How to start a b2b SaaS Company in 2024

Summary

How Much Money You Should Actually Raise? Playfair Venture Capital FundEver wondered how much money your startup should actually aim to raise? This episode spills the tea on venture capital fundraising. We'll chat with an investor about the rollercoaster founders go on, from getting funded to dealing with tough situations. You'll learn how investors pick which startups to back, how to build a strong relationship with them, and how to avoid common fundraising mistakes. Basically, this episode will give you the inside scoop on getting the cash you need to make your startup a success.

Takeaways

1. Finding a problem worth solving is crucial when starting a business.
2. Venture capital is driven by power law returns, with a few companies generating the majority of the returns.
3. Portfolio construction involves considering factors such as dilution, round size, and ownership.
4. own rounds can be challenging, and founders often have limited options.
5. Investing in a few companies allows for a deep relationship and focus on each investment.
6. Evaluation of founders involves assessing their expertise, assumptions, and fit with the business.
7. Balance depth and length of answers during pitches.
8. Look for founders with passion, energy, determination, and creativity.
9. Consider equity allocation and fundraising challenges.
10. Focus on distribution and pricing in crowded markets.
11. Maintain open communication with founders.

Chapters

00:00 Trailer
01:20 Introduction
04:06 Henrik's Experiences: Angel Investment, Crowdfunding, and Investment Banking
07:47 Starting a SaaS or B2C Business
15:10 Why join playfair?
17:55 Optimizing for Power Law Returns in Venture Capital
21:48 The Power Law Distribution and Portfolio Construction
23:45 Valuation and Raising Funds
27:25 Dealing with Financial Challenges and Down Rounds
34:15 Why Investing in Few Companies and the Evaluation Process
40:55 Giving Candid Feedback to Founders
50:26 Founders Common Mistakes
52:52 Measuring Equity Allocation
55:15 Evaluating Businesses in Different Verticals
57:20 The Relationship Between Fund Size and Strategy
1:00:16 The Importance of Distribution and Go-to-Market Strategy
01:02:30 Doing Things That Don't Scale in Go-to-Market
01:04:24 The Importance of Pricing in a Marketplace
01:06:30 The Most Common Piece of Advice for Startups
01:09:58 Investing in First-Time Founders vs Second-Time Founders
01:11:30 Ritual Time
01:14:02 Conclusion

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Transcript

Mudassir (00:01.094)
I hate these big ones, but I have to wear them. So I look more podcaster, okay. Anyhow. All right. Please do a clap for me, Hendrik, and then we're off to Gaza.

Awesome, thank you for that. All right, so one small thing before we start. So you might see, like sometimes during the recording, like your video froze, or like my video freeze, or something like that. But don't worry about that. It's the, like they're uploading and doing all the stuff. So yeah, we might be changing something at the back end. So don't worry about that, okay? The recording is gonna go smoothly.

Henrik (00:34.67)
Okay, and is it is it is video is it video is just audio right anyway. Oh, videos are okay. I wasn't sure. I'd seen like I'd seen most the audio online but I wasn't sure. Okay, cool.

Mudassir (00:38.616)
It's video. It's video.

Yeah, okay.

Mudassir (00:46.214)
No, it's the video one. Okay? Cool. All right, rolling now. Hey, Henrik, welcome to the show. How are you doing today?

Henrik (00:56.044)
I'm good. Thanks for having me. Excited for the long weekend coming up.

Mudassir (01:00.71)
Yeah, excited to have you on the show. One of the guests that I was looking forward to have on the podcast was such a long time. So thank you for the time. I appreciate it.

Henrik (01:10.286)
No, likewise. I mean, you've had some amazing guests over the years. So, yeah, very honored to be to be on the show.

Mudassir (01:17.574)
My pleasure, sir. My pleasure. All right, cool. So every single time anybody that I have on the podcast, I ask them one or two questions to kick things off. So one of the sort of a go to question that I ask everybody is what's the context you have of your life? Like who is Henrik? How did you end up here? What's the story that you have? So let's start there so we can talk about other things later on.

Henrik (01:42.35)
Sounds good. It feels like I'm around a sort of cozy campfire. I think what I'd start with is probably just my family background. I grew up in the UK, but my father's from Venezuela and Sweden. And so I just grew up with a lot of different cultures. We actually always spoke English at home, but still a lot of languages when we had other family events and so on. So that was kind of like just growing up as a kid and I grew up outside of London. So.

lot of kind of outdoorsy activities, a lot of just kind of freedom and roaming. And then I think as I went through school, had a massive focus on kind of academics, there was always, you know, you need to just give yourself every opportunity by just, you know, turning up being focused on, on work, you know, respecting kind of the structures and things. So I think I grew up with a kind of, quite a structured mentality, discipline, focus on, you know, giving yourself this, this opportunity.

And then I started to figure out what I really enjoyed. Um, and I love languages. I think that probably came back to sort of my, my roots and being frustrated that I didn't speak these languages naturally. I also sort of loved. Yeah. Business is maybe kind of like a strange catch -all term. I didn't think about business at the time, but I liked new products, thinking about things differently, kind of how to be more efficient in the way I do things, kind of coming up with ideas about sometimes.

what I thought were great business ideas, lots of them stupid little things, running a tuck shop at school, selling sweets, you know, all kinds of little things like this. And ultimately I decided to go and study French and Spanish at university. I kind of thought, you know what, we're lucky in the UK that you can study what you love. You don't need to be vocational like lots of European countries. And I just love that brain training. I just could go deep, deep, deep and, um,

started working on a few other things on the side, which we might go into later, but trying to really test this kind of entrepreneurial angle. And then later figure out what I want to do with my career. But those are a few kind of points, I think that when I look back on kind of growing up and what, what kind of interested me, those are some of the threads I pull out.

Mudassir (04:00.486)
That's a very interesting sort of a background. So, you know, when we were doing some research, so there's a few things that popped up. So obviously, you know, being a founder and then eventually ended up in investment and, you venture capital makes a lot of sense. But a couple of things that I saw was you have done like a lot of angel investment. So I would call you like a super angel or something like that. So that was one. The two was crowdfunding, which was...

kind of a different path like most VCs would take. So that's two. And then the third one I would want to link here is investment banking. So what do you learn from all these three different experiences and how would you think whatever you have learned, you can translate or transform all of them into PlayFair today, into being a VC today?

Henrik (04:51.598)
Yeah, I think that's almost a second part of that intro story, which is I sort of, I followed these three threads, I think, ultimately. And I think thread one was the entrepreneurial thread. My mother's an entrepreneur. She's run a small jewelry business for over 35 years. And I've been very inspired by that. I realized that I enjoy technology businesses and technology kind of entrepreneurialism. And so I kind of had this idea, one of many, the one that I ended up running after.

Mudassir (04:54.374)
Yeah.

Henrik (05:21.198)
Um, in my second year at university, and I said, I need to try and build this app, which was to try and connect people in a city, suggest the most convenient place to go, show them how to get there and then suggest kind of, um, where they could go, like a coffee shop or restaurant, a bar, et cetera. Um, and I loved just dragging that idea out of my brain and trying to build a product that I thought users would enjoy, which solve a problem for them. Ultimately I failed because it wasn't a good business. Um,

That taught me a lot of lessons, but that was one thread. Another thread was actually thinking about building a business from a strategic point of view. You know, what makes a good business? What makes a successful business model? How can you scale? And I didn't learn all these things. Initially, I learned them through basically trying and failing by looking at pitch decks, asking questions on the anonymous forum as HWS two one two or whatever I was called.

And investing in some bad companies and investing in some good ones and figuring out along the way, you know, where I should optimize and also where I was interested. Um, so that was a kind of step removed in a similar process. And then the third thread was seemingly very different going into investment banking, but yes, I studied at a good university, but I studied French and Spanish and people just didn't give me credibility. They just thought, ah, you didn't do economics. You didn't do maths. You didn't do computer science. These are hard skills. I can understand.

Mudassir (06:44.646)
Yeah.

Henrik (06:45.742)
What on earth did you do French or Spanish? Right. I think it's the hardest thing I'll ever do in my life from a kind of academic point of view. And it was real brain training and it was so deep and challenging. And I learned a lot of soft skills and actually going into banking was my way of almost doing a practical MBA. It's kind of how I thought about it. I know I'm not going to do this for very long, but maybe a couple of years and ended up being two years. And I learned quite a lot of hard skills around, you know, how to model.

how to be comfortable with numbers, but also a lot of soft skills around getting thrown into crazy situations like, you know, filling in for your managing director, age, whatever I was, 23, with like the CFO of FTSE 100 company and just for 15 minutes, just having to just roll with the meeting. And that's just part of the job. And it was really scary, but you were in disaster a few times. Actually you can do it. And no one really knows what they're doing. They just have like varying degrees.

of confidence. There's never 100 % certainty, particularly in business. So yeah, hopefully that's not too much detail. But it's kind of those three threads, I think then all come back together a bit a bit later when I join PlayFair.

Mudassir (07:44.294)
Yeah.

Mudassir (07:57.83)
Yeah, no, that's a perfect match. So one question that I was not intending, you know, planning on asking you, but that's been on my mind for quite some time. A lot of the people that I host on the podcast, they started somewhere, you know, somewhere similar. Like they started a small mom and pop sort of a business back in the college day, back in the school day. They did something at the beginning, beginning, didn't work out, they learned a lot of lessons. Like almost everybody has.

Kind of a same starting story because I doubt like I've met anybody who just said like, okay, it was my first business and we made like, I don't know, 10 million or something like that. That potentially never happens, right? You learn from the mistakes. So a couple of questions on that. If you were to start, and this is actually a question because I recently get to know that most of the audience that we have on the podcast like are the founders, but there are a decent amount of people on the.

who listens to the podcast or reads the news that they want to start a business, but they haven't been able to do that for whatever reason. They have a cozy job, they make decent money, they're happy with whatever they're doing, but they also want to start a business. And again, ideas comes all the time to all the people. If anybody wants to start a SaaS company, let's talk about tech, because tech is kind of the easiest to understand, and most people would want to relate to that. And then we'll come to DDC and e -commerce as well. But.

Henrik (08:57.998)
Mm.

Mudassir (09:21.702)
Yeah, two verticals I want to talk. So if anybody want to start a SaaS company, B2B or a B2C business, what's step one or step zero actually to step 10? It could be a bootstrap business, could be a venture backed business, something you would not invest, something maybe you would be interested in investing or anything at all. But from step one to step 10, with failing something, building something, working with so many founders. So yeah.

What would be that walkthrough to you look like?

Henrik (09:56.174)
It's great question. I mean, let's see how far we get. And if I go more than two steps, but I'd almost narrow it down to actually two steps and just make it even more simple. I think you need to find a co -founder and you need to find a problem that speaks to you and that has depth. And, and actually those two, I think can, can be done in different orders. I think sometimes people sort of like a life partner, you find someone who you think.

the way that you think and the way that you make me think and challenge me is exactly how I would like to build a company. And together we are much more than the sum of our parts. And so, and that could be one or multiple people. And I think when you find someone like that, either someone you grew up with, someone you worked with previously, or through some of the kind of matchmaking type accelerators and services out there, I think you know when you have that kind of...

collaboration and connection with someone and it's very legitimate to with them go out and just try and find a problem in a market that you'd like to build in. Because it's a legitimate feeling to know that you need to go and build something. You may not ultimately find some a problem that you're passionate enough or a mission you're passionate enough about, but it's a legitimate starting point. The converse is that you could start with a problem that's nagging you.

You know, it's kind of the opposite of a passionate kind of positive in a way. It's sort of, I just really find this issue just to the deep, the, my core. I just cannot understand why it's not solved. And it annoys me every day or it upsets me every day, whether or not it's something about how to optimize your developer workflow, or it's a something as existential as, you know, um, something to do with climate change and trying to save the planet.

And I think once you start there, you can really drill down into how exactly does this problem manifest itself for who, how do they feel that pain point? How often, how valuable would that be? How could you potentially solve it in theory? How would our theoretical solution that I've then thought of potentially work? Let me test it with some early users. I think it's all about sort of founder market fit and then idea market fit. Those two things together.

Henrik (12:18.744)
doesn't matter which order you go in, are honestly the key. I think once you solve those two steps, three to 10, a sort of a whole nother level beyond it's almost at that point, the business exists, you're ready to go for it. It's just a question of how and who's going to help you do it. But the company has already started on its way.

Mudassir (12:45.286)
So I got a couple of questions on top of that. I'm probably gonna have like two questions on every single statement you're gonna give, because I have like these two weird thoughts or like whatever. So the first one is, which is around problem. And I get that a lot. I've been in that startup ecosystem and one of the things that I've listened or heard most of the time is find a problem worth solving. Find a problem worth solving. So question number one is, how do you figure out if the problem is big enough to be solved?

So I like never get the answer to that. For example, for example, you know, just throw a random context here.

Let's talk about PropTech. For example, it's a hard thing, still very legacy sort of a market. A lot of people are doing innovative things, but there's only a few people who have managed to exceed, like whatever. So that's just come to my mind. Question number one is, how do you find a problem? And question number two on top of that is, how do you find a problem which is big enough to be solved? Like how do you measure or evaluate big?

like that one word, like, okay, so this is pretty big. Like, how do you do that? Like, how do you, in a way, put a number on top of that? So how do you do that? So that is part one of the question. And then the second question that I wanna ask you is, a lot of companies are built doing exactly the same things. And this is, again, a context. I come across a directory or something like that around DTC companies, and I found there's a handful of tools around landing pages, all doing the same thing.

All venture backed, all doing, building fantastic companies and doing great, you know, business and all that.

Mudassir (14:28.486)
they're solving exactly the same problem. So why solve the same problem somebody else is solving? Doesn't that kind of deviate from the fact? So yeah, two parts. So one, what's a big problem? How do you find that, like all of that? And two is people solving exactly the same problem in exactly the same way and all building a good business on top of that. So yeah.

Henrik (14:38.22)
Yeah.

Henrik (14:47.47)
I like it. I like it. So I think there's many layers to the first part. I think you've got to start small. You got to start with who is the user, who is the, the subject, ultimately a human that is feeling this pain and how do they feel it? Um, so, you know, take that construction industry example. Is it someone who is managing a team? Is it someone who themselves, um, needs to make their work more efficient?

just get down to the very, very end of that chain of logic to where does the buck stop? And for that person, what is the real issue? Let's quantify it. Let's figure out how often it occurs. Then let's try and figure out if you were to remove that obstacle, how much would it be worth? And how do you value it? Do you value it in time? Do you value it in output? So most businesses fall into either a cost saving type business or a revenue generating type business.

I think once you started there and you've understood from those users and that user market research, you have to speak to probably about 50 people to really gauge if this is a one -off problem or whether it's universal across an industry or a set of users. Then you can start to do the more kind of venture style, quote unquote, market sizing of, okay.

Mudassir (15:59.62)
Hmm.

Henrik (16:12.174)
If the assumptions hold true that I've started to validate, let's extrapolate across an entire region, the UK, Europe, US, et cetera. And then let's try and extrapolate pricing, uh, like a more generalizable level. And then we can figure out, okay, is this problem as you asked big enough? And that's ultimately kind of what you're aiming for, but there's two parts of big enough. There's the micro at the very beginning. Is it big enough for an end user?

or group of users, and then is it big enough as a business? I think the second part of the question around how can people be tackling the same problem and what's the point of that? I think in any well -functioning market, and I'm not, I did a bit of economics at school, but I'm not an economist, is you need competition. Competition is healthy. It creates the best outcome in almost all cases for consumers or for businesses in terms of choice and pushing companies to

Mudassir (16:51.994)
Yep.

Henrik (17:10.19)
deliver their best product. So I think there's a natural amount of competition in any healthy market, particularly one where there is a problem. I think two though.

There's many ways of solving the same problem. You know, we have a business called Trezzi. Um, there's an SME Fintech business essentially providing like real time cashflow visibility to like small business owners. And they operate in an incredibly crowded market. I think in our initial investment memo, we found 40 or 50 competitors across different buckets, but everyone has a different angle. And for Trezzi, their angle is not the

your accountant knows how to manage your cashflow. And it's not that your cashflow exists somewhere in your, in your financial books and bookkeeping. It's the fact that you don't have real time visibility as a business owner. And you don't really, you're not someone who is financially super literate in most cases. And you actually don't care about the depth of detail on a day -to -day basis because your accountant covers at the end of the month. What you care about is knowing today.

Where is my cash? When is it going to run out? Do I need to worry about it? But that same business owner has different financial problems and they're solved by other people. So I think it's basically how you cut a problem. You can cut it in many different ways. And ultimately some people will be building the exact same for the exact same problem and the exact same solution. And one of them will win and one of them will fail. And there's, you know,

a lot of history that's been written about various venture backed and non venture backed companies that went in a went in a war against each other and and some didn't work out.

Mudassir (18:53.094)
Yeah.

Mudassir (18:58.63)
Yeah, all right, cool. So thank you for just explaining that. All right, so coming back to things that we actually planned at the beginning. So we're gonna start there. Why join Playfair? Why not any other friend? Because you had a background in investment, you had a background in crowdfunding, you had a background in angel investment.

So two part question again, one, why not start your own fund? And two, why join PlayFair?

Henrik (19:33.102)
I think if I tried to set up my own fund age, how old was I? 25. That would have been tough. Because I'd done some crowdfunding investments and or angel investments, but it's really not the same as full venture investing, particularly if you're leading investments. It's an entirely different strategy. It's an entirely different level of responsibility and it's an entirely different level of portfolio work.

And you need to track record, um, both in terms of the, the wider market, but also your actual investments and are you good? Are you a good investor? So I think I really wanted to actually learn. I needed to learn the craft of venture. Lots of people have written about this and saying that you need X number of millions to basically fail and learn through failing. I'm not sure if I fully buy into that thesis, um, but I do buy into the thesis that it takes quite a few years to figure out how to train your brain to.

Basically triage opportunities. Don't think you can actually figure out who the best companies are, but you can triage who might be the most likely to be the best companies and spend your time on those. Um, and so, yeah, I think Playfair has been an incredible place to kind of foster autonomy, responsibility, and entrepreneurial culture. And I've loved that. I've loved almost being able to build the equivalent of my startup.

in an app play fair. And I see ourselves as essentially a startup. I think when I joined, we were probably at seed stage. I think we went through kind of series A and now we're probably on the route to series B is how we talk about it internally. And that's in terms of the same metrics of funding, product market fit, where's the team at, where's our product at. We don't quite have revenue as such, but in terms of our financial performance of the portfolio. So.

Um, yeah, I feel very lucky to have been there for, for five years. And, um, I don't think I'd have grown in the same way at many other, many other funds.

Mudassir (21:39.846)
Yeah, how big the fund is today? I think there's two funds that you guys run. So there's like, yeah, there's two fun like how big is bigger both?

Henrik (21:45.582)
Yeah. So our fund one was 20 million pounds, fund two was 25 million pounds and fund three is 57 million pounds.

Mudassir (21:59.046)
That's amazing. Okay. So, again, this sort of contrarian question because I want to take all your contrarian views on all of these things. Whichever, you know, venture capitalist you would talk to from associate level up to a GP, you know, all included, there's one thing which is pretty common. Like, it's this asset class is driven by power law. So, you make like, I don't know.

30 bets and you would know like only three of them are gonna, you know, be return like this thing and one of them gonna be home run or this and that. Like there's always a split difference, but more or less it's a power low thing. So my question to you is why VCs cannot optimize for a three to five X return on every investment they're doing rather than building this sort of a fund like, okay, so seven out of 10 are just gonna fail.

two out of 10 are just gonna return whatever the investment was and one at a it's gonna be fund return, so to quote. So why optimize for that and why not optimize for somewhat of a sustainability, like okay, every single investment you're gonna do, let's just try to get three to five X on all of them and let's just not figure out, worry about a fund return or a home run or something like that. So why is that so?

Henrik (23:19.054)
I think there's a few different ways of explaining it. I think one of them is just the pure data. I think a lot of people have spent a lot of time cutting the data and the statistics over decades and essentially figured out the distribution of returns and the power law is actually basically an output of the stats on kind of venture investments and by far the largest proportion of returns in terms of quantum, not volume, comes from.

Mudassir (23:29.382)
Yep.

Henrik (23:48.846)
a very, very small minority, you know, 1 % or even 0 .1 % of companies. And so in order to have one of those quote unquote home runs, you just need a very large portfolio. I think the caveat is that obviously your portfolio sort of matures and narrows over time. So you invest in a hundred companies at pre -seed and that becomes 30 at seed and then 20 at series A and smaller and smaller. And obviously if you start at series A,

You start with a smaller number and you go up from there again. It depends sort of your graduation rate. You know, that has a big impact. I say most pre -seed funds would be investing in close to 50 to 100 companies. We invest close to 25, but our graduation rate is three quarters. So actually at Series A, we have a similar number, if not a higher number of companies that still are kind of in the running than your average fund. And that's our strategy. It doesn't mean.

We're better or worse in our model, but it's just a different strategy. And then the final point around power law, why would you not optimize three, five X companies is actually you can create a fund and there are funds out there that do focus on three to five X outcomes. They're just different. They're investing in different businesses and they're different models and they have different investors. Um, they're focusing on usually lower risk, potentially slower growth.

but more profitable companies that actually have an exit land, exit opportunity in that kind of range. But if you're trying to play the venture game and invest in a business that fundamentally is going to be burning millions of pounds a year, that's not a very attractive offer for, you know, the three to five X return in most cases. So I think you need to know what your swim lane is and design your entire fund strategy, including your portfolio construction.

around that. So either lean into probably closer to kind of private equity traditional investment type model, if you're going for three to five x, try not to lose any model, or lean fully into the venture power law model. Because if you're trying to beat the statistics, you're in a you're in quite a dangerous place.

Mudassir (26:04.166)
All right, cool. So a follow -up question on that is, how do you do the portfolio construction?

Henrik (26:12.557)
It's basically a, it's sort of like a model, um, where you're, you're trying to estimate, usually using assumptions from prior funds. Obviously if you're on a new fund, you kind of need to start from scratch, but that'll probably be off wherever you work before. And you're sort of saying, okay, what are my core assumptions? I'm going to invest in X number of companies with Y amount of money, and I'm going to own Z amount of those companies and ownership. And what you want to do is figure out.

What are the key variables here? How big do I think round sizes are going to be? How high do I think valuations are going to be? How much dilution do you think I'm going to be taking? How many rounds is the average company going to raise? How much capital will I have to follow on into each of them and for how long? What do I think some of my exit ranges could be that I'm going to target? Those are probably some of the biggest variables and all of those numbers basically add up.

once you put them into a model of which there are many templates online, to spit out a bit of a number that says, this is how much capital you're going to have, and this is how you should split it between first investments and follow on investments. And so yeah, fund managers job is to figure out how they construct that portfolio to give them the best chance of returning, usually 3x is a kind of a target.

Mudassir (27:12.718)
Mm -hmm.

Mudassir (27:33.668)
Alright cool. So how much do you guys take at the beginning, you know, when you do the first investment and then suppose pre -seed? Like how much equity you are interested in taking on an average?

Henrik (27:42.638)
Yeah.

Henrik (27:46.094)
We aim to have 10%, but probably between seven and a half or 10 % is the average. And that's from a ticket of between 300 ,000 and 1 .5 million. It depends on how developed the company is, how much they're raising, how competitive it is. And our portfolio construction sort of allows for that range.

Mudassir (27:59.398)
Hmm.

Mudassir (28:09.766)
All right, cool. So there's a bunch of questions that I want to ask you around company exactly to your point where you mentioned that how mature the company is, where the state that they are at. So how do you actually do the valuation? So for example, I'll give you some context. Otherwise, it's not going to make any meaningful way to answer this thing. So suppose you have a.

any page deck in front of you and they're raising, suppose, a million or two million. And answer this question in two ways. Way one is because I want the founders to know how much money they should raise because a lot of people think they raise five million when they actually need to. That's a problem, but people don't think that way. So answer that in this particular way, like how much money founders should be raising. And on the second part,

How do you do the valuation thing? Okay, so this one idea, the pre -series is just the idea, right? So there's like not a lot of thing, not a lot of metrics that you can show. So how do you do the valuation thing? How you put a number on that one idea? Okay, so Hendrik's idea is worth, suppose like right now is 10 million valuation cap and we can invest that much amount of money, mine is probably like should be at like seven. So how do you do that? Like what's the VC math here is behind the scenes.

Henrik (29:34.83)
Yeah, on the first one, you really, really should be only raising what you think you need to achieve your milestones. That's the only answer. You need to figure out what are the milestones to unlock the next round of funding. And you probably need to speak to an investor, probably not the VCs you're going to pitch to, but other investors, angel investors, advisors, people later down in the, in the chain series A, B.

And so figure out, okay, I need to have launched a product to X number of users, Y amount of revenue, maybe a few other things on tech readiness, et cetera. And to get to that point, I'm going to need, you know, a certain number of months. I'm need a certain number of people in engineering and sales, et cetera, to achieve that. And then you basically just put that all into a model. It's a little bit like the portfolio construction and that will give you a number and you probably then want to give a 20, 25 % buffer.

because it will always take longer than you think. And that should be how much you're raising. So anyone who's doing it in any other way is definitely kind of just being led by the market. I think in terms of how we think about dilution, sorry, valuation is dilution. That's honestly the only answer. It's dilution 90 % of the time and then 10 % of the time it's just competitive tension. So we think that between 15 and 30 %...

Mudassir (30:45.542)
Yeah. Okay.

Mudassir (30:55.622)
Hmm.

Henrik (30:59.982)
is the range of dilution in rounds we look at. I think 30 % is really on the, on the high end. 20 % is probably the most standard 20 to 25%. You got to then also factor things like option pool and so on. But we think that's a very fair level of dilution for the founders to be taking in exchange for kind of the risk of an investor coming in at that stage. And so you just, you basically just do the maths of.

dilution and round size. If you're raising 2 million pounds, 20 % dilution times by five and you get to a 10 million post money. Um, so yeah, that's how we think about it. But you know, obviously as we saw in 2021, when rounds got more competitive, um, valuation has just become a factor of who can. Big up, bid up the price the most. Um, and sadly, in our opinion, a lot of founders over optimize purely on valuation.

Mudassir (31:46.148)
Yeah.

Henrik (31:58.094)
and forget slightly why they're partnering with a certain investor and is it the best fit? Obviously you don't want to take a derisory offer, but the highest price on the table is not always and very often not the best investor or partner for that group of people. And when things go wrong along the way, which they do for 90 % of companies, even in the best outcomes, at some point things have gone down before they go up.

You want to make sure that you have an investor who's going to back you. You want to make sure that you don't have a valuation that is so high that you're going to create issues for yourself down the line. So yeah, it's just one to be, to be careful of.

Mudassir (32:35.814)
Yeah.

Yeah, a few months ago, I just wrote a newsletter on exactly the same thing, like, you know, negotiating on the highest valuation number is not the best strategy. So, yeah, that was exactly on the same lines. But from an investor perspective, so suppose people who have raised around in 2021 and they have raised around on a much higher valuation, like inflated, it was very inflated, I remember that.

So they've raised around on that and now they need to raise, they just ran out of cash, right? So now they need to raise another round. So they're potentially looking at down downs or something like that. So a lot of structuring or something like that. So have you guys been in that sort of a situation where maybe a portfolio company or a company just came to you guys like right now that have, like, that have,

potentially raised a lot of money, but now facing sort of a down round. They're in that sort of a, it's a good model, good funding team, good all of that, but they're like looking at that kind of a financial challenge. Have you come across that kind of a challenge before?

Henrik (33:49.806)
It happens all the time. It's, uh, it's very, very common. I'd say the best investors will preemptively know when these financing crunches are coming up and try to prevent them ahead of time. So if you know, you're going to be running out of cash before you hit milestones to be able to raise another round at, you know, flat or up.

you probably need to really radically change the burn rate. And usually that means sadly letting people go, maybe shutting down certain markets or certain products. Definitely cutting things like marketing and sales spend and just sort of creating a leaner organization. Try and avoid a down round at all costs if you can, because that is the most painful to everyone involved impacts.

impacts investors and pecs that founders impacts the option pools and ordinary employees. I think keeping it flat is probably a bit of pill to swallow, but actually a pretty good outcome in the long run of the business. And obviously any up round, even if you're taking more dilution, I'd say in a difficult market or if a company is in a difficult place, absolutely fine. If you believe the long -term vision, a small hiccup along the way is not a problem. I think what the...

market today is really struggling with is that so few VCs and so few founders want to accept a down round when actually they should be in a down round. And so investors have started putting in more preferences and a preference very simply is saying, if it's a one X preference, I get my money back one times before anyone else gets money. Or if the preference is two times, three times, et cetera. And those preferences can either be non -participating or participating.

the first means that they just get their money back and then everyone else is kind of, is equal or you kind of get your money back twice. And so they're very, very punitive on founders in particular, but also early stage investors. And so you can have thresholds that mean that if the company doesn't sell for X amount, the founders could get nothing, particularly if you raise a lot of money. So.

Henrik (36:04.622)
This is where I think the market's got a little bit distorted in terms of companies are still technically valued at very high valuations. But in reality, if the company were to sell, the founding team and a lot of the employees and early investors would basically get nothing. And that's quite scary.

Mudassir (36:25.446)
Yeah. A few thoughts on that. When that kind of structuring is involved, like later down in the stages, and a lot of preference comes to play.

I think in a way, so you're screwing up the angels, you're screwing up people who invested in their beginning and people who just joined you as an employee, as a co -founder or something like that because they're probably not going to get anything, right? And in many cases, founders are not going to get anything. A very naive question that I'm going to ask you on this thing is, when this kind of structuring is involved,

Question number one is like why founders accept that, like that sort of a terms. And two is, so suppose at CDC this is happening. Is the founder legally binding or something like that to just convey the same information back to the early investors and people who were there at the beginning beginning. So suppose you invested some company at the pre -seed level and now they're at CDC and then they're raising 50 million power or something, or like 100 million power or something, and there's a lot of.

preference and structuring is involved, do they need to inform you guys at the beginning, like, hey, we're just about to take this thing. Do they need to take your yes? Like, OK, just go ahead, because otherwise it's just going to bankrupt anyway. So how does that happen legally from a communication standpoint as well between early investors and the founders? And a follow -up question on that is, would you be interested in investing such founder later on?

Or would any VC would be interested, like pre -seed investor would be interested in investing the same sort of a founder for another idea.

Henrik (38:09.454)
Yeah. Usually founders just don't have a choice. They get in that situation because they just don't have a choice. And an investor only really offers those kinds of terms when there's nothing else on the table and they can. And for them, it makes financial sense because it gives them a lot of downside protection. But yeah, I think this, you know, no founder would ever choose that willingly. But often it's a case of do I shut the company down and lay off all of my employees or do I take a...

Mudassir (38:14.916)
Okay.

Henrik (38:39.15)
to X preference from someone who's willing to give me 20 million pounds to keep running. Um, so yeah, I think sadly it's just a lack of options. I think from a pre seed investor point of view or an earlier stage investor point of view, you have some rights, but also you should kind of have that relationship with the founder where of course they're going to let you know, but ultimately you also don't have a choice. You know, we don't have 20 million pounds to invest in a company that's not doing well. Um,

So at the end of the day, we might try and optimize in advance for getting more investors involved, creating competitive tension, that kind of thing. But when it gets to the end of the finish line, if the offer is the only one on the table, we just have to advise the founders and doing what's best for them. And usually that means taking the least bad option.

Mudassir (39:30.762)
All right, yeah, that makes sense. All right, so coming towards the question related to how you pick the founders and stuff like that. So a lot of things like how you invest in any company, like what's the thesis behind and all that. So I just want to start with, you invest in very, very few companies throughout the year. And prior to the call, you know, the last time we met, you also mentioned there's an 11 page memo that you have for the founders. So talk to us a little bit about that memo.

that you guys have, like, you know, what exactly is it, like, how do you evaluate a founder? And two is, why only invest in a few companies? I can also see, you know, there's like a 73 % companies have gone on to raise series A, so there's a huge success rate. But why this strategy? And how does that work, actually? Like, how the hell do you actually, you know, pick these people all the time? It's just like, okay, so we're gonna pick like one or two every month, and that's about it. So how do you do that?

Henrik (40:26.094)
This is my favorite controversial question. The memos are usually more like 30 or 40 pages. So, you know, it's actually even longer than that. But the way I describe it is because most people think we're totally insane at pre -seed investing in six companies a year and doing 30, 40 page memos. In reality, we're still really investing in people. We're using a most of that memo and most of that research to evaluate the founders. And what I mean by that is.

Mudassir (40:33.094)
Holy. Okay.

Henrik (40:55.086)
The memo does cover each of the core parts of a business. So everything from problem solution to market competition, to go to market and business model through to kind of funding and defensibility and future outcomes. But all of it is basically a funnel. You know, how do you go from today where you're at an inception to this kind of series A point where you are quote unquote a real business with all those key pillars in place.

Mudassir (41:18.214)
Mm -hmm.

Henrik (41:23.98)
ready to try and grow and scale a problem, a product that's reached product market fit of some kind. And in order to get there, it's all about assumptions. It's about assumption validation. How many assumptions can you validate are true? Um, initially around problem and problem fit, as we talked about at the beginning of this through to how to distribute the product and how people buy and how much were they willing to pay for it. And all of these things then add up to.

giving you a bit of a view of, um, what is the likelihood of this company reaching that series a position and then going on from there. And all of it ultimately comes back to the founders. The founders are the ones who are going to give you this information and give you the credibility and certainty that these assumptions are well -baked because we're not the experts in the room. Founders, the experts, we can go and do, we usually do about 15 to 20 references externally, sort of trying to understand who are these buyers.

Who are the people that would or wouldn't use this? Um, who understands this technology, et cetera. And so we try and put all of these questions back to the founders and push them right to the limit of their expertise and understanding and figure out who are the people who are most passionate and most knowledgeable about an area and a problem. And those are the ones that are most likely to succeed, particularly when things go wrong and they have to be flexible and.

pivot a part of their business or the entire business. So that's basically what that 30, 40 page memo is doing. We believe that by going deep into those areas, we can figure out who the best founders are rather than investing on pure signals. And final point is, you know, we take that memo and share it to the founders with our term sheet and say, here's everything we understand about what you're doing. And, you know, we challenge almost any investor to do the same because we think that...

we're going to have gone deeper than almost anyone at our stage. And that backs up us only investing in a few companies and having a super deep relationship with them for the years to come.

Mudassir (43:32.262)
So you can, so if I understood correctly, they're gonna get the memo at the term sheet stage. So that means the page tag is already approved, you've already met them, you already like them, the term sheet is on the table, and then there's a memo, right? And how many people do you reject based off of that memo?

Henrik (43:48.27)
Mm -hmm.

Henrik (43:54.602)
I see, historically, we've basically had a 50 -50 ratio. So if you get to the investment committee with the memo, it's 50 -50. This year, we've actually had six ICs and said no to five people, we only said no to one. That's very unusual. But yeah, historically, it's about 50 -50.

Mudassir (44:11.142)
Yeah.

Mudassir (44:15.078)
Yeah, and the reason why you would reject them is because one day not able to answer all the questions, like they lack the depth to answer all those questions. Like what exactly is, if you could narrow it down, like okay, so like one main reason why you really reject all these founders based off of that memo, what would that be?

Henrik (44:37.262)
I'd say usually it's holistically a feeling that these founders either aren't the best fit for this business. The founder market fit isn't as good as it could be with another team or they're not working on the right problem for them where they have the biggest right to win or the route to product market fit is quite unlikely. So.

the validation of some of their assumptions is not super clear and hasn't been bottomed out. So they think they have a lot of, you know, views and assumptions on how things will pan out, but there isn't enough evidence to suggest that they are right. They could be right, but there's not enough evidence for us to kind of buy that. And then sometimes there are things that are kind of existential threats. Things like the unit economics just don't work, in our opinion.

Mudassir (45:22.916)
Yeah.

Henrik (45:32.184)
Um, it's too expensive to deliver the product and we don't think anyone will buy at that price. Um, and sometimes it's just things that come up in DD. Um, sometimes, you know, founders will. Oversell certain parts of their business. They'll oversell a reference or a bit of customer traction, and you can dig a little bit into that and figure out they've oversold it too far. And then you lose an element of trust. Sometimes, uh, that doesn't happen very often, but it does happen. So just kind of a word of caution that.

Mudassir (45:59.27)
Yeah.

Henrik (46:01.902)
We totally understand as a pre -seed founder or any founder, you need to sell a story. You need to sell a vision. You're in sales mode, but don't cross the line. Just be careful of that.

Mudassir (46:13.542)
Yeah, do you guys give candid feedback to all the founders? Because most VCs don't. Or do you guys have exactly the same sort of lines? You're just too early. I don't know, Hendrik is on vacation in France or something like that. So yeah, what's your thought on that?

Henrik (46:31.822)
Yeah, we take feedback really, really seriously. Um, we reply to everyone within a week, ideally within kind of five working days, whether or not you come through the website directly and everyone will have a reply. We think, I mean, that should just be table stakes. It's kind of ridiculous. We think when people just don't reply at all. And of course, sometimes we'll miss things, you know, there'll be exceptions and we'd really try and avoid that, but we like to be, um, reminded of if we ever do.

Mudassir (46:42.918)
Wow.

Hmm.

Henrik (47:01.624)
I think in terms of the detail of the feedback, it depends. We have 6 ,000 submissions on the website a year. We can't reply to everyone there with detailed feedback. It would be our entire job. It just, we just don't have the time. On pictures that we see directly, I think it's about 250 a month as well. So we can't really give detailed feedback unless we take a call, which is about 50 or 60 calls a month on average.

And those, we always try and give some feedback because ultimately a founder has taken at least half an hour and probably some prep time with us. We've taken prep time with them as well. And so we'll try and give a couple of bullet points at least of like, here are the biggest risks or areas we'd suggest you work on. We really try and avoid the phrase it's too early because it's not too early. Um, we invest it pre -seed. We only invest early, but it can be too early for us to build conviction too early for.

Mudassir (47:55.096)
Yeah.

Henrik (48:00.366)
us to believe that the assumptions are well -baked enough in your business. And we'll try and phrase it in that way to actually explain what we're saying. So yeah, it has to be a balance of triage and time priorities, but we really want to give founders as good a response as we possibly can and try and help. Cause it is so frustrating when you get fake feedback or get ghosted, which I think it's just not admissible at all.

Mudassir (48:14.382)
Mm -hmm.

Mudassir (48:27.014)
Yeah, so two thoughts on that. So one is a question that you actually, one is a statement that you actually said a couple of minutes ago, which was you do the lead rounds. It's a very naive sort of a dumb sort of a question I'm gonna ask you. It's like, why you only want to do a lead round? Like why not do a, you know, collaborative sort of round? Like why do the leads? So that is one. And two is, do you feel like, and this is sort of a.

scratching a personal itch because I see that on LinkedIn all the time people complain or especially on Twitter not on LinkedIn people complain all about like hey you know we just submitted the pitch deck to X many founder X many VCs and stuff like that nobody replied or we get this thing we get that thing do you think that founders some founders like I'm not gonna generalize and say most some founders don't understand the feedback when they're given one

Henrik (49:22.03)
Yeah. So on the first question, I think it just depends on your strategy. Uh, honestly, some funds are set up to lead and some funds are set up to follow. It comes back to portfolio construction. If you're investing in 50 to a hundred companies a year, it's going to be hard for you to lead all of those investments because leading basically means you're in charge of the legal documentation. You're in charge of being the first port of call for any major issue in the business and future funding rounds. And there are a lot of rights attached to it. So.

Yeah, it's a big overhead basically. So yeah, there lots of funds that are amazing follow -up funds and they just say, we're not interested in doing any of that. We're not gonna kind of set the terms. We're not gonna make big decisions at the board. We're not gonna be on the board at all, but we are gonna invest money and just let it ride. So both are super valid approaches. I think if you're being a high conviction investor, like we try to be.

you definitely need to be in a lead position. Otherwise, you're just not you're not in the room where it happens, essentially. I think on the on the second part of the question. So that's a reminder, was the second part of the question again.

Mudassir (50:33.574)
Yes, the second part of the question was, do you think some founders actually don't have the ability to understand the feedback on given one?

Henrik (50:41.452)
Oh yeah.

I think it's a dangerous assumption to say they don't understand the feedback, but I do think sometimes people, the lack of transparency from VCs is the true problem. And I think translating what a VC is saying is actually the key. And so I would say that at least 50 % of the times that VCs reject founders is because of the founders and you're never going to tell a founder.

Mudassir (50:59.75)
Yeah.

Henrik (51:12.974)
you're rejecting them because of them. It just, it's not a good human path to go down. And, you know, we tried that before we tried being fully honest and it's just, it's not a nice thing to hear. And it's not a good route to go down. So some people might challenge me on that. I'd love to be challenged on it, but the way as a founder for you to figure out if someone's rejecting you because of you, and it's probably not because of you, it's probably because of.

Mudassir (51:13.358)
Yeah.

Henrik (51:40.61)
your background and how well it fits with the problem you're after or the style of your pitch. So it's not really meant to be a personal attack or a front. It's usually if someone avoids giving you any other reason. So if there's no other reason that really makes sense, it's the fact that they didn't enjoy your style, your pitch, your background, et cetera. Um, so just take that on board and maybe try and follow up and.

Mudassir (51:49.158)
Yeah.

Henrik (52:07.118)
occasionally dig and say, you know, was there anything about my pitch that I could improve? Um, you know, was there anything about like my background or profile that you think of your better fit or my co -founders? You probably have an inkling of what some of these points are, and then you can try and tease them out. Uh, if you're getting lots of that feedback, um, otherwise I think most VCs who do give feedback, if it's on something else, like market competition, you know, the product or traction, usually they will say that. Um,

So that would be my advice.

Mudassir (52:38.598)
I could. So when you invest in any of the companies, what do you actually look for in a founder or a founding team? I would say that because there's a couple of people on that or at least two or three people. So yeah.

Henrik (52:50.926)
Yeah, I think we talked a lot about sort of founder market fit. So I won't cover that again, but in terms of maybe characteristics and traits, I think we.

Mudassir (52:59.396)
Yeah, characteristics and traits because yeah, exactly that.

Henrik (53:04.142)
I think we love, we have to see passion. We have to see energy. You know, if you don't inspire the room and bring us along on the journey, how on earth are you going to bring your co -founders, your employees, your potential clients along with you? You know, you have so many people that you need to be basically selling the vision to constantly as a founder. So as an investor, we need to be brought on that.

It doesn't need to be that you're mean that you're an extrovert. You don't have to be a natural salesperson, but you can still show huge passion and energy for what you're building. So that's number one. I think then characteristics like being driven, being super determined, being hustly, which is different. Um, and that can come across in a lot of the evidence of how you've gone about early traction and problem validation. That's really important. I think beyond some of those traits.

We actually quite enjoy the creativity that comes behind behind any founder and the uniqueness. I think different founders have different skillsets. Some are very intense. Some are very creative. Some are very open and empathetic. Some of those traits are good for building a high performing team. Some are better for building a cohesive team. Some are better for, you know, the early stages of growth. Some are better for later. I think as long as you have.

a deep grasp of the market you're operating in, a grasp between you of the problem of this product and the solution. And you have a clear vision of where you're going with that passion that sort of threads it all together, glues it all together. That's more than enough for us. Um, but yeah, we don't try and seek a kind of chat box of, of traits, but I'd say if I'm trying to generalize, those are some of the ones that a lot of our founders, um,

have exhibited over the years.

Mudassir (55:01.734)
Great. So, Henrik, thank you for asking all my weird questions. So I appreciate that. So what we do is we... Yeah, thank you for that. Very, very kind of you. So what we do is we have a decent big of an audience, very fortunate to anybody who listens to the show or read the newsletter. So what we do is before anybody's coming out of the podcast, I just send out this one message to a handful of people like, hey, Henrik from Playfair is coming tomorrow on the part. Any question you want me to answer, ask him. So please do that. So we get like all kind of...

Henrik (55:06.67)
No, it's a lot of fun, I enjoy it.

Mudassir (55:29.392)
All kinds of questions, like the crappiest one and the best ones. So I managed to pick up as many as I could because there's probably 48, 49 questions that I get. So I just, you know, some of them you already.

Henrik (55:33.838)
Can't wait.

Henrik (55:40.494)
So if we go quickly, we can get through them all, you know, see if super fast.

Mudassir (55:43.582)
You've already meant, yeah, you've answered some of them, but I think I have like about 10 to 12 or something like that. So just gonna ask them, okay, cool. So they're like in no particular order or like there's no stack rank or something like that, just asking them as we go. When it comes to pre -seed, what's the most common mistake you have seen founders make and what advice would you give them?

Henrik (55:51.318)
Alright.

Henrik (56:12.462)
Biggest mistake would be...

not finding the right balance between depth and length of answers. And what I mean by that is don't speak for more than a minute. It's such a simple rule. But if you speak for more than a minute, people lose focus, people lose interest, people lose the thread and can't remember the key point. And actually, if you stop after a minute, and you've given a really concise structured answer, people are left with the impression that not only

Are you totally in control of what you're talking about? But you have the ability to go deeper if asked. And sometimes you'll ask if it's a point you're actually then willing to or keen to dig into, but most of the time you don't. And then you've just created this, this answer that is complete. Um, and I'd say that honestly, across all the pictures I hear like hundreds a year, so many founders will just go off on a, on a, on a tangent.

And then you really have to put it back from there. So it's a very simple bit of advice, but I think one that a lot of people forget probably in the moment.

Mudassir (57:22.886)
Okay, that's a good one actually. Is raising a fund equally, if not more difficult than fundraising for a startup?

Henrik (57:31.214)
Good question. I have to admit, I'm not super qualified to answer this because we're lucky to actually only have one LP and our LP founded our fund. He ran the first fund as managing partner, and then we've gone on to essentially raise quote unquote two funds, but solely from him. And the reason we have that structure is we can slightly cheat the rules because our fundraising is a lot easier only presenting all of that portfolio construction and model, et cetera, to one person.

We still do it at the same level as we think an external settler LPs would, would want so that one day if we need to, we can go and do that. Um, but yes, I think for your average VC fundraising is incredibly time consuming, incredibly painful. And unless you have an amazing track record takes a long time, takes probably 12 to 18 months. So I still think a founder's job is always harder than a VC's and always.

always will be. I don't think a VC complaining about how hard their life is, is ever going to go down well. But yes, it is it is a difficult part of the job that doesn't get seen that much from the outside.

Mudassir (58:38.822)
How much do you measure like, I think we need to rephrase that, like, okay, how do you measure how much equity you need to have on any given stage of the startup life cycle? Like at the pre -seed, at seed, like how do you figure out, okay, we're gonna take 10%, we're gonna take 5 %? I think I asked you some of that before, but yeah.

Henrik (59:01.87)
And is that from how much a founder should have or how much a VC should have?

Mudassir (59:07.32)
VC should have, I think. But I think you've already answered the VC version of that, so I think you should be able to answer how much a founder should actually protect the equity and not diluting too early. So if you can answer from that perspective, I think that would be super cool.

Henrik (59:09.422)
Okay.

Henrik (59:13.39)
Mm.

Henrik (59:19.318)
Yeah.

Henrik (59:25.484)
Yeah, that's a good question. I think, so if you take two co -founders that start initially, you know, you have 50 % each. You introduce a 10 % option pool. So then you have 45 % each, 90 % between you and 10 % option pool is then used for early hires. You then raise a kind of pre -seed or a seed round. You probably take 20 % dilution. So, you know, you've then, you've then already, you've basically given away 30 % of the business already. So you're down to, you're down to 70 between you.

Mudassir (59:52.454)
Yeah.

Henrik (59:55.758)
you probably in this market end up raising an interim round before series A. So you're likely to kind of basically dilute to another 20%. And then at series A, you often actually it's 20 to 25 % dilution quite often because you're raising that much more money. Um, and usually founders overoptimized or optimized rightly for raising more money than minimum is minimizing dilution. And so you end up.

Between kind of 40 to 60 % of the cap table. I think if you're very lucky, you still own 60 % of the cap table as a group of founders. If you're less lucky and you've had to raise more money closer to probably 40 % and then beyond there. Um, there are quite a few benchmarks online that can kind of kind of track it and so on, but it's very common for founders to own 10 % or less of a business at exit. Um, particularly in a venture scale business, which is kind of crazy when you think about it. Um,

But if you're selling your business for, you know, a billion pounds, 10 % is 100 million. I don't think anyone's going to kind of sniff at that. So it's all about growing the pie rather than growing your slice of it.

Mudassir (01:01:04.902)
Yeah, yeah. Actually, the next one is.

Mudassir (01:01:12.582)
You guys are, I think he's read one of the terms somewhere on the internet and said, because you guys have used that term, which is deliberate journalist. So the question is on that. How come you evaluate any of the business that you would get in any of the vertical being as, like, now that you're a journalist, how would you evaluate, like, okay, so we're investing in space tech and we're also investing in B2C.

Henrik (01:01:24.494)
Mm -hmm.

Mudassir (01:01:41.932)
SaaS and we're also investing in DTC or like, so how do you do the valuation thing?

Henrik (01:01:48.43)
It's very difficult. It's honestly, it's really, really, really hard. It's really hard. Uh, but like, I love it and we love it as a team. You know, I love being a deliberate generalist and I've started using that phrase more because I think a lot of people think being a generalist means you know nothing about anything. And I actually think it means, you know, a lot about how to think about frameworks and how to think about the first principles of businesses or investing.

Mudassir (01:01:50.158)
Yeah, I should have asked that.

Henrik (01:02:16.91)
Even if you don't know the specifics of an industry. And the reason I really believe in generalist early stage tech investing is because the trends that will change how we do things and the products we use, the technology that influences the world in 10 years from now is nothing like how we divide and segment the world today. And basically sectors and business models, a proxy for segmenting the world. Um, so if you look 10 years ago at the trends that everyone was talking about,

They're entirely different to today. And so if you were an AI investor 10 years ago, you'd have been a niche investor. Um, so actually I really like to think about what are these first principles that we've covered in this podcast around, you know, the problem solution fit key assumptions, thinking about founder characteristics. Um, and so.

Mudassir (01:03:03.972)
Yeah.

Henrik (01:03:08.43)
So yeah, that would be my answer. And fundamentally, I enjoy it more. I find it more difficult and I find it more challenging. And I think I could do this job until I retire, hopefully in many years to come. And it's going to keep me fresh and curious. So.

Mudassir (01:03:22.502)
Yeah, okay, cool. All right, so the next one is, it's a very funny one. In one of the previous episodes, the host, Mudeh Siddharth, asked a former guest a question. Not a question, I think it was a statement, but your font size is your strategy. What's your opinion on that?

Henrik (01:03:44.078)
I think it's a good question slash opinion, because coming back to portfolio construction, your fund size informs your portfolio construction. Obviously, there are many ways you can cut it. You can take 100 million fund and cut it into 10 investments or into 100. But

Mudassir (01:04:00.1)
Yeah.

Henrik (01:04:03.446)
a pre seed fund or seed fund that is our size 57 million pounds, $70 million has a very different thesis to one that's 200 million, like a Hoxton say, they have to write bigger checks. They have more capital to deploy. So it does just mean you get involved in different rounds, you have to take more of rounds or less of rounds. You can pay higher valuation sometimes you have more or less follow on capital. So yeah, I think.

The point is valid, but there's a lot of nuance behind it that you'd have to unpick.

Mudassir (01:04:40.198)
Great. So when you get the same pitch deck slash idea from let's say 10 different founders, which one would you pick and why?

Henrik (01:04:50.574)
Probably the one with the best founders. Yeah. The one with the best founders fundamentally. I think what I mean by that is the ones with the best founder market fit. If you're operating in a really crowded segment, which if you're seeing 10 pitch decks, it probably is. So earlier last year, it was all about AI enabled sales tools. You know, how can you optimize selling and helping AE sell?

Mudassir (01:04:50.758)
He left it open. He left it open, he or she. But yeah.

Mudassir (01:05:03.718)
Hmm.

Mudassir (01:05:19.91)
Mm -hmm.

Henrik (01:05:20.142)
So many people are doing that. And so who's going to win this? It's going to be an execution play. Um, there isn't any inherent defense ability in our opinion behind that product. Um, and so the founders that have built in this market before or proven that they can scale businesses very fast are likely to be the ones that win. Um, so that's how we saw founder market fit in that, in that segment. Um, if we happen to see 10 robot cleaning robots, we'd probably say, okay,

There's a different level of founder market fit here. You know, someone needs to have deep robotics experience, but probably also some scaling experience, given that it's less of a hard product to build today. It's more commoditized. And then if you see 10 quantum businesses, well, then I'd be quite surprised. I think we'd be like, Oh shit, we might have missed something. But you never know given a few years, you probably will be seeing a lot more quantum businesses. So that would be my short answer, but.

Mudassir (01:06:06.79)
You're not going to see 10 quantum yet. Yeah.

Henrik (01:06:16.238)
You should do easy things like, you know, make sure you've got a good design to your deck. Keep it concise to like 10 slides. Don't have spelling mistakes. Answer all the key questions that many articles online can summarize better than me.

Mudassir (01:06:29.062)
Okay, this is not a question that we have on the list, but I want to take your opinion on that. You mentioned this thing, like probably the best founder you can invest because of the same thing, like founder market rate, that kind of thing, like Kent, is he or she has the ability to scale the business so quickly and have that sort of an experience? What's your thought on distribution? And the reason why I say that, so I'll give you some examples. So somebody asked me,

a few months ago and they were saying, hey, we just want to start the DTC business or consumer business or e -commerce business. And my thought process immediately was like, almost everybody's doing that. So it has to be a distribution play. Like, can you hack that GTM sort of thing? Can you do something other than just running Facebook ad or something? So what's your opinion on this thing? Like, distribution is equally, if not more important in a crowded market.

Henrik (01:07:11.682)
Hmm.

Henrik (01:07:23.694)
Yeah, I think distribution and go to market are really important. I mean, that was one of the key sections I kind of mentioned earlier about our memo. I think the way you go to market is set of secondary or tertiary importance to some of the other things we mentioned earlier. But fundamentally, if you don't have a strategy of how you're going to reach your users and how you're going to scale your commercial business,

then it doesn't matter if you have the best product in the world, the best technology, if you found a problem that people have. So I think it's super important. And the best founders have a combination of hush hustle and strategy. So they have a real plan of, okay, I think the outbound sales is going to work super well, or I think content marketing is going to work super well. But then I'm actually going to, at the beginning, just hack my way to that. You know, I am going to.

Mudassir (01:07:51.492)
Exactly.

Henrik (01:08:18.83)
I'm not going to just hire a load of people using outsource agency. I am going to like hack my way through LinkedIn and nothing's going to stop me. And I'm going to, you know, find connections of connections and offer favors and do whatever it takes. So things, there's a lot of good advice around do things that don't scale to begin with, um, because it can prove the early signs of kind of a distribution strategy among other things. But then over time, as you get towards series a and beyond, then you need to focus on things that scale.

Mudassir (01:08:48.87)
What do you actually mean by do things that don't scale?

Henrik (01:08:53.23)
So do things that don't scale in a go -to -market example.

Mudassir (01:08:53.798)
This statement has been making rounds for years now. Do things that don't scale. So what do you actually mean by that?

Henrik (01:09:04.014)
So in a go -to -market example, do things that don't scale is literally going individually on LinkedIn and saying, I'm going to find every user persona that I think fits my ICP ideal customer profile. And I'm going to message them one by one. And I'm going to go through the LinkedIn's and find the details about where they went to school or where they worked and customize every message and make sure I get as high a hit rate as I possibly can.

And it's going to take me 10 minutes, maybe per message, but it's fine. It's worth it because I just need to get to these people and try and convince them to use a product that basically no one's using yet. No one's paying for the scaled version of that is hiring a load of junior account executives with a couple of template messages, and then just pumping, pumping the phones, um, and just churning it out. There's some amazing examples out there about what can people at Airbnb did in the early days. Um,

of going round to people's homes with a professional photographer and just taking amazing professional photos of people's homes so that the listings would look better. That obviously doesn't scale. You can't go round as a founder to every house on the marketplace and provide professional grade photography, but it gets the marketplace off the ground and it gives you those initial dynamics. So I think those are examples of things that don't scale that can help you get lift off and momentum.

And then you have to figure out, okay, how can I scale? Do I offer a cheaper outsource photography service or do I give users tools to try and edit their photos or structure them better, et cetera, et cetera? Hope that helps.

Mudassir (01:10:46.854)
Okay, cool. All right, so the next one is, I think you've touched up some of that before, when I was asking like so many people solving the same problem. So I think it's gonna come down to a niche part of that, which is pricing. And that is, would you invest in a business that's exactly doing the same thing in a cloud market, but it's 10 times cheaper than all the other alternatives? And a question that I would like to ask on top of that is, what's your opinion on pricing as a marketplace?

Is that good enough of a play? Is that like, ah yeah, you know, when you get to pricing, it's a race to zero. So what's your opinion on this spectrum?

Henrik (01:11:27.918)
I think it really depends on why your pricing is so much cheaper. If you've discovered a technological step change, then sure, then you guys are going to be able to provide this at a lower cost and still maintain the same margin and therefore amazing. The chances of you maintaining that seem quite slim unless it is a really deeply technical product, but in B2B SaaS.

Mudassir (01:11:32.078)
Hmm.

Henrik (01:11:56.514)
I think it's quite unlikely that you're going to find a major technological change. I think if you're maybe dramatically changing your offering. So in the Trezzi example I gave earlier around, you know, lots of people having kind of cashflow issues, but providing a kind of certain type of solution. I think you can figure out that users only want certain features and to offer those features, you can offer a simpler product and therefore a cheaper product.

And it's a very different overall proposition. So if you thought deeply about how you're packaging the problem solution together and saying, Hey, yeah, I'll offer this for 10 times the price, 10 times less the price, but you're going to get 10 times fewer, you know, less functionality. And if that still solves someone's problem, then great. Um, I think it's dangerous where you're simply just providing a worse service and expecting people to pay less for it and still be happy. That's when you get to dangerous territory.

Mudassir (01:12:54.854)
Cool. All right, so the second last on this list is what's the most common piece of advice you give to the startups post investment?

Henrik (01:13:12.94)
It's a really difficult question.

Henrik (01:13:25.07)
I think it's difficult. It's a difficult question to answer because to be a good investor post investment, you have to really be extremely empathetic and understand the nuances of that particular set of founders and that particular business. And that's why you can't scale portfolio support and why you can't have templates. So then that's why it's such a hard question to answer.

Mudassir (01:13:36.846)
Hmm.

Henrik (01:13:52.238)
I think probably the best advice in terms of how I work with companies is trying to convince the founders to tell me what they're really thinking and what they're really feeling. And it kind of can only be done if you have an investor you trust. But for me, if I don't really know, even I don't need to know exactly what's happening in their personal life, but if they are having a lot of stress, um,

and rationale for making certain decisions, or they can't focus on certain things because of something outside of work. That's fine. And I can understand that. I can empathize with that. I have my own personal things outside of work as well. If I can understand that, we can come up with a plan on the business as well. If we need to let people go or struggling with, you really don't think something works, it's causing a lot of anxiety. The more you can communicate and have openness, the more you can actually come up with a solution.

instead of purely just telling founders that they're not doing a good job. We haven't hit the milestones. We haven't done this. We haven't done that. That's, that's where you get a very friction, high friction relationship. So yeah, my biggest advice is please, please trust me that I'm here for the long haul. Tell me the real story. And yes, there's a world in which everything doesn't work out, but that doesn't work out for me. It doesn't work out for you. We're on the same team here.

So we're going to try and do everything to try and fix it. And the more visibility we have into that, the higher chance we have.

Mudassir (01:15:24.806)
Totally makes sense. All right, so the last one on the list is, do you believe more in the first time founders or the second time founders?

Henrik (01:15:34.318)
There's an amazing book that was written a few years ago called Super Founders that has actually broken this down into data and broken down many other kind of assumptions and kind of old legends about founders. So I'd recommend anyone looking at that. And it's a good blog post online instead of buying the book as well. But fundamentally at Playfair, I think we back both and it depends how you define second time founders. I think we probably back fewer.

second time unicorn founders, honestly, because if you've built a unicorn, sold it, and you want to go again, you're probably going to go back to your first investors. And you're also going to be chased by every single huge fund in the world. And they have so many resources that a 57 million pound fund just can't compete with. And those founders today are going to raise 10 million off the bat at an incredibly high valuation.

Mudassir (01:16:19.686)
Yeah.

Mudassir (01:16:25.828)
Mm -hmm. Yep. Mm -hmm.

Henrik (01:16:31.534)
And I think maybe in time Playville will get to the point where, you know, we can compete with those, those founders and maybe we've backed a few and then we'll back them again. But I think going after them today is just not the smartest strategy. And so we tend to back founders who have been successful. They could have been very successful. They could have exited for tens or hundreds of millions, but they might not fit into that kind of super elite kind of, um, the camp. And they might have even built a small business that just.

didn't quite work out or they sold it for a very small amount, but they just got unlucky and the market timing was wrong. And we just think they're an amazing, amazing person, amazing founder that needs to find the right idea and the right moment. But equally will back people straight out of university, or even if they didn't go to university and they've just got the hunger and the desire and the obsession with a certain problem that they're going to go and build it and prove everyone wrong. They have, they have no right really.

to be winning against some of their competitors and the other people building, but they manage it. And, you know, we think of some amazing people like Victor and Peter from Recycli, Dan and Kieron out of Protex. You know, they've started with very little experience when you compare it to the grand scheme of things, you know, building in their 20s, coming either straight out of university or with only a year of experience here or there. And yeah.

we have as much faith in those founders as the ones who've done it before. So.

Mudassir (01:18:02.31)
All right, cool. Eric, thank you for answering all of these ones. I really appreciate it. So we, yeah. Okay, so I hope you liked it. So we...

Henrik (01:18:06.702)
It was fun.

Henrik (01:18:12.494)
That was great. Some really good questions in there. So thanks to everyone for the, uh, yeah, the smart questions.

Mudassir (01:18:18.854)
Okay, thank you for that. We do have this one small ritual on the podcast since the episode one. So what we do is we ask all our guests a question for our next guest without telling who the next guest is gonna be. So I got a question for you from the previous guest. I'm gonna take a question from you for the next guest. So the question that the previous guest left for you is, at the end of your career, when you retire, where do you imagine spending the rest of your life? Like where are you gonna live? So what would that...

what scene -a -d would look like to you.

Henrik (01:18:51.278)
and specifically where rather than what I'd be doing, is that right?

Mudassir (01:18:55.236)
Yeah, yeah, where? Like from the living part, not like, not the work part.

Henrik (01:18:57.294)
Hmm.

Okay. I definitely be in the countryside somewhere, you know, right at the beginning of this podcast, we talked about, you know, growing up in the countryside and I love being in London today. I love the energy. I love the possibilities, but I think, you know, probably even from when I started family, I'll be in the countryside. And I think when I'm older and retired, I'll definitely want that, that fresh air that.

Mudassir (01:19:11.674)
Mm -hmm.

Henrik (01:19:24.43)
not necessarily slow pace of life and everything. I still want my brain to be kind of running fast, but I think giving yourself the time just to just think, um, and be a little bit more pensive and reflective, particularly in later in life from what I've learned from my grandparents and others. I think that's really valuable. Um, and while I love running around today and everything being at a hundred miles an hour, I think slowing down would be quite enjoyable later.

Mudassir (01:19:53.286)
Okay, cool. Question for the next guest.

Henrik (01:19:59.374)
Yeah, God, it's hard. Yeah, as you're asking me that I was thinking, God, what's a smart question to ask? I mean, the question that comes to mind is the one that I've been asking my mentors over the last couple of months. And that's, you know, what does success look like for you? And how do you measure it? And the reason I asked that is purely because it's such a hard one to answer in venture. And maybe the next guest isn't, you know, necessarily deep in venture or not. But if they are,

or even if they're not, just how you judge success is such a difficult one to try and kind of break down. And I personally have found that really, really hard in this job. So I'd love to hear what someone has to say.

Mudassir (01:20:43.302)
He's the founder of, he was one of the founders of Versel, the unicorn Versel. So, yeah, I'm excited to hear his talk on that as well. All right, cool. So, we can pause the recording, save the bias and stuff like that, but please stay after I pause the recording because I just need to tell you how to upload and all these things, okay?

Henrik (01:20:49.935)
Okay, well, I'm excited to find out what they say.

Henrik (01:21:07.022)
Sounds good.

Mudassir (01:21:08.482)
Thank you so much, Enric. Really enjoyed talking to you. Thank you for all the wisdom, every single thing that you shared with me and with everybody listening to the podcast. I just love talking to you. Thank you so much for the time.

Henrik (01:21:22.222)
Thank you so much. Uh, it's honestly an honor to be able to just sit here and share thoughts. Um, I think five plus years ago when I was doing crowdfunding investing and trying to build a startup, I would listen to podcasts and listen to talks and go to panels and try and be a sponge. So I don't know if anything I've said is actually particularly insightful, but hopefully it's given people a nugget here or there and allow people to think a little bit differently. So thanks for all your amazing questions.

Thanks for all the guests, amazing questions. And yeah, I hope I'll meet many of you through a pitch deck at some point at PlayFair.

Mudassir (01:21:59.374)
Absolutely. All right, so let me pause that.