E190 | EUVC | Tobias Schirmer from Join Capital & Joe Schorge from Isomer Capital

0:00Hey, everyone, and welcome to the European VC podcast. Today, we have a bit of a special episode as I'm here alone in the host seat with two of our very esteemed guests, Toby, founding GP of Joint Capital, and someone who will probably need a little introduction to any of you because we've got our good friend, Mr. Joe Shorts from Isomer Capital in the seat as well. And today's episode is different in another way as well, because we're here to talk about Joint Capital. But as you just saw, we're not only going to talk with Tobias as the GP that founded the firm, but also with their trusted LP, Isomer Capital.

0:35And remember, everyone, if you're listening in and love our show, do drop us a review, follow the pod, and subscribe at eu.vc. This is what they're finding down. Tear down this wall. It's more than just an ally. This is a union of values. United and determined, we can serve as a model for other regions of the world. The nature of a problem requires a European response. Europe is a story of new beginnings. New beginnings. Let's start acting This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. So let's kick this off, Tobias, and jump into the story of Join Capital.

1:26Tell us about it. Yeah, hi everybody. Lovely to be here and it's an honor. We've never done this and so I'm very excited to do this with Joe, which is great because we go way back, as you can imagine. Yeah, so Joint Capital is a company that we founded in 2015. We're a team of previous corporate venture guys and saw an opportunity to invest in what we now call the new industry. And 2015 obviously was not quite as it is today or it was for the last five years. So for us, getting the firm up and running was quite a challenge. Nevertheless, it was possible for us to do early deals, find entrepreneurs that fit to our thesis.

2:24And yeah, we concluded a successful first fund and are currently on our second. And I think the original founding idea of Join has always been launching a fund that invests in a thesis or very specific sector thesis. And for us, that is the digitization of industry. And this was kind of a novelty back then. It's now becoming a broader topic and there's more capital flowing in these kind of companies. But that was our original ideas. and join. We call it join because for us, it's always been a joint effort between entrepreneurs, the investors, and of course, the corporate customers, which are very important if you're running a B2B focused fund.

3:12When someone says industry, I very quickly think about hardware as well. How do you think about hardware? I think hardware is not to be neglected. In the future, there will be more and more hardware everywhere you look. As of today, we mainly focus on software companies. Some software needs a little bit of hardware to facilitate the software sale, and that for us is fine. But kind of the pure dominant hardware investing, we have not yet figured out really for us. We're open, we're seeing more and more, but it hasn't been really a priority for Fund 1 or Fund 2. Now, Joe, we should bring you into this.

3:57And I want to hear from you how you got into the story of Join. Well, ladies and gentlemen, cast your mind back to 2015. As Toby mentioned, I forgot the date, but I met Toby and Jan, actually, when they still worked for a large German corporation. And they had a big idea. And that big idea was, you know, what you just heard. I also had a big idea. This was even before Isomer started. And I don't think you had the name Join, and I don't think I had the name Isomer. But we had these big ideas, and we found each other through the network. And you were saying, well, we're going to create a fund focused on this area.

4:45And I said, yeah, I'm going to create a fund, too, if I can get it together. And I always smile because, as you said, Toby, if you think it's hard to raise a new fund now, try in 2015. It's gotten a lot easier and Europe's gotten a lot more successful over that time. But, you know, I got excited about the ideas behind JOIN because I worked in manufacturing early in my career. I struggled as the head of tech for a group of engineering and manufacturing companies. I struggled with a lot of the issues that join capitals trying to invest in and bring solutions to factory floor automation, logistics.

5:31And having spent quite a few years myself working on those problems and running software development teams, addressing those problems or buying software to fix those problems. you're basically trying to make old traditional companies go better faster and cheaper and so when i heard the thesis for join i thought yeah i understand that problem and you know i spent years working on that and it's you haven't even started really scratching the surface of of digitizing these things i i kind of agree on the hardware point as well by the way um I think where hardware enables the business, then that's investable with a venture capital lens and target return.

6:14However, where hardware is the business, that takes you into more heavy capex and manufacturing, which is not really where venture capital can be effective and have the venture returns that we look for. Just to complete the story. So the happy part of the story is we did end up creating a firm called Isomer. Toby ended up creating a firm called Join and Isomer was the first investor in Join. I'd love to ask both of you because it's a bit funny sometimes. And this goes to your corporate mentoring background. And I'd love to hear the perspectives of both of you, how you think about that. Because I always tend to kind of feel like there's some people in the VC industry that think less of corporate venture.

7:03They say, well, they're not real venture, blah, blah, blah. and also especially, and that's of course primarily coming from normal venture guys that then you tend to then find a common enemy or talk bad about people that are different from yourself. So I think that there's typical group dynamics in that. But I'd love to ask you both, Joe, from the LP perspective, when you see a corporate venture team wanting to break out as a full-fledged private VC, How do you think about that and underwriting that team? What do you see that they need to show that they understand? And also you, Toby, when you were thinking back then, how were you thinking about pivoting out of the team?

7:50And how do you think about both managing the process, but also what were the differences? Where are the main risk factors? I think there are very different nuances of corporate venture in the spectrum. And there has been a lot of learning curve over the last 15 years as well. So I would assume that corporate venture as we knew it back then probably has evolved quite substantially. But I think there would be a different podcast going into the corporate ventures do's and don'ts. What I would say for today is, I mean, there was a reason we wanted to spin out. And that reason is early stage venture is really a partnership model.

8:37You got to take the risk. You have personal skin in the game and also be responsible for the upside. And those elements are rarely seen in corporate venture where you're an employee in a big shop. And so I think that's absolutely fundamental because then you can stick to a portfolio theory and basically ride the wave till the end. In corporate venture, you invest mostly for strategic reasons. And as we know, corporate strategies, they change frequently. And that makes it very hard for a team trying to optimize a portfolio to stick to their initial investment thesis and also probably get through times that are difficult and where the founders really need backing and not just kind of them being disregarded because the strategy is not a fit anymore.

9:29So I think those were kind of difficult things for us to observe, but there's one really good thing, and that became the really secret sauce of join. And that is the awareness of the importance of being close to customers. Because if you invest in a big multi-billion organization, there are thousands of potential customers in that group, in that corporate. and finding a way to really using them to your advantage to help the entrepreneurs and help in finding out the go-to market and product market fit, that is a real skill. And that is really the DNA of Join. And that's what we retained from everything.

10:13I mean, learning a term sheet, learning a cap table, doing deals, that's mechanics. And you can do that as well in a corporate setup than in a private setup. But being able to understand how you connect the dots and make that asset available to your founding teams, that is what we retained. And that was the DNA and the basis of Join. And we even have just recently launched a program around this officially. We can talk about it in a minute. But if you do B2B, that's, I think, really what sets you apart. And that was the really good part. And we learned that really well in the corporate world. And you, Joe, if you were just to chime in on this as an LP, seeing a team that wants to break out from a corporate venturing arm, how do you think about that?

11:05Yeah, Toby took all the good points. So how do I add to that? Corporate VC teams, you first have to look at who the people are, where do they come from, what's their experience? That's always important. you know and do you have a relevance for the entrepreneur what what are you bringing to the entrepreneur because the minute you spin out you lose your big brand you know when you're a corporate vc you have this big brand card that opens a lot of doors and then you leave and then you're you're who are you you know with the card you invented last week uh so so you know the first question has to be, do you have a relevance to founders?

11:47And can you really bring anything to help them? You know, once you're out of that context, I do agree a lot with what Toby was saying. Corporations have the problem of changing their strategy every year or two. And that's at odds with the objectives of early stage venture, which is we're going to invest in a company and expect to be part of the journey for quite some years because it takes a long time to build a company. So if you, you know, you often see within corporate venturing immediately from day zero, whether that's recognized or not, this conflict between the long-term needs of building companies and the short-term objectives that do tend to change in the corporate context.

12:34So what we look at, and we have backed more than one ex-corporate VC, but what you're trying to figure out is, okay, if you look at the track record, does that at all line up or in part line up with the thesis you're launching to go private, if you will? And what can I understand about what you've done that could inform the future? and we see a real mix from companies that on one end maybe haven't changed strategy a lot, have a long-term point of view, almost act like a commercial VC, up to the other end where companies are investing not for investment reasons, as we think about it, but more for access to teams or market intelligence or other aspects.

13:24And that's the funny thing about corporate venturing often a lot of investments are made for non-investment reasons they they may not perform economically but they do other functions so it's a little bit more complicated to to tease out you know what were the investments you did why did you do them how did they work out and how can we understand them but what i you know what i loved about about the early days of join and the thesis that continues today, it was partly informed by the experience, but it was also really focused on a problem in industry. And it's an identifiable problem. It's a problem where if you're a founder in that area, you need a certain set of expertise.

14:08And so I just love that joining up, if you will, between what they were thinking to invest in and what I understood about the market need. And I think that's a great recipe. For me, that's the exciting part. It wasn't that, oh, there's a big brand there. The brand goes away and isn't relevant over time. Actually, very relevant. And that's one of the problems. And that's why we've been super naive when we left is access to capital. This is probably for corporate venture teams, something they don't think about that much. How do you raise money if it doesn't come from the mothership? And that for us was a big, I mean, that was a problem.

14:57Then you realize that dealing with the executive team of the corporate was actually not as tough as dealing with LPs that haven't yet committed. Joe, you gave us the perfect segue to dive deeper on the thesis of Join. And Tobias, really, I just want to set the context by saying that you've now more or less closed fund two, which is 100 million euros. And I just want to hear more about your thesis, more about your strategy, what makes you different. And then, of course, as always, Joe, jump in to give us the LP perspective on all of this. But Tobias, take us away. No, no, absolutely. So the way we see this at the moment and for the last couple of years where it started is there are significant challenges in the world.

15:43Obviously, we hear them every day. We see them in the news. But if you drill down into this industrial sector, there's really three things that keep people awake at night. One is decarbonization. So I think it's a massive challenge to kind of decarbonize the way we produce, the way we organize supply chains, logistics. So the price for carbon will increase and people will be penalized if they don't bring this down. Now it's tightly linked to energy costs. So the more efficient I can do stuff, the more I can keep my competitive advantage and the more I can even keep producing maybe even here in Europe.

16:25So that's another issue that people are facing. And lastly, as it's becoming a real problem, the shortage of skilled labor. So, I mean, here, if you go to the big automotive factories or even to machine building companies, they would love to produce more. They don't find the skilled labor to do it anymore. And so for us, these three trends are really what we mean by the neue industrie. And these are kind of old problems that can be solved with software. And I think nowhere else in the world you have a density of real high tech and academic clusters where they spit out engineering talent that is capable of solving these problems with individual niche products.

17:17And that's really our thesis, finding more of the engineering talent, maybe the academic talent and write tickets, two, three, four million initial check in late seed or early A rounds and help them define and craft the go-to market strategy. So that's our approach. And we do this all over Europe. So our portfolio spans from Helsinki down to Lisbon. And as I said, our secret source or our edge, as we call it, is that we have raised money from family offices and obviously from some funder funds, but mostly from family offices that still own and keep operating. business. And so in these businesses, we have people identified that we call them the join ambassadors.

18:15And these are chief digital officers or chief transformation officers, and they are our direct link to the shop floor. And so before investing in any given company, we can get real life experience and feedback from people who have the problem, who are looking for solutions, and who can evaluate the solution at hand. And that is a real winner because the entrepreneurs love it because we don't harass their existing client base when we do due diligence. We bring some new people to the mix. They give us the time to do so. Worst case, they get customers, but no investment. We will still stay friends.

18:55And we can do this really well because we have that real thesis and sector orientation. And that's the ambassador program. We launched it on our portfolio day just a couple of weeks ago. I think it's going to go out publicly tomorrow. And that's a key differentiator for us, really. And if you talk to a founder in Lisbon or even in London, where maybe the density of industrial customers is not that high, they see this as a real advantage. And that's how we also get into deals outside of Germany, because we can bring them and onboard them here really well. I remember talking to Sebastian about this program.

19:40And that was before it was called an ambassador program. So first of all, it's something you've been doing forever. It's been ingrained into your fund. Now it's then given a label, which I'm sure helps for marketing purposes. But I'd love to ask you Tobias if you could dive a bit deeper into the mechanics of this because it's not a short process, right? It's not three weeks that you spend or let the founders spend with the LPs. It's actually, it's a quite lengthy process in many situations as far as I remember. Luckily, we've never been exposed to this market where we were asked to deliver term sheets in two weeks.

20:21And luckily, these days are over as far as I'm concerned. But you're right. I mean, it takes dedication and it takes also a little bit of will from the founders to work with us. But that's something we're looking for. We're looking for someone who wants to also build that relationship and also wants to incorporate the feedback, maybe even for the better. of the company and so it's not that it takes forever but um if we we have this kind of after the first filter or first pitch we have this deep dive approach to going really deep on a company and within three weeks we aim to really gain the significant feedback maybe then a pilot project or something takes longer but the initial feedback is enough for us to inform our decision and so we don't have to go dating for a year to make an investment.

21:16But oftentimes where it worked really well is we already engaged with the company before they're even thinking about fundraising. So we met them at a demo day or we got introduced by some business angel or someone else. And even though they're just raised, maybe they're around, they're not even thinking about fundraising. We asked them, hey, would you mind maybe pitching this to a customer XYZ? And we kind of started to wrap our head around it already way before. And that worked really well. That's how it worked out for our last investment in Munich, a company called Modelwise. It was really like a pass for us a year ago.

21:58But we kept in contact and we showed it a few people. And as they kind of developed it and we gained more feedback, we were then very quick, actually, in making the decision to invest. That relationship for us is crucial because we're dealing with highly educated, highly skilled people. They're sometimes probably among the top 10 people in their field. And it's really hard to challenge them on the subject matter. So for us, the ROI perspective from customers is really the only real thing we can test. And that's why we put such an emphasis on it. And that's how we do it. Joe, when you hear that the LP base is an important part of the value out of the firm and they're incorporated part of it and so on.

22:49How do you as an LP coming in with pure financial motivations then think about that? how the diligence that this LP base is actually relevant, that they're actually working correctly, and that obviously Tobias and his team will have, they'll be exposed to a risk of managing the relationship between having them as LPs, but also as partners around the value add. And then they have an individual LPs have some stake, at least as a customer, into the companies as well. So that is fraught with a bit of issues if you don't know how to manage it well. Is that something that you thought about or think about when you look at Join?

23:31I like the ambassador program a lot because I've worked on both sides of that table. I've been the guy in the company selecting the software products to optimize design or production or whatever. And I know something about the tensions of the in-house built product and the silo between one department and other departments. So from my point of view, you must have a champion to bring in an outside product quite often in companies. So this is beautiful. This is the way that Join can really add serious value. And by the way, we do the same. We have quite a few corporate LPs. We've had joint meetings in the Joint Office with a large group of Japanese executives talking about how can we bring, and then it's actually Isomer's LP, looking through Isomer, through Join to products.

24:24So in that sense, we're quite the same. We work with LPs in the same way, which I think in the early days of Isomer also was a surprise to LPs. Like, really, you can connect us to solutions and products and so on. And that arises out of our own corporate backgrounds at Isomer. So we are having the same mission there. That's really aligned. And then we're both fund managers. So that's really aligned. Like none of it matters unless we build great products, get a customer base and drive good returns. So in that sense, we're the same. I don't really see a conflict there. But as I guess Toby said, it's hard to figure out and you must spend a lot of time with people.

25:06Are you are you going to be an investor in the fund or are you going to be strategic or I hope you're going to be both. But that takes a lot of time. And I guess we both learned the hard way. you just got to knock on a lot of doors have a lot of conversations and and try to understand what is the objective of the potential corporate partner or potential LP and can those objective can we help you know can those objectives line up I guess the final thought I would give what we're always trying to figure out is not only can we help but can we find a way of working that's compatible with the founder, with how we're working.

25:47So obviously, we're not having a meeting every week with every LP, for example. We can't, right? So there's a level of engagement and an expectation setting up front that has to fit because at the end, we're all managing funds and that has to be the primary job. So the strategic collaboration has to have a context that works, a way of working that works. so I'm always doing a little testing oh how do you operate your team how do you think about engaging with the founders how do you think about the products and you can figure out ahead of time is this a context within which we can work and drive mutual value or not maybe Andreas just to clarify the ambassador network there's no need to be an LP to be part of it so I would say the ambassador program is probably one third LPs, two-thirds non-LPs.

26:43So it's really not a requirement. And the reason we now institutionalize it is exactly what Joe just said. I mean, in the beginning, it was my partner, Sebastian, Yann, and myself knowing a bunch of people, oftentimes probably people quite high up in an organization, and it just doesn't scale. I can't call the CEO every other week and say, hey, we have this really cool AI company. what do you think and he's like toby i love you but sorry i can't deal with this right now yeah and so we needed to bring it one level below and you find the ambassador whose actual job role is to know and to feed the stuff in yeah so we're not always pulling yeah so also some someone else is pulling the information in and we even have a dedicated team member now vanessa joined us she's running the platform she's running the ambassador program and and it's a dedicated role to kind of cluster these people matchmake and and and tell us tell the investment team when we look at a deal hey you should really show this to xyz yeah and and and and you need a dedicated resource to that because the fund manager you can't you can't do this you have other things to do well and in terms of the your question on the conflict of interest there's really none because we don't raise the money from the corporate yeah and and we raise the money from the owner which is basically the family office so the engagement then with the corporate that's a windfall profit that's just an argument for the owner to say look i invested here there's something good for you guys too yeah so make the most out of it but there's no no conflict nobody nobody's p l is kind of in between yeah yeah so you've never seen that play out that that makes a lot of sense i'd love to dive into your your thesis around the new industry or the neuer industry as as you say you're german so of course you're using neuer um i love to ask you because so industry is obviously manufacturing of products hardware, all that stuff.

28:56And then it's taking that digital. But does it matter at all whether they're producing for producing cars or producing windmills or a third thing? Or is it the actual process of just producing? No, and I think that's probably what we not mean by Neue Industry. So the term is actually much broader. So, for example, you have a chemical industry, you have an automotive industry, but maybe you have also an industry in construction or you have an industry in logistics, supply chain. So, don't only think manufacturing. Manufacturing is a large part of it, but we're not a manufacturing tech fund. So we also invest, for example, in the digitization of property, which is very similar to a factory.

29:53There's a lot of sensors now. There's a lot of potential to save energy or bring HVAC consumption down or whatever. So Neuer industry is not just manufacturing. It really is. It includes transport. It could also include vertical SaaS applications within large companies. So it's a much broader spectrum. And I'll tell you why. Because if you're doing a very narrow, even narrower than Neue Industrie manufacturing tech fund, you're running the risk of being too exposed to a very specific trend. And maybe in the return expectation, this may unfold late or may never unfold or be small. I think the risk for us would be too high.

30:47And I don't think the market's developed yet to produce outstanding companies only in manufacturing tech. So for us, it's important. And our fund one was a real outperformer in DPI because we had three really good exits. And those were companies that were already kind of using existing technology, well adapted to use case and that tracked well. And we were able to sell them at peak of the market. And it provided a lot of DPI that then fed our fund too. And so fund too, we're replicating that strategy. So we're seeking for the really crazy deep tech companies that are reinventing the world. We're super excited about those.

31:29But we'll also invest in a guy, for example, who's disrupting a multi-billion oligopoly in an elevator maintenance service. And obviously, he's not reinvented the wheel, but he found a really good business model and capturing a lot of attention. And we can probably sell that company in five years time and return the fund. And so from a portfolio construction perspective, we really have to construct something that pays back the money. And that is also important. And we're diversifying not only on a deal by deal basis, but also a little bit on the profile and the type of company we want to put in that basket of neue industrie.

32:15I'm curious, Joe, because and this will probably be our last question here. Industry 4.0 because it's pressing in my mind because I'm from Denmark and Denmark is doing a lot in Industry 4.0 and robotics and so on. I'm going to a conference here in September. So only about that, bringing VCs that only focus on that. And I'm curious because Tobias just said, well, it's a bit narrow for us. I think you get too much exposure to just one sector if you do that is that your view as well um that would uh would a robotics or industry 4.0 pure focused fund be we're not quite there yet in europe i guess this is just a point of definition right because the front end of all manufacturing is design so you forget there's a giant engineering department so so how's a company winning often it's winning on having a better product well you You need to build that product, but you also have to have a top flight engineering department.