Warner Philips (Rubio Impact Ventures): Don’t just do it because you think there is a market opportunity, do it because you believe it solves a problem that is close to your heart.

Warner Philips is a Managing Partner at Rubio Impact Ventures, an impact fund based in Amsterdam and focused on passionate entrepreneurs who can change the world through a commercially scalable business model. With over 25 years of experience in ImpactTech and startups, Warner has been both a VC investor and an entrepreneur, investing in or starting over 50 companies. In all of them, he was a founder, shareholder or an active board member.

How did it all start? How did you decide to enter the venture investment business?

When I graduated from law school in 1996, I was looking for a job and had never heard of venture capital, but I ran into some people who were active in venture capital. I decided to speak to a fund, and managed to get into it. And ever since I’ve been in start-ups! But I started off on the venture capital side and was a VC investor for five years. In 2002, I started a company in cleantech and sustainability. I ran that business for another ten years, and moved to the San Francisco Bay area in 2007 to grow our businesses in the USA. After 10 years, I left that company in 2012 and I became an angel investor in Silicon Valley based cleantech businesses, until I moved back to the Netherlands in 2015 and moved back to venture capital. Since 1996, I’ve always been either an investor on the venture capital side or raising capital from venture capitalists, with pretty much 25 years of work in this space.

What was the most unusual or, maybe, your favorite startup you have ever supported?

One of the startups that I’m most excited about now is the company called Samasource. It’s a company that employs over 3000 people in Kenya and Uganda that do data annotation to train artificial intelligence algorithms for high-tech companies across the world. What I love about them is that it’s a very strong technology company, very successful commercially and creates a massive impact. From that perspective, it’s also the most unusual one because they are the furthest developed in demonstrating that strong technology, massive social impact, and healthy financial returns can all be combined. That’s one of the companies that I think will set a new standard. One of the interesting companies that I’ve started is a carbon-neutral credit card affinity program. Basically, it’s a VISA credit card where you can see the carbon footprint of all your transactions, and offset that 100% for you. During the financial crisis, after somebody else was running the company, it pivoted towards a new business model and away from the climate, which I think is a pity, but we successfully sold that company several years ago. I’m amazed that nobody’s doing a similar product now because almost everybody has a debit or a credit card and even paying with your phone could work for this model. The climate challenge and carbon emissions are top of mind for so many people these days that it makes complete sense to relaunch that product or start a new company around it. I guess once this interview airs, there will be a whole new generation of entrepreneurs taking that idea and running with it!

Is there anything that surprised or impressed you the most when you just started working in venture capital?

I think I was most surprised by the fact that there’s so much that I don’t know and that there will always be so many things that you don’t know, particularly in venture capital. Even if you become highly specialized, I don’t think you will ever know as much as the entrepreneur that you are investing in, and you have to get comfortable with that. During the process of screening an opportunity, we have to find a way to assess how good the opportunity is, but also have to find peace with the fact that we will never know the business as well as the entrepreneur that we’re investing in. Then, it becomes a lot more about understanding people and picking the right founders and entrepreneurs to back. You have to follow your gut feeling that the entrepreneur that you’re investing in is the right one. Also, understanding that for every ten investments that you make, nine will probably not be super successful; a lot of them will fail, some of them will be okay, and one or two of them is going to be very successful. The funny thing is that when you invest, you believe each and every one of them is going to be the one that’s massively successful! You learn over time, and you never stop learning, which is a good thing. 

How do you select startups to support? What are your criteria?

We have formal criteria as a fund. My fund is called Rubio, it is an impact fund, so we invest in entrepreneurs who seek to make this world a better place for as many people as possible through a commercially scalable business model. They use business to scale impact and impact to scale business. Our first criteria when we get a new business plan is do we think this fits the formal criteria of our fund when it comes to geography, stage; does this really have the impact that we think it will have. After that, we operate as commercial investors; we look at all the things that any commercial venture fund will look at: is there a big problem, is this the right solution, how big is this market, how good are these people. When I look at the process, the first thing is, do we get excited about the solution to a very big problem and do we get excited about the people trying to solve it? Then we go into a much broader and deeper analysis of every aspect that covers what will make a successful business. At the end of the day, it’s a gut feeling again. Do we think the company is going to fly after all the analysis? Sometimes all the analysis says ‘go’, but your gut feeling says no, and then you should still not make an investment, which is really a tough call to make. The formal criteria for us are that do we understand the product, will it have a lot of impact in a very large scalable market, do we think the company has the right revenue model or can we help the entrepreneur find that revenue model, how good is the team, the strategy, what is the competitive situation. We go through all those things both from a formal perspective and from a material perspective. Does this company have everything it needs to be successful?

In terms of stage, when do you decide to enter and how do you decide to exit?

We typically invest in a company in the seed or Series A stage. For us, that usually means that there is a team, not just one founder; it usually means that there is a working product, some market validation, and usually some customers that are already paying for the services or the products. For Series A, we would expect a more advanced developed business. We typically invest about half a million to two and a half million in an initial investment. In terms of exits, there are typically three scenarios. One is when a company is doing really well, and the exit is driven by somebody who comes along and says, “Hey, I want to buy this company”, or the entrepreneur who says, “Hey, maybe it’s time to sell this company”. Sometimes the entrepreneurs have been running a business for seven or ten years, and they feel it’s time to do something new. It’s a good situation. In a bad situation, when the company doesn’t succeed at all in achieving its objectives for whatever reasons, then it will not get funded again, and there’s a wind-down, sometimes the sale of assets. Then, there are in-between stages, when we try to help the entrepreneurs to find the different direction to pivot and to move on, and we will help the company to raise more capital or, in some situations, if there’s a consolidation of the marketplace, we will help the company to find the right place, like a strategic buyer. If I look at all of the companies that I’ve invested in, I would say that almost all of the successful exits have been driven by the entrepreneur. They were ready to move on and found a good company to sell it to, or there was a buyer that came in and said, “I want to buy this company.” Typically, we will only be the ones to initiate an exit process when the company is not doing so well. We will talk to the entrepreneur, they also say, “This is not working the way we had expected”, and they will need to find another place for this company to sit. As an example, one company didn’t succeed in its growth model, Bomberbot, an educational technology venture that we’ve invested in from our first fund. Because it didn’t succeed as a for-profit company, we converted it to a non-profit company and merged it with another foundation. We didn’t make the return on investment that we had hoped for, but the company is still doing what it needs to do, which is developing great products and selling them to primary schools so the children can learn the basics of digital skills. Still creating the impact, still employing the team, but it didn’t create the financial returns.

About your process of working with startups, how do you work with them once you invest?

Once we decide that we want to invest, we enter due diligence. We use this stage mostly to get to better know the company and the entrepreneurs and to understand where the strengths or the weaknesses, the threats, and the opportunities are. That typically results in an improvement plan; what are the key areas the company needs to improve, and then we like to work closely with the entrepreneur to make that happen. It is the responsibility of the entrepreneur to make it actually happen, but we can help them; we have an ecosystem of partners when it comes to talent, strengthening the team and recruiting new resources, or helping to open the doors in business development and landing new customers, looking to strategically shift business model or developing new products and services. We like to be very actively engaged with the company, but we do want to make it clear that we are the investor, and the entrepreneur is the entrepreneur, and the entrepreneur needs to ultimately decide how this would happen. We like to work very closely with them as long as it’s clear it’s their company, and they need to do the job of executing the business plan and the strategy. 

To your mind, what is a fair stake to take from a company or a fund for investment? 

We believe each deal is unique; each entrepreneur is unique; every business is unique. We typically take 5% or more because we want to have at least a significant minority stake; we’ll take from 5% to 25%, usually in the 15-20% range. We also invested in very large companies that require a lot of capital, like a very exciting company that we invested in this spring, Mosa, which sells cultured (lab grown and thus animal and environmentally friendly) meat, which has a long way to get to the market. They’re still in the developmental stage. Therefore, it required tens of millions of euros to get to a market-ready product. There we have a relatively small stake. Another company, where we invested early but in a company that has already got to the market, is Wakuli, which sells coffee directly to consumers and pays a fair price to farmers in Ethiopia. Because it’s a very capital-efficient business model, we were able to take the typical stake.

What qualities are you looking for in teams?

There’s a couple of things that we look for; there are different dimensions to the criteria. A very important one is DNA compatibility, as we call it. When you enter into a relationship with an entrepreneur as a venture capital investor, you know it’s going to be a long ride, and things are always going to develop differently than you have expected. Therefore, you need to be able to work together in a trusted relationship to see the large ambitions, deep commitment to impact, and transparent communications. These are all parts of what we call the DNA. They don’t have to have the exact same DNA that we have, but it has to be compatible; you have to be able to work together closely in a trusted relationship, so it’s number one. Then, we look for a team, which means that there are at least two people, can be three or more, that have a couple of different traits. One of the dimensions is skills, and one of the traditional ways of looking at it is the hipster, the hacker, and the hustler. Somebody is really good at making a product; someone is really good at designing so that people really love it, and somebody is really good at selling it. Those different kinds of skills also bring different characteristics, so what we also look at are personalities. We do a team assessment for every single investment that we make to get a sense of who we are dealing with and what could be their challenges as they grow as a team over the next period of time. We do a test called Management Drives that offers a lot of insights on what motivates people. We want to see that there is sufficient red, which is the decision-making power, the drive to say, “Let’s make decisions, let’s move forward”. We look for a certain amount of blue, which is about how we structure processes and steps and work in a disciplined and structured manner. We definitely look for orange, the will to win, the ambition to be competitive, and the best in class. Those are the three key axes of what we look at; one is the DNA, two is the skillset, and three are the personalities. That forms a team we believe will be able to overcome the challenges every company will face when they run into those challenges, and we can tackle those challenges with the entrepreneurs together.

What are your red flags?

There are a lot of red flags. One is the razor-sharp focus. If the company is not focused, if they say they’re doing this and that and a lot of different things, then they are not going to be focused enough. Two is if they say they have a lot of options and arere leaving it up to investors to decide which option to pick, then we don’t like that. We want the entrepreneurs to have a very clear focus and a decisive statement of who they are, what they do, and where they want to go. The third one is if the communication in the process is inconsistent. Typically, a due diligence process will take anywhere between two to four months, on average three, and we’ll get some reports about how the company is performing on a product, on revenues, or on margins. If that information is consistent over the process, then it’s a great green flag. If it’s inconsistent and they don’t have their numbers together, don’t know what they’re doing, or they say this and do that, it’s really walking the talk and do what you say and say what you do, and it’s very important. Basically, in a very short time period, you have to build a relationship of trust, which is a trust that you can actually trust people from a relationship perspective and the confidence that people know what they are doing. If you get the sense that they don’t because the information is inconsistent, that’s the red flag. One thing that I have mentioned, the diversity in skills and in personalities, is the thing that we are continuously and increasingly focusing on, as well as the diversity in the team, gender, or national diversity. Having enough people within your team that keeps it coherent enough that everybody is on the same page in what they are trying to do but differentiated or diverse enough to have different perspectives means that topics are better challenged. Therefore, there’s a real discussion rather than somebody saying something and everybody agreeing immediately. Having diverse perspectives is very important.

To your mind, how much runway should a startup have to feel safe?

Traditionally, we said 18 to 24 months would be a good runway, and I think it’s a very comfortable runway to have. Early-stage companies sometimes have shorter runways, depending on the kind of business or the technology. Sometimes, they have shorter runways because there are a lot of uncertainties and the capital markets are really strong right now. It’s relatively easy; it’s what I would call an entrepreneur’s market. It’s easier for an entrepreneur to raise money now than it is for a venture fund to get into a good company for the simple reason that although there are a lot of entrepreneurs and ideas, very good entrepreneurs and ideas are relatively scarce, and there’s no scarcity of capital on the market today. There’s just a lot of money from venture funds, from regional development funds, from angel investors. Because of that, sometimes, a company can go with a shorter runway. Overall, if it takes you three months, sometimes longer, to raise a round, you would like to have a good period of time to execute your business plan and not actively having to raise the next round. I believe every company is always fundraising; you’re either actively fundraising or executing the business plan so that you can actively fundraise in a few months from now. You’re always somewhere in a fundraising bout. From the companies that I know, OLIO, a London-based venture, is a very successful company. The CEO there would take a 15-minute catch-up call with venture funds two or three times every week. Because of that, she had a very long list of strong investors and a very clear picture of what those investors wanted to see for the next round. When she was ready to raise the next round, and even prior to that, we had more than 12 months of the runway because she had relationships, the company was performing, and because the markets were great. Now, the company has over 36 months of runway and is in a very good position to execute. I guess 18 to 24 months is still great. If you can raise your next round at least six months before you run out of cash, I think that’s a very good and strong and healthy position to be in so that you never have to negotiate with your back against the wall and that you’re always ready to close the next round when you can. This is one of the things that we ask our entrepreneurs to do; even if you’re not fundraising, we want you to have an investment deck ready to fundraise if you had to. If you had to raise today, you should be able to send a deck within an hour so that if an investor wants to invest and it is the right investor and the right deal, then you can take your money.

What is the geography of your interests?

We primarily invest in and around the Netherlands. We’re based in Amsterdam; this is our home turf, we get the market really well. That said, we invest in Northwestern EU because we’re also a fund that is backed by the European investment fund, which means that they like us to invest in the EU. It is a big market, so we’re happy with that. Our primary focus is the Netherlands and the Northwestern EU, but we have made investments from Estonia to Portugal; we’ve invested in the UK and the US. These are all geographies that we were very comfortable investing in because we had people in our team who had worked there. I’ve lived and worked in Silicon Valley as a venture capital and formal investor and entrepreneur for almost nine years, so I know geography well. Typically, in other geographies, we will invest with other investors as well who are in that geography. We like to invest with folks who are geographically close to the companies that we invest in because we think it is important to be able to have a quick coffee in-person with an entrepreneur, to understand the culture and the regulatory and legal environment at the markets that the companies are based in.

Has your VC’s approach changed after COVID-19 started?

It has not fundamentally changed our investment strategy or focus. One of the areas we invest in is Digital Health, and it is accelerating due to COVID because there’s an increased need for better technology to create better healthcare that is more efficient, more cost-effective, and more patient-friendly. I think it just increases the momentum for us to invest in Digital Health. Other than that, we’ve done a lot more meetings digitally with the entrepreneurs. Ultimately, we will not invest in a company if we have not met the entrepreneurs personally because getting to know each other and getting a sense of what makes people tick, getting to know them even at a certain personal level, is really important. We’re conducting our business more digitally these days, but fundamentally we have not changed in what or how we invest.

The final question: your three pieces of advice or mottos to startup founders and teams.

The first one from me is pursuing an opportunity because you’re deeply passionate about it is really critical. Don’t do it because you think there is a market opportunity, do it because you believe it solves a problem, ideally, when that is close to your heart. If you look at all the challenges you face as an entrepreneur, it’s really important that you are in it with your whole heart. The second piece of advice is to be very smart and careful about the investors that you bring on board because that can make or break a company. The right investor can help you be incredibly successful, and wrong investors can kill companies. I was on a conference call this morning with an entrepreneur that I know we’ve not invested in them, but I’m an advisor to them. They brought an informal investor who is emotional about the investment and is trying to maneuver shareholders in a company to take a different direction and fire the founder. I think, particularly if your first investors are angel investors, you have to be very careful who you bring on board because not all angel investors are familiar or savvy enough to understand how long it will take to make a company successful, how many rounds are needed, and what it means from a dilutive perspective. Be very, very careful who you bring on board and make sure you do significant due diligence on your investors. If you are considering to take a term sheet from any kind of investor, whether it’s a venture fund or formal, make sure that you check them out, do reference calls when you can to know who you are signing up for. The third part is where American entrepreneurs do a little bit better than European, and European ones are getting there: be ready to understand that fundraising is a core competence of what you’re doing. You have the other ones: starting and running a business, hiring the right people, setting up the right strategy, but fundraising and shareholder management are the core competencies of at least the CEO. Understand that it’s going to be a key part of what you’re going to do in the next few years, and if you understand that, then it means that when you’re actively fundraising, you might spend up to two thirds or three-quarters of your time on the fundraising itself. Even if you’re not, you might still be spending about 20% percent of your time managing relationships and your shareholders; it’s a core part of what you’re doing. It seems very mundane and sounds like a very shareholder-value-style American, but having the right investors on board and cultivating them properly to make sure that they are there when you need them and the next round of investors will provide you the capital and, therefore, the ability to execute your business. In America, it’s more advanced, but top talent wants to work for key companies that have the right investors there, too. If you don’t have the right investors on board, it’s going to be very difficult to hire the right talent. If you have the right investors, you can get the right talent; if you can get the right talent and you manage them appropriately, then you can execute a business plan, and that will bring in more capital if you need it. It may become a very strong virtuous circle rather than a vicious circle. Having the right investors on board will not necessarily make your company successful in itself, but it can be a critical condition to be able to succeed.