David Gardner (Cofounders Capital): We have a joke that if we don’t understand something in the first 2 minutes, we won’t invest.
30 Jul, 2021
Patrick Polak is co-founder of Newion Investments in Amsterdam, the Netherlands. He is jointly responsible for managing the company. His tasks include defining the firm’s overall investment strategy, investing, managing portfolio companies, fundraising and investor relations. Patrick is closely involved in Newion’s investments and is holding various board positions to help portfolio companies accelerate their growth.
I’m in this business for 23 years already, since 97. Before that I ran a company active in high performance computing in the US and got in a contact with venture capital back in 1996, quite a few years ago. When I sold my company, I was 30. And I’ve got very much intrigued by VC world, all those venture things, the hint of a flavor of which I’ve got. I tried to get into the industry, and through an introduction I became an investment manager in a government-backed fund investing in all kinds of business. And from the day 1 all this intriguing things I thought might be interesting was ten time more interesting than I’ve imagined it. From the March 17th, 1997, St.Patrick’s day, when I started, I fell in love with this industry. And this burning passion hasn’t died. Every day I still learn a lot and love what I’m doing. In 2000 I had an opportunity to start my own investment firm. While I was at that government-backed fund, we acquired the portfolio of the companies I was governing while working there. With that we started and raised our first VC fund. Today we are a team of 9 people with portfolio of 20+ companies investing in BeNeLux, Northern Europe (Sweden, Denmark, Finland), and now moving toward Germany. Our backers are institutional investors, like banks, Family Offices, individuals. We invest, like we’ve always had done, in very early stage companies. There has to be a product, some – a few – customers, entreprise or B2B software, and then we can consider investing.
You’re asking for a magic recipe! There isn’t any. Every company is new, every company has its views, ideas, hopes and believes. Usually we do 3 or 4 months of investigating and research, when we decide to put in some money, between 1m and 2m Euro initially. We can go up to 7m. We have developed 3 stages in the development of a company, all having to do with the value proposition. The simple explanation of what the value proposition is: what value a product or service you’re providing brings to your customers, why they are paying you. The other side of it is what value it brings to you. At the 1st stage we’re looking for a value proposition. At the end of this stage we want a company to have a hard evidence that it has ICP (Ideal Customer Profile) and understand why this ICP makes sense. Are these particular companies right customers for you? Is the product you’re offering is really relevant to this subset of customers. For example, you have a product capable to satisfy 4 groups of customers – banks, hotels, airlines and hospitals, you’re a 10 people company, you have customers in all 4 areas. We will ask you, why keep all 4 areas, because you don’t have enough resources to address all 4 markets, so which one is the most relevant and why, and can you give me evidences of that. At the 2nd stage, if you’d found your ICP, you need to prove your value proposition. Here we like to help you to create a predictable sales and marketing model, when you know pretty well that invested money will convert in a new customer in, say, 3-4 months and you know what size your company will have in a given time. It is very black and white, of course, and never looks like that, but we want a company to focus on building a predictable sales and marketing machine. After that we can get to the third stage, which requires another funding. So, finding proposition requires funding, proving requires funding (and that’s our sweet spot), and then scaling up requires more funding. If you have developed a predictable sales and marketing model, then, in essence, you’ve built your money machine. So if your market is 2000 customers or 200 million of size, obviously you cannot have too many of these money machines. If your market is a couple of billion and thousands of potential customers, then you can have way more money machines to cash up that market. And every money machine, every sales model requires more funding, and the larger your market is, the more money you can raise or need to raise in order to capture that market. Because in the end of the day more investment means more return one day. So, criteria wise. It depends on where you are and how close you are to the BeNeLux market, our domestic market. You can start as little as in 20-30k Euro monthly recurring revenue. But if you are in Germany, I would like to see a little more revenue and later stage companies, that are already in proving stages.
We always want to see a must-have proposition, like is the customer really need to buy this product in order to do business better, faster, cheaper than ever. What we don’t want to do is transaction platforms, even B2B-oriented, like FinTech or E-Commerce. We don’t have any domain expertise in that areas. Also at many transaction platforms there is “A winner takes it all” proposition. Our 85m Euro fund, which is a lot of money, may be not enough for “A winner takes it all” thing, that is why it is not in our focus. We have not invested in Security, not because you can’t make any money there – you can make a lot! Still most of the time it is very research-intensive business, where is the constant fight between the good guys and the bad guys out there, which requires enormous investment in smart people. And I’m not sure whether we have enough talent in our domestic domain. Most of the talent is in the UK, the US or in Israel or maybe in Eastern Europe. I think, it’s very difficult to build and market such a company in BeNeLux. But we cannot have a luxury segment to be very picky and focus only on technology, or domain. Blockchain is a very interesting technology, we’re looking at a couple of companies there. It is a little bit too early and valuations are overhyped today, so it is not for us for now.
There is a couple of reasons why we like the BeNeLux and Nordic markets. Obviously, BeNeLux is our domestic market, and over almost two decades we had built here a nice network, and it helps us in recruiting talents for our portfolio companies. We like Northern and Baltic states because these are very small domestic markets. You may ask, if these are so small markets, why do you consider investing in these companies? We know that, if you want to build a company with a value of 16m Euro, you need to have International customers. We can enter very early there, and see if entrepreneurial teams have this international thinking from day one. That’s something we can access very easily. In order to be successful in these small domestic markets, you have to think internationally. In Germany there are many entrepreneurs who think internationally from day one, but also there are many entrepreneurs who are fantastic in building up very nice companies with German customers alone – and you can do it there. Still you’ll be a king of your local market rather than selling your products to other geographies, so, maybe, it is better to sell it there? And the US market is the largest enterprise open market in the world and really open to innovation, more than in Europe. So if we had the first traction in Europe, my next step will probably be the US. Also because the most acquisitions are made by US companies, and it helps investors to exit. At the end of the day, my only customer are my shareholders, that may sound very negative, but I’m a Dutch and very direct. And the companies we invest in and we can support, and nurse, and give advice, and coach, and love, and help – they are the tools for us to get a good return and get a new fund to support next entrepreneurs, and so forth.
A team that is coachable. In ideal world, which we’re never in, it has relevant experience. While saying this we funded first time entrepreneurs straight from university, that became a billion dollar company. We like a certain market size, above 300m Euro or dollar; if it is below, we won’t, probably, invest. We should be aligned in a company building, and both sides of a table should be comfortable in this process. We all have to believe in partnership. I know for sure that if we invest €1 today and make plans for the next year or the year after, our exact plans won’t ever materialize – it will be either better or worse. I don’t have a сrystal ball (actually, I have one, but it doesn’t work and I can’t predict the future), but I’m pretty sure here. If you are partners – real partners – you can conquer it. So it is team, offering, market size, those things.
No. It is a little bit too early for us. We don’t support one-man-band not because it doesn’t work, but you should not forget that we have a certain time-frame during which we have to get to a certain size of a company. And if you start with one person, it takes too long to get the size when we are ready to capitalize.
We review something like 250-300 relevant companies, which means companies in relevant geography, B2B software space, size and stage we could invest. If a company is not relevant, we don’t take it to our database. It is about 250 companies, that, in theory, suit our little investment focus.
We go out ourselves, we do a research with our team and try to find interesting companies just after their initial stages, because it is where we typically come in as the first investor. Some people are coming inbound, giving me a call, or colleagues drop us emails. And we go into events where companies present themselves to the investing community. A small part of leads come from M&A advisors, investment bankers or other investor.
We will not take a stake below 10% initially. After we get to a certain size of the company and do a scaling round in our definition, raising €5m or more, I still feel that founders still have to be in a majority position. Only if you have proven your scaling position, it’s ok to dilute into minority position from collectively founder’s position. I often see that investors take too much of the cap table in a too early situation. If the company really takes off and more money is required, a you will get to a cap table where the founders have such a small stake, that is not interesting for them to stay on. They’re almost acting like hired management. We always try to keep that balance. “The bigger the stake, the better’ is a very short seeing position. We never take below 10%, we never take a majority, and if we take a majority, we try to do it as late as possible.
We have a confirmative due diligence procedure. From the first moment you reach us or any other VC, you have to realise, that due diligence has already started. You want to make an impression, we ask all kinds of questions to understand, where the company is, its stage. We consume all these data. Later, after binding a term sheet, we start confirmative due diligence, checking if everything you told us earlier is right. We never use due diligence to change terms and conditions, lower the price. I’ve worked out a couple of due diligences myself, and it was like – “This data substantially different from the information we received earlier on, therefore we cannot make the investment thesis or I don’t believe in the partnership.” This is like marriage; while you have non-binding term sheets, you are dating many investors, but the moment that you received after signing a binding term sheet, you’re engaged and going to get married. And during the due diligence you need to make sure that your partner tells you the truth. You don’t want to have any negative surprises. The process depends on availability of people and data and takes 2 to 3 weeks max. Companies we are investing in are relatively small. We do ourselves the financial and commercial due diligence and have extra people for technology due diligence. There’ll always be a management assessment which is not about whether the founders are good people or not good people, but more about the characters of these people, how do they communicate and cooperate with each other. If there is some legal things, we take external party in that. To combine all the data and think over it is the most time-consuming part, that’s why it takes 2 to 3 weeks altogether.
Initial checks are about €1-2m. But as we stay with a company for multiple funding rounds, our presence may build up to €7m-8m, but only in the winners.
Too many! Everything that jeopardises the partnership. If we have found any inconsistency in your data during due diligence process, it is a big red flag, maybe the biggest. Like revenue is lower than you stated, or geography you claimed is different and you have no licence to operate there. If we find that, we are out. You need to understand, that if we invest today and plan to reach some milestones in 12 months, the real things we reach won’t be as planned, but something different, either better or worse. Most the times they will be worse. And the process requires open communication. In the whole investment process, those 3-4 months that we work on the joint investment thesis, if the things entrepreneur says us are not confirmed by due diligence, then I don’t believe in the partnership. You have to be open and transparent, otherwise it’s a big red flag.
Do you hold onto your chair? It may be 300x.
Yes, of course we looked at companies, and turned them down, and later on somebody else picked them up and they happened to be very good. It happened many times. It was 3 or 4 years ago, when we couldn’t get into the company, because the founder decided to use an investment mechanism we couldn’t provide. I still a little bit regret it. But being honest, if you take a decision, you have to stand behind it. There’s no point in regretting things. Yes, we missed, but we took a joint decision that we will not invest at these terms and conditions. It is always easy to look back and make decision based on today’s data. We have one company and in the process of getting a massive multiple return, and they talked too many-many investors and nobody wanted to initially invest. And we did it, we saw something that others didn’t. That’s good for us today; you took a decision, you stay behind it.
None of them. I want people who are genuinely themselves and don’t copy others. These two came from a different area, in different situation, at different time. For each company, each stage, geography, proposition, etc. you need different people. And I’ve learnt to live by the day. Even Steve Jobs, whom I admire… There are so many other people I admire. The companies we invest in are 10-20 people initially. You need a whole kind of different qualifications and characters. I would like to see in a full team a mixture, because you need to have the capability to translate your business requirements into technical solutions. I know people who developed fantastic applications by their own – and never showed it to the market, because they were building a technology or product based on their own assumption how are markets or business world is being run. This is one side. The other is some business people who think that there’s a problem and they have easy solution to fix it, so you just need to develop a product – it doesn’t work this way either. You need to have in your team a mix, a combination of business people, who understand that there is a problem you can solve in a right way, and tech people, who can translate it into good solution. As B2B investors, we often argue, is it a product or a technology. I’m not that much interested in technology, I’m interested in a product as a solution for a problem. I’ve been in situations that didn’t run very well for us, when entrepreneurs were very much focused on building a technology which can be used in multiple markets and multiple applications, but we’d never reach more markets or got no more applications, because we were only focusing on developing this product, instead of focusing on the penetration of another market or creating another solution. So, it has to be “we have a problem and a product to solve it,” rather than “we have a technology and are looking for a problem to solve.”
No I didn’t. Every investment we’ve made, including those that weren’t successful, we understood the offering of the solution to a problem, we understood the way forward in finding a value proposition (even if it wasn’t found yet). Although my business card says “managing partner,” my real job description is “head of failure”. I’m responsible for all the failures, while entrepreneurs are responsible for all the successes. If we invest, if we make this decision, it is my responsibility to sign off and go to my shareholders for capital call. If our initial decision was right and it was a good proposition to invest in, but something somehow goes wrong then it is my responsibility that we didn’t support a company well enough, we didn’t coach an entrepreneur good enough, or didn’t build a right team, or something like that. We missed a couple of things in the investment thesis, and it is also my responsibility. I am a very optimistic person, despite being a VC for 23 years, and I always look for the opportunity and growth, because growth is in my DNA. I am also looking for mitigating risk. That is a key: I am mitigating risk. And, back to the question; if I’m investing in exotic startup, I am going to invest in a space where I don’t know where the value is, therefore I increase my risk. This is something I don’t want to do. You can skate in winter time, but I’m not good in walking over water, unlike one metaphysical person. The only time I can walk on water, is when it is frozen, and that is slippery I will other drown or slap on my face. So I will stick to my guns trying to invest in those areas where we have the illusion that we understand the business (it’s always an illusion), where we have the illusion that we can support and coach the companies and introduce great people to build market leading teams.
I have a couple of them. My first suggestion is always The Startup Owner’s Manual by Steve Blank. It is a boring book of 300+ pages, and it really describes the methodology which we actually adopted in building and marketing companies. And everything I told you earlier about finding and proving skills is driving from that. When I read this book for the first time, it was like a Bible to me as for a person of another religion, it opened up my eyes, answered the questions I’d always had, gave reasons why I failed and reasons why I was successful. Another book in my reading list is The Lean Startup and everything around that from Eric Ries. It is good to read The Hard Thing About Hard Things by Ben Horowitz, which dives into dilemmas in building good companies; the same is Startup CEO: A Field Guide to Scaling Up Your Business by Matt Blumberg. Mastering the Rockefeller Habits by Verne Harnish as well. And some very important things which is either over or underestimated are discussed in Start With Why by Simon Sinek, discussing the reasons why you’re doing this, the essence why Apple is a successful company compared to others. Another very interesting book, but it’s more for enterprise software companies, Blueprints for a SaaS Sales Organization by Jacco van der Kooij, Fernando Pizarro, et al. And the last two ones I would really recommend is The Founder’s Dilemmas by Noam Wasserman and The Five Dysfunctions of a Team by Patrick M. Lencioni. I would really recommend to read these books.
The thing is that if you look at the most influential and dominating companies today, they are, probably, only 20-30 years old. Look what they’ve done with Facebook or Google! Especially Google, I think it is a freaking amazing thing with amazing story. You can only take your hat off for those companies. I’m too old and not that much into social networks, but I really admire Facebook. Obviously, Apple and Microsoft are there, but those are older. I’m not that much into your role models, still in order to be successful everything has to be right, all stars must be aligned, Jupiter and Mars have to be at right orbits. You have to have a right team at the right moment with the right funding for the right solution of a right problem. Many things you can influence, many things it’s just pure luck.
Yes. I am very much driven to change the industry, I still see many ways where we, as an industry, can improve. I’m 54 right now, still have a couple of years ahead of me, and I want to help entrepreneurs to create and market their companies. Hopefully, in next 3-4 years I can translate that in actions. Doing for several years the same things that didn’t work for me, I always want to change, to progress. I’m not interested in the money, which sounds crazy from VC, I’m very much driven by creating something that you can take as a heritage, building great companies that can last – that’s what drives me. If I can improve my game, I will. But I won’t do a new company myself – I’ve been there, I’ve done that; frankly speaking, I wasn’t that good in it, otherwise I would have been the Google myself. Now I ride a small VC fund in a very specific niche – and I like it, I enjoy it, this is my life. I just want to improve the show.