Enrico Mellis, Partner at Lakestar (+ a guest appearance from the guy building the European SpaceX)

0:00Daniel Metzler:We are back here at Bits and Pretzels now with Enrico from Lakestar. Enrico, tell us or our audience who don't know you a little bit about yourself.

0:09Enrico Mellis:Cool, yeah. So I'm Enrico. I'm a partner at Lakestar. I lead the early stage fund. I've been with the firm for three years. Before that, I was with another firm called Portrait Ventures for a little more than four years. I've been doing early stage for the past nine years. And before that, I was an operator, as we say, in a startup that got sold to Deliver Hero called Fedora. joined pretty much in the beginning and then left when we were doing the IPO with Delivery Hero. Lakestar, I mean, many people know us, but we are a generalist fund focused on Europe. We do mostly pretty much everything, but we have a lot of deep tech also on our portfolio.

0:49Enrico Mellis:We do defense as of late. And, yeah, many companies you might know, Spotify Revolut are like the big ones, and ESA Aerospace for example, Deep Tech.

1:00Daniel Metzler:Tell us a little bit about your investment focus and your portfolio companies. I know you've done like a very broad range.

1:06Enrico Mellis:Yeah, so I've personally never had a sector focus. I've always done stage focus so to say. I like to invest early, I like to invest in teams that just strike me as somewhat different and unique and that can be a team like Fixer, who we've just recently invested in, or a team such as Instruct AI who's just recently launched. There are many examples I can quote. SC3 from Munich is a great defense example. And yeah, I just look for unique teams in hardware-crack spaces.

1:48Daniel Metzler:Amazing. We actually interviewed the founder of Fixer, but before we get on to Fixer, can we talk about ESA?

1:52Enrico Mellis:Yeah, so funnily enough, I'm here with Daniel, the founder of ISAR. So, you can bring him in, actually. So, you have a mic? Yeah.

2:06Daniel Metzler:Great. Always prepared.

2:11Daniel Metzler:Amazing. Perfect. Well, ISAR's had a huge year. It became a unicorn. You had a successful flight early this year. It's great to have you. How important do you think it is that Europe has its own space companies? Well, the space industry right now is about as big as the global smartphone industry. And it's supposed to become almost as big as the car industry, definitely bigger than the pharma industries and so on. So when we want to economically use that opportunity, we have to properly invest, we have to build up the capabilities. But I think honestly, we have all the ingredients necessary. We'll just need to execute.

2:46Daniel Metzler:Amazing. Maybe for our audience who doesn't know ISAR as well, could you maybe just give us a quick rundown, what is our aerospace does, what you focus on within the broader space? We design, build and operate rockets to put satellites into space and so everything that you do in space or from space you first have to get there and that's what we do. Very cool and can you maybe explain what are the typical use cases that you work on that the satellites need to be put into space for just to not skating at the core. There's about a million different use cases of what's allied to anything from predicting the weather to telling the farmer when to harvest the crop.

3:27Daniel Metzler:Obviously since a few months there's been a bigger push for defense use cases as well. Germany just announced a 40 billion US dollar investment into German space capabilities. And that of course is massively fueling the industry. So overall it's a lot of dual use technologies right now. but generally speaking there's so many commercial applications and military applications it's hard to actually get a list of it. Can you talk about the launch early this year and maybe like the plans for future launches? Oh the goal for the first flight was to not blow up the path and so we're very happy that we didn't blow up the path and of course on the second flight we're much more confident obviously now that we've actually tested the whole system for the first time in an integrated way we're actually going to carry payloads on the second flight So we have a few more tests to do and then we're up and go for launch hopefully very soon.

4:18Daniel Metzler:And do you know when yet or not? As soon as we have the test done. Amazing. So if weather plays along, hopefully it's going to be very soon. And what's the hardest thing about building a space tech entrepreneur? What's not hard? The interesting part is actually that obviously while the engineering is hard, actually finding the right investors such as the Lexar team is even more difficult because people have no connection to space. People often think of space as you know very romantically flying to the moon, flying to Mars, but the real opportunity of space actually here on earth. We use space and space data to accelerate and digitize life on earth and that's also where all of the opportunities are but people don't have that connection.

5:05Daniel Metzler:So as soon as it clicks in people's minds it's oftentimes very straightforward to actually get them going. So maybe space needs like a rebranding, like what about close to Earth space? Exactly. Yeah, people just don't have kind of that personal connection to it. But as soon as people realize that space actually is a part of their daily lives, even though they don't touch the satellites, it helps to also tell the space story. And what is the story that you told to get your investors on board? It obviously changes over time. Right now, of course, we're living in a world with very strong geopolitical tensions.

5:42Daniel Metzler:And so if you just imagine if an adversary nation would actually launch a missile at bits and pretzels. An intercontinental ballistic missile takes about 30 minutes to fly halfway across the world. So if somebody launches a missile right now, it will hit here in 30 minutes, and we don't have any capacity to even track it nor detect it. I would love to get a 30 minute warning and say, hey, this is not looking good to evacuate your building because you may actually be subject to an attack. And those are all capabilities that I think we actually need to build up. And we can't just rely on foreign nations, which also have cut off other nations from access to satellite data.

6:25Daniel Metzler:Yeah. So there's like a sort of national interest piece to all of this as well. It's not it's at all. It's a national interest piece But it becomes the personal impact piece very quickly when you want to you know, live life life beyond 30 minutes What do you what's like the biggest difference you see between building a company like this in Europe versus building it in the US? I would say in general in the US people often see the upside potential and and they invest in built companies based on that upside potential. Whereas unfortunately in Europe, people always want to just mitigate their downside risk.

7:05Daniel Metzler:So they're much more focused on the downside cases instead of maximizing the upside potential. And that's unfortunate because that's also where the really big companies are built on the upside potential, not on the downside protection. Yeah, it's a tough cultural thing to overcome just like that. Well, luckily with our Lakeshore friends, we have some European investors who really allow themselves to think back. That's amazing. Daniel, thank you so much for your time. Of course. You're welcome. Good to see you.

7:34Enrico Mellis:Thank you for jumping in. Thanks so much.

7:37Daniel Metzler:Great to meet you. Back to you.

7:41Enrico Mellis:Where were we? I wanted to ask about Fixer.

7:44Daniel Metzler:So we had the founder a few weeks ago. Richard. Yeah, amazing growth they've seen. I've been using the tool. I wanted to ask, what gave you the conviction that this was a team or a product that you wanted to back?

7:57Enrico Mellis:So, Fixer's an interesting case where my early stage lens kind of hit first. So we saw, I mean, it's a new company, right? Essentially, they're less than a year old. And I met the team, I spoke to the team, and I was like, okay. Basically, before I knew Traction, I was kind of curious to find a way for Alexa to invest just because these guys are really obsessed with what it is they're doing, which is essentially building an assistant, right? They've done that before in the more traditional sense of offering assistance to people who want to pay for them. But kind of the AI aha moment for them was, hey, we can basically roll this out to everybody because email is a great distribution system of this service.

8:43Enrico Mellis:And I think that's when kind of for Legstar, our later stage lens also snapped in because what we saw was explosive growth at the same time, very, very low churn, at the same time very large enterprise contracts. So this whole idea of, oh, maybe this is just, you know, AI curiosity revenue, as many people call it, was kind of mitigated through the way they win their customers and the way the product works. and the kind of the third element to that was so this is a great business in and of its such I think they can easily scale this with what they're doing you know foot to the metal pedal to the metal and goes like 50 million revenue or 60 70 80 but email for so many industries and real estate is recent brokerage is one example that they're they're tackling is kind of the neuralgic point of you know it's basically a system of record automating on the system of record is essentially helping automate the whole job.

9:40Enrico Mellis:So I think it's a great wedge into what is essentially some of the biggest industries in the world.

9:46Daniel Metzler:Yeah. I mean, I also found it really interesting with them, this whole backstory of having done it as a service business, which gives them such a clear, like, why would they now be the email person and not, you know, because email is also somewhat of an obvious problem to some. So I think that's such such an interesting thing what do you like look for in founders what is your

10:07Enrico Mellis:early stage so you focus on founders yeah what are the quirks and tricks you look for yeah so I think a lot of it comes down to incentives as a why are you or why have you been doing what you've been doing so most of these people I'm also the founders that I work with personally have gone through a prolonged period of just enduring discomfort and through some way or another and through some way or another they found a wedge into their little piece of excellence and oftentimes that is combined with you know it's a two edged sword in the one way they're aiming for something very glorious like building a huge company and all that the other side is why do they keep you know, objecting themselves to this kind of pain and constantly try to do better.

11:01Enrico Mellis:And I look for people who've been constantly doing this. So you can kind of, as I talk with, when I talk to founders, I speak way more about what they've been doing in their life and what led them to get to this point rather than, oh, what do I think is my thesis for how the future... And the details of this market. The details of the market, the details of the model. I don't look at business plans because at seed stage I find it mostly ridiculous. I mean, I do look at, you know, somewhat the general mechanics of the business at a later stage in the process, but generally I'm more interested as to why are these people doing this to themselves.

11:35Daniel Metzler:Yeah, yeah. I always found as an investor, we like believe we can predict the future where I think we actually can't. Yeah. But we can look at the past of the teams and use that as a lens to see whether they can be excellent versus like predicting the future of some market that we don't know how it's going to develop exactly. I agree.

11:55Enrico Mellis:I think there are, we see archetypes, and there are some who say, look, I like to intellectualize this and kind of see how things play out. And I think some people have been, at least on track record, very successful doing that. Some of it might be reverse engineered, but that's just my conjecture.

12:14Daniel Metzler:Hindsight bias, survivorship bias.

12:16Enrico Mellis:But me personally, I think that if all the factors defining success are so chaotic and they're so complex and there's so many, maybe the only thing to focus on is input and input is essentially the founder team. So in a way, I simplify it and then I let a little bit of magic luck and hard work and toil and sweat and tears and blood do the rest.

12:43Daniel Metzler:Can we ask about the continuity fund? Yeah, the continuity fund. So, Lensley just raised, what, 200 million, 250? A little more than that, yeah. Yeah, and this is, from an outside perspective looking in, it looks like, you know, an attempt to sort of fix the problem of a lack of liquidity within a lot of early stage investing across a lot of tech, but especially European tech with this kind of still closed IPO market. Can you talk a bit about the fund, what you're going to be investing in, why you did it, that kind of stuff?

13:09Enrico Mellis:The continuation vehicle is essentially a fund of existing Lexus portfolio companies that are now being carried basically by a different vehicle. So it's basically prolonging their ability to deliver returns to the investors of the vehicle. The reason why we do this is I think, and this is now a general observation, I think that over the last 40 years of venture, you can observe that every 10 years the entry price has doubled or tripled. the exit price has probably increased in some periods four or fivefold, which is all well and good, and it kind of fuels the whole interest in the space and more investors coming in and more capital coming in.

13:48Enrico Mellis:Mathematically, though, holding period increase kind of cancels out IRR, the higher IRR numbers that we all kind of know the industry for, right? So with every 10 years in the past, kind of holding period has increased by five years. So what happens is, I mean, Klarna took 20 years, and I think that going forward, we're going to see more companies being held in private markets for longer. That is partially, it was partially an effect of, well, the IPO window just being closed. On the other hand, it's also just, there's just so much private market demand to participate in these companies that we're now seeing many companies with trillion dollar valuations and all that possible in the private markets.

14:29Enrico Mellis:that will mean that especially early stage investors and relatively early stage investors like us even series b you could consider early stage in this in this world the 10 year plus one plus one fund model is just a blunt instrument for something that is longer term more complex so it is a way for us to obviously show dpi as in money paid back to our investors but i also think it's a sign of how the future will go i think we're going to see and this is i mean time lagged after the lagging factor in Europe but because in the US there everybody's a little bit further ahead in that but I think we're gonna see more secondary funds I think we're also gonna go away a little bit from the gospel where you know the founder friendly BC's they stay with the you know they stay until the very end because simply if you're staying private for 20 years your 10-year fund lifetime you're gonna run to problems yeah so I think it's to become more normal that liquidity is created within the private time span of a company.

15:29Daniel Metzler:Yeah, because there's also so many different types of investors. Some of them want to cycle out. Some say, actually, the good companies, I just want to stay in. I don't even care about the date of the returns. So you want to cater to all those different realities.

15:42Enrico Mellis:Exactly. And if you think about it, if done well, it makes incentive alignment for everybody so much easier, right? The founders technically shouldn't have a problem with that unless it's bad signal. If it's not bad signal, why not? So ultimately, I think it's about creating scenarios in which this has worked. And the more this has worked, we've just spoken with Daniel about downside protection. In the beginning, this might feel like a new thing. I think in 10 years, we're all going to think about, okay, how normal is this?

16:10Daniel Metzler:And do you think it will be firms like Latestar having their own version of this fund? Or do you think we're going to see more entirely separate independent secondary funds? I think both.

16:19Enrico Mellis:I think both is entirely possible. I think a continuation vehicle is a very hard thing to build. It's just a lot of effort. It's a Herculean effort, basically. I saw the team. I was not fully involved on that front because I was dealing with early, but I saw the effort that went into it. That's a lot of time that it costs, and you need a platform to be able to pull that off. I think for all the funds that are smaller and don't have the operational expertise to do that there will be sort of the stand-alone players.

16:50Daniel Metzler:Amazing. One last question because one of the most common things I think we as VCs get as a question is how does one break into a VC? What's the recommendation for young VCs? Do you have a piece of advice for sort of the baby VCs? Before you answer that, when I was doing research for this interview, I always asked chat GPT and perplexity, and Enrico was described as a well-known rising star in VC. Oh, well. So not only how did you get in, but also... It also sounds a little bit like an LLM thing to say. Yeah.

17:22Enrico Mellis:You know. You are a rising star. You're a star already. Yeah. Big shout-out to Marius from Peak who helped me engineer this. Search engine optimization.