Matti Hautsalo, Nordic Science Investments: University Spin-outs, Multidisciplinary Bets & The Playbook to Scale Science in Europe

0:00Welcome back friends to yet another episode of the EAVC podcast. Today I'm excited to introduce you to Mati Houtsalo. It's always interesting when I try and talk to Finnish and Estonian guys, because my English is not good at any way getting me close to being able to pronounce your names, but I think I got it somewhere right, didn't I? You got it totally right, man. Thank you. You're a founding partner at Nordic Science Investments, and you're of course leading your OCH investing into university spin-outs and you're helping build science-powered teams, bridging disciplines beyond conventional silos and fostering rich networks outside of VC to support deep tech founders that come, of course, especially from the university ecosystems.

0:39You've just closed the first fund, which is a 60 million fund. And it's, of course, dedicated to academic innovation and to real companies. Before we start the show, a quick note. If you're building or running a fund, you know it takes the right partners. At EUVC, we only work with sponsors we truly believe should be part of your tech stack. Please do take a moment to hear about them. And if you do, reach out, mention EUVC. It's the best way you can support what we do. Thank you so much. Starting off, HSBC Innovation Banking. If you're a founder, a scale-up, or a VC, you need a bank that actually understands your world.

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3:22This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. So tell me, Mati, where did you come from to end up doing this? Right. So we have a very diverse team who come from different parts of life. In a nutshell, in our founding partners, we have tech transfer, we have a researcher background, we have a founder background, we have a VC background, and we have an investment banking background. So that's one of the main themes of our team. We try to be diverse as being a venture capitalist team. And this is something that we're looking for in our portfolio companies.

4:03the diversity as early as possible as well. Myself, my background is originally from consulting and asset management, jumping into the other end of the investment nearly 20 years ago, what was then called deep tech and raising finance for some companies and then joining a Finnish VC, being there for eight years, seven of them as a partner and did already our university-based startups, had them under my belt. And some of them went well and some of them didn't go well. But already that time I learned about this field and the fact that it's been a really lucrative area for investment, both for the LPs and for the university ecosystems in the UK and United States.

4:49So we wanted to embark on this one. And then in the between, I was managing a private investment company where we exactly did spinouts from North America, UK and Finland, which were more or less in the overlapping areas of AI and deep computation and biology and very much as sort of co-founder stage, all academic backgrounds. And it's a special field and we feel that it's underserviced in the continental Europe, definitely in the north of Europe. Masi, conventional VC wisdom back in the days was you never ever want to invest in a founder that comes directly out of university or from a research background.

5:31That has changed a lot, especially as we, of course, seen the dawn of deep tech and the more importance on having very verticalized, specialized knowledge. Can you talk a bit about that shift and what made you bullish enough to do a university spin-out focused fund? Yeah, absolutely. Thanks. So one of the things, of course, is what we look at is the potential technology. And this relates to the team building, which we will probably touch upon a little bit later. The technology as such and the innovation is the crucial thing in the beginning. In the long run, of course, everyone knows it's execution, execution, execution.

6:12But in the beginning, you have to have the core around which to build. And you actually do have to have a solid tech science person slash team to do that around. Something that we have noticed is that there are the exceptions that you can have a researcher making a great executive. In most of the cases, it's not the case, but you can have a researcher making a great key person in the team, for instance, the CSO or CTO. And that's something that we've been doing a lot, like bringing in the commercial expertise after our investment, if you believe in the concept. You're saying something there that also is super against conventional wisdom, so to say.

6:55Conventional VC wisdom would say you want to back a founder that can go all the way. And I only love founder-led companies, even at the public stage. It should be the founders, not someone hired in. Talk a bit about why you're contrarian on that. Well, one thing that we're seeing, for instance, in a lot of life science related companies is that what you need is a it's often a sort of a dynamic duo. It can be more, but it's often a combination of the tech and science and the business and commercial acumen. It's not so much about the titles. We have in our portfolio examples of companies where the founder is actually still the CEO and there's an excellent CBO doing the fundraising and the business relations.

7:41And we have cases where the founder is the CTO, CSO, and we found a great guy coming from outside to become the CEO at a very early stage compared to that new CEO's background and daring to take the leap because of the promise of the technology. But if you get these two persons to work together, then going to the next finance round later on where there are other investors in addition to Nordic Science Investments or NSI, as we call it, then that's so much easier. But having just the business when you have a company based on science, that doesn't work either. What's the value in having a university spin-out focused firm?

8:25Why isn't it enough that we have deep tech investors that just automatically, so to say, will realize what's happening out of the universities and the best will surface to them? Well, one of the reasons is actually what you pointed out in your previous question. I've been on the sort of traditional side of the table as a traditional VC. And it's exactly because they don't, science-empowered spinouts, don't tick all the boxes for the traditional VCs. for instance in relation to the team and the potential is sort of left there on the shelf of the university the IPR stays there if they don't get to spin out so the death valley is even bigger for science cases than for sort of more traditional deep tech cases and if they get actually the first investment the first private money after spinning out that's really crucial the statistics are pretty powerful for those science pinouts actually in both in switzerland and uk you have plenty of statistics showing that 90 of these companies if they get the first private funding they are up and running after five years which is totally the coppers uh opposite of the of the traditional you know wisdom that you know in three to four to five years you know 80 percent of them are dead.

9:46Now, one can ask that, is that a good sign or a bad sign? Because, you know, are they so early that they don't even die yet during the first five years? The cool thing is that in many of the cases, there's years or even decades of research behind the company before it's spun out. So if it's sort of incubated long enough under the academic wings, they are actually quite mature in terms of the proof of concept and and the validation of the tech. What edge does it give you, Mati, that you're university focused versus all other funds that are not? One edge that we have is know-how. We have a lot of tech transfer knowledge in our team.

10:29Three of our five, six people in the team have tech transfer background. All of them also have private sector background as founder or investment banker or startup entrepreneur. But we do know how to take the IPR from the universities through the processes to the companies, how to check that all the transfer of the core knowledge and especially the core intellectual property rights is done. And that's typically something that also keeps the traditional investors a little bit nervy with the early stage spin-outs. And we hope that we can function as a sort of stamp of quality for other investors, other deep tech investors to join us soon, then on the following runs, because they said, okay, NSI was there, they've done their work, they know this part of the chain.

11:19So, you know, we can tick some of the boxes and go and join them if we believe in the company. There's a bunch of critique, if I'm very honest, of the TTOs in Europe and the universities in general, how they deal with IP, how they deal with founders. Too often it's said that they block founders rather than empower them. Can you talk a bit about both best practices when it comes to TTO work, but maybe more importantly as a VC, how do you work with them to ensure that you actually have a working relationship that empowers the founders and makes the companies work rather than get caught? Right. That's an excellent question.

12:03and we could spend half a day on this, but I'll try to be short. No, don't be short. Go long, my friend, because this is one of our ecosystem's big issues, I think. So first of all, when you look at the TTOs, I think you have to separate two things. One is the process, how they deal with the promising inventions and the spin-out processes. And the other one is the strategy, what the university takes towards the potential ownership or what the university gets back from spinning out a company. So in both senses, you get a lot of diversification, a lot of heterogeneity. Even within one country, the universities are very different from each other.

12:43In the Nordics, we've seen universities where the process is actually quite elaborated, but the strategy leaves questions, to put it politely, from the traditional investor's point of view. For instance, some of the universities being a little bit on the greedy side in terms of wanting the early stage. What is not okay just to get it out there? Somewhere around the 10 % plus minus is definitely okay. What is challenging is when it goes above 20 % or so. But then again, if you look at universities, for instance, in the UK, they have had a lot of successful spinouts with very, very heavy stake for the university in the beginning.

13:24So maybe it hasn't eased up the path for the spinout, but they've made it great anyway. So I don't think it's necessarily a crucial stop sign not to go for it. In the end of the day, it is about the tech. You know, if the promise of the invention is so large, then you're, of course, a little bit more okay to accept the largest tech for the university. Having said that, one thing that makes a difference is that some universities have actually these university-based funds that can make even pretty significant follow-on investments. So that makes a difference. They don't necessarily bring the knowledge how to take the company ahead, but they can support them financially also after this pinout.

14:08So that does make a difference as well. Have you yet, Mati, run into a case where you thought the tech was awesome and the founding team is there, but we're just being blocked from being able to do anything here because of the university? The honest answer is no, but we've come across cases where there's quite a long discussion with university tech transfer offices or the people managing the funds behind it. But that has never been the reason to stop it in the end of the day. And going back to your previous question, I think it's important to understand that, at least in the Northern Europe, I would say that the people working in the tech transfer offices, they're pretty well trained.

14:54I mean, they are not perfect like anyone, but it's more about the resources. You know, they do tend to know what they should be looking for, how to take ahead the invention disclosures into the further process, how to help with the patenting and so on and so forth. But it is that some universities have like one or two people doing this. Then there are universities like University of Helsinki, where you have over 20 people in the team. And it's a totally different ballgame, of course, to manage the process. I think the sort of level of awareness and education is pretty good. So it's the matter to find those universities where they really need your help to sort of drag them out, even before the spin-outs and talk to the promising teams before they have decided to fund the company.

15:40And the smaller universities actually need more help. You know, they get much more out of an investor like us, whereas the biggest ones, which do tend to attract also the traditional VCs at least once or twice a year to sort of check their sort of undergrowth portfolio, they need less of that help. You often hear the critique of TTOs and universities being so strong-minded that it almost sounds like, I've definitely seen a lot of statements saying it's impossible to do spin-out investing in Europe because of XYZ. Is it your view that, no, if you're a VC that knows how to deal with the TTOs and knows the boundaries and the inner workings of a TTO and a university, the deal can be made.

16:33It's just a matter of knowing how to navigate it and what's going on on the other side. So in other words, if you're a VC with the right skill set, a good startup should not die inside a university. Welcome to our team, Andreas. You kind of nailed it. No, I mean, that's very much it. First of all, this is people's business. It's trust building business. The university, which we start talking to the tech transfer people and the related parties, it's not that they sort of welcome us with open arms right away. We have to explain to them how we work and start showing them with some teams that are maybe thinking of setting up a company so that we also give signals to the university how we work.

17:23And that's how you start getting the sort of deal flow also a little bit more from the sort of unofficial angles. And they start calling you. And by the way, that these guys might benefit from your sparring. You know, would you have a half an hour to chat with them and things like that. We don't want to try to change the ways the university do their stuff too early. We don't have the bandwidth. We can't start, you know, lobbying a university. Do change your strategy. It's rather sort of case driven, you know, that if we find a good case, then we start, how does this university do it? And then we find a way to do it.

18:03And we don't try to sort of change the way they do things. Maybe in the long run, some of them, they are asking our advice and comments on when they're developing their spin-out strategies and ownership strategies. And that's great, but we adapt ourselves to each of the universities, how they work. And that takes time. And that's one of our, I think it's one of our challenges. This is a labor intensive way of deal sourcing and doing it. So we have a, compared to the size of our fund, we have a quite a large team. We have to be there on the campuses.

18:56Now, let's shift to founder and team building, because I at least remember from back in my days, I was actually with a government-backed fund that was targeting specifically deep tech spin outs from universities. And one of the constant discussions that we had inside the team was, can this founder become CEO material? Can we find someone who can be a co-founder with a stronger commercial mindset? And honestly, back in the days, I didn't make it to see clearly whether it can be done or cannot be done. There are definitely some that are clearly on the spectrum of, no, you cannot go and find a co-founder.

19:40It needs to be a fully set team before we interact. And then there are others that say, no, if you want to do this type of work, this type of investing, you got to pull up your sleeves and actually or roll up your sleeves and actually do the work of helping form the founding team. Yeah, there are two standard cases. One is that we know and actually the team knows or acknowledges that they don't have the CEO inside the team. Then the question is that do they have an interim candidate to do that until we find the CEO together with them? And let's get back to how to attract the CEOs soon. But then there are cases where you clearly have a promising person in the team or attracted by the university already that there's someone in Finland they call often commercial champions.

20:33And some of them are better, some of them are less good, but some of them definitely can take the company out and to be the CEO for the first 12 months, 24 months maybe even. And it's really important basically just to sort of be open and talk with the team. What are your expectations? What is the expectation if there's an interim CEO in the beginning? You know, how long she or he is going to be in the position? Is that person willing to be there for the long run, which we typically hope in another CXO position? Often those people may trade either CTOs or COOs in the long run. The truth is that in most of the cases, you do need to recruit the CEO from outside quite soon.

21:18Because we have positioned ourselves so early in the value chain, we have a bit of an advantage. We can actually say to the CEO candidates that, look, we've only invested a small pre-seed investment, but we can go on with much more significant follow-on investments. And if you come to this really promising company and take it to the right direction, will be there and will be attracting other co-investors for the follow-on rounds. So for the CEO, maybe with an industry background, maybe with a little bit of wealth already built so that he or she doesn't need 200 ,000 euros a year right away, but rather sensible salary and rather, you know, incentivization state.

21:59So he or she joins the company and understands that, yeah, it's worth taking a bit of a risk, you know, and let's see if we can really make it and if I can help them to go to the right direction during the next year, and then we can go for the follow-on rounds. We've seen cases where the teams themselves from university have tried to recruit, and it's really tough because that's where the CEO thinks that, wow, there are a lot of risks. Can you tell me a bit about the principles that you work on the basis of when you're thinking about incentivizing an incoming CEO? Again, it all starts talking with the team and if needed, getting the university tech transfer office behind it.

22:42But you start talking about the cap table really early. And this is not rocket science, but it's something that is a typical challenge that, for instance, a team has a senior researcher who will stay in academia and has been important in creating the invention, but will not commit himself or herself into the company and is going to stay in a fairly passive role in the academia. and because the team has been thinking that this is a senior person having helped a lot, let's give that person a 20 % stake or 30 % straight, which is a no-go. And, you know, in that case, we can be the sort of constructive bad cops.

23:25By the way, university tech transfer offices, they do know that this is not how you should build the cap table, but it's much easier for us to come outside as investors and say that this is not going to fly because the university tech transfer offices, they will work with these professors and researchers also in the future. So we talked to the team, we talked to the senior researcher that this is more how it should look like. And then at the same time, you build, of course, the option pool for the future CEOs, future CXOs, key recruitments to be incentivized. So we quite typically, we enter there at some sort of a 20 % option pool ready for the first key person recruitment, who is quite often a CEO.

24:09Can you talk a bit about the core terms of that type of hiring that are really important to get right and where you see people going wrong? The core terms is first that before that hiring process starts, the founder team accepts. We talk it through with them, what it means in practice. And we also talk about vesting, which of course applies to the founders as well. And it's a lot of sort of sparring and education really, to put it bluntly. then it's you know in some cases they are they are so promising that you can you can get the first recruitment the ceo with a little bit lower stake and lower option pool but but it all really boils down into the number the the share of equity offered to the ceo that's i there are other things of course to be thought of but that's really the main thing how how to build the cap table and and with the right enough enough pool for the early ceo joining the company from outside How do you think about, because a notorious problem is that researchers, when they realize what it takes to actually be a founder, they realize maybe my life as a researcher was a bit better.

25:25And for that reason, you have researchers running for the hills after a year or two. How do you work with this? How do you ensure that doesn't happen? And how do you protect, from a terms perspective again, against that scenario? vesting is one obvious thing and you have to be transparent someone returning during the first 12 months you know that's that's you know it's it's standard stuff that there's a cliff for for 12 months and that's what we typically have and after that the vesting goes linear in linear manner and we're kind of in this sense we're sort of teaching them the the VC way from the very beginning it's important that the cap table is sort of for the commitment, it's not for rewarding what happened in the past in creating the invention or the and that's often the most difficult discussion to have.

26:20Then of course the people, it's a soft skill but you can see that you know some of them actually from very early stage they start running towards the goal and you're not really worried about the motivation. What you are worried about is the actual performance and the execution. But the motivation, that is actually very soon to be seen. And it tends to be so that those who are not motivated, they don't jump into the spin outside in the first place. Matti, I'd love to shift topic or focus of this conversation to investing beyond silos, so to say, because one of the things that you're very bullish around is multidisciplinary cases, where you're seeing two or multiple fields coming together.

27:06Right. So this is what we call in a sort of branding manner as well. They are the hidden gems for us and for everyone. And this is actually one of the sections which is even more underserviced than the rest of the science-empowered companies. Investors, for all the good reasons that we know and very solid reasons, tend to be very focused on the silos that they understand. We all know why that is. Now, especially when you talk about cases stemming from basic science, some of the most transformative ones are really, and this is not just BS, it's actually, you know, the real out-of-the-box thinking.

27:48It's like people from two faculties, very different faculties talking to each other and, you know, sharing what they know. And there's maybe some pretty standard stuff, but can be applied in your other field or the other way around? And some of the best cases come from there and someone needs to dare to be there. And that's one of our main theses, that you have to dare to be there in the multidisciplinary cases. I'll give you an example. Our very first investment was Perfect Technologies, which is it is a food tech company, which is actually coming from the physics department, material physics department.

28:24So they use ultrasound to manipulate plant oils in such a way that you get the consistency, the structure and taste of butter, but you get nearly 0 % of saturated fats. No plant oils, no coconut oils, very, very, very green technology at the same time. Where did it come from? It wasn't just the physics guys. There was a top guy, research-wise from the food biology side from a different faculty of the same university and and he was a top guy in in olio gels which is which are these gels around with which which which they use in their products and this is a great example the food food tech investors which by the way is a very hammered area validation wise at the moment you know they would look at oh it's material physics stuff and what about the scaling and and it's it's actually a powerful but a a bit complex patent portfolio created there.

29:20And they are sort of not necessarily looking at it because it's not a traditional one. And then sort of physics or say material sciences investors look at, oh, it's food tech. Not for us. No, no, no. And I think that's a classic example. Now, we have actually closed around just a small series A round with Perfat just a couple of weeks ago. And we did get some food tech investors from Central Europe to join us. And I think that's a prime example where you can then attract others after us stepping in. And I think we will need the food tech guys in the portfolio and as the owners, co-owners for us to take the company ahead.