Henrik Torstensson's Weblog

Sapphire Ventures has written a good blogpost called the The Nordic Flywheel Effect: Building the Next Startup Trailblazers on why they are excited to invest in the Nordics.

I share their view that each Nordic country is a bit different (and that the combination is exciting), they write: “Sweden is famed for fintech, Denmark for B2B SaaS and Finland for gaming, while Norway and Iceland are earlier in their respective innovation journeys”. This is one reason I believe venture investing across the Nordics, like Alliance does, is a good strategy.

It was also fun to see that Alliance has invested in 3 of 13 companies that excites Sapphire Ventures the most; Unleash and Enode in Norway and Bits in Sweden. Also worth noting is that Bits announced their €4 million seed round today to continue to build APIs to simplify KYC processes.

Alex Morris (who writes the excellent newsletter The Science of Hitting) visualized Spotify’s monthly active user growth since 2016 by geographical region. It is interesting to see what has happened over a longer time period than a couple of quarters, as the longer time period give high growth rates the time to play out.

In 2016 Spotify was already 10 years old and a large consumer Internet service with more than a 100 million monthly active users. At the time, most Swede’s probably would have said that “everyone has Spotify”. That what obviously not true. Most notably the absence of users in Asia and Africa (a.k.a. Rest of World).

Since 2016 Spotify has more than doubled in North America, tripled in Europe, 5x:ed in Latin America and gone from a few million to almost 150 million monthly active users in Rest of the world (Asia, Africa).

A company with a great product in a big market that keeps on growing 30 % per year for many years can reach 500 million active users and still have a lot of possible growth ahead (YouTube has more than 2 billion monthly active users as a comparison.)

Spotify announced its Q1’23 results today. The company grew revenues with 14 % year-over-year to a little more than €3 billion in the quarter, and now has 515 million monthly active users and 210 million premium subscribers.

Spotify has established itself as one of the very large consumer Internet companies, being the number one player pretty much everywhere but in China. This is a major feat, but there are many things on the financial side alone that will be interesting to follow going forward.

• Can Spotify keep a growth rate at about 20 % going forward? This quarter users grew above 20 % and subscribers and revenue grew below at 14 %.
• Can advertising, a €1 billion per year business and 11 % of overall revenue, grow faster than 20 % and become a larger part of the revenue mix? Higher advertising sales would help gross margins both on the ad-supported music and podcast sides.
• How and when will the layoffs and increased efficiency play out in the numbers? Operating costs for Q1 were up 36 % year-over-year (but according to the report underlying growth excluding FX, social charges to share-based compensation and severance was 16 %, which is more in-line with revenue growth). Will Spotify improve margins by keeping operating costs at same or lower level as revenue grows over the next quarters and years?

I don’t remember reading OpenAI CEO Sam Altman’s post How To Be Successful when it was posted four years ago. Today I saw it in my LinkedIn feed and think Sam’s 13 points is a very good read.

I find his writing on hard work to be very relevant when founding and running a startup that aims to be a very large company. (Or, I guess, being an athlete competing at Olympic level, being a top level politician or CEO.)

You need to be smart, work hard and work most of the time. And you need to figure out how to not burn out. The trade-offs are real and it’s rational to not want to be a founder.

Quoting Sam:

“You can get to about the 90th percentile in your field by working either smart or hard, which is still a great accomplishment. But getting to the 99th percentile requires both—you will be competing with other very talented people who will have great ideas and be willing to work a lot.

Extreme people get extreme results. Working a lot comes with huge life trade-offs, and it’s perfectly rational to decide not to do it. But it has a lot of advantages. As in most cases, momentum compounds, and success begets success.”

…

“You have to figure out how to work hard without burning out. People find their own strategies for this, but one that almost always works is to find work you like doing with people you enjoy spending a lot of time with.

I think people who pretend you can be super successful professionally without working most of the time (for some period of your life) are doing a disservice. In fact, work stamina seems to be one of the biggest predictors of long-term success.

One more thought about working hard: do it at the beginning of your career. Hard work compounds like interest, and the earlier you do it, the more time you have for the benefits to pay off. It’s also easier to work hard when you have fewer other responsibilities, which is frequently but not always the case when you’re young.”

This week became April Dunford positioning week on the blog. If yesterday’s video had a focus on storytelling, this one has a focus positioning. (It’s more similar to the presentation at SaasSiest).

I believe strong positioning, in addition to improving sales, can help make two of the least effective slides in a fundraising deck better (the market slide and the competition slide).

The market slide often says something like “the market is worth $25 billion globally and according to Gartner it will grow to $34 billion by 2028”, even if the company is only service a niche segment in Europe. Yes big markets are important, but it often becomes disconnected from the product and go-to-market plan and thus less effective.

The competition slide often is 1) a list of features where the pitching company checks all the boxes while the competitors don’t or 2) a 2×2 matrix with the company in the top right corner. It often feels like the features are cherry-picked or the assumed strength of the top right corner cannot be seen in traction.

I’ve done those things myself when fundraising, so I’m not pointing fingers just pointing out that making those slides effective is difficult.

After seeing April Dunford at SaaSiest, I spent some time watching some of her presentations on YouTube. One thing I realized is that she’s been telling some stories for years, so no wonder why the presentation at Saasiest was tight.

Watching April’s point of view on positioning and crafting stories that sell B2B software is time well spent.

A nice bonus is that quite a few of the rules/learnings can be used when raising venture capital.

Large technology companies will, I believe, come out of 2023 with higher profit margins than many expect. I think we saw some of the dynamics in the Netflix report this week and the playbook they mentioned and that Meta and others have been pushing lately.

Other examples are Dropbox and Box, who are reaching 30 % profit margins and have started repurchasing shares, executing a PE-style playbook for a few years.

The most dramatic way to improve margins short-term is large layoffs, like the 30% reduction announced by Lyft today. That on top of layoffs last year. Unfortunately I think we will see more of that.

In addition ongoing expense management, lower hiring and lower investment will lower cost and/or make sure it grows slowly. With 80% gross margins it doesn’t take a lot of sales growth for companies to see margin expansion.

Lower investments will likely open up many areas for startups to compete in, as large tech companies will cancel non-core projects and will stop most of the habit of keeping great people on payroll and let them ‘rest and vest’.

Netflix released its Q1’23 financials yesterday, and at 3.7 % year-over-year revenue growth it is no longer a high growth company. But it had $2.1 billion in postive cash flow, which is a decent amount of change. Especially as all the video streaming contenders are, likely, still bleeding billions of dollars per year.

Some interesting comments were that Netflix’s cheaper plan with ads is making more money than their standard plan, despite being at a lower consumer price. This is similar to what’s been said by Disney+, Hulu and others for their ads plans so maybe not too surprising.

In addition to the strong free cash flow, Netflix operating income reached $1.7 billion instead of $1.6 billion forecasted due to ongoing expense management and timing of hiring and content investment. I think we will hear that combination of actions from a lot of tech companies in the next 3 to 6 months.

Yubico, makers of multi-factor authentication hardware, will be acquired by the SPAC ACQ Bure for $800 million and be listed on Nasdaq First North.

Björn Jeffery writes about the deal in SvD (in Swedish).

I’m surprised at the quality of company ACQ Bure is acquiring. Yubico is a world leader in its space with $150 million in sales and profitable.

It’s stranger why Yubico shareholders want to sell in a tough market at not a high valuation. Do they think that the slower sales (3% y-o-y in Q1) excluding currency effects will continue?

At the SaaSiest conference in Malmö today I really enjoyed April Dunford’s presentation on positioning of SaaS products. I ordered her book Obviously Awesome after the talk, which probably is as strong as endorsement of a keynote talk I can give.