20VC: The Ultimate Guide to Scaling Marketplaces, Why Rule of 40 and EBITDA Optimisation is BS, How Founders & VCs Should Approach Market Sizing and Outcome Scenario Planning and Why Europe is Failing with Vinted CEO, Thomas Plantenga & Alex Taussig

25:15It was like, Thomas really, again, you call, like you know that deep roof is there. You're not going to win this market. I mean, come on. But I just want to understand, like, why did it work the six times when it didn't work with prior five times. Yeah. So I think we always want explanations that are kind of like binary. We fix this and then it worked. Yet if you look at an ecosystem of vintage, it is a multi multi varied system. So even within vintage itself, you have all these factors like the different type of buyers, the different regions, then you have this different shipping companies, the different payment companies, then you have outside factors, which is like your competitors, the fashion, macro trends, all these kind of things.

26:00So there are many many things that have impact. You never know exactly which of these things had the most impact. So the things that I know that we really really improved on in the last time when we went into it, that we really improved our shipping proposition. We fixed a couple fundamental things within payment. And then what we were very lucky with is that COVID opened the window of opportunity. The marketing prices went down, people went more online, and then we actually saw that our improvements that we did before gave some organic growth, and then we felt bullish enough to put money behind that, and then it really took off.

26:34When we saw those numbers, we saw like a now -threads -fits -her -market -face model, then we went all in, like the whole company just focused and just going. I think there's one other factor as well, which is a more of a macro thing, but the end of zero interest rates It's benefited us a lot. I remember when early when I joined the board, we're still in this era of insane discounting by some of our competitors in various regions. And we had to make these hard choices. Do we match the discounts? How hard do we really compete for this territory knowing this is less profitable? That all went away pretty quickly.

27:05Post sort of the COVID fears recession and inflation and then with the interest rates going. Up again, I think it's like one of these things where when the tide goes out, you see who's So I mean naked and the fact that we have had a great business model that we could port over there Allow us to take that ground at that time and I think we were very scared So Deepop got sold to Etsy and we were shitting our pants like I thought Josh Silverman is gonna like take a bit baseball bat And smash us into the ground because Etsy is a company. I very much look up to their great company I mean, George's great CEO and I thought, okay, we're fried.

27:43If we don't win now in the UK, we're done. We're over. Like, Thomas, you can go back to the Netherlands and this was a nice ride, but see you later. Was the UK about the boat's decision or was it not? Because you've tried it so many times. I mean, respectfully, it seems like a two -way duel though. Yeah, yeah, of course, but like at that point in time, can you imagine like one of your big competitors get bought by Etsy, which looks to us at that point in time a company with infinite amount of resources, an incredible technology team from the Silicon Valley. Like, I mean, now you're sitting there like Lituania with 200 developers and like a little bit of money on your bank account.

28:22It's like, yeah, you're scared. So yes, two -way door, but like maybe after this year, it might not door at all anymore, you know? So that was the feeling as well on the team. There's two -way door decisions, but like even two -way door decisions that are important require a lot of management bandwidth and capital and time commitment. And I think like the conversation I remember having was if we want to build a pan -European dominant peer -to -peer market place business, we have to get the UK. And there's no reason we shouldn't get the UK. So we just got to figure it out. I think it was just that persistence versus other some other ideas that I think came up.

28:58We were like, do we really need to do that? Like, is that existential for us that we have to do that? Whereas the UK is like, no, we have to do this. I was planning on discussing competition later actually, but I'm worried about Timo and Shine. I'm worried about Timo and Shine because I'm going to get killed for this and hopefully people don't know where I live. But like, the amount of advertising dollars they are spending is egregious. I mean, they are funding matter in a lot of cases. How do you compete in a world of endless capital supply for ad dollars against Shin Shine, what have they called, or Timo?

29:31Well, I think for vintage specifically, Timo shine are spending money to attract buyers. Every Timo shine buyer can become a vintage seller, and we're spending money to attract sellers of second and clothing. So for us, we're kind of like just out of that storm. So that storm just passes us and actually gives a whole new bunch of inventory that can be sold on vintage. So yes, we see it a little bit, but that is not something that really dramatically impact our growth at this point in time Does it not impact the add -ons you're able to spend in terms of the effectiveness of those doors? No, because they really search for the buyers So they have the content and they need to get the buyers.

30:15We need to get the content So it's not that if somebody bought shine, it's not gonna be buying us anymore In that sense, we're not suffering from it, but it's obvious that companies are directly competing with them, and it's incredibly difficult. So yeah, we're just protected by that our positioning is different. I also think of the value proposition for resale is very different than what they're offering. I mean, they're really competing against H &M and a lot of fast fashion, Zara, like the fast fashion companies. I'm just going to put this out here. I'm going to be an Ackman. If I can be an Ackman, I know I'm not talking about plagiarism.

30:49I'm gonna throw a short out there for boohoo and asus. Ooh, I would not like to be them. I think fast fashion is getting reinvented right now by these guys. But the thing about resale and one of the reasons is attractive is that you're getting a very cheap price relative to the quality of the goods that you're getting. It's actually a great way to buy high quality brands that you love that you already wear for 80 -90 % off. That's not a value proposition that Shannon Temu are selling, right? So in some ways it's actually an orthogonal thing as Thomas said, but it's definitely a problem for the online fast -fashion retailers.

31:28If you look at let's say the rise of these companies, everybody talks about the amount of money they spend on marketing, but actually when you look at the fundamentals that completely changed the fashion industry over let's say the last hundred years, then it's actually the people who consistently found new levels of efficiency in production and shipping. So the non -obvious is that shipping is actually what is really really important here. So these companies have completely renovated how fast they produce and how fast they're able to deliver from China and Turkey into Europe and the US. And that's actually, if you look at what, But let's say, as Zara as in the Zolandos did, they did that to the previous companies.

32:09And the previous companies did that to the previous companies before. There's a lot of focus on the marketing approach because that is in your face. But this marketing approach is possible because the underlying dynamics of the infrastructure that they've built is actually allowing them to spend up money on marketing. I bought on team move for the first time the other day. A Bluetooth speaker that I didn't fucking need and a pair of gloves that have some electronic I don't want to warm her in it that I didn't fucking need either and it came into about 11 pounds. How are they able to do delivery for free?

32:39That's why I really don't get that. Well there is one thing with Europe that I know is that there is a loophole that if you send in a package under 150 euros it's not text and therefore for example companies like Zalando are actually having higher prices to send a package from Germany to Belgium then they have from China to Belgium. Well you know you hope that it's better than anyone else so we'll get to that my friend. regulation. Can I ask you, what's the run totally weird and random one? But actually, first, how we talked about the difference between resale and what shine and team Udo. How do you think about breadth versus depth in each new geo?

33:15That's a really difficult decision. When you're looking at the type of marketplace that we are, we are two -sided network -effect marketplace buyers and sellers two sites. And the bigger we become, the more valuable the marketplace place becomes you clearly see more listings, the more listings you have, the faster you sell those listings. So for us to get a bit of model working in a country, it is crucial to get the depth because that's driving the network effects. And thereby we go practically in Europe region by region creating these working two -sided marketplace and then moving on to the next.

33:48And that not only goes for let's say a country, it also goes for category. So also within our categories, depth is the most interesting thing. So I would say in our business, two -sided network effects, depth is what drives the fundamentals to then go wider. When we think about the different regions that you've expanded into, what is the ramp time to profitability within each region? And how do you think about that maturation period to get to a good place economically in each region? Yeah, so it gets faster over time for us. It also depends how aggressively you want to go. So there are certain times that you say, well, at this size, I feel good and safe about my economics to take it a bit slower and then you know you hit profitability earlier But if there are more competitive situations it takes longer But it can be as fast as 12 months and it can be as long as three years Alex to your position on the board When you think about and have that discussion Honestly to what extent a a you like you know what fuck it?

34:47We're happier to win the market and be less profitable for longer then let's be super disciplined and get to profitability as soon as possible. How do you weigh that at the board? There's a few different levels of the analysis that we take into account. One is the marginal transaction. What are the unit economics on a marginal transaction? Is that a profitable thing we're doing? The second is at a country level, which is the question you just asked. How long is it going to take us to get in the money at the country level? It should be getting easier and easier over time because we have cross -border network effects we have lower shipping rates across Europe, we have more brand awareness, more inventory in different countries, so it should get faster.

35:23So that's the second level. And the third level is at a company level, including all your operating expenditures, what's the efficient frontier you're spending at? And the tricky thing about Marketplaces is that you cannot grow arbitrarily fast. There is an efficient frontier that you want to hit where you can balance supply and demand and to fill a high quality experience for both sides of the marketplace. And so I think what one thing Thomas' team is really, really good at is Viering out quantitatively where are we on the efficient frontier for a given country and that's the rate at which we're scaling We have plenty of capital on our balance sheet So we have to learn more will burn more But we want to prioritize being a dead efficient frontier and it turns out that if you do that you create a very healthy Company because what happens is the older Gios start to produce cash flow that cover the newer Gios and then there's a trade -off of like like we're not raising venture capital anymore, we're looking at our cash flow and saying, how do we want to invest that cash flow next year and what's the portfolio of investment opportunities and what's the time period over which those investments pay off.

36:21And we're trying to balance some short term and some very long term investments. So that's the discussion we have at the board. You mentioned the efficient frontier. Have you ever got where you are on the efficient frontier wrong? And why did you get that wrong analysis? One of the biggest errors in judgment on the efficient frontier is when you're attributing a lifetime value to a set of users that turns out to be wrong. The thing you know in the short term is your payback period, but if you're making judgments as to like, well, this is going to be a user that pays off three to one or four to one, and the retention doesn't play out the way you thought it did, you can be in a bad spot.

36:55And the reason this is a really relevant question you just asked is we just came out of COVID. And I guarantee you, if you look at any consumer company in 2020 and 2021, they're cohorts look fundamentally different than they did in 2022 and 2023. They just performed different. People were adopting new behaviors. A lot of those behaviors did not stick and a lot of projections at the end of 2021 going into 2022 before the collapse were based on cohorts that just were not the real thing. And that caused a lot of this sort of misses to plan in 2022 and excess cash burn. So you got to be really confident that what your projections on a cohort basis are going to be or accurate.

37:35And the more conservative way to do it to think about the efficient frontier is just to look at on a payback basis and to look at on a cash flow basis. But the trade -off to that is you're less aggressive and you might miss some long -term opportunity. So it's all about that discussion like, is this real? How confident do we feel? Why do we feel so confident? How repeatable is this? It's a judgment call at the end of the day. Yeah, I think it's very important to build a growth framework that has all these things together in the stages of growth of each of the countries. So they you constantly kind of check yourself, well, on a lifetime value on a payback, this on a catch flow, that does little still makes sense.

38:11So did you take context of all these elements? And then you really stay very clear to yourself about what are predictive values and what are actually real truths because like certain predictive values, like if you look at LTV over five years times, like, okay, we hope that this is going to be there. But like, as you this predictive values, not a real value. what's the actual payback now, how much did we earn? What is our cash flow? What is our burn? Yeah, you need to see all these numbers in context. It's like, if you look at these businesses, these marketplaces, multi -variant models. So if you're going to stare your whole marketing investment on one metric, like a colesper or a certain payback, then you're by definition you're wrong because all these variants are moving around.

38:50They need to control them all. Just to give you one more really tangible example, early on in the company's life, in a marketplace business, One of the fundamental things like never changes across all marketplaces is that more liquidity Generates higher and more inventory generates higher conversion rates But there's diminishing returns on that because the user can only see so much inventory in a given session So early on you're nowhere near that efficient frontier and as you're growing the inventory in your marketplace It looks like your conversion rate could be going up linearly and you're like this is great I'm just gonna add more and more and more.

39:20We're gonna invest linearly in more inventory But then you hit that diminishing return and so if your plan was it was gonna be linear forever Well, hey, it's going to be wrong and you're going to disappoint. And a lot of the times you have to even refactor the entire search experience, refactor the discovery experience. So that you can expose more of that inventory to your users and reclaim a new appriciate frontier for conversion. So these are the kind of things that happen for a product standpoint that matter with respect to what you're asking. I am perpetually stuck on CAC. And that's why I was single for many years, champs.

39:53But what I mean by that is, when you are quite your first users, in some ways it's cheaper because they're the most hardcore fans, they feel the need and the pain more than ever, but then in some ways, and so you think they're the cheapest and they'll get more expensive over time as that call saturates. But then you also go, well, you also have that trade off of then you have increased brand awareness, you have increased word of mouth, you have network effects, do customers get cheaper or more expensive to acquire over time. So I think it's very important to define exactly what customers are. So if you would say it from a blended, cuck -and -a -pebac, then absolutely should become cheaper over time.

40:35Like these blended paybacks are just going down over time because your organic goes up, your motorbike goes that absolutely to come. But I think the story of direct impact it by marketing, new, list -or -setters by our sort you want to call it, as the marketplace matures, you're going to have a certain point of a large share of the population and thus it becomes harder. So therefore, it's very, very important to consistently really look at the marginal cost and not the average cost of all your cock, because that's also a very, very big mistake, right? You can say, I have a cock of this. Okay, nice.

41:11But what is, let's say, your first 100 ,000 euros spent, your second 100 ,000 euros spent, and there are 300 ,000 years spent, the cocking each of these is wildly different. And as you see, a curve that goes like this. So I think averages are very dangerous to stay around and does she need to always look at distributed values of like the marginal additional cost of what you bring in? Did you mispredate because of inaccurate cohorts due to COVID? We were actually very conservative. We did not, because like we got quite a boost to it And we know that we have this summer effect and these autumn effects.

41:48And we see just in summer, people go to the beach and then they're buying a little less. It's very obvious. And then autumn comes, weather changes, people are starting trading again and whoop, all the metric goes up. So we saw kind of like people were locked up in the rooms and we saw a bit of a boost due to that. And it was very clear like it's because of that. And what we all also knew was like at a certain point in time, these people are going to go out again into the parks and enjoy their lives. So we were actually very scared of like the after -COVID dip and thereby we predicted quite conservatively and therefore we were in a good place.

42:21But I think Lithuania, we have a very paranoid mindset. It's a country that's been run over by the Soviets, the Germans and like if you live between Kalengrad, Belarus and Latvia, you kind of like are always aware that maybe something goes wrong. And thus like when things go really well you're kind of like okay this feels too good to be true, that's very careful. You mentioned cash cow early. I think Alex, you did in regions becoming cash cows and then being able to fund subsequent regions and subsequent projects, which region is the biggest cash cow today? I think without giving away too much, we see all countries moving at the same trend.

42:57The older the country, the more it contributes in terms of free cash flow. And then it obviously correlates to the population. So the older a country, a bigger country, the more a cash flow comes out of it. That's an old, I mean, old as in us entering. Can I ask the other thing? It's like, when choosing new markets, what are these, like, top one or two things? And Alex, do you chime in here too? Because it's like, all very significant in terms of deciding where to go. What are the top one or two markets? You mentioned Belgium earlier, and I was like, I'm going to get hate again, but Belgium, why, why, why is it you can go into Belgium?

43:28And you were like, oh, the transport, and that was why, and that shipping and so it made it, what are the quarter terms that decide why you choose a market as attractive or not? Yeah, so we tried to reason from probability of generating success as in Euro values, and if all probabilities in every country would be the same, then you would just start with the biggest country. Yet that's not the case. So the equation is a product of probability of success and the size of a country, and then probability of success is defined by practically the level of competition, the level of development of infrastructure and shipping, in payments, and maturity of equal mars market.

44:06And based on such variables, you then come to a probability that you are going to be successful, then you rank those probabilities of success times the value of the market in a little Excel. And then you have your prioritization. When we are talking about France, second margin, market Belgium, he was just the first time we were after a long time, folks in France were going out and we said let's just take a market that is the easiest and thus we took Belgium, kind of to warm up and have the lowest probability or failure. So we first went for a couple of safe bets and then we started to rank it as it is.

44:41Alex, what does it look like at the board level? Because boards won't growth. We're normally pushing, go come on UK, come on US, we go to get the next round. Well, I think the thing to grok is that fashion industries won and have trillion dollars globally. It's many hundreds of billions of dollars in Europe. Resale has grown from 1 % of the market when vintage started to probably 10 -15 % of the market today and on its way to 20%. So you don't need to have that many people to have a sizeable business, but obviously matters a scale year at. So the scale of vintage was at in 2019. Benelux was actually a reasonably sized marginal opportunity to go.

45:20It could actually make a difference. As we got bigger, it became things like the UK and Italy and Spain that you had to go and eventually Germany. And then over time, as you start to become dominant there, you start to not just think about growth in terms of adding people and single, you know, trans actors, but adding entire share of closet, how you get more of the stuff that is in that person's closet, and how you expand it to new categories. And so there's different ways to think about layering in town. The lightspeed when we think about a dressable market, we don't really think about it in dollars first, we think of it as surface area.

45:52We think of it as like, what is the surface area we're gaining access to here uniquely in our strategic wedge? Because if you look at some of the best businesses, they've been able to take their surface area and continue to build and build and build on top of it. And that's actually where the tan comes from. What is surface area? How do you guys think about that? Surface area is a sense of like, you might have 10 million customers, but only 1 % of their clothing is being transacted. But you know in the industry broadly, it's 15 % of all apparel is sold in resale. So therefore, if I have 1 % when I start five years from now, am I going to have 15, 20, 30 % of that person's closet?

46:30Because it's so that's like an order of magnitude expansion at the customer level. So what really matters is not getting 30 % of their closet at the beginning, it matters that you can land with that customer and then expand through them through their share of closet in this case. And so the surface area, meaning that the number of people you can touch, the number of people who experience the problem you're solving is actually a lot more important is the leading indicator of TAM versus the actual final TAM when all is said and done. Josh, you actually will not cast them to be greater between why we all now and that surface area, because if you're at 20 % and the standard was 15, you're like, actually, maybe weighted with already ahead.

47:06Yeah, I mean, to be clear, like, you'll be great if you could land with 30 % of their stop. It's just you're probably not going to be ahead of what the market average is. You're probably going to be less. And it's nice that almost every company actually grows into that. So I know you do a lot of enterprise investing as well, Harry, and like, you know, you're often thought about, okay, well, I'm going to land at 50 KACBs, but I really want to get to 200 ,000, 300 ,000, million dollar ACBs. The same thing exists in consumer. You know, I want to get that customer, I want to get them to transact. I want to have a good payback period on that acquisition.

47:34But what I'm really going for with that customer is much, much larger than that initial set of transactions. Listen guys, I do want to discuss Europe and I was just thinking really, you know, Thomas, Europe is a tough spot right now, I think. And you said before, how hard Europe is losing? Yeah. You agree. Why is Europe losing in your mind? Yeah, I mean, it's very hard, right? I asked myself this question a lot. It actually makes me anxious because as a continent, you need great companies that generate a lot of jobs and pay taxes to build highways and hospitals and institutes to train society and it scares me a lot when I see that the statistics about value we create versus what the US is doing is difficult to see.

48:16I don't know what it is exactly but there are a couple things that are quite different like for example in the Netherlands if I'm back at home I love my friends they're amazing people but when I'm around them it always feels like I'm an enormous workaholic and people are telling me like come on dude like take it a step slower and like take a friday's often, I don't know, start do whatever. And when I'm in New York or when I'm in Silicon Valley and I'm surrounded by people like Alex and the people there, I feel like I'm the lazy guy. You know, the work ethics is very different. And I think Lithuania has a bit of an exception because a very young country they really want to build themselves up when they prove themselves.

48:53So there's a very strong work ethic there. There are five feel very much at home in Lithuania. But like in Europe, this work ethic is different. I think we have it very well. Things are arranged very well. And thereby people are enjoying life more, which is not a bad thing, but like longer term, it might have very bad impact on our continent. So I think that's one. And then two, I think in terms of regulations, I think we're failing to stimulate the companies that we need to build for the future and are not able to tax Chinese and American companies in the right way. And thereby, our ability to practically extract value out of the economy to pay our society, which is what tax you do, is failing to a certain extent.

49:34So our flywheel starts to slow down. The motivation is less, the extraction to stimulate is less and then the fly will go slower. So it's something I think is very sad and I worry about it. It's not good. Listen dude, I deeply fucking worry about it. I live in London, I bat my career on Europe. I didn't move to America when I could have done. And so I share your concern. Can I ask you Thomas, from your experience, do you find the European versus the US venture product very different? Yes, it's like day and night. Like if you look what kind of like seed stage term sheets get to the table of like people I know building companies and I get like in these small markets that in Europe, it's like financial rape.

50:18And it does a lot of damage. It does a lot of damage because you're first term sheet in your seed or in your series A is like absolute rape. Then who's going to step in after that? You just handicap the company. So, and I think, you know, I really learned what our qualities feces by working with light speed, oxal inside all these, all these investors that we have are like of a breed that is high quality. And then later I learned about what's happening underground in an Edeland's Lituania. And you look at those terms, you're like, you should never agree to this. And but the founders are also not aware of what's possible.

50:54I'm just going on script here, but on those founders that, like, you know, they didn't know what's possible. I didn't think that's really good enough. If you think that the core job of CEO is to finance that business and to keep cash day zero being further and further away And with the democratization and transparency of VC knowledge Alex is of the world amazing VCs from the US joining me on podcasts You go into Apple podcasts and search VC you can listen to two thousand to my amazing VCs I've had on the show listen not knowing I don't think it's a good excuse to be honest anymore Yeah, I think that's absolutely true but imagine like young 19 20 year old person spending 110 % of his time building that company and then somebody comes to him is very very nice very polite puts a term she know the table talks about how it's done puts a big check in front of your eyes that looks big at that point in time 100 ,000 euros and then you're like let's go and yeah obviously that's not the best thing to do but like people are people like this emotional thing as well.

51:54The burden of hand is a powerful thing when you come from a place where there's not a lot of innovation. You're the first stony and Lithuanian startup entrepreneur and you don't know anyone else who's ever built a company before and yeah maybe I'd listen to the 20 VC podcast and I hear from all these great investors and operators. But that doesn't feel real to me. Here's someone sitting across the table for a win to give me $100 ,000 to build my dream. It's a theoretical benefit but here's a real thing that's that's sitting in front of me. And it's not just in Europe. I mean, we hear this in Latin America, we've heard this in Southeast Asia.

52:25Silicon Valley is weird. Silicon Valley has this like weird, risk -loving kind of culture. And we also know that it's a repeat game. We know that we're going to be playing the game with these people for decades. And so we got to treat everyone right. It's a very unique thing, but the good news is that the our own, the directionality is going towards the vision hurry that I think you've espoused. Can I ask you, Thomas, conventional wisdom that a lot of people like yes, the rule of 40 is the new black. And you've said before that this is maybe BS. Why is the rule of 40 is the new black, maybe BS?

52:56And how do you think about that? This is the thing. So like when you're evaluating a business, and I'm not a VC, but when you're doing that, it's really about the fundamentals. And practically those fundamentals come down in how fast can your recycle cash to get that machine growing. Obviously, if you had a certain point in time, make a scatterplot and you put like a high growth ratio and a high profitability ratio, then you get the best companies. If you make that tighter, you get them better. So at least you get a good selection with a high density of good companies, right? But that then saying that that is a causal rule that drives to create big companies, that's absolutely bullshit.

53:36Because I can have a company that is actually declining while I'm milking out a lot of cash and I will get to a rule 40 but obviously that is not a good company and what I've seen over last period of time so a year ago or something like that this rule 40 started to pop up in our board meeting I was like okay rule 40 how okay I kind of make sense like yeah I get it but then all of a sudden this whole investor community thinks that it's kind of like a physics law and start to apply it in a way that it's non -sensical anymore I'm so surprised by that how I then made young venture capitalists completely going on how on this and not understanding the fundamentals that are behind it anymore.

54:15And that's something that really surprises me. Like how can these communities of like mega talented, mega smart people, all of a sudden as a her just go one thing and only talk about roll of 40 anymore? Like, it's because they like listen to an all -in -poke awesome David Zaz, says something. Yeah, it makes you wonder, right? There are these dangers with these frameworks that you confuse output metrics with input metrics. and rule of 40 is output metric. It's like, I did a bunch of things, and the business spits out this number, and the revenue growth to the EBITDA margin, and they happen to add to 40%.

54:49And then what a very smart public analyst, equity analyst, realizes that if you correlate that with the multiples, prevailing multiples in the market, there is a much higher correlation with that, than with raw growth, which was what it was during the zero interest rate era. And so that's why I started popping up more, it's because that correlation started to go up, and it still persists to today. you look at companies that are trading at 10 times revenues, they tend to have rule of 40 or more. But to Tom's point, for operators, it's kind of irrelevant because they're working on the input metrics.

55:18They're working on the things that define that efficient frontier of investment. And they're trying to think like, I have this balance sheet. I have my management team. I have my own bandwidth. What is sort of the value maximizing set of activities I can do with all those resources? And then like the growth will come if you do those things. The last thing I'll say on the rule of 40 is actually I actually think it's a it's a useful output metric. So it is an output metric, but it is a useful output metric. If you use it that way, it's really hard to boil down the sort of vast majority of public companies into like one number.

55:49And this notion that you can balance growth and profitability is actually I think a really useful concept. And it's driven a lot of really I think good discussions about what that trade off is. But ruthlessly just focusing on one metric is never the right way to run a business. And you always have to be cogs in of like what's input and what's output. Yeah, exactly. So if you are in a board meeting and you decide that you're going to optimize the complete towards rule of 40, then you're doing really stupid shit. That's just dumb. You should work from the input metrics where you say like, I'm going to make this investments because it's going to generate this type of cash flow on the future.

56:24And yes, in the future, I will have healthy growth and profitability. Fine, but not optimize directly towards that. see it as an output in the future, but like it's dangerous to do this. Can I ask another one that you said was maybe a little bit of a conventional wisdom that needs to be debunked? EBITDA, margin optimization. Yeah. That's like the little tom. Let's see you go for it, my friend. Yeah, I mean, again, an output metric and it's not something that actually fundamentally matters. What do you want to have, rather, a business that does 100 million of free cash flow at 5%, or let's say 10 % or do you want to have a business that does 5 million of free cash flow at 70%.

57:0770 % EBITDA margin says nothing, it's about the absolute amount of EBITDA or free cash flow. Like a business is valued on money. More money that comes freely out of it is better. It doesn't matter under which ratio that money comes out there. And we've been looking at Excel file so much that we've seen very great companies with high -ebit margin, but it doesn't mean that it by itself is a good thing. The only thing that matters is the absolute amount of cash for us comes out of it. It's how do you think about that when investing, staying, and analyzing new companies, trying to understand what EBITDA margins can go to?

57:42Usually the highest EBITDA margin businesses have, the lowest growth, right? So it's this funny thing where the business like eBay has a great EBITDA margin. It's not really growing and it's kind of losing market share every single year to other companies like minted that are Doing more innovative things and it's become a real problem for them But what we do think about is okay We have to underwrite this business to some outcome at the enterprise values Going to be determined more by the EBITDA profile of the business over the very very long term So is there an inherent infrastructure that we think will yield a certain EBITDA margin over a certain percentage if the business chooses to do that in flowcache.

58:21And so we have certain businesses we invest in, we invest in a lot of software businesses at the application layer, we invest in a lot of infrastructure software businesses, security businesses, marketplaces, social media, et cetera, et cetera. And in each of those cases, there is a best -in -class company that has best -in -class EBITDA margins. In marketplaces, like, is this business potentially like an Airbnb? Like, like, if you, when you look at the characteristics of that business, they don't take inventory, They just kind of do payments and trust and safety, but you know the gross margin line It's a fairly light lift and then they have a huge marketing advantage relative to other people in travel They spend something like 18 % of revenues on marketing whereas bookings and expedients spend 30 % and that's because they have unique inventory And so you take an example like that and you go well we can replicate that in this other industry like a peril or Home goods well Maybe we can have that even up profile because the fundamentals of the business are not that different and so use these kind of like rules of thumb and look at best in class, and then you project forward what the business would trade out at a reasonable multiple that you bid on.

59:23And that's how you understand your underwrite. It's a little bit of a triangulation exercise and you're playing for best in class, but just because you have a high margin doesn't mean it's a great business. It could be shrinking business at a high margin. That's what we all know about, right? If you have a very good big margin, it's nice, brings a lot of safety, but like people feel, let's say, that the high margin is the safety thing, but if the absolute number is not big, it doesn't bring any safety, doesn't bring any real value. Like it really needs to be seen in context of the absolute value.

59:51Otherwise, it's just a rich. Yeah, and it also could be an opportunity for someone else to come in and undercut you, too. I mean, I think that's the main thing. Like, what I actually think is a better framework than margin is like, what's your return on equity? Like, when you make $100 million in the investment in the coming year, what do we expect to return on that $100 million to be over the ensuing five years? That's a hard thing to calculate, but if you can be really good at a company at Deploying Capital and Seeking and Equity Return on that Capital, that's how you compound for 40, 50 years.

1:00:20If you say to me, well, look, we're going to make this investment, but it's going to actually lower EBITDA margin. I'd say, how many EBITDA euros or dollars do you think it's going to add to the business relative to the investment we're making? That's the thing that really matters. Look at the ones successful companies, Kulsko. The one thing they did is they kept that margin low. and thereby they kept on winning and kept on going. So it's really in context of everything else. You should never say an industry should have this margin or it's dangerous and you can actually kill an industry with it by adopting that.

1:00:49Do you worry about going public because of the education that would ensure for retail investors for the streets to understand the nuances of what we said there to understand some other nuances of the business which aren't as obvious to everyone else as they are to someone like us? Well, when we go public, it's the same as when now talking to venture capitalists. Your numbers need to be obviously clear that it's working. Like it needs to be obvious. And I think if it's not, and you can be lucky that you raise around at a good valuation, but it needs to be razor sharp on like how you're converting cash into future cash flows and how you are growing your business and how you're building defensability.

1:01:30I'm not worried about it because every time I talk to somebody about vintage that they didn't know our financials. You know, we're very skeptical about it. Second hand, who's buying second hand? It is ever gonna be a big news. And then you show the financials and they're like, holy crap, how many people are doing this? You need to be very specific to be able to explain how you gonna create value. So I'm not too worried about it. I think it will be the same game as in private. So I wanna do a quick fire round. So I say a short statement and then you give me your immediate thoughts. Does that sound okay?

1:02:00Let's go for it. Thomas, is your biggest capacity? of C. Biggest competitor to vintage, I think it's Arvinta. Alex, what's Thomas' biggest strength and what's his biggest weakness? Be honest. Be honest? He's too hardworking. You're right. He's too good looking. Thomas is an incredible systems thinker and measured integration of quantitative and qualitative insight. He can zoom in and then zoom out and zoom in and zoom out. I think it's a quality, a lot of great CEOs have in space. He sweats the details, but he also cares a lot about the big picture. I think we've talked about like some of the sort of European conservatism, right?

1:02:37Like I think and sort of the fear of failure. And I think a lot of that just comes from the conditions for which Thomas and other CEOs in Europe have grown up. And I think one of the things I've enjoyed working with Thomas is just helping him think about the big picture and how we see the global market and like what then to can become in the future. And I've seen his thinking even over the last few years and the confidence grow as we've talked about those things. I think you're honest about it. And I think it's really a weakness of me and Alex has really helped with that and the other investors as well, but it really helped.

1:03:07But it's hard to think as confidently as the Silicon Valley people because you don't have all these examples around you and you see those people who build those companies in Silicon Valley as kind of like half -garts that don't exist in a regular world. Harry, this is my quick matter for you. You've met a lot of these people. How is your expectation met with reality? For these people, what have you learned on that front? I think what worries me honestly in this being very candid, VCs have got better than founders at telling stories. VCs are back to guests and founders on the show generally because we have to sell cash, so we have to be fucking great sales people.

1:03:44That's an interesting statement. And that's a worry for me. Tell me, Thomas, what does the second hand marketplace resale market transform into in the next five to ten years? It's going to be an Amazon, but then for a second hand. So it's gonna be all the ease and all the sophistication is gonna go into the secondary market as much as it's gone into the first market. So I think we've seen over the last two decades, we've seen how e -commerce has been optimized by players like Amazon, and now Teemo and Shine coming in again, is like incredibly smart people building systems that work very, very well to bring things to consumers.

1:04:25And I think we're gonna see that now in the secondary market. Alex, what's the biggest disparity of opinion the board have had across topics? The US was a big one. We've seen a lot of success in Europe and I think we've gone from having like, oh, maybe it worked at France, maybe it's going to work in these other places to feeling actually really confident that we've figured out a playbook that works and it's a different model is we're the only ones who really do the model that we do. And so the natural next step is like, well, why shouldn't this work in the US? And we've debated this a lot. And there's some element of that that is just management time and attention.

1:04:56it's like, what, Europe isn't big enough? Like, why wouldn't we just focus on Europe and make Europe really successful? On the other hand, the US is a massive, massive market, and the model that we do hasn't been tried there. But I think that tension exists for a reason. You can only do so many things well. And the CEO's attention is the bandwidth constraint. And I think, actually, forget about one. And that's like 2021, we're building these board budget. This was kind of like before all the shit hits the van. And we made a board budget, actually, and it's related to that, but me and my team made a board budget that was like with a massive burn again.

1:05:30And then the board was like, oh, oh, and we had people stepping in saying, no, Thomas, the market is super tense now. Probably shit is gonna hit the van. And we have many of these discussions. High friction and actually out of that came that we completely reworked a budget and like obviously luck there. But like shit hit the van. Macro collapsed. Everything went wrong and we just sailed into like a financial sustainable position. Instead of like going into one of our biggest burns that we would ever do. And we have many of these things time to time where there's real friction in the board, I get real pushback, but then out of that comes better decisions.

1:06:07So I don't know, we had that with the board budget, we had it with US, we had it with, going into shipping, we had it with going into luxury many times man that we go ahead to ahead and that there needs to be really good explanations of why we do something or not. If you could both change one thing about the vented business, what would it be today? I don't say the CEO, that's a classic VC. I wish we could just speed up time, wanted to go faster. Yeah, I'm always looking at the roadmap and then I'm thinking, why can't we not do this two years and one years? Why? I'm constantly trying to pull things forward, but...

1:06:43It'd be a shit VC, you have to wait fucking 15 years. Yeah, I wish we could just have higher productivity, like less people higher productivity so that we can with the same people now do more things like I don't know I'm really excited about all the stuff that's happening with it. I really hope that we can find more productivity It's just things become more complex with more people more opinions more people like I you know I wish we could run it with less people and then we could do more with the same people that we have I'm like less critical of the current state Because I actually think our velocity is actually pretty good.

1:07:14It can always be better I think that one of the challenges we have organizationally is that we have business units. Now we've shifted into a model where we have a few different businesses that are operating. And it's just a different velocity that you can expect when that happens and different level of visibility. But the good news is that I think we've shown that through M &A and some other things we've been able to accelerate those and get the boots strapping off the ground. And so I would probably say the same thing, but I probably be less critical about the current state. I think Thomas is the biggest critic of himself.

1:07:45I don't need to criticize. I just see all these vectors of growth, all these things. I would love to see faster how it works and like, I don't know. I always find a commonality of the best founders and CEOs. I'm sure you find this is like they never pitched the good. They're always like, oh, this is shit. This is shit. We could do this better. We could do this better. And I'm like, ah, this one's good. You know the line from Hamilton where they describe as he's never satisfied. I just find that most of the founders I work with that I admire the most, they're heavily dissatisfied with the status quo, no matter how good objectively good the status quo is.

1:08:17That's authentic, it's not put on. They're like really really bothersome. Yeah, but let me be very clear, like incredibly grateful for the team and how far they're working. They're exceptional. It makes me sound like I'm not after what they're doing. They're doing stuff. I'm absolutely unable to do. Like, it's just incredible people. Okay, final one for you both. Vintage in 10 years time. Where is it? You can say where it is and then you've got to put an ant -prose value number on it. And whoever wins, I'm gonna buy the most amazing dinner for in London. What was the price for the latest vintage round?

1:08:50So last one is what's in your Covid? It was a 3 .75 billion. 3 .75 billion, okay? Let's do this. 10 years, boys. 50 billion global platform, fully integrated shipping and payment functionalities, across every category, Amazon -like marketplace dynamics, across all categories, plus new software solution, businesses next to it. Look, I think if you achieve what Thomas described, there's only a few companies in the world that can say that, you know, you have Alibaba in China, or what it kind of used to be before the recent changes. You have Mercado Libre in Latin America, you have, you know, C in Southeast Asia.

1:09:30I mean, what we're talking about is D -regially dominant peer -to -peer marketplace business and all the things that come with that in terms of the next set of businesses and Not just doing fashion but doing across essentially every category of commerce That feels like a very valuable business to me. I don't know what the number is gonna be But it's probably at least as valuable as those companies. Yeah, you're gonna put a number on it. I need a dinner that All right, I'm gonna I'm gonna low -ball you because I don't want to lose the bet But I'm gonna say wordy billion. Yeah, yeah, I'm 40 50. I'll be happy with that Does that feel right?

1:10:00Yeah, yeah. But we have to write. We have actually, with Vin, it's an opportunity to build a valuable company in Europe. If we screw this up, like, it's just depressing if we don't, I think. It's really depressing if we don't. Thomas, you are my hero. We didn't know each other before this, but I love the honesty, the transparency. You're great, because you speak like an American in terms of your opinions, you're not being afraid to share how you think, but then you also just have this incredible humility respectfully on it, so that Americans don't tend to have. It's just so refreshing and then Alex, you're just a pro.

1:10:33I love this. So thank you both for doing this. I've so enjoyed it. That's nice. It feels really at home here, so you made me feel very comfortable. So I guess this wife came so easy. Thanks a lot, man. It was very nice. I have to say for me as an interviewer to hear that Thomas fell to home and felt comfortable, is probably one of the biggest compliments that I could get. So she's thanks to Thomas for being so open and brilliant there. Alex, as always, brilliant and charismatic. Huge thanks to him for being so fantastic on that episode. If you'd like to see more, you can check it out on YouTube by searching for 20VC, but before we leave you today, Hyve is the marketplace for private stock.

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