Guy Ward Thomas, Partner at DN Capital, and early investor in Europe's largest AI exit to date

0:00Guy Ward Thomas:Okay, Guy, welcome very much to Scaling Europe. We are thrilled to have you. Hi Seb, it's great to meet. Thanks for having me. My pleasure. Why don't you just kick us off by giving a quick intro into who you are and what you do. Yeah, absolutely. So I'm one of the six partners at a venture capital fund called DN Capital. We're a Series A focus fund with about a billion dollars of assets under management. And we invest predominantly in Europe and the US. Amazing. How did you get into venture capital? So I was lucky enough to have some friends who were working in VC before I took the move over and was lucky enough to have opportunity to speak with them about their career.

0:36And so they persuaded me they were working in various funds, Eight Roads, Highland, and they blazed the trail for me.

0:44Guy Ward Thomas:Yeah, amazing. And DN Capital, yeah, very big across the continent, great investors, an amazing portfolio. Can you talk a bit about, you mentioned Series A, but is it specific sectors, specific industries? What kind of things does the team focus on? Yeah, absolutely. So we think of ourselves as an early stage fund. So that means seed and Series A focus. We do tickets of two to ten million dollars roughly. And in terms of sectors, we really divide the world into two areas. We have an enterprise software and AI team where we've done deals like Encode, Cognigy and Decker. And then we have a consumer internet focused team where we've invested in companies like Autowan, Remitly and Shazam.

1:26Guy Ward Thomas:And what's your primary focus? So I'm much more on that first team, enterprise AI and software. I specifically focus more recently in companies that are selling software into financial services and selling AI and automation tools into financial services. Interesting. So I guess that's quite a niche. Why are you focusing there at the moment? Well, one of the things that we've realized is that the most exciting place to deploy artificial intelligence and a lot of the latest generation of technologies is in complex industries, solving difficult problems. And financial services is one of the biggest places where you can do that.

2:04There's regulation, there's data security concerns, there's big legacy tech stacks. And those are the kind of problems that we think are the most exciting to solve from the perspective of creating moat and differentiation long term.

2:16Guy Ward Thomas:got it and i think an example would be fimple is that right because that's that's almost like cloud banking software is that have i understood that correctly so is that an example of that the type of company that you're looking for absolutely right so so i did three deals last year one one was fimple which is a modular composable core banking system focusing actually on uh the middle east north africa and turkey another was a company called unique which is an agentic ai platform for the financial services industry, working with some of Europe's biggest banks. And they're really helping those banks to deploy AI in a compliant, safe, and productive and efficient way.

2:56Guy Ward Thomas:Amazing. What was it that kind of excited you about some of those companies? Well, as I said, we're early stage. So the most exciting thing is almost always the team that you work with. So both of those companies were founded by people who you would call, I guess, kind of industry veterans or repeat founders, people who really knew what they were doing, who understood the complexity of enterprise software. And I think that's something we spend a lot of time trying to work out when we meet founders for the first time, how familiar are they with the kind of problems they're going to encounter when they go into large enterprises to deploy their softwares.

3:33Then the other is just the size of those opportunities. um you one thing that we see in financial services is very large companies with big brands and big big balance sheets of big willingness to invest but not necessarily the strongest internal

3:49Guy Ward Thomas:capabilities to build their own tools got it okay so you see there's a real opportunity there for for technical teams who are using that kind of like new and advanced tooling to help some of those legacy players. I wanted to talk quickly about Cognigy, right? Cognigy. Cognigy? Cognigy is. Cognigy. Is that it? Cognigy. Yeah, Cognigy. You know, it was in the news like a month or two ago, D & Capital was all over it about the acquisition. You were on the board for a number of years. I think you led the investment. Was it a number of years? That's right. We led the Series A round in 2019. Are you able to take us on a bit of that journey?

4:25Guy Ward Thomas:You know, why you initially, or why DN Capital initially invested, what it's been like the last five or six years and now what it's like to have that amazing exit? Yeah, absolutely. I think, first of all, big hat tip to the team who did really all the hard work and incredible job on it. When we first invested in the company, the space was very noisy. It was very easy to dismiss the space as just another chatbot company. And so one of the things that we spent a lot of time doing was meeting all of the different players in Europe and some of the players in the US and really trying to understand what we thought was the winning product vision for the space.

5:13Because at the time, a lot of these companies were of similar sizes, similar revenues. They all had a few flagship logos. They were all doing what you might call essentially the same thing. but what we saw in Cognigy was a company with a very holistic product vision that always built with the idea of how do you build enterprise flexibility into the product so they were always very focused on that enterprise that enterprise challenge so we led the series a in 2019 at that time there were a bunch of different companies globally that were trying to solve this space. And that narrowed down very quickly over the next three to four years to three or four global leaders of which Cognigy was one.

5:59And I think the reason that Cognigy were able to get there was a real focus on product and making their customers happy and not getting too caught up in the VC hype and trying to make investors happy all the time.

6:12Guy Ward Thomas:Yeah, amazing. And it's a remarkable story. I remember when I spoke about it on LinkedIn, and there was some pushback from people who are saying that although it's an amazing outcome an amazing result it was ultimately sold to a u.s company and we're seeing a lot of this like a lot of uh the u.s bigger tech giants snapping up both the european talent and european tech companies what's your take on it i mean on i guess what's your take on the u.s companies coming in and buying out european companies i think first of all, we have to take the win. The first thing is, look, this shows that we're able to build globally leading technology companies.

6:52And if you look at any technology analyst report on the space, Cognigy were listed number one or number two, whether that's Gartner, Forrester, IDC, Opus, you know, Cognigy had built the best platform in this space. So let's look at the positive side first that we have the talent and we have the the ambition and the and the funding ecosystem able to get us to that point but i think we have to take the criticism as as europe we have to take that criticism seriously which is we can't rest on our laurels with a with a billion dollar exit in ai i mean in the long term that's going to be um it's going to be eclipsed hopefully by a lot of other larger businesses.

7:35And I think we do need to think carefully about how do we make it exciting for founders to keep building in Europe? And what does that mean in terms of, and it's really at that growth stage that I'm talking once businesses have scaled, I think our early stage ecosystem is very healthy. But what do we need to do in terms of public market reform to make it exciting for companies to stay in Europe and list in Europe. What do we need to do in terms of talent density that allows you to scale a business from 200 FTEs to 2000 FTEs or, you know, which is the kind of level you need to be when you're looking to emulate businesses like Salesforce or OpenAI or take your pick of global software leaders?

8:22Guy Ward Thomas:Yeah. And do you, you know, looking at recent news, recent rumors, someone like Mistral AI rumored to be potentially being acquired by Apple. Do you see that as a problem in terms of Europe owning some part of its own tech stack? Or again, do you think that could be an amazing result for a lot of early investors, provide a lot of capital and a lot of liquidity, which could then help further the ecosystem? I think at the first stage, we need to consider what makes sense for these businesses and to keep the innovation that these companies are doing going. And in the case of Cognigy and Nice, in the case of potentially Mr.

8:57Allen Apple, you're talking about strategic link-ups that make a lot of sense for the companies involved. And that strategic business logic has to take precedence, I think, over whatever long-term European flag-waving we want to be doing. Venture is a long-term industry. We We can't be looking to the current generation of entrepreneurs to solve this problem in a heartbeat. We need to be thinking more systemically about in five years time, when you have the next Cognigy or the next Mistral, what are the set of environmental factors we need for those companies to have to persuade them to keep going and build the 10 billion, the 100 billion dollar business that we know we can build in Europe with the talent we have, but we don't currently have the incentive structure that encourages people to keep going and do that.

9:47Guy Ward Thomas:Yeah, okay. So you think it's about fixing the capital markets, fixing that late-stage growth capital to equip founders, European companies, with the tools to carry on building? I would focus on two things, the IPO market, because if you look at the US and the big companies in the US, they go public and they know that the public markets there are going to reward innovation and growth. and they have the investors and the liquidity in those markets to do that. I don't think we've convinced entrepreneurs that that is the case in Europe and we need to do a better job of that. And the other thing is talent.

10:21We have the talent to start businesses, but do we have the depth of talent to keep building and compounding those companies to become$100 billion type companies? I'm not sure we necessarily do.

10:35Guy Ward Thomas:That's not an opinion I've heard on this show. that you think that perhaps there's like a gap of talent specifically around helping companies maybe go from series B, series C to that IPO stage? For me, it's less the type of talent, it's more the talent density. So if you look at Silicon Valley, or maybe New York, you have incredible talent density in those markets to build very, very large companies. In Europe, we are more fragmented in terms of where our talents sit. So if you, many of the companies that we found in Europe, they get to a certain scale and then they think, okay, we need to open a separate European hub somewhere or maybe we need to open a US hub in order to keep attracting the kind of talent that we need to keep the business going.

11:15We haven't built that kind of depth that you see in Silicon Valley that would enable you to hire enough people to scale the kind of business that we're talking about in Europe. And then I think the other thing is just look at the top technical universities in Europe versus the US. The universities in the U.S. have more funding. There are more of them. At least until recently, they were very good at attracting international talent to those universities. And we have an opportunity now as Europe, I think, to really become a beacon and elevate some of those technical universities that we have in Europe, whether that's TUM, ETH, Oxford, Cambridge, Imperial, and bring the best talent from around the world and get them to set up and join great companies in Europe.

12:04Guy Ward Thomas:And do you think European governments and European universities should be doing more to take advantage of the opportunity that the U.S. is potentially giving us by not being so attractive to international students at the moment? Yeah, I mean, I don't think we should see it as necessarily a competition with the U.S. I think we should be doing it regardless. Right. We want to make Europe as attractive a place for the best talent in the world to come study and create businesses. Yes, I think right now we have an opportunity to put Europe up as a credible alternative, but it actually takes a lot of work, I think, before the best students in India or Hong Kong are going to look at Europe and put it side by side with MIT and Stanford and say, OK, that's the place I'm going to go and study and build my business.

12:46Guy Ward Thomas:Got it. I want to talk about your career, your kind of getting intervention. We just had Will on. Will was an exit founder who then turned VC. we spoke to Peter Specht a few weeks ago who joined Creandum, very junior, rose all the way through the ranks to partner. You've done something very, very similar at DN Capital, you know, kind of joining as a junior mid-level VC and being promoted pretty quickly by VC standards to partner level. I'd love to know, like, you know, how have you managed to do that? And have you got any advice to other people who are maybe associate, principal level? what does it take to really get to that partner level?

13:22I think the first thing I would say is forget speed. Don't try and be quick. Never try and do anything quickly in venture. It's a long game and shortcuts tend to come back to bite you. And whenever I've taken them, they definitely came back to bite. So, and I think if you try and do things too quickly, you'll chase hype and you'll chase momentum. And that's rarely the best route to building a good portfolio in venture. I would say two things. Really try to compound good decisions. I think building a good career in venture is really about just compounding good decisions over and over again, whether that's the people you meet, the companies you invest in, your approach and investment framework.

14:05Try to build those things out. I would say the other thing is really try to become a domain expert in one area. become the person that founders and other investors want to speak to on a particular subject and who respect your knowledge and perspective in that space. Got it.

14:24Guy Ward Thomas:Okay. So try and carve out your niche, become an expert. And then I guess deal flow will come more naturally to your doorstep. You'll become a trusted voice in that area. Yeah, exactly right. Like if you're joining a venture fund now as an associate, let's say, There are so many new areas of technology that, frankly, the partners will not have had the chance to fully research and get up to speed on themselves because they're sitting on 10 boards and they've got legacy portfolio to manage. And think about you as a new associate have a real opportunity to find new areas of innovation and say, I'm going to make this my own.

14:58If you do that within a firm, it gives you a great opportunity to really stand up.

15:03Guy Ward Thomas:No, that's a great point. You mentioned there the kind of sitting on boards and that taking, I guess, like a decent chunk of like a VC partner's time. I want to get into, you know, you've got experience sitting on a number of boards currently. What is the role of a VC who sits on the board of a startup? First job, if companies are going well, is to make sure you get out of the way. Fundamentally, you're there to help this company build. I would say I would like to think where we've been most helpful to our companies is more in the strategic advice domain that's what milestones you need to hit when to fundraise you're in a sticky situation and if you're in a sticky situation as a founder our objective is to be the investor that you want to call at that time and talk through those problems I think every VC fund will talk about introductions and hiring and can you help with internationalization.

16:04And I think if you're sitting on a board, you're definitely doing all of that. But I think founders appreciate the investors who get their businesses and who really spend the time to understand them and are able to help them think through strategic problems, whether those are commercial or whether those are funding related.

16:22Guy Ward Thomas:And do you think there's a limit to how many boards a VC partner can sit on to kind of make sure they have that depth on each company that they serve? Yes, and I think it's going to vary from one individual to another. So I don't think there's one number for the whole industry. Depends how many new deals you're trying to do at the same time. Depends how much bandwidth you have as an individual to be able to do those things. We all have different kind of constraints, I guess. But I think it's hard if you're seeing a VC come to you as a founder and say, I already sit on 20 boards, but I'm going to make you my one special snowflake.

17:02You should question that.

17:04Guy Ward Thomas:Yeah, that makes sense. I want to talk also, you know, you've been in VC for a number of years now. And VC, as you mentioned, is a long, long, long-term game. But I think you joined, Dian, maybe 2018, 2019, was it? No, I joined earlier. I was in 2015. Oh, 2015. Okay. So yeah, like you spent a decade in venture now. How has the market changed? You've obviously been through, I guess, the hype bubble of 2021 with sort of people are saying we're now in another hype bubble with AI. What have you seen change and kind of where do you think venture is at the moment? Yeah, it's a great question. We're definitely seeing a bifurcation in the market where you're seeing a few very, very hyped companies or very fast growing companies getting a lot of excitement.

17:53And I think there is then a cohort of other good businesses that are maybe getting a little bit less attention as a consequence of the hype around some of the fastest growing businesses, which I think is an internalization of the power law dynamics that people have really realized play out in venture. So, which I think could well be justified at a certain point, but I'm not sure that it's going to yield the best returns environment if everyone is chasing, you know, a few businesses and not spreading their nets wider to look at the great areas of innovation that are happening elsewhere. And that's both the geographical comment and the sector comment.

18:39So one of the things that we're doing at DN is really trying to focus on

18:44Guy Ward Thomas:where do we see the most complex problems to solve, which may not be the ones that you're able to solve most quickly and show the most stellar 10x year-on-year type growth, but is innovation that you can compound year after year and will lead to much more sustainable and exciting long-term businesses with more moat. So I think that's one of the trends. Are you going after top-line metrics or are you building to solve very complex long-term problems? I think there's a really exciting resurgence in deep tech, which I think is deep tech and defense tech, which were terms that weren't really bandied around at all when I joined the industry.

19:30There was a lot more of a focus on kind of consumer internet investments at that time. And I think consumer internet has got a bit quieter, but I think it's also a space that we think is exciting and interesting to keep looking at.

19:41Guy Ward Thomas:So it sounds like you're not changing the way that you are necessarily assessing companies too much. you're still looking for, I guess, like amazing founders who are building products that can solve real problems. I've spoken to other investors who now say that they are looking for higher revenue growth and looking for leaner teams in the age of AI. Are you doing the same to an extent, or are you less focused on the revenue growth, less focused on team size? Those things are kind of stayed constant. You're more focused on, are they solving a real problem for a big market? The main thing that we always focus on is how real is this problem?

20:19How effectively does this company solve it? And do we believe this is the team that can continue to grow and develop and is demonstrating real vision in the space to go and solve something long term? In terms of the revenue, benchmarks are shifting. The growth of new AI companies are shifting benchmarks, but I'm not sure we've yet agreed on the consensus for what the benchmark should be. Because if I'm growing ARR 10 times year on year, but that ARR is retaining at 20 % in month six and it's at 0 % gross margin, I shouldn't be considering that on the same basis as I used to consider ARR that was retaining at 95 % annually and at 85 % gross margin.

20:58So benchmarks are shifting. We're expecting faster growth, but some of that growth is lower quality revenue. So everyone is in the process of resetting their benchmarks for different industries, depending on what products you're building.

21:11Guy Ward Thomas:You know, we see a lot of stuff about top-line growth, ARR, revenue, something I'm going to be getting into with Saul Klein later on, because we've just seen the release of this big report about European thoroughbreds. You know, one of the questions that I was going to put to him, and I'm actually curious to hear your take on this is, is ARR still a useful metric for companies to talk about when, to your point, we're not sure if it's annual and we're not sure if it's recurring? I think the term ARR has become diluted to the point where it's not that useful to talk about, or it's often used to dress up revenues as something or make people perceive those revenues as something that they're not.