E355 | Christian Dorffer, Defiance Capital: The Unicorn Founders DNA Report

0:00Welcome back, everyone, to another episode of the European VC podcast. Today, I'm talking to Christian Dorfer, founder and GP of Defiance Capital, a 25 million euro fund based in London, and they're focused at pre-seed stage in Europe and the US, and they're focused on enterprise AI. If you're listening into this episode, don't forget to drop us a review and also make sure to go and check the show notes of this specifically because today we're talking about the Unicorn Founders DNA report that Christian and his team have just published. Here's a few words from our beloved sponsor. This episode comes to you by the support of our partners.

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2:06Let's start acting. Christian, welcome to another countryman from Denmark on the podcast. Yes, thank you so much. I'm really excited to join you. We met the first time in the lobby at Web Summits in Masterday, I guess two years ago. And since then, we've been saying we should do this podcast. Now we're finally doing it. So I'm super happy to have you on. Today, we're going to be talking about your Unicorn Founders DNA report and all your learnings from that. And then also, of course, your own journey through the European VC landscape, both as a founder and as a community builder and as a VC now.

2:49But let's start out with a deep dive on the Unicorn Founders DNA report. Maybe the obvious question is just introduce it to the audience so they know what it's about. Sure. No, thank you so much. Well, look, I started life as a management consultant and I built a bunch of help companies kind of grow bigger. And then I became a tech founder myself. And then I became an investor. And over the past decade, I've been meeting founders all over the world. I mean, two thirds of my investments have been in the US. But you always wonder as you get into investing, what should I look for in these founders?

3:26And you tend to kind of follow what the big guys are doing. And the big guys tend to focus on a certain type of founder. So when you meet someone that's kind of hard to qualify, you kind of have to take a punt. Right. And I was fortunate enough to to partner with people who are very open-minded in terms of making investments and kind of look at the best in people, as opposed to being super critical and taking a very kind of hard-nosed private equity approach to evaluating founders in the past. And I'm obviously referring to the founders of King.com. And as I started raising my own fund, I took a look at my best performing portfolio companies over the past decade.

4:14And it turns out that over 80 % of the value of my investments to date have come from founders that traditional VCs would probably classify as non-obvious founders. A lot of them were immigrants. A lot of them were women. A lot of them kind of didn't fit the usual criteria. So as I started raising my own fund, I spoke with a bunch of LPs about it. And many of them said, oh, yes, that's a nice story. And yeah, everybody likes an underdog. But in terms of writing checks, they were a little bit hesitant. How much of a wider phenomenon is this? So almost in spite, I decided to just take a look at the actual backgrounds of new unicorn founders.

4:57And my team and I, we first looked at just UK and US for the last three years. And then I felt like, like, well, that's not really telling the story. So then we said, let's just go back a whole decade in the US. And we found some super interesting results. And I shared them with Mike Butcher at TechCrunch, who wrote an article about it. And I think the article became one of the most read articles in April earlier this year, because everyone kind of have an instinct to say, okay, well, immigrants, yes, that's a big group, but how big is it? Is it worth, how important is it backing? Ivy League educated founders, etc.

5:36And then we had a bunch of European investors and founders saying, Oh, why didn't you cover Europe? So then we basically used three weeks and covered 12 European countries in addition to the UK as well to kind of complete this data. So the reason we did it was really to say, okay, well, how much of a wider phenomenon is my small sample of the universe in terms of performance? And maybe the obvious place to go now is then, so what were the core findings? I'm sitting here with a lot of, obviously, I've read the report, so I know, but I'm very, like, I had the same thought as many of your European colleagues who said, what does this look like in Europe?

6:19Because you might assume that things are different here, specifically because many of the U.S. founders that would come to the U.S., well, they probably came not necessarily in their childhood or in their youth, but they came when they founded the company, which makes them still immigrant, but makes them also the guys who moved to Silicon Valley because they got venture funded. it's so interesting right because i mean i've been based in london for 20 years and been making lots of investments in europe and i i've co-invested with a lot of european funds and every time i visit one of their offices many of them have pictures of their portfolio founders in the lobby you know and without mentioning any names it's pretty shocking how few women and how few people that are not born there that are on the wall.

7:08I mean, typically it's like, you know, one out of 50 that's non-obvious in Europe. So I was really interested to look at the European data and what surprised me was that 40 % of European unicorns in the past decade actually have immigrant founders. And within that, of course, there's a lot of movement between borders within in Europe. But when someone from Italy moves to London, that person is an immigrant in many ways, in a similar way to an Indian immigrant moving from India to the US. They kind of have to start from scratch with no network and build everything ground up. So I have a lot of respect for that.

7:49And in Europe, the biggest source of immigration within the unicorn founder community are actually Indian immigrants. And this is the same trend as you see in the U.S. Like 25 % of immigrant unicorn founders in the U.S. are Indian. And these are not people that just arrived with a suitcase and nothing else. I mean, they do, but many of them come from great families. They are some of the best educated people in India that just feel that India can't really provide the opportunities for their career and their family than they can find elsewhere. So you have this brain drain. And what we see, I think, both in Europe and in the US, if you look at CEO founders of unicorns in the US, for example, only one third of the non-immigrant CEO founders in the US have a STEM background, whereas two thirds of the immigrants have a STEM background.

8:48So if you're building a software company and you don't have a STEM background, Of course, you're at a disadvantage, even if you've got great engineers around you. So that was one interesting insight. Another interesting insight in Europe is that compared to the US, the women in Europe are not really managing to build unicorns. And I think it's mainly because there isn't that much capital available. For instance, in the US last year, 17 % of new unicorns had a female founder. Whereas in Europe, it was about 2%. Or I would even say the numbers are so low that you can't really actually generalize.

9:27But then I thought, well, let me look at the makeup of the female unicorn founders in the US. And actually, there are more female European unicorn founders in the US than there are in Europe. So it's like, isn't that idiotic? And I also looked at several statistical databases in places like Denmark and elsewhere. to look at, you know, of the people who get a master's degree with it, like a STEM master's degree, what's the makeup of that? And about a third of them are women. You know, almost 40 % are immigrants. And then you look at who actually raises the capital. And so there's this huge opportunity in Europe, as well as in the US, for being able to identify and back extremely well-educated, extremely hungry, highly successful founders that just don't meet those typical criteria that most VCs traditionally have focused on.

10:27And then, Christian, you spent the last long while to look for these types of founders. So that means now you've crunched the numbers and you've told us about that. But then you've also spent a year or more actually looking for these founders, meeting all of them, backing so far five of them. I'd love to ask you, do you see them, like what's the experience that they have? Do they have that experience of we're not being taken seriously, we're not being given light of day? or do they not see themselves as immigrant founders or underdogs in any way? And kind of like it's something that they figure in the numbers, but personally they don't identify with it?

11:12It's very interesting. I think you have to be careful when you use the term underdog because many of these people, they just feel like they've never been given a shot, but they don't feel like they're victims. They just feel like, give me a shot and I'll show you. I don't think there's a lot of victim profile founders in the venture space. But it's very interesting because I would, I mean, one way to look at it is to say, and I've had a lot of conversations about this, you know, no matter how you define it, underrepresented founder or underdog or non-obvious, even the ones that are, you know, Stanford educated immigrants from India or women, They still feel like they're at the back of the queue when it comes to raising capital.

12:02It's still very selective and it's still very traditional in terms of how these founders are actually picked. So lots of the stories of unicorn founders that are non-obvious always start out with, you know, I spoke to 200 VCs and they all passed on me. And then one made an exception. And that was really the trigger to put me on this journey. And I've started a podcast called Defying the Odds, where I interview many of these non-always Unicorn founders. And it's a very consistent story. Once you look at people who didn't go to university or people who are really difficult to qualify, you really need to have an advanced kind of toolkit kit for analyzing their true potential.

12:54I think we're certainly on a path to getting there. But many of these unicorn founders, when you look at what they've actually done in the past, I mean, we don't go out and back people that have no experience. We tend to back founders who are non-obvious, but they will have 10 years of experience in software, either as developers or product leaders or serial founders. So by the time we meet them, they're actually quite sophisticated. They're just not at the front of the line when it comes to speaking to kind of top VCs. Yeah. I'd love to ask you to comment on a newly dropped report by Docsend on the time that VCs spend on pitch decks.

13:42And this is data split on whether the teams are all female or they're diverse or whatever, right? And I just want to say some of them because this was massively confounding to me. And I wanted to just hear your take on it based on all the time that you've worked on this. So what they found was that VCs spend 66 % more time on the team section of an all-team female team compared to an all-male. So that's one statistic. Another is that they spend 41 % less time on the business model section of an all-female team versus an all-male. And then they spend 20 % more time on the team section of a diverse team versus an all-white.

14:31So it's like, what do you see in that? What does that make you think, both in general, but also how does that contrast to your own approach as an investor? I think that's a great question. And if you look at how much actually goes onto the team page in the pitch deck, it's very little. It tends just to be photos, names, and logos. It doesn't actually tell you very much. But I think traditionally, VCs will, you know, I mean, most VCs literally see or receive thousands of decks, right? So unless the team page is an obvious tick, yes, they tick the usual boxes. it's kind of you know thrown to the wayside they're not even looking at the deck in in great detail right so i think uh it's really interesting that docs and obviously have all this data and and and they share it um and but but it makes sense you know they would spend more time looking at more unusual team pages than than not but again you know i think it's just the tip of the iceberg I think most of the conversations I have with founders is, you know, I'll have a conversation with them if they're building something interesting in an interesting market.

15:48But my first conversation is much less about the business and it's much more around their background. What have they done before? What motivates them? What are some of the challenges they've overcome? What are some of the successes? What are some of the things they've learned in the past? And then after I kind of feel comfortable that this is someone who is an interesting founder to back, we start talking about the market and the idea and the opportunity for the business. And I think a lot of VCs are doing it the other way around. They will kind of, they will only have a conversation with you if you kind of take the box.

16:23And then most of the first conversation is, is this a good idea? And is this in an interesting market? So I think the way we look at it is that a lot of VCs are just not sophisticated enough to pick up on future Unicorn founders because they can't really qualify them. So they kind of, you know, unless it's someone that ticks all the boxes, it's just too complicated. And there's, you know, enough other founders that they can have this conversation with, so they don't even proceed. But if you imagine that more than 50 % of unicorn founders, no matter how you define obvious versus non-obvious, are being passed on by the main VCs, there's so much opportunity that's left on the table that you can go in and actually back and create a top fund.

17:16And especially if you're a small fund, if you're a micro fund under 50 million, the opportunity of getting in, you know, at pre-seed and a highly experienced founder, sometimes even like one of our last founders, she's a Romanian immigrant founder. Her last company is now a unicorn and we're the first check into the new company, right? She can clearly execute, but she's still an immigrant. She's still a female founder. So she's still not, you know, at the front of the line. but the types of returns you can get on these types of of of honors is is crazy is that really the experience that you have with a person like that because i would that that does shock me uh if you can be a unicorn founder but because you're women and and and and an immigrant you're not considered uh best of breed so to say well i think uh you know if you look at just the statistics and you look at what people are getting funded, half of unicorn founders are serial founders, but still it's a very small percentage of them that are actually women.

18:22Combine that with someone who's an immigrant who still has a bit of an accent and was just one of a team of four and the other three were men, the three guys will find it much easier to fundraise than the woman in that unicorn founder team. I really have a hard time reconciling that because I know the statistics, right? And I think that they speak a very clear picture. But I also would think that that case would have been such a clear serial founder type case that all of the statistics that show that on average, you have a lower chance on average, it's tough. but for this type of profile, I would have never thought that they would have a difficult time getting FaceTime with the best VCs.

19:16That surprises me. I think it would be interesting to get some of these highly successful female founders on your podcast and have them share your stories. The conversations I have with female unicorn founders is very much that they themselves still have this sense of being an imposter very often. And even in the teams that they have founded with their male peers, often a lot of the investor relations part was left with the male CEO co-founder. So they never really had that relationship. And you'll be surprised even in second time or third time founder teams times when they pitch and I have a good example from from my own portfolio it's a husband and wife team uh and when they you know they they've built several very successful companies and when when they pitch when they pitch for their last company and they go into investor meetings she's the CEO he's the CTO and a lot of the she will do with the whole pitch but then the questions will be directed to him in the meeting yeah I've heard those and they're like trying and they were like And they're based in Silicon Valley, you know?

20:35So I think people like you and I just have never had the exposure. We've never been on that side. So we've never really had that experience. But if you speak to many of them, you'll find that it's still like, you know, they have to do so much more and be so much better than their kind of male non-immigrant peers just to get at that same level. That's ridiculous. this uh but but it's not it's it's ridiculous right but here's the thing if you're starting a new fund how likely is it that i can take away and i can i can win i can lead a deal and steal it away from excel or index or sequela that's that's not likely but the thing is if you if you have the tools to really qualify these types of non-obvious unicorn founders that are huge potential and nobody else wants to talk to them, your potential as a fund is, you know, it's definitely top decile.

21:31So they're basically leaving a lot of, it's not even scraps on the table. The majority of unicorns over the last decade in Europe and in US were founded by, you know, or had members of their founding teams who didn't fit that usual profile. Yeah. That's incredible. I would have thought, so I've always thought of this as a problem that only pertained to the ones that don't have the very clear signals as a great founder. Meaning that if you, all else equal, if you're then female or immigrant, you then have a tougher time and then the statistics would apply to you, so to say. But if you came with the pedigree of having founded a unicorn business before, I would have thought that you were just up there with all the others to the very best.

22:22It definitely helps to have founded a unicorn before, but still, and also in a market where fewer deals are getting done and often investors are kind of placing bets on who's going to win this category. And we've already placed a bet in this category. They're more likely to be, you know, like some of the more established, you see some more likely to focus very much on people that know they've backed before, that tick all the boxes. It's difficult to break into that, even if you're a very successful, non-obvious founder. Yeah. And there's a ton of dynamics around that. We've spoken about that on the podcast many times.

23:00So let's not go into the systemic problem because we know they're there. I'd love to ask you about this research and you focusing on these founders, how does that impact the operational model for you at Defiance? Are there anything that you do differently than if you had focused on just normal AI enterprise businesses? For a new fund, the challenge is obviously always that you build a brand, you create a top of the funnel. So I think all of us have to go out and do that. But in the past, I've been very focused on just building a network. So most of my deals in the past have come through my network.

23:42And as your network grows, as you've been in the industry for quite a long time, you get more deals and better quality deals. But now with a new fund specifically focused on what some would consider the long tail, you have to be noticed, right? So what we've done is we've chosen to do this research. and the research that was published by TechCrunch is only the beginning. We're doing a lot more research, which I can get into, but we're also speaking at conferences, and we have now built out our community. So we have more than 30 of these non-Albita's unicorn founders who are active angels, who are based on the West Coast, on the East Coast, and in Europe, who are incentivized and really committed to driving deals to us.

24:28so you have to open your kind of uh area of capture and then you need to also have um you know you need to create a brand that makes you relevant because i think it was sol klein that told me recently that uh he saw a statistic saying that there are over a thousand new seed funds in europe right but between us we could only name 30 maybe so there's so much money out there so if you want to get into the best and also keep in mind that there are only about a handful. Or let's say if we look over the last 10 years, there's about 17 new unicorns in Europe every year. And if you're really focused on unicorns, you're really focused on the best of the best.

25:12So at one hand, you need to create a lot of noise to make sure everybody knows about you. But you also need to get in and be able to qualify and support the very best founders. So in addition to the community and all the content we're doing, we're also creating a specific coaching program that's specifically focused on highly accomplished founders. So the founders will be back. They don't need your traditional platform services with, you know, introduce me to someone that knows performance marketing or introduce me to someone that knows how to navigate, like, know how to set up a legal entity or something.

25:51We believe that if we want to back winners, then the winners are the ones that know how to execute, but we can help them nurture that winning mindset. So we've teamed up with a former head of talent at WeTransfer and MessageBird. And one of the European unicorn founders, female unicorn founders, actually, she's actually a coach as well. So we're actively giving the founder as a coach and working with them to develop that mindset over time. So that's, I think, what we're doing that some funds would see as over the top. And, you know, that's a lot of work just to be in this business. But that's basically our model.

26:31Could we dive a bit into Christian Dorfer? You said it or we said it in the beginning. You come from from both a founder background, consulting background and community builder background. But who are you personally? Who's the man behind this? Yeah, it's interesting, right? Because traditionally, if you look at the kind of micro funds and new funds that are being started in the US or even in Europe focused on non-obvious founders, most of the fund managers, they don't look like me. Most of them are underrepresented themselves. but our definition of non-obvious founder also includes someone who is born and raised in a small town who didn't necessarily go to like the best university and someone that have had to kind of roll up the sleeves and and hustle from an early from an early stage because i think building unicorns is so challenging that unless you're able to overcome major challenges in your life of how likely are you to kind of see it through?

27:34Or will you give up when things get hard? So my background is, I was born and raised in Denmark, grew up in a town with less than 2000 people, literally in the countryside. Most of the people I went to elementary school went on to become like blue collar workers or teachers, et cetera. There were no role models in my world back then. And I became an exchange student to the US when I was 16, which opened my mind, made me very independent. And during that time, my father died. So when I came back to Denmark, I basically was a bit kind of lost. And I had to kind of figure out how to do everything myself and fight hard for it.

28:22My mother spent her whole career as a teacher. So I kind of very early, I was also in the military, and my first job was actually living in South America after university. And what I experienced was some of the most successful people that I was surrounded by were like from, you know, even less privileged than me. And I say I'm privileged because I grew up in Denmark where you have free health care and free education, etc. But a lot of these unicorn founders that I've also spoken to, they're like, as I like to say, I'm a hundred times more privileged than them, but they're a hundred times more successful than me.

29:01So I kind of grew up studying this a lot. And then I moved to London a couple of years after graduating and was kind of thrown into the deep end in consulting. I didn't know anybody. I didn't have a network. And then I kind of decided after a while that I wanted to try my hand at being an entrepreneur. But I only knew other consultants and big corporate clients. So the only way to do it is just to leave the comfort of a nice paycheck and go out and try to build companies. So it was actually a former, someone I tried to win as a client who was running Yahoo in Northern Europe. He left Yahoo to start a daily deals business and asked me to join him as his first employee.

29:43And I saw that as an opportunity, right? This is how I will learn. So I left WPP where I was running a consulting firm and I basically worked for free, just for equity and did a bit of consulting work on the side. But my decision was to become a tech entrepreneur in that space. And then I co-founded a gaming company. After that, I sold my flat, put all my savings into this company thinking, you know, gosh, we have index backing it. my co-founders just sold their last company for 350 million 18 months after founding the company what can go wrong and you know even when you have such amazing talent and investors in and i'm not even going to talk about non-obvious versus obvious in this one things can go wrong we were a bit premature going after the market and we ended up basically having to shut down and i I lost everything.

30:43So there I was thinking, do I go back into consulting or do I continue on this path? And I said, no, I want to continue on this path. But I couldn't raise a fund because I had no fund background. So I started on a climb of Mont Blanc with a good friend of mine. I met one of his friends who had been in private equity for many years who taught me about SPVs. and I started getting access to interesting deals and I had several very successful friends such as founders or early employees at king.com, Spotify, Airbnb and when I found deals I would invite them to invest and I would manage the SPVs. I wouldn't charge any fees so I was living on a rock basically but I would get carry and that taught me a lot about investing and actually one of the founders at king.com invested in three of my spvs and when they sold to activision blizzard i asked him hey i you know he actually offered to invest in my gaming company years before and but um i never i never really pursued that uh i was very grateful for his his interest but the other gaming guys that i ended up teaming up with had so much capital that we didn't really need that but at some point when King was acquired, he said, look, I've always dreamt of doing a king.com founders fund.

32:10Maybe you can set it up and run it for us because we still have to be at King for a little while. So that was my opportunity to then transition into, okay, now I don't need to fundraise anymore for SPVs. Now I can just focus on founders, sourcing deals and servicing other founders. So that was great. So we set that up. And for the first four years, I was the only employee. So So I learned everything about structuring, setting up the funds, sourcing deals, sitting on boards, doing everything. And it was interesting, right? Because back in the day, my mandate was consumer seed. But in Europe in 2016, there weren't that many deals that we wanted to do.