🚀 Cognitive Corporate Finance CEO Charles Thoma

Welcome to another CEO Wisdom Pod with Charles Thoma. He's CEO and founder at Cognitive Corporate Finance in Madrid, Spain. We're going to talk about startups, private equity funding, venture capital and real estate transactions today. This podcast is brought to you by podfire.com if you want to start your podcast and scale it and monetize it the unconventional way, go to podfire.com Charles welcome to the pod. Tell me a bit more about yourself and CCF.

Sure. Thanks Charles for, for that. Well, I'm the founder and CEO of Cognitive Corporate Finance. We are a sell side corporate finance firm. So our job in life is to help companies raise capital. We help companies, we help funds, we help sellers of businesses to find investors and buyers in the alternative investment space. Basically investment funds of all shapes and sizes. Venture capital funds, PE funds, credit funds, real estate funds, corporate VCs, corporate many departments etc and we walk them through the process from start to finish.

How did you first get into that and why did this get your attention more than other sides of business?

So I, I've been pretty much around every stage of life in, of the stage of a company's financial life from from growth to acquisitions to disposals to, to restructurings and, and liquidations and, and, and rebirth post, post liquidations and, and one of the things that struck me as after the financial crisis during which I, I worked on The Lehman's chapter 11 for, for a couple of years that there's lots of, lots of theory that doesn't really withstand reality in the financial space and there's lots of stuff that we saw that basically just fell apart from 2008 onwards. And I, and I thought it'd be a really good idea to get back to basics and to actually, you know, help our clients understand, you know, what is a basic financial instrument. The capital you ask against the rights you propose to the investor. If you're proposing equity to an investor, if you're proposing a debt instrument, it's not the same thing and what you're proposing should be on market. That also then generates a question well, who wants these financial instruments? Who are, if you're looking for 10 million in equity or 10 million in debt, you're not going to be speaking to the same people, you're speaking to different investors. Therefore you need, you know, to understand who has what kind of strategy. Which then led us to say well actually we need to map the investment strategies of a, a large number of people of investors specifically, which is what we did. Right. So, so we, you know, basically today We've mapped about 20,000 institutional investors from the point of view of, you know, what their investment strategy and their best mandate, their investment thesis consists of. And that basically means just understanding where they invest and what countries and what sectors, how much and where they invest in the balance sheet or outside of it. And we thought so long, long, long answer to a short question. We thought that basically that was back to the getting back to basics. You know, who wants what kind of risk and what makes sense and what's it? What's an on market instrument

and why this specific field? Is it because it generates tons of money? Because you're also an author? I mean, you could do that full time, right? Like why, why that part? Is it because it awakes a part of your curiosity as well? It's complex deals, it's adrenaline filled. Why?

So I don't know if I have the answer. I'll give you bits of answers to that. So the first thing is because I created basically the company right after the financial crisis and a lot of people came to us saying, you know, we need capital, we need capital. Which then, you know, generated a whole range of consulting work for us to help understand what they needed, why they needed it and where we go and find it. So basically the market kind of shaped that for us to, to, to, to, to a certain extent. So while we, this information and this knowledge from the market, we thought, okay, we're actually capturing a lot. Why don't we just put it in a book so that we can help our clients and anybody who, who's interested understand, you know, what it is to go tap into the, the, the investment pockets of, of, of VC funds, PE funds, credit funds, litigation funds. I mean, there's, there's a whole variety of investment animals quote unquote out there. And, and we thought, okay, it'd be worth putting in, in a, in a book and, and publishing technical papers as well to kind of focus on, on some of these areas. And, and, and yeah, I mean it is exciting. I think there's a, there's a whole range. I mean, it's most importantly, I think people have fantasies or nightmares about what investment funds look like. A lot of people think of, you know, funds sometimes as vulture funds as people just like rip your company apart and sell it, you know, strip it and sell it for, for, for parts. Others have these completely exaggerated ideas of what a fund can and can't do for you. And we thought it would be. There's a lot of hand holding that's required that we think we're capable of doing which consists of helping people understand what is the right kind of capital for their business at this moment. And just being able to answer that question is satisfying. I mean, it's great to see that you're adding value and that, you know, where people come to us and say, you know, I'm, you know, in my mid-50s, I've created my business. My kids won't take it over because they have other ambitions. I can sell now or I can grow the business and, and, and you know, raise capital, you know, make it grow times two or three and then sell it. Then, you know, what do you think? Those are huge questions. You know, there's really interesting questions. And when, when people come and open up and ask these things, we're able to give the answer. We're able to give the answer for, you know, sell now. We can tell them what it would look like. If we tell them no, raise capital and grow and sell in five to 10 years, we can tell them what that looks like. And you know, people open up. They're, you know, they're, they're really, you know, bearing their soul to many frequently and being able to, you know, answer those questions, help these people and value is, is very satisfying.

You've worked at various M and A firms, notably Alvara, Alvarez and Marcel. You started your career as well at kpmg. What did you learn from all of these companies before you started to. You, you decided to start your own company.

How not. How not to mess up, basically. So I started in strategy consulting in the uk. Then I moved. When I went to kpmg restructuring, it was to help do restructurings and turnarounds. So helping troubled companies. So I saw a lot of companies that had problems and understanding what the problems were actually was part of fixing it. We also helped the shareholders of these companies to figure out, well, what they could salvage out of it. We also helped the creditors of those companies to help them figure out what cash do they get back in in the event of a, of a bankruptcy proceeding. So that was one part of it. So we were doing a lot of operational restructurings. We also did a lot of finan financial structuring and, and securitization restructurings. And, and, and that's when you see, you know, when financiers kind of get too clever for, for their own good and invent things like CDO clos that end up blowing up. Right. And, and so, and that's back to your initial question, like why I created, you know, cognitive corporate finance. Yeah, it's seeing that there's lots of silly ideas that get put together and that convince people to put capital into them is I thought, well, let's not do that anymore. Let's keep, let's, let's keep things simple. Let's make sure we understand, you know, we can explain to the investors on behalf of our clients, you know, what they're investing in, what their cash is going to be used for, where returns is going to generate for what kind of period of time and make sure that everyone's aligned, that, you know, our client, the seller has a very clear and transparent offer. The investor who enters into it knows exactly where he or she's stepping into. There's no unpleasant surprises. And if there is, it's somebody else's fault and not ours. And, but we hope that there shouldn't be. Obviously we don't guarantee anything, but we hope that you know that in so doing you have a really healthy relationships between the investee and the investor.

So what do you occupy your time with nowadays? You write books, you consult for clients. How do you split your time and what are your top goals this year?

So we're the, from a business point of view or top goals. So last year was a hard year. So we had, you know, it was kind of basically just flat right all around. I mean very little happened for anyone in the market. So a lot of things just got pushed back to, to, to 2024. So we're seeing a lot of business. So our objective right now is to convert as much of these deals as, as possible. And it's looking really, really solid. And once we do that, we need to scale up our tech. So you know, our, we've got our own tech platform that we've got these 20, 000 investors mapped out. We need to take it to the next level to be able to develop new, new functionalities, to be able to also go beyond Europe, which is right now we're pretty much Europe focused, know 80%. So we like to go to, you know, Asia and, and, and maybe Latin America. And from personal point of view, I, I, I, yeah, I need to think of the next book. I haven't, I haven't got my head around it yet. So that, that's probably going to take me a couple years to, to figure out what it is.

There you go. You wrote a book giving advice to your two sons. What would be your top advice to future generation and specifically future founders?

Wow, you really dug deep. It's a, it's, it's a good, so I think, and I was Asking having discussion with one of my sons yesterday. I think find your passion. I think is, is the most important thing. I think if, if you really enjoy what you do then you know, working 14 hour days becomes, you know, a breeze. It's, it's feather light. If you don't enjoy what you do, working an eight hour day is a nightmare. And so I think it really making sure that you're honest with yourself, with what you do, if you think you're going down the wrong track, change, step back, start again or if you can just step sideways, do it. But I think you know, really making sure you know what you're doing and why is is really the key to success.

Right. And the Madrid startup ecosystem, how's it going? I had an incubator in Barcelona, BigAmbinator I think and was called and you know I felt that back in these days, about one or two years ago the startup world was really slow was start it was tough to get funding and so forth. How's the, the Spaniard startup ecosystem? Precisely.

Madrid and Barcelona so it's, they're, they're, they're booming. I mean it's, I mean the, just big picture I think Brexit just basically just brought a lot of capital back onto the continent and a lot of that capital came to Spain, right? A lot of the activity came to Spain and within Spain, Madrid is really the powerhouse of the, the Spanish economy, right. There's like, you know, reports about it and articles about it. Pretty much every, every week the number of investors who show up at you know, the likes of South Summit just never stops growing. There's, you know, now there's more investors from abroad that show up in Spain than investors from Spain. So I mean from our experience I'd say about, you know, there's 80% of the capital that we see entering ventures into Spain is non Spanish capital. Right. So there's a lot of non Spanish capital looking to invest in Spanish ventures. The same applies to real estate, the same applies to corporates. Maybe not in the same proportions, but there's a huge, I mean Spain is super healthy. I think it's the second fastest growing economy in Europe this year or last year. And, and Madrid specifically is, is just you know, basically you know, vying for top four positions with Berlin, Paris and, and London. Barcelona is still dynamic. I think there's a lot of activity in, in Barcelona, but it's not, it has a lot of an established base of large international corporates and the tech sector is very strong there as well. I think it's going to continue to stay strong. I think Madrid's just going to grow faster.

I'm reading your PDFs with various types of funds and couple caught my attention. Credit funds. So senior depth credit fund, Mezzanine distress funds. That one is probably the most interesting to me. Turnaround funds, Litigation funds. Litigation. That ethics might be a problem for me. But what are these different types of funds and which one is the most exciting to you?

So let me just pick up litigation funds. Actually, I, I, it's, it's super interesting because very often it's, you know, small companies get taken to the cleaners by large companies and, and when you're a small company and you have to, you know, take, take Samsung to court or the United States government, etc, it's most, most companies don't have the capital and they're saying, well, I'm going to dedicate, you know, $5 million or euros to litigate against Samsung. Right. Or for whatever, or any large corporate. So litigation funds are there to help the small guy right there. And they're saying, listen, you don't need to spend that capital. We'll spend it for you. We'll take a chunk of your earnings, you know, typically 30%. But it's good value for money because these companies can then dedicate their capital to growing the business. So just it's, it's, it's a really exciting, I mean it's a very niche market and we find it's, it's a really interesting space. So I mean they're all, you know, the, they're all very exciting. They all have their own story to tell. Right. So I think the, the, the ones that are, the one that have the, the wind in their sail right now are growth equity funds and credit funds. Right. So right now the, the, the economy is doing, you know, broadly well.

Sure.

You know, Europe, the Eurozone is just a bit flat now. But broadly the, the, the mid cap and SME space is, is doing well and there's lots of growth equity. Growth equity is when, you know, companies go from, you know, largely national, a bit international to very international when they raise 10 to 50 million to basically, you know, become European or if they're already, you know, in a couple of states in the US to become American. Credit funds do the same thing, but with debt instruments. Right. And, and, and there's lots of, given the fact that banks have, you know, largely withdrawn from the SME lending sector since the financial crisis, credit funds have come into their own. And, and there's lots of Credit funds out there that, that provide that growth capital, that acquisition financing capital that, you know, banks have come in and out of. I mean now the banks are kind of coming back into it, but it's credit funds are here to stay. You know, 20 years ago no one had heard of them, right? Or to a large extent now they're, they're really part of the panorama of, of, of investment alternatives.

Litigation fund. I just think that last founder that I'd fund would be litigation oriented. You know, as a founder you need to spend time building a product and you need to absolutely stay outside of courts. And if someone is messing with you, well, too bad, so sad. In my opinion, you just, you know, pivot and go elsewhere. You don't ever want to spend your life in a court. It's so such a win lose game, you know, and it's such a waste of, of energy and potential. I think that Quartz is one of the human inventions that we maxed out the most nowadays in first place. I don't think it was a good invention. I just think like punishing people is, is a bit archaic. That's not how you, you have people grow and so forth. That's not how you resolve difference. Obviously it's better than killing or stealing, right? Yeah, but I believe it's completely toxic. You know, like I think founders should relentlessly focus on product market fit. I often speak to founders that are like, oh, I have this ip, you know, and that's what's going to make my startup. Well, that's another dumb human invention. Ips, you know, that's not scalable. I think founders should relentlessly chase product market fit and nothing of the human conventions or what governments tell them to do, whether it's a court or an ip. What do you think about that?

So I, I think so. IP is, is, is not the end all, be all of a venture, but it is, I think it's a, it's a key ingredient in the, in the success of a, of a company. You need an intellectual property comes in, in various forms. So you know, patents, copyrights, trade secrets and, and industrial design and brands. So you know, you need to know if you're, if let's say if you're a tech company, you need to know where your technological blocks are. You need to know that they're your own. You need to have them protected to make sure no one steals them from you. Because if you don't, then someone will, right? The chances are people will say hang on, what you think is your idea is actually my idea. And then, you know, then you're, then you've got a problem. Right? And then, and then you have to litigate. Right. So the whole idea is to kind of protect yourself, make sure you're, you know, you're, you're, you're ready for battle so you don't have to fight. So it's important to make sure you cover, you know, the basic aspects and you don't go completely naked without any IP protection whatsoever. So nobody takes your lunch. Right. And unfortunately, sometimes people do. And then, then you do have to litigate and then you're, and you're right. I mean, that should not be the focus. Your focus should not be on litigation by any stress of the imagination. But sometimes it does happen. I mean, we've had clients that were, you know, really brutally robbed of, of, of what was legitimately theirs and basically the business was gutted. And so he didn't. Well, when that happens, what do you do? Right? You can't focus on the business anymore. It's gone. Somebody's taking it from you. But you're right. I don't dispute what you've said on litigation funds and dispute what you said on ip. I think, you know, unless you've got something, unless you're selling something somebody wants to buy, then, you know, you're not focusing your efforts in the right place. You do need the minimum to make sure that, you know, what you think is yours is actually yours. But you're right, I agree.

Yeah, well, I depend, it depends if like you're aiming for like a 2 or 5 or 10x returns. You know, like me, I tend to view life in my own lens, which is always aim for the billion dollars and the, the unicorn. I'm aiming super big, you know, and I take examples of Zuckerberg, for example. Well, he had lawyers eventually that once he had major product market fit, right. Then a corporate team came in and sort of protected his ass. Yeah, I feel that these founders are just relentlessly focused on, on product market fit. If someone copies you, well, again, too bad, so sad you're not full stack. You know, you're either too busy building and you're not enough good at selling as a founder or CEO. So you, you just got beat, you know, and to me it's even fair if someone copies you and, and brings it to market quicker while they have a GTM machine that's more advanced than yours. Right. I feel that as a humanity, you know, it's kind of our duty to, to just take what the others have built and Bring it further. And if you can be that person, well, it's a, it's too bad, you know, like you, you lost that. This brutal sports. That is business. I feel that yeah, if someone copies you, like most of them, they just don't know how to bring it to markets. It's like China trying to bring stuff to market. You know, they don't stand a chance against myself skills, for example. So they can copy me all they want but they, they don't have the full stack like I do. So anyway, that's just like my black or white opinion. The credit funds, why do you think they're so permanent nowadays? It's like people pretending to be banks if you want and they might have better conditions than banks. How do you run a credit fund rightfully and making sure that you actually get your money back?

If as a credit fund manager or as somebody who takes money from a credit fund, you mean.

Yeah, credit fund manager.

So I mean, I mean a credit fund just to give basic numbers would be, you know, a vehicle that maybe has from 250 to a couple million to a couple billion. And then they would lend to medium to large corporates. And what they do is lend in situations that have a higher risk risk components than banks are willing to take. So banks typically, and this is a, you know, very, an oversimplific oversimplification, banks like to lend to established businesses that they've known for a number of years and they like to take the lowest risk for their capital. Therefore they typically charge the least. Right. But their conditions are pretty, can be pretty harsh. They ask for a lot of guarantees, they ask for a lot of pledges, mortgage securities on real estate, pledges on shares, pledges on receivables, portfolio. So you know, they have some very constrained, typically they have some very constraining conditions that they offer. A credit fund by contrast, will say look, I'm not a bank, I can't take a mortgage security on you. I will give you money that you can dispose of more freely with fewer strings attached in exchange. For example, instead of lending you on a 365 day basis, I will lend you for five years, you know, on a bullet basis so, you know, no amortization whatsoever. In exchange for which I will charge you a much higher interest rate, 10% plus some sort of equity component so I can get, you know, some juicy returns. I'm not as well protected as the bank. As a credit fund, I'm not going to have the same level of protection as the bank. So in case of bankruptcy. The bank gets their money first, I'm next, and then the equity is, takes whatever is left if there's anything left. So that being a credit fund means, you know, understanding where you are in the, in the priority rankings in case of bankruptcy and pricing, pricing your, your, your yourself accordingly. And a lot of so. And why do people come to credit funds? People come to credit funds because, first of all, they don't. You know, companies, companies can grow really fast and they may never have, they may have raised equity and never really got around to actually raising banks apart from having just an overdraft facility. And then they say, well, I actually need debt now. I need to make an acquisition. And then they go to their bank and they said, the bank says, you know, we barely know you. You're small. You know, we're, we're not, you know, we're not in the business of just funding whoever comes through the door. I'm exaggerating, you know what, how banks behave because banks aren't like that necessarily. But you know, where credit phone will say, hey, come in, you know, we've got solutions for you. Right? And, and they're more flexible, they're faster. And, and, and they, and the price of premium, of course, right. In exchange for it. So I mean, that's, that's what a credit fund does. And here there's a lot of space, you know, in, in, in these days in, in, in the market for them because there's lots of solid projects that have, you know, solid cash flows that, you know, aren't bankable. Literally. Bankable, meaning, you know, a bank will, will not be able to lend against it, but somebody else can who's willing to take a higher risk, I. E. A credit fund.

Interesting. Well, thank you for all that information, Charles. Where can people find out more about you?

Well, on our website, ww.cognitivecf.com and LinkedIn, of course, and now on YouTube with this, with this interview.