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

• 0:00
  Foreign.
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  Hey guys, welcome back to our second part
• 0:14
  of our interview with Simone Riva
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  from Partech vc. Let us straight dive in.
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  Simone, looking at Southern Europe, are
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  founders repeating the mistakes in the Dach region,
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  Germany, Austria and Switzerland from a decade ago?
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  So I think that if you mention, I don't know, the
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  mistakes that were made by the companies that were generated
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  were created by rocket Internet back then, I think no,
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  because overall there is also way more a much stronger
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  VC culture understanding of the economics also in the
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  investors in those countries. But of course there
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  are still some, you know, mistakes, the common mistakes that
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  are made by entrepreneurs that are made both today in
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  Germany, uk, US and also in Southern Europe.
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  But I think that the right
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  now Europe on that it is really becoming, it has really
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  improved a lot because there are, you know, since
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  a lot of international investors are deploying capital in
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  multiple countries, there is a cross pollination effect
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  among founders. And so you do not have any
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  more country where founders are kind of
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  isolated and they are not talking anymore. They are not talking at all with
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  founders in other countries that are more developed in terms of tech
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  ecosystem. Give me just one
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  thing. What do you think they're doing better?
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  Well, I think
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  it is a good question. I
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  think in some cases they are setting up
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  customer support hubs or development
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  centers in areas of their country
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  that are not
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  in metropolitan cities but in very low cost
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  areas. I don't know, southern Italy or
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  some areas of Spain and that
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  helps in improving the economics. We're
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  now taking a look back. You already noticed this guys
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  in part two of our interview. We're looking a little bit more at Europe.
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  But Simona, where do you see
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  different capital allocation patterns, like really
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  bertilized patterns across Europe? I think
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  that 10 years ago or even a bit less,
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  you could invest in Europe, mostly in uk,
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  Germany and France. Okay.
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  Nowadays you can find good
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  companies in each single
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  geography and country. In European Union
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  the UiPath is approved of that
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  they came out of Romania.
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  And if there are very interesting companies today
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  in Portugal, from Portugal, Estonia,
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  Bulgaria, Romania, Czech Republic, their
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  domestic market is relatively small. This is
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  pushing them, pushing the founders to
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  export this business from day one globally.
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  In some cases they have very good development talent
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  at a relatively cheaper
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  cost. It's not anymore, it's not anymore cheaper
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  like 5 years ago, but still in some cases cheaper.
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  Yes, your iPad is an awesome success history.
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  Unfortunately it's not part of a company coverage.
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  Where would you say think about like all
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  the European markets for everybody who's not familiar with that. Basically you can
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  Break Europe down into several parts, into several
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  distinct cultural language areas, including
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  Benelux, France, D region, Germany, Austria and
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  Switzerland and so on and so forth. Taking a look
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  at those regions, where would you say
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  is capital most efficiently, venture capital most
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  efficient today? I would assume in the
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  area where there is. Where is the, where there is the least.
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  So again
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  it is a very good question and I think that
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  in some cases. Well, because then
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  in your question it depends whether
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  venture capital efficiency is related to how the
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  company is burning the money
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  compared to the growth that they are having or to the level of
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  enterprise that VCs are paying. Because the
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  answer might change a little bit. Let me,
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  if you want, let me break it down. The level
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  of prices that VCs are
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  paying depends in some cases in
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  some European countries also by
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  the amount of capital that local sovereign wealth
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  funds are giving to the venture capital funds.
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  If you have a lot of
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  local domestic venture capital funds that are competing
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  against themselves automatically and
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  they are obliged to deploy capital in that country
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  automatically, the average price of a given
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  round is going up just as a, as an effect of
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  competition. I
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  think that then on the other side,
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  compared to you know, efficiency in terms of companies,
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  honestly if you take Benelux
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  specific, Belgium, if, if you look at the, not the
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  population of Belgium, the number of startups that they have
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  and the average outcome, the number of great companies
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  created there. Insane,
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  Insane. Or even Sweden.
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  These are like Sweden and Belgium like today,
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  given the size of their domestic market.
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  Really unbelievable the, the number of amazing companies
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  that came out of those two countries.
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  We know Europe, especially in the European Union out
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  of 27 countries, if you see the,
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  the VC investments as a percentage
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  of GDP they're very, very low. So I was
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  wondering is your better at
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  capital allocation or are
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  we just. Later. Some people
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  might claim that in Europe there is not enough
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  capital. Others might
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  claim that there is too much capital.
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  It depends how you look at it.
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  If you look at venture capital as an asset class
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  or if you look at more on
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  the ability to generate companies
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  that can compete against the US giants.
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  So in Europe, let's say the VC
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  industry has quite
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  failed as of today to deliver
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  results for their investors in
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  line with their expectations because there is just too much
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  capital. But I, I agree that U. S
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  companies can, are actually
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  are having a much better access to
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  capital, especially for, I don't know,
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  companies like entrepreneurs that failed already was.
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  Or if they want to develop hardware.
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  Look at, you know, Elon Musk, what the number of hardware
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  companies he, he developed.
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  So yeah, I Mean it's we have improved
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  compared to 10 years ago.
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  I think that it is hard to judge if
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  we are better in tapping capital allocation or not.
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  The I'm seeing a lot of crazy rounds happening right
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  now. I'm wondering whether we will
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  really create amazing companies with those big rounds
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  or not. But this is something that we will be able to judge
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  in five, seven years from now. So a bit too early to say
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  we Simone, we've already learned from you very interesting things
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  like Champagne Mode and that that a
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  bad sign of a company is moving into fancy office.
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  By the way, I have a few founders that I know lining up in this,
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  in this segment but let us talk
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  a little bit about where do founders
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  consistent limiting in good and bad companies misuse
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  the capital.
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  So the most important
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  thing of. Sorry, sorry, I'm not sure I
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  got the, I got the, I got the question. Can you just
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  repeat. Yeah, it was basically where
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  do founders consistently
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  misuse the provided capital? Doesn't matter if it's we see if
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  it's revenue. Where do founders consistently
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  misuse capital? Again, as, as, as
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  I, as I said before it might be on over
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  hiring or
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  the they might arrange lavish
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  company parties or in some cases they might be tempted to
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  buy other companies
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  maybe mature companies that are some cases even bigger than
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  them. So they want to swallow a big player
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  at a price that are
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  completely out of the market. So that create a lot of
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  complexity and doesn't help.
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  What would you say is there the most
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  expensive mistake? Is it the people? Is
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  it the office or is it to
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  generate a pet project, site
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  side revenue project or something that takes
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  way too much money? Clearly not the office. The office
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  is just a sign okay of the way
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  you are managing the company. I think it
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  is people I remember I have met in
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  the past founders that told me, you know,
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  with a certain level of arrogance
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  my I, I, I have 1,000 people today and I want to be at
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  2,000 by the next, by the end of next year.
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  That company didn't end well.
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  I would have guessed. So okay, clearly, I mean
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  if you hire a lot of people and revenues are not coming in,
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  probably things won't go well.
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  You don't have to be a philosopher to see that
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  there are a lot of assumptions out there about venture capital.
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  What is one assumption about venture capital,
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  especially by founders that is fundamentally wrong.
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  So I think that, and again
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  here I'm gonna be a bit provocative but you know a lot of VCs
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  during their investment thesis,
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  investment memo preparation, they say when they think about the
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  Exit for a company, they think about the IPO
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  in the us, maybe it worked.
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  In Europe you have a very limited number
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  of IPOs and a good
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  chunk of them have been
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  quite a tragedy.
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  The reality is that in Europe
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  capital markets are not ready to
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  welcome tech IPOs, especially
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  below 1 billion in, in valuation. If you
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  start being at 5 billion plus
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  maybe yes, but you need to almost be profitable or
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  and you, you really need to be prepared for that.
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  And the other thing is that technically the IPO is not
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  a liquidity band, especially for companies
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  that are still burning money because when they raise the capital,
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  the big chunk of the capital goes into it is a primary injection,
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  not a secondary for the investors and the founders.
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  And after the end of the lookup, after six months,
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  it happens that you have a number,
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  you, you have basically a lot of people, a lot of investors
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  that are putting their shares on the market. So you have
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  clearly more shares to be sold than buyers
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  and automatically the price is, the price drops
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  and so the, the returns
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  are destroyed. So I
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  think this is really. So you really need to think about,
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  you know, if, if a company can also be sold at some point if things
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  are not going well to a private equity or to a corporate.
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  I was wondering a little bit self reflection here for you.
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  What's a decision you made as an
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  investor to turned out to be wrong?
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  I explained so I invested, I invested in a,
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  in a roll up, in a roll up company and
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  as expected it was a disaster.
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  I don't want to mention, to mention the name.
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  And then I basically, as I explained before, I understood
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  the reason why it doesn't work and so
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  I decided to stop investing in roll ups. At least
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  with standard VC terms.
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  Let's talk a little bit about your capital
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  posture. So I was wondering, are you
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  as Simona, as Partech, are you currently deploying capital
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  aggressively selectively or
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  almost completely hold them back because there's some
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  uncertainty at the time of recording. We are publishing this way
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  later. But it's 7th of May and the
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  strait of homos is for example still blocked here. Look,
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  despite the big macro and
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  geopolitical uncertainty that we are living today,
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  both last year and this year we have been investing
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  at a good pace. I'm not sure whether it is
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  selectively or aggressively. But of course
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  we're also always trying to understand whether an investment makes
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  sense or not and to challenge the
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  entry valuation or at least trying to understand
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  if the entry valuation makes sense. Typically the
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  answer is no. But we end up investing in any case,
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  no. But today I Think that one
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  thing that in some cases we are doing is also to
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  look at. To look not only at very hype deals but
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  also to verticals that are a little bit
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  forgotten by some investors that are
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  considered a little bit as unsexy.
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  Because you know, we believe that some
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  entrepreneurs building some stories still
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  deserve some additional capital to grow their companies.
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  And at the same time valuation might could make
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  more sense. I'm not saying that this
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  is 100 of our strategy, but at least a part of it.
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  Yes. What do you think?
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  I know forecasts are always, always
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  pretty difficult, especially concerning the future. But
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  what would you say what type of
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  startup will struggle to get funded in next
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  three to five years? As you said, very difficult
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  to say. We would need the crystal ball for that to answer that
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  properly. But if I have to make a bet, I would say
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  probably generative AI wrappers, meaning
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  companies that have zero defensibility and
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  that for multiple reasons, I don't know, they have a strong dependency
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  for one or more LLMs and you know, price
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  might go up and they are completely out of the market. I think that
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  those companies will really struggle to
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  raise. If you had to build a
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  company today, would you
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  choose to be more like Emma, Bootstrapped Emma or
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  Startup Radio? Even though admittedly we are far away from the almost
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  1 billion revenue they had or more like
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  flicks. So of course they have both
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  present cost has Emma has been more
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  capital efficient and profitable very soon. But
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  as I mentioned before in the post Covid world
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  it might have struggled a little bit and
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  it has also a relatively low
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  defensibility meaning that the business model can be
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  quite replicated. Flix require way more investment
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  but at the same time it is way more defensible
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  long term it is a company that can, you know, be there
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  out in the market for generations. Now if I had to
• 19:39
  start my company today, I would do probably something
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  completely different. That is, you
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  know, AI enabled service providers. That
• 19:50
  is very much in hype today. But not an
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  AI wrapper. No, no, no AI. No, no,
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  it's not, it's AI enabled service providers.
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  It's completely, completely different people companies that are
• 20:05
  selling services using AI.
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  Okay. And consider that
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  10 years ago Flix, Flix was
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  considered as a tech enabled low tech company.
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  And today we have basically the
• 20:25
  a lot this new wave of companies
• 20:29
  that are considered super sexy that are AI enabled
• 20:34
  companies. AI enabled service service providers.
• 20:39
  So it is, it is quite funny because the
• 20:43
  story has been changing a little bit. It was just enough to
• 20:47
  change tech with AI and suddenly
• 20:51
  the Business model
• 20:55
  became basically super sex again.
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  Inflix, you've been an investor, Emma, you've
• 21:02
  dug in a little bit. You've moved the interview to prepare for that. Thank you
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  very much. I gave you an option
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  to consider both in the last question. What would
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  you do differently than those two
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  companies? As a last question.
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  So on ANMA is a little bit difficult to
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  comment. Probably flixbus. The
• 21:30
  only thing I would do differently is to
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  move the maybe the
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  customer support and development centers in
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  lower cost locations.
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  There is something that they did at some
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  point but they could have done it maybe
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  earlier on. So I, I met, I might have
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  done it earlier on. But of course XPass is
• 22:00
  very, very easy, very easy to say.
• 22:05
  Yeah, it's hindsight knowledge. I know
• 22:09
  it's always easy for us to talk about something that has already happened.
• 22:13
  Simona, thank you very much. Mila Grazia was a pleasure having you
• 22:17
  here as guest. Thank you very much. Best of luck.
• 22:20
  And for everybody out there, if a founder is listening
• 22:24
  today had to follow one rule to decide whether to raise
• 22:28
  venture capital, what would that rule be?
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  So I think that at precedent level, if I were
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  a founder I would ask myself two questions.
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  A if I have an insane level of
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  ambition, an obsession to change
• 22:47
  a market and also a deep knowledge of the market
• 22:51
  where I want to start my company. Okay, because the level of
• 22:54
  ambition and the knowledge of the market is something
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  are the two most important
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  elements in when you are
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  if you want to build a super successful company. B
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  assuming there is point one, I would say okay,
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  I want to raise with a venture capital,
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  is there any way I can start today?
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  I can finance myself by selling, I don't know,
• 23:27
  some consulting projects, some AI enabled
• 23:30
  services that I can do without raising venture capital
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  so that I can get initially some traction and I can
• 23:37
  get a higher valuation at the
• 23:41
  first round. These are the two
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  questions. So A do I have enough ambition and B
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  is there a way for which I can already start to get some
• 23:52
  traction so that I can get less diluted?
• 23:58
  Simone, thank you very much. Thank you
• 24:02
  for the additional insights for everybody who stayed on. Guys, thank you
• 24:05
  very much. Looking forward to be with you next week again.
• 24:09
  Bye bye.
• 24:15
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