Heidi Roizen (Threshold Ventures): On average our investment period is somewhere around 6-7 years. It’s longer than the average marriage in the United States. Take your VCs very carefully
26 Oct, 2020
Marc Rougier is Partner at Elaia. He has over 30 years of entrepreneurship by successfully launching : Logic Controller Management, Meiosys (acquired by IBM), Goojet and Scoop.it (acquired by LinkInfluence). Prior to Elaia, he joined Thales as an international business developer in Australia, Asia, Africa and America and then spent two years at corporate development department at IBM. Marc is very active in the startup ecosystem, both as mentor and business angel.
Prior to being a VC, I was an entrepreneur for many years, and I really enjoyed it! As an entrepreneur I really loved early stages – when you have to create a team, access a market, create a product out of your ideas and watch your minimum valuable product starting to be alive. You have to speculate a lot, and try a lot, and put things together. Eventually something is born, and you have this feeling of creating something and opening new path, I mean discovering new spaces. That’s what I did for many years, traveling around the world – in Asia, Australia, Europe, North America. At some point, when I got older, I thought that, perhaps, I probably won’t have as many opportunities to launch new businesses, early stage startup still takes 4-5 years to go from the inception of your idea into the stage when you have proven that you have a team, you have a product, you have a market, and you’ve creating value. It’s not like six months, it takes years. And at some point on can’t do it over and over again. So I decided to do it in parallel, that makes plenty of sense. At that time I was living in SF running a startup in the MarTech. One of my VCs was Elaia – I know them as long as they exist – raising their fund #3 and they were short of one partner, because was going to be bigger than their previous fund. So they asked me candidly: “Do you think it is a good idea to have an entrepreneur as a general partner for an early stage fund?” I was living in SF, and, you know, I don’t believe that a single early stage fund without an entrepreneur as a partner exists there. So, it made a lot of sense. Later they called me, saying: “It is a good idea, and you are in the short list.” I decided it was time for me come back to France and switch sides around the table to become a partner.
B2B is one highly preferred business model for us, because we understand it better. I don’t suggest that you cannot create a successful B2C, I’m just saying that we don’t understand how to create B2C. Like any other early stage VC, our #1 criteria of selecting startups, of course, is a founding team, and there is no compromise here. We have something more than that, we also love technology – what is called HighTech, later DeepTech, so let’s name it tech-intensive. We love when there is a complexity in building a product, when there is a barrier to entry, intellectual property, special skills required to put the product together. We value complex ideas that can create value over just creating value. We want a market to be big enough to create scalable company. Because we invest very early and take a lot of risk to get those multiples you need to have a market big enough. But in addition to that we spend time on the product.
The world is our geographical interest, but based on which fund we are investing from we have to focus on some areas. This is based on relationships we have with our limited partners. The fund operating right now, the one I work on, is focused on France and Europe. We have about 80% in France, 15% in Spain and 5% in the rest of Europe in that particular fund. With other funds we may have different geographies. We have good contacts with entrepreneurs way beyond our boundaries, we believe that boundaries are a little bit artificial in today’ world. Because we invest early, it is crucially important for us to be close to founders: you have to understand people. If you don’t have enough time to shake hands, drink coffees and beers and get to understand people intimately, it is very difficult to access a company. This is the reason why we should limit ourselves to France, where we have an opportunity to get along with founders. Of course, we have a lot of French founders, we have a lot of people we know in US – both coasts of course and Europe Europe, while still not homogeneous, Europe is an interconnected space and is quite easy to be reached by entrepreneurs). We see more and more entrepreneurs from Asia – Singapore, Hong Kong, Shenzhen, Shanghai; a lot of connections are establishing between these two ecosystems. For us it is important to be as wide as possible. Still we wouldn’t invest in a company based on pure KPIs, we invest in people, and it is a prerequisite to spend some time with them.
My answer is the game of go; it is an abstract strategic game. In a game of go you start with an empty board and have to create that board. To do this you need to invest with the long-term in mind. Later the complexity arises, the fight arises, and you are getting some benefits from early investments. You will lose some and win some; it’s not binary when you lose or win everything. This idea of investing locally, and growing, and investing globally and later discovering what works and what didn’t work is what we do. On the opposite, in chess you have a defined board in the beginning and you have to destroy it until a binary victory occurs, which is not VC. You can have a lot of different funds work together with different companies, someone wins, someone loses. And we have to create something, not destroy it.
My attention is driven by enthusiastic people. I believe that our world is very difficult – we have environmental issues, political issues, unrest everywhere in the world, we are asking questions whether or not AI is good – that’s a lot. I love people who love what they do, who want to innovate, but who want to innovate with enthusiasm, when it’s not just about the money, not just fighting, but creating. When a founder is enthusiastic what he or she puts together, when it’s complex – and I can access with complexity… When it is trivial I would say: “There is too many things I cannot handle,” and I can purely speculate that something will happen… But even with complexity I can see if that person can go through this barrier and solve that complexity. And if this complexity can be solved, we will get an unfair advantage over our competitors. So I love the complexity, I love when people open up their ideas, products and technologies, allow me to dive in that and bring their enthusiasm about the complex problems, then I love it. Of course, as I said, because of the style of the fund, because of our ambition andthe fact that we invest in early stage, it needs to have a potential to grow. Sometimes we meet fantastically enthusiastic founders bringing non-trivial technologies, and everything seems to be good, but we end up saying: “Ok, you will be a nice company, but not a big one.” Nice company is great, it is very difficult to build a nice company, we love them, but it is not enough for our investment thesis. So, to sum up we love enthusiastic people working on complex subjects that could be a big opportunity.
I like meeting people. The best thing about this business is that you meet 2-3 teams everyday. If nothing catches your attention and nothing surprises you, you’d better get another job. I will never stop being interested and surprised by people. One of the investments I made some time ago was quite surprising, The founder came not from Paris but from tiny little town at the south of France and he built a product just because he needed it. He put it in open source (it is a software, enterprise communication and networking product). The community loved the product and adopted it: it became a preferred solution around the world for what it does. That person decided that, perhaps, he could build a company. He wasn’t someone who wanted to be an entrepreneur; he just liked the product he created and wanted to make it better, not to make money or create a career for himself. When we first met, he didn’t know what VCs meant to do or what entrepreneurs do. We had a very genuine discussion, because I did understand the product, it was an area I worked in my past and I could understand the value of what he was building. And the discussion we had was not about valuing the company, how much should I take, how do you raise money – no. It was about where we would land that product, how it would change your life, when would he become an entrepreneur. What you would have to sacrify? What would be the pluses and minuses of doing it? How much it would change you as a person? And that was an awesome discussion we had as person to person, not as VC to entrepreneur. We made a deal, and the company is doing super well. Actually, it is thriving.
We don’t support one-person teams; we don’t support hardware; we don’t support way to many things that are risky – until we meet that one person we love, that piece of hardware we love. And then we say: “We shouldn’t have dogma, we do have preferences.” And we don’t prefer solo founders, because it is extremely complex to build a company, and you need a lot of firepower, a lot of skills, and you don’t want to be alone when winter comes, when it’s super difficult and you have no one to bounce ideas with. It is extremely complicated to be a solo founder. And we don’t like hardware. I know it: I did hardware and I did solo founders.
We receive about 2500 startup projects per year. We interview about ⅕ of them which is roughly 500. We dive in about 1/10 of those, which means 50 projects. And we end investing in roughly 10. We see 10-20% increase on yearly basis in all those numbers.
Actually, this is a part of our weekly meetings – discussing the sourcing. Roughly ⅓ of applicants come spontaneously, because we have good enough reputation in Paris. Our fund was superperforming for 17 years in a row, so people love us and know that we love technologies and are a good opportunity for any early stage B2B DeepTech startup. Another ⅓ comes from our network venture partners, CMO, associates – they are well connected to the ecosystem. Statistically, a deal has more chances of going through if it comes from network. With all due respect for people coming spontaneously, because we love that. Yet those, who come spontaneously, don’t always know us well enough, may not know that we don’t do some verticals or late stage. For example, we don’t do Life Science in terms of molecula, we do it only as digital. The rest, which is a little bit lower than ⅓, comes from intermediates, like fundraisers working in France, other VCs, with whom we have good relations. We gladly syndicate with other colleagues when we believe it creates value in companies, so sometimes we send them some opportunities, sometimes they send us. It makes the last part of the dealflow.
We have a very structured procedure. First of all, we review every Monday morning most of our portfolio companies. Our Mondays are super dense. We decided collectively that when a startup goes from one stage to another, there is a procedure. Stage one is a meeting with the founders. Normally we tend to have two people at the first meeting, one of whom will be a partner and another with different levels of seniority – just to have two pairs of eyes. If we decide to go through, the first due diligence we do is the people assess the team on technology and market. We never cut corners. We can do due diligence very fast. It may put a lot of stress on entrepreneurs, but it is good; they have to understand that VCs may put this pressure on them. Yet we do all three parts of due diligence. If every partner agrees, we move to the next stage – the term sheet. It is important to write it heavy, not just a couple of numbers. We think, it is unfair to have a short term sheet, because when an entrepreneur signs it, he or she becomes exclusive with the VC. Then, after we sign this exclusive agreement, we start to negotiate the terms, all those legal details we put into the term sheet and up as a share order agreement. It goes way beyond the evaluation and amount you’ve raised. We believe that it can change the nature of relationships and that is why writing it down is so important. When an entrepreneur receives it and says: “Oh, your term sheet is 12 pages, and others are like half a page – why should I spend so much time on all these things?” We explain that it is important for us, we are going to do business together, and we want you to be clear who we’re going to work with and we want to be transparent. So, if we are happy with the team, the technology which we will dive into and the market (and we call customers and clients, by the way), then we sit down with the entrepreneur and show our term sheet, explaining every single aspect we put there. It is very important for us, because we are going to work and live with this company for 4-5-8 years, and we want to know how we will build and manage our relationships. When it is signed, we do legal and financial due diligence. Because we do early stage, normally, this aspect is quite light and goes quite fast. The whole process usually takes 2-3 months, but our record is 6 weeks.
You know, I’ve been at all sides of this table: as an entrepreneur, as a VC, and as a part of corporation, when IBM acquired one of my startups. When I was with IBM, I did M&A, so I have this experience as well and know what is the value of a startup for a big corporation when you want to exit. And when a big corporation wants to acquire you, they want the value they bring to go into the founder’s pocket, not VC’s pockets. Back to the question. When a startup actually works, when it has proven that it has a good market and is able to bring actual money. It is critical if the founder has built a solid team and has the power to conquer, to attack, to grow, to be aggressive. Despite “Aggressive” is not a very good word, you still need to know how to identify by your persona, how to reach and get money by your persona. At that point speed is the name of the game. And the execution. And to execute well you need to build a team, and a team means money, board members, advisors – all these mean money, and that has its cost. At this point the power is at entrepreneur’s hands, because he has a will. It is not important anymore if an entrepreneur has more than 50% of ownership, because the important part is who is holding the wheel and drives the company. Prior to that it is important for a founder to hold the majority because you don’t know when the product will deliver, when it will be identified by your persona and how much money you will need to get there. That is why you may raise money several times, you may need late founders or missing members you may want to bring on board – all of these have a cost. You, as a founder, need to have resources. Initially you need to be really careful and cautious if an accelerator or an angel takes too much. Yes, sometimes it may be worth it, but if they take too much money, an entrepreneur can be short of resources later on to try something new, to win and fail and retry again. So, it is about the stage where you are: initially be careful with your shares to have enough, but don’t hold on like crazy to – it doesn’t matter. At the end of the day you hold the wheel, and to have 10-15% of a company that is thriving and goes to NASDAQ will make tens or hundreds of million.
Our ultimate red flag is when we have a beautiful pitch made by an incredible entrepreneur who is very enthusiastic, but after a few weeks of due diligence we discover that there was a lie, fake news or misleading information, It totally kills the deal. People claiming a client they don’t have, or product performance they don’t have, relationships with an opinion maker they don’t have – all this kills the deal. Not because we need this connection or client, but because the trust is broken. We had to give up on deals we really loved, but we stopped trusting the founder.
As I said, our fastest ever deal took us 6 weeks. Normally it is about 3 months.
It depends on the fund. The one I’m in usually invests around 2m Euro into a company and we can put up to 15M euros into the company while it is in our portfolio. We’ve made smaller checks for a solo founders that hadn’t event set up the company and we made checks of 6 or 7 millions because the stage of the company was more mature, but 2-3m is what we love as the first investment.
I think the company I loved the most, but we didn’t invest in is Algolia. I love what they do, it’s really tech, really B2B, really international ambition. We missed it for many reasons, one is that we weren’t ready as a fund. Right now when I see a company… it’s too early to say, will I regret or not, because they didn’t perform yet. A good example also is GitGuardian. When we first saw them, we really liked them, but thought that we were missing some information. At some point they just raised money without us and did well, so it’s not a real regret, but I loved them and still do. Sometimes you have to take a risk even if you think that some information is missing. Some companies come to you when they still need a couple of years to perform, some grow too fast, so every VC has companies he or she didn’t invest and later regrets. We love people and if we had unlimited funds, we would do hundreds investments. Still if you hesitate, you may be right.
First of all, if it is DeepTech, B2B, enthusiastic founder, I’m in love, whatever industry it is. But I still will never invest in two industries which I like a lot – Life Science and Education. For a long time we couldn’t invest in Life Science, because, as we said, it was “wet” – building molecules in labs, and life cycle of those investments are very long, super regulated and will differ your type of investment. We couldn’t do that for a long-long time. The good news is: now we can do it, because of digital technologies, AI, 3D simulations, VR and others make their way to Life Science. These can even shorten the transition to new molecules helping to treat patients. We see a lot of technics and we started to invest in those startups and have already done half a dozen investments. The other one that I really love, but have never invested and don’t know how to invest, is education. I don’t understand the business model there, because in France it seems to be tricky, it seems to be complicated to know how to extract the value of technology contributing to education. I know that other markets are more mature, more open, say, in the US. And I think that education, by far, is #1 thing the humanity has to solve – education at large. If, as an investor, I can contribute in this finding of value creating viable investment thesis, I’d love doing it.
I fall in love first. We try to create connections between our startups and others as much as we can. And we have examples of startups working together and even merging, and that is value creating. However, there are two things we don’t do. One is to be fuzzy in governance. I couldn’t have two startups – one funded by our fund and the other funded by someone else – creating something together and being biased. We have to be super transparent with our limited partners, with people who give us money. The other thing we don’t do is trying to marry two startups together when it’s not necessary, because such a marriage slows down the execution. It can create synergy at execution level, but more often it doesn’t. That is why we believe in asymmetrical relationships where a small startup works with bigger organisation. It is easier, because you know who brings which value. Small startups can innovate faster and bring better products, because they can be bolder, have linear governance that brings results faster. On the other hand, a larger organization has a larger client base, better access to the market, more fire power, marketing power, political power, etc. And for the synergy it is better, because you’re not replacing one’s power – you’re adding powers. So, by marrying two startup together you can create an incredible product, but you’re ended up pairing two CEOs, two CMOs, two VPs on engineering and need to figure out who is more important and powerful, which is complex from the human perspective. So we create connections between two startups helping them to work together, but to a certain extent, only in cases when it creates synergy, not only two products working better together.
I’m sorry to give you the title of the book that is very old, but, for me, still the best. It is Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers by Geoffrey A. Moore. I read it multiple times, and it remains the most compelling way to understand what it takes to have a valid idea and to make it work as a company. Also I’d like to mention The 4-Hour Workweek by Timothy Ferriss, which is my anti-book you should never read. I think it is very smart and addresses a valid and useful aspect to humankind point: you shouldn’t believe that the only way to succeed is to work long hours and kill yourself while working stupidly. It is true. However, at some point it created a trend, people started to believe that being an entrepreneur was easy, and you needed to be just smart to make money come to you. This is false. It is fun to be an entrepreneur, it is really fulfilling, but it is extremely hard.
We go to different tech conferences. You need to meet entire ecosystem – bloggers, journalists, VCs, corporations, startups from all around the world. But I don’t like when founders go to meetings every week because they believe that it is how you create value. I believe that being an entrepreneur is hard work. I would put it this way: the most successful entrepreneur is the least visible one. You can be visible after you became successful, not before.
I have a very ambiguous relationship with Facebook. I think that it is maybe the most important startup or product in the history of humankind, because it does change the world like never before. And I spent a lot of time on Facebook myself, still I’m not sure that it changed the world for a better one. That’s why I’m ambiguous about it. What is happening with electric power is crucial. I know it is trivial to talk about Elon Musk, because he is a controversial person, and we love him and love to love him and love to hate him the same time. But what he does with Tesla is beyond the car industry. I think we need to be smarter in how we use transportation, how we use our planet resources. And to refuse the environmental impact of the car industry by using more advanced technology, such as software and new technologies related to electricity is extremely important and makes the world a better place. Tesla technology go into smart housing and agroindustry and that’s why they matter.
I’m in love with my job and I’m in love with Elaia’s performances. As I said, we want to make an impact. The impact we made so far is twofold: we helped entrepreneurs or would be entrepreneurs to become entrepreneurs and we gave our limited partners more money than we took from them. This is the mission of all VCs. What we need to do now and want to do is make an impact that goes beyond these two things. We want to create not just any type of jobs or any type of companies. There are companies that could bring more money to our LPs, but we won’t invest in. And our next aim is to make some positive impact on society. If we find Green Tech company that makes money, we love it. Also we are very strict about diversity: half of our partners are women. We don’t invest only in that usual typical startup founded by 35ish white male who has done a good level of study and brilliant – we do more than that. We believe that value can be created anywhere. I won’t lie and tell you that my goal as a VC is other than financial performance, but I want to make money for LPs and make positive impact on the society. It doesn’t mean that we will give money to any green startup, just those that can make money, but when choosing between a startup which is environmentally conscious and another is not, we will choose the former one. Life Science, Green Tech, Education, Infrastructure companies – fantastique! – are great. There are a lot of ways to make the world better. I don’t want to overestimate VCs impact on the world, but I don’t want to underestimate it either. We have invested in 126 companies already, and if we bring good governance with these companies, it may have a tiny impact, which is also important.