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
Stephen Chandler is Co-Founder and Managing Partner at Notion Capital. He is an entrepreneur, investor and company builder with 20 years experience founding, funding, running, advising and investing in technology businesses. He is Winner Investor of the Year 2020 at the Investor Allstar Awards (and shortlisted in 2019).
The team at Notion is a team of ex-entrepreneur operators who turned investors. Prior to setting up Notion we founded, built, and exited a number of tech businesses together, some of the early success stories in the SaaS. We were passionate about that business model, about the opportunities it represented around the world, and how disruptive it is going to be. We’re also very passionate about Europe beginning to create some large category-leading outcomes in the technology sphere. Europe always had tremendous entrepreneurial and design talent, but there haven’t been as many of the large commercial outcomes, and we felt that that was going to change. Those 2 things – the passion for the SaaS delivery model and for Europe made us want to setup Notion, which we set up in 2009 with a focus in those areas.
We have a very clear focus around SaaS at Series A. And whether at things that have been slightly outside of scope for us, they have probably been the more unusual, more exotic. We don’t really do things that are too far away from our thesis. I believe that if we stay close to what we know and what we good at, we are more likely to make better investment decisions overall. The probably one example I would highlight would be ArQit, and it is a quantum encryption business: basically, it’s a quantum key distribution to protect against the emerging threat from quantum computers. The model behind that is predominantly a satellite-delivered model and it supposes to put a satellite to the space, and it’s quite a long way from what we typically do. The team had a very interesting and unusual profile, having run satellite businesses rather than software businesses before. That’s probably been quite at the age in terms of what we done, and it’s a tremendously successful company. Looks like it’s going to be a very good outcome.
We’ve invested in over 70 since we set up the firm. In terms of opportunities that we look at, we look at in excess of 2,000 a year and we will typically do 5 to 8 deals a year. We engage with, after first filters, in about 800 and we meet physically with about 300 teams.
We do scout for interesting ideas and when we have multiple sourcing strategies, including, actually, a digital sourcing strategy that looks for signals out there in the market of interesting companies, whether that be on product reviews, people moving on LinkedIn, etc. We obviously have a lot of web inbound based on our brand, but that’s quite a mixed quality, to be honest. We all do a lot of outbound research and thesis lead staff as well where we’re looking at spaces. Probably the biggest source of the deals that we’ve done would be an inbound from our network – things that have been reviewed by people that know us and what we look for and come with the recommendation. That tends to be the highest quality.
We have a bunch of criteria that we look at. The qualities that we’re looking for in the team are some real ambition and a desire to change the world. The best founder is not necessarily focused on value creation, that’s just the consequence of what they’re doing. We like them to be an insider to the pain, to have the first experience of the pain that they’re trying to address, but also have an outsider’s view on the solutions, and not be too entrenched in the market that they can’t see a new way to approach. That’s from a team perspective. We are looking for a company that’s addressing a big market, whether that’s an existing market or one that they’re creating. You need to know that there’s a large company to be built. Then we’re looking at a product or technology that has early traction or indicates a success that they may have.
We kind of in-between, so we like some data. We’re not a growth-stage investor, we’re not expecting all of the financial information to be fully-fledged and we’re not completely focused on metrics and performance. We’re not a seed startup either, where it’s all about the vision. We’re looking for someone that has a bold vision and a big market but has some early evidence that there is a genuine demand for the product that they’re creating and that they can execute successfully in that market. We expect our companies or the majority of companies will have a minimum viable product in the market, so we can see some of the early traction indicators. That’s not always the case but the majority of them do.
I think that the first interaction with the company is a very important one, it sets the cadence and the scene going forward for the relationships. I’ve seen a number of companies that have really grabbed my attention, and that tends to be the qualities of the founder that I was talking about before: they understood the scale of the opportunity that they were looking to address. It was this way with ArQuit. Another company I’d like to mention was Tradeshift – the scale of the opportunity that they were looking to address, the scale of their ambition was very compelling. Another company was Paddle – their vision is to simplify the whole sales process for software companies. Since we invest in software companies, we’re very in line with what they’re trying to do, and the product was very applicable to all our companies. I think it is a combination of what companies are doing with their energy that makes us impressed.
We support B2B software companies, generally cloud-delivered and generally recurring revenue models. Within that we really like FinTech and we have a lot of successes in the FinTech space, that includes payments, InsurTech. In the last year, we’ve done a number of investments in the RegTech – regulation-led technologies and risk-related stuff. All of those are areas that we like and have done some interesting deals in. We will also look at things instead of vertical place, are they’re disrupting a single vertical or industry. You get some quite interesting models there. You get some conventional SaaS model, but often you get utility-based pricing as well as some other metrics, perhaps, a share of payments or something like that. And finally, you have B2B marketplaces that serve these verticals, for example, Mews Systems which operates in the hotel space and tides all those models that are interesting for me.
Yes, at Series A. Sometimes we will go a little bit earlier, a deal that’s called a post-seed: they normally have a product live. Occasionally we will come in at Series B as well. And we do investments around Europe: we’ve done 4 deals in German last year, we’re very active there; we’ve done deals in Greece, in Portugal, in Eastern Europe, in Switzerland – we try to cover the whole area.
To be honest, there are some companies, that we invest in, we’ve been building relationships with them over a number of months or even years because that’s we met them too early for us. And we got to know them over a period of time. We definitely like that. I think it’s in both sides’ interests to take the time, get to know each other, check the chemistry of the relationships, and really build on that. So, if we have the luxury of taking the time, we will do. Equally, we can move extremely, if we have to. If it is a time-pressure deal, we can certainly get to deal within 2 weeks and in further 4 weeks close an investment. Typically is 3 months.
Every individual company we invest needs to have the potential to be a fund returner. Like many VCs, we are looking for large outcomes – not all of them are going to do that, of course. But that’s why you have to aim big – to make sure you end up with it with a few of those. In order to deliver those kinds of returns, they’re going to be a pretty impressive multiple. We might invest €10M cheque over life, but if we’re looking for at least 10x return. Ideally, potentially, more than that. When we go into something that’s what we’re looking for: the potential to do that.
It’s €2M to €8M, with an average of around €4M. Clearly, we invest additional capital over the life of the company. And we also have additional sources of capital: we have a follow-on Opportunity fund. In our best-performing companies together with all of the structures, we might put €25-30 million/company.
We like to have a significant minority stake, typically in the teens, so around 15 to 20%.
I’ve already told about the founder: it’s someone who wants to change the world, had been inside of the pain, and has some fresh perspective as an outsider. When you extend that beyond the founder, we prefer to see more than 1 founder: it’s usually very helpful to have co-founded businesses, especially when it’s some geographical expansion. We want to see people with different and complementary skills around the table. In the early teams we like to see alignment and resilience, because, as everyone knows, it’s tough to build a business. We also want to work with people that we enjoy working with, frankly. The business should be fun.
With Wozniak, probably. Steve Jobs was an amazing person but he wasn’t the type of person to work with easily.
Anything that is a breach of trust or dishonesty. If I don’t feel the company is disclosing everything to me or is hiding anything from me that would be a bad red flag. Another important issue is if I don’t feel the team is aligned if I think they’re trying to do different things, we wouldn’t like that.
Yes. I’m not going to tell you who, but several. We don’t make perfect decisions – no one does. There is a number of companies that, for whatever reason, I haven’t been convinced enough to want to invest and they’ve gone on to do some successful things.
From a personal perspective, there is a number of things that I’m very passionate about. I love Alternative energy, I’m very interested in the whole Food security space, in AgriTech. But they are not things that fit within our thesis. The Notion mandate is very defined around SaaS, and we stay with the things we know and love.
We’ve invested in the security software company that plans to put a satellite into space, remember?
Now we have to be more flexible about not meeting people in person as others have. We’ve, actually, been very busy during the period – we’ve done a number of investments, including the investments where we haven’t met a team in person. I think that is going to happen more and more, and this is the direction we go in. Also, we focus on areas we think will be long-term beneficiaries surrounding some trends we’d seen during COVID. It is driving digital adoption extremely fast, and we think there are a number of people that will see medium to long-term benefits from some of the trends that we see around the world, and we try to refine our investment pieces toward them.
I think it’s both, particularly in the area that we’re in – B2B SaaS. There is definitely a significant opportunity that comes out of that. If you look at most of the analysts’ commentaries, they are saying that it drives the adoption of SaaS as the conventional software much more quickly. I think that it’s a great opportunity for Notion giving our investment thesis. Equally, I think we all have to be cognizant that there’s a lot of economic challenges around the corner, especially short and medium-term.
You always have to be willing to learn. I learn a huge amount every single day in this job, which is what I love about it. I’m meeting people that understand their business better than I do and often smarter than I am, and I like to pick their brains and learn from them. So, you have to do that, but at the end of that learning, you don’t need to have an opinion. There’s no point in sitting on the fence – either you believe in a thesis or you don’t. It is a combination of those two: being willing to learn but at the end of the day have the courage to make a decision.
Yeah, I need to be creative, because obviously the success stories today are Apple, Google, and Amazon who are massively creative in their own way. And I have tremendous admiration for those companies. I guess, going back further than that, there will be Kodak in photography, Nokia and Motorola in mobile telephony – both were very innovative, GE is amazingly innovative and has fantastic execution. If we go back even further, the whole production line and a number of industrial processes that were developed by some amazing people out there.
There are some that come to mind. I don’t say that WeWork is not a failure, but I think it’s failed to live up to the expectations that it set. That reflected hubris on behalf of the founder. I do respect people who try and fail and then just go out with dignity, and I have a lot more of a problem is where people misrepresent the capabilities of their companies.
There are several SaaS events, like Saastr in San Francisco and SaaStok in Europe. We are always very strongly represented at those. Again giving our background and our profile, we tend to like some of the reading around that, like The Hard Thing About Hard Things by Ben Horowitz – it is a great book. Another book that we’re interested in at the moment and which is completely off in another direction is Ikigai by Carlos E. Hernandez. This is a super interesting story about the Japanese philosophy of Ikigai and how to live a more fulfilling live.
I’m very happy. I love some variety of what I do: I love meeting young founders who are passionate about what they do about their businesses. That gives me a tremendous opportunity to see and do lots of different things. I do sometimes miss being an operator: having been an operator before it’s never quite the same doing it through other people as doing it yourself. You know, I do wonder whether I might have another startup in me at some point, but at the moment I’m very happy being an investor.
I think it is kind of backgammon. Chess is almost entirely skillful, and I don’t think VC is entirely down to skills – there’s always an element of luck in the game we’re playing. There is an element of luck when we play, but it is also a strong skill component.
Think Big in terms of the opportunity that you’re going after. Choose the people around you very carefully – both of the people you work with and your investors. And don’t run out of money!
My second favourite city in the United Kingdom is, probably, Manchester. One of my partners is based up in Manchester and we see many interesting things there. I like the city.