E424 | Sune Stilling and Christy McCaig, Nine Realms: Reshaping supply chains through operator-led investing

0:00We've been used to sort of this quite flat world. It's the same thing as supply to supply chain. And this has meant that as a supply chain manager, you have been allowed to or you've been able to optimize your supply chain on one parameter, namely cost, right? So we started moving stuff to China. When then, you know, coastal China became too expensive. We moved inland China. Then people started talking about China plus one. Then we looked at Vietnam, Cambodia, Laos, Myanmar, Thailand, whatever, what have you, right? And I think sort of what you mentioned, COVID, right? But then, you know, then you suddenly got, you know, a vessel blocking the Suez Canal.

0:34Then you got, you know, the war in the Ukraine. Then you got, you know, the situation with the Houthis, you know, which means suddenly we have to sort of, you know, you know, go south of Africa. Then, you know, the U.S. West Coast, the longshoremen, they go on strike, blocking the ports. You've got trade wars, all of these things. So I think the point really is that, as Christy is saying, is we are not sort of, let's say, trying to pinpoint the next Black Sworn event. But really what we're doing is we are trying to invest into companies that helps prepare or help sort of, you know, create that readiness so you can replan and you can act around your supply chains, right?

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1:54down this wall. It's more than just an ally. This is a union of values. 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. Welcome everyone back to the European VC podcast. Today I have with me Sune and Christy from Nine Realms. Sune and Christy are both general partners at Nine Realms, which is a new fund being raised currently. They are targeting 200 million euros. They're headquartered in Denmark. SUNY, you'll notice, will have about the same axe in this mine. So terrible for you. Sorry about that. Target stage is Series A and the GO is Europe and North America.

2:40Supply chain sustainability is the focus. And they have invested in some beautiful prior investments, which is as a fund, clearly, and Forto, LoadSmart, Afresh, Altana, Platform Science, and Offload. That was a bunch of stats and a really quick overview. Either of you, please tell me, did I get something correct there? Well, I think you've got a lot of things right. And thanks for having us, Andreas. Yeah, I mean, as you're saying, we invest at the intersection of supply chain and sustainability. And we sort of come together as a team to build this vision. We've kind of been working towards the same goal from different vantage points for a number of years.

3:20and now we come together and we are building nine realms. Tell me, because I only just briefly said the highlights, right? If we were to say a bit about yourself, also the team, how big is the team, where do you come from, that type of thing. Yeah, absolutely. Chris, did you want to introduce yourself? And then maybe I'll do the honors on behalf of the rest of the team and audiences. Yeah, absolutely. So as soon as we'll get into, we've kind of built this team all coming from different angles of supply chain and investing. So my personal background, different accent to Suna and Andreas. I am Canadian, but based in London.

3:58I've been in London for about 10 years. I've worked in finance my entire career. So starting out on the advisory side, doing transaction services and due diligence, and then moving into the investing side. So initially, I focused on growth equity investing in Europe. Did that for a couple of years before moving into more early stage ventures. So I joined a venture fund focusing on everything from Series A to pre-IPO investing and across a range of sectors. So actually a lot of focus on consumer internet at the beginning of my investing career. From consumer internet, we started focusing more on enabling technologies.

4:32So that was obviously within the supply chain and logistics. I was seeing the huge opportunity there. And then also worked with the family office, which was exclusively focused on supply chain, specifically transportation investments within North America. So it's a huge opportunity. Heard about kind of what Suna plan to build with Nine Realms, which he'll get into. I was really excited to really narrow in on this sector. Yeah, and then I'm Suna, the other guy with the Danish accent. I had an early career in tech back in the mid-90s. And then I joined Maersk, that will be familiar at least to the Danes, one of the world's leading transportation and logistics companies.

5:09I joined Maersk in 99, ended up spending more than 20 years with the company, which was certainly not the plan coming in. but I was fortunate enough to have a lot of opportunities. With Maersk, I worked both on the transportation and logistics side and on the energy side of the business. I filled a number of leadership positions all over the world, everywhere from Southeast Asia, Latin America, Europe, the Middle East. The last three businesses I was the CEO of was with an M &A sales side mandate. So I'd come into an asset that was partially fully owned by Maersk, restructure that asset, fill it off, move on to the next one.

5:44The last of the businesses I sold was the largest oil field services provider in the Middle East. And while I was busy selling this business, Maersk in mid-16 introduced what became known as the Integrator Vision. So essentially sort of this concept of this strategy of becoming an end-to-end logistic provider, a one-stop shop, if you will. And as part of that, a lot of things happened, including I became what was called Head of Growth. So a role where I reported directly to the enterprise CEO for Maersk, became responsible for building the future of Maersk. So building the future revenue streams and kind of redefining the global transport and logistics industry.

6:27So moved back to Denmark in late 16 and started on that journal. We did a lot of things with that mandate, things around innovation. We built some businesses from the ground up, both more traditional break and mortar BDB, like, you know, cold chain logistics, less than container load. We were involved in things like building autonomous truck boats, alternative fuels. We built what became known as Trade Lens later on, which was an aim at digitizing global trade documents on the blockchain. Most importantly, for what Christy and I and the rest of the team are doing today, towards the end of 2017, I went to the board of Maersk.

7:01I pitched a corporate venture fund, which became known as Maersk Growth. Maersk Growth was one of the early and I would argue most successful investors in supply chain we see on a global scale. So, you know, during my time, we, you know, backed, you know, 20 odd companies and other than, of course, the financial returns, there's also been some very solid strategic returns to Merck. Fast forwarding, we had so much success with this strategy that I sort of started sort of pitching fund to of that strategy, which to me sort of included a more LP agnostic platform. A lot of benefits, of course, as people will know, to having a single LP, also certain drawbacks.

7:40And I just couldn't sell that vision internally of a more LP agnostic platform or multi-LP platform. So essentially went out and decided to build 9 Realms, which for all intents and purposes is the continuation of what we built at Merce Growth. And we can talk a bit more about exactly what that is in just a second. But, you know, we are currently five people in the core team other than Christy and myself. So we are two people in Copenhagen which includes another Canadian, a Danish Canadian, and Marie, who's our latest joiner, you know, comes with a lot of experience sort of within venture investment and also from a legal perspective, having ran a couple of funds in Canada for BTC, which is the largest Canadian venture investor.

8:23We also actually have a Danish American on the team who spent his career within Morgan Stanley doing investment banking, tenology banking, and also having built funds. And then we have a French national, Arno, who has spent his entire career within supply chain and built a fund, which in many ways are quite similar to what we built at Maersk, but he built that for Kühne and Nagel and to Marsec, a fund called ReefNut, which was also focused on supply chain and sustainability. So all of that to say, sort of, we're this team that's come together, really sort of going after this opportunity, which, you know, we believe is quite unique and quite exciting.

9:00and essentially sort of this is what we've all sort of been training our entire lives for. We also have a larger group of venture partners working with us on a fractional basis. We sort of have very, very deep industry expertise. That's the genesis and that's sort of where we all came from. And I'm, for one, I'm certainly very excited about this opportunity to work with Christy and the rest of the team on this opportunity. To the attentive listener, they might notice that Maersk is being mentioned here. And we're, of course, doing our EU CVC podcast together with Jeppe Hoyer, who's a former partner or colleague of yours soon.

9:39Maybe to just double click a little bit on the learnings from that journey with Maersk. Of course, Jeppe has given his perspectives on the podcast a couple of times. But I'd love to just because I do think it's incredibly important that we in Europe get better to collaborate between CVCs and VCs. So maybe you can talk a little bit about the core learnings from that. No, I would be very happy to. Obviously, I mean, having been sort of MERS growth from the ground up is one thing. But Christy and I and the rest of the team, we, of course, on a daily basis, we engage with a lot of corporates, a lot of strategic investors.

10:21And sometimes that's a corporate venture arm. Sometimes it's more like their corporate development or strategy arms. And then, of course, I mean, I also, for therapeutical purposes, also actually wrote a teaching case that I'm teaching a couple of times a year at IMD in Switzerland, where I engage with corporate executives around that whole piece about corporate VC. I think, I mean, I think, you know, corporate VC is, I guess, a little bit of a complicated animal, right? But I think, you know, actually just earlier this morning, I know when I were called with a large logistics firm that are sort of looking at breaking into this.

10:58And I think kind of to me, it starts with this whole thing about, you know, saying, why are you actually doing this? And I actually think a lot of corporates tend to forget to ask that question. They kind of just go out and say, hey, you know, we need to do, you know, something with startups. So we need to develop a CBC or whatever it is that they decide, but they haven't really sort of asked that question, why are we doing it? And what is it we really want to achieve? Yeah, actually, to comment on that sooner, we had Nicholas on the podcast, Nicholas Savage from TDK the other day. And he said exactly that.

11:31He said probably a corporate should spend 50 % of their ideation time on figuring out how to build a CBC on the Y. because that's where everyone gets it wrong. Not everyone, but all the ones that fail, that's where they get it wrong. And I think that was one of the things that I think we got very right at Maersk and we spent quite a lot of time thinking about as well. Then, of course, sometimes as strategies change, as people change, the answer to that question also changes, right? And then, of course, the question is to then adapt your structure to that, right? And I think that brings me to the next one.

12:06I think that whole piece about structure, I think some of the things she also got very right at Merce for us then saying, well, how do we actually structure this? And I think sort of one of the things I'm very grateful for still is that we were allowed and I was sort of allowed within my business unit that independence of running that fund. Because the fact is that decision making and, you know, it's very, very difficult to run a discounted cash flow model on, you know, a$5 million startup investment, you know, pre-revenue or very sort of early stage. That also means if you go to a normalized process and you're comparing investing in startup X, you know, to investing in 10 ,000 new containers or three new vessels, that conversation becomes very, very difficult.

12:48So I think that really is the other one. So that whole structural piece and the decision making piece, right, where we were allowed a lot of leeway and a lot of freedom to sort of make those investments. And then, of course, there's a whole ton of stuff around, you know, talent, incentives. how do you play you know how do you play sort of with with the core business how insurgent do you want to be or you know are you kind of looking for what the core business tells you that we should be looking for are you looking to disrupt the core business and so on and there's of course a ton of different different elements for that and you know I as mentioned you know I spent I spent like a whole day at IMD business school talking about that so so you know I can talk about that for a very long time.

13:31But I think what we're really seeing today in a lot of the strategic investors will both some of the people who are backing us, which includes some very, very, very large corporates, but also some of the people we are currently in process with, right? I think sort of the smart ones kind of understand, well, first of all, they understand the why. What is it they want to achieve? What are the business objectives? Then they also understand what are they good at? Per definition, I don't think, you know, nobody's good at everything, right? And I think there's really something about sort of that understanding your own limitations and then sort of saying, okay, the stuff that we're then not good at, but we still consider business critical, who do we then partner with?

14:11And that's, for instance, that's where we come into the picture with, say, one of the world's largest FMTG companies. They understand that they're good at this, this, and this. These things here, that's important for the transformation of the business because they have a very large supply element to their business. but that's where they partner with us and invest in us to get those strategic returns and those insights and kind of look around the corner and then of course you have a thousand different outcomes right you need to be you know you need to be true to your dna your corporate culture your heritage and all of these things right makes a ton of sense everything you say and we should do the imd course one day i want to ask you christy your background investing in the in in the North Americas and then out of London for a long time.

14:59Where do you see sustainability and the whole mobility supply chain agenda moving in the US versus here in Europe? Is it the same and maybe this is a good pivot into talking about the opportunity for Europe specifically when it comes to supply chain and sustainability? Yeah, well in terms of I guess supply chain more broadly before getting into kind of the sustainability topics specifically. Supply chain tech is underfunded in Europe, even though Europe is really the home of a lot of large supply chain companies. So over 50 % of large supply chain companies are actually headquartered in Europe, but Europe's underfunded on a VC perspective and supply chain by a factor of over 2x.

15:41So we really do need to foster the European ecosystem for supply chain innovation. And that's why we really saw this gap in the market to launch 9GOMS. That was one of our main. incentives to really launch a vertically focused investor to foster this ecosystem in Europe. So we're really excited about that gap and kind of creating this specialist investor within Europe. In terms of sustainability, that's a huge part of our strategy. And there's tailwinds globally for sustainability and supply chain. Up to 90 % of the consumer goods footprint is actually sitting in the supply chain. So when everyone's looking at all these corporates, they're looking at their agenda to reduce their emissions, they need to be doubling down on their supply chain.

16:20So this is a global trend, but obviously with differences in Europe and the U.S. and, you know, the outlook for the next four years in the U.S. is obviously different to how it could have been. So corporate agendas may shift in the U.S., but we still think that corporates are going to be focused on their ESG and reducing their emissions and sustainability in the supply chain. So a lot of opportunity there. We think a lot of this technology could come out of Europe since Europe is a little bit more advanced in some respects on the sustainability agenda. And one of the reasons we like to have this transatlantic approach is that we can actually export technology from Europe to the U.S.

16:54as the agendas kind of come together a little bit. Also, vice versa, we can be exporting technology from the U.S. to Europe. So that's why we like to take a global view. Maybe you could explain a little more closely the investment strategy, how much goes to the U.S., how much to Europe, primarily Series A stage, who start. What does that mean in terms of then the allocation strategy with reserves and so on? How are you thinking about all of this? And is there anything in the supply chain space that's different from the standard VC model, so to say? Yes. So in terms of kind of our fund parameters, broadly, as you mentioned, we're Series A focused, transatlantic, but European overweight.

17:34So about 70 % of capital will be deployed in Europe. But we all have quite a bit of experience investing in the North American market and networks there as well. and different technologies evolve at different rates in both markets. So it's really important for us to kind of have our eyes on each market. But European overweight mostly boots on the ground in Europe. So I was going to mention the majority of our team is European-based, but we have one individual in California. So that's how we're thinking about our allocation. In terms of reserves, was your other question? So we're a very active investor.

18:06We think that's really important by chain complex industry being vertically focused. so we will be reserving about 40 % of the fund for follow-on. We'll be taking leading roles within our investments and then taking board seats and really supporting our startups so staying close and following on into the B rounds and the C rounds. I think one of the things that's a bit special about us from a portfolio perspective and not sort of to get sort of, you know, into too great the level of detail of that but I think, I mean, you know, sort of you are, you know, often in VC, right, we talk about home runs or, you know, know grand slams and whatever right and and you know you know you have a portfolio size of x and what you're really looking for sort of that one fund return on the portfolio and then the rest of it doesn't really matter i think what we really see in our space over the last couple of years is that you've had sort of a number of generalists you know either generalist funds crossover funds and this is sort of particular in the u.s but we also see in the europe kind of moving a little bit down market sort of encroaching a bit on on our space sort of applying that sort of normal fund logic to supply chain, we fundamentally don't believe that there's going to be a lot, if any, of these hundreds of thousands excesses in the space that we are investing in, right?

19:18So, you know, this whole sort of B2B industrial sort of which we are subset of, if you will, we don't believe in these hundreds of thousands excesses. I mean, there might be one or two, we'll be very happy to do those, don't get us wrong. But really what we're seeing is that we We do, however, believe that there's going to be a lot of these like 10, 20, 30x outcomes. And that's, of course, really where our specialization differentiates us, right? That I think historically, we've been incredibly good at identifying the emerging categories. Within those categories, then identifying the winners. And then coming back, Christy mentioned we're a very active investor.

19:51We really think sort of in terms of value creation. So kind of think like growth equity, private equity model, we moved into venture. And then we're really good at helping these companies then grow and achieve their targets. And when we sort of look at the exit landscape, because that's, of course, another thing, one thing is that you're keeping stuff at whatever valuation on your books, but there is also a day of reckoning where you actually need to have a liquidity event around these companies. So our main avenue of liquidity, actually, our main exit path for these companies is really trade sales.

20:21We are seeing all the incumbents, including in Europe, also in the US. We're seeing private equity funds, intrafunds, who are very, very hungry for this space we're investing into. And there's going to be a ton of these exits in that like 300 to 500 million euro, maybe up to a billion euro. And that's essentially sort of the game we are playing. And because we are a thematic investor, because of our expertise and because of the way we leverage our strategic investors and their insights, we are very good at predicting which capabilities are needed in the future, which also means at the other end of the spectrum, our portfolio mortality is much lower than what we would see.

21:02And historically, even our losers, we can typically recover one and a half, two X capital on because we've been investing in capabilities that we know that there is a demand for. I want to stay on this point a little bit. And I want to do so because it's the age old discussion, right? The typical VC power law model versus this model where you have more trade sales. And to be honest, it's two very fundamentally different investment approaches. Everything around how you run your firm, not just your investment strategy, changes based on which model you're going for. So maybe you can talk a little bit about how this conscious decision to not try and pursue the 100x trickles down through your firm, not just in the investment strategy, but also in the different moves or repetitions that you do as a firm.

22:02And I'll kick that off. And, you know, Christy, as always, you just pile on if there's something important that I'm missing. I guess sort of essentially, right? And if this sort of becomes a little bit sort of, you know, long-winded, just let me know, right? Never got too long-winded. But I mean, of course, well, you haven't seen.

22:25I think it kind of starts right when you're building a firm or when you're building a product. I think it really sort of comes down to saying, OK, what is your USP? What's your positioning and what's your right to win or your unfair advances? And we do fundamentally believe that there is a significant opportunity where we are positioned within supply chain, sort of late venture, early growth for a European fund, right? Which is also one of the reasons that, you know, Christy has, you know, come over from Canada and, you know, we got, you know, people with, you know, dual passports, you know, returning to Europe and, you know, Arno has been back from Singapore and I've decided to stay in Europe to really go after this opportunity, right?

23:11And I think that to me, and this is not sort of to bash anybody, But I think sort of the days of sort of the generalist funds and sort of those spray and pray models, I think they're over. And I think sort of we've seen this in the U.S. for a while, right, where it's pretty clear that when we go out and talk about operator-led funds with U.S. LPs, this is just much, much, much better understood, much better appreciated. And I think also sort of when you look at how essentially VC started in the U.S., you know, that's how it began, right? that some of these successful firms were essentially built by operators.

23:47And we sort of carved out this niche and we believe that this is very relevant, it's very relevant to Europe and sort of the global VC landscape. And then, of course, you then start looking at, well, what does success actually look like in this space? And I think sort of if you just go out with your generalist lens and try to apply that to sort of a specialist field, I think you're going to lose. And that's also why a lot of these generalist funds have been burned pretty badly in our space. And I think they all sort of have their wall of shame and all have their stories because they kind of applied this logic.

24:22And you kind of need to understand what does it take to drive successful businesses in this industry? And also what are then realistic exit scenarios and all of these things? And I think we've taken a lot of time from, again, from our different starting points to really sort of understand that and come together. Now, some of the things that this then translates into is that, first of all, we have quite a concentrated portfolio. So as Christy mentioned, we're going to be investing in 15 companies. We're going to do that over four to five year active investment period. So every year we're going to do three, four, five at the most investments.

24:55To get to those 15 investments, we see somewhere between 60 and 100 companies a month. So we essentially see 5 ,000 to 6 ,000 companies to get to 15. and we are, you know, some people, and maybe that still exists, but some people at least sort of when you tell them that you do venture, they kind of think it's like snacky fingers and you kind of flip a coin and it's all cool and so on. I'm not going to say we are not cool. We obviously are, but we're also very, very analytical, right? Do we have a lot of analytical rigor in what we do, right? Are we all coming sort of from different, you know, again, and Marie has trained as a lawyer in a legal council at Goldman Sachs, right?

25:36You know, Chris did his part. He's been doing transaction services with KPMD. Now, Frederick has been doing investment banking. I've been the CEO of a number of companies, right? So we come up with a very, very different training where sort of rigor and discipline, you know, you of course still need conviction, but we have really, really strong conviction in those companies. And then also the fact that we can actually help them, right? We are probably more science and less art than your average venture fund And you, of course, sort of still need to be able to sort of see the vision and buy into that.