E423 | Stephen Millard, Notion Capital: Launching the "Cloud Champions" report & backing European B2B SaaS companies

0:00I met with Matt Weller and Jop van der Voort, who's the CEO of Remote. Matt Weller is the CEO of Muse. And I was just struck by their ability to encompass both the vision and the minutiae. And I think that's what founders are able to do. And so there is an element in there that is quite extraordinary that we're looking for. They all are very, very comfortable being out of their comfort zone. They're all very comfortable knowing that they don't know everything. they're all very very comfortable in like it's not just growth mindset right it's really active open-mindedness with with a high degree of conviction whether they're the smartest but i don't know but they're bloody smart i know for sure high eq high iq high eq huge amounts of resilience huge amounts of kind of open-mindedness and kind of ability to learn

1:20This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Welcome back everyone to the European VC podcast. Today I have Stephen Millett with me. Stephen, welcome to the pod. Thank you. I'm very pleased to be here. And thank you so much for inviting me. Of course, of course. I think it's about a year ago since we had Notion on last time. So great to have you with us. Who is that? It was your founding managing partner. We were talking about your latest fundraise. The wonderful Mr. Chandler. Yes, exactly. So let me start this by saying you've just written a big report, done a lot of research.

2:01congratulations on that work i do actually so i was working through this with with the use of ai of course as anyone would and i wanted to just say i got to give you a nod because you're one of those that are still creating content at a time where we're all just consuming content by a big model so making us all think who's going to produce the next eras of of content i you know why because I have to do it to learn. I think there's one thing consuming content through AI and simplifying and summarizing, but I've always found to synthesize things and to make sense of them. I need to do the work. I actually think that makes a ton of sense.

2:41So obviously to anyone that follow UVC, we're quite rapid in our content production, which means I get to synthesize less than I wish. I got to consume a lot, but I really wish, because a few times where I do take the time to work and develop content from the ground up. It's real work, Andres. It has meaningful an impact way beyond just the production of it. We gain so much personally from doing that kind of work. Because now this was the personal side of it. Stephen, maybe first give us a really quick intro on Notion to those that don't know, and then tell us afterwards what made you think that this report is relevant right now.

3:20Sure. So Notion Capital, we're a London-based, European, EU-denominated venture capital fund. We invest exclusively in business software, B2B SaaS. That's our pedigree. We've been investing in that space since 2009. The founders of Notion Capital founded one of the world's first SaaS companies. I worked there as well. It's a company called Message Labs. A few of your listeners. Good old days. Good old days. Founded in 2000. Yeah. We really challenged ourselves to try and figure out what do we actually call this? But that business grew from kind of a zero standing start in 2000 to 150 million revenue profitable and was acquired by Symantec in 2008.

4:04When it was acquired, I think, which is quite funny when you think about the contrast, it was the second biggest SaaS company in the world, second to Salesforce. Well, so we like to say, and then you say Salesforce will like, I don't know, 30 billion in revenue. So anyway, the founders of Message Labs came together, decided to invest in the next wave of European SaaS companies. And 15 years later, we're investing out of our fifth venture fund. We're almost full lifecycle. We have a very active, very early stage, predominantly focused on Series A. And we do some straight to ops, I should say straight to opportunity stage, like Series B, Series C.

4:49We've invested in probably north of 200 European B2B software companies, some really notable companies that we can talk about. And I think there's three things that really stand out and they've always been true. One is we only do business software. We're all ex-entrepreneurs and operators, and we believe in delivering a lot of value and impact to our founders. And to anyone that heard you talk a little bit about the last fundraise there, I dive quite deep with Stephen Chandler on that episode from a year ago. And there's a ton of learnings in there when it comes to fundraising, which I think that for anyone listening in is really worthwhile because Stephen speaks very bluntly, very openly and actually also shares quite a few stats on your fundraise and the path from top of funnel to bottom of funnel and the duration that it actually takes for a big behemoth like you.

5:41I have so much respect for those, for the investment fundraising team. They really do an extraordinary, extraordinary job. so so i did and i wanted to say because it's not so often that you hear as many details from the big funds as steven shared in that one so that's why i like really to reference that and send people there uh thank you thank you and my my job is post investment so i run our value add team um which is basically you know founders choose us because we're business software ex-operators and entrepreneurs we deliver a lot of value my job and my team internal and external is to deliver on that promise.

6:20So why this piece of work? It's very interesting that the single most important question we ask of founders and founders should ask of themselves before raising money from venture capital is, do I have a credible pathway to 100 million in revenue? And not to say you're going to stop there, but let's just like, let's put a line in the sand. Can you see a pathway to doing that in less than 10 years. And no one really understands, well, one, the probability of that, two, the companies that have achieved it, three, the success, the lessons they've learned, the mistakes made along the way. And I just felt there was an extraordinary opportunity to lean into a topic that is critical for anybody going on this path.

7:11And what I unearth when starting to dig and find is like it's actually quite hard to find a lot of the companies you know because revenue data is private even when i did find them they didn't know who the other founders were yeah and nobody really shared their kind of stories and so i want to set out if i if i can just add a point to that because this is exactly why we founded uvc right we started on the venture side now we're doing a bit more on the founder side at least that's that's in the in that works. But it's exactly that recognition that European centric case studies, European centric data is nowhere near where it is in the States.

7:53If you said the same thing about U.S. firms or companies with around 100 million AR that are privately listed, you have a whole list of podcasts with the founders, long articles diving into them. But we don't have that in Europe. So I think it's so important. I think it's so great that you do a report. Yeah, and I was inspired by some of the USVCs that I admire so much and some of the operators there, but also inspired by the companies in our portfolio like Muse and Paddle and Don Cosless because I learned so much from them. And I had the opportunity to sit alongside them in a very kind of informal, passive sort of way.

8:30You know, we are minority investors, but we led the A's and the B's in all three of those companies. And so I've had the opportunity to see that journey kind of play out. And then I wanted to really dive deeper into it. And that's kind of what led me the same realization as you have, Andres. This information doesn't exist. Yeah, exactly. Okay, but then let's, before, because I do think we should talk about some of the commonalities among the cloud champions and so on. But before we go there, let's touch on something that I've always been wanting to understand, your perspective on Innotion. And you're probably one of the best guys to do so, being that you're really working with the portfolio companies as the operating partner.

9:15And that question is, you initiate the report with finding three large insights from this new era of AI. And you're calling it the dawn of a new era. And the first insight is knowledge asymmetry has flipped. And then you have a graph in it that I don't even want to try and describe because it's actually, at least to me, it's a bit difficult to describe. But you have an inversion basically of the relationship that used to be between buyer and seller, where you had the buyer knowing less than the seller to then now being in a situation where the buyer knows more than the seller. Can you tell me about that learning and what that means for SaaS companies?

9:57Honestly, I've learned so much from Jacka van der Kooij over the years, who's the author of that section of the report. And for anybody who doesn't know them, you really should lean into Winnie by Design's kind of models and insights and learnings. He's an extraordinary, extraordinary man. And I think what he's really tapping into here, and I think that this is a critical insight, is that, you know, if I sit down and think about, right, I'm going to buy some new software and I want to, I can create a very simple nowadays and simple construct in perplexity to say, Hey, I'm interested in five companies that do ABC.

10:38I want to know this, this, this, this, this, all of a sudden I'm incredibly well-informed. Now, what does that mean? Is that there's obviously profound implications in terms of how companies need to be discovered. But it means that it's going to be increasingly harder to sell and it's going to be increasingly harder to keep customers unless, and I think this is to Jaco's point, is it's all got to be focused on outcome. And it's all got to be focused around kind of really delivering customer value. So every single one of these 23 companies are obsessed with customer impact and customer value. And that asymmetry has flipped.

11:21You know, I was selling software back in the 90s at Oracle. We had all the power and none of the risk. And so it's a very profoundly different kind of world that we now live in. You know, I still think the fundamental truism of SaaS, which is I win an ideal customer that I can keep and expand, remains absolutely central to every B2B software company, in whatever form factor they operate. The way in which you're going to do that is going to be, I think, fundamentally different over the next five to ten years. Jan, can we tap a little bit into that? Because what I'm hearing is exactly that part that you are going to a place where we definitely are more often buying outcomes then we're buying product specs and so on in the beginning.

12:16Can you explain to me a little bit about the consequences of this, the flip you're also seeing? Because when we're talking companies that are at the plus 100 million ARR stage, that means that they will typically have created their products in the beginning pre this wave. And now they're then changing their model to adapt to a new environment. Well, I mean, there's so much tied up in that. One is that every one of these companies needs to go through constant processes of reinvention. It's a bit like the Swiss and high fleet. The ship of Theseus, have you heard about that? The myth of the ship of Theseus, it sails around the world.

13:03And, you know, hundreds of years later, the hull's changed and the crew's obviously different. The sail's different. The mast's different. We're still the same ship. And I think there's a lovely quote from Ewan Blair, who's the CEO of Multiverse, where he talks about the realization that building multiple businesses, not just one. So I think there is that constant process of reinvention. But that reinvention is like acute right now, really acute. I think there's a really interesting insight and takeaway from this for new founders, which is pace has always been really important in building enterprise software companies.

13:42We looked at data for Europe and we looked at data for the US. And we went back and we've done this twice, like going back almost 20 years. It seems to be true that if a company doesn't achieve 100 million revenue in less than 10 years, it becomes less likely not more. When you think about that, you say, well, that doesn't make any sense. Well, it does make sense. It means that the company has plateaued. They've plateaued. But why have they plateaued? Why have they plateaued? They may have plateaued for fatigue and burnout or kind of like the challenges of their investors or whatever it might be.

14:22But more likely, competitive pressure, technological obsolescence. Because all of these companies, they will be thinking about this like 100%. But every company coming through needs to be thinking the same thing. Can you tell me a bit about, maybe some more stories here about the challenges that the companies that you've worked with have had to overcome to adapt to this AI wave? I think all of them are constantly balancing the kind of, are talking the report about the yin and yang, the opposites of like exploring and exploiting. and just one example so in every single instance with in any business in any stage you're at there's a there's a trade-off between those two things something i can't exploit if i haven't explored yeah and there's no point exploring if i don't exploit yeah when i've figured out something that works i want to exploit it until i see it doesn't so you can never dial down the exploration so every single one of those when i talk to the team at muse or the team at paddle they are all constantly challenging themselves to say, actually, we're not optimizing because that assumes that nothing is going to change.

15:43We're kind of exploiting what works and then constantly challenging ourselves to reinvent. So they're all exploring the better use of AI to find better insights for customers, using AI to be able to support existing customers better, to allow themselves to become more and more productive. I think that's, it is just software, right? But it's just the pace of it. And I don't think we should assume that any of those companies are sitting on their laurels. It's very often that whenever we talk about Europe, we compare Europe to the US. And I kind of want to take the same thing, so to say, because there's a strong quote in the report where there's a founder that says, scaling in Europe is almost 10 times harder due to our fragmented markets than it is to scale into 100 million ARR in the US.

16:39Can you tell me a bit about what's behind this and whether you agree with that statement? Yeah. So when we were scaling message labs, you rapidly come to the realization that we need to be a global player to achieve our ambitions. and we needed to expand to across, do we expand across Europe or do we expand to the US? We actually took a very kind of pragmatic approach to say, for us, we believe a global business is UK, US, a foothold in Germany and a foothold in Asia Pacific. And that's a global company, right? We went really big on the US and in the end, that was the majority. It is incredibly hard for anybody to hit the kind of scale that companies in the US can do in Europe without addressing the US marketplace.

17:37You know, that Europe is, and the EU and UK particularly, you know, still pretty heterogeneous. And, you know, the markets rapidly get a fair degree smaller. But interestingly, some of the companies in this group have done that incredibly well. I was talking to somebody the other day and we're talking about U.S. expansion. And actually, we used to get pulled a lot into that kind of conversation. I think most of them are just thinking global, not U.K., U.S. or France, U.S. But it is certainly harder. And when you say that, why is it possible? Why does it make sense to think global rather than U.K.

18:19and then U.S. or Germany and then U.S.? What is the difference? What's the nuance behind saying that instead of? Well, you've got very different buying behaviors and patterns across many of the European countries. And where there is homogeneity, they're pretty small. Whereas the U.S. is a relatively homogenous marketplace. Not entirely. You still have to make it kind of addressable and small. But if I'm a US founder, I don't need to go anywhere else if I want to be 100 million revenue business. Now, that doesn't mean that that company is necessarily more resilient. Well, but it is another part of the report, right?

19:04You say you have this point that European SaaS founders tend to a bit more grow with the long-term resilience rather than a blitzscaling framework or approach. That is definitely an inference you could take. I think that's a relatively European, is it a European mindset, I think? I don't think we've ever really kind of bought into the blitzscaling. It's a really interesting thing, right? So it's a constant discussion. We have it on the podcast here as well. to what extent do you in the U.S. have larger ambitions? Do you focus on going larger, faster than we do here in Europe or not? I kind of tend to say that the beautiful thing about Europe is that you can definitely in venture create great returns because our funds are smaller without as large outcomes generally.

20:07But then you also have the larger funds like Notion where you automatically are put in a category where every single hit needs to be a really big hit. Yeah, yeah. Tell me about it. And I guess that to you, Stephen, that's also why you don't like to think too much or describe Europe as being a bit more of a long-term resilience play rather than a blitzscaling play because it does not work for your model at all. And it's not about resilience versus blitzscaling. You know, it's more about, for us, you know, the fundamental definition of our category, right, is you shouldn't take money from us or from any other big VCs like Axel, Bautista, Index, etc.

20:55You should not be taking money if that's not the goal. That's not your ambition. If that's not your desire. And we shouldn't be coming. It's a contract, right? that this is what we agree to do because our model depends upon it. And I think you can still unlock extraordinary growth in a very, very considered manner. And some of these companies have really done that. And then tell me, Stephen, because I'm super curious, because you, by definition or by extension of what you just said, will automatically have worked with a ton of companies that when you come in are at this 10 million, 30 million ARR, and that is where many of them stall.

21:41So how do you as a VC help them unlock that next level of growth? I mean, 100 % is the single most important thing, right? So we actually, we come in at less than a million in revenue. Okay. And what I like to say is, okay, look, we've invested in you because we've mutually agreed that we're going to the moon, like we're going to do hundreds of millions of revenue in the next 10 years. Let's talk about getting to 10. And that is a very, very different kind of set of challenges. And when you get to 10 and you start approaching it, we're going to start talking about the reinvention that you need to make to get to 30 million.

22:24And when you get to 30 million, guess what? There's another big chasm that opens up. And the data's not as robust, right? But I've tested and validated this with some USBCs, which is like fully 50 % to 60 % of the companies that raise a Series A will not get past 10 million revenue. It's just over and over again because you can brute force your way to a pretty substantial business. And certainly we're seeing some companies doing that faster and faster. But if you think about the fundamental difference of doing anything and everything, whatever it takes with an amazing generalist to get yourselves to 10 million versus, okay, now I need to bring in a whole raft of specialists.

23:14I need to scale up my sales team, my success team, my marketing team, my product and engineers. And so operationalization, operationalizing that, we call it the build stage, is critical. And that's where companies kind of stall, stagnate or die. And that's not just us. It's not just Europe. It's global SaaS companies. That's the critical milestone. So we really lean into this. A big one that you also described in the report is the problem of finding talent that can really grow with the company or the decision of, okay, now we need completely new talent at the entire executive level. Can you talk me through a bit how you think about that?

23:58I'd probably start in a slightly different place, which is that there's a lovely quote from Christian Owens, who is the CEO of Paddle. And I've heard this so many times, right, that what gets me here won't get me there. Building businesses is a process of overcoming inflection points, major critical changes. Some people call it as a plateau. What's been working will no longer work. will no longer work and what and who made you successful they may not be that they just don't make you successful going forward they might lead directly to your failure the kind of the concept concept of understanding that actually i need to think about this business in an entirely different way and i need to adapt and and if you think about adaptation and survival and success and this is a bit darwinian right it isn't necessarily the strongest and the smartest it's that it's those who are most adaptable that word came out over and over and over again focus and adaptability and so if you think about the founder right i'm one of our ceo coaches calls it you know sub 10 million i'm a fearless warrior like fighting every battle when i get to 10 million, I actually need to take a different step and be more of a systems builder.

25:19She calls it a considered architect. And then when you get to 30, 40, 50, 100 million, I'm a monarch. I'm like leading a whole kind of raft of different kind of fiefdoms and divisions. That's a massive adaptation. How do you work with founders to be able to go through that? Because most of us inventor quite strong relievers and founders and the importance that founders stay at the helm. Oh, 100%. But going from that first the fearless warrior to then being someone who is a bit more considered to all the way in the end being a monarch managing the fiefdoms, those are very big changes in how you need to adapt and think.

26:05The most important thing for us is just signaling that this is normal. Right? Yeah. This is the reality of the journey that you need to go on. We did some research about two or three years ago, and we looked at the most successful SaaS IPOs at 2020, 2021, 2022. It's 25 companies. And in 75 % of cases, the founding CEO is still the CEO today. Yeah. You think about the big tech companies, the founder is the CEO, right? There's a strong correlation there. So that's implicit. it, but everybody else is different. And so that founders need to adapt themselves. They need to adapt their team. They need to adapt their organization to the requirements of each stage of the business.

26:50Now that might be the same people. And we need to find a way to keep and retain the very, very best. But we also have to accept the fact that the challenges of starting, building, and scaling are profoundly different. And some of us are really good at all three. And I'm talking here more the operators, not the founder. Founder is, as far as we're concerned, that's immutable, right? They're the founder, they're the CEO. We want them there. They need to adapt. The leadership team is a bit more, needs to change. And the organization underneath it needs to change as well. So when you ask the question, well, how do you, you kind of just start leading the way, right?

27:37You just start explaining this is what will happen. And these are the changes you'll need to make. Imagine yourself now, 10 people running the business. Imagine yourself in 10 years time, a thousand people in the business. How have you changed? You have changed, haven't you? You've adapted. Right. How have you adapted? okay let's talk about what that means and what it's going to look like that doesn't mean that you're leaning into a huge kind of change program but you recognize that that need to adapt is critical and i think that's the most one of the most important things you know we can we can do for for founders is to give them the language to use for themselves and their teams around the kind of challenges of their businesses and success.

28:27You know, I haven't done a study of those companies at the leadership level. I'd be amazed if many of them had the same senior leadership team as they had when they were 5 million in revenue. It was guaranteed a bit different. That's a good thing, right? Because what that means is if I bring in a sales leader and I'm 10 million and we often have this, I want someone to take me to 100 million. I'll say, no, let's get someone who'll get us to 30. Because that 10 to 30 is the hard yards. This is building on the frameworks, the systems, the process, the repeatability. If that person, when you're getting to 30, is still the right person to take you to 100, amazing.

29:11If not, hopefully we can repurpose that person into a different role. Maybe we send them, they go off to run the Americas or the APAC business. maybe we just wrap our arms around them and say andreas amazing fully vested yeah my love go go and do it again and they come back and they do it again and that that's what drives real success that continuity of people where we're not taking people through and out of their comfort zone we're actually allowing them to operate where they're very very best yeah can I ask you, Stephen, about the founder CEO, just because you've done this study before and I actually wasn't aware, but it's one that I think can all kind of puzzle us a little bit why it is that the founder talent is so important.

30:03I'm not trying to look at an individual company, but rather look at what is the reason here? Is it because of the standout talent in that one individual? Is it because of the dedication to the business and only the founder can really have that and what it's going to take? Is it because of them knowing the story of the company? I wish I knew. Entrepreneurialism together with understanding of the sector and understanding of the industry. What do you see? Is it the confluence of all of these? Are there any of them that you say the single most important thing is X? a huge huge dose of kind of like conviction and belief with a huge dose of open-mindedness that says i believe but i don't know you know and and they're constantly challenging themselves to to go out of their their comfort zones i met with matt weller and um and yop van der voort who's the ceo of remote matt weller is the ceo of muse and i was just struck by their their ability to encompass both the vision and the minutiae.

31:14And I think that's what founders are able to do. And so there is an element in there that is quite extraordinary that we're looking for. They all are very, very comfortable being out of their comfort zone. They're all very comfortable knowing that they don't know everything. They're all very, very comfortable in like, It's not just growth mindset, right? It's really active open-mindedness with a high degree of conviction. Whether they're the smartest, I don't know, but they're bloody smart. I'm not sure. High IQ, high EQ, huge amounts of resilience, huge amounts of kind of open-mindedness and kind of ability to learn.

32:02And what's interesting as well, it's a slightly different point, is that there are people who are very, very willing to trust their instincts. I didn't really think that was going to come out quite as strongly. It came out virtually in every single conversation. Now, one could say you're trusting your instincts because you've been doing this for 10 years and making these tough calls and making these hard decisions. So you're starting to learn, but they all talked about being counterintuitive, trusting their gut, going with their instincts, ignoring their VCs. And that came out quite strongly in a few of them, which is what you need to hear, because we don't know how to build their businesses, whatever we might say.