SOUTH SUMMIT 2016 - Panel - The winner takes it all Maintaining competitive advantage in VC

How do you compare these funds? What are the competitive advantages of one fund against another? So we've got an amazing lineup that Jeff is going to moderate today. We have XL Partners, we have Index, and we have Aleph. Three funds that are pretty innovative, pretty big, and are fairly active in Europe. So it's my pleasure and honor to introduce to you Luciana from Accel, Martin from Index, and Eden from Aleph.

Come on in.

Hi. Oh, these are assigned. Okay.

I'm here next to you.

Very organized. Thank you.

They don't trust us to choose chairs.

Exactly.

I guess I'll take the one in the middle that says my name is. Okay. Jeff, you did a great job warming this up for us.

Thank you, Jeff.

Well done, Jeff. Thank you. Okay, well, hey, we are thrilled to be here with everybody today. It's kind of hard to see you, but I would love to. Before we get this started, just by a show of hands, how many entrepreneurs in the room, if we can see you. Ah, now we can see you.

Great.

How many investors in the room?

Wow. Okay.

All right. More entrepreneurs. That's great. So today we're going to talk about the mythical competitive advantage within vc. And you're going to hear from four very established investors on this topic. So let's just first really quickly go across, give maybe a 30 to 60 second intro of you, what you do, maybe something off balance sheet that people don't know about. You raise that, go. Why don't we start over here? Edin?

Yeah.

Hi. So I'm Martin. I've been working with index for almost seven years now. Based in London, but covering France, UK, Benelux and investing mainly in marketplace SaaS, API based businesses, mobile. At index, we have two active funds today which we raised earlier this year. One early stage, one growth stage. Together it's about 1.2 billion US and we invest about half in the US and half in Europe across a wide range of sectors.

Okay, thanks. Luciana.

Hi, my name is Luciana. I'm an investor with Excel out of our London office. We're a global venture capital fund. We have our roots in Silicon Valley, started there about 32 years ago. We've been in Europe and investing in Europe for about 16 years and we also have funds and offices in India. So very much a global platform. We invest anywhere from early stage seed deals up to growth, anything in soft technologies. Personally, I spend time both with consumer businesses and software businesses. Our funds in Europe are half a billion dollars, in the US are $2 billion and India 300. So decent dry powder, very Excited to fund as many of you as possible.

Excellent, Eden.

I guess I'll start with the fact not known. So I'm originally from something called Kibbutz, which it was the last socialistic experiment. I guess it proved that you can share everything as long as you have nothing. Not very capitalistic. I'm part of a fund called Aleph. I moved over to a dark side about six years ago from building companies. And I think something unique about aleph, it's a $330 million fund, mostly focused on Israel, Israel related ventures. Something that is uncommon is it's an equal partnership and a partner only firm, much like Benchmark, which US side. So it's a very different kind of a fund in how it operates.

Great.

And I guess if you heard me for 15 minutes, I'll just mention the thing that wasn't known is that I wanted to be a chef, but my grades in math and physics were way too good. So they said no and I couldn't. So I ended up being a vc.

I'm still waiting for that invitation for dinner. Come on, Jeff. Okay, so let's. This question is for everybody on this panel. I'd like you to each talk through a little bit about what you think makes your investing platform unique. What are you doing that is different? What do the entrepreneurs in the room know about your firm and you specifically that makes you different or unique as an investor? Maybe we'll start here and go back around.

Sure. So I think it's a mix of things. One is the fact that we were one of the very first micro VCs in the valley. And I was one of the very first, like web2o investor. So we have the longevity, we have the track record, we have the reputation of really sort of going deep to help our company. So we're very focused on doing only a handful of deals per partner per year. We can sit on boards, we'll sort of lead deals because unfortunately for entrepreneurs, there's always a bunch of people who are very excited to, you know, invest in you once you found a lead. But finding the lead is really sort of the challenge and we have no problem being there and stepping up to do that. And I think entrepreneurs often come to us saying they have a ton of interest but no lead. So please help us.

So I mentioned the equal partnership and I think it's interesting because the dynamics in many partnerships is something that is not often talked about. And many of the partnerships descend into a kind of a political organization because most of them are unanimous based voting vehicles. So in order for your deal to pass, all partners will need to vote for the deal. And generally that turns into pass this deal for me, I'll pass the other deal for you, and it becomes fairly political. The interesting thing about an equal partnership, if you structure it right, is it's non consensus. So in ALEPH you vote 1 to 10, you can't vote to 5 and if the deal is above 5, it passes. So for example, if in a case of two partners, then if I vote one and the other partner votes a 10, the deal goes through. And so it allows us to take a lot of non consensus type deals on one side and on the other is there is an ownership, someone sits on the board, but everyone has the same economics, which means that everyone is stepping up to help a founder once we invested, regardless of who led the deal. So there's no kind of for the founders in the crowd, there's no, hey, you have 55%, so you'll be staying up at 8pm and I won't be.

It's very interesting. I'll just follow up on that before I go to the differentiation points. But it's very interesting because it's actually quite similar for us in that if the person who wants to write the check really wants to write the check, of course we take feedback from all our colleagues and we value this feedback, but they have the power to do that. There is no voting system per se. So very interesting that you mentioned that as a differentiation point. It's very similar for us in terms of, okay, what helps us stand out or be different, be special? I don't know, Unique. Unique. Well, I think I mentioned when I first started, the reason why we go into the office every morning is because we want to find the best entrepreneurs from everywhere. So we're very much a global platform. We want to find the best entrepreneurs in the us we want to find the best entrepreneurs in India, the best entrepreneurs in Romania. Maybe I haven't found them yet, but I'm sure they're there. Exactly. So that's one angle that's very important to us and it's very much part of our DNA at Excel. The other one I would say we're quite hands on. Obviously many VCs have board seats and a lot of great board members. But what I can say is that I look at my partners around me and they'll be on the phone with their founders, you know, before dinner, after dinner, before breakfast, any time of the day. Very accessible. And I think that's really important because it shouldn't be a big deal to communicate to your board members. You should have access to them. You should be able to, you know, it should be a sounding board at the end of the day. So I really like that. And yeah, those are just a couple of angles that we emphasize a lot.

Great.

Yeah.

So I mean to go back on the voting side, we actually do have a vote. We've been having it for about three years. It's actually a qualified majority. So even a slightly complex vote, although a partner can still push for a deal. If you really, really believe in pounds of table and one of the main reason is that when we have about eight, nine partners and you have different personality around the table and you have people who are always extremely convinced about what they do and have huge sometimes ego and personalities and big another partnership and some people are more, some people are more downplaying things a bit more casual. Especially when you have different nationalities and different personalities. And so you end up having. If you don't actually vote it's hard to really figure out what people really believe about it is. So we've been very, very happy with that new system. On the differentiation part, I'd say one of our, I think two main characteristics. The first one is that we can help entrepreneurs across the life cycle of the company. So we can write a 500k check all the way to a 50, 60, $70 million check. And we've done that on some occasions in companies which we've been helping from the get go to go to you know, hopefully to, to IPO or to exit, you know, companies like Delivery where we invested, you know, with Excel who actually came in on the first round and we do have 2 million check and then we wrote every check until series, series D. So not the only investor obviously. You know, we brought in a sell and a few other, a few other guys along but we were significant in you know, encore investors for a large part of the story. And I think that's, that's super helpful when you kind of, you know, need to raise a lot of money and to have someone that can help you syndicate your deal quickly and contribute to the deal. And the other thing is that we are a European and US fund but it's one fund. So that's the difference with Excel, for example where we actually sit down together at deep flow meeting and partner meeting with the video conference with the guys in SF and us in London and we look at every deal and every investment opportunity together which also means that we are, everyone is very and we share the carries as an equal partnership as well. But everyone is. There's a huge buy in across both sides of the Atlantic when those companies need help to go to the US on the other hand come back to Europe or go to Europe when there are American companies. So I think that those are the two different. If you really want to internationalize from the get go. I think we got one of the, I think the only fund with Cross Athletic team looking at everything together.

Excellent, thank you. So Edin, you started something off and I want to now we'll just kind of open this up to the four of you if you want to comment on it. But this concept of non consensus and this thinking that the deals that you're looking at don't have to be. Everybody has to say yes. Maybe only one person has to say yes. And really what that gets to is this idea around conviction. And so as a founder sitting in the room meeting with investors, they're thinking, I want somebody that's going, I want my investor to fight for me. I want them to have conviction around what it is that I'm doing. Maybe you can talk and then open it up to the rest of you. How do you feel? What kind of role does conviction play in your differentiation for a founder taking your money versus the next person's money? Anybody else is on this stage.

So I'll actually use a story for that. So Aleph is a very young fund, right? It's three years old. Three years young. It's still a startup in many ways. And one of the second deal that we looked at is a company that now I guess many people are familiar with. WeWork. It was a strange deal. It was, we just told LPs that we're doing deals, we are focused on a rounds and we are, that's our, that's the sweet spot. And it was a billion dollar valuation deal that Michael was leading and we, and I was, I was, I was head scratching at that point. I was trying to figure out, okay, so you truly believe this is a 10x opportunity. So let's, let's figure this out, let's look at the numbers. And Michael's in the U.S. i'm in Israel. It's the biggest day in the year for me because I run a conference called GeekCon and we were on the phone for eight hours straight. Eight hours straight just trying to figure out, I'm telling him, listen, this is a 3x for sure. But I just don't see how it gets to $10 billion in valuation. I just don't see it. And not only did we go through the numbers, not only did we get the trust between us, but we were fortunate enough to place the head of product in WeWork before. So I call him up, I try to figure out what's going on and we started going through the we live vision and I kind of soften and then we go on another call for two hours and Michael is absolutely convinced and he's saying listen, this is too new for partnership. I'm not going to activate the fact that if I'm convinced enough we'll do the deal, but we should do the deal. So he was absolutely convinced. I was wrong on two counts. I was convinced because of WeLive. But WeLive is just two buildings now, so unrelated and they I think leaked numbers now so we can talk about that. It's at more than half a billion dollar revenue. So conviction plays a significant role and sometimes it just ensures and shows you that other competitors and other startups will, because it's non consensus are not likely to compete with you neither with a company or with you as an investor. So it's actually, it's a feature, not a bug.

Feature, not a bug. Other thoughts?

Well, the way I think about it is at the end of the day we make money from outliers and it's just very difficult. If you put 10 people in a room they're not all going to identify the outliers as serious a where we hope to get into an investment, I mean we that's later stage as well but ideally that's when we'd get in. So if you're looking at a private equity investment or if you're looking even at a growth investment, you can do your analysis and you can reason with people and explain why this is going to be a 3x or a 4x. If you look at an early stage company and say this is going to be a billion dollar plus, it's hard to draw a straight line. So for example, when we did the quote unquote seed and supercell which was an 8 million euro seed before they had a game, I don't think that was a straightforward decision at all. I think in any partnership if you needed a consensus it might not have happened because there might have been one partner who would have said hey, it's crazy to put 8 million euros in a company pre product no matter how good the team is. We invested in Slack when it was a video gaming company. Probably also not straightforward. So I think because in venture capital you make money from outliers. This model Works quite well.

I think those are examples where you just follow the founders. Right, so.

So yeah, absolutely.

Stuart has always wanted to build a gaming studio and he failed the first time. And they did Flicker and he failed again, it did Slack. So maybe the third company will be successful.

Absolutely.

I think the point on conviction is essentially saying, look, I'm willing to put my reputation behind this deal, but I need the firm to essentially agree with me. And at Softex there's three partners and we could have a vote but basically we'll have to say yes. But it can be sort of a big yes or a small yes and everyone has the sort of no fucking way card which is a bit like, you know, the nuclear arsenal. You have it because you don't want to use it, but just in case. And it's really sort of a case of look, if I really hate this deal and I really disagree with you, I'll kill it. And anyone can do it because we're all partners. But at the same time, if you're here around this table, it's because you deserve to be here. And if ever you really believe that that deal that I really don't like. I had the case with my partner Andy, former co founder of Huddle joined us a year and a half ago and he loved this deal that had a. So it's actually funny, it's a company which has a back end here in Madrid and front end in the valley, healthcare based and we really sort of didn't get it but he convinced it and he got away with it and now we're all behind it. So everything you do shouldn't be obvious because if it's obvious to everyone then there might actually be something very wrong.

Do you have a sign with a small yes and a sign with a big yes?

No, but you see how excited people are and you know, of course you can see the okay, I'll do it fine or the yes.

Well, the beauty with voting is that in a few years time I will be in a position to tell you what's the best, hopefully what's the best approach because I can look at the data and see how people voted and look at the performance of the companies. We've only been doing it for a few years and as you know in VC it takes a long time to figure out the returns and it may be that what happened in the past won't happen again in the future. And also results can be so skewed by one winner that maybe it's probably not going to be very significant. But at least with the voting, we'll try to. So next time I'm on this panel, I'll try to come up with a good answer of what's the best approach prediction of our consensus.

Excellent. I hope the organizers heard that. So, entrepreneurs, you want to find an investor that has conviction around your deal, regardless of their structure within their firm. You want to find an investor that has conviction around your deal and your job is to convince them of that quickly. I'm curious for each of you. We talked about your firm dynamics and we've talked about maybe what sets your firm apart. But investing is a hand to hand combat game helping entrepreneurs, as you were saying, Luciana, it is being accessible to the founders. That's one on one. That's personal relationships for each of you. What sets you apart? Or what is your, for the title of the panel, your competitive advantage. What sets you apart as a person? Why do founders want to take your capital specifically independent of what your firm brings?

The promise of no bullshit.

Okay?

Because essentially that's what they get from us. And it's not always pretty. And you know, as one of our founders just posted a piece on TechCrunch a couple of days ago about her seed and her series A company is called Shipo Seed and series A sort of Dex. So what she actually used to raise money from us. We led the seed round and then from Albert Wenger at Union Square and you know, she tweeted, you know, thanks for the support and you know, parenthesis is tough love. And that's really sort of what we give them because, you know, we're there to support them, to help them, to, you know, sometimes be the, be the shoulder on which you can cry. But we're also tough and we're there to help them make hard decisions and sometimes sort of put them as well. If sometimes, you know, someone comes to us and says, you know, I've beaten the plan four or five months in a row, I say, well then let's change the plan as opposed to say, hey, let's continue beating the plan. Because at the end of the day, only the very best companies will be able to grow sustainably, you know, 3, 4, 5x per year for, you know, a number of years. So we try and really sort of push them hard and never, ever run from, you know, tough discussions and tough decisions.

So interestingly, I think it's a service business, right? So many VCs, like old school VCs were born under the premise that the LPs are the customers. Well, I think it's very clearly that the entrepreneurs are the customers and then the LPs will benefit because entrepreneurs are well served. And one of the big challenges there is is if you look at the kind of relationship between entrepreneurs and the VCs is what does it mean? Good service. Right. So, and many times as an entrepreneur, I hated getting an email from a board member saying having a URL and the word thoughts question mark, it's like, fuck you. If you read this, how about you include your opinion and your analysis of it? And if you haven't, are you just outsourcing the reading? To me, so much of what we do, we're very software driven and we measure basically everything and we track about 30,000 entrepreneurs because Israel is a small ecosystem. But we also track our bullshit ratio. Right. So what's our signal to noise ratio? And were we helpful? And have we done 10 intros out of which nine were a total flake? So that was a waste of time for the founder. So we actually measure the signal to noise ratio and for me that's a big success if the things I do for the entrepreneurs are actually providing them with value.

How do you measure that? I'm curious.

So we categorized a few things. I actually published end of 2015, a summary of the kind of service that we provide and the KPIs that we measure anywhere from follow up funding. How many of the intros for the follow up funding did we make? How many individual contributors did we find? How many executives have we found? Israel is really bad about messaging and press, so how many media presence entries have we provided for them through our interest? So very specific, understandable KPIs.

Okay.

Any thoughts over here? Yeah, go ahead.

I think it's a really hard question. I'm not sure why people choose me, to be honest. I hope if you ask entrepreneurs, I'm sure they'll say tough love. This comes up a lot. I hope they'll say empathy. I think being an entrepreneur is really, really hard. I think the opportunity cost is really high. You're dedicated and building your entire life around this company for years trying to make it work, and it's never smooth sailing. There are always ups and downs. So I hope, you know, hopefully not totally panicking and trying to understand where they're coming from when things are not going well. But that's what I hope.

I'm sure that's the case.

Yeah, I'd separate.

Is it your beard? Is that what it's called?

Yeah.

So the beard advice comes up a lot when I ask feedback And French accent. Those are the two, my two selling points.

French accent definitely helps, but I'm covering.

France, so actually it does help. But no, I think it's fairly, fairly similar to Luciana. I think the way I interact with my founders, it's at least a weekly call and on which we kind of usually dig a bit deeper on one topic which is either hiring or product or international expansion or fundraising usually are kind of the four things we are most helpful with. And then also kind of direct access on WhatsApp, Facebook messenger, whatnot. That's the new way, obviously businesses is being conducted and so there's kind of a daily hourly contact if needs be. Typically one day is a fundraising situation or M and a situation that's not a situation where I've been helpful. I had to exit this year on which I played. I come from an M and A background and so I kind of helped first time entrepreneurs in both cases. One which was intermediated, the other one that wasn't, in which I ended up playing a little bit of the, you know, I didn't do the full role of a bank, but I kind of helped a little bit on that on those ones. I think that was kind of practical value add, I hope.

And you just said the key word there. So I want to press back really quick for anybody to answer this very quickly. Value add. What does value add mean to the entrepreneurs sitting in the room? Anybody? Really quick.

So I actually outlined the numbers. There's 99. 1. So 90% of investors detract value, 9% are neutral, 1% are actually adding value. And it's so hard to find the 1%. Might as well try to find the 9. But anything other than that is that. So let's assume that's a good baseline then I think fall on funding is super important. 89% of the B rounds in our portfolio came through our introductions. And companies die of one reason, one reason only. They run out of money. So in my mind, much of that is the trust by proxy. That B round investors will say, oh, if they invested, I'll verify that. I'll do my due diligence. But there must be something in it.

Yeah. Any other thoughts? We good on that one?

So I thought about this quite a bit. The reality is, if you think about it, you know what? I think Facebook would have been Facebook without Excel. Probably Dropbox would have been Dropbox without Excel. But I think what a good investor does is that it helps the entrepreneur get there a bit faster. And if they get there a little bit faster, I think that's significant value add.

That's a great point, Luciana. Thanks for making it. Our opinion on this, the Kauffman fellows, is that big companies can be built anywhere. The VCs. As you heard on this panel, we are the service layer. We are the connective tissue. And we believe that big companies are built by having connective tissue to the major population centers around the world. And the VCs help be that connective tissue for entrepreneurs. Okay, quick lightning round. One word answers. I'm going to go just really quick around international investing. Yes or no?

No.

No. Fuck, no.

Absolutely.

Absolutely.

Of course.

Okay, now we'll start on here. Massive company can be built in Madrid. Yes or no?

Yes.

I hope so. We have investments here.

I think so. But there needs to be more failure. Willingness to fail.

That was like 10 words.

I saw willingness to fail.

Not invested buyers. But good luck.

Okay, and last, last question. Trump Clinton or move to Madrid?

Clinton, please.

No comment. We have Netanyahu.

No comment.

No comment.

I'm not voting.

Oh, my gosh.

Come on, you guys. Help us, all right?

Please join me in thanking this group.

Thank you all. Thank you for having us.