EUVC | Carlos Espinal, Seedcamp: "Fundraising field guide" his latest startup founder's guide to all things fundraising

29:23We have huge, great pedigree founders that are able to raise incredible amounts without having necessarily done much. But then on the other hand, we have the average founder who is seeing all the big rounds being announced. So they're expecting that they should raise those numbers, which are then being declined on. But they would probably even also be declined on normal terms and on normal target races. Because every VC or many VCs are looking at AI right now and saying there's so much competition in this market. And these guys are not the great pedigree founders. So for that reason, I don't dare jump into this.

30:08And then no one dares make the jump. I'd love to ask you, do you see the same thing? You've done a bunch of AI investments out of the latest fund. So I know that this is where your mind is. Yeah. Yeah, no, that's right. Although in all fairness, you could throw any one anecdote that is kind of weird right now. And you'd be like, yep, that's right. Because everything is happening that could happen. everything is still happening in every direction you know it's funny two years ago you know everything was going in one direction and now everything is going in every every direction down up sideways and and on this point specifically the the emergence of many unicorns as a function of capital injections driving valuations over created value is actually a statement about about how in a market that is dynamic and booming nobody's willing to nobody's willing to take money on a flat round so some companies probably need the growth capital but if they're not if if you if you assume that every piece of capital that comes in is non-dilutive in the traditional sorry in the in the flat sense every capital is dilutive right so but if it's in a flat sense then by definition, you need to increase the valuation of the company.

31:24And therefore, you have this correlation where simple working capital injections that are competitive between one investor and another force a competitive dynamic in excess of the value created. And that's where you lead to these big, big jumps, right? To have the capital go in. I'd love to ask you, but coming to the AI part, the question that I just asked, do you see this bifurcation of some founders being able to raise incredibly large rounds and others kind of thinking that they can, but where the rounds are actually much more meaningful. And you're seeing also many great AI companies not being funded.

32:05I don't know how to put this. I haven't thought about how to articulate it, but there's always a moment in everyone's life where your perceived identity is questioned. Like you think you're taller than you are, or you think you're better looking than you are, or whatever. And it's, it's always kind of like a moment of reckoning. You know, you, you get injured because you couldn't lift the weight you thought you could lift. You know, there's always these moments in life where you get challenged. And I think to your question, there is this really interesting bifurcation, as you put it, of those that can raise and those that think they can, because they have some attributes, but then they fail.

32:43And then, And I've seen a few of those recently where they end up having to come to market with a reduced, maybe halved fundraise, different terms, and then having to deal with the repercussions of what that says about them through the ecosystem. And that's hard. That's hard. And it's not clear to me that you can recover from that. I mean, I think we're still observing whether you can. but yeah it's not easy okay let's go let's go to the the fourth one which is uh the creation of specialized investors across the different stages of financing all the way through to IPO due to the speed at which people could make money at even the latest stages I have two questions just to understand exactly what it is that you are seeing are you seeing that we have new investors and thus new money that are specialized or do you see that the existing investors are turning to specialized strategies both so for example during uh late 2021 22 you started having these funds called crossover funds do you remember and SPACs you know the things that were like okay we can do a quick flip like we can come in near the end and then before IPO and then like get in and then you know sell at the peak and then get out you know so that's what that was and and if you if you look at podcasts from that era you know spacks and everything like there was all these specialized really cool ideas about how you could like come in here and go out here and then and that's all at the late stage in that early stage people like i am the specialized space investor that does quantum blah and those are needed by the way i'm not i'm not i'm just choosing those as an example of hyperspective because there's nothing more specialized than a quantum investor right and but those didn't exist before right on on the and those are all manifestations of excess capital they're all manifestations not all manifestations of excess capital are bad though because having more specialized sectoral investors means founders get better support and better capital that's good when you have crossover capital and late stage capital that's very short termist it's bad because it reinforces the point that i made earlier of many many unicorns as a function of capital injections driving valuations over created value you said now you just used the word it's a function of excess capital excess capital at least is often used in a negative sense when you just say it's a function of having a well-functioning capital market in the early stages.

35:27Because I think you guys are generalists and you're great and incredible, but there are companies that definitely benefit from having specialists on their cap too. Yeah, no, that's a good challenge. Let me play with that a little bit. When I say excess capital, what do I mean? in a low interest rate environment capital is looking for yield in excess of alternatives to make up for the fact that there is no safe place to put money and you need to make money you can make money much faster through some of these strategies and so it means that you're either reluctant to put money into the market because in the public market or fixed income of some sort because you fear that you're at a peak.

36:18So there is excess capital not being used in light of fear. Or there's, and that fear includes thinking things are overvalued, right? And if you look at the public stock market at the time, it was like GameStop and all the big tech and Tesla was at an all-time high. And so there's a reason why potentially one could interpret that value is overheated and therefore excess capital is, can i put this into private markets right so excess capital is maybe a better you maybe a better term would be like idle idle capital like where can i use this money better than the current alternatives that i have and that's how i mean it do you see this specialization continuing yes but certain up certain opportunities are gone so the specialization that is sectoral continues and is good and many emerging managers which you have invested in are doing that and making it easier for founders to raise money from people who understand what they're doing that's great but the stuff that can only exist in a in a sort of in a market that has a lot of capital that wants to go somewhere where it can make a better return than the next best thing then that that's kind of disappeared for now it'll come back it always does but but it's also yeah i don't know as far as it's also a good thing but i i don't know if i dare say that you have your major change number five that is added pressure on founders to tell compelling stories that could justify the massive expectation from investors across the growth journey i just you know we all agree that that we're now a bit more grounded in unique up unit economics, the path to profitability, defaulted live models are kind of more what we're seeing.

38:09But do you see that this is the approach we'll stay with for a long time? And I'm asking you here about what are you thinking about the market going forward? For how long are we in this market where the focus is on a path to profitability and union economics versus? Yeah. I mean, if I had to peg it to something, it would be interest rates, right? Like if I had to peg it to how long something will last, it's a function of how expensive capital is as an alternative to other investments, venture capital costs, right? So I don't know when that will be. But what I do know is that the moment that there is idle capital that needs to go into something that will yield a meaningful return, it's when those kinds of dynamics will return.

39:04So how does that affect this point about added pressure to founders? Well, if you think about, actually, I was in a board meeting recently where this topic came up partially. When you think about what a startup needs today to really showcase excellence. Yes, there are a few companies that are in the space like we discussed earlier, like if you're a foundational model, that's killing it. You know, there's some elements of the traditional way of looking at fast growth where you don't need to monetize immediately because you're just dominating a market and you're integrated into everything. Some of that still applies, right?

39:38But for other companies, there is an element of can you build a sustainable business? And whereas before that might have been paused as an idea because you had to sell for fast growth, conquer all. Now it's an attractive attribute. Now, the tricky thing is that you still have to tell a story that returns the capital that your investors have given you. So founders are in a trickier position now where they're not only having to show where they're a business, but at the same time, having to show that they are the potential for something that is almost as big as it was. So, you know, when I say there's added pressure on founders to tell compelling stories, that hasn't changed.

40:22It's just the expectations of what good enough looks like is now compounded because you now have to showcase a sustainable business and tell a compelling enough story to make it a big outcome. And that's not easy. Yeah. Would you say, would you agree with me that the way it can be framed is that investors have an increased, at the very early stages, the preceding seed stage, or any stage for that matter, they have an increased focus on saying, I need to see, so to say, the private equity case in this, as well as the potential huge upside VC case. In the sense that when we were in the frothy market, everyone were almost happy to invest, were happy to invest into a model that obviously only VC would ever bet on.

41:19Because there was only, the whole way that company was built, it could only work if it was massively funded for a long, long time. and then it would start working with decent unit economics at a later point. But now you're saying, I want to see the path to the 50x, 100x at some point. But I also want to see that if we're not hitting that, we're not necessarily required to raise the next round in two years. We can see that there is a path to actually just surviving. And then we exit this either at cost or at 2x. And then, of course, the effects of this is also that someone like Speedinvest have built a team of two that are doing one thing and one thing only.

42:11And that's looking at their portfolio, at things they've written off in the past, and then saying, okay, maybe we shouldn't have just written it off. Maybe we should have sought exit routes with them. And this is part of why you won as Firmware of the Year. You've been incredibly good at seeking exit paths for the established portfolio that's not necessarily the huge successes. Yeah. And look, you bring up several points there about like not only what the role of investor is in helping create liquidity for the founders as well as their LPs and for different kinds of companies and all that kind of stuff.

42:48if you forced me into a corner said carlos what is the thing that makes a company attractive 2024 i honestly i couldn't pin it exactly because for each different stage it's it's looking a little different you know for super early no revenue no nothing the story still matters and the story still has to be like big because there's a lot of capital that's still undeployed once a company has some sort of revenue all of a sudden the expectations are around well is this company a real business and is this where's this going is is this a good is this a good unique economy like all those traditional more old school venture metrics which are wise are being enforced but they don't necessarily have like a bar it seems like that bar is different for different people and different funds and that that's confusing for a founder because it it used to be that you could rely on christoph jans's you know uh sass napkin as an example of numbers that you've cleared, you were good to go.

43:42Now it feels like it's all over the map because different people have different perceptions of risk and how long a company needs to be before their cashflow positive. And I haven't found consistency in that from conversations I've been having. And then on the other end, it's like, once you have that, then what is impressive from a growth point of view to justify growth capital, which I think you probably have better metrics than I do in terms of how many investors are actually doing late stage growth capital right now in Europe. And so it's like, it's confusing. Like, I think we're living in a very confusing time because on the flip side, you, you, you see stories of these immense fundraisers that are still happening as if it were 2021, like wave, you know?

44:20And so you're like, as a founder, I would be totally confused. What do you want me to be? You know, but that's a function of, of sort of two things. It's a function of the fact that the market has corrected to some extent, but there's still a lot of dry capital so some dynamics from 2021 but some rectification as well and the two things together create turbulence for for the middle area where the water intersects and to be very fair that's life right there's nothing in life that's just you know we just do one thing and and now we don't have to keep an eye on on the burn But that's not how anything in life works.

45:00So why would it in startup creation? Now we spoke about the impact on being a founder in this. I'd love to ask you inside Seacamp, what has the change in the market kind of made you do in terms of, now I said Speedinvest as an example. realize, wait a second, we've probably been writing off some companies that we should have put a bit more work into figuring out how we could liquidate in a different situation, different scenario. So what inside Seekamp would you say you've done either on an individual level or on a more structural level? Yeah. I mean, look, it's the interesting thing about being on a podcast is that, you know, people, guests have to calibrate the pain that you want to share for others to sort of feel that you're feeling right.

45:57For me, the most painful thing is having a chat with a founder that I've worked with closely when things are getting tough, because not every conversation ends with more money. That's a hard job for venture capitalists, if you have a heart of any sort, right? Because you're friends, you're colleagues, you work together, you sort of invest in each other's visions for what things could be. But that doesn't mean that capital just continues to flow, because you also have responsibilities to your shareholders. And that means that you have to make some difficult decisions. So in terms of how has all of these changes affected how we're operating a seed camp and and i started i started off with the negative because it's it's worth addressing with with sensitivity is like a lot of time in the last you know nine months or so have been around helping companies that are struggling in one way or another that's not every company you know on the positive side of things there are many companies who have come out the other end of finding product market fit are doing well and you can continue your back and so the investment side of things like new investments actually has been pretty consistent like that the we've you know there was a august last year there was a bit of a period where everybody was like okay like july august september last year everybody kind of felt like it wasn't the best time to go up fundraising because i think people were calibrating on valuations but now now everyone's building companies and moving back so the investment side isn't actually that different than the last you know decade or so obviously valuations come and go and all that stuff that's dictated by the market less so by us but in terms of support is where really the day-to-day has is the focus you know like sometimes businesses don't work and i think that during the heydays of the last three, four years, there were some ideas that could have worked because, you know, everyone was happy buying software or happy buying other things.

48:17But now that people are cutting costs in organizations, that's not possible. And that's probably the biggest focus. Different question, but connected. Seekamp have always pioneered the large portfolio model. And in an up market, that's very fun and easy in a way because it's not, I'm not saying it's easy, but it's easier because the companies are on a good trajectory. But I can only imagine that when shit hits the fan and you've got a large portfolio, it's all the more difficult. It's all the more difficult to be the person that you want to be. How have you navigated this as a firm? what does the large portfolio model so it's one thing because you spoke about what you did but what does the large portfolio model kind of imply on how you run your portfolio management as a firm and your value at work in a market like this?

49:17So yeah, it's a good question for those that are listening you should probably know that Andreas is an investor in Seedcam so it means that this question is extra funny because you should already know the answer, I think. But it's worthwhile discussing it. You know, one of the things that has made it very interesting to observe is how super early stage companies are hard to identify which are the winners. But it's easy to identify which ones don't have a chance of winning. So super early stage is really more about giving a few companies a chance to succeed versus picking the ones that are going to succeed, which is a luxury that a later stage investor who has access to metrics can more easily calibrate.

50:13So the way that I see it numerically is that two things. First of all, during the times when there was quite a bit of capital in 2021, what was happening was everyone was getting a follow on round. And ironically, that's not good for us because it means that I don't know which ones are not going to succeed until much later after much more money going in. because as the rounds got bigger, our pro-ratas got bigger, and you still didn't know whether there was a profitable business at the other end of it. So in some ways, we're better off now because there's less companies that are raising on the tail end of nothing commercially.

51:01And as a consequence, it means that we can take the limited follow-on capital that we have relative to, let's say, a specialized fund in a growth stage. and send it and allocate it to the companies that have the most prospects. So ironically, counterintuitively, we're actually better off than we would have been in 2021, where we are more concerned about not participating is bad, but participating could be bad. That's happening less now. Back to the point that I made earlier, because more companies therefore don't raise, then there is the impact from a personal basis for my colleagues of having to deal with companies that inevitably don't make it.

51:50So that's the two things, right? It sounds bad, and it is, emotionally and also from a capital point of view, but it is preferred than being too far in the follow-on amounts with too many companies and then not being able to really help the really good ones do really, really well. Did you, and I know the answer here as well, but just to get it on the record for everyone, did you increase the follow-on reserves in the fund that you then have now in this environment versus in the last? And in the last, did you use all the follow-on reserves that you had? Or did you say, no, we would actually prefer to reallocate them to initial tickets or just simply not call them because you're just seeing the price have gone up on this asset, but I have no idea whether it's doing better.

52:51So I'll leave that on top. We actually didn't approach it either one of those ways. We took a view on our model and said, we're going to stay with a consistent approach to this investment strategy. And if there is growth capital, it's going to be consistent relative to the total fund size and any excess follow on will have a separate vehicle. So one of the things that we don't really mention too much, just because it's not like a separate thing that somebody can apply to. One of our colleagues, Hillary, leads our effort to fund companies a little later by reaching out to our LPs and saying, hey, do you want to participate in the pro rata that Seedcamp have and expand the fund, if you will?

53:41And so that's very limited and it's for a limited set of companies and it's driven by somebody separately, which is, as I mentioned, is Hillary. But that is a more disciplined way of dealing with how to deal with follow-ons versus expanding your fund size to something that could accommodate the current market dynamics or previous historic market dynamics in hopes that you could adapt your follow-on strategy for that. Because then that puts pressure on your valuations for the market to be at exit to justify the existence of your fund. So we've tried to make sure that we could return the fund according to the current inflationary pressures, keeping 100 companies as the core volume of companies per fund.

54:28And then anything else beyond the allocated follow-on, which is roughly about 40 % or so, is going to be given to Hillary. From an LP perspective, I think it's such a great design. Let me ask you about another one of your major changes, which is, and we've spoken about it a bit, but the financing terms and the structures. You're saying competition between investors on financing terms and structures versus value add leading to disproportionate increases in valuations as round sizes grew larger and investors competed to win by trying to appear more founder friendly. I won't ask you about back in the day, so to say.

55:12I'd rather ask you about what do you see today? Because I think that's the more interesting question, because some would say that now it's maybe more about being at least non-founder friendly. You know, it's funny. When I read this, it's always tricky to try to say something in written form with a level of inclusivity of all the circumstances that it applies to, but without saying, as example, this company that did this and this investor that did that, right? Because the temptation is give me an example. And if I give you an example, A, I might be violating some NDAs or it might be something nobody appreciates sharing, right?

55:58But at the same time, the lesson is still there. And I'll give you an example of that, right? So it's not unusual that an investor has more knowledge of the legal structures of investment than a founder does because an investor does it every day, right? And a founder does it maybe four or five times in a lifetime. And while you can come to the same conclusion and the same valuation in two different ways, it can create very different dynamics from a marketing point of view as an investor to propose something. You know, like, oh, look, you know, we're going to we're going to come in and uncap convertible and, you know, you know, and you sell these ideas that are structurally sound, but cater to a competitive market's ego.

56:51And the ramifications of that down the road aren't obvious. Because they're not obvious because you you just assume things will always be great. so one company this is an example of one one company took like five convertibles a safes really that were in some ways unpriced or rather the price the price in the cap on it was very large and and because nobody wanted to nobody wanted to get into conflictive and a conflict with the founder people wanted to come in and it just led to stack safes now the company that went into distress and then all of a sudden it was really hard for the founder to raise additional capital because you had all these outstanding convertibles that had different terms and that needed to be reconciled into one share class and it was impossible to get them all to agree and who was going to get what and what like because the the structures weren't they're great on the upside but not so great when you're trying to compress them into one share class because it's unclear how you treat one versus another.

57:59And so another example is when there were a lot of cases where investors were promising all sorts of restructurings of the cap table as a condition to or as a benefit from taking their money. Oh, if you take my money, I'll expand option pool and give you some shares. And these were all, I mean, there were all different forms of just

58:27showcasing better terms better structures versus what i say here is value add is like let me help you with your marketing plan like there's company businesses uh support and then there is like i can creatively put something together that's so attractive to you from a structuring point of view that you're going to take it even even though it's not very obvious to you how it's going to unravel and later in the book i talk about that things to avoid and things to worry about. So it's probably worth talking about where it came from, but I do talk about it later in the book about how to avoid it. I'd love to ask you because this was a bit the upside scenario, right?

59:04When in an up market, where everything's good, no one looks at the downside protections. How about today where we are seeing some of the more predatory or more rough terms come back into term sheets? What would you say? Give me an example. Before I answer that question, give me an example of what you mean by that. So first of all, I'm deliberately an LP angel and not a direct investor because I'm not sophisticated in this. But what we, as an example, often hear about is at the growth stage, you have, what's it called? Liquidation preferences, right? that would then destroy you as a founder if you're not returning what the VCs are looking for.

59:53Or you have at your stage, I guess you have bigger issues around what you're allowed to drag a founder into. And my question to you is then, what are you seeing in the market that you think right now, either because as you said earlier, you primarily are not the price setter. You're primarily a price taker. That's also a terms taker. What terms are you seeing being handed to founders where you're saying, guys, if that's in there, we're not coming in. We love the team. We love everything. But these terms, that's not how we do business. So let's do two things. One, I'll answer the question by picking on those two terms that you mentioned, the drag and the lick prep.

1:00:40And we'll talk about that. We'll geek out a little bit on that um it's kind of i mean this is always a fun part of conversation some people might find boring i find it very fascinating um but i'll i promise anybody who's still listening to this it'll be fascinating yeah those ones will be fascinating but but um in terms of the terms that we're seeing i think one of the things that you touched upon earlier when we were discussing how things have been democratized. But to some extent, because we are working in an environment where we're syndicating with other firms that think founder-friendly as well, ironically, it's not as much as you think.

1:01:20I know it is happening, but I suspect it's happening for a subset of companies, some of which I'm not seeing. So it's like if you took a random sample size of terms given to all companies, regardless of their success or failure or who's the lead investor who isn't, I suspect you're right. But when you look at it as a cross section of like new investments made by, let's say, Speed Invest, Seed Camp. And I think that if they're setting terms, they just tend to stick to things that they know are founder friendly. But that does beg the question of, well, what is founder friendly? What's investor friendly?

1:01:57What are these terms? Why are they there? And this is the part that I find fascinating because I look at legal terms not as negative or positive. I look at them as tools. And what is the tool trying to solve? And there's a whole series on this that I did with my colleague, Tom Wilson, as a legal series on YouTube. If you really find this section of this podcast fascinating, you can go watch those. It's fascinating. It's fascinating for me, the history of terms, because each term was invented for a reason. And so sometimes we can sort of vilify a term and be like well that term's horrible it's like only horrible when applied in in a way that it wasn't intended to be applied right so as an example convertible loans when they were invented i mean they were invented much earlier the founders wasn't completely understanding what they were getting themselves into right because that's on the very early stage what we see about right but like when when they were started first being used in anger in in 2008 nine was on the tail end of a lot of the financial collapse and people wanting to bridge companies without pricing them and so they're therefore there's this this ability to use a convertible loan to have like a discount on the next round and and it borrowed heavily from the traditional convertible known so there was interest and there was all these other terms which the safe which is an evolution of the convertible stripped out so it's funny it's like there's a history to these things and how they're used right because they're inventions they're they're inventions just like a car is an invention and sometimes when they're used inappropriately it's kind of like having a car with no seat belt you know it's like it it's now it looks like an ancient car right and so i think that's that's part of the context that it's important to to sort of for the listeners to know but let's let's let's talk about these two terms.

1:03:50So liquidation preference is one of these terms that's really fascinating because it's a reconciliation between a misalignment between valuation of entry and the risk that investors taking. So imagine that a company is valued at 100 million and that was the first round and you give the company 100 million. Technically, depending on the governance structure if there was a liquidation of that company at 90 million all right so it's a down round the company didn't do well it has 90 million in cash without liquidation preference a founder went from having zero let's say that founder had 50 of the company right they could walk away having failed still making with 45 million it's not particularly fair for the investor especially if there was something about the company that wasn't obvious at the time and that they were forced into just going with it.

1:04:53And remember, we're talking about tools here. We're not, don't try to like, if you're a listener here, trying to like vilify one view or another, it's not that. It's like, look at it as a tool, right? And so when is that tool appropriately used? Well, that tool is appropriately used when there's a discrepancy between the valuation and where the company is relative to the risk that it provides the investor. So the example that I gave you at a hundred million for a first round, people would be like, yeah, okay. I can see that. I can see where like you could go raise a hundred million tomorrow and then liquidate the company for whatever reason and then walk away rich.

1:05:26You know, sure there's lawsuits and all that, whatever, but the liquidation preference is sort of a way of protecting against that by returning that money. And there's different types of liquidation. There's non-participating, there's participating, and they're just amplifications of the same theme. That's what it is. Amplifications of the same theme to magnify and create a solution for a problem, which is effectively a disagreement between price of entry and actually risk as perceived by the investor. So that's liquidation preference. So the example of it where it's used really negatively is if you're investing in a valuation of a million and you ask for a liquidation preference.

1:06:04Well, what are you going to get? you know like you're you're now creating a because liquidation preferences when there's too many of them creates another issue so you know there's there's a spectrum of when it shouldn't be used and when it shouldn't and you know people can debate that but that's that one and then drag to some extent one of the issues that has happened with more people having money and investing in companies is that you have a whole bunch of people who are on a cap table and sometimes are not available to make decisions or there's paralysis you know there somebody's you know on a holiday so how do you make decisions you know and so that's where that term comes from and then there's a percentage threshold for that and then that percentage threshold is a is a function of where you need to be to make decisions so i think you know it's these are these bad terms no if used inappropriately, yes.

1:06:59They're just tools. I read about on SIFT that they covered that it was starting to creep into terms that early stage investors would require founders to okay, that they would be able to liquidate their position in part of a larger sale in their portfolio. I think that was the framing of it. And then there's always the how vague, what's the larger sale of the portfolio? Is that three companies or is it the full portfolio? And I remember, and I asked Joe Shorts from Ismer about this, and I remember saying to him, kind of seems fair to me, though, that you'd have that as an early stage investor because you want to be able to liquidate the last seven portfolios or sell it to someone, especially if you're not a large shareholder, right?

1:07:55See, Cam, if you want to sell your 5 % minority stake, you can't, you know, without any special rights and so on, that really affects the founders' ability to maneuver. Shouldn't you be able to do so eight years down the line? You may have not intended it, but I think you asked me two or three separate different questions there. There's the idea of like a redemption right, then there's the timing of it, and then there's the motivation behind it. um a redemption right is a historical term it used to be called that on term sheets it now isn't called that but it's kind of the same and it means i have the right to liquidate this position for a certain multiple at some point in the future where that's evolved now is that if it is used it's used on a i want to have some sort of liquidity option on my position then there's different types of liquidity there's like individual shareholding liquidity or lp position liquidity and that doesn't disrupt a startup's cap table that's just a transference of of underlying ownership from one lp to another lp the governance structure might not change at all so that the manager is still the same so what is that you know well first of all if you're an investor asking for a founder to give you money back or to carve out a specific term for you special that's hard to do even today i'd be very surprised if anybody like was able to get like very specific terms that didn't apply to everyone and if they did apply to everyone would destroy the company because it would just mean everyone would liquidate at the same time so generally if there is a solution to this issue it's usually that there are pre-arranged windows for secondaries at the next round or something like that alternatively it's when there is a a fund that's coming to the end of life and another fund who wants to buy those positions and then you just sell the fund it doesn't affect the company at all the manager will still be the same so that's just like moving things from left hand to the right hand it sounds sounds more dramatic than it really is all it is is you know like selling it from david to andreas they're both euvc like it doesn't matter they're both euvc so you're selling it from one party in euvc to another party in euvc it's still euvc i think everyone in the audience i hope that you respect my attempt at getting through all the major changes, the 11 major changes.

1:10:33I did not make it because now I'm going to jump because there's two parts that I want to ask you about. The first one is that you're writing that there have been positive changing attitudes to tech entrepreneurship in Europe. And then you're saying risk and failure is okay, which has thankfully continued. I 100 % agree that, But yes, it's super important and we're very happy. I'd love to ask you if you've seen it having been tempered lately. Because we all heard about it and we all saw how the Dragon Stand shows kept happening. We all heard about huge increases in entrepreneurship. But I haven't seen big stats on whether we've seen drops in new company formation.

1:11:21No. So this is a tough one for me to speak with authority other than through my own data set. so I can only speak from what we see. There was a drop in deal flow, as I mentioned, sometime between July and September last year. And I think that was a pricing issue where people were like, do I go now? Nobody knows how to price this. Now it's back to normal. I would say now it's back to normal, normal being pre-2021, pre-COVID. It's just like linearly increasing as opposed to exponentially increasing. and um but in terms of failure which is the quote here i would say it's pretty good i mean like you know we just backed recently a founder who has failed twice before on his third company and i know him very well and i know the reasons why the previous companies failed and you know that would have been harder to do a decade ago.

1:12:19And now, you know, founders that are very compelling and visionary can have another chance at building a company. It doesn't always have to end in failure. Sometimes it can just be like, you know, not super eventful exits, but that, that is like so critical because that is what the, the U S ecosystem is like. And, and I'm, I'm happy we're there in Europe. And on the topic of the US ecosystem, your final major change is the celibatization of receipts. And then you're saying, and Driesen, the chain smokers, Ashton Kutcher, Nico Rosberg, one from Europe there at least, and an overlap with other pop culture.

1:13:01And then you're saying Sir Mike Moritz co-authoring a book with Sir Alex Ferguson, Carlos Hispinal writing a book. No, you did not mention yourself. But there's two parts to it. Because I see names that are celebrities coming in. That's always a fun experience and fun to see. What I don't like about it is obviously that there's a bunch of risk associated to it because some of them just have access to capital to invest. They don't necessarily have what it really takes to be in the business. That can go completely wrong. And I think it's a dangerous phenomenon that I'm holding my breath to see play out in Europe.

1:13:36But there's another phenomenon that I would love to ask you about, which is VCs becoming celebrities. And oftentimes, Martin Driesen is a good example, I find, of someone who I really am happy has kind of transcended a bit into pop culture or mainstream culture. Because I wish we had more VCs in Europe taking a stance on policy, taking a stance on things in the mainstream media, not just voicing their opinions on LinkedIn and X about our small part of the world. But we've got AI that's going to disrupt a lot. And I'm not really seeing VCs taking a strong stance and helping educate the public and the politicians about how do we think about this.

1:14:24So I'd love to ask you this last point. Do you think VCs should become celebrities do you think we're doing it enough well i mean that's you you love throwing three questions at once right yeah i knew that so all right so let's let's let's talk a little bit about this point and what i meant by it and then maybe we can try to do your question actually as as i do this interview i realized that like just this conversation of itself could have been a book as opposed to a series of bullet points in a book. You know, like in of itself, it's a series of statements that are kind of interesting. So I'm definitely going to take this podcast and put it on the book's website as like the longer explanation of just the introduction.

1:15:06Of one page. Yeah, seriously. So, you know, in 2007 through 2015, and even earlier, there's always been a culture around venture, but it's been no different than let's say the culture around private equity or something else but what's happened was this growth from 2015 all the way through to 2021 of the silicon valley tv show type characters you know like if you think of 2015 through 2021 as that sort of slow but exponential growth in the celebrization of vcs it then generated this sort of persona this meme of a vc and what it represents but from a power point of view from a uh assumptions and from a like uh values and and sort of you know like the the machiavellian nature of it it's like it's a characterization right it became it became a meme that that is plaguing the industry in some ways and and therefore vilifies the whole industry also keeping us true at times true yeah and there's a there's a really funny instagram account called vc memes and it is like painful true sometimes um but the the reason why i find that interesting as a phenomenon is because in in his book about zappos uh the book's called delivering happiness a path to profits passion um by tony shea he talks about the early team and then the team that the team that joined once things were obviously going to be like where it was cool to be in startup land and make money off of your options and the culture was very different the the culture of the the early people were very much like the culture of the early vcs in silicon valley like let's build tech let's build innovation let's build it you know because this sort of takes a village to build something kind of vibe into this sort of i'm a banker turned vc vibe and so that's where it goes weird because if you take those two groups and i'm generalizing here right but to make the point i need to if you take those two groups and you say one group is the sort of og venture capital meme which is like let's build companies let's help founders let's drive innovation it is the best for society and then you have the other one which is like let's spack it let's uh let's like do you know here's here's like a secondary safe on top of yours because it'll help you double your speed that you execute and then we can get in get out come on sell all options you know there's that meme to your question about which one can help change society well it's obvious with the celebritization of vcs what you don't know is which one of those two you're amplifying because the ones that are on one end will promote agendas like financial instruments that that are more for just the sheer sense of making money whereas the motivations for the other group the the sort of the ogs if you will is around how do i help founders build the best companies and break down walls regulatory jurisdictional international that will allow them to do that to build a better world and that's the distinction and so it's a it's a sword that cuts both ways depending on where where the mean spectrum you are and then to my question and i want to know your answer to this would you wish that the ogs in europe would be more vocal do you think that do am i wrong in saying that they should be yeah i think maybe the ogs is probably the wrong term because it implies like age or like vintage is something to do with it maybe the the spirit of venture capital versus the the greed of venture capital is probably a better labelization of it but let's i'll take your question as the spirit of venture capital should they be more vocal well in many ways they are they are already that way so for for example um jeanette from um la familia now a general catalyst has just recently hosted a round table around sort of the risks around ai in many ways they are i mean i think that the celebrization of any anyone whether it be a sports star a musician or a vc runs the risk of people overreaching their area of expertise you know it's like when you see a footballer commenting on politics fine you're allowed to have your own opinion but using your your platform as a way of influencing others is probably slightly disconnected because that's not your area of expertise and so i think to answer your question there are areas of expertise that venture capitalists have i think ai is one of them right because we see it every day in ways that others don't and at the same time we've invested in many companies that are doing that and i kind of understand the fundamentals of it and we have a and so for that kind of stuff sure we should we should probably and and many of them are in all fairness i think it it is already in motion a lot of voices are already in that equation where it can go wrong is that when you start opining on things that have nothing to do with our industry you know it's like one of my one of my old colleagues ivan for neti gave me advice that i still hold to this day which is you know speak from a place of where you have authority, not from where you don't.

1:20:45And like, I'm not a politician. The hell do I know about, you know, satisfying the needs of a nation with a specific agenda that is so biased by anyone's admission, you could pick any one single point industry, and it's always going to have a bias. Now, do I personally try to keep an open mind when I have a view and I articulate it? Sure. That doesn't negate that there are not individuals who are more inclusive of different things and challenges, you know. But it's not something that I would agree with you overwhelmingly, Andreas, because it's very hard to say to somebody, oh, because you are a well-known VC, you should voice your opinion on everything.

1:21:26Like, it's fraught with a lot of risk for those that listen to them and assume that simply because you're good at allocating capital, that also means that you're qualified to make statements about what climate change should be, you know, a policy should be? I think I come from a place of thinking of VCs as people very much spending their time thinking about both instruments and structures that allow, societal structures as well, that allow for cultural structures, that allow for the creation of new technologies and new companies. And I think that's, that's hugely important in today's society and something that we're maybe talking a bit too little about in the, in the mainstream.

1:22:15On the other hand, or in addition to that, I also think that we're also as VCs thinking all the time about what's going to happen on the technology side, what's going to happen on the, you know, in the future. So there's, there's very few that spend as much time thinking about what might happen in 10 years, What might the world look like? And for that reason, I think that the VCs do have a special vantage point. And by no means should they then speak on every single topic. But I think that there are topics where VCs would be incredibly powerful talkers or speakers. They are. But guaranteed, even the most qualified to talk about something will get it wrong.

1:22:53And a perfect example of that is if you look at even fiction. So imagine you decouple science from the equation fiction from the 1930s 1920s that predicted the future how the future world would look got a lot of ideas generally right right it had it had flying cars not quite there yet it had tvs that you could talk to somebody else in facetime they got that right it had many other like automation ideas right what was the one thing that got completely wrong they got completely wrong was that the people in the future were still wearing clothes from like the victorian era in other words like we sometimes can predict how technologies will affect us from a convenience point of view but not from a sociological point of view otherwise we would have put reins on stuff like social media way earlier that we're now trying to figure out how to do after the fact when the cat's out of the bag so i think even having an opinion because you're like most qualified person in the room does not mean that you actually have an authority on the actual outcome because there's so many other variables that are very hard to include, including how a population reacts to a technology.

1:24:09So concluding on this, Carlos for precedent, I think that's what you said. Carlos, thanks so much for joining for this conversation on the European VC podcast. We always are super excited to have you on this. And I'm just thankful every single time. And I hope that we managed to get a bit of your thought leadership into the VC crowd. And maybe someday you'll be taking it to outside of the VC crowd. It sounds like you won't, but I'll still push for it. I appreciate it. Appreciate it, Andreas. Same for you, my friend. Here's a few words from our beloved sponsor. This episode is presented with our good friends at Haynes Boon.

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