Duncan Davidson (Bullpen Capital): In Silicon Valley failure is a feature, not a bug.
04 Feb, 2022
Kjetil Holmefjord is Partner at StartupLab Oslo. He was one of three founders of StayAtMy in Bergen, then Incubator Manager at StartupLab Oslo. Now he isa partner and a part of the investment team in FoundersFund 2 at StartupLab, one of the leading tech incubators in the Nordics to support top Norwegian early-stage tech entrepreneurs.
It was somewhat random. I was going to start my own venture, but before I’ve even got to that point, during my studies, I met the founder of StartupLab, and he invited me to join. It seemed to be a very good platform to start a company from because I would be exposed to the front networking in Norway. I was living in Denmark, so it was a nice way to get home and get access to the network and resources that are available at home, which increased the chances to start a company. Gradually, instead of finding one path to pursue, I realized that when you work with another company you can see things that you may not experience with your own. I really really enjoy working with a lot of companies in parallel, being able to contribute to their development. Still, at least for the first year, I was thinking that I will come across an idea or a team that I could join but I ended up joining this team for the long-term and becoming a partner and helping more companies to scale.
We like to say that we do a lot of weird stuff in our fund: we do mobile games, Software-as-a-service applications. At the same time, we are the first external believers in a lot of companies. We are the first money in, and if we allow ourselves to be defined by historic or old investments, we won’t be able to see the future. We have a very flexible investment mandate and we’ve done a lot of weird investments as a consequence of that. One of the weirdest examples is a company that, at the moment, doesn’t seem like a good idea: the paper tablet company emerging at the times of Kindle and iPad. It is reMarkable. Now it seems supernormal that you want to have an electronic tablet just for note-taking. When we met the founder the first time, he was a former consultant with no hardware background, no consumer technology background, whatsoever – his skills weren’t compatible with the product he intended to build, but his passion for the problem was. It sounds like a really stupid idea, but with his passion now, 5 years later, in the funded by Spark Capital, they sold hundreds of thousands of their tablets. This is one side of the specter in what we do – companies that are started looking weird, but eventually become mainstream. On the other side, we have a company called Zeg Power which produces hydrogen from hydrocarbon gases with integrated CO2 capture. This domain is very far from the normal software service application.
We do all. We only invest in Norway based companies, so we’re working with one of the smallest markets in the world when it comes to the companies. We can’t afford the luxury to only do one thing – we have to be there and be the best partner for all startup founders emerging in Norway. Some of them find us through the accelerator program. Twice a year we do active outreach to find companies. Many founders find us through our network, from references from other founders we work with. They reach us through our website, and we’re getting to know them more gradually. The ratio is about one half come from accelerator programs and the rest are coming from other sources.
I think I’d like a little bit of both! Given that we invest super early, it’s more about having conviction about the team than the numbers. You just don’t see enough numbers to make a decision – numbers usually come later. Still, we don’t want to see a circus, but a good founder-market fit, but a good founder-market fit can be circus, explosive, fireworks – or completely the opposite, but super driven. So, we like both circus and boring numbers, but usually, we invest in teams, in people who are driven, who have the right skill set to solve their problem, in founders who are able to convince us, who can engage customers and engage potential employees. There are many ways of engaging, selling, winning over people, not just a charismatic extrovert founder, just somebody we can trust.
As any investor, we want companies that have the potential to become very big. We try not to think too much about the time or what is the market going to be later because this early a good team on a bad market can switch to a better market. We do ask questions about the products and about their market, but it is about the team, how they think. And that’s the best way to understand how they will think and maneuver if we potentially fund them. So, everyone is saying that the team is what matters most because it’s true: we want people who know how to solve the problem.
The number of projects we discuss is somewhere around 500. And we meet 400 out of those 500, which is 80%. Usually, we do 20 investments per year.
We are very agnostic when it comes to what type of companies we invest in. We work in a very small market. We do pre-seed, we work in Norway – we can’t afford to have the third filter, because we couldn’t do 20 investments per year. We do have some domains that we try to exclude: we don’t like to do Weapon, Non-renewable energy, but we are super agnostic to everything that has a neutral-to-positive impact on the world in terms of problems companies are going after.
I guess, every investor says that we like to move fast, and it also applies to us: we can make a decision in a week from the first meeting with a company. We are a small team of partners, and given that there is not much to look at, we can’t really think too long. We have meetings to understand what a company wants to do and what’s their plan for the future, to understand a bit more who the founders are, their skill set, and then we can make a decision based on that.
It is €100k to €300k as an initial ticket.
A good fund is expected to make 3x in a 10 year period, and we expect that most companies will not contribute to this outcome, but a few will. A good company will make at least 20x on exit.
The market decides, actually. Usually, we take between 5 and 10% of the ownership of the companies we invest in.
There are rules and exceptions from the rules. That the majority of companies we deal with are founded by people in their 20s and 30s, because they have less to loose. But there is a lot of counterexamples when people who are a bit more mature start companies, and, if I remember the statistics correctly, their odds to succeed are higher. It’s just a much smaller sample to look at.
I really like the term founder-market fit. At the same time, as you probably know that the world’s biggest taxi company was not founded by somebody with a taxi or transportation background, and same with the world’s biggest accommodation company. So what is a good founder for a specific market? Sometimes it makes sense to have a very strong industry related background because you have a network you know from the inside of the market, and you also know how to do something better. If you want to have that 10x improvement, sometimes it takes a fresh set of eyes that makes the best difference. It depends on the problem of what is the best founder for any specific market, but there are a few things that are recurring – determination, energy, intellect to pull a company forward. A successful founder is always a set of skills and personal qualities, and that set differs from one company to another, so there is just no rule for it.
Many times. The company I just mentioned, reMarkable, is one of those, and we have several examples of us backing solo founders. Many people say that it makes sense to be a team. It’s like raising a child: you can do it alone, but it’s much easier to do it with a partner, having somebody who’s in the same boat and has the same commitment to the process. But if you look, for example, at Facebook, you’ll see that Mark Zuckerberg had co-founders, but he was the dominant founder. LinkedIn and a few other companies had solo founders as well. If there is one founder with a strong team around him, a company can be successful. There are rules, but there are too many exceptions because working with startups is more about finding the exceptions than following rules.
I think we would prefer to work with both. Coming back to us being a geographically focused investor, we have to be adaptable and able to work with technologically savvy people as well as with visionary business-oriented people. It is our task to find out how to support them the best as partners. There are examples by people who build excellent companies, coming from a commercial background, and just as often companies built by engineering teams and them doing something exceptionally well. We don’t really have a strong preference for either one. And you need both kinds of people to scale a company, so our job is to figure out how we can supplement our founders with other people in their team so that they have a complete to be able to build a massive company.
Being a founder is all about talking about the future, painting the picture of this future, of a mission about the future, of how things are going to be. It’s not a lie or something, it is just an ambitious forecast, a variant of what the future can be. That’s ok for founders to be ambitious in their plans for the future, you want to set a big goal, and shoot for the stars. But there is a very very big line between being ambitious when you’re on the topic of forward-looking statements; it’s impossible to falsify. The red flag is when companies or founders start lying about things that have happened which are actually untrue, being dishonest about what they’ve done. That’s a very very red flag for us in the evaluation process. Apart from that, there is a lot of things that are not red flags, just making an investment decision less likely. Being dishonest is where we draw the line very firmly.
Multiple times! I think we should probably have an anti portfolio at some point in time. We do regret several companies we missed. Some of them had the price too high for us, but we should invest in them despite this. Sometimes we made decisions basing on experts’ advice, which is a very interesting topic – should you fully trust the experts from the market a company tries to attack because you can get an opinion that the proposed solution is never going to work. If they’re right, you’re going to lose your money, but if they’re wrong, the product has massive market potential, because they have a secret. If you will, working on something which others don’t think is possible and have a massive competitor’s advantage. So, yes, that happens all the time, when we couldn’t see the potential or the market.
We are agnostic in the types of companies, we invest in high margin opportunities, in companies that can quickly scale. That means that restaurants or hairdressers or many other sectors that we like as consumers, we will not invest in. The same goes for infrastructure. We like Green Energy projects, but within that vertical, there are too many companies relying on infrastructure and the capital requirements are too high for us. We also can see a lot of exciting things happening in Sweden, but it is more about geography.
Somehow, we have become even more accessible because we’ve been forced to do more outreach and be more visible online, rather than meeting people in person. I think it’s become easier to get in contact with us – and we like to think we were very accessible already: we answer any cold email or phone call whenever someone tries to reach us. Otherwise, no, nothing has changed, and we continue to help founders to build successful companies.
Both. There is a lot of opportunities for VCs. We, specifically, are first money in and we dilute with the founders from there on – we don’t bring any follow-up money. A big part of my job is to help these founders to find the lead investors for the next round, at the seed stage. Historically, pre-COVID times, if you want, the majority of those investors was Nordic, especially Norwegian seed investors, just because they had proximity, we knew them, and it was more natural to have them meet our companies. Now, in post-COVID, it makes no difference, if you’re sitting in Munich or Vienna or in Oslo or London, meaning that finding the right investors for any company is much easier and we have a bigger pool of investors to drow from. And it’s just as natural for a Munich investors to meet a company from Oslo, as it was to meet a company from Berlin a few years ago. It is a massive advantage given that we work, again, in a small market, and most big VCs don’t have Oslo in their monthly flight schedule, so we haven’t been able to make many relationships with these VCs. Now our network has a massive boost in this part as well, which increases the probability of somebody who normally wouldn’t invest in Norway startups will start doing that.
Google – because of the huge impact they have on making information and data available to a big part of the world. I’m battling between if it’s Microsoft or Apple who made personal computing most accessible to the public. On the one hand, you have Android with Google but on the other hand – to choose between Apple or Microsoft… I choose Apple because of what they did with the cellphone, given, again, people access to information and education. You asked about the last 50 or 100 years, still, the most important innovation was made by Johannes Gutenberg. Another question I like is “If you can go back in time to help with some invention, what would you choose?” I always say that I would go back to make printing available earlier, in pre-Gutenberg times, because distributing information broader is the platform everything else can set on.
Maybe, it’s not a very good example, but I really like the Segway story, despite we can argue whether or not they actually failed. The inventor of Segway was already a successful inventor of infusion pomp for insulin. And one day he’s got to work on an even bigger idea: he founded a company, brought in some of the best engineers, and made them work on a secret project that made the media even more curious. Then with the big unveiling of Segway, which was on YouTube and everywhere else. Everybody was like asking “What’s THIS?” because it looked so weird. But his thinking was 100% correct: instead of having these metal tanks rounding in cities to transport people, what if we make much smaller modes of transportation, that needs less space and, obviously, emanates no pollution? Fast forward 20 years, with all the scooters around our cities now, we know that he was actually right, his creation was good and fast, just too much ahead of time and looked too weird. Now, this market is growing like crazy.
Nobody knows what’s going to happen in the future, and I try not to think too far into the future. At the moment, I’m satisfied, but not content. We can always do better, I can always do better, and that’s what I try to do at work every day: I think about the ways to improve myself, improve the company I work for, and, as an extension of that, improve the way we work with the founders that we support. As long as that’s motivating and challenging, I think, I’m going to continue to do that. One day I may start something else, but I’m trying not to make too many plans, just go with my life.
Curiosity is super important. You need to be curious about people, about their challenges, about the markets they are going for. Being a good investor is about not being the main character in any way – you’re just a supporting actor, but this is a job that comes with many awesome things. You get to meet super smart people who are driven, who are experts in their fields and want to make an impact with their work. To be a good partner to them you have to be curious and ambitious, you have to have empathy for what they’re doing. But also you have to understand that, regardless of how hard you try, you will never have the same depth of understanding. They are thinking of what they’re doing 24 hours a day, and you meet them for an hour and have a bunch of other companies to think about. You have to be humble. Also, you have to enjoy talking with people because very often you’re not the one with the answers but you if you know enough people, you, probably, will find somebody who can answer your questions. I think you have to have strong communication skills and be able to articulate your views, in a good way, to deliver your message efficiently.
It is a very long-term game, and you don’t really know how to win, but you have to be patient and do a lot of things. In chess, there is more thinking and less luck involved. Maybe, it is Risk, a strategy board game. You’re paying it for the long-term, you need to build alliances and relationships, you have to be patient, and then – to win – you probably also need to roll a few 6s in a row.
First: Don’t scale too fast, but figure out and make sure that you have something people actually want before hitting the gas pedal. Be a little bit patient here, make sure you get things right on a small scale before you try to reach the whole world. You will have a major return from this stage if you do everything right. Second: Focus. Business in itself is not something that can be achieved by addition and subtraction. You’re going to be better by doing some things very well rather than doing a lot of things half good. And remember that you always have an alternative cost. If you spend 1 hour on alternative A and 1 on Alternative B, it’s better to choose the best alternative of those 2 and spend 2 hours on it. Third: Take care of yourself. Building a company and staying with it for a lot of years is super hard. You have to train yourself, because you’re going into a new role every 12 or 24 months, as your company scales. So that means – sleep, exercise, eat healthily, have a peer group, have a mentor, therapist, or coach, etc. To make sure that you take care of yourself because if you don’t do that, there’s no way you can take care of your company.