E365 | Hannah Seal, Index Ventures: Latest fund announcement and building your team from 0 to 1000

0:00Welcome back to this very special episode of the European VCBZ Podcast. We are joined by Hanna's Yale partner at Index Ventures. Hanna is a leader in B2B software and enterprise AI investing, backing founders who are transforming industries by digitizing workflows and automating processes. In this episode, we dive into Index's recent$2.3 billion fundraise and what it means for European founders navigating the intersection of AI talent and market expansion. We also explore Hanna's unique perspectives on scaling startups, why specialization in hiring, especially in technical roles, is critical. Howie Ayes creating new investment opportunities in professional services and her belief that remote work can be a powerful model for building successful companies.

0:40Plus, we unpacked the scaling through chaos research on managing high growth teams. Another episode that's super action-packed. We're here ready to rumble.

1:02values. 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. Hannah, welcome to the European VC podcast. Thanks for having me. I am so excited to be talking to you because we've been wanting to talk to Index for a while, but it's kind of eluded us for some reason. So I'm excited that our good friend, Louis, from your team finally made it happen.

1:47So I'm super excited to have this conversation now. Yes, likewise. I want to get us started. We're going to talk AI, we're going to talk services, But I first want to ask you a bit about the latest fundraise announcement that you had, because that's one behemoth of a fund. So I have to ask you a bit about the success. What's enabled you to do this? Why is it that Index has managed to be so incredibly successful in the European venture space? Yeah, thanks. Thanks. So as you'll know, earlier this year, we raised two new funds, a$1.5 billion growth fund and a$800 million venture fund. And that's on top of the$300 million seed fund index origin that we raised last year.

2:31So yes, as you say, a pretty big fundraise. You know, when you ask the question, what is it that's enabled index to be so successful? I think it's really that we've stuck to our knitting. We've been around for three decades across Europe and the US and Israel, and we've stuck to what we do best, which is investing in great people. And that's really been our mantra from the very beginning and continues to be the case. And that's been a useful strategy for us. I'd love to ask you when you, and this is maybe a contentious topic, but VC Twitter is very full of people dunking on Europe. And I've been very saddened to see that.

3:14And it's kind of seen like that's the thing people want to say these days, or at least the people with the biggest mics right now. For some reason, why is this happening? And what's your take on how we should counteract this as the European ecosystem? Yeah, well, clearly being a European investor, I don't hold the same belief that some people on VC Twitter do. You know, our view at Index is that talent is universal and great companies can be built out of anywhere. And actually, if you look at Europe, many of the most successful companies that Index have invested in have been European companies and continue to be European companies.

3:51I mean, Agen that came out of Amsterdam, and now we have Revolut that originated in London. So I think it's difficult to say with a straight face that Europe is not a place of entrepreneurship. That being said, clearly there's ways that we can make it better, make it an even better place for talent to come and great companies to be built. But I feel like we're doing a pretty good job. Completely agree. I completely agree. And I wonder, it does elude me as well, why is it that we have not been able to counteract effectively this growing narrative? Because I think it's completely wrong. Every single number that you might want to look at shows that Europe is just growing faster than the US when it comes to venture or growing faster than all the other regions.

4:38Many of the US founded companies actually have Europeans as co-founders or early hires. So it's kind of like, it really makes me wonder, but I just wanted to get your take on that. Now, the second thing I wanted to ask you is you've just recently announced the UK or the European version of Scaling Through Chaos. And I wanted to ask you, so first of all, just to set the context there, this is the most extensive research that's ever been done on the growth of VC-backed businesses. You've done an analysis of more than 200 ,000 career profiles at 200 companies, including the likes of Airbnb, B, Datadog, Figma, Stripe, and WIS, of course, portfolio companies of indexes.

5:18I'd love to ask you, tell us a bit about this research and also what it means for European founders. Yes. So as you said, this was a pretty enormous piece of research and it's really meant to guide founders through those chaotic days of scaling from naught to a thousand people. The idea is not to sort of remove chaos from the process. You know, chaos is a feature, not a bug of fast growing companies. But it's very helpful for founders to have an idea of what other companies have done, how it's, you know, how they've scaled, how to organize their teams most effectively so that they can learn from all of the good things and the mistakes that other companies have made along the way.

6:03And I think most of the things in the book hold true for both US and European and other founders. It's generally pretty sort of universal, some of the findings from the book. Things like, you know, at all stages, founders tend to spend 50 % of their time on people matters. And in the early stages, that's probably hiring. In the later stages of a company, that's probably, you know, leadership and persuading your team and that sort of thing. and it might change, but overall, like roughly 50 % of a founder's time is spent on people matters of all kinds. So those are the sort of things that we pull out of the book.

6:39How does that, or how do you as an investor convert that into one-year diligence in teams in the beginning? Because it can be very hard to look at a founder at the very early stages, the company's basically just the founders. How do you, from there, deduce whether this founder will be able to scale with and have that people focus? I mean, you can often tell it from the early stages of how, if they haven't even hired anyone yet, how they're thinking about hiring and what their approach to hiring is and how important they see talent, whether it's an afterthought or whether it's all consuming and everything they think about day in, day out, how they can attract the best people to come and work at their company.

7:19So that's a sort of early indicator. And as the company scales, you can get a sense from the early hires that they've brought on and whether they have that sort of bar for talent and excellence. But also that it's a sense of, do you understand that at different stages of a company, different people might be required? So maybe in the early days, you might need generalists that are going to get their hands dirty. You might that might need to turn into more sort of specialists as you scale. And can you have the ability to put loyalty aside sometimes to some of your early employees and recognize when those employees might have to have to be moved on because the research shows and this is not true for every company but in general when you get to a thousand people only two or three of the first ten are typically still there and that's tough right like the first ten employees they become like a family they were there from the beginning they were in the trenches with you there's so much inbuilt loyalty and to be able to recognize when they might have sort of graduated from the company and not be the right fit anymore is tough, but it's a really important job for a founder to do.

8:25What does it make? So I also know that in the research, you also found that it's very common for the founding CTO to step back at some point. I'd love to ask you about then the scaling of the founding team. How do you think about that? How do you help founders go through this process? Because it's one that's very hard to navigate. And it's one that if you as an investor do not approach it in the right way, you can do a lot of damage. Yeah, that's absolutely right. You know, many founders stay with their company through, you know, IPO and beyond. And others don't. Others love that early stage of building and the chaos and their creativity, but they don't like, you know, the really scaled version of building a big company, which is process.

9:14And, you know, once you go public, having to speak to investors and all of that. So not every stage of a company suits every founder. And it's up to a founder to decide where they want to be. And, you know, that's something that we see often is that founders actually sometimes want to go back to the building or they want to take a different role that enables them to do the stuff that they really love and hand over the sort of more operational stuff that they might not love so much to someone else. So, you know, those dynamics do get challenging as company scale inevitably. There's another thing I'd love to ask you when you're then thinking about it, basically a different perspective on the fact that so many of the early employees end up leaving as the company grows.

9:56That also means that, and this is obviously a big cause of why we're seeing so many spinoff companies, so to say, or new founders coming out of former tech successes. I'd love to ask if you have any stats or any feeling about how often the new teams that you back are actually breakout founders or breakout operators from past investments in index. That's a great question. I don't think we have the stats, but we should probably get them. But, you know, anecdotally, I can tell you that it's very, very common. You know, many of our founders have spun out of existing index companies and also non-index companies from the ecosystem.

10:39I mean, there's so many amazing diasporas of early employees at tech companies that have gone on to build brilliant things. I mean, Robinhood has been a great sort of creator of talent, Deliveroo. It's also been amazing. We're even seeing Revolut now starting to generate some amazing young entrepreneurs. So Agen as well. So it's how the ecosystem evolves. It's the best part of the tech ecosystem, right? Like you get people the skills, they see the scaling journey, they get the bug, they go and build, they sort of know what they're doing a bit more because they've seen a journey once. They have big talent networks.

11:14It's a great accelerant to building great companies. I'd love to ask also, because one of your findings is also that regardless of the sector and the technical talent and the AI, that's really coming all over our sectors now or all over anything that's venture related now, specialisms are more important than ever. Could you expand a bit on that point? Yeah, I think in a world of, you know, many technical companies, you clearly need people that are specialists in what they do. And, you know, Revolut is an example for, you know, at this top of mind, because we had a session with the CMO recently who said, for marketing, they only hire specialists.

11:56No one is good at everything in marketing, right? There's like brand marketing, performance marketing, almost no one is really a pro at all of these things. So if you want the best people to do the best work, you've got to hire people that are really specialized at that. Equally, in the early days, you know, Revolut is a scaled business. In the early days of a company, that's not always true. You need people, you know, it might be an engineer, but you might want that engineer to go and speak to customers sometimes when there's only a six person team and you need all hands on deck. So I think that sort of specialist angle really evolves as the company scales.

12:30Yeah, no doubt about it. I'd love to ask you about that product specialist perspective, because it's one that I think we're talking a lot about whether you want people that are specialists in scaling and more commercial, or you want people that are more product and technical. Yeah, I think the only finding is that there is no standard for this. Every company is different. It really depends. Is it an infrastructure company or is it a consumer business? And then the answer is completely different. So I don't think there's a standard finding for that really. I'd love to ask you then because that ties perfectly into you have a significant sized seed fund and you're investing across verticals, which makes me then think because at the same time, we have an absolute extreme growth in the number of specialized funds.

13:21How do you think about being a non-specialized generalist fund that's investing at the seed stage? Yeah, I think there's room for generalist funds and specialist funds and both coexist together. And actually with our seed fund index origin, the real purpose of that fund is to collaborate with the ecosystem. So often we will do a round and bring in a specialist fund or a specialist angel to complement the work that we do. So we definitely believe that there's room for everyone in the seed ecosystem. My view on seed is that it's all about people. I mean, inevitably, the ideas that you might have when you're thinking of starting a company evolve as you start the company, speak to customers, shift, pivot.

14:05And so often the company that you, or the idea that you end up backing at pre-seed or seed is totally different from the company that ends up being built, which is why our focus at Seed is just people, people, people. And actually with our first Seed fund in X Origin, once we'd finished deploying that fund, we went back and looked which of the companies that have raised follow-on funds, follow-on rounds, or have been super successful and less so. And the teams that have been the most successful were the ones where actually often the idea was like, we weren't that convinced on the idea or the idea was half-baked or it's been a pivot, but we were absolutely just certain that these were people that were going to do something great, regardless of whatever the idea was.

14:49So that's really how we think of things at the seed stage. And if you can then talk just a tiny bit about when you're looking at these people, what are the things clearly they need to be able to manage teams, build a team that is going to be excellent. But what are the other characteristics of a founder at this seed stage that you think are the ones that are absolutely important? Yes, I'd say what we look for in a founder is not a generalist, not someone that's sort of good at everything. It's someone that is exceptional at one thing. And that might be product engineering, an amazing commercial mind, whatever that might be.

15:27It's a spike, a very, very clear spike in a person. And what's even better is if we see this really complementary founding team. So someone's got a spike in one place, someone's got a spike in another, and they just work together super well. So that's why there's no one archetype of a founder. Everyone's got different spikes, but what's clear is that they are spiky people, you know, pretty exceptional at something. The other thing that we really look for is a reason why they want to solve that problem and something sort of around founder market fit. Why are they uniquely placed to solve the problem that they're trying to go after and not a founder that's sort of doing that because he thinks it's he or she thinks it's a way to make a quick buck or because they did some sort of analysis and saw that there was white space in this area and thought that was kind of makes sense.

16:18That our experience is that the best companies are founded by founders who have experienced the problem themselves and felt so strongly about it and then left whatever they were doing to go out and solve that problem. When I look at VC managers, because we invest in funds, right, my co-founder and I, I always say that the best emerging managers are those that, you know, you can almost draw a complete line through everything they've done. And then the next step necessarily has to be a fund. If that is, if you can't do that, like then, then it's just like, then you're going for something that's very sexy these days, which is being a VC, more than you're probably doing just the next iteration or the next step on your journey.

17:03Does that reflect somewhat also how you think about founders? Absolutely. Fully agreed. Maybe I should invest in some founders as well then. Sure, it's fun. Yes, I should. Okay, let's get to the big one here because professional services is something that you care very deeply about these days. And that's obviously because of the unlock that AI has made, which is before professional services was considered by everyone completely non-investable. You're very much saying this is one of the areas where AI is going to really unlock a lot of potential. I'd love to ask you, tell me a bit about your thinking here.

17:41Yes, exactly. As you say, you know, services has always been this dirty word in venture. Low margin, operationally complex, not scalable, and everyone sort of stayed away from it. But actually now my view is it's the moment for services and AI is going to unlock a huge opportunity for investors to be able to invest in these kind of areas. So think tax, payroll, accounting, legal, HR, auditing, all of these sort of fun, sexy areas. Like these are the areas that will be disrupted by AI. Because if you think on the one hand, things like accounting, it's a lot of repetitive manual processes that AI is really good at.

18:21And when you look at law, it's these like huge reams of documents, unstructured data. And AI is also really good at being able to extract insights from reams of unstructured data in ways that's never been possible before. So there's lots of reasons why now is an incredible time to be investing in sort of back office automation and professional services in general. I'd love to ask you because I want to test something on you. We had a prior guest who said this, and it was specifically in legal tech. And the way he is thinking about it is he's not looking for someone who's basically seen, okay, you can do this with AI.

19:05And for that reason, you just go in and build a startup that should do what's being done today. But rather, he's still just as much as he always has been focused entirely on how the the user experience is changed. And then however that is unlocked, however that much better to next better experience is delivered with AI, that is really what matters. That the user experience is changed, not that you can use AI to do whatever you've done before. Do you agree with that mindset? How do you think about looking at these? Because there's never been more startups pursuing the same solutions almost just because it's so evident to anyone with a bit of technical understanding that, wait a second, this could be done with AI and the incumbents are not going to be able to because it's very far from their expertise.

20:00So let me go and do that. Yeah. So our view on this area is that you have to fit in to the workflows that they already have. As much as we believe there's going to be this huge shift in professional services, the individuals that are doing these jobs today are typically quite risk averse they are not people that are used to sort of adopting the new technology all the time they have their ways of working they're often working in highly regulated industries as well which makes change even more difficult so when we typically invest in these areas it's been products that are embedded and fit into their existing workflows so a couple of examples data snipper which we invested in earlier this year a company based out of amsterdam that's built a product for auditors to do data reconciliation, their product is a plugin for Excel.

20:47And it started off not being that. So when the founders first built it for their friend who was an auditor and he was complaining about all of the manual workflows he had to do, they built him a standalone tool. And he was like, guys, great, but I can never use this. I work in Excel and I'm only ever going to work in Excel for the rest of my career. And then once they embedded it into Excel and it was a plugin for Excel, then the growth was explosive. And similarly for other companies that we've invested in, like DraftWise on the legal side, it's a co-pilot embedded within Word because if you know any lawyers, they are only ever going to work in Word.

21:20That's what they're used to. That's what they want to use. That's what all their colleagues use. So you have to meet them where they're working. Could you give me some examples of some that seem to be successful without doing that? Do you think there are any? I'm thinking of someone like Notion as an example. I'm sitting here looking at our notes in Notion. I love Notion. I live in Notion. But as soon as it hits anyone that's not from the tech industry, they're like, what the? I'm never going to get into this. Yes, it definitely stirs up strong emotions. Do you see any large scale successes that don't plug into the existing ecosystems?

21:57I would say there will. To be clear, we're still in the really early innings of this right um so of course there will be great standalone products that are going to be built for people that do not fit into to workflows like i think how i use ai in my everyday life when i'm telling my kids a story at bedtime instead of having to think of something again for the hundredth time another story about football or monsters or whatever it might be i just get chat gpt to come up with the story it's way better way more exciting it can incorporate football and monsters and power rangers all in one story much more creatively than i could ever do um and that's a standalone product that isn't you know something that's embedded in my day-to-day life before that so of course there will be these new products but for for many of the enterprise use cases if you think of another one code generation for example these sort of coding co-pilots they're typically embedded into engineers existing workflows which makes them much easier to to adopt and much more easy to see the value quickly, which is super important.

23:05If we look at the last two years as an example, how many of your investments you've done, would you say, have been in AI? Yeah, great question. And this is actually quite a contentious one because the definition of AI is pretty blurry these days. Barely any company that we invest in will have no component of AI in it somewhere. It might be a consumer business, but maybe their support function is fully sort of AI. And so it's a really tough one, sort of AI native, where sort of AI is really the core of the product, probably 50%, but where AI is being used somewhere in the product or in internal operations, 100%.

23:43It's the operational excellence enabler of a startup, right? That's how I think about it. Okay. And then what sectors, because you described this case of always having to plug into an existing world. But are there any sectors that you're saying, this is where I really think that we're going to see a lot? And are there any where you're saying, we see a lot chasing this, but I do not believe we're ever going to, or at least it's not for the next five or 10 years. I'm not sure there's any sector that I believe will be like untouched by AI. You know, and I think we maybe did think that a few years ago, that certain sectors would be slower, but we're always surprised.

24:24I mean, I think our view on gaming and some of these more creative areas, we thought probably in gaming, maybe less. So it's all about the creativity of the game creator. But actually, when I speak to some of our gaming founders, they say that their ability to build games quickly is just astronomical now. It's gone through the roof. They're much quicker. A team of 10 would have been a team of 10 is now a team of one or two. So I really believe AI will permeate so many different areas, creative or routine or infrastructure, whatever it might be, some will be faster than others and some will be quicker than others.

25:00And we'll have bumps in the road for sure along the way. But I'm optimistic that actually AI will be a feature of all companies going forward. The same way that we used to think of sort of mobile companies and non-mobile companies or cloud companies and non-cloud companies. It's just companies now. When you look at the 50 % that are AI native, how AI specialist do you need to be to be able to create a startup that successfully will build something incredible as an AI native startup? Yeah, so it depends. If you're building an infrastructure company or a foundation model, yes, you've probably got to be highly technical.

25:37Pretty good. Pretty good, right? Not me. Definitely not me. But if you're building an application, an AI application, what's more important is to deeply understand the problem that you're trying to solve. AI and especially generative AI, it's a really new topic in many ways. So it's not like you have tens of thousands of people that you can pick on that are experts. Everyone's got to be getting up to speed on it. And it's moving so fast. So someone that was an expert last week has to continually be updating their knowledge and kind of maintaining their expertise. So in these instances, it's more important that they are an expert in the problem they're trying to solve, but are able to attract the relevant hires that can build the product and understand the relevant tech stack that they need to use.

26:21Could you speak a bit to the technical talent that we have in Europe when it comes to AI? Do you see any hubs that this is where we just see that the startups need to gravitate to very quickly? Or is it more so that, well, it's actually quite widespread across different hubs. So normally we don't see any startups needing to go anywhere specifically to be able to get the talent. I don't believe that you need to relocate to a certain area to get talent. There is so much incredible talent and it's pretty dispersed across Europe, actually. So obviously London and the UK is a massive hub. There's incredible machine learning labs in Cambridge and London universities.

27:04DeepMind has a really deep bench of talent and we're starting to see a lot of founders now coming out of DeepMind. But then equally in France, you see with Mistral, there's amazing AI engineers. ETH in Zurich has also started to generate some incredible companies. is TU in Munich. So I'm incredibly bullish on the talent in Europe, but I do not believe that it's going to be concentrated in one or two hubs. I think it will be incredibly dispersed. Eastern Europe has some amazing entrepreneurs and technical talent as well. So I'm actually more bullish on there not being one hub, actually, and it being really dispersed.

27:40And that's really exciting. Why should there be one place where everyone has to move to and uproot and live in that certain way. People should be able to live their lives where they want to live, with their families or wherever, whatever culture they want to live in, and build a company from that. I got to ask you, just because you said that specifically, your philosophy on remote work? Well, I'm an investor in remote.com, which is obviously a pioneer for my work, but I'm incredibly bullish on remote work. As I said, talent is universal, and why should companies not be able to hire from a global talent pool and get the best person for the job, not the best person in this city for this job.