. In our pod appearance and previous post we indicated that we’ve now entered a new era. This means we’ll discover new metrics to gauge growth across the globe. Despite the fantastic narratives you hear from formidable names, keep listening for numbers. When you hear a number, then watch for these two words: ‘usage’ or ‘adoption’.
Those numbers are notoriously hard to get real about. We use proxies to calculate usage of solutions in any area. We use capital raised, employee growth, traffic stats and even Adwords pricing fluctuations to find out what grows. If this last metric doesn’t make sense, then perhaps you’ve never had to calculate the cost of acquiring a customer. This goes back to another deep cut from 2019: The cost for acquiring a customer in legal is among the highest in the world. Therefore, no need to envy fat wallets. Like we stated in this video with a shrug: illustrating growth is easy, demonstrating is it hard.
Boilerplate
Now, about using GPT-4: it is the best at producing boilerplate. It requires a lot of data and prompting to steer it away from default, which is looking for consensus. If you require something counterintuitive, you’ll need prompt engineering. So GPT gave us a starting framework and inspired us to…scrap its framework and start over. It’s unparalleled in research, but be careful with the facts and examples that it provides. GPT gets you started, but you need to polish it. Lots of polish.
In Hallucinations, we made the case that finding the extraordinary in the ordinary is GPT’s greatest strength. However, it needs our ingenuity and creativity to do it. For most cognitive tasks, humans are in a weight-lifting contest with a forklift. But with a forklift, we can build skyscrapers. So to build skyscrapers, a forklift requires us, humans, to imagine it.
With GPT, we can imagine and build mindscrapers.