E464 | Fergal Mullen, Highland Europe: 🏆 Exit of The Year Finalist: Sensible Growth, Hard Truths & Building Europe’s Next Giants

0:00What if Europe's biggest tech winners aren't the ones burning through massive funding rounds? How do the smartest founders outgrow their cash-burning rivals without setting their capital on fire? Fergal of Highland Europe has a philosophy that turns conventional wisdom on its head. One of my old partners in the US said, you know, it's better to be discovered than found out. That mindset drives Highland Europe, where Fergal has built a firm that looks beyond flashy pitch decks to find founders who welcome real partnership. And the most important criteria that we list on our page are coachable founders.

0:33Their thesis? Companies that grow intelligently outperform even the most heavily funded competitors. Sensible growth is an extraordinary driver of value. And contrary to Silicon Valley mythology, Europe's talent ecosystem is now matching America's output. We're graduating as many engineers and science graduates as the U.S. is every year. But the window of opportunity won't stay open forever. When market sentiment shifts, the funding floodgates will reopen. Mark my words, everybody's going to be back. Trust me. From board composition to capital efficiency, Fergal's insights challenge conventional wisdom at every turn.

1:13VCs are a bit like Martínez. One is usually not enough, three is always too many. Join us as we uncover how capital-efficient European founders are rewriting the tech playbook, creating more value with less cash before the next wave of tourist capital arrives.

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2:05Tear down 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 back, everyone, to the European Easy Podcast. Today, I am excited because we're doing yet another of the episodes that I'm so excited about because they are really mapping out the key players in the ecosystem. And today we have Ferkel Mullen with us from Highland Europe. Ferkel, you come highly recommended by a couple of guys, and one of them being a good friend of ours at HSBC Innovation Banking, Steven there.

2:49So I'm happy that we're finally having you on for the podcast. We're going to talk about why capital efficiency is Highland's Edge, how it has led to breakout wins like AMCS, the firm's second best exit year ever, and how they find the right buyers, and also why it's now the end of the tourist capital in Europe and what comes next. Ferkel, welcome to the pod. You're very welcome. Thanks, Andreas, for having me. It's a pleasure to be here. So, Ferkel, Highland Europe has been around forever. Let's maybe start with the name. Why Highland? Why Europe? And why put that in one sentence? Well, actually, we haven't been around forever.

3:26I set up Highland Europe 12 years ago with my co-founders, Lawrence, Sam, and Irina, and Tony. So, Fergal, I date myself when I say forever about something that's 12 years old. Sorry about that. 12 years is not forever, at least not where I come from. We are a spinoff from a U.S. firm called Highland Capital Partners. I kind of got fed up with being the lone ranger of a U.S. fund in Europe. I had an exclusive interest in growth stage investing. My firm was primarily early stage biased on the U.S. side of things. I was investing from a dollar denominated fund into European and pound denominated assets and investments.

4:04It didn't make sense. So we just had an agreement that we would take the brand and build our own business here in Europe, which is entirely growth stage focused. and we can talk about what that means for us because growth means different things to different people. We're very clear on what it means. Yeah, so we've been around for a while. We've built on the back of this Highland Europe brand and it's gone very well. We're now in our fifth fund, a little over a billion euros. We're now 10 partners. We're an equal partnership. I say that because it's important to us because I think it should be important to entrepreneurs because it tells you a little bit about our culture, how we work, how we collaborate, and how we're incentivized as a team to do right by entrepreneurs here in Europe and elsewhere.

4:50So actually, I didn't say something just before, but I should have. In my introduction of you, where I also gave you a lot of love, I hope people heard. For two years now, in a row, you have been nominated to be one of the firms of the year in our award show, the UVC Awards. However, so far we've said growth is so different from early stage venture and it's so difficult to compare a growth stage firm to a seed stage firm. So for that reason, we've actually two years in a row bygone you because your growth stage. We'll correct that next year. I'm sure we'll have a growth category. And then you're automatically nominated by being actually one of the very few growth stage firms that have been nominated both years.

5:38So first and foremost, congrats on being that. I don't think you even knew. I did. I think I did know somewhere back there. But we're not really the kind of firm that publicly puts ourselves forward for awards. We tend to be a little bit more on the understated side of things. One of my old partners in the U.S. said, you know, it's better to be discovered than found out. And I'm a firm believer in that. But I think your track record, what you do, how you behave, what people say about you in the market, what entrepreneurs think Highland Europe means and what the partners are all about is the most important thing.

6:18Well, I can tell you the nomination came from very esteemed LPs in the ecosystem. So I guess you were discovered by the right people then. Thanks. Let's talk about what defines Highland Europe's approach and how you're different from other growth stage firms in Europe. Yeah, look, I'll do my best because I think it's really hard to be differentiated in this market when everybody's got euros or dollars. So first of all, our strategy in three words, Europe, tech, growth. I mean, that's it. As simple as it gets, laser focus. And I think focus is one of the key elements of our differentiation. We don't do anything else.

6:57We only do growth. Growth for us, by the way, just to come back to what I said earlier and put a definition on it, means 10 million or thereabouts. Revenue threshold, recurring revenue threshold, could be pounds, could be euros, could be dollars. We don't mind anything that's relevant. That's kind of number one criteria. Number two is growth rate, very high growth rate. At that scale, you're probably doubling or tripling. But if we're investing in a bigger business, something that's in the 30, 40, 50 million range on a revenue scale basis, we're typically looking to a growth rate minimum of 50%, 5-0.

7:29So these are really high growth companies. And that gives you a really important pointer to the most relevant aspect of our strategy, which is the bias towards growth. Growth, for us, sensible growth. And you hinted in your beginning around capital efficiency. sensible growth is an extraordinary driver of value. Even if you've overpaid for something, even if you've overpaid, growth can bail you out, sensible growth can bail you out in a year or two. And then you're in the money and you're creating real profit for your investors, just to kind of make that point. Differentiation, I think, is your real question.

8:10I've defined what we're looking for below those two key headline metrics. We're looking for capital efficiency, sensible unit of economics and brilliant founders. And the most important criteria that we list on our page, it's the softest phrase on the whole page. And it says coachability are coachable founders. And that's kind of a catch all for people who are good listeners, people who like to be challenged, but have a very open dialogue. People who like to be, to have new people presented to them for board positions, for CXO roles, whatever the case may be. Not people who kind of know it all, just want your money, and then want to be left alone.

8:48That's really not a good fit for us because some people just need that kind of money. I'm not criticizing it. I'm just saying it's not a good fit for firms like ours and many firms in the industry who really want that collaboration. We want to be helpful. I don't want to just get involved with the business, turn over the money, and then not show up. I mean, that's not who we are. It's not what we're about. Can we, Ferkel, talk a little bit about a case study for this approach of investing? If we take AMCS as an example, if you think back to when you first invested and the journey you've been on together, how did you see operational efficiency in the model already?

9:28How do you think about the pricing, either of that asset or others? You can kind of go as deep as you want there and asset specific. and then also about this value-add and coachability of the founder, how you engage with the team after investing. This is a really fabulous story for us. And I think for AMCS as well, if you spoke with Jimmy, he'd be great on this. But it became a proper partnership. So credit goes to Tony. Tony sourced this, Tony Zappala, my colleague. He was living in Ireland at the time. You know, he told me all about this business, guy from Tipperary, based in Limerick, really cool business hardware and software focused initially at least at the time on the waste management sector huge sector but completely under invested from a tech perspective so i came over to meet in dublin with jimmy and his cfo we had a great meeting um fantastic meeting but this was jimmy didn't show up with a you know a really sexed up pitch deck and you know perfectly polished numbers and cohort analysis and so forth you could tell that there was really something here but he was in no way overhyping the story, right?

10:36It was, at the time, it was not recurring revenue. He hadn't pushed the business towards SaaS yet. Anyway, long story short, we liked a lot of what we heard. Fundamentally, we believed in the aspects of the story that he related to us around the sector being multi-trillion sector globally with significant tailwinds from a regulatory perspective. And then the fact that it's underinvested, not difficult to get your head around that and all completely provable from a diligence perspective to build conviction. but there were things about the business that were a bit crazy you know first of all no marketing really really poor website to kind of share their story about who they were and what they were all about headquarters was kind of funny it was literally out in the fields west of limerick east of limerick in the south of ireland kind of an odd place and after several visits we discussed with Jimmy, the idea that, look, we really like this, but there's a few things that would need to happen.

11:45So this is a very, very important topic. Investing into a company with your game plan in mind, but not sharing that with founders. Yeah. Very dangerous. Pre-the-investment is, in my book, a big, big no-no. Yeah. Okay. So we just sat with Jimmy, we put down five or six points on a single page and said, look at if you're up for this stuff we'd love to join this journey and it was basic stuff like get some marketing into the mix build a go to proper go-to-market team you know get out of the field east of Limerick and get to a headquarters close to the university campus fantastic university in Limerick um you know get a bit of a blush of of the academic halo coming on top of you build a website you know tell your story properly and then we can look at the business model down the line and a few other small things right so these were the simple things and jimmy was like yeah great no problem three weeks later after that kind of yeah we'd love to do this we had a follow-up diligence session in limerick and in the same building that i just described east of limerick jimmy said come on i want to show you we need to do the tour of the of the truck facility outside this is where they do the retrofitting of the trucks to put on the hardware and all that kind of stuff and that weighing a weighing capability and a data aggregation capability on the truck so i said jimmy i saw it three weeks ago i don't don't need to see it again i said no just just come out i want to show you something so we walked out to a building 50 meters across the yard this is an old farm by the way i walked into a completely different situation than i'd walked into three weeks prior this was you know kind of white walled room screens everywhere the crook through a big glass window, being retrofitted, all the data up on the screens and everything.

13:36I said, Jimmy, how come you didn't show us this last time? And he said, we visited, he said, but I just sexed it up, like you said. So I took your advice and I just want to demonstrate to you that the points you put on the page about taking marketing seriously and presenting ourselves properly to the market and to the world, we got it. So three weeks we were able to do this. I said, that's brilliant. So for us, that was absolute confirmation. Now, that journey went from good to great over time. We ended up funding an acquisition. We bought out another VC, actually, as part of our investment, I should say.

14:14So we had a big ownership. And we went on this journey with Jimmy and somewhere early in the first year or two, he said, listen, I think I want to make this transition to SaaS. but I'm afraid to even talk about it with you because that means, you know, we call it the SaaS smile, you know, you've got to take a hit to revenue and all this. And I was like, we don't care. If it's the right thing to do for the business, let's just go through it. We're not here for the next two years. And the reality is the recurring was going to grow up to the right. That's what we were focused on, the multiple of recurring that you could get.

14:46So that was a fantastic journey. We funded an initial acquisition by the business in Denmark. And we went on then through a roll-up strategy with Insight as our key partner. They came along later. And we funded, I don't know, 21 acquisitions from 2012, 13, up until last year when we exited. By the way, we also reinvested in the go-forward of the business from our new fund. So we exited the old funds and re-entered on the new fund. Let's just stick on that point just because you said it. you do this of course because you want a clean cut I guess from you don't want a mixed bag so that you do you still have some investments from the old fund and then and then you have the next fund coming in at what terms and how is this fair and that's part of it but let me be it's I really try to sum it up simply the old fund is a 2012 vintage fund so we're now 2025 so we're in what's called the extension years on that fund.

15:52Pre-selling AMCS, there was four remaining companies in the fund, essentially four out of initial 15 or 16 investments that we made with a lot of navs sitting there. So there comes a point where you need to bring home the capital, right? And this was a good time. The valuation was exceptional. So anytime you can clean up, bring home the old funds because it is a distinct economic entity, right? and the investors in that fund, they'll want to wrap up in a rational period of time. So we were able to get that done very cleanly. We had invested in Fund 4, from Fund 4, to support another acquisition a couple of years ago.

16:30And the idea on that was to hopefully get a quick return for that fund. So we just took both off the table, done, clean. And then we asked ourselves, how do we feel about the go forward at this business? It's a completely new process. It's a clean, fresh decision. So the way we do it is you take me out of the equation because I've been on that board for a long time. Take me away and dispassionately, unemotionally, just reevaluate the new investment opportunity. And if we can underwrite at our typical level a return on this new go forward business plan with EQT leading, then we should do it, which turned out to be the case.

17:13and we continue to back a guy we adore. We think he's a fantastic guy, brilliant entrepreneur. His business is going to continue to scale for another five, 10 years at least. He's dominant in the sector that continues to need technology. So yeah, not a difficult decision, frankly. How did you, just because it's of course an interesting case study of how you liquidate positions and how you think about it. Did you mechanically make this decision just within the partnership or did you consult your LPs or your advisory committee to make sure that they're okay with you doing it this way? So on the exit, not much to discuss with the LPs.

18:00That's a decision solely at our discretion. In fact, the new investment is also solely at our discretion, but we felt that was worthy of some dialogue with our advisory committee members just to make sure that we weren't surprising anybody or doing anything that they thought might be odd. It was also one of the reasons to have the clean exit of the other funds and look at this as a completely new decision. You want to be unbiased, of course, and you just need to make sure that you're doing everything for the right reason, especially that you're not supporting, you know, a laggard company with new capital from a new fund.

18:40All right. I have another question on this case, because you went in, you love the dynamics or you love the fundamentals of ACMS, but you also saw that there were some things that you wanted to work a bit on with the founder. How do you think about this case of there being some fixable things, so to say, some easy quick wins that you see this is, you know, it's not perfect. There are stuff that we think should be done versus just getting on a train where everything is clicking and you actually, you know, think you just want to supply the capital and then you'll help when asked. But first and foremost.

19:18Yeah. First of all, I don't think there's any such thing as the latter. The more perfect it looks, the more likely it is that there's some things not being discussed that you will figure out eventually. And everybody needs help. That's the bottom line. And we just tend to appreciate when, you know, the materials, the way the team presents and so forth, it's not too perfect. Because if it's a bit too perfect, you wonder, you know, did the investment bank, did the advisor have undue influence on the development of the plan? And is it really the team's plan or not? And here's a classic example of this.

19:54We sometimes see entrepreneurs coming in to see us with a business plan that has an immediate expansion to the US. Immediate expansion to the US. And I often have the feeling that that's a plan that they think they need to have for us. As opposed to it's what they really believe in. So I tend to, we tend to pressure test on that one. it might be that the US is the right thing and the right next move. But it might be that going from UK to Ireland and Scandi and Benelux and Germany and France is a better first move, right? So we like to really get to a level with the entrepreneurs early on and the founders where they're comfortable chatting about anything, right?

20:41And they might say to you, you know, thanks for asking. I thought you wouldn't be interested if US wasn't part of the equation can we talk about Germany or whatever and I say yeah let's go and we'll talk about that and then we'll come back and say US may come up it's probably not your next move and the reasons I have for this are very simple in Europe we're not good at hiring in the US in fact I'd go as far as saying we're disastrous at hiring in the US because we tend to buy the BS a little bit too much. Somebody walks in with the Rolex. I got the Rolex for the last five years running as the top salesperson.

21:21We buy it. We don't diligence. We don't probe hard. We don't ask the hard questions. So we hire somebody and it turns out they're completely unmanageable. A lone ranger. You can't scale them. They're not capable of managing or scaling. So it takes you six months, a year to figure that out. Another six months to get the person out. Another six months to hire. I mean, you're minimum two years down the drain before you rectify that situation. So that's one reason. The other reason is unless a founder is willing to pick up and move, I think it's a really dangerous move to go to the U.S. and put it on auto control from Europe.

21:58In the same way that it's difficult for U.S. companies to just launch into Europe without getting exceptional European talent on the ground. How does this inform you when you look at startups or scale-ups, whatever terminology you want to use, growth stage companies that have you in their plans? It's one thing that you pressure tested from the perspective of, are they just putting it in the deck and plans because they expect you as an investor wanting it? But just as much when you see a company where this is the actual route they want to take, do you oftentimes then shy away from it because you say, well, No, no, no, no.

22:37We don't shy away, but we just want to be sure that they really believe in it and that they are willing to make the commitment that we think is required. And it's not just capital. It's, as I said, there's two or three co-founders. Which one of you is going to move to the U.S.? I run a VZ podcast. I've had tons of early-stage VZs on. There's not a single – there's not a lot of VZs that don't have in their playbook for founders we help you get to the U.S., Do you feel that this problem of early stage companies having U.S. in their plans sometimes being pushed a bit too hard by early stage VCs? I don't know.

23:18I really don't know. It could be the case, but I don't want to jump to any conclusions there or paint a broad brush across the whole early stage sector. I think it's often a good thing to do and the right thing to do. But I think timing is of the essence. Having the right capital base, having the right partners and people that can help you, having the commitment from the founders to do it. I mean, everything adds up because if you just try to do it by BA flight once a week, every two weeks, every three weeks, first of all, you're going to be exhausted. So you're not going to be top performing in either location because you're going to be just not quite there.

23:58I know this because I did my first year in Europe, I did 24 transatlantic trips back to my US colleagues. The only thing I know for certain about that period is that I wasn't top of my game in either place and certainly not top of my game at home. So everything matters, right? So don't read too much into what I'm saying. I know I can be a little bit, sound a little bit dogmatic sometimes, but I don't mean to be. It's just something that I believe in. If you're going to do it, do it for the right reasons. Do it with the right timing. Do it with the right resources. and commitment and then go all in.

24:30Let's go. And number one task in that early period is to get the right people on the ground around you, but ideally with a founder in the mix. So I want to ask you, what does a managing partner of a growth stage firm think when you're looking at that type of year? Do you gear up for the next fund as quick as you can? No, yes, no, yes and no. I mean, in our situation, we're on a kind of a three-year investment cycle. If the answer was absolutely yes to your question, we'd be fundraising right now at the back of that great year. But we actually don't need the capital right now. We've got enough capital to take us through this year, maybe a little bit early into next year.

25:11So the timing would be wrong. For us to go now, it would look odd to our LPs. It would, frankly, it would feel a bit disingenuous. It would be exactly what you're talking about. But I also, just to be very open, I don't think LPs are right-sided yet from this dry liquidity period of the past few years. In other words, their cash flows are still a bit upside down. It's hard for them to make new commitments. It's even hard for them to meet commitments that they have to ongoing relationships if you come back too soon, too quickly, too aggressively. So we have to keep in mind the perspective of our investors, the limited partners, that trust us with their capital on behalf of pension fund, pensioners, on behalf of university endowments, on behalf of foundations pursuing fantastic missions, whatever it is, we just have to be respectful.

26:07And we try to take that perspective. So our plan is Q1 next year. It could accelerate a quarter, but not much more than that. I said we were going to talk about the era of tourist investing ending. Some would say it already has because that ended with a tech reset. And the question is then, are there more substantial drivers than just the sexiness of the asset class from the outside? Meaning, is the competitive dynamics sufficiently different today versus earlier? And for that reason, you can no longer make it as a tourist. Or why do you think that now is the time where we just have to say the era of tourist investing and venture is just gone?

26:50It's never gone, just to be clear, Andreas. It's like fashion. Something comes back. And, you know, I would say, by the way, just to clarify, when you say tourist capital and tourist investing, I assume you're referring to what happens when the markets are super hot and corporates start to jump in with more capital and maybe some hedge funds start to come down into our asset class, our crossover to our asset. That kind of stuff is what you mean, I presume? Exactly. Yeah. So I think it's just human nature. You know, when things are hot in a given asset class, people want a piece of it. And right now, it's not as hot as it was in 1920, 21, even early 22, before the market took a bit of a hit.

27:33Quantitative easing ended. That era of, let's just call it super cheap money. I won't say free money. It ended and the game, and then we entered a period of inflationary period, of course. That changes everything. Money flows, capital flows completely change in that kind of a context. So I, just coming back around to your question, I don't think we could ever say that an era of tourist capital has ended. It has quietened down for a while. But mark my words, as soon as the asset class is hot again and Europe's hot again, everybody's going to be back. Trust me. That's actually also my assumption.

28:13I saw a quote by you, or at least you were referring to us stating that it was ended. And for that reason, I thought, okay, this is an interesting point because normally I would also say it steps and flows. And it does come back in fashion. Venture will come back in fashion. I had Stephen Miller from Notion on the pod a few weeks back. And we spoke a bit about founder-led companies versus hired CEOs. and he's obviously earlier in the game than you are. I'd love to ask you this question. How do you think about companies at your stage? Do you see any problems with hired CEOs or does it give you caution when it's no longer the founders that lead the companies or do you think that that's an overstated thing from the early stage in Masters that we all preach because it's great towards founders at the early stages.