20VC Fred Destin @ Accel on Why Startups Fail & Founders Get Fired

In this episode of the 20-minute VC, host Harry Stebbings interviews Fred Destin, general partner at Accel Partners in London. Destin shares his journey from derivatives at Morgan and Goldman Sachs to venture capital, where he has successfully invested in companies like Deliveroo, PillPack, and Zoopla, and emphasizes the importance of understanding risk, finance, and passion for creation in investing. He discusses the challenges of backing hyper-growth companies, the critical nature of early hires, and the reasons startups fail at the seed stage, attributing it to hiring the wrong co-founders and unrealistic time projections. Destin also touches on the delicate balance of being a supportive board member while making tough investment decisions, the significance of building relationships with founders, and the necessity of trust and transparency between investors and founders. He concludes with insights into the venture landscape in Europe versus the US, drawing from his experiences in both Boston and London.

• Excel Partners is one of the world's most prestigious and successful funds.
• Fred Destin is a general partner at Excel in London, focusing on consumer and software investments.
• He is known for his investments in Deliveroo, KNC Miner, and PillPack.
• Fred was previously a partner at Atlas Venture and a founding investor and board member of Seedcamp.

"And joining me today, I'm so delighted to welcome Fred Destin, general partner at Excel in London, where he focuses on consumer and software investments."

The quote introduces Fred Destin's role at Excel and his investment focus areas, setting the stage for his expertise in the VC field.

• Fred Destin's background includes working in derivatives at Morgan and Goldman Sachs.
• He was part of a team that did the first-ever credit derivative.
• Fred transitioned from finance to venture capital due to his passion for creating and understanding risk and finance.

"So I studied life as a derivatives guy at Morgan in Goldman Sachs and actually was part of a team that did the first ever credit derivative back in the day."

The quote provides insight into Fred Destin's early career in finance and his involvement in pioneering financial instruments.

• Fred Destin moved into super early-stage investing with a bubble vehicle called Speed Ventures.
• He progressed into more prominent funds such as Atlas and Excel over time.

"So I figured, if you understand risk and finance, and if you're passionate about creating things, what's the best thing you should do? And the answer is probably to be an investor."

This quote explains Fred Destin's rationale for moving into venture capital, highlighting his skills and passion as the driving factors.

• Rocket ship startups like Deliveroo and Pillpack require investors to make decisions with imperfect information and handle the consequences of rapid growth.
• Fred Destin prefers to back businesses with solid microeconomics before scaling.

"When companies truly grow at exceptional speeds, it's very important to let go of your fear, especially as an investor, and to be able to make decisions with very imperfect information on the fly."

The quote emphasizes the need for investors to be fearless and decisive when dealing with high-growth startups.

• The first 8-10 key hires, especially at the executive level, are crucial for a startup's success.
• Fred Destin spends significant time assembling diverse and strong teams early on.

"Your core eight to ten first key hires, especially at the executive level, need to be great. You really just cannot afford to make too many hiring mistakes."

This quote highlights the critical importance of the initial hiring decisions in a startup's journey and the impact they have on future success.

• Deliveroo is the fastest-growing startup Fred Destin has been involved with.
• The growth is not just for the sake of it but to seize an opportunity.
• Deliveroo created a new market by offering a service to customers who had never used food delivery before.

"Delivery is the fastest growing startup I've been involved with."

Fred Destin cites Deliveroo as an example of his most rapidly expanding investment, illustrating the potential scale of successful startups.

• Venture capital is a challenging industry with a high level of difficulty and hardship.
• The primary reason for failure at the seed stage is hiring the wrong co-founders or team members.
• Seed-stage companies often overestimate what they can achieve in a limited timeframe.

"The number one reason why seed companies fail is because they hire the wrong co founders."

The quote points out the common pitfall of poor co-founder selection as a major factor in early-stage startup failures.

• Startups often underestimate the time it will take to reach certain milestones, leading to financial strain.
• There is a common misconception that after a test launch or a few months with good metrics, the next financing round will be easy to secure.
• Reality often involves unexpected delays in product market fit, technical issues, and other setbacks, which can extend timelines significantly.

"And last three months with these wonderful metrics, we're going to raise our next round of finance and the reality, of course, is they go out to test product market fit."

This quote highlights the optimistic planning that startups often have regarding their growth and funding timelines.

"Then they find out that their back end database doesn't scale and they have to shift from whatever it is, a graph database, back to postgres or whatever problem you're going to run into."

This quote exemplifies the technical challenges that can arise unexpectedly and delay progress.

• Startups should set realistic projections and prepare for the worst-case scenarios.
• Tailoring fundraising strategies to more realistic timelines can prevent setting up investors and the startup for disappointment.
• Overselling capabilities to raise funds can lead to missed milestones and strained investor relations.

"Just always project realistically what you can do within a certain amount of time and plan for the worst."

This quote advises startups to have realistic expectations about their progress and to prepare for potential setbacks.

"Because half the problem is when you oversell yourself at the beginning, which is what you need to do to raise money, you then get a bunch of investors in who are expecting the moon from you."

This quote warns against the dangers of setting unrealistic expectations with investors, which can lead to disappointment and strained relationships.

• Building a relationship based on trust and openness is crucial for successful investor-founder dynamics.
• Investors should not set rigid goals but rather adjust expectations based on the startup's actual progress.
• Assessing the talent within a company is more important than strictly adhering to business plans.

"I mean, I think my philosophy on this stuff is you try and create a relationship of trust and what you might call almost intimacy from the outset."

Fred Destin emphasizes the importance of establishing a trust-based relationship where founders feel comfortable sharing their challenges.

"I look very hard at the talent we have inside a company, because I don't really give a shit whether you hit your plan or not."

Fred Destin prioritizes the assessment of a startup's team and their potential over rigid adherence to business plans.

• Investors sometimes need to advise founders to discontinue their current venture if it's not viable.
• It's important to learn from failed startups and not to stigmatize failure, especially in different cultural contexts.
• Investors may support founders because of their potential, even if they do not believe in their current project.

"I think sometimes it's our job as investors and more as human beings really, to tell founders, hey, you can keep going down that track, but I've looked at your strategy, I've looked at your team, I've looked at the market you're in. I don't think you're going to make it."

Fred Destin discusses the responsibility of investors to provide honest feedback to founders about the viability of their business.

"I have told a couple of founders, I'm putting some money in you because I believe in you, but I really want to back your next business."

This quote reveals that investors may fund a founder's current project as a vote of confidence in their abilities, while actually being more interested in their future endeavors.

• Founders may be fired due to a breakdown in trust with the board, often stemming from misaligned expectations.
• Boards sometimes pressure founders to achieve early revenue targets, which can lead to poor decision-making if the product isn't ready.
• Creating an environment where founders can openly discuss challenges with the board is essential to prevent erosion of trust.

"The primary reason is a breakdown in trust at the board level."

Fred Destin identifies the loss of trust between founders and the board as a key reason for founder termination.

"How do you create intimacy between a board of investors and angels, et cetera, and yourself as a founder."

This quote stresses the need for a close, transparent relationship between founders and their boards to avoid miscommunication and ensure the right decisions are made.

• The relationship of trust between investors and founders is crucial for startup success.
• Investors who don't understand the business or are toxic can be detrimental.
• Angels, especially in Europe, often fear losing their money, which can lead to problematic behavior.
• Venture capitalists (VCs) sometimes adopt a controlling attitude, which is counterproductive.
• The role of a VC should be to enable and support the startup team through uncertainty and chaos, not to control.
• A healthy board dynamic is achieved when VCs view their role as supportive rather than controlling.

"Vcs are very often assholes because they're in a logic of control. Their viewpoint of the world is like, hey, you work for me. You have to deliver results, which is, of course, completely wrong, because the reality is we're only trying to enable a project called a startup to be successful."

The quote emphasizes the misconception that VCs should control startups, highlighting that their true role is to support and enable the success of the startup.

• Alignment with founders is key for successful investments.
• Regrets in investments correlate with inadequate time spent getting to know the founders.
• Ideally, investors should get to know founders over months or quarters before investing.
• A real strategy session and engineered disagreements are methods to understand the founder's capabilities and the dynamics of working together.
• Social compatibility and enjoying the company of founders can be a positive aspect of the investment relationship.

"So in an ideal world, I would get to know people for months or quarters before investment."

This quote suggests that a longer period of getting to know founders before investing can lead to better investment decisions.

• Engineering disagreements is a technique used to see how founders handle conflict.
• It's a way to discover how people react under tension and work through disagreements.
• The ability to resolve conflicts is crucial for a successful investor-founder relationship.
• VCs and founders need to understand each other's conflict resolution styles before committing to a partnership.

"I will literally engineer a situation of some tension, even if I can't find one, just because I need to know."

The quote explains the intentional creation of tension to assess how founders manage stress and conflict.

• Venture capitalists face the challenge of balancing multiple roles.
• They must be a sounding board and confidant to founders while ensuring performance and meeting milestones.
• VCs must look after the company's interests as well as fulfill their fiduciary responsibilities to their fund.
• Honest communication and early warnings about investment decisions are essential to avoid damaging trust.
• The ability to manage the "schizophrenia" of conflicting roles requires soft skills and consistent behavior.

"There's nothing fundamentally difficult intellectually about being a venture capitalist. It's not like you need to be a rocket scientist to do it. However, there is a real difficulty in managing your own schizophrenia."

This quote highlights the complexity of the VC role, which lies not in intellectual challenge but in managing conflicting responsibilities and relationships.

• Saying no is a frequent necessity for VCs, and strategies for doing so vary.
• Some VCs provide immediate feedback, while others let the relationship "fizzle out."
• Clear, honest communication about the reasons for saying no can be more constructive than avoiding confrontation.
• The way VCs say no can impact their reputation and relationships with entrepreneurs.

"So my strategy for saying no is completely inconsistent. There are some people who I can tell, have the chops that I can tell them no in the meeting with constructive feedback."

The quote reveals the speaker's personal approach to saying no, which varies depending on the entrepreneur's capabilities and the context of the meeting.

• VC professionals often use polite language to decline investment opportunities.
• They avoid direct confrontation and maintain a positive tone to not hurt feelings.
• This approach is common and stems from experience in handling such situations.

Wilson and me and a bunch of others, we all go like, hey, it was awesome to meet you. We're prioritizing other stuff, literally, because it's sort of a nice way people don't feel bad, et cetera, and then you don't get into an argument.

This quote explains how venture capitalists like Fred Destin use polite language to reject investment proposals. It highlights the emphasis on leaving a positive impression and avoiding conflict.

• Founders are particularly disappointed when they receive no response from investors.
• Lack of communication can be frustrating for entrepreneurs who have invested time and effort.
• Investors may inadvertently fail to respond due to prioritizing other commitments.

I think what founders hate the most is when they don't hear.

Fred Destin acknowledges that a lack of response from investors is a major source of frustration for founders.

• Investors like Fred Destin feel guilty when they fail to respond to entrepreneurs.
• Sometimes, other priorities cause them to overlook certain communications.
• Despite feeling bad, investors recognize that not responding is sometimes unavoidable.

So I've been guilty of dropping the ball. Maybe twice a year, I'll drop the ball on someone.

Fred Destin admits to occasionally failing to respond to entrepreneurs, indicating that while it is not intentional, it does happen and causes him to feel guilty.

• Fred Destin enjoys "Master and Margarita" by Bolgakov for its unique qualities.
• He reads various sources, including Twitter, The Atlantic, and Quartz, drawing ideas from multiple disciplines.

And margarita by Bolgakov. Because it's phenomenal written, it's russian, it's crazy, it's sensual, and it's wonderful.

Fred Destin reveals his favorite book, highlighting its remarkable writing and attributes.

• Investors like Fred Destin acknowledge missing successful deals but focus on learning from those decisions.
• They avoid dwelling on missed opportunities and instead appreciate the overall success of their portfolio.

Nah, I think I've missed deals. Like everybody else. I try and learn from the mistakes that I made in terms of saying no.

Fred Destin discusses his perspective on missed investment opportunities, emphasizing the importance of learning from these experiences rather than regretting them.

• Long-term performance and the development of companies are key indicators of success.
• Fred Destin values building great companies and making money for investors, particularly pensioners.

So, first of all, being a successful investor, it's fascinating how long it takes before you know.

Fred Destin speaks to the long-term nature of assessing success in the investment industry and his personal motivation for building reputable companies.

• Fred Destin contrasts the investment environments between Boston and London.
• He appreciates London's vibrant ecosystem but recognizes the efficiency and professional nature of the US market.

I was really positively surprised coming back to London.

Fred Destin shares his positive impressions of the London investment scene, while also acknowledging the advantages of the US market.

• Fred Destin respects investors who are founder-centric and forward-thinking.
• He admires those who combine strong investment skills with respectful treatment of founders.

I think there's a composite whenever I listen to Rulof Bota at Sequoia.

Fred Destin expresses admiration for certain investors who balance investment acumen with ethical conduct and a founder-focused approach.

• Personal connection with founders can be a decisive factor in investment choices.
• Fred Destin emphasizes the importance of aligning with a founder's vision and integrity.

Well, there is a new one that will be announced shortly, but the most recent would be Deliveroo.

Fred Destin mentions his recent investment in Deliveroo and hints at an upcoming announcement, reflecting on the personal connection with the founder as a key reason for his investment decision.

• Gratitude is expressed for the time and insights shared during the podcast.
• Encouragement is given to listeners to stay engaged with the podcast series.

And I'd like to give a huge hand to Fred for giving up his time today to be on the show and for inviting me into the axle office.

Harry Stebbings thanks Fred Destin for his participation and hospitality, inviting listeners to continue following the podcast for future episodes.