Latest / Deep Tech Germany – AI, Robotics & Frontier Innovation by Startuprad.io™ / Financing Capital-Intensive Deep Tech — Partech's Simone Riva

Transcript

Financing Capital-Intensive Deep Tech — Partech's Simone Riva · Deep Tech Germany – AI, Robotics & Frontier Innovation by Startuprad.io™

0:00
Speaker1: If capital is supposed to make companies stronger, why do some of the most efficient
0:05
Speaker1: companies emerge when they can't raise any venture capital?
0:21
Speaker1: What actually determines whether venture capital creates value or destroys discipline?
0:27
Speaker1: Today's guest sits at the intersection of venture capital strategy and long term capital thinking.
0:34
Speaker1: He is a partner at ParTech VC and previously worked at H14, the family office
0:42
Speaker1: associated with the Bilosconi family as well as the consultancy Bain.
0:47
Speaker1: We connect that perspective with real founder outcomes, including companies
0:52
Speaker1: like Flix, which scaled with significant capital, and Emma,
0:58
Speaker1: which reached over 400 million euros in revenue with minimal funding and strong discipline.
1:05
Speaker1: A little disclaimer, the most recent numbers are not available to me,
1:09
Speaker1: but since they sold half of the company to conglomerate, they are close to getting
1:16
Speaker1: to 1 billion euros revenue.
1:19
Speaker1: Hello and welcome, everybody. Simona, great to have you here.
1:23
Speaker0: Hi, Joe. Great to meet you and thanks for having me.
1:28
Speaker1: Totally my pleasure. You had quite an illustrious career so far.
1:33
Speaker1: When you look back at your own career, what shaped your philosophy on capital and risk?
1:44
Speaker0: Absolutely. Let's take it from here. So let's say that basically I always wanted
1:50
Speaker0: to be an investor even before I started the Bain & Company.
1:55
Speaker0: So when I joined Bain, I proactively decided to,
2:03
Speaker0: invest most of my time and spend 50% of my time on the project on due diligence,
2:12
Speaker0: for private equity funds, strategic planning projects,
2:16
Speaker0: cost-cutting projects across multiple industries from luxury,
2:19
Speaker0: med tech, pharma, oil and gas, diversified industrial, B2C.
2:25
Speaker0: That helped me basically learning two things,
2:30
Speaker0: how different industries work and especially how a P&L looked like,
2:39
Speaker0: especially a top-notch P&L looked like in each industry.
2:44
Speaker0: Um then i basically when i moved
2:49
Speaker0: to age 14 i learned how to invest in the growth stage and so i really,
2:56
Speaker0: uh understood how to apply what i learned at ben and company more on the tech
2:59
Speaker0: side especially because i was investing already uh at the later stage and so,
3:05
Speaker0: i had the opportunity to help also some entrepreneurs in scaling.
3:11
Speaker0: Their businesses. Now at Partec, basically, I'm investing at Series A and B,
3:18
Speaker0: so much earlier on compared to what I was doing at age 14.
3:23
Speaker0: And basically, I'm using what I learned in the first 10 years of my career to,
3:31
Speaker0: A, to understand which are ideally the companies and the business models that
3:36
Speaker0: work better than others.
3:37
Speaker0: And B, when my portfolio companies reach already a certain scale,
3:44
Speaker0: I can help them in identifying early on the issues that they have and,
3:51
Speaker0: you know, solving them and scaling them.
3:55
Speaker0: Uh scanning basically the the business uh ideally becoming uh you know large
4:01
Speaker0: businesses and also profitable.
4:05
Speaker1: I was wondering you you talk about learning what did you believe early on for
4:10
Speaker1: example when you started at main um that you now think is wrong
4:17
Speaker0: In terms of uh you mean for venture capital or in general?
4:23
Speaker1: In general investing, but especially, of course, 91 percent of our audience
4:28
Speaker1: listens for professional reasons. By the way, there's always audience feedback link.
4:33
Speaker1: You can take it every time, wherever you're watching this or listening to this.
4:38
Speaker1: So especially in venture capital investing.
4:43
Speaker0: So listen, I think that is, you know, consulting. I think it is good when you
4:51
Speaker0: start working because you learn a lot.
4:54
Speaker0: Maybe what the output that you generate is not super useful,
4:59
Speaker0: but for sure you learn a lot.
5:02
Speaker0: So what I would say is that I wouldn't use or I wouldn't hire consultants for
5:09
Speaker0: any kind of need and assessment.
5:13
Speaker0: That I have to perform on my portfolio companies because by the way, I can do it by myself.
5:20
Speaker0: But very often, you know, CEOs were hiring consultants just because they were,
5:25
Speaker0: they wanted to put the finger to the consultant and blame them just because
5:30
Speaker0: they said what the CEOs wanted,
5:34
Speaker0: to tell to their managers. Okay.
5:36
Speaker0: So this is a little bit how it worked. But consulting is a good school,
5:41
Speaker0: as it is also investment banking.
5:44
Speaker0: Pros and cons of the two experiences. Of course, you learn different skills.
5:51
Speaker1: Little disclaimer for my laughter here. It was not about Simone.
5:54
Speaker1: It was not about the consultants.
5:56
Speaker1: It was about my memory starting out in consulting.
6:01
Speaker1: Simone, what was the most common misconceptions founders have about venture capital.
6:08
Speaker1: Usually I would assume the most misconceptions are cleared out after seed.
6:17
Speaker1: But there should be some misconceptions at the very start.
6:20
Speaker1: For example, what I see with most early stage founders, it's venture capital.
6:25
Speaker1: So I pitch it. They don't understand that it requires different expertise,
6:30
Speaker1: different stages, different industries.
6:34
Speaker0: Yeah. So let me say that today in the venture capital industry,
6:39
Speaker0: both on the investor side and on the founder side, there is a big ego topic.
6:45
Speaker0: And a lot of decisions are made also driven by ego sometimes.
6:52
Speaker0: I'm not saying always, but sometimes.
6:54
Speaker0: And not rationally. Okay. And I can understand, you know, young founders with
7:00
Speaker0: a lot of ambition that they see their peers raising massive round,
7:06
Speaker0: you know, hundreds of millions at super high valuations.
7:11
Speaker0: And they probably just look at the positive side of that and they do not understand the implications,
7:19
Speaker0: that those rounds have in terms of, you know, the liquidation preference stack
7:24
Speaker0: that you might have on top of your head,
7:27
Speaker0: especially if things are not going well.
7:31
Speaker0: So I think, you know, it is very much important to understand early on if you
7:36
Speaker0: want to embark in a journey with
7:37
Speaker0: a venture capital Because the moment you race around, this is not just.
7:45
Speaker0: A first milestone of success, but basically you are automatically raising the
7:50
Speaker0: bar and you are embarking on a journey where the speed has to be much faster
7:58
Speaker0: compared to what you did before.
8:01
Speaker0: And, you know, capital is accelerating things, is accelerating growth,
8:06
Speaker0: technically, but it is also accelerating issues.
8:10
Speaker0: So if you don't have the right machine, the right people in place,
8:13
Speaker0: you might risk to hit the wall.
8:17
Speaker1: A very smart friend of mine told me, basically, all venture capitalists are
8:22
Speaker1: sharks that will hunt you if you're not fast enough.
8:26
Speaker1: Would you agree to that?
8:29
Speaker1: He didn't instantly say no
8:35
Speaker0: Let me tell you something. Private equity funds can be considered as sharks. Okay.
8:44
Speaker0: For venture capital fund, I wouldn't define myself a shark when I pay very hefty valuations,
8:56
Speaker0: okay, at enterprise on a very limited traction just because a company wants
9:03
Speaker0: to raise a certain amount of money that is typically quite big.
9:09
Speaker0: And of course, there is a rule of, you know, 20% or even less of dilution.
9:15
Speaker0: The thing is, our job on paper is to make money, to deliver our clients,
9:25
Speaker0: are both the entrepreneurs, but also our investors, the LPs.
9:30
Speaker0: So at some point we need to generate money.
9:34
Speaker0: If of course we see that things are not going well, we need to take actions
9:42
Speaker0: and to explain to the entrepreneurs that things are not going as expected and
9:47
Speaker0: he has to change something.
9:49
Speaker0: Then of course it is market standard to have the 1x liquidation preference on each round.
9:59
Speaker0: And then, of course, okay, you might blame and you might say that that is not fair.
10:06
Speaker0: How can I say?
10:07
Speaker1: Welcome to life. Life is not fair.
10:12
Speaker0: For sure, there are some funds, you know, the very large fund that are very
10:17
Speaker0: much power load driven funds.
10:21
Speaker0: They tend to you know invest in a high number of companies but just to spend
10:26
Speaker0: time on those that are going very well and they tend to forget a little bit
10:32
Speaker0: about those that are not going well,
10:36
Speaker0: the other VC funds that are not focused on power law and that basically they,
10:43
Speaker0: in a way tend to minimize a little bit the loss ratio,
10:47
Speaker0: my view is that they are a bit more supportive also in companies that are not
10:52
Speaker0: performing super well, just because they want to try to have maybe an early
10:57
Speaker0: exit and to sell the company, I don't know, to a corporate.
11:03
Speaker0: Yes, of course. I wouldn't define venture capitals as sharks, but my personal view.
11:11
Speaker1: I still find it funny that you didn't not instantly say no.
11:16
Speaker1: But we are already talking about scaling companies fast when you invest venture capital.
11:24
Speaker1: What we say is the first sign you look for that capital, venture capital,
11:30
Speaker1: your venture capital will actually improve a company?
11:35
Speaker0: Look, I think that companies are made of people, okay?
11:40
Speaker0: And, you know, I don't think that companies with more revenues are better than smaller companies.
11:50
Speaker0: Companies that have a solid tier one top management are better than others.
11:58
Speaker0: So the sign that I want to see is a willingness and ability,
12:04
Speaker0: both things together, of the founding team of being surrounded of top talent, top managers.
12:12
Speaker0: Because, you know, and by the way, it is very difficult and I understand that
12:17
Speaker0: because typically the company is your own baby.
12:21
Speaker0: So sometimes it is difficult, you know, to let it go and to delegate.
12:25
Speaker0: But it is important long-term to have someone that has more experience than
12:29
Speaker0: you and that can do things much better than you.
12:33
Speaker0: So the ability of selecting people and then, you know, also the willingness
12:39
Speaker0: of hiring those people is a key point for me.
12:48
Speaker1: What would you say is a signal that capital won't improve this company?
12:56
Speaker1: We've been talking about the human factor here.
12:59
Speaker1: Would you say that's also the most decisive one?
13:03
Speaker0: Probably, yes. Absolutely. Absolutely. Because it is when you have the right
13:07
Speaker0: people in place, it is when the magic happens, right?
13:14
Speaker0: If you don't have the right people in place, and of course, not everyone is
13:18
Speaker0: the right person for the right company,
13:22
Speaker0: but when you have the right mix of people in place and the right culture is
13:28
Speaker0: created, it is when you have the magic happening.
13:33
Speaker1: We've seen companies here at Startup Radio, for example, like Emma Sleep,
13:37
Speaker1: they scale to the last available public numbers on 950 million in revenue,
13:44
Speaker1: million euros, with very little funding.
13:48
Speaker1: What did they get fundamentally right?
13:53
Speaker0: So let me say first that I never had the chance to look deeply at Emma, okay?
14:01
Speaker0: But I know quite well that space.
14:06
Speaker0: So Emma basically was playing in a vertical where the consumer have a very low.
14:17
Speaker0: Repeat rate, repurchase rate.
14:19
Speaker0: Okay, so if you buy a mattress basically this year, probably you won't buy another
14:26
Speaker0: one in the next two or three months.
14:28
Speaker0: That means automatically that you need to have a customer acquisition cost that
14:35
Speaker0: is lower than your contribution margin post cost of production,
14:41
Speaker0: post cost of goods sold and post,
14:44
Speaker0: logistic cost. Okay.
14:47
Speaker0: And so I guess that, A, since day one, they set up the operations in a very
14:54
Speaker0: asset-like way because basically they didn't have their own logistics.
14:59
Speaker0: They didn't have their own production.
15:02
Speaker0: They just had a sourcing team in Southeast Asia.
15:07
Speaker0: And then they basically relied on third-party provider.
15:11
Speaker0: And then more on the customer acquisition side, again, I'm not sure,
15:16
Speaker0: but I think that they did what my portfolio company, Coro, did also.
15:22
Speaker0: So meaning using the microbloggers on Instagram because that can give you a lot of variability,
15:34
Speaker0: because, you know, they give a lot of discount codes and basically you pay only on performance.
15:43
Speaker0: And I think basically they were in the right vertical at the right moment because then COVID started.
15:52
Speaker0: So probably there was also a pickup of the revenues and, you know,
15:55
Speaker0: multiple e-commerce companies were pretty high back then. Post-COVID-19.
16:02
Speaker0: Who knows what would have happened? But, you know, they sold the company at the right moment.
16:08
Speaker0: And I think that, you know, it was a massive journey. So congrats with them.
16:13
Speaker0: Chapeau, as they say in Paris.
16:15
Speaker1: By the way, we interviewed the founder. Basically, he said they were too honest
16:20
Speaker1: in their pitch decks. They had realistic numbers, but everybody inflates them apparently.
16:27
Speaker1: And so everybody thought, oh, the real numbers are the inflated numbers and
16:30
Speaker1: nobody invested. So that was the bottom line of the interview.
16:34
Speaker1: Let's get back to that. If that company had raised significantly more capital
16:39
Speaker1: early on, what would likely have broken first, like culture, product or economics?
16:49
Speaker0: I see three potential mistakes they could have made.
16:55
Speaker0: A, setting up their own operations, warehouses, logistics, that is very difficult
17:04
Speaker0: to operate and is very expensive, so from a CapEx perspective.
17:08
Speaker0: B, they might have been tempted to increase, to push up the customer acquisition
17:16
Speaker0: costs to increase the revenues,
17:21
Speaker0: basically reducing their margins and overall unit economics.
17:25
Speaker0: And C, they might have been tempted also to hire a lot of an army of developers
17:32
Speaker0: that for this specific business, I'm not sure they are so necessary.
17:41
Speaker0: Just because they might have been tempted to say, hey, I'm a tech company.
17:48
Speaker1: I think I know what you mean. Like now everything can be tech.
17:53
Speaker1: We've also seen spectacularly that co-working is not necessarily tech.
18:01
Speaker1: I was wondering because I also see that here privately in my company, you're tempted by
18:12
Speaker1: more available funds that you ask outsiders to do more.
18:18
Speaker1: You just try to do more. So does sometimes capital make companies worse because
18:26
Speaker1: it removes their financial discipline?
18:30
Speaker0: Well, the reality is that for sure, so let's start from one very common thing.
18:41
Speaker0: When a company raises a round, there is,
18:45
Speaker0: a moment in which the founders and the rest of the team, they are so tired at
18:53
Speaker0: the end of the process, so exhausted because the team basically pushed art,
18:58
Speaker0: for really for a month to deliver results and not to disappoint the investors
19:02
Speaker0: that are about to invest.
19:04
Speaker0: That they tend to, of course, not always, but they tend sometimes to relax a little bit.
19:10
Speaker0: And the abundance of capital might trigger what they call the champagne mode,
19:18
Speaker0: meaning that, you know, you have abundance of capital.
19:23
Speaker0: So you are not really caring too much whether your employees are taking on subscriptions,
19:30
Speaker0: they are taking consulting services, headhunters, any kind of expenses.
19:36
Speaker0: And if you don't check, you don't have processes in place, you know,
19:42
Speaker0: you might have bad surprises.
19:44
Speaker0: Also, more on the people hiring side.
19:48
Speaker0: Again, if you do not establish and design a target organization and understand
19:55
Speaker0: which are the right roles that you need to go from point A to point B.
20:02
Speaker0: You might end up basically overhiring. Mm-hmm.
20:07
Speaker0: A number of people that is too high and the wrong type of people.
20:13
Speaker0: And in that sense, this is not adding value at all. This is destroying value.
20:18
Speaker0: Because by the way, founders and existing investors got diluted with this round.
20:25
Speaker0: And you're not creating value. So this is an issue. So this is typically what
20:30
Speaker0: is happening when you are raising money. Not always, but when you raise too much money.
20:38
Speaker1: What will stick to my mind for the next few years is champagne mode. I like that.
20:48
Speaker1: You've described that pretty nicely with an outside view.
20:53
Speaker1: What would you say breaks internally first in those companies?
21:02
Speaker0: Again, I think that the most tricky thing is going back to the hiring of the wrong people, because,
21:10
Speaker0: when you hire, typically you
21:12
Speaker0: realize that a person is not right for that role after six, nine months.
21:18
Speaker0: And after six, nine months, you have already spent a substantial amount of time
21:24
Speaker0: on onboarding and training that person for that role.
21:28
Speaker0: And therefore, if after nine months you need to get rid of that person and restart
21:33
Speaker0: from scratch, re-spend money on hiring, well, I think that you might start to create a lot of friction,
21:43
Speaker0: on daily operations.
21:45
Speaker0: So having a core group of people that are there with an average tenure that
21:52
Speaker0: is much longer than the average
21:56
Speaker0: is really important because you have one third or more of your employees that change every year,
22:02
Speaker0: still to be tough, in my opinion.
22:05
Speaker1: Yes, like in consulting, when on average every year 20% change,
22:12
Speaker1: it's completely common to have an I'm leaving the company in your mailbox like almost every week.
22:22
Speaker1: If I would ask you to choose what creates more long-term value,
22:27
Speaker1: is it capital efficiency or aggressive scaling?
22:34
Speaker1: By the way, that's also very interesting given the current scaling race in artificial intelligence.
22:41
Speaker0: Absolutely. So let's say that,
22:46
Speaker0: when you are small, let's say sub 10 million in revenues or even five,
22:53
Speaker0: I think you have no choice, but just scaling aggressively, okay?
22:59
Speaker0: Because you are too small to become profitable.
23:03
Speaker0: If you start reaching 15, 20 million, I think you can have a choice.
23:11
Speaker0: Let's start from what, by defining what aggressive scaling means to me.
23:17
Speaker0: I think I see three categories.
23:20
Speaker0: A, one is price dumping.
23:25
Speaker0: That is basically the art of using the VC money to subsidize the price of your product.
23:31
Speaker0: Two, conquer market share.
23:35
Speaker0: Okay uh and this is basically very good because later on,
23:41
Speaker0: once you have a dominant position in the market you can always increase the prices uh b,
23:48
Speaker0: you can flood your local market with sales and marketing in a super aggressive
23:55
Speaker0: way and it is basically the other side of the coin uh,
23:59
Speaker0: of price dumping, because on the unit economics, they have more or less the same impact.
24:04
Speaker0: But basically, if you flood the market with your sales team and marketing, again, same stuff.
24:13
Speaker0: And then basically, you can go international and open multiple markets at the
24:19
Speaker0: same time. This is really assuming you have a business model that is really exportable.
24:25
Speaker0: These are the three measures of aggressive scaling that I think are good and okay.
24:34
Speaker0: But the moment you see that basically to add one euro of additional revenue, you need to spend an,
24:45
Speaker0: always higher amount in sales and marketing, I think you need to stop.
24:52
Speaker0: If we go back to.
24:55
Speaker0: Basically to capital efficiency, I think that if you are already at 15, 20 million,
25:03
Speaker0: you can afford, if you want, to say, okay, I still have, I don't know,
25:08
Speaker0: 10 million on the balance sheet or five, I don't know, something like this.
25:15
Speaker0: I'm very close to profitability. I can decide to grow 40% every year,
25:23
Speaker0: making selected investments.
25:26
Speaker0: And when selected means I make a proper assessment of what is the input and what is the output.
25:36
Speaker0: If you grow 40% every year for seven years, basically you reach,
25:42
Speaker0: this is the amazing effect of compounding, you reach 200 million.
25:47
Speaker0: That is overall a nice outcome and probably you would have generated a decent amount of cash flow.
25:53
Speaker0: And in that case, by the way, in the middle, you can always change your mind
25:58
Speaker0: and decide to raise capital if there are the right opportunities out there.
26:03
Speaker0: But it is a nice outcome. And the overall dilution in some cases,
26:07
Speaker0: of course, is way lower than if you raise $150 million to get to $200 million in revenues.
26:17
Speaker0: It's a matter of personal choices. This is how I see it.
26:25
Speaker1: Which one would you say fails more often?
26:31
Speaker0: Of course, it isn't an easy one. Well, aggressive failing, because you need
26:38
Speaker0: always to be in control at each point in time.
26:44
Speaker0: And if you have your company that is growing that fast, it's going,
26:49
Speaker0: I don't know, let's say from one to 50 million in revenues. in,
26:55
Speaker0: I don't know, let's say two years.
26:58
Speaker0: Well, there are a lot of things that you need to fix. You need to change constantly processes, people.
27:05
Speaker0: So you need really to have a proper, I think, finance department,
27:12
Speaker0: in place to make sure that you need to track everything because otherwise you
27:19
Speaker0: can really risk to go off-road.
27:23
Speaker1: Talking about tracking everything, do you think venture capital sometimes compensates
27:30
Speaker1: for weak business models? We work!
27:34
Speaker0: 100%. So there are two cases. The first one is when there are hypes.
27:43
Speaker1: Yeah, we've seen this, like ride sharing, fast delivery, whatever is out there, right?
27:53
Speaker1: There's always a hype in startups, right? There was quick delivery.
27:59
Speaker1: There was marketplaces. There was social media.
28:04
Speaker1: What else did I forget? Blockchain.
28:08
Speaker1: Cloud first.
28:12
Speaker1: I could go for quite some time.
28:14
Speaker0: Yeah, yeah, exactly, exactly. Roll-ups more recently.
28:22
Speaker0: Of course, during a hype.
28:26
Speaker0: It might happen that the venture capital wants to deploy absolutely into that
28:31
Speaker0: vertical, into that model.
28:33
Speaker0: And so if the first company is already gone because it is already too big,
28:38
Speaker0: I say, okay, let's invest in company B.
28:41
Speaker0: But maybe company B is not that great. And so, but if that VC ends up investing
28:46
Speaker0: there, you say, well, it's good for the entrepreneur.
28:52
Speaker0: The other case is when you invest in a company, the business model doesn't work
28:58
Speaker0: super well or founding team is not great, not amazing.
29:02
Speaker0: Overall growth is not really there. Maybe you have burned a bit too much.
29:10
Speaker0: And existing investors don't want, you know, to cut their investment and to
29:16
Speaker0: put it at zero for multiple reasons. And they continue injecting some capital into the company.
29:23
Speaker0: And that company might end up selling to a corporate for $150 to $100 million.
29:29
Speaker0: And in some cases, the VC will end up having a nice 1x return on their investment.
29:38
Speaker0: And founder with a little bit of luck might have, I don't know,
29:43
Speaker0: 20, 30, more or 50 million in return because they have common shares.
29:49
Speaker0: And so in that case, why not?
29:57
Speaker1: I was wondering,
30:00
Speaker1: as we've seen, even weak business models can make tempting acquisition targets
30:05
Speaker1: for established companies, but what would you say as a VC?
30:11
Speaker1: What metrics exposes this the faster? Does you cover up a weak business model with venture capital?
30:21
Speaker1: It may not always be the losses you are incurring.
30:26
Speaker0: Sorry, can you just repeat the question?
30:30
Speaker1: What's the metric you think is the number one that would expose a weak business model
30:40
Speaker1: compensated, hidden by injection of venture capital?
30:45
Speaker1: It cannot always be losses.
30:48
Speaker1: Sometimes pretty good long-term companies make losses in the start.
30:52
Speaker1: But what would you say is the number one metric?
31:02
Speaker0: Look, I think that at some point, companies,
31:08
Speaker0: when they raise too much capital, you have the ratio between capital raise and,
31:15
Speaker0: revenues that they have that start to be a bit too high.
31:21
Speaker0: And that is not a good this is the first signal that you see,
31:27
Speaker0: as an indicator of you know issues on that company that's why in some cases
31:35
Speaker0: when you announce a round,
31:38
Speaker0: it is also it is always a little bit tricky to announce the true size of the
31:44
Speaker0: round or to pump it a little to be tempted to pump it a little bit,
31:51
Speaker0: to show that you are better than competitors and you have more money than compared to yours.
32:00
Speaker1: I vividly remember the dot-com boom area where traditionally your losses have
32:06
Speaker1: been larger than your revenue.
32:07
Speaker1: Let me ask differently, where do you draw the line between necessary investments
32:15
Speaker1: and really unnecessarily burn.
32:21
Speaker0: So, listen, I think that unnecessary burn can be everything related to expenses,
32:29
Speaker0: due to lack of tracking, reporting, measurement, processes in place,
32:34
Speaker0: or budgeting choices made without having a proper assessment framework that
32:40
Speaker0: are not in the end delivering results.
32:42
Speaker0: OK, so this is what I define unnecessary burn.
32:49
Speaker0: Necessary investment to me is something that is absolutely required to protect
32:56
Speaker0: the existence of the company in its core market or to defend the company from external threats.
33:04
Speaker0: For example, I don't know, cybersecurity. OK, everything is a middle,
33:09
Speaker0: in my opinion, is up for discussion, you know.
33:15
Speaker0: So these are the two definitions that I have in my head.
33:23
Speaker1: Also, picking a little bit on your head, what would you say is the first bad
33:28
Speaker1: decision companies make when they have too much money?
33:34
Speaker0: Change office.
33:35
Speaker1: Sorry?
33:36
Speaker0: They want to change office.
33:38
Speaker1: Ah, bigger, more fancy. Okay, okay.
33:43
Speaker0: They want to move to an insanely fancy office. This is part of the champagne
33:50
Speaker0: mode that I mentioned before.
33:52
Speaker0: They want to change office. And if you go to, if you visit the company in person
33:59
Speaker0: and, well, you say, wow, amazing office, congrats.
34:05
Speaker0: I mean, still as a startup, I don't think that having an amazing office is a
34:11
Speaker0: good sign because I don't think, okay, I understand the corporate culture,
34:15
Speaker0: but I mean, you are not Google, you know?
34:17
Speaker1: Yes, I understand. We've been going over our guest Emma for some time because
34:24
Speaker1: they grew with almost no external capital. They did have a little bit of investment.
34:30
Speaker1: But let's go to companies we also interviewed like Flix.
34:34
Speaker1: They required significant capital to scale.
34:38
Speaker1: What made that justified?
34:42
Speaker0: So maybe let me remind for the audience a little bit how the Flix model works,
34:48
Speaker0: right? Because I think it is useful.
34:51
Speaker0: So when they basically decide to open a new market or to launch a specific route from city A to city B,
35:01
Speaker0: they select a certain number of local bus partners that basically allocate specific
35:08
Speaker0: buses to work with for Flix.
35:12
Speaker0: And same is for the driver they have to be,
35:16
Speaker0: they need to have the Flix branding and basically Flix is sharing the economics,
35:23
Speaker0: with the bus partner of each trip once you achieve a certain utilization rate
35:28
Speaker0: on each trip on each line basically,
35:32
Speaker0: Flix achieves a pretty interesting margin that I cannot disclose because the company is private.
35:41
Speaker0: So on overall, I think that the company has been pretty disciplined in launching new market,
35:52
Speaker0: on the customer acquisition side,
35:54
Speaker0: because I remember when I was supporting them, even on TV advertising,
35:59
Speaker0: they were really spending a very limited amount of money.
36:05
Speaker0: They were super, super disciplined on that.
36:09
Speaker0: Flix basically spent a lot of money in acquiring in asset-like M&A to buy basically local players.
36:21
Speaker0: Okay, so the big chunk of the money was used to that.
36:26
Speaker0: They acquired Greyhound in the U.S., the iconic bus operator in the U.S.
36:31
Speaker0: They opened India, Brazil, Turkey.
36:35
Speaker0: They acquired the largest, basically, bus operator in Turkey.
36:40
Speaker0: So that is where the big chunk of the money actually went.
36:47
Speaker0: But what I really liked back then of Flix, of Flix's model, on top of the three
36:54
Speaker0: founders that personally I think that were amazing and I still believe that today,
37:01
Speaker0: is that it is one of the very few business models that has a global potential
37:08
Speaker0: that is easily exportable in any kind of geography,
37:13
Speaker0: and where you can have a global repeat because basically people,
37:18
Speaker0: when they travel, they can use Flix in any kind of geography where Flix is present.
37:26
Speaker0: So this is basically the nice thing of Flix and it is basically quite difficult to replicate.
37:34
Speaker0: So it is highly defensible.
37:38
Speaker1: What would have happened with Flix without that massive VC investment in capital?
37:47
Speaker0: Listen, I think that basically,
37:53
Speaker0: it was one of the very few business models where VC investment were really required to scale or,
38:02
Speaker0: in case if they had failed in raising additional capital, basically they would have.
38:10
Speaker0: Stopped acquiring other businesses and so they might have found themselves just
38:15
Speaker0: on a couple of geographies, let's say Germany, Italy and France,
38:18
Speaker0: they were the three core geographies. They wouldn't have expanded into the UK, into Turkey.
38:25
Speaker0: And so they would have gone basically, they would have become profitable way sooner.
38:32
Speaker0: This is how because basically Germany and Italy they became profitable pretty early on,
38:43
Speaker0: so the business was you know.
38:46
Speaker1: Cash generating
38:51
Speaker1: what would we say if Flix were built today would you find it the same way?
38:58
Speaker0: So I think yes maybe Maybe they would have required less capital on the tech side.
39:10
Speaker0: Because, you know, they had a good
39:14
Speaker0: number of developers in Munich that are expensive, as you can imagine.
39:20
Speaker0: Today, with the AI that has completely transformed the way developers write
39:28
Speaker0: code, basically, they might have needed a much lower number of developers.
39:35
Speaker0: And so, you know, the cost automatically goes down.
39:40
Speaker0: But on the rest, I think that,
39:46
Speaker0: it was the right way of doing it.
39:51
Speaker1: What types of companies do you think truly need venture capital to win?
39:58
Speaker1: And which should actually avoid it?
40:01
Speaker0: So I think that the, listen, the companies that absolutely require,
40:11
Speaker0: venture capital are companies with founders that have global ambitions and where
40:17
Speaker0: the business model has numbers, you know, unit economics that work and that can be exported,
40:26
Speaker0: outside of your core market, basically where you can create,
40:32
Speaker0: a massive outcome. uh,
40:37
Speaker0: this this is the uh this is the reality on the other side to be a little bit
40:43
Speaker0: provocative here companies that should absolutely avoid vcs,
40:51
Speaker0: are roll-ups,
40:54
Speaker0: because it doesn't work vc doesn't work for roll-ups and i'm and actually.
41:02
Speaker0: If you want, I can explain you why. But so,
41:07
Speaker0: keep in mind that every round, for sure, Series A, Series B,
41:13
Speaker0: has to be done with NVC with 20% or more or less the standard dilution. Okay?
41:23
Speaker0: You raise the first round, and that one is more or less okay.
41:27
Speaker0: So seed round is more or less okay.
41:30
Speaker0: You use the money to acquire companies that are valued, let's say, 3, 4x a bit.
41:37
Speaker0: And let's say that they have, I don't know, 10 million in revenues.
41:44
Speaker0: Then, if you want to grow, because you have just acquired companies that are
41:48
Speaker0: not growing, you need additional capital. So you raise another round.
41:55
Speaker0: You raise another round, and of course, you don't want to dilute yourself.
41:59
Speaker0: So you raise the bar, you just ask for a standard 20% dilution,
42:05
Speaker0: and automatically the valuation, the multiple on revenues goes up.
42:12
Speaker0: So you just spent, let's say, I don't know, 7, 8 million to acquire 10 million
42:18
Speaker0: in revenues, and you are automatically valued, let's say, 80 million.
42:23
Speaker0: Okay. But down the line,
42:28
Speaker0: if you just end up being basically a package of non-integrated,
42:37
Speaker0: companies that on the market standalone would be valued at 3, 4, 5x EBITDA.
42:47
Speaker0: Down the line, you raise to be valued 3, 4x EBITDA.
42:53
Speaker0: But the problem is that in the meanwhile, you raise tons of venture capital
43:00
Speaker0: rounds that put on top of your head 1x LickPref.
43:07
Speaker0: And so if that happens, basically, you are squeezed after some time.
43:11
Speaker0: So this is for which I would prefer to avoid that.
43:21
Speaker1: Guys, if capital can both accelerate success and hide structural weakness,
43:27
Speaker1: what is the decision rule that separates the two?
43:31
Speaker1: We are already doing 45 minutes. We'll do a second part because we are already running 45 minutes.