Episode #73 Hugo Bongers – Corporate Venture Capital, Grooming Unicorns, and Investing in Startups

Hugo Bongers is the Head of ABN Amro Ventures, the 150 million Euro Corporate Venture Capital fund of Dutch Bank ABN Amro. His mission is to make strategic investments in early-stage (series A and onwards) tech and fintech companies which are relevant for the bank. His job is to scout for innovative companies, invest in them, connect them with relevant stakeholders within the bank. Hugo is on the board of a lot of startups, like solarisbank, penta, crosslend, just to name a view. Hugo has a background in acquisition finance and private equity. Hugo holds Masters degrees in law and economics from Utrecht University.

In this episode we talk about the Corporate Venture Capital arm of ABN Amro. We talk about how Hugo sources his deals, his decision criteria on when to invest in startups. His value proposition to startup founders and how he deals with internal and external stakeholders of the bank. We go into the latest market developments, the recent rise in valuations even in early stages before hitting a positive cash flow. And of course, we give some interesting career advice.

Links

https://www.linkedin.com/in/hugo-bongers-5406383/

https://www.linkedin.com/pulse/venture-capital-fintech-hugo-bongers-from-abn-amro-marcel-van-oost/

https://www.crunchbase.com/person/hugo-bongers

https://www.abnamro.nl/en/commercialbanking/partners/transaction-banking/partnering-is-the-way-to-go.html

Contact

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https://www.linkedin.com/in/andreasvonhirschhausen/
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TRANSCRIPT

EPISODE 73

[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.

[INTRO]

[00:00:23] AVH: Hello and welcome to another episode of The Wall Street Lab podcast. My name is Andreas von Hirschhausen, and I’m your host. With me today is Hugo Bongers, and Hugo is the Head of ABN AMRO Ventures, the 150 million euro VC fund of the Dutch bank ABN AMRO. ABN AMRO is the third largest bank in the Netherlands, and Hugo who is also on the board of a lot of startups. For example, Solarisbank, Penta, Crosslend, just to name a few. Hugo has a background in acquisition finance and private equity. He also holds master’s degrees in law and in economics from Utrecht University. What’s very special about today’s episode, I can actually sit across from him and talk to him in person.

[INTERVIEW]

[00:01:13] AVH: Hugo, I’m so pleased to be here.

[00:01:16] HB: Thanks for having me, Andreas. This isn’t the first time also I’m having a personal interview, instead of all these digital Zoom things.

[00:01:25] AVH: Yeah. I just thought who – I was really nervous, instead of setting up the tech, just because I haven’t used it in two years. This is – It’s so weird. But, Hugo, let’s start. We had a corporate venture capital fund before on the podcast, and they had the mandate to basically just invest in all kind of technologies for the future. What is your mandate within the ABN AMRO Venture fund?

[00:01:49] HB: I strongly believe as an investor, you need to add value to a company on top of the money that you bring. Our pitch is pretty simple. I can deliver the bank. So that is the value-add that I can bring to a company, and that also resonates back to the mandate that we have. There always needs to be a strategic angle for the bank and there always needs to be a clear financial perspective, the financial return. So it’s a combination of both.

[00:02:14] AVH: Okay. So you always have a look at the US strategic investor, right? You can use the technology of the banks that’s up. You wouldn’t probably start investing into an e-mobility startup.

[00:02:26] HB: No. That’s fair. So it needs to resonate with our strategy. Within that definition, we can invest very broad. So it can be that we want to stay close to a certain technology. We can be a buyer. We can be a distribution partner. We can help with European expansion with the brand, the regulatory framework, the balance sheet. But there needs to be a strategic angle with the bank, and we always need senior executive support in order to make an investment. I strongly believe that that is a value-add. Because if you don’t have that, why take my money? Why take the money of ABN AMRO Ventures? There’s so much money floating around. If I don’t deliver the bank in any shape or form, you shouldn’t take my money.

[00:03:09] AVH: Yeah. I’ve heard a lot that actually today VC or like investments in general, they are about more than just the money. If you can’t deliver any soft skills, then you basically have a really hard time. Now, to give people a bit of perspective, what’s your investment focus in terms of like deal size? What kind of stages are established usually in the – Do you have any preferences there?

[00:03:34] HB: Yeah. We are a 150 million balance sheet fund, typically invest 5 to 15 per – We can invest series A and onwards and we have invested series A up to series F, so we’re pretty flexible there. I think for a VC fund to invest, at least for us, it suits well to invest series A and onwards and not before because then companies are really early stage. In order to work together with a corporate, that takes time. It’s painful. We can help there. But if you’re too early in and you don’t have your exact product yet, you’re finding your product market to fit your revenue stream, within a bank, you need to deal within any large corporate with compliance, onboarding, procurement. That can be a painful process. So if you are too early stage, I wouldn’t recommend you to engage with large corporates in general and also with banks.

[00:04:32] AVH: Can you give the listeners from all over the world maybe a bit more background on ABN AMRO? What do you do? Where do you stay because maybe not everybody’s familiar with the bank?

[00:04:44] HB: Yeah, for sure. ABN AMRO listed in Amsterdam global bank with a focus on Northern and Western Europe, roughly 20,000 employees. I think a full bank, so corporate banking, wholesale banking, retail banking, private banking, asset management, the full spectrum of whatever a bank can offer. We have it lying on the shelf headquartered in Amsterdam for global reach but with a focus on order in Western Europe, where sustainability and driving a better future for society as a whole is core to our strategy.

[00:05:22] AVH: Okay, perfect. What was the purpose? You told me in the conversation before that you were the first man on the ground in the VC for ABN AMRO. How did this come to be? Did you like, “Hey –”? As I read, you have a background in private equity, where you’re like to the senior management, and he was like, “Hey, look. We need to do this focus.” Or were they like coming up with the ideas itself? How did it develop that you started the corporate VC fund?

[00:05:48] HB: Yeah. When I joined, there was a fund. So there was 10 million allocated, and there was an ID, and it was something of a strategy. But I came from outside ABN AMRO, so I always used to work in a deal setup, so financing with depth or financing with equity, always investing in TMT, in software companies. I started walking around within the bank and I thought, “How can I deliver a value-add to ABN AMRO?” It was pretty carte blanche for me to set up my own strategy. Then I started talking to people within the bank. First, I had all these credit startups that are new and I was talking. I said, “Hey, this is great and this is great.” But all these senior executives in the bank, they didn’t really care. So then I turned it around and I found out that if I can solve your problem, then people think, “Hey, this is interesting.”

People who run a P&L and are responsible for thousands of people, senior executives, if I asked them, “Hey, what is your biggest problem? I can solve your biggest problem.” That in the end was really the tipping point. So then people thought, “Hey, that Hugo guy, he can solve my problem.” So I started talking to these people. Some of the people said when I asked, “Hey, what is your biggest problem,” they said, “I don’t have one.” I said, “Okay, great.” I move on. Other people said, “Oh, this is my problem, A, B, C. Can you help me?” That is really concrete. Other people said, “I don’t really know what my biggest problem is because I don’t know what is happening outside.”

Especially number two and free, those are really relevant for us because we have the privilege to look outside ABN AMRO. We view hundreds of companies per year, talk to the smartest people globally, and we can filter those trends and developments back to the bank and say, “Hey, maybe you need to pay attention there. Hey, this is happening within private bank, ESG, lending.” All kinds of trends we can filter back and then say, “Hey.” These startups can also solve your problems. That should be a win-win.

[00:07:55] AVH: It sounds like a lot like an innovation department from a typical bank, right? They kind of like popped up over the last couple of years to like half the tech innovation. I’ve been in my last job dealing a lot with those. What sets a corporate VC fund apart from, say, the innovation department, as also looking actively at startups? Is it that maybe the innovation department doesn’t get as much traction because there’s not like we can invest behind you or – What is a bit the difference?

[00:08:30] HB: I think all corporates have different setups here for ABN AMRO. Especially for ABN AMRO Ventures, we only invest in external ventures. So within the innovation department of ABN AMRO, there are a lot of homegrown ventures. So people that come up with ideas are coached, lean startup methodology. Their methodology developed by ABN AMRO. So people are given as an entrepreneur the opportunity to work on their own ideas. Sometimes, you see that these ideas and these internal homegrown ventures also run through the corporate venture fund.

Within ABN AMRO, we chose to focus, so we only invest in external startups. That is broader than, let’s say, only innovation. Yeah. We also try to impact, let’s say, the main bank, and that is sometimes where it’s challenging [inaudible 00:09:23] from another corporates is from the innovation department to really impact the main bank. We can do investments for group innovation as well but also for the main bank. I strongly believe, let’s say, the hard work starts once you’ve made the investment. That is only when it starts, so all the advisors, everybody popping champagne, and all the lawyers and bankers, woo-hoo. But then the hard work starts for everybody involved.

[00:09:47] AVH: Can you elaborate on that last part of the hard work starts after the investment?

[00:09:52] HB: Yeah for sure.

[00:09:54] AVH: My pitch, I can deliver the bank, that’s great. One sentence but it’s the hardest part of my job, delivering a big corporate to startups. Those are two completely different worlds that need to merge together and help each other. We both have something to bring to the table; a big corporate brand, customer’s reputation history, a young startup, young people, eagerness, drive. Mixing those two things together, that is where we strongly believe. But that hard work and it’s day in, day out hard work, and also to deliver my pitch because a lot of CVC funds or some CVC funds say, “Yeah. I invest and then I deliver the corporate.” You need to prove to the market that you really do that because then otherwise in four or five years, and everybody is, “Ah, this is corporate innovation theater again. Hey, a typical CVC fund. Then you’re not credible to the market.

I want to build a sustainable investment fund that really drives value for companies and then also drives value for us. But if I drive value to the startups where we invest, then the VC see that, and I can drive value for the corporate for ABN AMRO as well.

[00:11:05] AVH: Say this value, you mentioned couple of things. It might take the form of delivering ABN as a client, as a distribution partner, as whatever. Do you have this value proposition at the beginning of when you invest in a startup? You kind of know, “Okay, I want to be a customer of the startup or I want to be a distribution partner.” Do we have this before, or does this crystallize more like during building up the relationship after the investment? Or do you have like a hypothesis, and then the reality comes and you react? How does it work?

[00:11:37] HB: No. At the start, we have a certain idea. For instance, if we invest and we have one use case that is already signed, and we have five additional use cases that we have identified. That is coming back to the earlier point, and I need to deliver the bank. So I say, “Okay, I deliver five other departments.” That’s great. But then I need to show them that to, let’s say, the startup. So that is an example. We can also open up our network, other banks, other VCs, other corporates. But there is a clear assumption, a clear investment thesis, how we can deliver value to these startups at the start. One thing is certain. Things will change over time.

For instance, we start with a partnership. Two years later, the bank decides that, “Hey, that partnership is not valid anymore.” Or maybe the startup makes a pivot and geographical focus. So there always needs to be alignment on the financial incentive mutually so that I drive financial return as well when the partnership for whatever reason falls away because that can happen. We now have, let’s say, 70, 80 percent of our portfolio companies in active partnerships with the bank, and that will change over time for sure. But there’s one clear thing. You need to communicate transparently also to the startups. So a strategy can change. The corporate can change. A startup can change. As long as you discuss it openly with each other, then it’s okay.

[00:13:04] AVH: I keep hearing that from like startup investors to that trust is very, very important. If you’re playing a single game, then it doesn’t matter. I mean, if you’re playing a repeat game, it’s going to be much, much easier to be able to trust each other.

[00:13:21] HB: Yeah. It’s about trust and it’s about deliver what you say. Let’s say we now are around four, four and a half, almost five years, and we’ve made 17 investments, one, seven. In the end, I want to stay around for the next 14 years as well, and the only thing I can do that is deliver on the promise. If I’m not able to deliver, communicate it transparently because it’s a small world. It also goes for the startups. If I say to the CEO of a startup, “Hey, I’m going to deliver the bank,” and if something changes, that CEO talks to another CEO and to another founder. It also very tightly connected people. There’s a lot of debate about corporates. Are they really delivering on their promise, etc.? In the end, I can only do what I can influence and communicate about that transparently going forward.

[00:14:08] AVH: Do you have an investment time horizon, like a typical VC fund, like six, seven years? Or you’re just like whatever happens?

[00:14:15] HB: We’re an evergreen fund, so we are long term and patient capital, no extra pressure. But in the end, we never invest by ourselves, so we always invest with other VCs. That has to do with my background. I feel comfortable during that setup. Then we can drive the financial outcome together.

[00:14:30] AVH: That was interesting. You said you invest with other VCs. Are you mostly the lead or are you a co-investor?

[00:14:36] HB: I think – So the first four years, we did take the lead sometimes. Most of the time co-investors but we are flexible there. So we can take lead if the situation requires it, no necessity.

[00:14:50] AVH: Okay. So could you walk us through how you typically get to a deal? Where the does a deal flow come from for you and then how do you figure out the other co-investors or lead investors?

[00:15:05] HB: I strongly believe the investment professional occupation, we are salespeople. So I’m constantly on the phone talking to other VCs, other corporates, people within the bank, trying to hear what is happening. I think roughly 50% of the deal flow comes from within the bank that people say, “Hey, this is an interesting company. We’re talking about a partnership here.” That those companies come on our plate. The other 50% is us making calls to VCs, advisors, startups, events. It’s sales. You can do the math. We’re a team of five people. So if you have two to three calls per day, which is the bare minimum, that means, let’s say, 10 to 15 companies per week times 5 is 50 companies per week. Times 40 working weeks, that you can speak to 2,000 companies, and that’s only companies.

So if you add on top of that other VCs that we have gone and invested with, that we have board seats with together, if I speak to them, they always ask, “Hey, what is ABN AMRO looking for? Because if they know what we are looking for, typically $1,000 banks are looking for more or less the same thing, and that provides for them. But at market validation, most of the time, they have startups in their portfolio. They know companies they’re looking at, and then we can help each other.

[00:16:24] AVH: That makes sense. I’ve rarely heard this kind of deal flow. Mostly, it’s like, “Yeah, we have like in this industry,” like you said, or people reach out to us, other VCs. But what fascinates us is about 50% of companies come from internal sources, right? That kind of like talks to the mindset of people here. They’re like actually looking for solutions or like, “Hey, let’s connect with Hugo. He might be interested in investing in a company that reached out to me that I found on the Internet that I –” I mean, it’s been very successful for you. You have at least, I think, two unicorns as of as of late in your – See, my sources are not up to date. It’s incredible. I bet there’s like a lot of VC funds out there that especially exist for four years that were really happy to have three unicorns in their portfolio and that in Europe, where it’s like, we’re not in the US here, right? We’re not like in unicorn country. I think it’s –

[00:17:24] HB: No. But I think Europe is picking up quite good, compared to the US. But the markets are differently. In the current market environment, it’s relatively easy. Markets are going through the roof, excess liquidity, startup environment. Everything is really positive. The big question comes. Also for CVC funds but also for VC funds, what happens if the market goes down, and will go down somewhere in time, if only I knew when? If only I knew, but it will go down. Then it really – The proof is [inaudible 00:17:54]. Am I able to deliver the corporate, the money, the trust, the long-term commitments also when the market goes down?

[00:18:02] AVH: When you find out when the market goes down, let me know.

[00:18:04] HB: Yeah. I will text you one week before.

[00:18:07] AVH: Perfect, nice. You mentioned something really interesting, and I want to see your opinion on that. I asked that most of the investors I speak to because it’s just such a fascinating answer most of the time. It’s how do you deal with those high valuations, right? How did you strategy change to when you started out versus now? Because you said it yourself, there’s a lot of excess money. There’s a lot of money generally in the market, even in Europe now. But how do you deal with this as an investor? Do you say like, “Well, if I invest now, I’ll get – When I sell, there’s also a lot of excess money, so I get higher valuations. I’m willing to take a higher valuation. Well, how long can this go? I keep my feet still and I see what happens.” How do you react to this excess money that is currently in the market?

[00:18:59] HB: It’s a constant challenge, Andreas. When I when I joined ABN AMRO Ventures, I was in private equity and leveraged finance before, so I looked at cash flows, EBITDAs, single-digit EBITDA, multiples. I’m now looking – There is not a single portfolio company that has ever had a positive cash flow, so that’s quite interesting, right, so from a traditional valuation perspective. But look where we are. With three unicorns and a lot of exciting things happening, we don’t need to invest. So only if, let’s say, the strategic rationale is there and if the financial perspective is there, then we invest. So we have declined on deals where the business of ABN AMRO said, “Yeah, this is a great partner, and we need to invest.” Only if you take it from an economic perspective, it makes sense. Sometimes, it’s really challenging, and you also need to take a step back and say, “Is this really – Do I feel comfortable with the team, with the other VCs that are involved?”

In the end, valuations, it’s great on paper, but how many exits are really realized in cash that delivered the return? On paper, everything looks great, but you need to also look how many exit. Let’s say 500 million plus exits that we’ve seen in Europe. How many IPOs do we really have seen? If a founder say, “Yeah, I want to go for the IPO in two years’ time,” okay. But then you need to be at least revenue X. What is your path to growth? In the end, there’s room for good companies. But there’s only so much room for these good and great companies, so we need to be careful.

[00:20:29] AVH: It makes sense. You mentioned that before you work with EBITDA models, with multiples, right? But in a market like this, how do you evaluate a company?

[00:20:44] HB: We also have our return models right now, and it’s about, let’s say, making an investment at a certain entry multiple, and don’t do the multiple arbitrage. It’s about sensitivity. It’s about making an assumption on the management case. We all know management cases will never be reached. So how much haircut do we need to make? It’s art, not science valuation. For sure, within venture and growth equity, it’s even more because there’s limited history or track record where you can make certain assumptions on. So it’s about people, it’s about other VCs that are involved, and it’s about the metrics. Turn it around like a Rubik’s cube. This is a constant struggle but this is also the most exciting part of the job.

[00:21:29] AVH: Do you have like a “quantitative model?” Do you have like a huge equity? Do you make checkboxes, and then out outcomes 80 or 100 points? 80 and 100 points [inaudible 00:21:42]. We’re confident. Or it’s just literally like, “Okay, we look at the models that management provides us and we just take our cart.”? How does it usually work? Do you have like some sense of guide rails to guide you on every view?

[00:21:56] HB: It’s true. Yeah. We have our own models and we work together with the management models because in the end, this is different between PE and venture capital. Let’s say in the PE, typical piece, and you take the majority of the shares, and then you are much stronger involved in driving the output because you are the only majority shareholder. In a VC setup, it’s different. You have syndicates. Everybody is more in a minority perspective, so you need to collaborate much more. That also goes for the various assumptions, the business case. We always have our own models that are driving on the back end to provide us guidance, based on all the deal flow that we see.

[00:22:35] AVH: What would you say is the one or maybe the two or three most important factors for you to invest in a startup? What three boxes have to be ticked? If one of those is not tech, like you are out, right? Like the biggest decision factors that you are looking at.

[00:22:55] HB: Management, commercial traction so that there is a clear product market fit for us, strategic rationale, and venture capital funds that we trust and know. I’m sorry. Those are four tick the boxes.

[00:23:09] AVH: That’s good as well. Let’s dig into each of those just a bit. What differentiates a good management team from bad management team?

[00:23:18] HB: I think it’s what everybody said. Everybody’s keen on having serial entrepreneur, so who have been through the journey, who have had one, two, three, four, five successful exits. Of course, that is a plus. I think it’s also about diversity, and people need to be conscious where their strengths are but also where their weaknesses are. If you then are able to create a team that drives mutual value for the company but also is able to – Where people have some weaknesses, that’s perfectly fine. But if you find other people that can fill those gaps and in the end that you have product, finance, growth, strategy, people, everything that is necessary to derive a company going forward, you need to have that in the right balance.

I don’t have, let’s say, a full HR department that can help me or can help managers in making the right decisions. Other VCs are much more capable for that, have had some staff, dedicated recruitment officers. So that’s a great way how other VCs can add value on the HR and equipment side. We see it, we observe, but we don’t drive that outcome that much.

[00:24:27] AVH: Do you do – I’ve heard this because actually some VCs do like personality tests of the founders. Or do you more like interviews and see, okay, how reactive are they [inaudible 00:24:37]? What are your weaknesses? Not like in the very plain vanilla interview sense. So where do you see where it goes, “I’m just too much of a perfectionist.”?

[00:24:47] HB: Too much execution-driven. Okay, good.

[00:24:50] AVH: Okay. Ouch.

[00:24:52] HB: No. We don’t do the – I know it’s quite common and especially also in the [inaudible 00:24:57]. But also in some of the VC setups, we don’t do the personality checks. If other VCs do them, we’d love to get access to those and share our insights as well. But we always want to have, let’s say, personal interactions. That is an interesting observation. So when COVID hit, typically, we always go do the site visits, have dinner, spend your time with the founders and the teams involved. During COVID, that was not possible. So at first, I said, “I’m never going to wire a couple of million euros based on a couple of digital interviews.” But, hey, look where we are. We have made new investments to people I’ve never met before. But it still feels strange, only digitally.

[00:25:36] AVH: How did your technique change, or did it at all change when you made those interviews? How did the interaction change like virtually versus in person?

[00:25:46] HB: No. I think the technique didn’t change. The depth and real human interaction, of course, is lacking, doing it fully digital. At least my personal observation, you’re never able to get to really know a person digitally because you cannot see how they react, the smell in the room, the atmosphere, how people turn on their chairs. It’s about the soft factors. When I was doing PE, I always came, let’s say, 15 or 30 minutes too early to a meeting and sit at a reception desk and see how people interact. How do people pick up the phone? Is there a separate parking spot for the CEO? All those soft factors, that is, in the end, what drives the outcome, and that creates a full picture. It’s impossible to get that fully digitally.

[00:26:36] AVH: I love that. People watch out at everything you do. You’re always being watched by Hugo.

[00:26:42] HB: People should also do that with me. How do I interact? Am I paying attention? Am I properly prepared? Do I ask the right questions? Or is the only question asked, “Okay, tell me about your revenue model.”? No. You need to be prepared because also the first introduction meeting, so asking, “What is your revenue model? No, I’ve read your pitch deck. Hey, that says that my assumption is this. How can we work together on this.” Instead of tell me your USP, you need to really be interested in the person that is next to you.

[00:27:15] AVH: I mean, I’m at the very, very beginning of my startup journey. I think talking to some investors, you just know. They just ask standard questions out of a textbook somewhere. I think it’s a really good thing to like dig deep to show that you’ve prepared things. Now, let’s talk about the next point. It’s traction. How do you define traction? Do you have X customers? Do you have a POC, versus do you have a paying customer, versus they have so much revenue? What’s the one point that makes, “Okay, that’s traction.”?

[00:27:47] HB: No. There’s not a single point because many fintechs sometimes, let’s say attraction is defined by assets under management. Sometimes, it’s defined by ARR. Sometimes, it’s POCs. But there are strange things happening in the market, so people now already put in the data room a signed LOI for a POC as a committed revenue.

[00:28:08] AVH: Just to define a couple of the terms, ARR [inaudible 00:28:10], letter of intent, proof of concept.

[00:28:15] HB: Yeah. No. Thanks, Andreas. Sorry for not explaining those words. But people work on an assumption that a proof of concept, which is more – Only, let’s say, testing if something works for three months, four months, two weeks, what have you. That is not 100% guarantee that a full deployment will happen within a big corporate. But do you see that happening now in the market that people say, “Okay, I’ve signed an intention to work with a POC somewhere later in time,” is taken into account as fully 100% secured three-year license revenue. That’s difficult for me personally.

[00:28:53] AVH: But apparently, in today’s market, they can race with that, right?

[00:28:58] HB: That’s true. Let’s say some entrepreneurs can do that. Successful companies sometimes are able to sell that to investors. But in the end, it’s not getting the biggest valuation on paper for your series A, B or C. The prices are given, let’s say, at the end when a company is sold. So that is in the answer. If you get a too rich valuation at the start, you create, for sure, a problem somewhere down the road. You can push it away and you can raise the next series. But somewhere, it will bite you.

[00:29:33] AVH: If like there’s kind of a sport out of raising higher and higher valuations and like people are like, “Yeah, I’ve raised X. I’ve raised that,” or just like, “Yeah. Did you ever create revenue? Did you ever like hire people? Did you ever sell a company?” “No, no. I just raised money.” But that’s maybe a topic for just in a bit because we have two more items to go through, and then we’ll return to this because I think it’s a really interesting discussion. So you said fair point I think was strategy, vision fit. I think that we went into this quite a bit in the beginning that it has to be good for the company. Do you want to add anything on –

[00:30:07] HB: No. That needs to be good for the company and for the bank as well. So there’s actually a mutual value-add that we see. The fourth part was, I think, quite interesting because I think it’s one of the first times I’m hearing this that you want to see VCs that you trust. How do you do this in practice? Do you have like a network that like this early stage VC fund, they know if they have a banking company? The first thing they call is Hugo at ABN. Or do you like, “Oh, I like to see the name because I know they do a good due diligence,” versus what we said like the smart capital and, pardon my French, the dung capital? Like, “Oh, I kind of can see where this is coming from, where this is going.” Or –

[00:30:48] HB: I think it’s here about personal relationships. So being around now for four and a half years, I see how people act in board setups. I see how people do their due diligence. Other people see me acting how I drive value or at least try to drive value, how I can create impact for the bank and deliver the bank to the startup companies. So it’s about the personal relationships, and everybody has their own interest. Typical traditional VCs have one interest, create financial return for their LPs. That’s great. Yeah. If people want to deliver a certain solution to a bank, for sure, I’m not the only one they call. For me, it’s about execution and speed. So show that I’m real. If I’m not real, then be transparent but also drive, be able to deliver on time.

[00:31:36] AVH: How do you or do you ever – When you talk with a startup that has an investor that you don’t know before, right? Maybe it’s either I reckon after that much time to market and having such a successful fund, it doesn’t happen very often, but I guess it sometimes happens. Do you also like try to interview again “the existing investor” and see how they think, what they do?

[00:32:01] HB: Interview or interviewing, it’s trying to get to know them. That’s the starting point. Set up an intro call. Hey, this is what we do. Hey, I’m curious to hear your story. It’s also reference checks. People will do reference. I hope that people also do a reference check on me. I assume they do, and I would advise them to do that and not ask me for reference checks and do it on your own. Ask other CEOs, other CFOs about the reputation of us, the team, the fund?

[00:32:30] AVH: Did it ever happen that if you didn’t do an investment because you didn’t see eye to eye with an investor in an existing company?

[00:32:38] HB: No. Especially in the COVID time, there were times where I only met people digitally.

[00:32:46] AVH: Okay. One thing I want to circle back to now because I think it’s a very important point is what happens if a startup goes too high in their early valuations, right? How does it fall on their feet? I mean, in the very plain vanilla thinking, you’re like, “Higher is always better. More is always better. I give away less equity. I get more money. How can I possibly fall on my feet?”

[00:33:12] HB: To some point, let’s say that’s true. But in the end, if the valuation is only rich on paper, and nobody’s willing to pay the price at the end, then it doesn’t have a lot of value. So if you raise a series A at, let’s say, 50 million, and you double your revenue, and then the series B is at 100, and then you go to 300. But how many exits in Europe have you seen where really 500 million plus companies or one billion plus companies? How many of them are we really seeing right now? In the end, somebody needs to be willing to pay certain amounts, so you can raise and raise and raise. But if the revenue stays behind, and the people say, “Yeah, we need to grow into this valuation,” that’s great. But if you don’t deliver, then it will come back to you, for sure.

[00:34:03] AVH: Just look at WeWork, right? They’re just like the best example.

[00:34:07] HB: It’s one of the best books or one of the best books, one of the most exciting summer reads I can recommend to people. The same goes for the Uber book.

[00:34:15] AVH: Yeah. One thing that is really important is if you have a down round, you’re in really bad shape, right? That’s also one of the reasons. Or how do you feel about –

[00:34:27] HB: No. Of course, it’s not a sign of strength. But building a company takes 5, 7, 10, 15 years. If in that journey something goes not according to plan, you need to be able – It also goes for us as a CVC fund, where sometimes the CVC funds are perceived as, “Hey, they invest only for the PR and for the marketing. They come in with one round and then they are left.” I also need to be able to put in money in companies that have a harder time performing where it takes longer to get to the right traction. Down rounds will happen.

[00:35:05] AVH: How does it affect – I mean, in a classical VC setup, it’s easy. If you have a down round, if you have a loss of a company, then, well, it’s basically pocket out of your own money because you’re the manager. You get the fees out, right? How do your investors, your “LPs,” again, I’m using a lot of quotation marks, to a senior management of the bank, how do they react if like you’re losing a company? Or I don’t know if it ever happened that an investment failed.

[00:35:33] HB: No, not yet. But let’s say we work in VC, so at least 50, 60 percent of the company by statistics will go bankrupt. In the current time, maybe not, but that will happen. So we will have failures, we will have bankruptcies, and we will need to ride down investments to zero. That will happen. I think the good thing for now is that the track record of the fund is the fund is performing well, so that gives people trust. There’s also a bit of luck here. So let’s say if one of my first two investments would have gone bankrupt in year one and the other one in year two, then it’s more difficult to create, let’s say, trust. Now, people say with 17 companies, a good return, a nice performing portfolio. Then people say, “No, it’s okay if something happens to that portfolio,” but that’s how it goes.

But also here, show to my stakeholders internally that some – If things are not performing according to plan, also make that clear and not try to hide it until, “Oh, I’m sorry. That company went bankrupt.” Show the traction is not according to the plan. More capital is needed.

[00:36:38] AVH: You have to be honest, right? In VC, everybody thinks VC is just like a pill thing where you can never lose. Then you’re probably like in the wrong market.

[00:36:47] HB: Yeah. It looks like it can only go one direction go up in the current times, but it will go down somewhere.

[00:36:54] AVH: Now, as the last part of today, and I always like to ask this at the end, is do you set – Soft skills in tracking entrepreneurs are very important, but you also have like a model. If you look at your team or if you were to look into hiring somebody new, what would you look into a hire? What skills should they bring to the table? What should they be proficient in? Should it be a university education? Should it be former entrepreneurs? I see this a lot that now former entrepreneurs are coming to VC. What are you looking for a candidate?

[00:37:30] HB: It depends on the setup of the team. There needs to be a clear value-add that a person can bring. I definitely see value in former entrepreneurs joining the VC side because then those people know firsthand how it is to run a startup. It’s not fun all the time. It’s not like, “Hey, I buy a MacBook and put on some stickers and some nice sneakers.” Then, “Hey, I’m a successful entrepreneur.” It’s not fun all the time. On the contrary, I would say, so from a VC perspective, it’s quite easy to say, “Hey, you need to perform and then you go off to the next board meeting.” The entrepreneur has as really also the mental challenges to be on top of his game constantly. For a VC, it’s never enough. If you get the plan, hey, why don’t you double the plan? You have the recruitment issues.

As a CEO, you have customers. You have product. So to really be able to understand that concern, that pressure, it makes sense to hire, let’s say, former entrepreneurs to your VC fund. All the other skills, really technical skills, can also provide a value-add that you can resonate well on that perspective. Financial modeling, yeah, basic. I think people can learn that, but you need to have a certain – You need to be curious. I think that is the most important thing. You need to be willing to learn every day because, personally, that’s the reason why I like investing. It’s the best job there is. I get paid to go to college every day to speak to new companies, new revenue models, and you need to have that curiosity. Then it doesn’t feel like work. Because then if you work 60, 70, or 80, I don’t really care. Then it doesn’t feel like work because you like to learn new things. That curiosity is key, and then the rest will come by itself.

[00:39:11] AVH: That’s interestingly enough a theme that comes over and over and over again in the podcast to be curious, to focus on things, to really like to dig into things because it’s not always going to be fun. I imagine even as an investor, right? I’ve been in sales myself, and like sales is not a fun thing always, right?

[00:39:30] HB: No. Cold Calling is not fun. If you try 9 times or you try 10 times, and 9 out of 10 people say no to you, but you need to get over that. When I started in ABN AMRO, I thought, “Ah, everybody knows we have a great investment fund and fintech, and people should know about it.” I started talking to people and then I said, “Do you know the fund?” “Yeah, but please tell me again.” That means that people don’t know. So I started with zero. Let’s be honest. I had a big corporate supporting you at least and I had the money. But I also needed to explain over and over. Still today, sometimes people say, “I never heard about you.” “Okay, great. I’ll tell you the story again and again and again. It’s sales.”

[00:40:13] AC: Absolutely. What I just thought about is in the beginning, when we started the podcast, we interviewed VCs as well. When I asked the same question or like when my two co-hosts asked the same question, it was mostly, “Yeah, we hire investment bankers. We hire people that have like experience in modeling Excel valuations.” Now, I feel like it’s more towards we want for more entrepreneurs. We want people that like have the soft skills to it. Do you have the same feeling –

[00:40:45] HB: No. I have the same feeling. I have the same feeling. But it’s about the soft skills and also the personal connection because if you’re a VC investor, you also need to create a team that can fully trust on each other. Sometimes, people have different characteristics, compared to others. But there needs to be a clear value-add combining those various backgrounds, cultural, everything. Then it needs to blend, and that is also not easy because a lot of people talk about diversity. But it’s much easier to put everybody with the same background in one room than create multiple backgrounds that needs work. Then people also need to put in energy to create a better outcome for all the people involved.

I think it’s important for VCs also to be a bit humble to entrepreneurs. In the end VCs, I’ve have a couple of hours per week in these companies, and the entrepreneurs are really doing the heavy lifting. The only thing we can do is support.

[00:41:41] AVH: If it’s, say, your children, your son, your daughter, were just the last year of their master’s degree or of their bachelors maybe, and then you tell them, “Okay, what do you –” They want to be in VC but they don’t want to be with you. They want to be somewhere entirely different and make it on their own. What would you advise them, like what masters to take, what early jobs to do, what to do next to university? What advice would you give them?

[00:42:07] HB: Try as many different things as possible to find out where your real passion is because if you haven’t tried it, then you don’t know. You need to listen to new music in order to find out if that new music really resonates well with you. If people talk to you and say, “Yeah, this is how orange tastes. It’s a bit sweet. It’s a bit sour,” you need to taste it in order to really understand what the taste is. That goes for jobs as well. Try to do as – I’ve done five internships before I started working. Do these internships. Try to work around there. Talk to people. Ask firsthand experiences. There will be a good outcome somewhere in time.

[00:42:48] AVH: I love that advice because I personally am like that. My CV is all over the place. It makes no sense to an outsider. But I think that also changed over the years, right? I remember early when I came out of university where like, “What the heck did you do? Were you drunk when you did your choices?” Now, it’s like, “Oh, my god. You did so many cool things, right?” So I can totally second that.

Now, Hugo, it’s been really fun. It’s really insightful. Do you have any last advice, any ask to have of our audience, anything that you want to get out into the world?

[00:43:22] HB: No, not really. I think we’ve talked about, let’s say, the key things that I want to share with, let’s say, your listeners, Andreas. It’s about curiosity, be a bit humble, and just be nice to people. Then you get so much in return.

[00:43:36] AVH: It sounds like amazing, soft advice. This is an really important advice too, so I loved the interview. Hugo, thanks for hosting me. Oh, my god. It’s been such a pleasure to like look you in the eye again while talking, and all the best.

[00:43:52] HB: Thanks for having me, Andreas, and thanks for the Schwarzwald premium gin you gave to me. Thanks a lot.

[00:43:58] AVH: That’s a note to all my future guests. So if they want to see me in person, I’ll bring you some gin.

[END OF INTERVIEW]

[00:44:08] ANNOUNCER: Thank you for listening to The Wall Street Lab podcast. For the show notes and much more, visit us at www.thewallstreetlab.com. To see what we’re up to before anyone else, subscribe to our newsletter on our website, and follow us on Facebook and Twitter.

[OUTRO]

[00:44:39] AVH: Disclaimer, information contained in this podcast constitutes the opinions of individuals and should not be treated as investment, tax, financial, or legal advice. We take no responsibility for the accuracy of any statements made in this podcast. This podcast is for informational and educational purposes only, and it does not contain an offer to sell or buy any sort of financial products and should not be treated as advertisement for such. Any copying, distribution, or reproduction of this podcast without the prior permission of the creators of the podcast is strictly prohibited.

[END]