E371 | Mikael Johnsson, Oxx: How to make a company stand out in a competitive market

0:28Welcome back everyone to the European VC podcast. to the current state of VC and why Michael believes that we will have a wipeout in the number of seed funds in Europe. And of course, we also dive into the sweet spot of Ox, which is investing between Series A and Series B. Hope you'll enjoy this episode as much as I did making it. Here's a few words from our beloved sponsor. This episode comes to you by the support of our partners, Portfolio IQ by Synaptic. Portfolio IQ is the most effective way to track your portfolio. It pulls data from all sources, board decks, financials, MIS sheets, forms, emails, everything, and creates a true single source of truth for your portfolio data.

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2:22story of new beginnings, new, new beginnings. Let's start acting, acting, acting. This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Michael, welcome to the European VC podcast. Thanks very much, Andreas. Great to be here. I've been looking forward to this conversation. We just featured another piece by one of your colleagues on the European VC website on our insights section, our insights platform, as we call it, where we're sourcing input from the community. And I really think it's something that's working well. And it was picked up very well.

2:58I had quite a couple of people reaching out saying, huh, I learned something there. So that is not what we're going to talk about here today, but we are going to talk about how you got into venture and building Ox. Yeah. Wow. I mean, I've been at this for now pretty much 25 years by now. And it's been a long road when I started in venture back in the 2000s. we were in the middle of the dot-com boom and bust. And I was quite fascinated by what was happening at the time with all these new companies coming up with innovative products and business models and getting funded and growing very quickly and everything.

3:36So I figured that I wanted to be an entrepreneur and build some of that stuff because that sounded really cool and that got me excited. So I started working for a venture capital firm with the idea that that is a really good way to see a lot of different companies and seeing what works and learning what are the mistakes that people make and what are the good things people are doing in order to be successful. So I thought I'd give it three years. So this was in 2000. And then I was going to go out and run my own company. Here I am 25 years later, still on that same side of the table, on the investor side of the table.

4:15I'm running my own firm now, though, together with my co-founder, Richard, obviously. So maybe, you know, all roads lead to Rome after all. I don't know. But it's been a long and winding world for sure. What made you stay in venture, would you say? Why stay on this side of the table instead of the founder side? A couple of things. First and foremost, if you are, as I am, primarily motivated by intellectual curiosity, I don't think there's any better job in the world, at least not from my vantage point. I might be a podcaster talking to all the VCs in the world. I still, 25 years in and at 52 years of age, learn something new every day.

4:59That's what keeps me so excited. I think that's the difference between a VC and a podcaster because I just talk to you, but I don't really make it to internalize it because I don't have to do anything else with it than just have fun with the conversation. So that follows just me being less smart. I think that, you know, it really tickles this sort of intellectual curiosity side of me. I think what I've come to understand about myself is also that I am a person who wants to build. I'm not a manager or someone who just like takes care of stuff. I want to be part of building stuff, seeing things go from nothing to something and maybe planting that seed and watering that seed and seeing it grow into a beautiful plant or tree or whatever.

5:45There's just something philosophically that resonates with me about being part of that and the excitement of really seeing it happen. And obviously, once you've sort of caught that drug, it's really hard to kick the habit. So I think that's also it. No, I still to this day continue to be excited coming out of meeting with new entrepreneurs with great product missions and ideas. And I get a kick out of that. So, you know, it's that side of it as well. And I think the third thing is I'm just damn stubborn. I refuse to declare defeat. It's like there's been so many paths on this journey where I could just hang up my boots and say, no, that's it.

6:21I'm going to go into consulting, banking, whatever, right? or taking a regular job as a manager or something like, but I'm just very, very stuck. Fuck life as a manager. That's not good. I've been there. Never going back. I've done everything I could to not have any hires inside EVC. Now we've brought on two, and I thought I had a full day of working this morning, but it ended up being four hours of onboarding. No, I mean, it's a part of it. So obviously, I've been investing for 25 years. Do I get a kick out of making another investment? As I say, I'm excited by talking to founders, by new propositions, seeing companies develop, but the process of making another investment and stuff, that doesn't really make me excited anymore.

7:10But building a team, as we're doing now at AUX, and being a manager, I guess, but hopefully more of a leader, that's sort of the next phase for me, right? And that's also exciting. But I do see your point of your degrees of freedom. They reduce pretty quickly once you start having employees. Yes. Absolutely. All right. Now, I want to ask you about a pivotal moment in your life. Is there anything that comes to mind when I ask you something, some moment that has really changed how you thought about the life going forward from that? Yeah, I think, you know, coming back to how I started my career in venture.

7:49venture. I started in the really heights. Well, actually, when I signed my contract to get into this line of business, that was in March of 2000. That was exactly the day NASDAQ peaked at that time. And then as I started my job, we'd already gone into a correction, which lasted for three or four years. So it's all downhill from there. So I had very formative experience as an investor, where I came into a situation where there had been tons of overinvestment. There were just casualties by the roadside everywhere, just dead corpses of companies and investment funds and everything. So I very quickly learned that being an investor is not about necessarily, you know, making an investment in a company.

8:34It's about building great companies and being able to exit those companies at some point in time. And it's damn difficult. So I think that has probably, you know that has definitely colored me as an investor in terms of a mindset and how i think about things like it's not just about deployment deployment deployment and getting into the you know hottest sexiest companies like you have to do all the oftentimes you know boring tedious work to just get there in the end and that's the cycles are so incredibly long adventure how would you say then that that because this is something that I've just been scribbling a bit on um and and it's this dpi creation mindset uh from day one so to say and also from how you built your construct your portfolio model and think about when when do you make the big bets when do you make the shorter term bets all those things yeah how would you say that you know is then your mindset, your thinking, the processes that you do affected by this increased focus on DPI creation from day one?

9:47I think it's inherent in the DNA of our firm and in the strategy that we pursue. So traditional venture, get in early, you absolutely need to get into the one or two generational companies. you invest in 30 40 real options you obviously have some sort of analytical framework for trying to make the best bets and assessment but honestly it is a numbers game a very much a numbers game and then with time there's definitely success bias right so the best firms get the best deal flow attract the best entrepreneurs and all that stuff right but fundamentally it's a numbers game I think we are much more on the analytical side when it comes to, you know, almost like a growth equity firm being incredibly high conviction on every single opportunity that we invest in.

10:41And we might get that wrong, right? But we will be crunching the data and we will have our hypothesis and we will test them. And we will do tons of work to do that, which is very different from how most VC firms think about it. So we invest in a much smaller portfolio. So our first file was only eight companies. Our current second file would probably be 12. And I think that's where we're going to be, 12 maximum 15 companies. We're not going to get to 30, 40. But we're doing that with a lens of getting some sort of stable base case whereby we can realize 4 to 5x our money if this just goes reasonably well per what we think.

11:19But always and critically doing that with a very substantial and real option for a breakout case where this thing just flies and returns venture style, you know, top-deck style returns. And I think we've shown that in our first fund where we have, you know, out of eight companies, there's arguably at least three of them who've broken out on that, you know, venture return profile. How would you say this impacts your ability to take big bets, so to say? Because that's the typical critique of this model is that, well, if you're not swinging for the fences or if you're too concentrated, you can't swing for the fences on the things that will either go to a thousand or go to zero.

12:06what is your take on that critique i'm sure that many lps have told you you're too concentrated you're crazy yeah yeah no i agree with the critique it's true we're not going to swing for the fences on next generation uh whatever you know like i can't even come up with an idea like but like the very crazy stuff like we're not going to swing for the fences on that in the early stages we're just not going to do that but i think we are proving and we are very confident that we'll be able to continue to prove that there is a very particular strategy that we're pursuing which is honestly reasonably differentiated and unique there's not a whole lot of people do that there's a lot of people who think about doing what we do almost like i would say micro cap growth equity but they're not investing in those companies where there is substantial venture upside they're not looking for world-class global potential category leading potential they're basically just looking for the steady returns of the two to three to four axis that's not what we're looking for but but to be sure like we we will miss out on some opportunities that could be generational companies for sure we will yeah and that's the and that's the trade-off that you make right yes um how do you could you tell us a bit about then maybe first of all make it super clear to everyone what's this this ticket size and stage that you then prefer to go in that i know i said that back when i did the introduction but some may may have have forgotten so i think be be super clear there and then tell us a bit about how you think about the reserves allocations that you're that you're doing when when you're pursuing the strategy our philosophy is one where we we have a fairly structured model in terms of how we think about building world-class leading software companies and we think it's really really important that you're optimizing for the right thing at the right point in time of the evolution of the company so when you launch a product it's all about finding product market fit you should do everything to optimize for finding product market fit there are way too many people who start thinking about long-term strategic stuff that only becomes relevant five years down the road and trying to optimize for that in the beginning, you just don't know what is your use case, what's your ICP, what's your distribution channel, what's your core market event.

14:27You have no idea, right? So optimize for the right thing at the right time. And for us, that means going for product market fit first. And we think about product market fit in a fairly structured data-driven way. It is about growth, of course, but it's also about growth with a very specific ICP. So one type of customer, one type of use case, one type of product, right? Like not being all over the place. And we also think about it in terms of usage. How is that usage increasing and how is it spreading and how is it proliferating in an organization? We think about it in terms of retention. Are these customers within this ideal customer profile staying with your product?

15:05And we also think about it in terms of customer love. Are they attesting to the fact that your product is better and more differentiated for their needs than anything else out there. So being able to crunch data around those things, that is really core to us at the point of entry. That means the companies we invest in, they will have something like 24 to 48 months of operating history, at least. So that already tells you that we won't be doing seed investments, right? We will invest anywhere at, let's say, late series A to early series B, there in between. And typically, this means companies with 30, 40 to 50 employees, maybe up to 70, 80 employees.

15:48It means having an annual recurring revenue of maybe a couple of million euros up to 5, 6, 7 million euros. But that's not the sort of metric that we're looking for. We are religious about thinking about this customer, the product market fit phase of things. And that really is what's driving the type of companies we invest in. And then we go in, fund them with an initial check size of probably, you know, we invest in rounds of, I'd say, 10 to 25 million euros, where we will do typically, you know, 50 to 100 % of that check. 50 to 100 % of that check. How often do you lead, sorry, not lead, but actually take the full round?

16:30It's rare that we wouldn't have at least insider participation. It is quite common that we wouldn't have a joint lead. But we do, you know, honestly, I think we prefer to investing with a joint lead. Yeah, you prefer to be the only lead, right? No, so we want to be lead, but we're very happy to co-lead with a partner. And I think for many companies, it's just good to have a shareholder investor consortium that is stronger than one party, both in terms of dynamics, but also in terms of funding power and staying power and how you think about things. When it comes to putting together the ideal round and the ideal investor consortium, where do you see that we could maybe do better?

17:20I think, and this is not only companies, this is also only investors. And I think we're guilty of this as well, right? We're all searching for the great companies. Once we find them, we get a little greedy, right? So we want to keep as much as possible of that round if we've negotiated it in terms. I think many times we have very clear examples of this in our portfolio where there's a number of other trusted colleagues, partners around the table. We've fared much better. many companies and it used to be obviously in in 21 and 22 these b rounds or even a rounds were just getting ridiculously large right so getting way too much money too fast you will need to try to drive a return on that and you'll spend it on stupid stuff and and that makes no sense at all we're not seeing that anymore i mean you know the amounts have come down they've halved or even more So I think that's under control now.

18:15Very rarely do we see a company raising too little money. At least, you know, a company that is interesting to us with certain global ambitions, they tend to, you know, raise a substantial check. But the one thing is, I think many entrepreneurs would be better off thinking about the dynamics around the table rather than just getting one check. Because obviously it's easier, right? Just getting the check for me than getting it for me and someone else. But you could enter a discussion with someone like me saying, you know, I'd love to work with you guys, but who else would you bring to the table?

18:46You know, we are very focused on expanding into the U.S. market. Would you bring a U.S. local partner, for instance, right? You know, you could think about that as an entrepreneur. I think there's too little of that.

18:58Take a start.

19:06I know that you are off the view that we don't have too few early stage firms and we don't have too few growth stage firms either in Europe. So I'd love to ask you about both those parts. Yeah, I mean, it's fairly obvious to me what happened over the last few years, right? There was a lot of successful startups in 2020, 2021, 22. A lot of those people made money, wanted to go from entrepreneurs to being investors. There were tons of funds started and there was just a lot of money and firms into the system. So at the earliest stages, I think there's a massive over-establishment of firms. the analogy that I always tell to people is when I got into venture in 2000 there were 200 firms that were listed with the Swedish venture capital association as being active technology investors in venture in Sweden they weren't all based there but they were active there there were 200 in 2003 they were less than 20 that was that shakeout we are in the middle of this shakeout and it's still protruding because people are trying to you know save as much money as they can for a better day in the hope that things will turn around.

20:20I'm not going to put a number out there, but a large number of these particularly early stage seed firms with absolutely no differentiation, they're going to go out of business. So that's a pretty harsh comment, but that's my firm belief. Similarly, I think at the growth stage is what you're seeing now. We're seeing this obviously with some of these firms chasing our companies and seeing transactions that we just can't make any sense of. They raised such massive funds in 22, and they haven't deployed that because the market's been falling. Now they're desperate to deploy, and you have obviously an organization of people who are trying to make a career for themselves, so they have to deploy, and you have to be deploying in order to create a new fund.

21:02So the incentives are pushing the growth funds to deploy quite aggressively as well now. So I think you're going to see, unfortunately, you know disappointing returns from quite a few of those people as well where there might be a shakeout.

21:20Let's start in the early stage because there's so much to unpack I think you said something interesting in the end where you said that we had so many coming to market with little to no differentiation and I always find it super interesting to talk about okay so what is differentiation in venture? I'd love to ask you that question. When you say that there's too many with too little differentiation, what are you then saying that there's missing there? I just think that they've got a similar proposition. Differentiation can come in so many different forms. It can come through access, through networks, through knowledge, through expertise, through experience, through focus.

22:02There are just myriads of ways. There are just so many generalist early stage seed, pre-seed, seed funds out there competing for the same deals. And I just... But can I ask you though, can I ask you though on that question? Because I absolutely agree that there's many, right? No doubt about it. There's also no doubt that our market grew incredibly. So there's also been that ramp up that you're describing. But then if you look at the number of funds or the volume of investment capital in the European venture ecosystem, vis-a-vis the number of startups and the rounds happening, there's more capital per founder in the US than there is in Europe.

22:50so I'm kind of always like is it not just that there's a lot of new players in our market making someone like you feel like fuck what's this name and then there's this one on I don't know I can't hang up this anymore. Hey I'm not competing with it I'm not competing with it I'm not I'm not so you know it's interesting you say that because the numbers absolutely are you know pointing in that direction however if you slice them by stage we're at parity in terms of number of companies and population and GDP with the US at seed and even series A in Europe. When you get to series B and beyond, that's where that drops dramatically.

23:28So we're less than 40 % of the capital in comparison to the US. Yeah. And here you're talking about raised capital, right? So not round... Capital available and invested into companies at that stage. Yeah. But hey, I might be an old fart and I might be wrong about things. There might be So many opportunities in, I don't know, robotics, in virtual organic farming, in whatever type of sector that I'm not focused on. So there might be a massive availability for people to invest in that. The challenge I have, there's just so many seed funds who want to be investing into B2B software without having any sort of experience, track record, understanding or particular knowledge about it.

24:19and I don't see the alpha. I just don't. And there are, to be clear, seed funds who do have that, who are really, really good at doing that. So here comes my provocative take then. Because I don't think so. Looking from the numbers, that's what's making me think, well, I don't think that we have too much capital versus amounts of startups here. I don't think that's the problem. Because then you'd have a bigger problem in the US, and I don't think you necessarily do. What I do think, however, is that you're absolutely right that we do have too many undifferentiated funds. I do think that we have too many going to perform lower than you would want them to.

25:02So they're not worth the risk, so to say. And they, as you also said, and I do think that I'm seeing, we're also LP investing as angels, right? And I'm seeing a lot of funds that I would never put my money with because of exactly what you said. The market is undifferentiated. They cannot give me a good reason why someone would pick them over Ox or Seedcamp. And in the end, the best founders will. It's so easy for the best founder to now reach out to the best firms in Europe. There's podcasts like ours, there's content platforms like ours that makes it perfectly clear who the leaders in the market are.

25:42so a great founder would have such an easy path to go there. So I absolutely agree that you need an incredible amount of differentiation to be a successful VC. I just don't think that it's from a numbers perspective, like there's too much raised capital or too many funds necessarily. No, and I, you know, may I call it? But I think that the capital lives with some of the wrong firms. Yeah, yeah, yeah. And I think that I know people that I have seen not being able to scale their firms as quick as they would maybe want to, or not be able to raise their first fund or second fund as successfully as they would have hoped.

26:21And then at the same time, I'm seeing 10 million and 15 million and so on in other funds. I'm like, how can this guy not be successful? And that's because oftentimes funds are raised on an LP network, not on a founder network indeed yeah so yeah so that was our controversial take part of this podcast that will i'll be very honest i'm super optimistic on the european venture ecosystem overall i i just think like entrepreneurship is like it's just exploding and it's becoming a choice for so many super talented people there's more and more role models coming up obviously with successful both you know, companies, founders, and VCs.

27:02I am really bullish on Europe and, you know, the venture ecosystem over the next 10, 20 years. I think we're going to be seeing some phenomenal companies out of here. My big wish is that we're going to see companies as big on the B2B side of the house as we've seen on the consumer side of the house, right? We have world-leading companies produced on the consumer side. There hasn't been a lot of those on the B2B side, and that's obviously where we're hoping we'll be part of some of those. Okay, now I want to go to something completely else, because I know one of your big passions is positioning and how startups can really build out a sustainable competitive advantage for themselves.

27:39I am the biggest fan of Michael Porter. So anyone that writes the word sustainable competitive advantage makes me happy. So tell me a bit about how you think about that and where you think that founders can really make a difference compared to others. I think this comes back to when we were talking about that formative experience, like being an investor, like investing in things that are fundamentally sound and differentiated with a long term sustainable advantage. Like that's always been the way I think about things. So positioning is obviously a way to clearly distinguish yourself in the market.

28:16Most software is, you know, fairly generic. Eric, there's probably 10 companies that can do at least 10 companies that can do the same thing. How you think about positioning yourself against those companies and against the consumer needs or the customer needs out there is really critical if you want to build a big company. If you fail in doing this, you will be a jack of all trades, a master of none, and you will not be able to grow particularly fast or grow very big. So we think, as I said, we're religious on finding companies where we can find strong product market fit. We then try to help them build for what we think is go to market space.

28:54The core tenant of that is this positioning. Who are you going to, you know, what product, for whom, through what channel, what way, etc. You're doing these things really well and really be better than anyone else for someone, for some use case. Start there and then you can proliferate and expand as you go on. But if you don't nail that down, it's really, really hard to grow a large and scalable company. And that's why we see so many, at least on the B2B side, companies in Europe, they get to 10 million ARR. They might even get to 20 or sometimes 30 million ARR, but then they fizzle out and they sell to private equity or to a strategic.