Duncan Davidson (Bullpen Capital): In Silicon Valley failure is a feature, not a bug.
04 Feb, 2022
Stephan Morais is Co-Founder and Managing General Partner at Indico Capital Partners. He was formerly an Executive Board Member at Caixa Capital, the Private Equity and Venture Capital fund management company, a Non-Executive Director, and an Independent Board Advisor in numerous companies.
I was doing my MBA at Harvard Business School and I found out this being a professional investor. I had already founded a startup before when I was in London, but it’s very different – being in the world of startups or actually being an investor. It’s similar but it’s very different in many senses. I actually understood that this was a profession better when I was at HBS.
And I had this idea that one day I would become an investor, but in the meanwhile, I did lots of things with were very useful, so that you can become a better investor hopefully when you’re ready for it.
I think the most surprising was the fact that the different ecosystems are at that different levels of development. You would have thought that both investors and founders would have the same level of information and approximate knowledge about how a startup should be developed, about how an investment should be made. Actually, more developed markets are really far ahead in terms of the way things get done, the best practices, the tools that are used, the level of ambition, and so on. I think there’s a lot of catch-ups that have been done but there’s a lot of catch-ups that need to happen, so Europe catches up to the US, and some parts of Europe catch up with the most developed ecosystems within Europe. Sometimes it’s a bit surprising and from the start but I still feel that there is still a big knowledge gap, particularly on the entrepreneur’s side on how they should develop their companies and what level of ambition they should have.
We currently have one which is a bit spicy. It’s a company called Pleasy Play, it’s in our pre-seed program in our accelerator in Google for startups. They are SexTech solution for couples, so that’s a bit unusual. It’s led by a female founder and basically, it’s a solution for couples not to get bored – they send a personalized box of sex-related stuff to their subscribers, there is some gamification there, so it’s fun.
The best founders tend to understand the market, they tend to differentiate who are the best VCs and the best investors from the less well-known. Quite often the deals come to us – through LinkedIn, through email, through recommendations. We have seen close to 2000 companies in the last 2.5 years. Almost all of them came to us because they knew about us, they knew that we had invested in the most of success stories from Portugal. It’s a reputation game: you’re just as good as your track record. Of course, we are in the media as well. It’s like a snowball: you get known and then founders talk about you, allowing other founders to get to know us.
As I said, we’ve seen about 2000 projects in the last 2.5 years, so the average would be anything between 500 and 600, depending on the year. We have invested in 21 companies so that gives a little bit less than a 1% of the probability of getting invested by us.
Mostly we’re investing in SaaS. We also invest in marketplaces. Currently, the companies always have some sort of Machine learning or AI component to it. We invest in FinTech, in Crypto-related companies. Although we don’t necessarily do tokens, we invested recently in Anchorage, which is the biggest Crypto bank for institutional investors. Sometimes we invest in Micro mobility, like Tier which is a big micro-mobility company in Europe and globally nowadays. We have a generalist approach, although we go into quite a lot of details, given our knowledge base inside a team. We have a more targeted approach in terms of geography – we focus on Portugal and Spain mostly. And we try to concentrate on certain stages of development. We invest between €100K and €5M, and that normally translates between pre-seed and Series A, although we have occasionally done Series B and C. In general, we’re a typical, classical early-stage venture capital tech fund.
Well, never say never, right? For example, we see a lot of movement in BioTech, but we are not in that field. We had invested in BioTech in our previous funds before we formed Indico. That’s an area with tremendous potential. As well as CBD-related production, which, we think, has huge potential in Europe where everything is yet to be done. But that’s outside of our scope. So there are 2 examples of areas where we love to be involved, but they are outside of our scope.
The show part and the presentation skills are important, but the content is way more important. Good entrepreneurs define the problem in one or two slides. One of the mistakes people often do is they talk about the problem for ten slides. That’s not needed: a smart investor will understand the problem very quickly if there is a problem to be solved. Your solution should be quite straightforward as well. And then why is your solution so much better than everything else, 10 times better than your competitors’. That’s something that normally pitch doesn’t go enough in-depth, they don’t do justice to their own solution and underscore poorly the differentiating factors versus their competitors’. They also underappreciate the strengths of the competition, so that’s something we like to focus on very much because in venture capital you’re looking for something spectacular. So you, as an entrepreneur, really want to show that you’re better than the competition. Last thing, of course, the team: we need to understand why is this team the perfect team to do this, why do they have the ambition, the humbleness, and the willingness to go big. It’s a conjunction of a lot of things. Sometimes we see pitches with lots and lots of financial data when there is really nothing more than an idea, sometimes we see an early-stage product – that’s counterproductive. We don’t need to see lots of spreadsheets for something that doesn’t exist. Much much more important than the idea is the execution, and in the end, the winning companies are the ones that are able to execute.
You need people which are really smart and know the market, deeply know the problem and its solution, mainly in tech terms. We like tech founders: at least part of the team that should be heavy on tech. We like people that are ambitious, but can listen, can work with us and between themselves as a team. Team leaders that are not good listeners, that don’t understand that they don’t know everything, that doesn’t understand that a good VC is someone you want to work with, not for or against, is not our choice. We are looking for people that have what it takes to be a global champion and also are ready to work in partnership with us.
It starts with a great idea, of course, it starts with a solution for a clever problem, and something hard to replicate. It helps to show huge metrics of increase in revenue or MRR or whatever. All investors like very steep curves in whatever metrics. A good level of English or whatever language you’re pitching in is important because it makes sure that your ideas come across fluently. It is important for entrepreneurs to have a good level of English, if they don’t, they better go back to school and practice till it is not the barrier anymore. There is a lot of competition for capital, and sometimes those small things also make a difference.
It can be anything from a couple of weeks to several months and covers a lot. Sometimes the companies are just don’t have a business plan and what we would like to see them, the level of ambition, the level of detail, so they need to refocus or change in their strategy or operations, finding the right people. It can be quite fast: we have closed deals in a week or so, although the paperwork always takes longer than what people expect with a very few exceptions – in the US. In Europe paperwork does take time. Even if you agree on terms, time from the handshake to the money in the bank maybe a few months because of the bureaucracy. There’s a lot of stuff that is outside of everyone’s control around a table, that depends on authority and government. When you’re fundraising, you have to take into account that it will take at least 6 months from start to finish, so you don’t want to run out of money while you’re fundraising.
It was low as €100K and as high as €5M, and we’ve done those multiple times, so there is no proper average. It depends on the stage of the company.
I would rather work with Steve Jobs. Those two are both amazing founders, but you definitely need the person with the vision, the company leader that breeze along with other people, that inspires. You need the inspirational leader and the demanding leader like Jobs was and the one that has the vision to drive the products where the customers will be. Jobs created products that people would want one day. That’s pretty exceptional and that’s the kind of person you want to have – maybe not at all stages on the company, though.
We have cases and we have invested in solo entrepreneurs, but we always prefer teams. It’s very difficult for anyone to take the burden of everything by themselves. It is also extremely difficult and rare that you can dominate every skill that you need to drive a startup forward. It is much much better to have complementary team members so that you can share the burden and make things happen. And needless to say that diversity of thought is much better than having one person that is very smart – even if you are very smart. The outcome of group thinking is almost always better than the solo founder situation. Definitely, we want a team.
In general, the younger the company, the more we are close to them. Once companies become bigger – they become more autonomous, because they have internal teams and at some stage, they will have later-stage investors which will be leading the rounds. But we are very very close to our companies. If they’re really young, we will talk to them every week (if not every day) at the beginning to check out their progress in terms of recruitment, product development, customer development, and so on. If you’re typical seed/Series A round, you speak with them every couple of weeks and have a board every month. It’s kind of decreases a little bit as time goes by, we really close to the CEOs and the senior leadership of the company as VCs. We like to lead the rounds to Series A whenever we believe in a company.
I would like to focus on operating. When they operate, it’s not striving for differentiation enough. Sometimes that has to do with the pressure to show metrics and revenue, but the product gets left behind because it’s complicated and sometimes doesn’t bring immediate revenue. That’s one of the very common mistakes. Those companies don’t differentiate enough in terms of the product, the solution, and they might have some revenues, but at some stage, the growth will get stolen, because they’re not unique. Smart investors realize that the companies aren’t unique, they don’t invest and there’s no money anymore. We like to push companies to dig deep into their products, have a lot of customer feedback very frequently, and the sooner the better, but don’t rely only on revenue or cash metrics. Tied up with that is when you end up not having the right talent because you think you can get away with lower quality, less expensive employees. Entrepreneurs may not realize that this is a “Winner takes it all” game: you’re either going to win the lottery or you’re busted. You can only win if you have the best team. You need to hire people that are smarter than you, who can challenge you, and have ambitions by themselves. That’s expensive. That’s why you need to have very good investors to support you.
Even if you’re very very careful with the selection of your portfolio, the majority of the companies are not going to be high performers and maybe half of them fail. Eventually, you’re going to have one or two or three companies that will be going to drive all the returns of the fund, and those two or three companies will, hopefully, return 2 or 3 times your fund, which means that companies need to be Unicorns or something like that, bringing you dozens of times multiple to compensate for everything else. That’s why when you’re looking at investing in a company you have to believe that it might become a unicorn; if you believe that it might be a successful but average company, you should, probably, not invest because you’re just wasting your time. You have to dedicate yourself to the companies that you believe might become huge winners knowing that it’s not going to happen.
It depends on the market, but I would say that, at the early stages, anything between 10 and 25%. We try to concentrate on about 20%. Anything around those numbers for a leading investor is fair, even if you build it across a couple of rounds. What you don’t want to have is a situation where the VCs don’t care about your company in their portfolio, because they have a small percentage. Maybe you were able to negotiate something amazing and were able to get away with not diluting a lot, but that might mean that your VC has not aligned with your company. You don’t want to dilute too much as well, for sure. We all – entrepreneurs, Angels, VCs strive for a balanced approach: if things go well, they will and they should go well for everybody, and if they go wrong, it will be wrong for everybody as well. We all have to be reasonable in negotiations.
For sure: there are situations where we should have invested and we didn’t. If that doesn’t happen, you haven’t seen enough deals. It’s very normal and it would be unusual if a VC doesn’t have an experience like that.
In our previous funds and we used to put together a one-page summary on every portfolio company what we could have done better, even the ones that were successful. I think that a really interesting analysis because that’s where you build knowledge. And build more knowledge when you fail. In fact, we like entrepreneurs that have failed in the past – it makes people more resilient. We try to learn from our mistakes and we like our entrepreneurs to learn from their mistakes as well.
Not really. We kept on doing investments and we had a record year last year in terms of rounds raised for our companies. In the last 2 years, we have invested about €30M in the companies that have now raised €626M – that’s 20x of what we put in. COVID didn’t really change the situation: we still have the dry powder in our funds. VC is a long-term game: it’s not only about choosing companies, it’s also about balancing your portfolio, investing at a certain pace, etc. You really need to stick to your game and to understand what you’re doing and choose the best companies and the best teams and keep going on. COVID even speed up the digitalization of the economy and those areas that used to be a little bit sleepy and now are well and truly alive.
Who else, if not Google, Microsoft, and Apple? It could be others, but the truth that they are all the big tech companies that started as, well, startups – with VCs, and with Angels, and with founders, and they’re all now the biggest companies in the world.
Theranos is the biggest recent case. I think that’s an incredible story and I really recommend reading Bad Blood: Secrets and Lies in a Silicon Valley Startup by John Carreyrou. It is the detailed story of how the whole thing unfolded. It took quite a long time, more than a decade before it was found that the product wasn’t working. WeWork, to some extent, is also a recent failure, although the company still survives but not in its original form. I think these stories tell a lot about how investors and entrepreneurs should be aware of the ego and should be aware of cutting corners on corporate governance, accountability, reporting, on independence. Bubbles have this tendency to pop, and we’re happy that they pop now and again, because it’s not good when the market is too hot, and people get too excited and not doing stuff that should be done.
A good VC needs a good VC team, needs to have a mix of tech knowledge, business knowledge, financial knowledge. That can help the founders navigate very difficult waters. There will be ups and downs and if you don’t have the right partners, it’s going to be even harder than it should be. A VC needs to have that kind of skills, and the patients, and the knowledge, and the network to help the companies go through the motion and help them succeed.
That really depends on the VC. There are VCs who play the roulette and for sure those who play Go. I really encourage founders to understand who they’re talking with, what’s the track record, what’s the reputation in the market, are they the Go players or are they the roulette players. The analogy I like to make is that you want to be a football player but you don’t really know how to distinguish FC Barcelona from a third division club in Portugal or in Romania. You need to know who you’re talking with, because not all money is created equal, and smart capital is really different from average capital. I see in many ecosystems founders are not aware of the differences between VCs and Angels, for example, of different incentives and different reputations. A good VC will understand if you don’t know. In fact, if you don’t know who you talk with it is implies that you don’t know what you doing overall. It’s important to do your homework and differentiate the investors.
I’m super satisfied. I love my life and what I do and I think that I’m very fortunate when I go to work (or stay at home nowadays). I love my team, I like to be a part of different projects. I’ve been a CEO in the past, I’ve been a consultant, a banker, and an interpreter – I love those little things and all those parts of my career over the last 25 years. That’s the profession that should be done when you have experience as an entrepreneur or as an advisor. I think, now I found something that really fulfills me. I like to do different things, to be at a certain level of detail but maybe not too much. I am very happy that I did all those things but I’m super happy with my transition to being a full-time investor. This is the sort of profession that I’d like to do as long as can think and I can contribute because I think that retiring is not that good either – you just lose your mind and your capacity when you retire. As long as I can this is what I’ll do, maybe, with different types of funds. It’s a lot of fun.
Focus on building a unique solution. Focus on your customers. And focus on getting the best people by your side. If you have that, funding will come and success might come. But if you fail in those three, it’s very difficult to force things to go right.
I love Porto, it’s an amazing city, it’s beautiful, it has amazing food. And we have a lot of our portfolio there, at least as much as in Lisbon, probably even more. Porto is a great tech hub.