#172 Kim Lundberg, Export and Investment Fund of Denmark

0:04Hi, and welcome back to the European VC, the go to podcast for everything European VC. If you love the show, share it with your friends and join our newsletter at eu.vc. Today, we're happy to welcome Kim, Senior Portfolio Manager at the Export and Investment Fund of Denmark, formerly known as VexFonden, a Danish growth fund that he joined in 2017. Kim has been supporting numerous Danish startups with venture debt and growth loans in collaboration with both investors and other venture debt lenders, offering a great overview on tech lending. If you enjoy our content, do support us by hitting the follow button, giving us a review and following the European VC on LinkedIn.

1:00Kim, welcome to the European VC. We're so happy to have you with us. Yeah, hello, hello. Excited to be here. Yeah, so am I, because Kim, we've known each other the first time you have had different roles in the ecosystem. I've always said, Kim, we need to bring you on the podcast. And I'm so happy that we're finally doing it. But Kim, now you're with VextFonten and you've been there before as well. And I'd love to hear your take on VextFonten. What is VextFonten? What are you doing for the Danish ecosystem? I think, you know, given that our audience are GPs in the ecosystem, many of them have even considered raising capital from VexFund because it started to rumor that VexFund also does fund investments outside of Denmark.

1:39That's not the branch you're in, but I'd love to, you know, kind of get that overall overview of what is VexFund and what should our European audience in the VC space know about VexFund. Yeah, sure. So, and just a side note, so some would know that we are in the midst of a merger, so we're actually changing our name in this period, but let's still call it VexFund. VexFund is supporting the Danish tech ecosystem in three ways. We're doing investments in funds, acting as LP. Then we're doing direct investments, placing equity in somewhat a typical VC way. And then on the third hand, we are doing lending towards the tech ecosystem.

2:13So as I would call tech lending, a way of doing loans with an approach that would not fit into a typical banking approach. Yeah. And that, of course, is, as we teased in the intro, the topic of today. So we'll dive super deep there. But Kim, before we go into that topic, let's just hear your route into venture, where you're coming from and what you've been doing these last 10 years. Yeah, originally I've evolved from corporate banking. Actually found my way into VexFund in 2017 and got my eyes open for the whole tech and VC ecosystem, which I didn't know that much about before joining VexFund.

2:49So that was actually quite amazing for me in those first years to experience those hyper-growth companies and how to fund them, actually. And this was still in the very early days of venture debt and tech lending in not only Denmark, but I would think in Europe as a whole. So it's been quite exciting to follow how this system has evolved over the past four, five, six years, and also how we could fit into that and develop our own products to serve the Danish tech startups and scale-ups. Yeah, absolutely. And it's been quite a journey. And also anyone at least, so you're primarily writing in Danish.

3:22Am I right in saying that? In the like articles or blog? Yeah. Yeah. Yeah. I've been doing both, but primarily in Danish. That's true. But if anyone's really into tech lending, I think that it's worthwhile you going in and finding him on LinkedIn, connecting with him and following his writing, because I do think that this is a under described topic in European VC. So for that reason, I'm enjoying at least following it. And by now, our Google Translates are of good enough quality that it doesn't really matter what the original language is. May I just literally ask, do you agree with what Ndere just said?

3:53Do you see that it's a topic that is still somewhat underexplored slash not fully understood by scale-up founders themselves as well? Yeah, definitely. And as a whole, it isn't described in the academic world yet as well. It's still so premature. I would imagine that in the coming years and decades, we will have a lot more literature about this, a lot more data. Like, for instance, some argue that a lot of venture debt funds, they have higher returns than like an average VC fund. Now, I might provoke someone here. I don't know. But I've heard it several times. I haven't been able to find any data or literature about this.

4:25But when I look at our portfolio, I think it could be true. That's an interesting perspective. And I think it also goes to show that it's a different instrument, right? And thus, there are different dynamics. Different asset class altogether, right? Yeah, exactly. It's not even equity. I was about to say that if we just talk about it for a second from the LP perspective, you should not be expecting outlier returns from a venture lending provider, which is exactly what you should be hoping for, at least from the VC portfolio that you have. The fact of the matter is that many VCs maybe shouldn't be funded for that reason.

4:59We don't have good average performance. And of course, to anyone listening, that's of course not your fund. It's all the other. Nope. But that way of putting it, Andreas, that is like some core in this as well, because a venture capital fund would always look at the upside, at the high growth journey where a venture debt lender would look at the bottom of the case. What's the base? All right. Kim, give us the overview on tech lending as an asset class or as an offering to founders. Tell us what's important to understand for our audience. Yeah. Wow. Huge question. Trying to start out from scratch.

5:37Tech lending is a way of financing where you do a loan or something similar to a loan for a typically young company with typically high growth rates that is not able to go to the bank and have a loan there. So the funding provider needs to put another view on this company. They need to look at other metrics and data in order to assess the loan and structure the loan and how large the loan should be, actually. That's like the short definition of it, I would say. And then you said, well, Andreas, what to be aware of. Maybe we should start with some history in this as well. Venture as a term has, to my awareness, been there for like the 1970s or 80s, evolved in the valley and then matured up till the dot-com bubble.

6:23And then from that on, it started to be more in the way we see it today, actually. Structured and pricing as we see today and the assessment approach the way we see it today. U.S. is those one decade or 10 years ahead of Europe. So in Europe, we've seen tens like 2010, 12, 14. We began to see for real like the first venture debt lenders putting their foot down in Europe and doing deals. Silicon Valley Bank entered the UK in 2012. In Denmark, I believe we saw the first deals in 2015, 16. when we introduced our venture debt product at VexFund in 2018, I believe maybe two, three, four deals had been made in Denmark at that time.

7:00So naturally, like the venture debt activity and system rides on the back of the VC activity. And that's like the venture debt loans, typically maturity of three, four years, what I would call a long-term loan. Then there's also the term revenue-based financing that I would also touch upon when talking about the heading tech lending. We've seen that evolve very much in just the past two, three years in Europe and in Denmark. It has been also in the US. Again, they are a bit ahead of us. But the revenue-based financing products, some would call it loan, some would call it equity, some would say it's in between because it's neither or.

7:37Yeah, I don't know what I would call it, but it's a way of financing that is quite different from venture debt because it's short term. It's not the same strict covenants and collateral and so on. So often it's much quicker and easier to apply, but also often, how to say, put all the costs together. IPF lending would often be more expensive than venture debt, but still cheaper than an equity, right? That should be like how you would prioritize. And how about stage-wise? When is venture debt and revenue-based financing relevant? Is it already at the pre-seed stage or is it more for the growth stage?

8:12So first of all, important thing is that the company should obviously have product market fit, but also have like the scalability ready. You should have some kind of predictability in your numbers because with a loan, the thing is you need to pay the money back, right? It's not as with equity where you can just pour more money into the business. With loans, there is a limit because it has to be paid back. When talking about venture debt, the typical thing is we've seen them enter after a classic A round. During the past years, we've also seen venture debt funds enter after a seed round or something that would look like seed rounds.

8:46And the main thing is here, there are three ways in which you can pay back a loan. You could pay back the loan with cash from the operations. You could pay back the loan with a future equity round or with an exit. So dependent on where you are on the journey and how your projections look, this should be a determinant for are we ready to take on a loan and how much should we take on, right? But venture debt from seed A round, RBF a bit more subjective, I would say, because often they could be like much smaller lines and tied up to a monthly revenue. So often in some cases we would see them enter earlier on, but the money has to be paid back often after a short period of time, maybe four, six, eight months.

9:30Do you see big differences between how the venture debt, tech lending to be a bit broader industry is operating in Europe and the US? And I ask this because probably 99 % of what I've read on the topic is US-centric in terms of how the deals are structured, the terms of each deal, how the money is paid back, how the different periods of the payback period work, all of that. And I wonder, is it quite similar the way the industry is operating in Europe compared to the US or do we see some structural differences? I think we do. This is correlated to that the US ecosystem is just that more mature, right?

10:07So you have more data to base your deal and risk assessment on. What I've experienced is that typically the deals made in the U.S. are at a pricing level lower than Europe. The cost for a rent-a-loan consists of fees, interests, and a warrant. And if you look at both the fees and the interest rates, I definitely think that they are lower in the U.S. Interest rate, maybe 2-3 % lower actually, and fees also way lower. Then on the other side, my experience is that combined with a lower pricing level, it's more common to use financial covenants on Eurost. So you set up this set of rules in which the company has to operate within on the financial numbers.

10:53And if you trail outside this ballpark, well, then actually the loan would trigger a default. That's what you sign for, actually. And obviously this sets some limitations and the risk to the company, which you should be aware of. So it has a price to pay this lower interest rate and fee, right? That is just to put it up a bit black and white. Yeah. Yeah. And we'll dive much more into that in a second. I just wanted to double click on what you said in terms of tech lending being cheaper for the founders in the U.S. versus here in Europe. because you tend to say, looking at it from the investor perspective, you're used to say that the deals are more expensive in the US when you're talking equity than it is in Europe.

11:36But if you then reverse that to lending, well, then it should be the same, right? But it's not. Yeah, and that's a very good point. Well, the difference in cost between raising an equity round and a venture debt round is going the opposite way. I think actually you're correct, Andreas. I've never thought about that, but I think you're right. But still, I would argue that a loan would be cheaper. Otherwise, if it isn't cheaper, it has no relevance on the balance sheet. Yeah. I have one question more on, and I'll let David take us into some of the more provocative questions that him and I have been considering around tech lending.

12:12But I'd love to understand how you think about tech lending in the European landscape. Is it competitive enough or are we missing players? And for that reason, a bit too expensive on the founder side, or at least it's more expensive than it necessarily had to. How do you see it? Do we have enough active players? And also, if we have any worthwhile mentions that are active across Europe, do name them because many in our audience would like to just have them top of mind. Yeah, sure. When I found my way into this space back in 2017-18, we did a mapping and counted around 20 active players in Europe.

12:49Some of them based in Europe, but also U.S. funds putting their feet down in Europe and hunting deals in Europe. Through the past four or five years, I haven't done the math, but I would think that this number has four or five X actually. We have seen a lot of new players entering and just as well as we see a lot of the larger U.S. VC funds placing their money in European startups. We also see U.S. venture debt lenders increasingly targeting PIN and now Danish tech scale-ups. The ecosystem is maturing in a way where we see terms and structures adjusting and developing over time. And this is very interesting.

13:28Like coming from a corporate banking world, I've always thought to myself, why don't we see any of the larger banks doing some side vehicle or just finding their way in the space? I still think we haven't, at least for now, for real, seen some of the larger Danish banks and for real also some of the larger European banks entering, finding their way into this space. We've seen Barclays, but B1 Deutsche Bank trying as well. But like you can't talk about this without mentioning Silicon Valley Bank, right? They are like the fathers and mothers of this. And to our audience, we are recording this on the 10th of March, which means it's literally the day where the news broke that Silicon Bank are in trouble.

14:10We will not comment on that because it's too much of a developing story for us to be able to say something that won't make us look stupid in five hours, really. So for that reason, we're sorry not to be commenting on what's probably still a developing story. This episode goes out, just adding that in there. But yes, absolutely. Silicon Valley Bank have been hugely important in this space. If we should add one note to your philosophical question of why aren't the other major normal banks venturing into this space? Well, I'm guessing that Silicon Valley Bank will kind of be something that will prove some of them right, that this is a difficult space and you really need to know what you're doing.

14:47And Silicon Valley Bank have always been very specialized in terms of servicing the venture and startup ecosystem. There is increasing activity and a huge focus and money from outside Europe dropping into Europe, definitely. PitchBook made an analysis back in, I think, late 21, where it was very visible that the venture debt activity was growing actually significantly more than the VC activity in the past two, three years at that time. And maybe just to go back to the other question you had just before, Andreas, on the cost side of it, just a side note on that. I think the cost on doing an equity round might be more fluctuating than doing a loans deal.

15:27And the cost is, I would say, significantly higher now as valuations have dropped, right? So that's also a variable in this math. So, Kim, I've been looking forward to asking you a couple of questions, mainly around topics that are typically raised as critiques, let's put it like that, to tech lending or misconceptions or areas that are misunderstood. So one topic is like the overhang topic, right? This concept that going for the venture debt creates overhang for the next round. A couple of minutes ago, you said, you know, there's different scenarios of how you can pay back. And one of those is effectively the next round, right?

16:01So, okay, it makes sense. Things seem to add up. And here I'm just kind of echoing, I'll call it a rant, by a prominent VC in the US. And kind of just to read and quote a bit here. He says, I don't really understand how it makes sense for lenders or for founders, to be honest. I think the whole industry doesn't make any sense for founders. I don't like it because money has to be paid back right as debt. So founders taking this venture debt thinking like it's an equity round, but without dilution or some more. And they don't realize, well, wait a second, we've got to pay this back in a year or a year and a half.

16:30And here are parentheses. I don't know if this is standard in Europe this period. I don't think so, but you can comment on that. That creates an overhang because a new VC is coming in. They want their money to go into the company, not to pay off a bank. Love to hear your comment on that. Yeah, thanks. Great question, David. And these are really key points in this, because obviously doing a debt facility, that's more powder for the existing cap table. And who pays for that? Well, that's the future investors coming into the company, right? You could put it up that way. So the exercise is to do this in a way where we're balancing it with not too much debt and also in a structure and a timeline that would fit into a future equity funding plan.

17:12This is so, so important. And I think when doing a loan and you're a growing company dependent on future equity as well, you need to be very, very aware of how much debt you take on your balance sheet. We have seen examples. We've also, to be honest, where I am looking back, we have seen examples where we've, in good faith, actually, we've put too much debt on a company at that given time. And by that, making it harder to raise that next round when you're not materializing your budgets and projections. And it's, yeah, that's just common, right? That's not unusual. So you need to be aware of how much debt you take on and what's the structure of this debt.

17:53And most importantly of all, how is the cash flow for the deal, right? Yeah. Can I ask you just a comment on it also from the perspective of capex intensive businesses, right? Because that's something I've heard and I've always thought it's a really interesting merge of the two where equity investing isn't necessarily well suited to finance capex intensive operations venture debt actually feels like it is right so there's also from my perspective there's different ways you think about as a founder right you think about where the cash is coming from and what's its funding right so if you need to build a stock because you have electric scooters or whatever always seen venture debt playing an interesting role there but i'm not an expert so i'd love to hear your comments from that perspective as well.

18:37Like doing loan financing for CapEx, that is like the old way of thinking. It's still very suitable for that. But the main thing is that you, with VentureNet, you finance future organic growth or acquisitions maybe. So you extend whatever you have now, and then you can draw a line and see predictable metrics from that on. And then you actually, what you put a loan into is the future cash flows more than it's some kind of asset. Still, you would need to have collateral in that asset because that de-risks the deal as a whole, right? That's not the core argument for doing the deal. Does it make sense?

19:09Yeah. Could I ask you, Kim? So in startup land, there's always the issue that a pre-seat founder is typically quite less sophisticated than the VC in terms of the terms. And that sometimes have founders doing something they shouldn't be doing, right? This is much, much more complex. And the typical toolbox of a business manager oftentimes is heavy on financing. But in the startup world, we tend to have less business savvy or financiers in the executive teams. So in a way, I could imagine that there's very, very difficult not to end up in a situation where you're kind of selling candy to children in a sense, right?

19:53That you really need to be aware of your own role. And now you're coming from Vex Fund, which means, of course, you're not there to be a vulture. But I imagine that a founder can very, very quickly end in the hands of a vulture when they're doing venture debt-like structures. Am I right in saying that? And how do you think about that? Yeah, I get your point and your question. And definitely like many of the founders and the startups, it's the first time they do this kind of financing. They've never tried doing a loan with a bank and they definitely never tried to do venture debt. But most often we would have people on the cap table and or at the board with experience in this.

20:32Maybe some of them know this lender beforehand. Often, actually, that is like the way for a venture to lender into a company that is knowing core parts of the cap table. So like the founders should use their investors or the people they have around them to guide them and to consult in this matter, definitely. And then also, I would argue that they should have a lawyer on their side to go through documentation part of it. But even the lawyer can help you with understanding it, right? But then applying that to your quite complex startup business side of it, commercial side of it, is not the lawyer's toolbox, right?

21:07No, true. Adding to that, you should try and have references with an investor that you are thinking of engaging with. You should do the same with a venture debt lender, even though the venture debt lender would not be as close to you and on the board. It's still a partnership through many years where you should be able to talk together and you We should have a belief that this lender would have good morals and should have some kind of awareness of how would this company and these persons act when things maybe not turn out as we planned. Maybe things go out. And what happens in that scenario? This can be, if you do the right work beforehand, have references on this lender, this can bring very valuable insights to this coming partnership that are actually, maybe they would mean more actually than the hardcore cost.

21:50Another topic I wanted to raise here, Kim, is this topic of venture debt or tech lending, generally speaking, a great way to increase your runway. But this kind of argument, which it's not really taking equity risk. So it's a different type of runway. And again, let me quote and hear the argument being right that since the lender is not taking equity risk, they never want to be the last six months of your runway. It's going to be the first six months. So just to paint a clear picture, and I'm quoting here, the other thing about it is that a lender is not getting an equity reward. So they don't want to take equity risk.

22:23They may be getting a nice, you know, coupon. I might be getting 9 % or something like that. Again, between brackets here, this is my comment, probably US-centric, this comment, which sounds high for that, but they're not taking true equity risk in the company. So the last thing they want to do is be your last six months of runway. They want to be your first six months of runway and then get paid off on the back end. And I think a lot of founders think, oh, I'll take this money and I'll stay in my runway for 18 months or two years. But what will happen is in the last six months, there's all of a sudden a bank that will come your way and activate whatever it's called, a covenant or whatever.

22:53And the founders just kind of not realizing they signed themselves off that flexibility. Again, we'd love to hear your comment on that. Yeah, very, very relevant question. And actually adds to the question we just had before, because you need a lender that would be flexible and in for it in the long term. So when you look 18 or 24 months ahead and plans have not materialized, we don't need a lender that would stay on the original repayment schedule before everyone else. If you have a situation where everyone needs to tap something into the bargain to handle some situation. And I think that's the core part of knowing what lender you engage with.

23:32It is very, very important that you have some kind of patience and flexibility with the lender. I have seen situations where lenders act very differently in these scenarios, both in regards to how flexible are they postponing payment schedule and extending the total duration of the loan, and also what fees do they require when changing the original facility. And I think that is key points you need to look into as a founder when doing a deal, because most often they're not described in any documentation or materials that you receive. This is like knowing your opponent, actually. And you're true.

24:08A venture lender will not take equity risk. That's true. But still, if you have a situation where some gap needs to be filled and the relevant investors tap in with their prorata and you have a lender that is also significant in the funding journey, well, then they need to do something as well. And when you say flexibility, so you connected it a lot to extra capital needs, but there's also the point of, you know, the last thing you want as a founder is to have to consult your bank with every kind of business change you make and you're derailing a bit from plan. Not that you need extra capital, that just things have changed, right?

24:40And that also goes in a lot of what you're saying, right? That flexibility goes beyond just the capital need. It also goes into like business planning, you know, how we're executing on everything, blah, blah, et cetera, right? Yeah, exactly. And it also goes the other way around because you shouldn't expect as a founder and also as investors to, if you need something to fill the gap, you shouldn't expect the lender to be the only one to do something here. It's an agreement all the way around the table. Do you see other kind of critiques to the model in the day-to-day business? Do you see VCs coming up with stuff they don't like about the tech lending model or even founders?