Oliver Thomas: Managing Partner at Expedition Growth Capital as they announce a new €325m fund!

0:00Hello and welcome back to the Scaling Europe show. I am thrilled to be joined by Oli. Oli has got some amazing news that we are here all to chat about. Can you just talk to me, Oli? What is the news?

0:10Oliver Thomas:Seb, great to be here. Thanks for having me. We've just closed our third fund. We've raised€325 million to invest in the best of Europe's ambitious bootstrap software companies. and this is a huge fund 315 million your third fund i think you raised another fund last year or two years ago was it um so you have been raising huge amounts of money to invest in this category before we get into the fund the news about kind of stuff i want to talk about what it is that has always appealed to you about bootstrapped software companies Sure. So we love investing in businesses that have a use for capital, not a need for it.

0:56Oliver Thomas:So they're a really particular type of company, a little different than many of the venture track companies. These are businesses that have funded themselves, usually by being really product centric, really customer centric, that generated revenues early and being able to grow without raising outside capital. And we have the opportunity to partner with them typically when they're growing rapidly, somewhere between 4 million euros of revenue and 10 million euros. They're growing 50 to 100 % at the time where we invest. And we're providing them with a mix of growth capital and often some founder liquidity and coming on board as a really supportive minority shareholder.

1:45What's the role that you play once you get on board with these businesses?

1:49Oliver Thomas:These are all companies run by founders who have already proven that they know how to build a real company. They don't need capital and they don't necessarily need somebody to come in and tell them how to grow the business from here. They've usually got a very clear strategy. But often they are reaching a point in their growth where there are certain scaling challenges. And we've got a really well-developed capability to help with some of those. So, for example, many of these companies are really strong product companies, but a little less mature when it comes to go-to-market sophistication. And we've got a lot of resources in what we call the Expedition Operations Group and a wider community of operating advisors who can come on board and really partner with those founders and their management teams and help them work through those kind of scaling challenges.

2:50And why, you know, what's the rationale, do you think, for these businesses to then come on board with a growth partner? You know, a lot of times, you know, the businesses have been bootstrapped. They haven't wanted or needed capital. And now they come to you and they say, we do want capital to kind of take us to the next level. What is it about that type of business that needs capital at the stage that you invest?

3:10Oliver Thomas:Yes. So as I said, they're businesses that have a use for capital, not a need for it. Usually there's some kind of catalyst that changes the thinking and has the shareholders and the founder open up to the idea of bringing on that outside partner. And it might be a change that's happened in the industry. Maybe the business has been growing well, winning against competitors, and one of those competitors might have gone and raised capital. And so the founders may think that this is a good time to get a little bit more on the front foot, be a bit more aggressive in investing in growth. It might be that they're getting really strong signals, pulling them into an exciting new market.

3:57Oliver Thomas:For example, we invested in a company called Fabric earlier this year in the manufacturing SaaS category. And that's a business being built out of Paris, but where their global customers were pulling them into the US. And they clearly saw an opportunity there that they wanted to invest behind. And so that was a catalyst for them to think about raising capital. And gladly, they chose us as their partner. So it's those kind of changes in the operating environment, but it can also be changes in the circumstances of the founder group. It might be that one of the founders has a need for some liquidity outside of the business or is looking after building their business for five, six, seven years to de-risk a little bit, diversify their wealth out of what is becoming an increasingly valuable business so that they can then focus on scaling the business.

5:03Oliver Thomas:and have the right risk appetite for building the business to that next level of scale. Go on. And can we touch on some of the successes that you've had in your portfolio? I mean, this is your third fund, huge fund since being founded in 2020. You're obviously doing something right. You've obviously found your area of the market you're looking at and you're finding the right businesses. Can you touch on kind of maybe with some examples, what has gone well that has enabled you to raise this you know mammoth third right fund yes i might just challenge that that you know the mammoth scale i think um uh one of our um approaches to this category from the start has been having the right sized pool of capital to make sure that we're really aligned with the types of founders um that we're that we're partnering with.

5:59Oliver Thomas:So our first fund in 2020 was 175 million euros. Our second fund was 250. And then this fund is incrementally bigger at 325 million euros. And that is the right size to enable us to partner with founders who are looking for anywhere between 10 and 30 million euros of capital. What often happens in our area of the investing industry is that as funds grow much larger, there's a minimum check size that they have that makes it difficult for them to bring the right level of focus and commit the right resources to companies that are at this kind of stage where they might be looking to raise 15 million euros.

6:58Oliver Thomas:And that size of investment can be difficult for a billion dollar fund to address in a way that really works for the company and in a way that's really aligned. And so we're really building our business to be aligned, to be big enough to have the right amount of resources to be a really helpful partner, but to have a fund size where every investment of that size is important to us. And we'll work hard alongside the founders throughout that partnership. and what enabled you to uh to raise this round you know was it the success of the portfolio that you've seen to date was a you know conviction from your lps that this is a thesis that it's that's working what was it yes so absolutely that the fans that we partnered with and and the teams they built and um all the great things they've been doing uh in our fun one and fun two companies.

8:01Oliver Thomas:We've got a number of examples, you know, businesses that have grown by three, five, 10 times since our original investment. And those are businesses that attract a lot of interest from other strategic acquirers or private equity firms. And so there's, you know, really good evidence of the value that's building in those portfolios. So I think, first and foremost, it's that performance within the existing portfolios. But also, I think the focus of the strategy, we've got a real conviction in this particular type of company. And so everything we do is focused on being the best possible partner for this type of company.

8:56Oliver Thomas:And I think over time, there's a flywheel effect that happens where we build up a good track record of being a good partner for what is now 17 companies across the first two funds. And they all look like this. They've all got this particular profile. And so, you know, that's allowing us to build a leadership position. And, you know, I think, you know, be able to invest in the next generation of, you know, the most promising bootstrap companies that are coming through. Amazing. And, you know, in the world of tech and startups, you know, the classic model is not bootstrapping. It's VC, it's whatever, the 2 in 20 model over a 10 year period.

9:46It's trying to 3x over 10 years. Do you have, or can you touch on like how this model is slightly different? You know, the growth equity model is not the same as a VC. It's not as illiquid. It's not as long timeframe. Can you touch on, you know, your own timelines and maybe some metrics that you would like to deliver for Fund3 to be a success?

10:03Oliver Thomas:Yeah, so I think it's good to put yourself in the shoes of a founder CEO in the type of company we're investing in versus maybe founder CEO in a more typical venture-tracked company. So, you know, we're investing in businesses that are typically worth 25 to 100 million euros at the time where we invest. And importantly, the founder or founders still own, you know, in many cases, all of that, all of that equity, all of that value. And so when we invest, we're providing capital and partnership, but we're working with people who have a lot of value in the business that we're investing in. And then as they think about their horizon, they really want a partner that's aligned to build with them, let's say from being worth 60 million to 300, 400.

11:08Oliver Thomas:And they might see a real clear line of sight on that path. And they want a partner that is really aligned and well resourced for that journey. not to say that we can't go from there to a billion euros or beyond but there's an alignment there because if you're a founder that owns that business that that's a really ambitious transformational journey where you know you might own 60 70 percent still of a business that's worth two three four five hundred million euros and so that tends to be the nature of our partnership Every investment is important to us and every investment is really important and potentially transformational to the founders that we're partnering with.

11:58I think on the venture track, you often see more of an underwriting towards Decacorn outcomes and where the amount of capital required to get there means that those will

12:13Oliver Thomas:still be transformational outcomes for the founder CEOs. But with the dilution that's being incurred, everyone there is pretty aligned around gunning for that Decacorn outcome. Whereas in our strategy, we're building businesses, partnering with founders that are building businesses that are sort of powerful companies within their specific markets. and where the path to leadership is one growing from somewhere between 5 and 10 of ARR when we invest through to 40, 50 of ARR over the next four or five years. And that is a really ambitious and really important industrial project in that market. and you know that that's a little bit different than um the venture track that you know that i was describing yeah yeah and they're very different models at different stages and um i'm curious to hear kind of what you think you know working with bootstrap businesses and you know i always love talking to bootstrap founders because they don't get the same attention they don't get the same stories or media attention that often the vc founders have because they haven't raised the big rounds i haven't got the snazzy valuations and um and you know i'm curious to hear like do you think there's a different type of person or a different type of ambition who chooses the bootstrap path compared to the traditional vc one yeah i i think uh i think so i think i think we we uh you know part of what we we love about about this strategy is is exactly that the people that that we get to work with.

13:58Oliver Thomas:They're really substantive people who have built things already at the time where they're, you know, considering raising capital, they've built something of real value. It's a, it's a often self-financing company. So it's, it's not, you know, its value isn't predicated on raising more capital. It's a self-sufficient, valuable entity in its industry. And despite having much fewer resources than many of the other companies on the landscapes that they operate in, they're punching above their weight. And whilst if you look at the headline inches of growth company media, they may not be prominent, but if you go and speak to the leading enterprise customers in their category, you'd get a picture of these businesses being the leading companies and having, you know, the strongest solutions and being the most domain expert players in their field.

15:09Oliver Thomas:And so, you know, we're often working with founders who are, to some extent, kind of vocationally drawn to solving complex problems in their particular industry domain. and then building patiently, often building products that are superior because sometimes you can't build things in a hurry to the same standard that you can if you're building in a really patient, focused way. And of course, you can only do that if you haven't raised venture capital and you're not on a sort of venture clock. And so our great opportunity is partnering with these leaders when they've built those products, they're getting pulled through into these increasingly valuable markets that they play in.

15:58Oliver Thomas:And as I said, they can see the use for capital. And so we love that these founders are typically just laser focused on their businesses, on serving their customers. It's our job to cut, to find them and understand their businesses and be the best partner we can be. All that, all that journey. And when you look at industry, look at your portfolio, you've got software businesses in accounting tech, energy, you mentioned sort of like manufacturing. You know, you span a wide range of different verticals or industries. is that going to be the thesis going forward it's less about where you're working it's more about the type of business yeah so you know a range of a range of verticals and and geographies too you know we're all over uh we're all over europe um 17 different investments um you know you know a whole variety of of countries uh many of which already growing rapidly in the us uh but from a sector standpoint, we really have this conviction around deep domain expertise being the key ingredient.

17:14Oliver Thomas:And we like really domain expert founders who are serving complex industries and solving complex operational problems. We think that's where the edge is for businesses that aren't necessarily the companies with the biggest balance sheets. We inherently have to find markets where capital is not the only source of moat and differentiation. It has to be about expertise and complexity and their ability to codify that in a differentiated product. And so you're right, manufacturing is an area where we've made a couple of investments, one in a company called Factbird based up in Denmark, which in that case, serving some of the largest manufacturers in a number of verticals, food and beverage, pharmaceuticals, and driving huge improvements in overall equipment effectiveness.

18:28Oliver Thomas:So if you think of all the capex that goes into all the production lines in these industries, it's critical to manage them effectively. Factbird's a company that came out of originally a consulting business that was serving Nova Nordisk. So one of the world's most demanding enterprise customers. They developed a huge amount of know-how and were able to codify that into this solution that is driving 20 % uplifts in equipment effectiveness for some of the largest brands in manufacturing. Another example would be Fabric down in Paris. And again, in their case, they're helping the largest manufacturers in a number of verticals to digitize their implementation of lean.

19:28Oliver Thomas:So the lean methodology, which is all about driving efficiency and minimizing waste. That's a very valuable process for the most sophisticated manufacturers in the world. But for many, that's been quite a whiteboard, a clipboard-based process. And so fabric has been growing really rapidly and getting deployed across hundreds and hundreds of manufacturing sites around the world, being used by, I think, 20 ,000 frontline operators today, today, allowing those companies to digitize that important lean methodology across their states of factories and production lines. And do you think there are other industries like that, which perhaps have been underserved by traditional VC models that you're looking at?

20:29Oliver Thomas:Yeah, so I think there are a number of industries that are, if you like, low digitization industries. And I don't think there's anything proprietary about our understanding of that picture. Most of the venture capital industry and the private equity industry, the software specialists will have a pretty clear view of where those opportunities lie. but we would certainly see opportunity in some of those industries like construction and for example, what we make our job finding within those industries, finding the founders that have been building this way. We think it's a really hard choice to build this way and then making sure we do all we can to be the best possible partner for those founders and allow them to build, continue to build the way they want to build.

21:36Oliver Thomas:So very often these founders do not want to raise to the next raise. They don't want to commit to raising$50 million, burning a huge amount, and kind of betting the business on the successful path to the next raise. What they want to do is raise a meaningful but measured amount of capital, invest that in a way where they preserve control of their destiny, preserve all the optionality to be able to build in a sustainable way. and that's you know those are the founders that frankly where you know we spend all of our time working with and that there's the companies that you know we're going to continue to to try to partner with through fund three.

22:32Love it and talking about fund three looking back at fund one and two could you share maybe the biggest mistake or learning that you made over the first two funds that you're now going to be applying to the third?

22:44Oliver Thomas:Yeah, so I think Fund 2 was, in a lot of ways, has been an expression of the learnings from Fund 1 and all of our prior experiences that Fund 3 will continue to follow that path. And I hope all future funds, this is an industry of learning and refining what we do. I think our first fund, we made our first investment in December 2020. And the last investment was early in 2023. So for the first half of that investment period, we were operating in a really heated market for growth investing. And I think part of the reason we've been able to raise the funds that we've raised is that we navigated that environment with some discipline.

23:58Oliver Thomas:But inevitably, you know, there will have been, you know, companies where we invested in businesses that were showing maybe more cyclical growth. You know, there's a lot of demand coming through COVID that, you know, if you extrapolate it, you can end up being too bullish on the growth outlook. And I think, you know, happily, those are also secular growth companies, but the secular growth curve is probably a bit slower than the cyclical growth rate at which we, you know, joined the journey. And for us, thankfully, that means that we're invested in businesses that, you know, know how to play defense.

24:44Oliver Thomas:They've been self-financing companies in the past. They are happy being self-financing companies again. And, you know, as long as we're patient, they've got great products. Those are categories where there are interested acquirers and it'll take time. But, you know, there's still value to be built in those companies. But, no, I think that I'm sure every investor, you go through every cycle and you try and sort of sharpen your lens on what's truly a sort of long-term growth rate here versus, you know, the product of being in, you know, really good times. Well, look, thank you so much for joining me, Ollie.

25:25It's been great to chat. And I love talking to businesses in this world who do things differently. and it's so interesting to hear from a fund which is such a different model backing a very different type of business but still so impactful on the wider European ecosystem. So look, thank you so much for joining me and congratulations again on the third fund.

25:44Oliver Thomas:Thanks a lot, Seb. Appreciate it. Cheers, Oli. Bye-bye. Bye.