E267 | NEUVC | Rebecka Löthman Rydå, Investment Director at Inventure on doing early-stage investing with empathy.

0:07Welcome to the latest episode of the special series New VC hosted by Freddie, an analyst at Isomer Capital and Linda and associate at Karma Ventures. Today we welcome Rebecca Lodzman-Rudak. Rebecca is an investment director at Inventure with years of experience in the VC world. Having made deals for a number of years, she was happy to share thoughts on successful dealmaking, importance of founder relationship building and the current state of the VC landscape. In a world where podcasts outnumber humans, we try at EUVC to be mildly more interesting. Tune in at eu.vc to watch this episode instead of just listening.

0:46eu.vc where the extraordinary is just another monday

0:55rebecca thank you so much for joining us today we're super happy to have you with us let's just kick it off who are you what do you do how do you fit into this european vc ecosystem and can you tell us what is your superpower okay hi guys thanks so much for having me it's a pleasure to be on this podcast. So quick intro to me. So I work as an investment director together at Inventure, a Nordic Baltic fund focusing on early stage investing. And I've been an investor as well for the past almost nine years. Ended up in venture a little bit by accident, but got stuck because I really, really love the early stage investing.

1:30It's also what I'm truly passionate at about i tend to fix a lot on sort of software ai data nerdy stuff uh also a bit of deep tech and clean tech but we as a fund um yeah very much a generalist fund and i tend to be curious about a bunch of things as well so and so i mean what does early stage mean to you everyone has a different interpretation do you go from pre-seed up to series a yeah so as a fund we can do pre-seed to seed to even early A-runs. We can do ticket sizes from like 250K to 5 million euros. So it's really a luxury. We can look at anything that's early stage. It's very much about the founders and their potential.

2:09And then we can be flexible about when we come in. So that's very cool. And I think about 87 % of the cases we've invested in for the past sort of 16 years or so as a fund within one of the first VCs on board or the first VC on board. We were, for example, in Vault. There were like six employees when we invested and there was really not that much in place. And that ended up being a big success as well now. So we do like that really early phase. And so how did you arrive at InVenture? What was your career beforehand? Yeah, so I started off my career at Ernst & Young. I learned a lot during my years at Ernst & Young, but I realized quite quickly the brewer career wasn't really for me and wanted to go to the operational side and actually do stuff in the company.

2:54So I joined this group of companies as a CFO. And then this group of company was going public. So I got it ready to go public. And then the board changed it mine. And I instead joined as a CEO and head of investments. And that's how I started working a little bit with investments. And been doing it ever since. So been at two funds before joining Inventure. You very conveniently avoided the question of superpowers. So what would you consider your superpower? I guess you'd send me a list. you're like choose one of these so as I looked at the list and I think one of my best superpowers is probably empathy I mean when you work with with really really hard-working founders in the early stages where it's a lot about failing and failing many times and and failing forward hopefully so you learn and iterate and get better I think empathy is super important to have as as an investor in that early stage life and that's something I try to bring to the founders I work with and always really have their back and be a very good listener and a good bouncing board.

3:56I hope I also sort of challenge them and bring that challenger status quo is something I like talking about. Like how can we think in a different way to progress or move beyond the status quo? And also I'm like a sci-fi and fantasy nerd from the very beginning. And I think once you've been that sort of nerd, you're always a nerd. 100%. So I tend to be a dreamer. I'm quite good at sort of visualizing and dreaming about how something can look in the future. And when a founder comes with a very novel technology or an innovation, I can dream with them and sort of visualize how it can look in the future.

4:37And I think that's also something that's very important in sort of early stage investing. It's obviously super important to be empathetic and being able to relate to the founders, et cetera. But I guess that's not maybe the first things that you think about when you think about deal-making as such. And that's probably the least empathetic part of the process in many ways, because after you've invested, you're in the same boat. You're kind of thinking on the same lines. But prior to that, there's a balance between trust and empathy, but also fund structures, et cetera. So how do you kind of go about making a deal?

5:16So when does it start for you? How does it go? And what is it about at its essence? I still think it's a lot of trust, though, for sure. We're not trading commodities here. It's not like a stock picker. No, but how I go about it, I think it's really easy to make a deal. It's the easiest thing you can do. But to make a good deal, that's what's a lot harder in our industry. And I think it comes down to a couple of elements. One is, of course, making sure you have the right deal flow. And it's both a matter of quantity and quality. Because if you're missing the top percentile, the top 10%, you're going to miss all the good deal.

5:59It's a lot of hustling and a lot of outbound work, making sure you access those sort of best builders out there, building something variable, crazy, that can be super big. I think last year we looked at about 3 ,000 deals and we invested in about 15 companies. So it's going through a lot of potential deals to begin with. And then we always start to think as a team first approach when we do that deal flow work, who is the best to put in front of this founder to maximize both the chances of winning, but also of course adding the right value and build the right relationship with the founder. So that's something I think we do really well as a team.

6:39And then the last thing about dealmaking is, of course, sort of making the right call, the right decision. And I think that's one of the hardest things because how do you know it's the right one? In venture, it's such delayed feedback loops. You might think you're doing really well for a couple of years and then, you know, a crash comes and a company fails and something happens. So it's, of course, super hard to know you're making the right call. But I think we try to be really fast to begin with when we make up our minds to not waste founders' time. And if we do like something, on the other hand, we can also be fast.

7:14So if we meet a founder, and even if they're not sort of actively raising and we see a potential deal match, we try to go after it and then move to a positive decision fairly quickly as well. But it's a balance, right? You want to move fast enough to win a deal, but you want to move slow enough so you actually have time to both do the legwork and the DD you need to do to understand the space. But more importantly, get to know the founders and know that they have the drive, the experience, the qualities needed to build something really great. And also to know that we can work well together, we can add value, we can challenge in a good way.

7:54So I'd say those are sort of the main components when looking at sort of deal making. And as you've been at a kind of a few different funds, do you see that the basics are the same everywhere? And it's only like a few things to change based on whether fund structure, team structure and the competitiveness of markets, etc. Or it doesn't change very significantly based on the fund? No, there are definitely differences. And there can be a lot of differences still within a fund. I think we're quite good at operating as a team with a sort of common process and strategy, how we do things. But I think at other funds, it can be very individual as well, how each sort of partner investor works.

8:36I think I've been both at a fund where one of the partners could sort of shake hands in a meeting and say, we're in, sort of first meeting. and another fund where it was maybe a little bit longer processes and very, very extensive analysis and DD. So I've seen sort of both worlds and I guess the perfect way of doing it is somewhere in between, right? Which is probably why you've chosen a place at Midventure where probably having seen different ways of making deals makes sense to you. We do it also in two different ways. I'd say for the pre-seed bets, we do really fast decisions and it's very much like 95 % about the founders.

9:15So we spend a lot of time like taking references of founders and getting to know them and that's what we spend time on. And then after about three meetings, they can have a commitment and then on the seed, the deals, we spend a little bit more time with sort of more traditional due diligence and customer calls and expert calls and those things. Why is that? Because arguably the pre-seed is riskier, so more time should be allocated in a place of greater risk. Yeah, it's definitely riskier, but it's also so much more about the founders. So many of these pre-seed companies are going to pivot and change their strategy.

9:49And then it's more important that you have the right founder in place to be able to do that. But we also, of course, allocate less capital. So from the risk reward perspective, you know, it makes sense to not allocate too much resources and time on the DD. I think the upside, as long as the upside is still there and we really get conviction on the founders and that they have the resilience and the drive to build something really big. That's the most important thing. How does it work? I was talking to Linda, you know, as we were sort of preparing for this call and I realized because I'm sort of so far removed.

10:20And I realized that, you know, probably a lot of analysts are kind of in my boat where they're just joining, just starting to take the exposure to deals and deal making. What is it that you have to go through to make a deal? So, I mean, typically we have a first meeting. It's a 30-minute call. And I'd say maybe 90 % of the deals we look at, we say no after that call. So we quite often are able to say no after just one call. We might be wrong. Who knows? But for either the deal wasn't a match with our criteria, then we typically actually don't take a call in the first place. But something wasn't matching up.

10:55The founder wasn't strong enough. Or we couldn't see the potential really being there. If we feel after the first call, hey, this deal could actually match our criteria. The founder is excellent. We try to involve one more person from the team to do a second call. And then during that second call, we typically ask the founder to make sure we meet the other founders as well. And then it's a little bit of a longer call where we go deeper into sort of the product. Maybe they demo the product and we go a little bit deeper into the strategy when it comes to go to market. And if that call goes really well, then sometimes we bring it up for a sort of first excitement phase on a Friday meeting.

11:37And that can be after two or three meetings typically. And on the Friday meeting with the whole team, everyone gets to sort of say, we explain why we're excited. And then the whole team gets to say, what risks do they see? Are they excited as well? Can they help in any way? Does someone have an expert or a potential customer or anything that can help us both win the deal? and understand it better. And yeah, and then we dive a little bit deeper in sort of a pre-DD phase, I guess you could say. And it can range from one to three weeks. It depends. A couple of more meetings with the team, a couple of expert calls, talking to customers.

12:14Often we try to source potential customers for the company we're looking at so we can hopefully add a little bit of value. We try to source potential maybe angels that we see can add value to this deal. Do you always have to sell in parallel that you evaluate? And those things need to go hand in hand. So I think when I first got into venture, it was a lot more like a dragon's den. I think the old school investors were sitting there going, you know, just asking all the tough questions and grilling the founders. Now it's a lot more about proving our value at the same time that we understand the founders and the business a lot better.

12:53and hopefully by the end of that process both the founders and us feel that hey we want to work together we can make this happen and then it goes out for a final decision with our whole team we don't have only the partners in an IC we include everyone even our interns summer intern can ask questions it's a very flat organization and then the founders get to present themselves for about half an hour or 20 minutes and 10 minutes questions and then we have a discussion in the team and hopefully come to a positive decision. We don't need consensus. I don't believe in consensus when you're making venture bets.

13:32I think consensus deals will be the mid-performers. And often where we disagree, that will be the outlier, either the worst performers or the best performers. So it's OK to have a bit of an argument and it's OK for some to say no. We might still move forward. so that's in essence I guess getting to to the commitment yeah sorry Linda no no but to follow on on that it's a mix of like internal and external skills right because from the one side on the external you need to keep the founder interested in the deal on the internal you need to get your team excited about the deal and I think both can be hard to balance because from one side you don't want to oversell the fund you don't want to kind of say something to the found that it is untrue or the promise on the other side, on the team side, you don't want to oversell either.

14:24You might be excited, but just kind of keeping this. And I think this pressure, especially in like young people, you need to make deals, you need to bring in deals, give deals. So, you know, if you look at all of that, how do you first balance it and any kind of, you know, what is your kind of go-to thinking about these things and how do you feel? Because I'm guessing now it's gut feeling by now but when you started how did you kind of manage that when i was very new in venture i acted a lot more like a project manager like just getting things done not always maybe stopping to fully think and trying to really really understand and visualize the potential of the space and nerd in properly on both the the product and and the space in general i think i'm a little bit better at sort of also stopping and sort of thinking like a little bit further ahead like how can this actually look and play out and spend time on understanding alignment on the vision I guess the other thing that I'm hopefully getting better at and I think this is core is no not overselling to the founders obviously but make sure you spend time building that relationship in parallel so that you show that you're a good bouncing board you show that you're transparent and clear about the path ahead what you expect to see what's the next internal step how long will this take so you're very very transparent about where you're at in the sort of decision making process or deal making process and I try to move to to like whatsapp and be like quick about communication and open for them to call if they have questions and be like very available in the whole process because I think that builds trust as soon as we get a little bit serious I also always offer like a bunch of references like I think the best way of getting to know me is talk about the founders I worked with before so here are all the companies I work with let me know like who you want to talk to and I'll connect you and I also think that hopefully builds trust because I mean, we might work together for five, even 10 years.

16:31It's quite important to understand how I've operated sort of in the past as well, or how we as a fund has worked with other founders. So we often introduce other sort of portfolio companies as well. Sometimes those portfolio companies can be a potential customer. They can also be a good reference. They can be with that sort of win-win situation again that we try to find. How important is building that consistency of the qualities you just defined at the earliest stages of your career? So very important, I'd say. And early on in your career, getting access to your sort of deal flow sources. Yes, there's no such thing as proprietary deal flow, but kind of, you know, constantly sort of increase your quality of deals coming in, the quality of founders you bring in.

17:20that will give you a real edge, I think, in venture in general. And everyone, I think, needs to find their way of doing it. But I mean, obviously, building strong relationships, not just transactional relationships, is something I think is quite important. I see that mistake sometimes with young VCs. They're too transactional in their networking. If you don't, again, build trust, I don't think other angels or funds will give you their best deals. So you might get a lot of deal flow, but it will be not the quality you want to access. And I think still in our work, you need to do a lot of outbound.

17:56You need to do a lot of search yourself on LinkedIn or a lot of asking around who's building something. And one key skill to master is that outbound work, reaching out to someone cold and getting hold of them and getting that first meeting. So I think about half of our deal flow today is outbound at least. Do you think it's harder to get that trust when you do outbound? Because I think that the VC ecosystem is a majority built on introductions. I think this is what we all try to get. I think investors and founders are the same. So does it start a relationship different if you get an intro versus yourself?

18:36So if you do want to access maybe a very quartered sort of founder, it can definitely be an advantage to try to get an intro from a common friend or an angel investor of theirs or early stage investor introducing you warmly. Sure. But quite often, I think you also need to be able to reach to a meeting through outbound. And it's a skill that takes a little bit of time to master. And I think the very outreach can seem a little bit transactional. I try to be clear about sort of what value I see I could add and make it a little bit personalized. So not do like mass, you know, generic outbound send outs.

19:17Same with founders, actually. If we get way too many of those like generic inbounds without them having to done any sort of research on who to reach out in the team and if it's actually a fit with sort of our fund focus. I think that's important, personalizing the outbound. And then, of course, you have the first meeting, hopefully, if you get it, to prove that value and that trust. We had two questions that are kind of the same, but I wanted to ask it, which is, you know, what are the core skills in dealmaking? And we've identified that, you know, there are various parts of the process, but I want to specifically focus on closing it with the founder.

19:58That's the key question, right? Always be closing as well. Seed is still fairly competitive, I'd say, especially for the very sort of second time founders and very experienced founders. So I think when it comes to the key skills to closing a deal, I'd say one thing is, of course, speed, making sure you move a deal forward at the right speed and progress. The other thing is, of course, making sure you've proven your value enough along the way so the founder actually wants to work with you and you win the deal. and we don't win 100 % of our deal. And I also think that's fine. If we lose one or two, of course, we will be annoyed.

20:40I love winning, so you do get a little bit annoyed. But it also means that we're going for the best deals or at least the most attractive deals. Typically, it might be either the founder wanting to go with a larger or a U.S. fund or a different kind of skill set in a fund. Maybe they're vertically oriented and has very clear sort of value in a certain sort of vertical, or they were able to offer a much higher valuation. That, of course, happens as well. But I think quite often in a situation when there is competition and they are tempted to go for a higher valuation and a larger international fund, And we try to convince that at least in the very early stages, sort of pre-seed and seed, going for too large a fund or too far away as well, you might not get the same commitment because you'll be one of very many companies and probably a very small investment in their very big fund.

21:43And they will sit a lot further from you and might not be able to add the same sort of value along the way. We try to sort of explain the benefits of having more of a hands-on sort of local lead and where you become very important to us. Your success is sort of instrumental to mine and the funds a success. And hence we'll work like very hard to make it into a success. I think, yeah, sometimes we're not able to come in, but most of the times we are. and then getting the actual deal done in the final phases. Of course, there's some negotiations around sort of terms. And if you're a first-time founder, you might not be that accustomed with sort of the typical VC terms.

22:25So there might be a bit of teaching and explaining why do we have these provisions or these videos or whatever it might be. And it's all often once you explain that it's actually a protection for each of the founders as well. It benefits them as well, hopefully. typically not that dramatic and i think these days early stage terms are very market practice for most of the funds and no one there so should go outside sort of market practice so we try to try to stick there to also get the deal done so in your experience like what are the most common challenges that can make or break a deal because you know i think one of the loctions where it can don't go wrong, is obviously deal terms.

23:09But as you said, especially in early stages, the terms are fairly generic. I think in Estonia, startup Estonia has put together a list of documents and many investors use 95 % of the same terms and maybe case by case change a little bit. But are there any terms and stages where you see that there is a higher risk? And what are those elements? And what are the broader kind of things that you've seen or often see that can, in the later stages, make or break a deal? I mean, occasionally it's definitely valuation, right? And I think some founders do get very carried away by, you know, a much higher valuation getting offered at an early stage.

23:51I think it can also be a bit dangerous. It's a bit like peeing your pants. Like it feels really, really nice when you get that high valuation and that massive round. And then, you know, you still need to. That puts a lot of pressure on the growth. You need to deliver and all the milestones you need to achieve to be able to do an up round. And otherwise, that might be a bit of a poison pill for the next investor coming in. So I think it's a delicate balance of raising enough to achieve the milestones you need to achieve, but not too crazy high valuation at the early stage. So you can't like raise the next round.

24:26I would say that's probably the most common one. Occasionally, you get stuck on sort of how much or how long should our shares vest. But that's always something we can agree on and find a compromise. So in general, it's pretty straightforward. Maybe like a cap table as well. Yeah, of course. Especially if you have a cap table that comes with a bit of legacy and a bit of a mess, that can be something you might need to clean up to get a deal done. And sometimes we might propose a higher option pool compared to what the current investors would like. And then it can be a bit of a dialogue getting the sort of current investors on board on the larger option pool, because that's usually something that comes in place before our round.

25:09So, yeah, it can be those things, of course, to align on. Yeah. And sometimes we redo the board arrangement a little bit. We might want to take away one investor that has come in earlier. But for most of the cases where the first one's in and then it's not an issue. But occasionally you find, you know, someone who's had a very large board of like angels where we need to sort of redo it a little bit just to optimize. Also, I'm guessing professionalize like stage. Right. But normally that's not anything too dramatic at the early stages. We just started touching on that negotiation piece of where to compromise, where to stick your ground in the term sheet negotiation.

25:49for those who haven't seen it what does a good one look like what does a bad negotiation look like and are there any examples you could give maybe maybe we rephrase them we go what should it look like and what does it look like okay so i think we try to in a negotiation optimize for mainly three things i'd say like do we get enough ownership with our ticket size so it matches our criteria and we're probably more strict on ownership than valuation because in the early phases normally the exact one or two million up and down valuation wise might not matter as much as the ownership you come in with because just looking at the typical dilution say say 50 percent from seed up till they become a unicorn hopefully and then if we don't own say up towards sort of 15%, 12 % to 15%.

26:45Say we come in at 10 % and we in the end own 5 % of a unicorn that still doesn't return our fund. So ownership, I think it's the one, the first thing we try to optimize for. And then how much capital does the company actually need and to achieve the milestones? That's the second thing to agree on and negotiate around. And sometimes we challenge the founders. They might think they need too little. And we look at the plan together, maybe challenge that, hey, you might actually need a little bit more to do what you want to achieve and sometimes it's the other thing hey you're trying to raise a little bit too much and we're not in the business of having money in a bank account for three years you know so we want to invest the money you need in sort of the next 18 to 24 months and then the last thing is sort of how much dilution actually makes sense for the founders at this stage because we're very mindful of the founder's incentive and want them to own you know have a very strong incentive and not get too diluted in the early stages I'd say in the very early phases between 15 and 25 percent, where I think 20, the middle there is the most common one.

27:49When you look at like a great deal, I'd say that, you know, every year there's these like few buzzwords that everybody's kind of looking at, everyone's saying it's the future. Right now it's like generative AI and anything to do with that. You know, beforehand, Web3 for a while, Metaverse. what is your policy on you know sometimes a great deal is a great deal and and and at least it's seemingly like you know everything seems to match up but maybe the valuation is too high so do you guys sometimes say hey let's go a little bit lower on the ownership or let's compromise here or like the FOMO is massive right like especially on these like super attractive deals So how do you keep a clear mind and understand, is it the business case and the actual company?

28:36Or is it the market that's creating this excitement? Or do you have any advice on how to survive another 2021 type of, here's my money, no due diligence needed type of investing? We were never a big fan of that way of investing. Stayed away from those deals, the very, very FOMO driven deals during 2021. I'm glad we did because I think a lot of those deals are not looking great today. With that said, I mean, sometimes there's reason for FOMO, reason for us to get involved if the founders are outstanding. You know, Spotify come very highly recommended from our network, building something very exciting that can become very, very big.