What European Founders Get Wrong Before Expanding to the US | Stephan Dietrich (Neolane, Adobe) | part 2

0:11Hi, everyone.

0:12Matt Oxley:David Rose here from USXP. Welcome back to the Scaling Stateside podcast, along with my co-host and co-founder, Matt Oxley. We are on a mission to help founders from the UK and Europe better understand the US expansion journey. We are having part two of our discussion with Stefan Dietrich from Lead Edge Capital. He kind of covers both realms of the companies we talked to. So he's also an experienced entrepreneur who's expanded to the U.S. And now he is an investor who funds U.S. expansion for entrepreneurs coming to the U.S. So this is part two of our conversation. If you haven't caught part one, it's basically Stefan's entrepreneurial journey to the U.S.

0:50Matt Oxley:If you haven't caught it, there's some great tidbits in there. Be sure and check that out. Today, we're going to talk about the other side of the table, which is the venture capital fundraising side. So with that, Stefan, welcome back. Great to talk with you again. Thanks for making time to speak with us. Hey, thanks, David. Thanks, Matt. Glad to be back again. Well, if I may, Stefan, because I think one of the really interesting components of your story is making that leap from operator, founder, call it what you may, into an investor and into being a VC in the kind of mindset shift that maybe had to go on on that journey, on that step.

1:31Would you mind just unpacking that a little bit for us? Yeah. Yes, that's quite a difference to be on the other side of the table. And it requires, I think, a lot of humility to get there. Because when you're an entrepreneur, you're 100 % focused on one baby. You have one baby, that's your business. Very often you have one concentration of wealth too. You have all your wealth is in there, your concentration of efforts, sweat equity and pure equity is in there. So you're maniacally focused on one company. So the first adjustment you have to go through as soon as you start investing your own money and you consider this to be the new chapter in your life, which I considered after having also a health issue.

2:19So the health issue was the trigger for me to really stop operating and go into another type of dynamic, I think, also and another type of stress level also that wasn't compatible with my health condition anymore. So I knew I had to make a change. So that was like a compelling reason to do it. I would have started other companies. It's not the ideas that are missing here. but it's just like felt it's the right thing for me. Also, you know, I've been married for 30 years. We're celebrating 30 years. My wife has seen me build three businesses with my co-founders, the same co-founders. She's seen me grinding three times and she said, you know, the fourth time, the fourth one is not going to be with me.

3:09Because you're insane. You're insane when you're in that mode because it's day and night, right? It's all of a sudden, it's like you give birth to a new baby. I mean, it's like day and night. So the compelling thing was like health and then a family decision saying, you know, this is don't restart from scratch, right? I'm not going to be supporting you in like these early days of grinding. Even if like financially, you have more comfortable and everything. If you're passionate about something, it becomes a little crazy. So the fourth one is going to be without me. So that felt was like, that's a pretty good reason.

3:41also to switch to an investor model. So it's not just the decision of choice. It was also driven by external factors. That's what just I want to illustrate. So now all of a sudden you're sitting on the other side of the table and you have to make a few decisions. First, you want to create like a VC fund that has LPs, that is borrowing money from someone, commitments and redistributing them into like portfolio companies and being some sort of a marketplace between supply and demand. and match that. And my decision was clearly, no, I am not willing to start a fund. I had tons of offers to like, you know, from other people saying, hey, you have great track record, let's start a fund, a projection fund together, like specializing on Europe to US expansion.

4:27I think that's a very good idea out there to say, hey, I'm going to bring a lot of resources to bear. And my fund is going to be specializing in that. So that was one of the ideas. But no, I wanted to invest in the same spirits as I wanted to build businesses, is build them for the long run. Which means like invest forever, potentially. So invest my own money and invest it in a way that feels like you don't have to exit after four, five, six years. You don't have the pressure of LPs to return the money because some businesses are just amazing or some businesses take longer. So having that pressure, I didn't want to have that pressure.

5:06So you have to have some sort of guiding principles also as soon as you get to the other side of the table and become an investor. And among my guiding principles were like, okay, I want full freedom. Because actually what's magical when you have an exit and you make money is all of a sudden it allows you to spend time on what money cannot buy. You know, freedom of investing wherever you want, freedom of time of investing, health, privacy, things like that are things that you cannot buy or you cannot really buy much. So focusing on that, becoming an investor and saying, hey, here is my guiding principles.

5:49I want to invest forever, potentially. So it's going to be evergreen. I don't have the pressure to report my decisions, for example. to explain my decisions to LPs, to raise money, to be able to, you know, survive in a fund, to have an expiration date on each investment, right? Because they physically have an expiration date. You have to create DPI if you want to raise the next fund so you're under pressure of time. So establish these guiding principles. For me, it was like freedom of investing wherever I want. You also have limitations when you're in a fund, right? So it's like, Like, oh, I cannot do defense.

6:30I cannot do like some certain types of gambling or things like that. So that's the first thing to establish the framework of your investments philosophy. Then the heuristics, of course, of your investment, you know, what are the type of companies you go after. So I have like a framework of eight criterias that I like to look at. So it's more growth stage, et cetera. So there's a bunch of financial things, but there's those things like, hey, the coachability of the team, you know, So for me, it's critical. You have great teams, but they don't need any help. But that's not a good fit for me. I was about to double down on that because I think you then have that alternative operator experience you're bringing into investment.

7:15Would you say that the way that you were looking at the founders was your differential when you're obviously investing in a portfolio company? Was that something that you were, you know the value add you were taking to the founders that you were you were looking to invest in yeah one of the critical component in my investment heuristics is is the team in looking for help are they open and looking for help and that's different from like pure vc funds who want to cut checks and move to the next one because i have that entrepreneurial background and what i want to bring to the table is smart money right that's as me personally i'm not speaking with a lead edge hat or with a BC hat, etc.

7:57It's how my own investment philosophy works. I want to bring smart money. So I want to work with teams I feel comfortable with, products I understand, and a team, a leadership team that's open and willing to get some help, some external help and recognizes their limitations. So they're amazing founders. They don't want any help, but it's not a great fit for me. So once then you make that decision, you found the investments, then yes, it takes a lot of humility to sit on the bench. You're sitting on the bench, like it's soccer time, right? I hope you watched the French soccer game last night. Congratulations.

8:39You're sitting on the bench and you're watching the other players play. You're not on the field playing anymore. And that is really a lot of adjustment. That is so much adjustment because all of a sudden, you're like, don't do that pass. It's going nowhere. I know this is going nowhere. I've done it. I have scars on my back. So you have to have the humility to say, hey, here is what I suggest. Here is what you should consider when you make that decision to go that partnership route, to develop that additional product, to do this. And I've seen them, like I've seen so many where I was like, I don't think it's a great idea to develop that new product range because it's another buyer.

9:21So are we going to be able and credible to sell to another buyer in the organization? And the team is like, hey, we're still going to commit 5 million. Thanks for, you know, thanks, no thanks. And it's like, okay, I'm going to disagree and commit, right? I'm going to support you in that and we're going to try to make the best of it. You are on the field. You are the players doing the passes on the field. You're playing. I'm not. I'm just a supporting character. I'm like on the bench trying to coach you, trying to tell you, you know, what is my experience? What would I do in this situation? And you make the decision.

9:55So I make suggestions, you make decisions. So that's a lot of adjustments. And the fact that you go from one baby deeply into like a portfolio strategy all of a sudden. You have like five, 10, I have 33 now, 33 SaaS businesses I invested directly in. So six I'm on the board of. And so it becomes more of a portfolio strategy, even if I don't see it that way. But the real VCs are in a pure portfolio strategy. You know, when something goes south, they just don't give a shit. It's pretty sad, but I've seen a few of those going on right now because they're going to make it up on some others. But when you're a founder, you're attached to your babies.

10:36You want to love your child equally. You know, all your childs, you love them equally, et cetera. and you want to go deep into every of these situations, but you can't because there's too many.

10:47Matt Oxley:I know as a long-time operator, of course, I think there's a tremendous advantage to investors who've also been operators. Some of the topics you were just talking about, but you have that experience of not only being an operator, but an operator who has expanded already to the US, right? Successfully. How does that lens of that experience, how does that help you or how does that influence your process when you're talking to founders and they're talking about coming to the US. How do you think about that experiences and how do you help coach founders and how do you evaluate potential new deal flow when you're talking about coming to the US based on those experiences you've had previously?

11:25Yeah, there's a lot there, right? It's like, hey, you use your own experience, but then you also draw from a lot of data that you acquired over the years and pattern recognition in terms of readiness, I guess, right? It's like, hey, is this team, is this organization, is this product, is this go-to market potentially ready to go to the US? Can we replicate some of the success they've had in their domestic markets? I only look at businesses that are above 10 million in annual recurring revenue. So more in what we call the growth stage of the business. So they've had product market fits in their local domestic markets in Europe or in a couple of markets in Europe.

12:11But they've also had go-to-market fits in these regions, right? And I differentiate the two, product market fit and go-to-market fit. So they have that traction in their domestic markets. And now can we replicate that in the US? So product readiness is, of course, one of the things. very often I think funders are too the European products are usually very good. They're usually on par if not better than American products. And they're holding back too much on that very often. Very often the products are too complicated. The UI is too sophisticated. Because in Europe very often the markets are smaller so you need to go deeper.

12:57You need to make it more sophisticated because you need to answer to more use cases because the companies are asking you this, this, this, kind of add this feature, etc. So it turns into something that's a little too sophisticated. And in the US, it's a little bit more cookie cutter. So you need to simplify the UI, you need to adapt the product. So product readiness and how you're going to adapt the UI and a product to US use cases is definitely a key a key thing. And I'm very obsessed by product. It all starts with product, right? The innovation of the product, but also the differentiation of the market.

13:30How is this going to be different than the current competitor? Generally speaking, 100 % of the businesses I've seen emerge in Europe, when they expand in the US, they already have competitors. I've never seen, except with some exceptions, a real unique new concept out of Europe that goes into the US. One exception, you know, BlaBlaCar, for example, you know, the ride-sharing company in Europe. They never made it to the U.S., but that's clearly a concept that doesn't exist in the U.S. But generally speaking, the U.S. has its own product, has its own leaders, has a lot of backing already, has a lot of like financing.

14:11You're not the first one in the U.S. So looking at the product is a key piece. organizational readiness. You know, is there the will and the skill of that organization to tackle major challenge like the US? Who is willing to go there from the founders? You know, who is willing to commit from the founding team or from a leadership team to bring the culture, to bring the knowledge, to bring everything that is not that easy to describe, and the experience, the customer stories. Also, a number of these customer stories never relates to the U.S. logos. Sometimes they do in some specific verticals. They recognize the names, et cetera, but it's difficult.

14:59So having that ability to understand the organization, you know, in some European countries, the ability to do everything in English all of a sudden. It sounds obvious, but it's not that easy. There's some organization I've met that are only speaking French. They're only speaking German in their board meetings with their investors, with their employees. All the internal communications are done in the local native language. So is that organization going to be ready to go to the U.S.? Are these founders willing and open to change that? And all of a sudden to standardize on English and adopt culturally also a lot of the standards?

15:43It's not a, you know, something to... Not trivial.

15:46Matt Oxley:Definitely not trivial. Not trivial. No, no. And you can see founders telling you, I want to do the US, et cetera. As soon as you say, okay, who's going? Is your wife fine? Is your family fine to go? Have you had the conversation with your leadership team, with your founders, co-founders? Oh, no, but we'll hire a local guy who's going to be the head of the US. I'm like, okay, that's a red flag. Okay, it's absolutely good. So things like that. Lessons learned, you know, access to capital, ability to commit big amounts of money in a country where everything is more expensive. Very often they say, you know, hey, I want to go to New York City.

16:29I'm like, okay, great. Why New York City? Give me three good reasons to go to New York City or Silicon Valley. Okay, give me three good reasons. Oh, you know, it's where everybody is. Okay, it's not a good reason. Okay, it's where blah, blah, blah. You know, it's a fun city. It's cosmopolitan. It's huge. We can find a great talent pool. It's great. Yeah, you're going to find a great talent pool, but you're like a drop in the ocean compared to like Google, Facebook, Amazon, whatever hiring there and all your local competitors, you know. So I'm going to have a hard time to attract, retain, pay, talent.

17:06So, oh, my wife only goes if I go to New York City. Okay, that's a good reason. That's going to be a good reason.

17:13Matt Oxley:You just need to know that you're embarking a structure, a cost structure that's probably 30 % to 50 % more expensive than if you were going to Nashville, if you don't have a clear reason to go to New York City. Oh, I only sell to ad agencies, or I only sell to finance at Wall Street. Okay, that's a good reason to be in Manhattan. So there is so much to assess there. In terms of readiness to go to the U.S., financial capital commitments, how much are you going to raise? How much do you commit? Then you have a lot of founders that are like, hey, I think we can make it with like 5 million. It's like, yeah, we did it with 5 million a while ago, back in the New England days in 2007.

18:00You can't do it with 5 million anymore. I'm sorry. The times have changed. The salaries have increased. The competition is fierce to get talent. and accessing that talent is the most difficult piece for you. So what's your angle to access the talent? What's the story you're going to tell someone? Back to the story we were sharing on like, you know, it's like hiring a sales rep in France to sell Portuguese wine in the Burgundy region. You know, it's like, it's not an easy, it's not an easy sell when you go home and see your wife or your significant other, say, by the way, I'm going to quit my job and go for that Portuguese wine companies to sell wine in Burgundy.

18:38So there's just a lot to unpack that I learned over the years in raising enough money, being committed enough. And I think it was in your question also, don't half-ass it, right? You cannot half-ass the US. The US is not a satellite office. The US is going to break every bone of your body personally and it's going to break every organizational bone you have. Just be ready on the roadmap, on the internal comms, on the processes, on the financial side, because it's going to be so expensive, on the culture of your organization that we'll have to adapt. And in some European countries, France included, you have some anti-Americanism, you know.

19:31Uncle Sam doesn't always have a good reputation and some team members are going to be like, oh, you know, again, it's one of the US. Oh, the US is asking for that in the roadmap. Oh, they're giving us a hard time. Oh, we hate the Americans, blah, blah, blah. Why this, what that? So you're going to have to be ready. You have to be ready as a founder to nip that in the bud, saying, no, this is our commitment. We're going there. We're committing financially, organizationally, from a product standpoint, et cetera, et cetera. So you cannot half-ass it. This is not just the distribution office. This is something that's going to influence all aspects of your business.

20:09I love it. It's so in line with the conversations that we have with founders. And I think they fall into a number of camps. One is they are over familiar with the US markets. Therefore, they're taking it for granted and therefore they're not prepared because we watch the same TV shows and read the same kind of news content. or they're fully underprepared. You know, they're almost scared of taking the leap. It's the fear that comes from, you know, going out there and putting yourself on the line. And what is the one thing you would recommend any founder listening to this about to embark, no matter what camp they're in, that they should be thinking about?

20:55What's that one bit of advice you would give? Yeah, very often I'm asked, you know, what's the biggest mistake we've done going there? And I've thought a lot about that. And I think the thing is we were too late. We were just too late. So we went when we were like 15 million on track to do 15 million. We should have gone earlier because the market was getting structured. it was as a reminder it was in the marketing tech space in 2007 so there were only like a bunch of vendors in the marketing tech space maybe like 20-30 when we entered the US market today there is 9 ,000 according to like some different landscapes from analysts so we waited too long and if you have something innovative, if you think you have like a vision and something differentiated Even at 2, 3 million, you can go, right?

21:57If you are able to show that you're going to have a clear strategy, very laser-focused strategy of how to succeed in the U.S., the differentiation you can have with your product, with your go-to market, et cetera. So you don't wait too long. Don't wait for so long. Don't hold yourself back. And we were holding back. When I landed there, I remember I landed in New York, JFK, took the flights, and I'm like, Frank Sinatra's song is in my head. When I landed, I remember very vividly when I landed in New York City, and you drive from JFK into the city and you see all of a sudden the skyline. And I landed in New York because we hadn't yet decided that we're going to go with Boston as a secondary city.

22:42So, and I knew New York, and I see the skyline, and I have the song of Frank Sinatra in my mind saying, if you can make it there, you can make it anywhere. So all of a sudden you have that huge commitment that you're taking. And it's like, hey, retrospectively, we waited for too long. We should have gone earlier. We could have raised more money. We could have built a bigger business. And the reality is our number one competitor sold at$2 billion. They raised more money, way more capital, $140 million in the last round. Our last round was$28 million and it was considered big already. and we're just holding back.

23:19We're all holding back too much. It's like when you play tennis, right? Don't hold back these like shots. Just like go for it. Like, you know, go big or go home, but don't do it in a stupid way either. I'm not a high growth, high burner type of guy. I'm very disciplined in terms of like spending the resources because we raised only like a total of like 35 million to get to an exit to see like 600 million. So it was very disciplined. And we only burned like 20 million total. So you, but yet you have to commit. You have to commit early and the earlier the better. So that's my advice. Don't wait too long.

24:02Matt Oxley:So you've obviously seen this story, this US Expansion story from both sides of the table, right? So you've obviously done it as an operator and you've seen it from the investor side quite a bit. And you've touched on this a couple of different points, but if you were going to say, what is the one biggest gap that founders from Europe need to understand before they come? We've touched on talent, we've touched on capital and location. What is the one thing you need to really understand really, really well before you take that leap? What would you say that is? One thing is really talent. I think talent in our space, right?

24:37In tech, again, I'm talking from a perspective of like tech, software, that's my experience. B2B SaaS software technology, where accessing the right talent is day and night. And having the angle, the story, the ability to do backdoor checks, for example, on talent, which is so hard, you know. Is this person really good? You know, we talked about the onion and the multiple layers of the onion, right? All the onions look the same. They look beautiful. Some are rotten inside. Some are empty and dried out inside. Some others are just amazing. So you have to be able to peel off all these layers of the onion to see, you know, is this person a high quality person to drive our U.S.

25:23growth, our U.S. expansion? And that's the hardest when you show up in a country that is so culturally different from a business standpoint. Also, they assume, we assume we talk the same language. So getting access to the right talents, attracting the talents, incentivizing the talent, knowing how to incentivize them, retain them is really hard. It's the one thing I think is the hardest. Sorry, David. And do you see that from now being, playing for the other side? Is that the thing that you're picking up on? You're seeing all of these portfolio companies through potentially, you know, making those mistakes.