Navigating Fundraising and the VC Landscape Today with 20VC and Visionaries Club

Please welcome to the stage Harry Stebbings, founder at 20VC, and Robert Locher, founding partner at Visionaries Club. Okay, let's just start with some context on where we invest. Rob, where do you invest in the stack? How much do you write check size-wise? Just talk to me about that first.

Yeah, yeah, super short. So we are— and thanks so much for having me. Great to be here. And, uh, yeah, so we invest— we have a seed fund where we go in pre-seed very early, focusing on European software founders. We have another early growth micro fund, so it's a $200 million fund where we set the best product for founders. From our perspective, is not just to build another lead fund where you compete with great multi-stage funds, but to complement those Series B+ rounds with our entrepreneurial network. Because the difference from our LP base compared to other VCs is that we only have successful entrepreneurs. So we have 25 unicorn founders like the founders of UiPath, Miro, FlixBus, HelloFresh. So people have built great digital companies and went through the journey. and then we have 25 family entrepreneurs, which sounds boring, but if you look at the European economy, the DNA are 90% of the companies are family businesses. Some of the best companies like LVMH, Peugeot, Fiat, Ferrari, they're all family-owned and they're entrepreneurs, and they're a great enablement actually for software companies. So we want to bring that into the late stage, and, uh, that's our strategy.

Okay, so today is going to be completely unlike all the other structured talks because Rob's actually a really good buddy of mine, and, uh, so we're just going to shoot shoot the shit on some of these slides, which are pretty good actually. Why don't we start on multi-stage investing at seed? A lot of founders are like, ah, Accel and Index, they're super interested, and actually it'll progress and they might even want to do the deal at seed, and people are like, ah, signaling, it doesn't exist. How do you feel about this, buddy?

I think it clearly exists. I think as a founder, there's no right or wrong who you want to partner with, right? There are different strategies on how you want to build your company. Do you want to be more aggressive, more risk-taking? Do you want to be a bit more like, organic. I think the thing is, if you look at the whole market, what happened in the last 3 years is that there have been a tons of multistage funds entering Europe, building a new office. So 5 years ago it was Accel Index, Atomico, Balderton, and a few competing. And now you have Sequoia, NEA, you have Iconiq, you have Lightspeed, you have General Catalyst. So suddenly you have maybe 5 times the amount of multistage funds in London. And then I think it was on a slide just now. Those funds have raised their largest funds ever in history.

So am I allowed to be really unfair? Just the top 3 of those funds for founders listening. Which ones would you go to? Multi-stage, generous, rank them.

I think there are— again, it depends on what you're looking for out of a funder. If you want to have a GP-focused fund, Benchmark is a great address because like they just have partners that will work with you. They don't have a platform. They won't delegate the work. If you're saying, hey, look, So I'd go with like— Many great ones who would use it, who you choose. 20 VC, 20 VC for growth.

I'll go first. Sequoia, Accel, and Index.

They're all good partners in one or the other way. So you won't get me to an answer because I think it really, it depends on the individual who's taking the board seat. It depends really on what you're looking for as a founder. Do you want to go into the US market with your software company? Do you want to stay in Europe? And I think it's just as a founder about finding out about the DNA who you want to work with. And I won't give you a recommendation now on who I like most. I respect all of them a lot. To be honest. But it's a different story at seed stage. We were talking about signaling. So I think what I was saying in the beginning is Series A has become such a red ocean for VCs competing to enter the rounds that it's just very difficult to win deals. If you were a multi-stage fund 5 years ago, you would maybe have a 50% chance to win a term sheet in one of your great founders, right? And today you would have 20 funds maybe competing with the term sheet. So your win ratio as a VC firm is maybe going down to 10%. And if others are even Having more momentum, it's going down to 1%. So what are you doing? You're trying to do a seed round. So you're buying optionality. You're doing maybe a $3 million check here, a $3 million check there. If you have a billion fund, doesn't hurt you that much, but you basically buy the optionality to preempt the A-rounds if things are going well. If things don't go well, it's just a little difficult for the founders because if you have an aggressive multi-stage fund in your cap table, everyone knows if you're killing it. They would preempt your next round. They would clearly do the A round. That's certain. Can give you 10,000 examples. It's just if things are going OK but not massively great, which is normally the case at the early stages, it's going up and down. It's just a bit more difficult to explain. Hey, there's this partner, David, in my board from Multistage Fund X. And yeah, he likes us. He has his 12-15% ownership. He said this. Nice, he doesn't need to preempt the round. Everyone will call him and then say, look, can't be such an amazing deal if you're not doing it yourself. So I think that that's a little maybe the tricky situation to be in.

I think the core question to ask if you're a founder is like, does this multi-stage fund care about me enough? Am I meaningful enough in proportion to their fund size? So it's like, what portion, what proportion of their fund size is this check? Sub-2 to 3%, honestly, it's a total optionality bet. Yeah, I think you'll probably agree with me on that. I think another thing is one of the biggest ways that I see companies get killed in the in the vein that you just said, you're doing okay. Sometimes actually really good. But the principal in the multi-stage fund left, and you're one of 30 companies, and you are orphaned is the term where you don't have a champion in that fund. And then actually you're not going to get the next round anyway. And so you have done well, but you're still, in other words, in trouble in that respect. And then the one— sorry, it really pisses me off. We do rounds, and it's $3 million round, we do $2.6. And a big fund says, we'll do $200K. And the founders are like, oh, I really want that big brand name. And I'm like, it means nothing to them. They are buying optionality. Don't take that money.

Yeah.

How do you feel about that?

Yeah, I think it's— as mentioned, we love partnering with all those funds and we love them leading the A-round. And I'm in Seed boards with some of those funds because we also teamed up with multi-stage funds at Seed. And I'm in many Series A/B rounds. And if you put in a $20 million check and you have a partner of a multi-stage fund, in that company, that is a meaningful ticket. That partner will work her or his ass off to make you successful because it's basically called track record. It's really something, maybe one investment that you do a year as a partner. On the seed side, it often gets delegated to an associate, which doesn't have to be negative, but it's just like a very different kind of operating mode. So if you're a multi-stage fund, it's just a different business model. You're doing a few investments, you're spending great time with the founders, you're having a larger fund size, but you can't build a portfolio of 50 companies, then you're ending up Y Combinator. And that's not the brand that you want to have as a multi-stage fund. For us as a seed fund, if we're having a $165 million fund, we do a $5 million investment. That's a hell of a lot of money for us. So whether it's myself or one of my partners, they would die to make that company in the Series A round a fundraising success, right? Because it's a meaningful check if we lose that. And again, there's no right or wrong. I think there are funds I admire, Crandom, benchmark or smaller, like 400 to 500 million funds that clearly say we do seed and A, and clearly when they do a seed investment, it's one of 30 investments they do in total. They are all in with the founders. I think it's a little of a different thing than if your strategy is, oh, we have a seed fund and a fund, a growth fund, and you feel it's a little like an industrial pipeline to just over time build opportunistic ownership in your best companies, which is a smart strategy, but it's just comes a little at the cost of the founders having that exposure. We just had it like a few weeks ago. There was a company very successfully raising that had 3 multistage funds competing. Or let's take Tacto last year. You were also following the round. So there were a lot of multistage funds putting down a term sheet for an A round and afterwards a B round. That's a great situation to be in as a founder if you have all those logos basically trying to win you for the A round. I think the tricky part is if you have already blue-chip fund A in the cap table, it's a little bit like— I think we have this picture of a towel next to a pool. Like, I'm from Germany, and Germans, when they're on holiday in Mallorca, in the morning they put a towel next to the pool to reserve the space, and then they go sleeping again, and then 4 hours later they basically go back. So it's a little bit putting dips on the companies, and then you can preempt it. But it's What's the ratio? Is it maybe 15-20% of multi-stage funds following up on their seats? So I think it's something interesting to discuss.

I think these conversations are best when they're like super granular and tactical. And so I think like the question to ask if you're a founder is like, okay, 5 out of 160. How do you think about initial versus reserve checks? The reserve is the follow-on capital that you put subsequent. Okay, so actually you have a 50-50. So actually you're 80-80. Okay, can you talk to me about a time when you have not followed on into a company Why? What would be those reasons? By the way, if they do also want to do the deal, you've also just got a number of references that you can speak to, which maybe wouldn't be perfect because you always want to get off sheet or imperfect references. I think it's really important to ask these questions. And I don't know about you, but I find the best founders really interview me.

Yeah, yeah, yeah. Look, I think it's— as a seed fund, it's a bit more easy because you're more aligned with the founder because normally the first check is the one that matters. And then, you know, I think there are a lot of arguments against pro rata rights, right? So I think there are a few funds or founders that say, why should you have the right to do pro rata? You need to deserve it. I think there are different models. There are funds like Point Nine who say, look, if you want, we just give you the promise to do pro rata in the next round to avoid any signaling. So they would just do pro rata in any company where a founder wants it. So you avoid that, right? So there is no signaling risk because the seed fund would always follow on. We offer the same to our founders. There are other founders Take Deal from like Alex from Deal. We were lucky to do this round with my first fund, La Familia. When Andreessen and Spark preempted the A and B rounds, they were saying, look guys, Prada, are you kidding me? Like, I want to do the whole round. And we got really pushed to our limits to be asked like to do as less as possible to make that. And look, and then there are those situations when founders are like, if they're not really So there's 3 scenarios. Either the founder bloody kills it, then it's a competitive situation anyway, and you would want to do pro rata as a seed fund, and everyone is just fighting for the ownership. Or the founder is doing good, okay, in the middle. That's normally the case. And with any amazing outlier we had in our portfolio, whether it's Adele or Presonio or Amiro, like, they've all gone through those journeys. They were all not obvious. I think Daniel Dines was on your podcast. When your AIPATH has been done, I don't know, 80 fundraising meetings, 2 years fundraising, Volt, Mickey. I think normally companies are in the middle bucket and that's where there's a lot of room to— we would always do our full pro rata there because we still know the company can go into a great direction. We don't know yet, but we would also offer the founder, if it's a very aggressive situation, to do a little less than pro rata. And then there are those companies where you think obviously they're maybe not doing that great, but they found an investor that is backing them, where it's a bit also like we would never talk someone into such a deal. I think it's a bit also the choice then of the new investors still leading the round. And normally the founders are then of course asking us to do a certain part of pro rata. We would always do that. We would maybe optimize a little bit as a fund to say, look, is it okay if we do half pro rata? Is it okay if we do a certain amount just to give you the confidence to close the round? I think that's often honestly how we're trying to handle it. You know, about yourself, are you having a follow-on reserve? Strategy with your seed fund?

No, so we remove signaling, so we don't ever do follow-on. And so the reason we don't ever do follow-on— No, because the reason is when you actually look at the data, and we have probably the most data across, I think almost anyone, we have 2,700 GP track records. And when you look across that dataset, 78% of the time reserves are misallocated. The way that we define misallocated is they don't achieve a 3x TVPI on paper within a 5-year period. That, in my mind, is a serious opportunity cost of capital. I do agree with you that signaling risk exists, which is why we take it away by saying, we never do it. We always align with you. And from this point on, we're totally incentivized to get you the best next round. If you have actually a very heavy skew towards reserves, actually, we're not aligned. Because that new round that you're getting, I don't want it to be that high. Because I want to double down and put more in. It's much more beneficial to me that it's lower. Also, it creates this really perverse incentive mechanism where you can't really be that honest with me. Because you're always waiting for the next check. I'm like, "Hey, we're in this together. You can hit me with anything because I'm not writing another check." But we're totally— If you have a multi-stage fund that does the seed, you can't come to them that easily and say, "Oh, our head of sales sucks. We missed the quarter. We definitely don't have product-market fit. But we'll be coming to you in 3 months for the next round." Yeah, doesn't work. So that's how I approach it.

I think it's a great takeaway, by the way, also for you as founders, because there shouldn't be a pirata ride. If I was a founder— and I'm speaking against my own interests a little as an investor being opportunistic— but why the hell would you give someone a pirata ride? Because either that investor needs to earn it and really show that they're doing great work. So it's even making the investor more hungry to show after a seed round, after an A round, after B round, to really deliver on their promise. Or you have the signaling thing, which, which again puts you in a negative situation that maybe existing investors don't do pro rata, but in all the other deals they do. So I think we should— it's somehow in Europe, it's still very existent. I think it's fair to kill pro rata rights.

I think it's also lazy. I think you're a buyer or you're a seller, and I think pro rata is this kind of easy pass to be supportive. Yeah. Which I think is just lazy thinking, actually.

Yeah, good stuff.

There we go. There's something I wanted to discuss here, which is realizing they don't have bandwidth. And when we think about venture value-add, it's something we all sell. Venture investors essentially sell cash, so we have to wrap it up differently. And venture value-add and platforms, as they're called, are so popular. How do you feel about the platform approach to value-add today?

Yeah. It's a great question. Again, I think there is no right or wrong answer. It depends on what you're looking for as a founder. What I can say, if we take the extremes, what, what Harry was mentioning, they're on the one super extreme funds that just give money, don't take a board seat, say that we don't want to get involved, like Tiger, very late stage. Fair enough. And then on the other side, you have those platforms, all those early-stage funds that try to be super involved and really support them. I think among this In the second category, you have again two very different poles. You have the one that Harry mentioned taken in Dreesen and Atomical. They have a team of I don't know how many partners that are just focusing on platform support. The other extreme would be someone like Benchmark who say we don't have anyone in a platform team. We don't delegate work. We do it as a GP. I think the way I would balance it as a founder is ask myself, I think if you're having a GP support, so imagine you're hiring a VP sales. You're tapping into a new market, you're looking for advice. That would be more like an ownership perspective because that person is aligned with your interest to just make your company a bloody success no matter how. So if that person is doing an interview of your VP sales, that person will, like the GP, will grill that person, will make sure it's the right fit. If the GP is delegating to a platform partner, it becomes sometimes a bit more of a service business because people that are in platform teams That's the way why we don't have it as visionaries, and we are all former founders. We think the best of the best people out there, you can't hire in a VC firm. If you look at our LP base that we're trying to leverage, and you're having the same strategy with TrendyVC, if you want to speak to a Daniel Dines on international market expansion, or you want to speak to a Hanno Renner from Personio on, hey, how did you build the sales team, if you spend 30 minutes with those people, it's a 10 out of 10 support that you get and value that you get out of this. I think the more you delegate to people who are platform managers, it becomes a bit of a consulting service, ticking the box thing. So I sometimes get the impression that the platform people are more like scaling the GP time of a fund to make more investments than really scaling the founder time. But again, I think there are other founders who really love those platforms. If you take in our portfolio, Alex from Deal, I think he has worked a lot with Andreessen and they have been a great support. Because it has been such a fast scaling company. There are other companies in our portfolio where it has been the opposite. One last thing I would say, and I would be super curious to get your take. Those founders in our portfolio that really outperformed were pretty independent founders that really just were looking— if they were looking for advice, they were looking for a 10 out of 10 highly strategic or on the point advice to answer a certain question. As a founder, you have to answer 100 questions a day, or you have to make 100 decisions a day. So I think every second you spend with a VC firm beyond the money should be a 10 out of 10 experience, not a 5 out of 10 experience. And I think you get closer to a 10 out of 10 experience if the GP is giving that support, or if, like in our fund structures, you make the introduction to someone who is really authentically gone through that journey. So I think summary from my side is both models can work incredibly well. It depends on how much handholding you want, on how much— what you expect from a VC firm. And what's your take? That was a too long monologue. You have to interrupt me.

No, I think there's 3 types of investors. As investors who know a lot and are very helpful, fantastic, big tick in the box. There are investors who know nothing and know they know nothing, and and don't do much. Fantastic. Big tick in the box. Both great. And then there are the really dangerous investors who think they know everything but actually know nothing and want to do a lot. Big cross. Worst of the worst. Europe has a lot of them, sadly. So I think that. And then I think on the platform spend, really dig into their spend. Andreessen have hundreds. They're actually very deep across every segment of hiring, across every segment of B2B customer acquisition. They are a machine. Insight is the same. We have Insight who've done our companies, and it is a machine that they roll in. That is very impressive. The ones where I'm just highly doubtful is, oh, we've got a head of talent here, whatever their name is.

Yeah.

And you know what, it's complete crap because you're hiring a CMO or you're hiring a CTO, completely different roles. At the end of the day, they just end up navigating a job spec between different recruiters or It's not helpful, but we're pretty good at selling it. I would just say that build your cap table like you do a sports team. Everyone has a very specific position, a left back, a right back. Have someone for PR and marketing, have one for engineering recruiting, have one for fundraising, have one for pre-product market fit customer discovery. And then for each different thing, you have these outsourced kind of weapons that you can utilize. Really effectively. Be very tactical about how you build your cap table.

Yeah, no, I think that makes a lot of sense. But really, two little things to add. On the one hand side, like, we don't work that much with search firms, like, for at least management hires. If, again, it's a service that they give you, it's not an owner in your company that is really trying to get you the best senior management candidate. It's different if you're looking for AEs or if you're scaling the overall team, but if you're really looking for the best. It can open up the funnel, but I think it's just if you look at the distribution of candidates, we think if it's really the GP putting a lot of time of it, sometimes the quality is a little higher. The other thing is I think it heavily depends on stage. So at seed stage, if you take a Christoph from Point Nine, it's an amazing partner. Like, he would be very hands-on the spot. I guess every half an hour you spent with him, it will be amazing. And then maybe at a Series A stage, you work with a Luciana and the board from Sequoia, or it can be anyone from Accel or Index or any of the other great funds. Funds. Sometimes then when you've built your board, let's say you have Harry and Christoph Jans in the board and you have a great multistage fund in the board, and then you're raising your Series C or D. The question is like, what exact support do you need? Is it maybe US market entry? Do you need a platform in the US, or is it maybe really just the money? That's why I think at the later stages we really see sometimes the support angle relevance declining, and it's more like raising money at better efficient economics than having another partner that takes a super hands-on role in the board.

Yeah, I mean, I always want to roll off the board. I think, as you said, you shouldn't have 5 investors on the board who generally don't have that much of a different perspective. If at the Series B, not that much use for me to be there, really. If the founder wants it, fine. But absolutely, I don't think we should stay on the board in perpetuity. And a lot want it for brand or whatever. I don't think that's necessary.

Yeah, I think it's important to take ego out of the equation as VC.

To venture.

And be happy to leave a board.

Let's talk about this one. I like this one. There's companies that just get hot. You mentioned Tacto earlier. This was successive rounds insanely quickly, extremely high prices. Just talk to me about how you see this one where there's incredible heat for a very few number of companies. And then what about the rest?

Yeah, I think this is a really interesting one, and hopefully we'll have a long discussion about it because it has so many angles. Let me maybe start with one angle. It's at least how we perceive it. If you look at 2020, '21, like the, let's say, bubble boom times, if you imagine there's a left door and a right door, and the left door is maybe the top 10% companies, and the right door are the 90% remaining companies, which can be amazing. It can be the top top 25%, top 40% whatsoever. I got the impression that in this bubble time, funds just went through both doors a lot. So there was a lot of funding left and right in companies that maybe didn't have the metrics yet but got preempted. A bit of FOMO. I got the impression, and it's something sad, and I'm sure you can add to this, that in the last 1.5 to 2 years, there is more than enough capital in the market. We never had more capital. For software companies. There haven't been many investments, but those investments that had been done, I got the impression every fund suddenly just wanted to go through this left top 10% door of great performing companies that were absolute outliers with metrics, and the valuations went insane. So if we just take a few of our portfolio companies, Pigmento, but there are many others like DeepL. Johan is here with, with Jarek also, or Penny Lane. I think great companies, amazing performance, but the valuations are insane, right? So my takeaway is a little bit what has happened. A lot of funds suddenly just— everyone just wants to do insane outlier quality. And it has become quite difficult for some of the maybe top 25% companies or top 30% companies that are still amazing SaaS businesses, great opportunities that were a little left aside. Oh yeah, let's wait. And difficult market times. Let's see how they play out. But what's your take?

I'm losing all my friends in this talk. I just think investors are incredibly lazy as to how they define attractive markets. Like, I always laugh that all my investments are in the world's best founders in the world's most unpopular VC markets. And I'm perfectly happy for that. I don't care that other investors don't find my market attractive. Generally, they're very good businesses that make money pretty quickly. Yeah, and so I don't really care. I think there is an element though to unpack there, which is like there is a question mark around incentive mechanisms of investors. And if you don't own your firm, you do actually have to think a little bit about that. If you are a strategic person in a multi-stage fund, getting into one of these hot deals is what's going to get you the promotion. Doing the slightly off the beaten track but amazing company that might take 3 or 4 years to get to product market fit or is very deep in the infrastructure build, ah, you're not going to get that promotion. So you've got to think about the strategic incentives of the people making those investments. And that's why I also really like— and I always push people— work with the founders of firms. They ain't leaving, number one. You're not going to get orphaned. They're not afraid to take these courageous bets. They're not getting fired by other partners. And so I think we're just lazy to define hot markets. And I think that drives a lot of the concentration of capital to a very small number.

Yeah, I think it's a great point because it's something bad about our VC industry and what we discussed 50 minutes ago. There are many funds, maybe 60, 70% of the multi-stage funds now based in London, just have moved over in the last few years and they had to recruit people from Europe that would lead their practices. But there are not that many VCs that you could hire that, that have built a track record or have a lot of experience. So it's of course easier. And I think it's a bit of a misalignment of interest to just do blue chip deals that are hyped in the market, trying to win it. I think the best of the best VCs and some of the best deals ever are those that are in this other door that are not obvious. That are left.

Let's just unpack those if we actually look at them, which is in Europe. Like Volt, as you said. How many rejections did Micky get?

Insane. As one of the best companies, Micky, one of the best founders. I think they got 80 rejections. All the standard VC talk. Yeah, you never get a delivery model profitable. I give you 10 more. UiPath, Daniel out of Bucharest back then. Many people saying, ah, he has done this 10 years. So standard VC would say, oh, didn't scale in the last 10 years and looks very manual. Miro, one of the best companies ever out of Europe doing several hundred million in ARR, founded in the little city of Perth in the middle of nowhere. Andre, an amazing founder, also not a really obvious one. You can continue. So it's basically we're now talking about the best outliers we have in Europe.

I would argue that more proportionally of the biggest outcomes have been in this door than that door.

Yeah, I think both doors are fine. I guess there are two rules you added in your podcast following the heat or trying to identify the own alpha. I think it's great that both doors can work well. I think as a VC, actually, the better brand you can build is the right door, right? Because that's the non-obvious one. If you pick— if you have picked a UiPath or a Miro at the seed stage or at the early stage, it would have been more of a differentiator than if you had done the stuff that all the others are doing.

But when does price stop you doing a deal? —like there are some great companies too that are on the left side that you will get the chance to invest in because of brand, access, network, whatever that is. And when you look at— again, we've got great companies here, but I don't know if the numbers are public, but these prices were crazy. And when do you decide, fuck it, I'm going to do this and double down, or no, it's just too high?

Yeah, so I— two lenses from my seed investment perspective. So from our seed fund, when we do a deal, And we never really negotiate the price. It sounds odd. It's more like we want to have a mutual understanding with the founder on what game we want to play and if we're aligned in how we want to build the company and how we can be a good partner. So to give an example, if there is a founder saying, hey, I have an idea, I want to raise $10 million and I'm just amazing. And look, because I have been a serial entrepreneur, I'm raising that it wouldn't be our DNA because we like humble founders who are product-driven, sometimes a bit more nerdy ones, sometimes a bit the outliers. That for us, it's more the founder thinking about why would I choose to make a round expensive or less expensive. So on the Seed side, we have more founders actually taking— if we offer a term sheet, we're not often the highest one, but going for a term sheet with us or even saying I want to do a little lower round because I want to build my company sustainably. I want to keep optionality. I don't want to go into a loser game where I'm sitting on a high valuation and just work against it. So on the seed side, I'd say that it's more this what we're trying to get to the ground of. So we are doing sometimes an expensive deal, but there are good arguments from the founders why it makes sense to raise more money. And sometimes we're passing on a deal at the same valuation because we got the impression it doesn't convince us how the founder is thinking about it. At the later stages, it's A great question because we're also struggling with, with the market or doing it. And I did many wrong decisions in the past. If you look at some of those companies, I said no to deal. So we were seed investors in Pikmin, Tacto, and I could take Deal. We didn't follow on in Pikmin, Deal, some of the best companies because we thought it was too expensive. It was wrong, right? I think the great deals sometimes When you review that, when they get preempted, they are just expensive. But it's difficult to figure out where it's a momentum bet that can go wrong and where it's just a great deal.

But when you review that, this is— pause that— would you do it differently now?

They were— we're trying to get better to judge. So we had a few preemptions again last year and this year, and I think we're just trying to have an honest discussion in our team where we think we're seeing the upside. And I think you have to pay price points for great companies. We're not value investors, we're upside investors. So we're only interested in how big can it get, not that much to make a great deal. But we're also interested in backing sustainable founders. So if we are too momentum-driven, we end up being a bit of a momentum fund that just puts in money left and right. And I think the worst thing that can happen— and that's why it comes down to our quality of judging— is if you pay a high valuation in a deal that is just doing average because then you're building a portfolio of companies. And that was the trap in 2021, '22. So we all drank a little bit of this, too much of this wine that where it just has been a high valuation, maybe not the perfect SaaS growth metrics and the companies are doing nice, but they're not really a VC case. So I guess that's what we need to balance. And sometimes we'll be right, sometimes we'll be wrong. In those companies, I regret it.

I think the big mistake that I see actually founders make on constructing rounds is that also on dilution and how the venture business works. So if you come to a venture market with a 10% dilution round, you're not going to get the best venture investors in the world to partner with you because you're going to be giving it max 8% away because there's going to be 2% for angels, maybe even less, maybe 7%, 1% existing, 2% for new angels, whatever that is. You're not going to get the best. That is the problem with these, like, low dilution rounds. Now, don't get me wrong, they can work. You can do angel rounds, you can have people who aren't ownership set, but like the true tier 1 partners who founders want as venture investors, you're not going to get. I'm just intrigued to hear how your thoughts are with that in mind on ownership and how you think about that.

Yeah, I think as a founder, and we discussed 10 minutes ago the value add that you expect from a fund, and I think there are two things that should go into this. The one is like The value angle, I would always at the early stages just go for the best partner, not that much optimized for 2% more or less dilution, because it's more— you're up building a $10 billion-plus software company and you want to get any ingredients on board to make that happen, which is already very unrealistic. It is already something of a massive act. So I would try to get on board the bloody best ingredients in terms of an angel, an investor to help me build the upside and not optimize for 2% more or less because it's more about what you get there. The other thing is I'm personally biased totally against like aggressive pricing or raising massive rounds because I think they're like— it feels nice for 1 or 2 days after closing the round for the founder that you did this amazing deal and you have 7 years runway or whatsoever. But I think it just comes with downsides because you— the first thing is you're sitting on a high valuation. You're turning a winner game into a loser game because basically sitting on a high valuation means you constantly work against proving that you can grow into it. It's a daily pressure on top that takes your optionality. I think having optionality as a founder is the best situation you can be in. If things go amazing, you can always accelerate and raise more. If things go bad, you have the flexibility to do a bridge round to take in more money from great investors. If things go medium, you have the optionality. If you're sitting on a bloody high valuation and look at all those companies in the last 2 years, SaaS companies that had to raise down rounds, like that's something terrible to do. Your employees, the most important ingredient. If you have a high valuation, high strike price for your ESOP, like the people will leave. The smartest people are smart that make the dent in your company. They will understand what valuation you're at. So they are leaving. Yeah, they're starting to leave, or they're starting to question. Look, we just had a medium year. Maybe we grow X percent, so maybe 50% below what we wanted to grow. The valuation is high. Maybe I go to this other company at the earlier stage where the valuation is lower, because how should we grow into this? It takes 3 years for us to grow into the valuation, another 3 years to make money. That's 6 years for myself. So you lose your best employees, or you have to reprice, which again is not something nice. The third thing is something hidden. Which we really see with every hard learnings we had with pricey seed rounds. If you have more money as a founder, you're not as diligent with the first employees and hires that you do. You're more aggressive on hiring, and you're starting to compromise on quality. If you can only hire 5 people and that's all the money you can spend, you will sleep 3, 4, or 5 nights, be up at night to think about, should I do this one hire? And those 5 or 10 people are automatically the next 100 people that you hire because they will So it's destroying the culture in many companies. If you have this momentum, oh yeah, and I got a VP marketing fast, VP customer success done because I have the money, and if it doesn't work, I can rehire. Suddenly you have 50 hires that they've made, which is maybe, I don't know, 60% of your employee base. And then you feel that's not our culture, it's not the right people. And the last thing is, sorry, super long monologue. If we look at the later stages, for every billion in valuation that you add, If you take a 10x multiple, which is already generous, taking public market 6x multiples, you need to add $100 million ARR. So take a normal round, even if you have 2 to 3 years runway, and if you're adding $1 billion as a valuation, that is too aggressive. You have to add $100 million in ARR to justify that valuation increase in that point of time. If you don't do that and the market is not as nice as it was the last 2 years, you're just having trouble. But how do you think about it?

I've done 170 investments. In 10 years. And we analyzed performance across them according to actually how much they raised at the seed. And consistently, the worst performing companies raised $5 million or more at the seed round.

It is— consistently. It starts at seed.

It is just absolutely the clearest signal you have. It slows down all urgency, as you said there. Fundamentally, people do too many things at the same time. They are not focused. They do a second country way too soon, a second channel way too soon. Customer discovery, whatever. That's just uniform by far the worst. And then also, when you do 5 on 25, you know, you take away the ability to actually do the next round at 25. The best is to do 3 on 12 or 3 on 15, and then actually, if it doesn't go that well, you can still raise like 4 on 20. But when you raise 5 on 25, you gotta hit it. A really good heuristic to think through is I need to 3x every round. So if my price is $20 now, in a 12-month time period— because you're going to fundraise generally for 18 months of runway, generally speaking, like broad strokes— you're going to go out in 12 months. I need to be at $60 then. Can I see that? And if you can't see that, or you're going, oh, you're going to open up a world of pain because it really damages employee morale when they don't feel like they're moving fast. I think that's really, really important.

It's spot-on advice. I think it's exactly interesting that you have those metrics. Maybe you can publish them on, on Saastr, or you can publish them to me in an email. No, it's— I think one thing to, to add on top is, which I forgot now, but I'll get to it, I'm sure, in a second. Speaking about— we spoke about raising too much optionality, about price points.

Every founder's just, I'll put the money aside, I'll put the money aside. I know I raised too much. Yeah, they never do. Parker Conrad from Rippling and I always have this beef on Twitter, and he argues with me, you're wrong and you can put the money. I said, yeah, 100% you can, but barely anyone is Parker. The majority, you just get a little bit looser on what you can do. Yeah, that's a luxury hard, but fuck it, we can do it.

I give you one funny example that I loved with a founder. It's actually, it's on the slide, so it's a contra example, but Office of Founders, interestingly, what We have a massive correlation between— an anti-correlation between how nice the office looks and how good the company is performing. So here's the thing. I had a conversation with the founder a week ago who said, look, we're going into a mediocre office because we're an early-stage company. We're doing well. We've raised a lot of money, but we want to give the people, every employee, the impression that we've not made it yet, that you're hungry every day, that you built this company into something absolutely insane. But we're not there yet. We're not retiring yet. If you give your employees the feeling that we have the most luxury office with 20 coffee machines and kickers and take the Elon Musk example of going into Twitter, your employees will feel like I'm on top of things. I've reached everything. It will just make them a little less hungry. It's just one argument of a founder, but it also creates the constraint resources.

It's also, ah, fuck it, they can afford it. And so when it comes to also like salaries and bonuses and fuck it, you can spend that on a coffee machine. Why can't I have this? Yeah, I'd much rather invest in the team.

Yeah, and I think it's also aligning which people do you want to have. Do you want to have people that really get their hands dirty and build a great company, or do you want to have those people, you know, that want to have a great office? I mean, it doesn't mean like, of course, get a great office, but make sure you get it at the right stage and the right kind of expectation management. One last thing to close that chapter: I would forget about everything we just said and just be a founder and build the company the way you want to build it. I think there is There's far too much hype about what do VCs expect at what stage and what would one do to raise an A or a B round. You're an entrepreneur. There are 1,000 ways to build a great SaaS company. Some of them haven't even raised a lot of money. There's a company called Kyma, or it was called Asia Inspection. The founder has built a billion-dollar-plus software company. He hasn't raised any amount of money. So just think about what do you need, what money do you need, what support do you need. How can you be a great entrepreneur and don't listen too much of what 1,000 people would tell you to do?

I think it's know when you're Walt Disney and know when you're Jordan Belfort. And what do I mean by that? Walt Disney is, sell me this story, make it magical, and make it wonderful. That's your pre-seed and your seed. And then you need to know when to sell me the pen. Yeah. And there is a very rude transition between the two that I think will catch people up. And I think people are seeing that now, which is why it's often easier to raise pre-launch than it is post-launch. Pre-launch, you can still be Walt Disney. Next, you're Jordan Belfort. And I just think it's really important to recognize when that transition is. Yeah. Do you find that too?

Yeah, I think it also has changed a little bit in the last 2 or 3 years, right? So I think 3 years ago, 4 years ago, people would raise an A-round maybe with not that much traction and you would be Walt Disney. Do you buy this? This slide or the metrics? So these are just metrics. It's an average of our portfolio. So we have different quartiles of company performance and a few other VC funds who have shared data with us. So it's a bit what we— how we classify VC cases. It doesn't have to do with— you can build an amazing software company that grows 30% year over year, make this a family business, or— but if you want to be aggressive, in the VC Shark Tank, I guess this is a little bit different metric categories that we, that we see as our orientation for the Series A stage.

Do you invest through this? Do you invest through this lens?

No. So we are, we're investing seed and Series B. So this is more when we get our companies prepared for an A round, like from those conversations they have with funds. This is not like what we think is great. It's more like what the market represents in which companies convert in raising Series A rounds fast. I really am fast and maybe not. And if companies— I think it has just changed a little bit that there is more focus on metrics. There is more focus. I think what maybe used to be, if we take $500K ARR, maybe 3 years ago with a great Walt Disney story and a few great product references would have been an A-round that many would have— many VC funds would have looked at, which today I think the corridor has gone more into something in the direction of $1.5 million to $2.5 million in ARR. I think where Series A funds start looking seriously into, into SaaS companies.

One slide everyone should have on their deck, I think, is 3 reasons why you should not invest in us today and then say I don't know, our sales cycle is too slow, and give the data. Our net retention number is too low, give the data. And then on the next slide, show a proactive plan as to how you plan to mitigate each of them. That is the most insightful, self-aware founder who clearly understands their challenges, has a plan to solve them, and is completely humble enough to accept that. And on top of it, no one does that. When I'm at Oh, because we're all thinking, oh shit, that sales cycle sucks. No, no, you've just addressed it. You've not only said that I get it, I see that, I see where your head's at, but I see the 3 ways that we're going to solve that here. Yeah. Wow. That's really impressive. Yeah. Answer the problems that VCs think before they say them. Yeah. So what we're trying to do—

we're not always best preparing the companies, but we're trying to have a monthly check-in on where we stand with this, and it starts with the seed. Like there, there are no metrics. You're building the product and you're seeing, do people use the product? Once it gets more into Series A, normally it's the case that some things might look like outliers, but it comes at the cost of others. Like if you grow faster, normally your burn multiple is higher. It's fine if your kind of sales cycle is bloody long. Fine if you have a good argument like why that is the case and how you want to improve it. I think at the Series A, you don't need to have an answer to all those things, even if your metrics don't track. I think it helps a little bit to navigate the coming from a Walt Disney, having a good idea, building a product, to graduating a little bit into what will be important for Series B, C stage. Because at a certain point, you need to look more into metrics. And I think these are the metrics, at least I think for a SaaS company. As a human, if you do a— is it blood picture? Is that the English word? If you go to a doctor and he's telling you, oh yeah, I looked at your blood and blood test, this is what tracking good, this is average. Oh, you should have less cholesterol. I think this is a little like, a little like a blood test of a SaaS company. It tells something about some health angles. But if Harry had a night out where he drank like 2 bottles of vodka, of course it would show bad. But if you have a good answer that it was just one night out because it was the wedding of a friend, then It's fine to understand it. If this is a recurring pattern over 10 years, you won't do well. The company wouldn't do well if the metrics don't add up.

I'm loving these analogies. Final one. What would be your parting words to founders in this fundraising market?

I think it's the best environment ever that you could have because the pace of digitization and digital adoption B2B has never been higher. Europe is home to all those industrial world market leaders, look at the DNA of our economy. I think it's the biggest enablement you can have building a SaaS company. The capital is there. There is more than enough capital that has been raised. Just be an independent founder. Great founders build great companies independent of cycles and try to not be too much in a bubble of what VCs expect and just try to define your way to build the company and you will succeed. If there is a good product, there will always be a pull. And you can decide yourself what founder you want to be. Do you want to be a VC-driven founder? Do you want to be an organic founder in the first years like Daniel with your iPath? And I think it has never been a better time to be a founder. What's your take?

Someone once gave me wise advice, like, getting a great round is like finding the love of your life. Which is like, the truth be told, you should not be— the best way to do it is to work on yourself and work to be someone that someone else would want to partner with. And it's the same thing with fundraising. Work on yourself, make yourself a fantastic product, and work to be that thing that someone else will partner with who is also great. And I love that analogy. We've really gone from Jordan Belfort to love at the end. But I would say that's a very strong one. We focus too much on what other people think. And it's like, just work on yourself and work harder than anyone else.

That's a great, great sentence to close.

I hope this has been really different, actually. I want it to be fun and discursive between two friends. And so I hope it's been enjoyable. And thank you so much. Thank you for being with us. Thanks.