E640 | Jessica Bartos & Stephanie Opdam, Notion: Scaling European Growth Companies with Founder Quality & AI Insight

0:00Hello, everyone, and welcome back to another episode of the EUVCVC. podcast. Today, we are talking growth, momentum, and vision at Notion Capital. I'm joined by Stephen Chandler, ASP4, co-founder and managing partner at Notion. And then later in the show, we turn fully the spotlight to Jess Bartsch as their new partner hire from Salesforce Ventures and Stephanie Obdom, a long-term partner now fully focused on the growth strategy. Before we start the show, a quick note. If you're building or running a fund, you know it takes the right partners. At EVC, we only work with sponsors we truly believe should be part of your tech stack.

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2:54Let's start acting. This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. So, Stephen, you've been on the pod, as I said before, one of our bangers. I've actually been quoting it quite a bit to people because you were so kind to dive into your LP pipeline and how you manage that. And it kept being a point of transparency that I wanted everyone to both emulate, but also a lot to learn from. So welcome, Stephen. Maybe you would just say a bit to everyone about where Notion comes from and where growth fits in that. So we are a 16-year-old firm set up in 2009.

3:34We are a team of ex-operator entrepreneurs who built a number of SaaS companies together and made the jump across to being investors. Our primary focus when we set up the firm was really as an early stage, mainly Series A investor in B2B software companies. and that's remained true to our heritage throughout. So we're now currently investing from our fifth vintage venture fund. That's a 300 million euro fund, was oversubscribed at the hard cap. It was after doing that one that we last had a chat address. So nice to catch up again. But that's the strategy that we're best known for. We have been adding to that a secondary strategy or a strategy in growth.

4:20And that started really in 2016 with our first opportunities fund. Since then, we've raised two further ones. So today we're talking about our Ops Fund 3. And we've really evolved the kind of language we use. We call it Growth Opportunities 3 because it has the mandate both to invest in our venture fund winners at the growth stage. So cherry picking the best venture assets as they move into growth stage. but also has capacity to do outside deals, either that we missed at the early stage or that we didn't get into or that we didn't choose. All kinds of reasons. But, you know, some great companies out there that aren't in our venture portfolio that we still want to consider as well.

5:04I've got a question to all three of you. What does it say about where European venture is today that you guys are now raising a third opportunities fund, which also has a wider growth mandate? What does that say about where we are? We feel good about where the market is. The market is very different from when we first came in, as I say, 2009. There's a lot more success. There's a lot more competition as well. You know, I think the market has matured and the opportunity set, the quality of the founders you see today are really, really second to none. I think different people have taken different approaches.

5:38Some people have let their fund size get quite large and try to cover venture and growth from a single fund structure. We decided not to do that. And we keep our early stage funds relatively small. We don't anticipate them growing much from their current level. And then we've overlayed this growth opportunity strategy just because, you know, we feel there's a significant opportunity to deploy capital there. Frankly, too much growth stage capital in Europe historically has come from overseas sources. And we need more locally based champions deploying at that stage. And, you know, we will only be one contributor to that.

6:19There are lots of other elements to make it successful, but we feel we can play a part. I want to double click on the pros and cons of doing it out of two different funds. We can get back to that. But to let Jessica and Steph just join in, I'd love to hear your take on where we are with the need for growth and kind of the round involvement that you're seeing in the market. I think the European ecosystem has matured so much in the last 10 plus years. I think some of the stats around this sort of speak for themselves. There were around 40 unicorn companies in Europe in 2015. And I think there's over 600 today.

6:57And the amount of funding going into early stage venture has increased by more than 10x. And yet there is still a growth gap, a growth capital gap for when those companies start to scale, start to get that product market fit, that go to market fit to scaling momentum. Momentum, they hit a wall where the only risk capital that's really ready for them to fund that journey to a unicorn often comes from overseas. And there's much less of it here natively that's really looking at them and focused on them and their companies. So we're aiming to fill that gap. I think some estimates have it on the order of$300 billion in growth capital that European companies have been missing over the last 10 years.

7:42So we're here to bring that capital to them natively. And to bring some of the expertise along with it as well. We have been doing this since 2009 as a fund. Started out as one of the first SaaS companies with the Message Labs legacy. And then seeing now how that portfolio, the 150 plus companies mature over these stages, there are some valuable lessons to draw from that. And I think we're uniquely positioned to capture these lessons and bring it forward to the next generation. And that's why this growth fund is so important to address that need, give that domain expertise, give that growth expertise and help our European founders really succeed both within Europe and across the pond as well.

8:28Let me ask you a bit about this European sovereignty point around growth, so to say. Everyone says that, of course, it's an awesome LP talking point that we should have more capital here in Europe. But if we look at it directly from the founder perspective, why is it important that we have European growth funds? Europe will be a non-core geo for the U.S. funds. They're very large funds. Their main focus will be the U.S. So they will only often look over at European companies, more by exception. And then when they do make investments, it's a relatively small portion of the portfolio, and they tend to be smaller check sizes than the amounts they may be investing in mega growth deals in the U.S.

9:15And you only have to look at the size of rounds that U.S. AI companies are raising now and the size of some of those, you know, multibillion dollar growth funds to see the difference in scale. And when you are a kind of non-core or side project for the fund that's leading your series B or C, you know, you're just going to get less attention and have less buy-in from the fund that's backing that journey. So I think there's absolutely just practical reasons to be at the top of the priority list for the fund that's backing you with the B and C and have some of that buy-in that would come from capital closer to home base.

9:58Stephen maybe you can use this opportunity to talk a bit about also what it means to have a multi-stage firm on your cap table and of course then specifically why it might also as a founder be an advantage that there is a there is a split between it being one big fund versus versus some differentiated strategies and singular funds. Several advantages to being multi-stage as a multi-stage firm we can we can just support our founders longer on the capital journey and you know these relationships are hard fought and uh very deep you know we you get to know each other very well when you've uh back to back to founder at early stage and supported the company through those um formative years uh and so i think continuing to sort of build and extend that relationship is additive to both sides you know from our perspective the fact that we can in support our founders longer, but also engage them at different processes in the cycle is attractive for us.

10:58And, you know, for them, they get the same longevity. And that's not to say that there isn't value from a diversified investor base as well, particularly if you have ambitions in the US, you know, we will partner closely with our US friends there. But I think being able to support them on the capital journey is still very important from local capital. From the founder perspective, is there any reason why you would want your fund or your backer to run dedicated funds? Or could it might as well just be one and it's more of an LP appetite question? There's definitely an LP aspect to it. Obviously, it allows the LP to choose their own kind of risk tolerances and appetite and deploy more capital into the strategy that better aligns with what they're trying to achieve.

11:45we've taken the view that that's appealing to them and and that seems to be the feedback that we've had from the market you know there you can also take counter views as you said earlier on there are pros and cons to this uh in terms of uh simplicity and one decision etc but i think there's definitely a strong lp story from a from a founder perspective i think it's more nuanced you know i think they get the benefit of us being able to support them longer on the journey as i was saying that if we didn't have a, if we were only an early stage fund, we would not be able to do. And so I think there are kind of benefits to them as well.

12:18I think the domain expertise at growth helps them get to that next step, that next round after the growth journey. Basically, our team, Stephanie and me, all we're doing is growth deals and then helping those growth companies onto the next stages. So that's a very different kind of set of work and domain expertise than pure play early investing. We're essentially specialists in the stage and dedicated to helping founders through that stage and on to a much bigger outcome. For our existing companies and founders, I mean, nothing much changes in that story, right? Oftentimes it can mean for the founder not to have too much distraction when they're going out to race and instead kind of raise a slightly more internal round, slightly smaller round instead of always kind of like a set number that you need to hit there.

13:11Board might stay the same that way. So that's kind of from an internal. If they have been on the journey with us, it offers a lot of benefits that way. Founders always, or not all, but there's often a conversation about the signal value, either that the fund coming in for the second round or the third round or the fourth round. that being a strong signal, but also it being an anti-signal when you decide not to come in. Can you talk a bit about that, how you think about it, how you talk to founders about it? No, I think nothing much changes from being your regular fund with a reserve pool, right?

13:49You're trying to optimize for what is, for that founder, the best option at that moment in time. And that might be a different fund because they provide additional expertise in going into a particular geography, particular strategic interest that could be suited for a company at that stage, or it could be us, right? And so to me, that doesn't signal anything. Yeah. And I'd also emphasize we will work, the growth fund as we invest, we'll work very collaboratively with other investors in the syndicate. Usually there will be an external lead. In fact, I believe, yeah, given the size of Series B these days and the size of our fund, There will be external leads or co-leads that we will work collaboratively with as part of a round, so forming a syndicate.

14:35And I'd also emphasize that we have a separate IC here where this fund is a concentration of assets and businesses that we've selected to purposely put into this fund, not just a continuation of the early stage funds. They are two separate strategies and ICs. I'd love to pick your brains on one thing, which is the lead, co-lead. Do you run with a round entirely on your own, pre-empting it and using the information advantage you have with a startup to do that? Or the other side of the spectrum, many funds run the program of only investing as a co-investor or at least with someone else externally setting the value of the round.

15:20Can you tell us first clearly where do you come down on this? and then maybe also help people understand the pros and cons of either strategy? We have the flexibility to do both, and we've deliberately structured in a way that we have the flexibility to do both. So there may be circumstances, as Jess said, it isn't a huge fund for a growth fund that we're managing. And this is more, Fund 3 is more a kind of statement of our ambition for the future, where we will seek to grow this strategy. But it's large enough for us to write meaningful checks. So it means we can lead a transaction if we want to, or we could co-lead, or we can equally, being not terribly stake sensitive, you know, not as stake sensitive as, for example, our venture fund is, we can also tuck in to a syndicate behind another lead investor.

16:05And it's precisely that flexibility that I think is best both for the company and for our strategy. But we would have a preference for having a third party to come in and price and lead the round. I think it avoids any conflicts or minimizes friction in those discussions. So that would be the preference. Could you talk a bit about the LP appetite for this fund in general, how LPs right now are reacting to growth versus early stage in Europe? So, well, I think it's been a fairly, you know, it's been a challenged LP environment for a while, as we know. And a lot of that is to, some of that's to do with stuff within our own industry and a lack of liquidity.

16:44but there are other factors at play in terms of the denomination effects and asset allocations that big capital allocators have. So it's a difficult market out there. I would also say, you know, we were one of the first or we were the first people to do an opportunities fund in Europe back in 2016. There'd been one or two in the US, I think, at that time, but first people to bring that model over here. And it was a model that I think resonated well at that time with people, LP investors being very open to deploying additional capital into the best performing venture assets, that kind of messaging.

17:21I think that kind of appetite has weakened over recent years. I think with reduced allocations in general, people are saying, well, if I'm only going to do if I've only got a limited amount of capital, I'm going to deploy it into the early stage fund and the flagship fund and pass over the ops fund. So I think that kind of added additional challenges for those people trying to raise opportunities funds. You know, if you look at it, there haven't been that many of them raised. I think what we found is, you know, we've got a good loyal set of LPs. We've delivered for them in the past. We have strong relationships with them.

17:58So we managed to get some very good support there. And we also brought in a handful of new relationships. But it was a handful because I think we're still really establishing ourselves in this strategy. Obviously, we have a couple of funds behind us and track record for that. But with new people in the team and a new vision for where we're taking this strategy, I think we've got to earn the right to build that over the coming vintage years. And so it was the majority of the money came from existing venture LPs. And we brought in a couple of new ones as well. I was just looking over my notes from our last conversation, Stephen.

18:33And here you described in and this was obviously in the flagship fund. You said overall, we saw the percentage of money from U.S., continental Europe and MENA all increased with the U.S. or U.K. decreasing as a percentage. Could you talk a bit about, because we all saw last year, maybe the year before, a lot of interest from the MENA region in European venture. Do you see that continuing? Do you see it maybe stalling a little bit? No, I see it continuing. Well, you know, I think you've seen moderate sort of asset allocation headwinds across all geos. You know, everyone's had challenges on the back of the kind of COVID corrections.

19:16And I think MENA is no different from other regions in that regard. In terms of our personal mix, for this fund, it reflects the mix of the broader early stage funds. So we continue to have support from all regions. We expect that to continue. We haven't noticed a downturn in one more than other, I would say. I don't know. Have you spoken to Asia in connection to this? How important is Asia to you? Not very important to us historically. We haven't really marketed the firm in Asia or gotten mainstream Asian LPs. Something in our ambitions for the future potentially, but not somewhere where we spend time historically.

19:55So not in this fund or in our flagship fund. To those wondering why I asked that question, I hear a lot about Japan and Singapore being very interested in European venture. So that's why I just wanted to see if you had a feeling on the water there. I heard the same. And we have had a few conversations with people and there is some appetite there. And I think it takes a while to build those kind of bridges and relationships. All right. Now, let me ask the three of you about the four thematic buckets or sector lenses you're using. Just in terms of trying to simplify the way we view the market, we've talked about knowledge, money, labor and machines.

20:32and really with knowledge and money reflecting our historic focus areas of SaaS and fintech, respectively, where we have a longstanding pedigree and have had a lot of degrees of success. And then the other two areas being labor, which is services and software. So the kind of ability of AI to replace humans and professional services and labor in that regard, something that wasn't really possible previously. and then machines being software in the real world where it interacts with hardware and other parts of the market, including things like drones and robotics and precision engineering and those kind of areas.

21:13So that's the way we've tried to categorize the market. And we've had a good degree of success in the formative too, as we said, but the latter two weren't necessarily within our ambit until more recently. but AI as the new kind of replatforming and super cycle going on has opened up significant opportunities in those markets and and when I say significant you know because you're able to capture more of the overall value chain in those in those areas not just the kind of pure software element of it they are very very large markets you know significantly larger than the formative two and and definitely kind of trillion dollar markets so we've made a number of investments in in those areas already that we can talk about if we have time to get on to.

21:58But certainly a development that we think is super interesting and opens up all kinds of opportunities for us. The way we see it is, you know, AI is the new super cycle, but in some ways it's also a continuation of the software super cycle with the automation that AI can deliver on, fulfilling the promise of what we said when we said software is eating the world. Now we can finally deliver on all the potential of how software can replace human services or human work and even replace or augment machine work and augment or change money flows as well when thinking of the money vertical. So we see it as the next super cycle, which we're in the early innings of, but also a continuation of areas where our expertise has always been.

22:49So labor and machines is a bit of a rewrite of deep tech, at least parts of deep tech. And I asked this question because on Thursday or Friday, I was moderating a on conference on robotics here in Denmark. I come from a robotic city. And for that reason, I try and help whenever they ask for something. We had a lot of discussion around generalists coming into hardware and the trouble of finding generalists that truly understand hardware. Because right now it's not difficult to find a generalist that's excited about hardware, but it is quite difficult to find one that understands the journey and the importance of, as an example, being able to underwrite a bridge round and not thinking it's necessarily a death sign that there's the need for a bridge round.

23:41Because that's just the name of the game when you're dealing with hardware and technological development, typically. We see the labor and machines verticals as always being integrated with hardware plus a software element or human labor plus a software element. I wouldn't say we're doing deep tech in that we're underwriting pure scientific breakthrough and technological innovation that is many years from commercialization. we're more thinking about how can software be integrated much more deeply with hardware and then deliver transformative products. One example of that is sort of the breakthroughs in computer vision and how computer vision can now be applied with LLM and large vision model and large action model type technology.

24:29So for instance, when you used to have computer vision recording a particular scene, you would then need to analyze that data and apply it in a rules-based way in order to glean some insights from it and then turn that into an outcome for your customer. Now, these large vision models can really look at a scene the way a human would and reason over it without needing to rely on fixed rules. That is a breakthrough that can really unlock a lot of new applications of something like computer vision. I think that's more of what we have in mind. Yeah. So there's going to be a lot of commonality in the stuff that we were doing previously we're still looking for a lot of the same characteristics i just think that you know as as jess said i wouldn't say it's too like um deep tech in terms of very very early um prior to commercialization we tend to be a post post kind of commercialization investor in terms of when we focus so some examples for example that we've done in our portfolio so far i would say um like cogner which develops uses ai to develop precision software to solve a business need within a large, often kind of more mature industry, so utilities or something like that.

25:38Really, they're replacing what would have been done traditionally by a systems integrator who would go in with a project plan and charge a professional services fee for pulling that all together. And they're going and doing it much quicker in a much more deliverable way and then effectively creating a bespoke SaaS product that is then monetized in the normal kind of recurring SaaS model, but doing exceptionally well in terms of customer satisfaction and delivery of value and speed to value and all of those kind of things. So, you know, that's just an example of something that would sit within the labor vertical as we described it.

26:14And I think a large part of that is also humans being, in a way, unable to do some of these things anymore. Take the case of resistant AI where, you know, fraud is happening true by utilizing AI, making fake utility bills or fake receipts, what have you. And the only way to capture that is by utilizing AI for the good here, using it as a security system. Humans won't be able anymore to witness what the difference is between a fake generated utility bill and the real one. And so it kind of becomes more on like, hey, how can you utilize AI to combat some of the bad that's happening there as well?

26:55in addition to that. And so, yeah, we always play to our strengths, right? Software is our strength. And that's what we're trying to look for in every investment that we're doing. Steven, I want to ask you one final question. And that is, where is Notion headed? What's the next thing that we should expect from Notion? So, you know, as I alluded to, we don't anticipate particularly growing our venture fund. We think we've got the strategy right size for the opportunity set we're going after. we obviously will continue to raise funds within that strategy and deliver value for our LPs and support our founders.

27:32I think this new growth opportunities fund is much more of a status of intent, of our ambitions, if you like. Hiring dedicated members into the team and Steph moving across from the venture side to focus on this really reflects the fact that we see substantial upside and growth in that strategy. I think it's about building our track record and earning our right to compete. I recognize that our brand and heritage is on the early stage side, and we're still learning as we go. But we also do have a great deal of experience, both within Notion, given our history at the growth stage. So many of our companies have gone on to be successful as growth stage companies, but also bringing in talent like Jess to further augment the team and bring their own expertise and experiences to bear.