EUVC #252: Fred Destin on his decision to pause on venture in honest conversation with Joe Schorge

0:00All right, everyone. So now we're back for another great episode of the EUVC podcast. And we're here with two of what has come to be very good friends in the industry because we've gotten friends of the podcast. It's, of course, Joe Schorch, who you know from Ice Mercabula. I think he probably holds the title maybe together with Chris of the one who has been most on the podcast. And then we also have Fred, who has been a, I would say, recent, very often showcased friend of the pod because he was on first during the summer to tell us everything about Stride because we had not yet covered Stride on the pod.

0:38And then he came on for a more in-depth fireside chat with David just a couple of weeks ago. And lo and behold, two days after that recording was done, Fred announced that he was pulling out of venture or at least putting it on pause. So following that, of course, we got a bunch of inbound questions from everyone asking us, do we know, do we think, blah, blah, blah. So we thought we did know some because, of course, we had spoken to Fred, but we didn't want to do any conjecture more than everyone already did. So we wanted to put together this conversation and recognizing that this is a very special situation where someone actually talks on the way out of the market.

1:24We invited Joe to lead this conversation because we think that Joe can actually speak to this at a much better level than David and I.

1:35Tear down this wall. It's more than just an alliance. This is a union of values. United and determined we can serve as a model for other regions of the world. The nature of a problem requires a European response. Europe is a story of new beginnings. New beginnings. 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. Thank you, Andreas, and good morning, Fred. It's really nice to talk with you today. As we were saying, when people enter the market, we talk a lot about it. A new thesis, a new idea, someone's analysis of the market and why they're doing what they're doing.

2:27But it's very rare that someone takes a pause like this. with equal deep thinking about the market. You're an important investor. A lot of us look up to you. And so your thoughts are important to me and to many people across the ecosystem. And I can tell you that since your announcement, a lot of people, as you go to conferences and meet people in the course of work, a lot of people are saying, what about Fred? What are you thinking? What do you know? What's really behind his idea? Yeah, it's had an effect on a lot of people. All of us who do what we do, the market's changing. And so your thoughts on that matter a lot to us.

3:11So, you know, it's great to have some more time with you today to say, take us through in your own words, what's really driving this decision of yours to cause. Thank you, Joe. It's a pleasure to be here. And, you know, you've been one of the more consistent and sophisticated LPs in the market. So a very big thank you for helping us structure European venture. So I'll start with, there is a first bookend and a final bookend. The first bookend was a walk in the Pyrenees that I did a couple of years ago. Let me start with that little story. So I decided to go out. I just felt cold to go out in the mountains for 10 days solo.

3:52and I took no books, no music, no journal, purely my tarp and a little bit of gear, about 12 kilos on my back. And it's amusing how absolutely terrifying that sounded at first, both to me and to everybody else. Oh my God, you're going to go in the mountains with nothing to do. Which is exactly what I did. I ended up spending hours and hours on end just contemplating the mountain and the birds. And I think after day two, my internal chatter is starting to drop. And I got into this place of complete quiet to the point that you notice a butterfly taking off sort of 20 meters to your right. And it sort of culminated as I made my way up to the 3000s, to the Cirque de Gavarnie.

4:39I remember very clearly what I would call a blade of grass moment. So you're sort of sitting there in the mountain doing absolutely nothing. And suddenly you realize that this blade of grass in front of you contains everything that happened in the past, everything that happened in the future. And sort of this moment when you realize, you know, how both you are everything inside yourself and you're also nothing at the scale of the universe. And of course, there's nothing like the mountains to kind of bring that up in you. And that really started a journey of personal interrogation. You know, when you think about your mortality, meaning of life, et cetera, and that kind of culminated.

5:14So the second bookend would be the October 7th attack, I think, were kind of a big deal for me in terms of triggering a slightly more profound interrogation of what I was doing and, you know, what was my contribution and how was I part of the system? And so I think I've spoken a little bit about this on LinkedIn, but when you look at the crisis, conflicts, and also the role of technology, it was somewhat difficult for me to sit there and think that my best contribution was going to be to raise another fund and fund the next 25 companies, or at least in its current incarnation. I think, you know, technologies had a very ambiguous role.

5:59I'm not a techno-utopian. I think we have to think very profoundly about our impact on the system. And at Stride, we had put this layer on top of what we do called intentional venture, which was our version of ESG, if you like. Do companies have intention? Do founders have intention? Do we have alignment of incentives in a way that we like? do we understand who we're disrupting second and first and second order effects but you know that that kind of didn't feel enough so i think that was the core uh secondarily i'm trying to think about what's the definition of success and i think we we spend most of our lives comparing ourselves to other people when it's sort of a deep source of unhappiness because really the race we're racing is only our own race and so on what terms do i define my own success in venture it's always can Can you raise the next fund?

6:53Can you raise a bigger fund? But, you know, who defined those rules? And when I looked inside myself, it really where I get the most energy and joys in what I call the craft, the craft of working with founders and building companies as well as investing. But not so much, you know, kind of had nothing to do with whether my funds are 100 million or 500 million. So that was part of the decision making. Another piece was, which I think a lot of emerging GPs or more experienced GPs will know about, is that there is no off-ramp in venture capital. It's like when you're successful, you get the right to raise the next fund and then the fund after that, and sort of the treadmill never stops.

7:36And so as a founding GP, it's almost the more you build, the more you carry. And so in a bizarre way, I viewed pausing or opting out as a kind of my own act of dissent. You know, it's like an act of freedom. And then one thing that was tough for me was a little bit of boredom creeping in. And I think it raised the question of when you know the game so well, do you keep playing the same game or do you go learn another game? And to that, really, I have no answer at the moment. I mean, it's possible we raise another fund. It's possible we don't. And I think I'm kind of trying to be in a space of discovery and emergence and thinking.

8:13So I was trying to bring all these things together and really looking at my own motivation. And, you know, we know motivation, once you get past fame, money, power, which are important, but not very sustainable, you get into the internal motivation side, which is the mastery of your craft, autonomy and purpose. And just trying to sit with that and see what in my next iteration, you know, what does that stack look like for me? And I like thinking, writing, using my creativity. I love working with teams, you know, when you marry the human element and the strategy part. And in fact, one of the only things I committed to myself is next year, I'm going to do a big coaching course with a holistic coaching outfit called New Ventures West.

8:57And that's really, you know, to add another piece of learning to what I've acquired today in terms of skills. so I think at a fundamental level there was a little bit also a question of do I still feel fully alive I think a lot of men especially women too but men in particular I noticed struggle with exhaustion and you know I felt my light was a little bit dimmed and so kind of sat with it and said all right I need to change the system what's next I don't know but at least let me just put a stake in the graph. Well, that's an amazing story on so many levels. There's a lot to unpack there. But what you're really describing is this very personal choice.

9:44And particularly, I hear you loud and clear, stepping out of the noise for a moment, because our market is noisy, our jobs are noisy, so much complexity in supporting the portfolio, which gets bigger every time you do a new deal. So I understand that. And again, it's very uncommon. Most people are on some kind of treadmill. And it's just you spend all the time you can throw at it, supporting and helping. So it's rare we have anybody in the market with this kind of introspection. So I can picture you sitting on the mountain looking at the blade of grass and i'm and i'm picturing kind of this what's it all about moment is that is that a fair um not nothing to do with the funds the firm the market this is really all about fred and what am i doing right now is that a fair summary yes i think that is absolutely fundamentally where it comes from and you know if you started doing personal work So people who have done conscious work, let's call it without sounding too grand, know exactly what I'm talking about.

10:54It's really interesting that when I interact with people who've gone down the path of self-exploration, they get it immediately. I think, you know, factors like the markets being tougher and, you know, elements that are specific to stride come into the mix, you know, because, of course, it's not some kind of binary. But that is really the source of the interrogation for sure. As you say, there's no offering. This isn't the treadmill. You can just step aside and it keeps spinning. And people in your portfolio will keep calling. They need you. So it's a tough thing to do. But look, that's all great and important.

11:33We can unpack more of that. But a lot of what people have been asking me in the market are, okay, let's talk turkey here. Have you just not raised a new fund? Have you just not kept the team together? But as most people running firms, they look to the next milestone. And the only thing that would stop them is not achieving that milestone. Sounds like that's not what you're saying. But can you answer that question direct? Because that's the one I hear coming up a lot. For sure. And I think that's a very legit interrogation. So, I mean, first of all, let me say I'm a marathon runner. I can take pain.

12:10I can take a lot of pain. When we raised Fund 1, we talked to, Harry and I spoke to 800 investors, about over 1 ,000 meetings. I mean, I've been through tough fundraisers, and I've been through three crises. Now, to answer that question specifically, I actually looked at my CRM. Because what's interesting is, in the process, when I started explaining the strategy for Fund 3 to people, what I found is my heart was not really in it, which was definitely part of the thinking. and I actually looked at our CRM to answer your question in a very factual manner. So here's exactly what the stats look like.

12:48So I started really talking to investors in mid-September and starting with my existing ones. And I only reached out to my 12 largest. So of my 12 largest, I had three firm yeses, which were immediate. One firm yes, but subject to their own funding. I had four leaning in, probable yes, had to do re-underwriting work, but were sort of indicating they were coming in. So that's seven. Two, I have no clue because they were late in the process and we didn't really, don't know where they stood. And then I had out of the 12, three probable no's. One was very focused on DPI, which we have a limited amount of in fund one.

13:32and two had a change of strategy where fund of funds was not part of what they were doing going forward. So of my ATLPs, that's as much as I knew, but I actually felt very comforted by that. There was probably more than half the fund that was either a firm yes or a leaning in yes. For the rest, it was very early. So I had about 20 people engage in a first conversation. And of course, we maintain relationships on an ongoing basis, but I would say 20 people engaged in first conversation around fund three. And of those 20, I had one no so far. And the no that came back was described by the person as a very hard decision and an edge decision that was primarily based on team stability and other opportunities they were looking at.

14:23So at the moment, I really don't know if I could have raised Fund3, but I think the data that I had, which is quite limited, was pretty good. I felt quite confident that we could raise Fund3. It was extremely early in the process. We're literally three, four weeks into it. And the signs were good. Now I can't tell you where we would have landed, but it felt pretty good. Also, maybe contrary to popular belief, there's actually a lot of inbound on European venture. And so we had some names I'd never heard of sort of smaller US endowments, some very large family offices, which came out of the blue.

14:59And part of what they're trying to do is there's a shift of money towards European venture, which I think will come the next 12 to 24 months. And they saw us as a viable way to get some UK seed exposure. So actually, it was almost surprising the amount of inbound we had. So that's as much as I know on the fundraising side. You know, Fred, that's really interesting. And it's exactly, if I would run the statistics on our own fundraising, I think it would play out in a very similar way. And what you're describing is where we are in the cycle, in my opinion. We're also raising our fund three, and it's very similar.

15:37And it's more about where the LPs are. They put out a lot of money in 2021. So some of them are simply saying, hey, I'm planning to be there, but I don't know when and I don't know how much. So to me, what you're describing is what certainly we're seeing in our own LP base, and probably most. So no change there. And I think I heard earlier, maybe it's interesting to point out to the market. I think you heard earlier, this is firmly a pause. There could be another strides fund, but we're just saying not for the moment. Is that also a fair statement? Yeah. So I think, look, this is where LP responsibility comes in.

16:16So first of all, and I feel quite a deep sense of responsibility. I mean, you know, 200 million fund, 120 million fund for me is a meaningful amount of money, 40 plus projects. I mean, I don't take this lightly at all. And I think that if we come back to market, it has to be, first of all, with the confidence that we've managed existing assets really well. And secondly, with a strategy that I can get behind and which I'm fully in. because I think it's not a question of amassing fees and getting wealthy. It's also just the deep sense of responsibility that I feel towards RLP base. And I've always said, we're always extremely transparent with RLPs.

16:58If I can't make money for you, don't give me any. It's a privileged enough position that you got to go fall on your own sword if you can't deliver the goods. Yeah, well, that's a very important point. You may say that you're pausing on fundraise, but you have these two portfolios and a lot of people gave you money to build something exciting. And that very much needs active management for years to come. Agreed. I know how people in the market have reacted to the story and the questions they've been asking me. But what reaction have you been getting? Why do you think, at least from my point of view, the stories triggered a lot of people maybe to think about their own process, their own next few years and so on?

17:43What sort of reaction have you had so far? So the reaction to the blog post itself was extremely positive. But at the same time, I know that that's, of course, what I'm seeing sort of the tip of the iceberg. I can tell you that from the LP side, so existing and prospective, or just people who know me, that response has been overwhelmingly positive. And really, strikingly so. I think people are, you know, there's been a frenetic pace. Everybody realizes it's difficult to be, you know, you end up in multiple funds from the same family inside your same fund. I mean, everybody's a little bit exhausted.

18:23And I think people thought, well, great, take a breather, manage the portfolio well. That's been overwhelmingly positive. There was some, you know, I think in the Sifted article, some speculation around kazoo. People took kazoo really well. You know, look, would I back Alex Chesterman again tomorrow? I mean, one of Europe's most successful entrepreneurs with a beautiful story with Zoopla. Of course, it was a check I would write. And secondly, you know, we can talk about the kazoo mistakes. But I mean, is it a venture bet you should make? Sure. Do people understand that sometimes come? I mean, this one, it was quite a spectacular flame out.

19:01But, you know, does that reflect on us in a poor way? I don't think so. I mean, I think we managed it as professionally as we could. And so I think LPs are grownups. Their experience, you know, they get it. There's a set of responses, which is quite interesting, which is there's almost like a how dare you? You know, so I found some people quite triggered. and immediately their assumption is, oh, you failed, you can't raise or there's something else going on that we don't see. And I think as usual, when somebody gets triggered, most of the time it's a reflection of what's inside of you. And it's almost like stepping out of the system is kind of an act of betrayal to what the prevailing narrative is.

19:41Why are you leaving the party? It was so hard to get in here. How dare you, in a way? And I totally agree. It reflects on me, because I'm here. I'm staying. I'm still on the treadmill. Why are you leaving that treadmill? And what I really appreciate about you talking about it in public is there are many people thinking in the way you're thinking, but they'll never say it out loud. They might say it after a couple of beers, in that quiet moment with very trusted parties. But got to give you a lot of credit for putting it out there and letting us all have a discussion around it and think about it.

20:22I mean, I think I heard you say about Kazoo, by the way, that you were the very early money. And that was the bet you made. What came later with SPAC and so on? I don't know how influential the early stage investors were at that point. I mean, my initial thinking was we can nail the UK. It's a big market. We could have built a five to seven billion pound company in the UK, just running reasonable stats on that. And it was quite a contained problem. When the growth investors came in, there was this dream of building a pan-European fabric. And it's almost like in everybody's mindset, oh, let's build a 20 billion pound company.

21:00It was kind of shifted the bar completely. And when you have the world's best SPAC knocking at your door, I mean, this was the SPAC started by Dan Ock. with Kevin Systrom, with Andrew Dzycki. I mean, this Ajax bag was literally the best vehicle on the planet. I think everybody started playing that game. So the mistakes made here were going public way too fast, for sure. This was a company that was three years old, wasn't ready for public markets. Building the pan-European fabric may have worked, but it was predicated on sort of infinite supply of capital or at least another couple of billion or something.

21:39And then taking on the debt. You know, I think for a public company to take on such a large convertible with the Viking syndicate was really tough because now you have this huge, you know,$630 million worth of debt sitting on top of the capital structure. Then remember, we also had that DMGT take private. So when the Daily Mail group went private, they actually shifted all their holdings to the retail investors as part of the deal. So they created an absolutely huge stock overhang. Not that we had that much liquidity to start with. So you sort of had this combination of events which made it unbelievably tough.

22:17I mean, the stock could have recovered, but it was like fitting through the eye of a needle. So, you know, you look at this compound set of problems and you end up with the kind of value destruction we've seen on the stock. And again, I think the underlying company may yet surprise people operationally. But of course, as a shareholder in the public equity, it doesn't really help much, does it? And everyone forgets during this moment in the capital markets that you're describing, all of the various movements, a lot of the European growth was by acquisition. And that is not easy, right? Go and acquire a company and somehow bolt it on and make it live the brand and all of that.

22:55I guess that had to be really tough. I guess that's also something Alex Jessam is very good at from his Upla days, but that can't be easy. My operational experience in buying companies and integrating them takes years, actually, to do that well. Look, first of all, let's just say we assemble the most exceptional e-commerce team I've ever seen in the UK. I mean, it was just an incredible cast of characters. People worked hard and who worked well. They for sure needed probably two years and another billion to be able to execute on that integration. And, you know, that money was not coming. Now, you know, do you look back and say, was it too much, too fast?

23:41Sure. It's a flight of Icarus. And, you know, there's no shying away from that. And, you know, let's hope we all learn the lessons of building sustainable companies over the long term. Sorry, I took us off of the narratives you're hearing and thinking about that. Back to Kazoo. It's a fascinating story. We'll be studying it for years to come. One thing that surprised me about this moment in the cycle, you spoke about the challenges of the market. It's changed a lot in the past 12, 18 months. But the surprising part for me is new firms are coming together at a very similar pace. They were coming together two years ago.

24:22You know, the number of new teams were meeting. You know, I'm an angel going pro. I'm spinning out of a bigger firm. That just keeps going, which surprises me. I would have thought at this moment, given all the difficulties fundraising, that there would be fewer new VC funds launching. We're not seeing a slowdown in that, at least not yet. What are your thoughts on that? Are people entering? There's one point of view that, well, prices are down. This is a great moment to enter and do more. But there's another thought that actually there's a big group of companies there that need support and follow on money.

25:00Why are we creating more and more early stage? As somebody who's been around longer than most, what are your thoughts on this new activity? Look, my general, my first comment would be, you have to know exactly why you exist and be precise. I mean, surgically precise about how you create value. If you only have a vague idea, you probably are in for a rude awakening. When I look at Max at Nucleus Capital, who's doing synthetic biology with a great group, where I look at Amino Collective, where I look at firms like that, I'm like, I understand exactly why they exist. I understand the risk you're buying as an LP.

25:41I'm a little bit for sure concerned about too many undifferentiated firms at the seed stage. And the question there is, are you at seed because you can't raise a bigger fund or you're at seed because you're fundamentally a seed animal and there's something unique that you can deliver? If you look, for example, at myself and Harry, so Harry, under his 20 VC incarnation, brings you the best network in the world. He has an unbelievable network plus the media property. He's not going to do active work in the way I do it with the companies, but that's a very clear point of value. And you know why you're inviting him in syndicates.

26:18If you take me, me and Gabby, we're about deep company building. We go in the weeds and we know how to do it well. And we're natural seed animals. And then to limit our space of complexity, we only invest in humans. So we don't do energy. We don't do climate. And we're trying to be the best seed fund in the UK as an aspirational goal. so I know why I exist in the world and I know what we do so I think it's more like an existential question of like why do I deserve to exist? What is it that I bring to the party? And of course, what's my value creation strategy? And I've definitely come across a number of funds where it's not exactly clear how they're going to outperform and as we know this is a game of top quartile and yeah, I'm slightly nervous that this Cambrian explosion is leading to too much undifferentiated seed capital for sure.

27:08it's funny to hear because you could say the exact same thing five years ago the exact same thing 10 years ago the way i describe it is uh why does the world need another fund you know if you have a good answer to that then let's talk um but if you're just answering i'd like to have a fund or i'm just another one that never worked so that to me that isn't any different um i mean full disclosure we we invested with Manuel at Amino Collective and for the reasons you described he's doing something really different and really something we don't understand so we need a we need a partner like that so yeah we got excited about that as well um so let's see that you know this you're taking us back to the introspection to the why am I doing this and what am I adding to the system, which I think is a good, those of us who've been around a while ought to do it, but actually those of us thinking to enter the market really need to do it.