Episode #68 Radboud Vlaar from Finch Capital – Venture Capital Investments into European Fintechs

Radboud Vlaar is a Managing Partner at Finch Capital, a VC investor based out of Amsterdam.  Prior to launching Finch Capital and its first fund in 2013, Radboud was a Partner at McKinsey & Company, focused on Financial Services, PE, and M&A. Prior to McKinsey, Radboud worked at TPG, co-founded 3 companies. Radboud holds four Master’s Degrees from the University in Groningen. Radboud leads the firms’ investments in ZOPA, Fixico, BUX, Safened, Salviol, DIG (incl. KNIP and Komparu), Trussle, Supply Finance among others.

This episode is dedicated to VC investments into Fintech startups. We have a look into investing in AI companies with a focus on the financial sector. Radboud speaks about how Finch Capital uses Machine Learning for their own deal sourcing and how a VC investor adds value to startups beyond the money when competing for the best investments. We have a section on raising and investing money over the lifetime of a VC investor. We get into how things change from a first fund to a third fund and get some great lessons learned when it comes to VC investing.

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TRANSCTIPT EPISODE 68

[INTRODUCTION]

[00:00:04] ANNOUNCER: Welcome to The Wall Street Lab podcast, where we interview top financial professionals and deconstruct their practices to give you an insider look into the world of finance.

[00:00:23] AVH: Hello and welcome to The Wall Street Lab podcast. I’m your host Andy, and today with me is, Radboud Vlaar. He is a managing partner at Finch Capital, a VC investor based out of Amsterdam. Radboud launched Finch Capital and its first fund in 2013. Before that, Radboud was a partner at McKinsey and Company, focused on financial services, private equity and M&A. Before McKinsey, Radboud worked at TPG, where we had Weijian Shan, as another TPG alumni on the show couple weeks ago. Radboud also co-founded three companies and holds no less than four Master’s Degrees from the University of Groningen.

Today’s episode is all about investing into FinTech companies with a focus on Europe. We’re talking about investing into B2B and B2C startups, especially into AI for the financial sector, and how Finch Capital uses machine learning algorithms to source their deals. We also talked about how VC investors compete for deals and what they bring to the table other than just money and how they’re adding value to startup. And then we talk a bit about the history of Finch Capital, how they started out, how they raise funds themselves, how they invested and how they changed from their first fund to the third fund. Then Radboud tells us a bit about his lessons learned from nearly 10 years of investing to startups, which is super interesting. Of course, last but not least, he gives us some career advice. So, I hope you enjoy the episode and now without further ado, my episode with Radboud Vlaar.

[INTERVIEW]

[00:02:04] AVH: Radboud, hey, welcome to the show. It’s a pleasure to have you here.

[00:02:08] RV: Thank you for the invitation.

[00:02:10] AVH: So, you have found Finch Capital in 2013, and could you tell us a bit about why did you found the company? When did you start and what were the ideas behind it?

[00:02:24] RV: So, I worked 10 years at McKinsey, and was active in the financial institutions space, as well as in the private equity space. I always had a passion for new products, new innovations, or building new companies, businesses, also within the large corporates, of course, which was a lot of my advisory work at a time. I also liked the entrepreneurial part. So, that’s when, and actually, as a child or a student, I was most interesting in investing into companies, that was always an idea of what I wanted to do over time.

What you saw in that period is after the financial crisis, a lot of focus of financial institutions was inwards. Well, on the other end, if you look at data, you saw that a lot of the consumer and customer behavior was changing quite a bit. So, they were increasingly moving to online channels mobile. So, if you take the period of 2002 to 2012, in Northern Europe, 50% of the branches were shut down, partly to save costs, but partly also, because consumers we’re no longer in that much need. So, you saw on a lot of areas, you saw a change. I think Europe’s history in venture capital was mixed.

I think for a long period Skype was the main success people could talk about. What we found is that, as the hypothesis at that time, is that in financial services, Europe has a very strong history of innovation. Europe, also in adapting new technologies was in the forefront. In the US, they were at that time, still opening branches, while using technology to interact with your bank, or with the insurance company was already more adult in Northern Europe than in the US. So, the hypothesis was that for financial technology, Europe could be a very good platform and also very effective with more homogeneous regulation across Europe. Nobody forecasted the Brexit at that time to happen.

It’s all of that combined. It was basically the underlying thesis for the opportunity in financial technology.

[00:04:38] AVH: With Finch, as you said, you focused on FinTech investments in the VC space. Can you talk a bit about what is the background of the company, so how much do you invest? What kind of companies are you looking at? What is your focus point?

[00:04:51] RV: Yeah, so like any company, nothing is as dynamic as the investment focus. I think what has stayed constant and consistent is the focus on, and the definition of financial technology. So, on the one end, it’s a very broad range of financial services. So, for payments companies to insurance, to banking, to asset management, to private banking, intermediary, so the whole value chain of financial services and then we focus on two type of quality technology companies. So, companies that try to disrupt so they try to become a mini bank or a mini insurer by taking away customers from these players. And on the other hand, companies that sell software and technology into these companies that are active at the moment in financial services, to make them faster, better, more efficient by using technology.

So, it’s that combination. Initially, we had in the first fund a very broad focus. So, we have invested in companies right from the start. In the seat face. So, with very few revenues to companies that were in the tens of millions of revenues, that most companies around the half a million to a million revenues and fund. We started to invest as of half a million revenues and the third fund out of which we’re investing now is more in the two to five million. So, in fund two, I would say we invested between half a million to five million in revenues and now we narrowed that a bit more into the two to five million range.

Then we do tickets to get to an ownership of around 30%. So, our tickets have evolved in fund two, I think it was between two and seven million, and probably moved up now a little bit more to the three to eight or three to ten million. And then we continue to invest in companies as I need funding for the future rounds.

[00:06:45] AVH: I’m not an expert in VC, but I feel like 30 plus percent is fairly high in the space. Am I mistaken there? Basically, what’s the reasoning behind why are you looking at that percentage? Why not 5 or 10? I mean, above 50, I think it’s pretty clear, right? But is there any reasoning why around 30%?

[00:07:04] RV: Yeah, so we used to invest 15% to 25%, which is more than normal percentage for a lead investor, for someone who does the majority of the rounds. If you go below 15%, it gets too small, because how the business model works or for venture capital investor is that a few of the companies drive the outlier returns so differently to the buyout sector, where every company, you make a little bit of a gain, but you try to not let any income burst or lose money. Here, it’s 20% of the companies determine 80% of the total value creation. If you then own 10% of that company, instead of 15%, or 20%, it is much harder to make very high returns here. So, that’s why a minimum ownership is needed.

Now, the other thing is what we see in Europe differently than in the US, like if you take unicorn or takeout [inaudible 00:08:04], or any, Europe just has less of the multibillion companies as outcomes, and most of the companies, which are successfully sold are somewhere in 100 to 500 million. So, in order to get to the same absolute outcomes, also, every time we have a slightly bigger fund, a little bit more bigger ownership makes it easier, and what we typically do is the majority is primary, but also secondary, as there are sometimes angel investors, former employees that want to sell some of their shares, then we try to find a combination of new money and buying out some existing shareholders that would like to take some money off the table to get to that percentage.

[00:08:43] AVH: That’s a fairly detailed question. But I think it’s really interesting, because I haven’t spoken about this a lot. How well is it received from a VC like yours? If people want to kind of get out of the company? You are a serious A, serious B investor? If I’m correct. So how common is it? And then how do you try to get the percentage right? How much money do you want to give the company to further the growth? And how much money do you say, to get the capital holders in place?

[00:09:14] RV: Well, I think the primary focus of the company, the investors in the company, and the new investors in the company, is to make sure that the company has sufficient cash so that it can grow and create value. So, I think if that number is x, if that number is 5 million, 8 million, 10 million, then that’s the number I typically look what is needed for 24 months ideally or 18 months. But somewhere in that period. So, that you don’t have to start fundraising as a company the moment you just lost the last round.

So, that is the first goal number and then there is a question what is the ownership you get for that number is that what is the interest now? What you see in a lot of cases there might be people willing to sell and if there are investors that are also willing to put more money in, assuming the company has sufficient runway that can be facilitated. So, I think as long as the company doesn’t have sufficient capital and cash to grow the business, I think a secondary is not part of the discussion. If we, for example, would like to invest more than that the company needs, that can be a way to actually make some of the existing investors happy that would like to take some money off the table, and some new investors happy, maybe have a minimum amount of capital they would like to deploy. If you are getting franchises that are getting bigger and bigger, you’ll have to – on the one hand, there is a certain amount of capital, you have to invest. On the other hand, there’s a limit to how many companies you can have as a firm, because you just have a limited set of partners and principles that can be on the board. So, there was also a scarcity of human resources to manage these companies.

Well, and that’s why sometimes you would like to deploy more money into a company than a company would like to take. And then secondary can be in a good answer for both people. But if people desperately would like to sell and get out of a company that is, on shelf, not a good sign. So, if people say, “Hey, I would like to raise money, and half of my investors would like to sell the company”, then that might scare new investors. But if there was like, 3% or 5% of investors that, for example, are angels, or friends and family that have been there from the first day of investments, and it’s now three to five years later, I think it’s not strange.

[00:11:35] AVH: That actually would have been exactly my follow-up questions, how it would feel like, if there’s a kind of a threshold where you say, “Oh, actually, if 10% to 15% of the previous investors want to get out and they want to give their shares away, I’m getting a bit varied.” But if it’s like only 3% to 4%, I was like, “Yeah, it’s totally normal.” It’s just they want to get out. It’s out of their league now, or it’s out of the station they’re looking for.

[00:12:02] RV: Yeah, but we’re seeing different stories there. So, I think you’ll see either people that have gone bust or are in financial distress, and they’ve made some private investments, so they’re in desperate need for cash. Most of the secondary school might have discounts. I think about 20%, 30%,15% of the last round. Or it could be that people pass away, a human tragedy, sort of like a lot of stories. If the investor in the last round is institutional, and there’s no real explanation, besides the party not being very keen on continuing to hold shares, that’s typically a red flag.

So, it’s typically more smaller shareholders whose core profession is not investing in companies, but for some different reasons would like to create liquidity.

[00:12:46] AVH: Yeah, I guess it’s always a game of like looking at how does it fit into the bigger context. Now, I saw press release of yours. And you said that the latest fund you raised will focus on AI technology, right? Why is that strong focus on AI and what’s your reasoning behind, why not, for example, there’s other upcoming technologies, blockchain or anything else?

[00:13:15] RV: So, we focus on multiple technologies. If we look at the two sides, sort of disruptive sides, and the quality order side, we focus on our software companies or technology companies that help financial institutions to transform. We see there are very strong need for technology companies that make a use case for financial services that use AI. So, I think AI is a little bit like a buzzword like the internet or the worldwide web. Our view is that AI will be used in some way or form by lots of the companies going forward. There’s a way to do things smarter and more efficient. If you look at the financial sector, there’s lots of data available in this sector. There’s a lot of manual work and there’s a lot of inefficiency that can be improved by automating either repeat processes, and smarter use of data.

So, our view is that software companies that have a strong use of AI will be better able to help the financial sector and have better products to help them whether its niche and customer insights, productivity, or whatever its tools to help to make investment decisions. But that’s basically why the strong focus of AI, because we think it’s going to be embedded and 8 out of 10 software companies that help or in traditional industries to change will use some way or another AI.

[00:14:38] AVH: Interesting. Now, I saw when I looked into Finch Capital that you actually use AI for deal sourcing. Can you talk about this? I think it’s called flow rents. I find it really interesting because I thought especially VC deals are not like very high-end data, right? There’s not so much data there. But how you try to source deals by leveraging AI yourself?

[00:15:05] RV: So, I think if you look at our case, it’s how we use it. At least we don’t see a situation where the tool provides, if a deal comes out of the tool, automatically, that company has sent a term sheet and ask with an amount of valuation terms and is asked for countersigning. So, it will not replace the work that is being done. But it will help to tap into and generate a list of companies that are worthwhile to meet and talk with and find out more about. I think there’s a lot of data about tech companies, most of it, if you, for example, start using the data of angel investors or seed funds, there’s a lot of data published on databases like crunch based newspapers, and you figure out the parameter showing them in 2020, a lot of the months have been used to fine tune also the quality that comes out of it. So, it’s a machine learning tool. It requires input from the human to get it right.

But it’s basically leveraging a lot of the data out there. And a lot of startups are, even if there is not a lot of data filed by them, a lot of them have some form of a press release or get an award or get something. I think if you’re not able, as a startup to get into any news, but you’re very successful, especially the phase where we focused on these, the two to five million revenues. By the time companies that are there should have had some coverage, and where it helps is to get a complimentary set, and partly an overlapping set of companies that fit within the focus where we invest, and maybe wouldn’t have been on our radar without the tool, or maybe they would have but maybe we find them earlier now. I think also, where the comparison is not completely clean, basically we started using it almost – we developed it almost at the same time or just before Corona kicked in.

So, maybe otherwise, a conference list and other platforms, you will find some of these companies, but first, it’s a very efficient way. So far, it’s proven to good quality. We haven’t made any investment yet in a company there. But it’s we have been working on tuning it. But now, I would say roughly 20% of the companies in our shortlist, which we discuss and track in our investment committees are coming from us. But I think it will take some time. At least we’re earlier on finding a good set.

[00:17:37] AVH: Yeah, I mean, that’s typically with machine learning algorithms. They need time. They need more data. How does it work? So, you track crunch base, you track new sites, you track announcements, and then, does the program already sought? This seems to be the top companies that you should look at, or it’s just gives you a huge –

[00:17:57] RV: Yeah, generates a list of the companies that have the highest match with basically what we’re looking for. And so, it generates a list of companies that someone in our team scans through this company, so that you’ll have to look up these companies if they’re really interesting and that’s why we also become better and better. Out of that list, let’s say if you get 20 companies probably two or three, we then really find interesting. So, that’s why I said based on our experience, not be that the point, the machine produces a term sheet, because it’s so good. Still, you would like to speak to the company and get a bit more color because there’s a lot of data not perfectly available, but at least it brings another set of companies that we haven’t found. There’s of course a lot of data. LinkedIn, you can find how many employees, how much was the employee growth. You can find data about downloads and order statistics. So, you get a bit of a sense where the company has a strong momentum. Companies that grow super fast, but are not hiring anybody sounds a bit a mismatch.

So, you get a sense, then if the company is successful, and that you can do all the data, but still also a lot of things which are explaining something. Some companies might not have been growing that fast, because they may be using third parties, or they have two different entities and et cetera, or it’s fragmented. So, it’s always important to get the story behind it, but to get a first filter, it works very well.

[00:19:24] AVH: So, you arrive at those two or three companies out of 20 from the website that look interesting. How do you then proceed as an investor reaching out? I I’ve heard a lot about the other way around, that the founder trying to get an intro to the VC. And that’s they always say like, you should have a hot enter, you should have a warm introduction. And then it’s much more likely to get the call but for you, is it also that you want to check your network if somebody knows the founder, or is it more like you reach out directly?

[00:19:58] RV: Yeah, so I think the the way we do it is probably very similar as a company, I think what the big difference is that, kind of one founder asked for another founder to reach out. In a lot of cases, they’re not competing. But if we would ask another VC, “Hey, there’s this super amazing company, can you make an intro?” At the end of the day, there’s typically one lead faster. So, a lot of cases would be if there was a seed investor, we know very well, they could make an introduction there or it might be that there was another company where we see founders that know each other that we get introduced via this order company. So, ideally, you tried to get an intro out of your network. But if not, we can also reach out.

At the end of the day, I think, there are not that many VCs. So, I think we’re in a slightly different setting, like probably they’re 10, 20 VCs that are a good fit for that company, given industry expertise, or country expertise or business model or aspect. So, it’s maybe easier rather than sending cold emails to a VC via company, and then being one of the 3,000 cold emails.

[00:21:07] AVH: I guess you are in a much better position supply and demand there than most founders.

[00:21:15] RV: Only not very attractive for venture. For us, it’s about making sure that we don’t miss this one or two or three great deals. So, a company that is doing super well, yeah, if another VC gets a warm intro from an angel investor, or an order seed fund that knows them very well, there’s more comfort. So, it’s as important for us as for a founder too, if you see, to do this well. But maybe if we don’t know someone, and we’re early enough, and there’s a hook an angle, how we can show that we can add value, or we have companies in our portfolio that are of interest to that founder. Then typically, it’s also an easier way to do that and more cozy.

[00:21:54] AVH: You touched on something interesting, how you add value. How often do you see yourself kind of competing for a deal? What is your your value proposition? I mean, in the really good deals, I think both sides kind of pitch to each other, if I may call it that. On the one side, the startup wants the money, but on the other side, the investor also wants the deals. What are some some typical things that you will say to a founder, “Hey, if you work with us, this is what we could provide for you.” Aside from the money, because I feel like at least globally, overall, I’m from the US, money is getting slightly more abundant. So, kind of soft skills or soft facts seem to increase in value. But please correct me if that’s not correct.

[00:22:44] RV: So, I think there is a difference in the stage of the company. I think if companies have hundreds, millions of revenues, or 50 million, I think there is already a difference. The role, the value adds place, versus the valuation and the capital. And then there’s very early on, in the early days, where of course, if someone can bring extra clients, if someone has a network or a deep expertise, it can help a lot the acceleration of the company. So, the art firms that have a lot of logos and a track record of having IP out, 25 companies, so there is much more tangible, but a track record is there. If I was a founder, I think it’s very important, who, within that firm, you work with, as probably there are different styles and different personalities. So, checking that.

But overall, these firms can help is clear with the network they have and in a lot of cases, what we do is the best references with the companies we have invested in. Because every firm will tell we will help you with A, B, C, we will do this, we will do that. So, people really do that. We have very large network of financial services, a lot of financial experts. I think we’re speaking to the portfolio companies and the founders and CEOs of these companies. I think you will get a more color around what it is. But value adds in combination with sector focus and sector expertise is where we tried to differentiate.

[00:24:14] AVH: We covered how you partially source deals via this AI based tool. How are the rest of the deals sourced currently?

[00:24:26] RV: Yeah, so like I mentioned, there was a large volume coming fire inboxes emails, white gold. I would say almost all the investments we have done are coming indirectly or directly out of people we know. There might be a bias is that we are one step ahead and first the ones that get cold emails. That’s why there’s a higher conversion and also around that if you get introduced that the party that introduces you has a good feeling that there could be a good fit based on personality investment criteria and what is needed on both ends.

Plus, I have probably good founders and good entrepreneurs, do an effort to get a warm intro rather than a cold. And probably good entrepreneurs are a better network than average entrepreneurs. So, there are probably a lot of factors that play a role. There might be biases that we get better due diligence input prior to the company, or timing. But overall, the majority is fire people we know. Let’s say, if you would look within the LinkedIn definition, our first or second connection. So, there’s always one person we know well, that they know well.

[00:25:33] AVH: Now looking at the funds you raise, I think you’ve tripled the size of the funds threefold. So, was there any, I guess there was, but how was the difference between when you just started out in 2013? Where it says how you get them now? Did it still come a lot of inbound? Because you already had a network from your experience at McKinsey? Or was it more that you kind of had to get to the startups, had to reach out more, and had to like hack your way around how to get onto the good deals?

[00:26:08] RV: Yeah, so I think it’s not something’s changed, that are positive in that dynamic and some things that are making it more difficult. So, the thing that make it more difficult, I think when we started, people didn’t really know, FinTech was not a buzzword like it is now. So, we’re one of the few FinTech funds. I think FinTech has become more mainstream now. So, that differentiation is still there. But like, in the beginning, we were really one of the few focused on FinTech and I think you also, at that time, there were not that many FinTech. So, we basically grew with a lot of these entrepreneurs. I think the more you’re known, the more companies you have invested in, the more investors you I’ve worked with, that is basically expanding your network. It’s also clear where you stand for. I think, also, if you’re into third fund, you’re more likely to stay here, than you raise your first fund and then disappear.

So, in that, it’s easier. But also, there are lots of more FinTech at the moment than there were before. I think overall, there are also more investors. I think there’s from US investors that have come to Europe, there are some more corporate investors that started to focus on this more local. So, it is more developed ecosystem than there was in 2013, ‘14.

[00:27:24] AVH: This brings to me an interesting point, because I’ve just recently talked to Brett King, author of Bank 4.0. And he said when he started his “challenger bank”, moving, it was in 2010 and there was not really – as exactly what you said, there wasn’t really a big FinTech world out there, especially in 2010 is even three years earlier. When would you put this trend when it really started to take off? When did it really start to be FinTech?

[00:27:57] RV: Yeah, so I think there may be two sides of that. So, one is a bit what do you define as FinTech? And why do I say that is, if you look at the capital ones, the IMG directs, take the stock brokerage firms like the banks, the Swiss quotes, like, there have been a lot of startups or Germany, you have [inaudible 00:28:18], the mortgage side. So, there have been a lot of new business models, and a lot of them have been either been acquired or incubated out of startups. But there were, I think, somehow not seen as FinTech, because I think a lot of them have also been founded by people that know financial services, well, like mature bankers or insurers or businessman.

I think what changed a bit on the FinTech now, I think A, there are a lot of also more younger generation of people maybe that haven’t worked in financial services that have started this. And I need adoption has been way more and much more mobile playing a role than it was before. A part of that is that I think, first people needed to start sending an email to each other, you’re not going to do your financial services online. If you don’t even trust to send an email, then the smartphone adoption was needed. And I think when that network started to kick in, that people were all online, and I think the financial crisis also helped with it, where a lot of financial institutions were inward focused, rather than investing a lot of new money into innovation.

I think a lot of FinTech have done great, but if you look at a lot of them have changed the UX and improve the customer experience, but fundamentally are still solving a similar customer needs or bringing a similar product to the market, which can be cheaper or can be better. But who knows, if there was no financial crisis, financial services could have made some of these investments or put more resources at work to do it themselves.

So, I think it’s a combination of that. I think it’s the type of entrepreneurs that do FinTech and I think it’s the whole, everybody being online and digital, and able to really have more mobile ads and pure digital models. I think a lot of the models before were more hybrids that had some branches in combination with the internet. Now, I think you go to the more pure digital models, which scale much faster. And therefore, if you have to open every time a branch, it takes much more time than one website, or one app in App Store.

[00:30:28] AVH: You said there are now more people from outside finance, founding FinTech. Why do you think that is? Do you feel like there is just a lot of room for innovation there? Is it a very attractive field? Or what do you feel drives people currently into FinTech?

[00:30:46] RV: So, I think if you look at the most successful FinTechs, I think there’s some way or another have worked somehow in financial services or they have a bit of affinity. But in general, I think they’re more younger than the generation that did that before. I think there are lots of people that have, as the world move digital, experienced the gap between their experience on sending messages or doing things online, in their normal world versus their financial world. So, they have great difficulties figuring out what the best mortgage was, or had great difficulties, finding an insurer that was more flexible than something where they need maybe for a week, a car insurance, instead for a year.

So, I think, as a lot of the traditional products enhance the customer experience and flexibility and pay when you go type of models. I think people also saw the gap with the way they bought and use financial products. So, that probably inspired them more, whereas the older generation maybe was not adopting that fast to digital products or didn’t see the value in depth. So, I think it’s a lot of experience gaps people see between the two worlds.

[00:31:58] AVH: Can you name an example trend within FinTech? Because as you described, FinTech is huge, right? You can talk from mortgages to [inaudible 00:32:07] before. They do FinTech for over 50 years now. Do you see some particular trends? For example, you said you do B2B but also B2C, business to business and direct to consumer. Is there any overlap of one of the two businesses or it evens out? Half of the companies are consumer companies, half of it is business, enterprise software?

[00:32:31] RV: Yeah. So, I think in B2C, you see a lot of companies that work with partnerships, so have become B2B, B2C, as marketing is quite expensive. So, a lot of them are developing products that have a great customer experience and solve a real problem, and then use some of the other parties at that have large customer bases to basically bring these products to the end consumer. I think a lot of growth is in the B2B space, because there’s a big demand also by the established financial institutions to use technology to adapt and transform themselves. So, that’s why we’re seeing a lot of growth. There are some areas that have grown a lot, of course, due to the Corona, where people see, for example, that digital onboarding, that’s got a massive boost, the same as that remote working and productivity tools, I think, have helped the corona lock downs and working from home shift have helped a lot there.

But there are so many areas, and I think the financial sector is typically 20% to 30% of the country’s GDP. So, it’s it’s huge in terms of volume. But even if you take already the rental space, or the mortgage space, there are a lot of different sub sectors in that where efficiency improvements can be made and that’s the beauty of financial services. Some of the small improvements can have a huge impact financially for the value chain. And as a result of that, if you can save a lot of money, you can also charge more money.

[00:33:59] AVH: I want to switch gears a bit now and we talked a lot about the sourcing, the investing. I’m a bit curious how it works on the other side, because I read in one of your press releases that I think 90% of your investors that follow up on investment and now I just did my KAIA. So, I’m like, curious, how does this work in real life? Do you take on most of your current funds from old investors or do you get new ones? How does this process work?

[00:34:29] RV: Yeah, so if you want to have a larger fund, typically you need also some extra new investors. Then, of course, there are investors that continue, but maybe with a less amount of money because money in the industry where we are active is for a relatively long periods locked up. So, a fund lifetime is 10 years, and you get typically some early on access, but typically a lot of the best companies will hold longer in your portfolio. So, that means that by the time you raise a next fund, the money of the previous fund, a significant part has been called, basically is that we ask the investor to wire the money to us because we make the investment, but not returned yet. Therefore, institutional investors have certain limits of how much they would like to deploy in the asset class. Some of them increase when you do an extra raise. But some order if you think about family offices, or high net worth individuals, they could have certain private situations, some people buy a house, some people get separated, some family offices have generation shifts, where there are new people managing the money with different appetites.

There are always shifts in terms of how much people would like to allocate. But overall, we’re very pleased with a loyal investor base that has continued to invest. And then we always add new investors to our fund as the funds grow bigger. But probably, the future funds, I’m not sure how much bigger we will get versus what we are now. I think, because if you want to have very strong returns, the bigger the fund gets, sometimes it doesn’t make it easier. So, we feel down with 50 to 200 million is a good franchise, maybe 250 of diamond, but more in that space.

[00:36:16] AVH: You touched on a point that I read and hear a lot about. You can’t infinitely, especially in the VC space. If your ticket size is somewhere, just roughly 5 million, if it’s 500 million fund that’s more like a private equity fund, where you deploy like dozens of millions of dollars. But if you just have five-million ticket, you’d have to invest in 100 companies, right? It’s just like, very hard to manage.

[00:36:44] RV: Yeah, so what typically the firms do that have the 500 million funds, they also invest in new growth rounds. So, if you would look at a series D or E or F, each of the rounds has a number. So, when companies are start raising like 200 million or 50 million, so they write bigger tickets, which are companies that are typically more mature, so they have already more revenues, and have a shorter time to exit. I think some of these funds have done very well now with the recent IPO or not recent, I think pretty good IPO window we have had so far, and attract valuations at the stock markets.

So, you can deploy quite a lot of money there, especially in the US. I think Europe has less of these very large growth rounds. Plus, some of these companies want to expand from Europe, into the US or from Europe, into Asia and might look for investors that can help them in that region. But there are a couple of the 400 million plus funds. In Europe, you don’t need to very large team or you need to be in combination, or would be in a bit more flexible that you also do the more later stage funding rounds.

[00:37:51] AVH: I’m repeating a question from earlier, but from another perspective now and that’s basically from your first fund to your latest fund. How did the fundraising for you change? Did you just then try to keep your – I mean, you said that you have to follow on investors, right? But was it harder for you in beginning to raise money, especially for FinTech that basically, as you said, didn’t really exist? What kind of investors are the ones that look into those niches that are not established? I guess today, if you say, “Hey, I’m raising money for FinTech.” It’s like everybody knows what it is. But in 2013, if you say, “I’m raising money for a FinTech, VC fund.” They’re like, “What’s that?”

[00:38:34] RV: So, I think if you look at the investor landscape, a lot of large institutional investors like bigger funds. If you are a pension fund or insurer, and you have 50 billion of assets, or 500 billion of assets, you need to deploy every year, 2 billion in private equity, then a venture fund with a fund size of 50 million, and you don’t want to have more than 10% concentration limit is not very attractive to deploy 5 million. Then you need to do every day three firms to deploy your money. So, that’s why you see, if you’re on the smaller end when you start, and because you don’t have a track record, the only way is to – our people basically that somehow know you, trust you.

So, if we look back at who invested in our first fund, I think we spoke to lots and lots of investors. But these were the investors that directly or indirectly knew us and had a trust in us that somehow, we’re going to make that work. Now, as you go to fund two, there’s already a little bit more of evidence of what you can do and track record showed that develops. I think the easiest is probably fund four or the hardest, you will not know, because in fund three, the amount of realization, so you can have a great track record on paper but at the end of the day, the question is how much cash did you really return to the investors. If you look at most of the capital is returned between year 7 and 10, and you start raising fund three in year, let’s say 5, 6, at the time you’re at fund four, there should be a lot of more proof whether what you thought was going to happen, did happen. And there’s quite a lot of institutional money that looks for more proven realizations.

So, I think overall, we have been lucky with the team and the performance, as well, as a result of that. In the beginning, of course, we have to learn also a lot with that, and as you become bigger, and there’s more track record and more data, fundraising, becomes easier if the track record is good, which we have, luckily, in the case. But realized track records is going to help even more so. And then the short and fund size, now the 150 to 200 million is still on the lower and for the most of the institutional money as they would like, ideally 200 million plus.

[00:40:54] AVH: I want to change gears a bit, but you can also relate the following question to fundraiser, to anything in your career, in your experience. What were some mistakes that you now say, actually, I’m glad I made those mistakes? Because they helped me in the end, and what was the best experience you took out of a mistake that you made?

[00:41:19] RV: Yeah, I must say I’ve learned from all mistakes, or at least. I think there were mistakes which you wish that didn’t happen at that time. But you also learn from it. Either you don’t make the mistake twice, or you got some early warning, alarm bell developed your brain that the next time you get there, it rings. So, I think, I wouldn’t say mistakes, but the learnings maybe, we had, is we invested in certain companies where we probably were not the right investors for these companies and these companies and the team were not the right investors for us. So, I think a lot of areas where I think, mistakes we have made and call it maybe judgments on people where either they were amazing and creating efficient and telling a story but not in executing it, or not great in hiring the right people around them.

I would say we have had very few business model or adoption mistakes. There’s very little of that. So, it’s much more on the execution and I think there’s a balance between being stubborn, because you need a bit of stubbornness as a founder, because everybody will tell you not to do it. So, if you listen to the advice, then you will never start up a company. But you also need to be able to listen enough to figure out, “Hey, this is not working. I need to adapt this.” So, what does it take to win and therefore listen to the feedback of clients and people?

There is this fine balance of listening, I think we’re a lot of things we learned in founders that were too stubborn or not listening or not able to hire the right people around them. Timing, I think, the mistake we will continue to make and have made is timing. Like investing too early. Investing too much, too early. Stopping to invest too early. And to get to timing right, probably, destroyed the most value and created the most value. The lessons there with timing is when do you stop basically believing in it, and when do you need to give sufficient time to make sure that you didn’t pull the plug too early or jump too quickly to conclusion. But timing mistakes have been most insightful with hindsight and are probably also the hardest. So, every time you get better at it, as every like company is its little pilots with everything slightly different each time the founder is not exactly the same. The market is not exactly. But I think probably, if you look back when you made the mistake on timing, you see what did I miss as a signal where I could have seen it actually things were going better or not.

The same is when to exit. You probably sometimes exit too soon or actually it’s too late. Look at the stock markets. I think you could say the listing, if you take probably Europe’s more successful companies, that companies like an RTN got IPO too early. Or if they would have IPO’d later, they could have had a higher proceed for the investors. Some probably were forced to sell the moment a company is liquid.

So, at the end of the day, some things are a success. But there are also lots of examples where people just IPO’d on time before the whole market collapsed and made a lot of money. There are examples of companies that have been sold for 800 million, and 2 years later, were sold back by the buyer for 30 million. So, getting this timing right is, I would say has been a very valuable lesson and will continue to be very valuable. It’s probably the same for entrepreneurs. When to enter a market, and when to adapt to new technology, when to double down on hiring more people, which increases the burn. But if you do it well, it might help you to raise more money at a higher valuation. Getting that right is an art.

[00:45:17] AVH: As an investor, then after those timing mistakes, any kind of tools, and I’m speaking in the broadest sense. It might be as easy as a to-do list or a checklist to kind of keep you from at least like stepping out of it? There is habit forming, there’s many things like, “Am I doing this subconsciously or I’m making a conscious decision?” Do you have developed anything like that, that you say, “Okay, before I take an investment, or before I give up on a company, I check those five topics, and if they all are red, or green, or whatever, then I say, Okay, I’m stopping, or I’m taking a step back.”

[00:45:59] RV: Yeah, so some things are more soft, like on the people mistakes we made. In the beginning, that’s part of our background, we thought that if certain things, the management felt differently, or there was a gap in the team, we thought we could help them or we can discuss that later. So, we’re not making any compromises anymore there. If something doesn’t feel good, intuition on the team, or you feel that there are gaps, or we have a significantly different feel on where the opportunity is, you quickly get in situations where people all agreed that we’ll do it and we’ll sort it out later. So, if that good feeling is not there, we’re not going to compromise and we’ll not invest.

Then on the checklist, et cetera, I think part of our moving up a little bit the revenue threshold of the companies we invest in from very early with no revenues to half a million or two million, is also that there was way more clarity on at least what we see companies with two to five million is clear, whether this is a theme that can also hire a manager or people, and where the team that can not only develop a new product, but can also sell and scale a product. There’s more data to see where the customers really like it. In B2B, if you’ve got a pilot from a very big, one of the top 50 banks, you could easily get a contract for half a million or a million, that’s like a pilot. But what you can really do as a product market fit or whether you really get multiple clients that are interested in this product, or you just happen to have one client, that’s what we all feel is easier to judge and is two to five million level.

[00:47:36] AVH: Now, before we wrap up, I found one interesting thing and it brings me to our typical last section of the day, and that you are holding four Master’s Degrees. That kind of like brings me to how important in your hiring. So, if you are looking for a new investment manager, if you’re looking for a new partner, how important is like the university education versus real life, like street smarts? Because I also saw, before we started, founded free companies, right? How do you value those kinds of skills? What skills would I need to bring to the table to get a job with you?

[00:48:17] RV: Yeah, so first of all, we work as a team. So, we try to look also what does the new person bring to the team that overall makes the team better. So, we’re not looking for 20 identical people, because probably, we could have been as good with 18 or 10 of these people because they’re all the same. So, we look at new people bring a different network, people bring a different lens. We now have in the team people that work in companies in the area of product. Some people worked in the area of technology. Some people have found it from start to finish their own companies. Others have been investors or built their own companies.

So, it is important that people come with a different lens. Okay, a constructive lens. If one hates investing, and the other one likes investing, that’s not necessarily helpful, another lens. Age is for us, not an issue. Probably, unlikely that we hire as an associate someone who is 65. But we’re not focused on that. I think for the junior roles, if it’s like business analyst, people need to be open enough to maybe learn new things, which is some aged people have used and got familiar with a certain way of working. So, that is important there. Then geo networks, as we’re an international firm, personality, so we also do test in the beginning to see some people are more introvert or people are more execution or the ones are more reflective. That’s for us. We like to different personality styles. Also, I think a lot of founders are different. We also have different personalities that can be a good match with the companies we invest in academics, I think, as we look at it, what grades people get and what I did. But it’s more are people focused on getting the best out of their skills is more important. And it could be that someone has done a great sport achievement in combination, or people have worked in amazing companies. Academic is an element, but it’s not – especially for all roles after associate and business analysts. I think the academic, I’m not even sure I know the academic achievements of most of my colleagues.

[00:50:29] AVH: Okay, perfect. Radboud, that’s all the questions I had. If you want to have any last words, be my guest. Otherwise, thank you so much for coming on the show. It’s been very insightful, very interesting. I wish you all the best of luck for your next fund.

[00:50:46] RV: Thank you. Thank very much. Thanks for a great interview.

[OUTRO]

[00:50:54] AVH: Hey, again, this is Andy. I hope you enjoyed the episode. If you did, please leave us a five-star review on Apple Podcasts or wherever you get your podcast from. Share the episode with your friends, with your colleagues and everybody that is interested. And if you want to reach out, feel free to drop us an email, a message on social media. And I look forward to hearing your thoughts, your comments, your feedback. And thanks again for listening. Have a great day.

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