Full transcript: Ben Holmes on London Real
1:22 This is London Real. I am Brian Rose. I also host London Real. It’s the same studio, but it’s not just tech. I was just telling Ben about a celebrity astrophysicist, Neil deGrasse Tyson, Tim Ferriss from The Four Hour, everything, and this week we’ve got the author of Rich Dad, Poor Dad, Mr. Robert Kiyosaki, and I spent like some time with him about a week ago, and it was a really fantastic interview.
1:42 He’s been on Oprah, so I mean, have you guys been on Oprah? Was his book? No, not yet, this is The Stepping Stone. Was his book on her book club? I don’t even know if she had a book club.
1:52 I think this is like in the 90s. That’s when Oprah was big, so on top of that. So I was pretty impressed by that. So anyways, you can check that out at LondonReel.tv. But today, of course, we’re here to top tech.
2:02 My co-host is Colin Pyle. You’re making wonderful coffee, Crew Cafe. You’re in Harrods soon. Give us an update. Yeah, things are good.
2:10 I’m just exhausted. So I feel like I did when I was 12 and going through a growth spurt. It’s like just tired, man. Things are busy. So first delivery in Harrods today.
2:20 So it was a cool experience just dropping off, going down, dropping off our coffee in Harrods. Yeah, it’s a real accomplishment for us, so we’re really excited about that. And otherwise, the intense blend came out this week, so for all you people that love a slap across the face, 12, 13 strength, we finally have it. Look at you guys. So we’re ready, so check it out.
2:41 Awesome, man, cool, thanks so much for being here. Let’s get on with the show. Our guest today is Mr. Ben Holmes, who is a partner at Index Ventures, a multi-stage international venture capital firm based in London, San Francisco, and Geneva. Since 1996, you’ve teamed up with over 140 companies in 38 countries, employing over 25,000 people, and looking for an additional about 2,000 people on your website with job openings.
3:06 Not that I’m looking for a job. This year, in the last 12 months, seven of your companies have exited for over $1 billion. Currently, 11 are valued over $1 billion. Those are serious numbers. Ben, your companies include Dropbox, Just Eat, King, Skype, and SoundCloud.
3:26 You joined Index in 2002. Your primary focus is games and e-commerce. Exactly. So I’m almost, I’ll introduce you a little bit more. You’ve managed King, Playfish, which was acquired by EA, Mind Candy, iZettle, Just Eat, Secret Escapes, and Trustpilot.
3:43 Ben, welcome to Silicon Real. Thank you for having me. I appreciate it. Jeez, that might have been the longest intro, and maybe the most impressive as well. I mean, there’s a lot and I dropped a lot of names there. Thank you. Thank you. They’re not all my personal investments Some of them are mine, but many of them like esteemed colleagues from index You know you tweeted out before you came over here that you’re gonna lift the lid on some VC secrets I can’t wait, you know We have a lot of entrepreneurs that watch this show and to many of them, you know VCs are these kind of untouchable these like all-knowing deities that kind of live somewhere else and that kind of determine the success or failure failure of a company with like a single email you know especially index you guys have one of the best names in the business in London for sure and internationally you know once all Klein talks I listen and I was just wondering if you could lift the lid on what kind of goes on behind the scenes and and how you see it from your perspective. Sure sure well actually a lot of people get their first sort of insight or perspective on what it must be to be an invested by watching programs like Dragon’s Den and so on.
4:47 And I’d say the first thing I would say, which is really different about our industry, from what you might perceive watching those programs, is it’s actually about being a nice person and not being a nasty person and not trying to denigrate people. So all the entrepreneurs that we work with, every single one who we works with, gets multiple, multiple offers of financing. So rarely are we the barrier between a successful entrepreneur and getting financing. And actually, the one thing that people probably misunderstand is that we have to sell extremely, extremely hard to get into the deals.
5:22 It’s not an academic exercise about thinking, I believe that one or that one is the right one to go for. Often, many of the VCs have come to the same conclusions about what are the exciting themes and who within those themes are the exciting entrepreneurs to back. And the way you really ultimately generate good performance for your investors and hopefully win the deals is just by trying to be a nice guy and persuading the entrepreneur. A, the people he’s giving 20% of his company to are gonna be nice guys to work with and that you’re gonna help them grow the company and just not be a pain in the ass.
5:53 So that’s really, really important and that’s the thing that we really, really strive to ensure. Yeah, the word humble is used on their website. Not a word you would expect from the VC perspective, But I guess it is a misunderstood industry, right? Am I speaking out of term when saying that’s an impression, or do you hear that a lot? Are you constantly explaining that?
6:14 Well, listen, I think particularly in the UK, I think in the US, it’s better understood by the man on the street what venture capital is. And I think in the UK, unfortunately, I think for many people, it’s mixed in with associations of vulture capitalists, of kind of Gordon Gekko type characters. And there’s a massive, massive difference between being a venture capitalist and being a buyout investor, a buyout investor, they’re buying the whole company. So the only thing that the person who’s selling the company is at work cares about is the size of the check.
6:44 So once you’re in a buyout industry, the key skill you need to have is being very, very, very good at spreadsheets to analyze the target company in as much detail as possible and understand who you can hire and who you can fire and so on. Whereas venture, the entrepreneurs, they’re staying in there. They’re there for another five, 10, 20 years, right? And they’re thinking about who they want to have with them along for the ride. So the premium of being successful is, as I said, it’s about creating a good bond with the entrepreneur and persuading them to take your money.
7:21 You wrote an article, what index looks for an investment. And I was wondering if you could just break down some of those points of what you do look for, because I think a lot of people have no idea. So I like to use acronyms, partly because I’ve got a bad memory and it helps me. So on this one, I actually have my three T’s, which is team, technology and traction. So, and I suspect that’s a similar sort of set of characteristics that other people would look for.
7:48 So team, is it a team that have done stuff before or is it a team that have not done stuff before but have some magical element to them which makes you feel they’re gonna do something amazing? Attraction are the visible signs that people are engaging with the product or service which the entrepreneur is trying to sell, and technology. Is there something unique and proprietary which gives their business or makes their business hard to replicate? Often when you get business plans, people try to shoot for being B plus, A minus across all three.
8:29 And say, listen, I’ve got quite a good team, quite an interesting technology, and a little bit of traction. And actually, it’s almost more interesting to us where there’s a massive asymmetry. Either it’s incredible traction, but with a team that, frankly, are very immature and don’t have expertise, or it’s a wonderful technology. I certainly remember the first time that you did a Skype call back in 2000 and must be in three or four, immediately got in touch with the company.
8:57 I could just see that that was a technology that could change the world. And sometimes, yeah, we do back teams just with a business plan and nothing else, nothing built, just a guy with an idea, but we’ve got real confidence in that individual. So, as I say, those are the three elements we look for, but we’re very happy to invest, where there’s an awful lot that’s not evident yet when we invest. And indeed, I think about just in London in the last 12 months, I think we’ve done 30 investments where we were the first serious money into a company.
9:30 So often, very often, it is just a team that you’re backing. 30 investments, and is that seed stage? It’s across multiple stages, across multiple stages. So we have a venture fund which does seed and series A, and that can be as little as a few hundred thousand invested in companies. And then we’ve actually got a growth fund, which is also investing in the same sort of areas and themes, but can deploy bigger amounts of capital where there’s some degree of proof around how a product or service is getting on.
10:02 So usually 15, 20 million in revenue. I was wondering now, a few of, I don’t know if they’re your competitors or people in this space in America. The guys at Y Combinator say no single founders. Do you agree or disagree with that? I certainly think it’s great if you can have a technical founder and a non-technical founder.
10:23 And if you just had to have one, I’d rather have a technical founder who had some ability to grasp commercial aspects. I think that is pretty important. I won’t say we never do that, but if you’re a bright young person out there without a technical background who’s thinking about doing a start, I would definitely, I would say, try to get yourself as technical a background as you can. And there’s loads of tools and services out there now which will educate you and help give you a grasp of some technical fundamentals but I would actually try and find a technical co-founder. It will make your life much easier. And do you get worried when people don’t have a team as in maybe they can’t attract a team? Well it is a good proxy you know being an entrepreneur is about selling your idea and I guess the first people as an entrepreneur you have to sell your idea to even before you probably pitch up at your visa at a VC or an angel investor is prospective team members and Usually, yes, you’re persuading those guys to take a big salary cut to work long hours.
11:27 So it’s a very, very good proxy indicator, yes. You mentioned Skype, and something Peter Thiel says is that it has to be 10 times better than the competition when he looks at a startup. And you mentioned Skype, which is probably a factor on top of that. Is that something you look at, some kind of factor like that? Or is it not that quantitative?
11:46 Yeah, I mean, the biggest venture returns, and the most successful kind of companies in the tech ecosystem, they’re usually either causing some disruption in an industry or taking advantage of some disruption which is happening anyway in the industry. In the case of Skype, it was infinitely better because it was free telephony. I think free is always a very, very compelling proposition for consumers, and we’ve done many investments both on the enterprise side open source software where there’s essentially people are giving software away for writing code and distributing it through the open source community for people to use for free and they built fantastic business models on that down to the games businesses where we invest in where generally the freemium business model there is very powerful so on a cost perspective I’d say the the best thing I’d love to see on a on if you know in your proposition is to have a have a large element of your product or service available for free.
12:47 Interesting. And the last part of that is Ben Horowitz is a big fan of founders becoming the CEOs. Are you in one mind about that, or is every situation different? The best outcome is yes. If you can back a founder, and they can stay with the company, and develop, and learn, and carry the vision of that company all the way through.
13:09 And I don’t think it’s any surprise that the three, four, of my biggest tech returns generally fit that characteristic with Google and Facebook. There are other businesses where for whatever reason it does make sense to get more experienced commercial people in, where you’ve got a very, very technical founder who’s taken a business that far. But we don’t make those. We just want to back great ideas. At the time we’re doing investments, if it’s a good idea with a passionate team, we’re not thinking ahead to what’s the right management for that company in five years’ time.
13:47 We’re really just trying to help the management that’s there when we get involved. It always sounds good in theory, but I always think a company’s growing in some strange way and then a person is growing in a strange way and getting those to line up in five years’ time always seems always unlikely, but like you said, the big ones have done it, right? Yeah, and I think also I think one of the reasons the reasons maybe that people may have felt that you needed to have a serious management come in, I’d say people’s perceptions have changed and whether it’s public market institutions who are going to invest in a company once it’s public or whether it’s later stage investors, I think they’re getting more and more comfortable that they will, if they want to be having great returns on their investments, they’re going to have to be investing in young people who don’t fit the mold of what they might have traditionally thought of as a businessman.
14:39 See, the way the market is constantly changing so quickly. For me, a product, developing a product, in five years’ time, if a big guy may become in who’s built an international logistics business, things may have changed from when they were doing it. So unless you poach someone from a competitor, then having someone else might be a negative. I think in all sorts of areas related to where we invest the half-life on experience is very short and getting shorter and shorter, particularly if you take something like marketing.
15:15 Would someone who’d been a senior marketeer for the last 30 years, what would they know about getting your app up the app store or the CPI cost on a certain game or product? I think definitely around the distribution economics and marketing systems which are used to make companies successful these days, as well as the technology platforms which are used, and even the organizational structures which are behind successful companies. Just there’s so much innovation in those sectors that it’s difficult for us as VCs because often the experiences we’ve had with companies that have been successful five, ten or even two, three years ago may be outdated. So yeah, I guess that’s why it’s the young person’s industry and it’s always a privilege to get exposure to all those changes and dynamics.
16:01 Can we talk about just eat because you’re in a perfect position to kind of give us maybe a case study It obviously went public this year very successfully I was worried you could tell us Take us back to when you first heard about the company and when you first got involved and how you kind of brought it You know from Denmark out into the world No, so so we we became aware of it it had been in Denmark I think for about three four years and and had basically had been running on an absolute shoestring and the original founders they were were, they had a background in field sales, so I think that many of them had worked in nightclubs and had been bouncers in places like that, so they were brilliant at signing up restaurants and explaining to the independent owner of a takeaway store why the internet was the future for him and why he should sign up, which in 2001, persuading a guy running a kebab shop that the internet is the way forward would have been a hard sell, and managed to do that. And they spent as little as they possibly could on technology, as little as they possibly could. So when we came in, they just started in the U.K. And we’re getting decent traction with some of the restaurants, but it was still a tiny, tiny business. I think hundreds of orders per night when we first invested it back in 2008, 2009. And And I think the interesting thing then was the general business model about connecting
17:28 Small local merchants of whatever type it was to the internet, that wasn’t as in vogue as it is now. Now, you’ve clearly got Uber and we’ve had Groupon and all sorts of businesses which have had that broad business model have been extremely sort of got extremely large on the back of it. Back then, it was not that fashionable. And actually, I don’t think in the original round where we invested, there was enormous VC appetite for this. And I certainly think a lot of VCs would have looked at it, gone onto the website, sort of searched and found that it didn’t have their local Mayfair sushi bar on it, and said, this can’t be any good if it doesn’t have this sushi place on it.
18:09 But in practice, it was one of those phenomenon which didn’t really, you have two different types of internet company, or internet company, some kind of start with the tech community and gradually filter through to Main Street, but you do have many others that start with the average Joe in the street. And actually it’s the tech community in a way who hears about them last. And Just Eat probably fitted that category. We were seeing lots of young students really love the service and use it.
18:35 And for them it was a real treat to once every couple of weeks order a takeaway to their house and Just Eat was enabled them to do that. So at the time, it just seemed like a long shot. But it seemed possible that there would be a big shift away from picking up the phone and ordering to using the internet. And I think that was probably before the mobile phone really became, or the iPhone was becoming a popular platform. Obviously, now everyone expects to use their phone as their remote control for their whole life.
19:12 They expect to order their cabs on it, their lunch on it, order their cleaners on it, and all sorts of aspects of their life they expect to manage. But Just Eat was one of the earlier companies in that theme. So yeah, so we took a punt, there was a lot of things that got fixed in the period after we invested. There was a new marketing director who came on board who eventually got them to do TV advertising, which proved to be a great return on investment for the company, the technology platforms were fixed so they didn’t fall down every evening when people were trying to order the takeaways.
19:51 Gradually, it’s been a classic journey from small scrappy startup to very successful, efficient, well-run public company. Are there any specific milestones you remember in 2010 or 2011 where you were close or something wasn’t going well and then you got some adoption and you know kind of saved the day or any members you remember in that? I think, well at one anecdote which I think I will remember is when I was first looking at the company they were showing me the data about the usage patterns and they showed me the usage over Valentine’s Day and your instinct might be well surely on Valentine’s Day everyone’s taking out their other half for a romantic meal at a restaurant.
20:39 But actually, the Just Eat data showed that that was one of the biggest days in the year for them. And it proved to me that your gut instinct about things isn’t always right. And actually, for many people, it was a luxurious treat to get a takeaway. So I think it was a few snippets like that, which made me realize, actually, this could be a real mass market phenomenon. And I think from once we invested, the things that we really pushed for hard as a board, not just me, but I think all the other board members were, well, you know, we have to get onto mobile.
21:15 And it turned out there was an awful lot of tech debt that had to be sort of paid down before we could ultimately refocus on getting the product launched on mobile. But that was one of the, I think when I first was able to order on a dedicated app, that was a great moment for me. Because I think when you’re on a website, there’s always the fear that Google could eat your lunch, as it were, literally almost literally in this case. Because if people are thinking, I mean, you know, take away, even if they maybe remember Just Eat, they often go to Google and they’ll, you know, type in take away Derby.
21:49 And you always risk that someone else might get in because of SEO or because they’re spending on SEM, whereas once you’ve actually got the app on someone’s phone, then you really own that consumer response and I think that’s really the new battleground in the internet now. It’s really owning a particular consumer response and I guess Uber is, I guess it’s sort of doing it a little bit for taxis now and maybe even broader sort of set of travel services. And I think if Just Eat is going to be ambitious and be successful going forward, they probably need to think about trying to own the idea of food or eating.
22:26 So I think that’s the direction they’re heading, I’m sure. But yeah, I think I felt a lot safer once I saw they had the app out and I saw the traffic started to shift from the internet or the PC to the phone. Is that something you’re always worried about in your portfolio companies, that Google coming in and just making everything free and just launching some product that just blows things out of the water? I mean they’re a fantastic company and I’d argue a large part of the value of Google is their brand and they have a brand that’s associated with search and just as I was saying they own the consumer response for search and obviously they’re distributed in loads of different endpoints where you can type into a Google search box and it does give them an enormous amount of data, they know exactly which companies are doing well and They understand exactly the customer acquisition flows across many, many industries.
23:29 I think you have seen in things like travel, where you type in a travel search and increasingly before you get to the generic Google search listings, there’s increasingly this bespoke Google customized code which spews out airline flights and timetables and they’re doing that in lots and lots of different areas. So I do think that’s a threat to many startups, which is why, as I said, I think the app ecosystem represents a challenge to Google, and probably a safer home for successful startups than the browser-based internet. Interesting.
24:04 You said pay down technology debt. Is that a kind of a term that people use in the industry? What did you mean by that? So I guess when you’re a startup, you try and do everything on the cheap, and that’s That’s often what you’re forced to do and that’s what you have to do to scale often. Eventually stuff builds up and your throughput increases and the technology choices that you’ve made and the limitations on scaling that you may have introduced by making shortcuts in the early stages of the company have to get resolved.
24:45 Actually, in a sense, being thinking about VC industry, that’s actually quite a good reason for firms at one stage to get a VC involved, because often, actually, we do see a trajectory of company. The revenues may ramp up, up, up, up, up, and then the revenues flatten out for a year or so, whilst the company is really sorting out all its systems before it can really re-accelerate, particularly if a company is wanting to go international, often they’ll They’ll need to have a more sophisticated technology platform to operate in multiple countries and multiple currencies and so on. And often the product that they launched on is not the right one.
25:26 So I guess that’s what I mean by paying down technical debt. It’s an interesting way of thinking about a company when you make a decision, it’s either an asset or a liability. And if you’re skimping on tech, it might later become a liability that you have to pay off. And I think I’ve heard management debt being used the same way if you run your employees into the ground, then you have to pay them somehow in the future with something. Right, right.
25:48 Yeah, absolutely. Rewarding teams is critical. In the paying off the technology days, is that often where you just kind of take one of your like really technical expertise guys that maybe you’ve used before and drop them in for six months and do a complete reboot of the tech? Yeah, yeah. Well, so absolutely, actually, when we invest in companies, you know, there are some people at Index Ventures who’ve got more technical expertise than others.
26:10 We’ve got a partner in the U.S., Mike Volpe, who worked a long, long time at Cisco and knows an awful lot about various ways of the technology stack, and there are other people more generalists or, if you’re being honest, amateurs like me who know less. So we do rely heavily on external advisors to, you know, usually not paid guys, just people in our friends, family, and other portfolio execs help us out when we’re looking at the technology stacks of companies we’re investing in, and also we have a very active CTO community across all our portfolio companies who talk about challenges, whether it be security issues they’re facing or whether it be hiring challenges we’re facing. So I think there’s a broad range of people who help us think about tech and post-investing there’s quite an active community of support that we sort of coordinate for the tech teams in our portfolio companies.
27:09 When you’re pushing Just Eat to kind of go mobile, I mean, how do you do that when you say only own 20% of a company or 20-some percent and you’re trying, I mean, ultimately your job, you’re a people person, right? Because every day you’re contacting the company and you kind of suggest the right way to go, but they kind of have to make their own decisions, right? And that’s right. Usually when we first invest in a company, you’re right. We own 20% and often the founders are left with 80%, so all we can do is make a suggestion and they can sort of listen to us, but they usually control the balance of the power.
27:41 And actually, what tends to happen is even after they’ve had two, three, or four financing rounds, so maybe collectively, the financial investors may own 50%, 60%, 70%, and the founders and employees may end up owning 30% say, generally, we still want those companies to be run and managed by the founders, and we’re not telling them what to do. We’re giving hints, we’re giving advice, we’re connecting them to people who might have helpful input, but we want the founders and the management of the company to have the decisions and we’re really there to course correct, and as I say, that’s another big difference between the buyout world and the venture world. We’re really there to help people who know what they’re doing, whereas I think in buyout world it’s really about taking control of these assets yourself and imposing your own management and so on.
28:35 So it is a very nuanced, it’s very nuanced because often not all the investors are aligned and winning hearts and minds of founders and management is an important job for any successful investor to be able to exert influence yet still remain on great terms with founders and management. And what do you do if a CEO doesn’t want to go your way, but you have to keep him in place to run the company? And how do you resolve that situation? It happens relatively rarely.
29:10 It happens relatively rarely, I’m glad to say. And actually, when I think of the future CEO transitions we’ve done, usually it’s been a fairly consensual process which has got us to that point. But it’s a difficult, it is a difficult process to get a new CEO on board if that’s the right thing for the company. And it takes a lot of phone calls and a lot of coordination. I can see it in your face.
29:43 I don’t want to get too graphic on there. And now the IPO is done, is there anything that surprised you about that whole process? Or was it more difficult or was it simpler than you thought it would be? And is that chapter kind of over now with you? Well, all the hard work was done by the management there.
30:00 I’d say the things that we influenced a little bit with respect to the Justy IPO was there had been a clause with respect to London. And it was always clear for Justy, because they had such a strength of business here in the UK that they were going to list in London. And we were very happy with that choice. But actually, at the time we started to think about it, if you wanted to list on London, you had to list a 25% for your company. I sell or get diluted down, but a 25% of the company.
30:29 And all the investors in Justy love the company, didn’t particularly want to sell down 25% of the company at the stage, we weren’t public. And actually index with various other people that lobbied the government to introduce this new segment on the London Stock Exchange that you may have read about with a high growth segment where you actually list the company with a slightly lower percentage of equity enlisted much, much more similar to what happens in the US where typically only 10, 12, 13 percent of a company is listed. And Just Eat was actually the first company that used that high growth company resumption to get onto the London stock market. So we did play a bit of a role behind the scenes in influencing that change. In terms of the IPO process, it’s the same as the base, it’s the same as the first pitch you make with your business plan to your first angel investor.
31:20 It’s persuading them that it’s describing the idea very, very simply. It’s explaining why it’s defensible and explaining how you’re going to achieve the goals that you set out for. So in a sense, the only difference is when you do it with a VC, the VC only has very, very limited time and availability to check that what you’re telling them is true. Whereas when you go public, you’ve got to tell a compelling and simple story. Then you’ve also got to produce reams and reams and reams of data and numbers and financials and audited material to actually get through the hurdle to go public. That is quite a big effort for the CFO and his team. Basically, it’s all about telling a story. And that’s what educating founders to be ready to tell that story is a key part of getting a company ready for IPO. And we definitely tried to help a lot with that.
32:26 And David, the CEO at Just Eaters, has done a fantastic job at that. And that was a huge success, having a big IPO like that. I mean, that’s big, right? It was a funny moment for me, because for a long, long time, people were criticizing Europe, saying there are no great tech companies that came out of Europe. And every time when we went fundraising, and we were there like the entrepreneurs are, occasionally, with cap in hand, trying to raise money, a lot of our investors would say, is Europe really going to produce anything?
33:00 And for 10 years, we’d had to say, listen, we’re doing quite well. We’ve had Betfair, we’ve had Skype, and we’ve got these other things that look good, just trust us, Europe will deliver. And then suddenly we had a kind of a real flowering in the last 12 years, well the last 12 months where an awful lot of these things like buses happened at the same time. And I remember there was a funny moment for me, Just Eat listed I think the second week in April and there was a king listed the first week in April.
33:28 It’s a king I’d been involved in 10 years ago when we first did that investment. And there was a critical call, call that you have the night before IPO, where the bankers and everyone else goes on the call, they tell you how the roadshow process has gone. They say there were this many times they were subscribed. And I had that call with Just Eat and then with King, and then I had another call related to the Just Eat IPO. Basically, we were going to announce the intention to float the next day. So I had two of these calls, and I just managed to coordinate it so that one was after the other. And I was coming back from Stockholm where I’d been on a business trip and the only way I knew that I could guarantee to be able to do both these calls was to actually stay the night in the airport hotel in Stockholm and then fly on the next day because I knew if I flew the plane might be delayed and I’d miss these critical calls so I did these two calls one after the other and at the end of the call the bankers said so congratulations your you know your company will be listed tomorrow and it’s going to be worth X billion on the on the New York Stock Exchange and then a similar call with Just Eat and then after that I was just on my own in an airport hotel, walked up to the mini bar, it was a kind of surreal and odd moment for me.
34:39 It should have been the pinnacle of my career but it was quite a reflective moment but we did celebrate a little bit a few weeks later once Just Eat went out. That’s a great story. I love it. I want to ask you a question that you love answering and that is where is Europe’s Silicon Valley? Silicon Valley Silicon Valley is the question I would respond it’s a state of mind isn’t that what they say? I think it’s definitely changed so I think when when we first started investing in Europe which was before I joined index in the in the 90s but even when I joined in 2002 companies could come from anywhere in Europe. And there was no natural centre of gravity. And that made it quite hard to organise events and to put people in touch. So I remember, if there was a CTO who had a question, said, you know, can I talk to another CTO who might have encountered this particular challenge before? It usually meant you were kind of putting someone from Spain on a call with someone in, you know, Finland or something. And what’s really nice now is we do have these sort of clusters and London definitely I would say is the foremost tech cluster.
35:57 We have these clusters in London, Stockholm, Berlin, I would be the ones I’d highlight, where people can get together in person and have a conversation. So now when we have those similar questions arise, like as I say a marketeer who wants to find out what’s people’s experience with TV advertising, how do I measure the return on my TV advertising budget, we can arrange a seminar and get like 30 people together, the next morning or the next week in London. So I think having that velocity of communication, which you only really get if you have a nice dense cluster, is really, that exists now in a few places in Europe, and that’s fantastic.
36:36 It makes, for a VC, it makes it much easier for us to do our job, having these clusters. And so those are the cities, Stockholm, Berlin. No, there’s gonna be, I’m gonna get a lot of grief. I’m gonna get a lot of grief from other places. We’ve had fantastic, I mean, the things, many companies, the companies still come from anywhere and most of our London companies, when you look at the management, the management’s been assembled, not just from all over Europe, but from all over the world.
37:04 So I think we still expect tech companies to spring up throughout Europe. People have great ideas and people have great technical ability. But yeah, I think we would encourage them generally to house themselves and grow in one of those tech clusters if they can. And Paris is, you know, Criteo, another one of the successful exits, has built up a fantastic tech team in Paris. So it’s not just those three, but I certainly think, you know, the tech landscape in Europe has become clustered, not diffuse, and that’s to its benefit.
37:37 What’s going on in Denmark? I mean, you guys have Just Eat, and Zendesk, and Milestone Systems, and Trustpilot. You know, why Denmark, of all places, do these companies come from? Well, I guess it’s… I was going to say there’s something rotten in Denmark, but I thought I wouldn’t go there.
37:52 That’s Hamlet, right? Yeah. That would be too obvious. I didn’t know you were a FESP. So it’s a small country, so I guess they have to export pretty quickly.
38:03 If they want to build a big business, they have to export very quickly. Unlike the US, you can’t, or even UK or Germany, you can’t really build a massive business in many categories unless you expand internationally. And I think the Danes have proven particularly adept at doing that. And the Zendeskis are fantastic examples of that. They had customers from that product from day one throughout the world.
38:28 And I think there’s a very good education more broadly in the whole Nordic. I’d say there’s a great technical talent there. And maybe if I could contrast those Nordic cultures with the British culture is I think in the UK, you have a slightly a harder divide between the techies, as they’re kind of rather insultingly called, and the business people. Whereas my reflection on the Nordic culture is that you have a great level of commercial understanding
39:02 From the technology people, and quite a good level of technical understanding from the commercial people. There’s not these two kind of camps, as maybe is the case in the Anglo-Saxon companies. And I think in certain areas, that’s really, really served Nordic companies well. And you know, Bielmar Winblad, he runs a company called Rap now, and he’s a guy we’ve invested in before in a company called Rebtel and was successful before Incendit. He’s an example of someone who’s got a great, great commercial mind, but understands the technology with sufficient depth that he can understand what’s possible with the technology shifts that are happening and what’s the you know what’s that confluence of you know where or what’s the how technology joins up with the current commercial aspects of the business to provide a an opportunity and I guess Nicholas Zenstrom of Skype was another one who had that who had that dual understanding of both tech and business in order to build a great a great success yeah that’s interesting I guess in London it’s kind of Daniel like Daniel like it’s Spotify is probably in the same boat and some of the King founders as well, great fantastic game developers but very commercially savvy people as well.
40:16 Besides Index, the European VC returns have been pretty poor and I was just wondering if you could tell why you would think that’s true and if you think that might change. So I think the three biggest trends around where most Most of the value in the tech industry have been created the last 10, 15 years, probably I would say mobile, social, and cloud. Those are probably the three biggest and the winners or the platform winners in those three categories have become US companies because you’ve got Apple and Facebook and I guess in cloud you’ve got Amazon and arguably Dropbox as emerging winners there.
41:00 I think if you can be the platform company of when there’s a real technology shift happening, you can deliver astonishing returns as Facebook have. And yes, those are US companies. And I think the question really is, will Europe ever produce one of those? And we’re thrilled to have kind of got on the first rung of the ladder and have a few companies that are getting out for, you know, $3, $4, $5, $6 billion. And we absolutely, as a venture capitalist, have an aspiration that we want to invest in companies that can be worth $20, $30, $40 billion.
41:39 And if we’re going to have that success, it’s pretty clear to me they have to be the companies which are basically the anchor, they’re the anchor platforms in some new platform shift which is occurring. And I think there’s a fantastic chance that Europe could produce one of those. And that’s the reason we’re here. And that’s the reason our investors invest in us, by the way. I think they’re delighted that we’ve got good returns on our funds, generally, and they’re very pleased that finally we have delivered on our promise and got some great returns.
42:10 But the reason they’re investing in us is not because they want us to create billion dollar companies. They want us to create 10, 20 billion dollar companies, and you just keep yourself in business by creating a billion dollar companies, and the only reason you want to stay in business in the VC games that create a really, really, really big company. And I honestly think Europe will produce one, and I just hope I’m here and involved when it happens. And not alone in an airport?
42:37 Yes. You got a good chance of it. You know, Marketplace is something you kind of specialize in, obviously would just eat, and then auto butlers kind of be next. And we’ve seen the marketplace factor kind of go with Uber and things like that. And I was just wondering if you could give us your thoughts on what makes a good Marketplace.
42:53 I know you’ve talked about more acronyms of P’s and C’s, but a lot of people are trying to get into the marketplace business, and I was just wondering how you view it at Index. Yeah. So, it is a great business model. Usually, obviously, it’s the value you create is through a network effect, it almost goes without saying, and there’s often relatively little technology or relatively simple technology you need to launch one of these marketplace businesses.
43:23 That’s interesting, because I think a lot of people think it’s very tech-driven or new tech-driven. Well, the four pillars of value creation are basically technology. If you create a product which someone can’t replicate, their scale effects, and Amazon’s the example of that, you just get so big that you’re more efficient at what it is, shifting boxes or bits than anyone else, or network effects. And the last one I’d say is brand, and I’d say more of the businesses we’ve invested in are really predicated these days on network effects and brand.
43:56 And the funny thing about it is, as I say, I think there’s even a company out there called, which gives you the platform that Uber essentially has, but you can apply it to different marketplace business models. So I think you could certainly get launched quite quickly, but the challenge is because it’s relatively easy to copy, there’s a strategic imperative to grow extremely fast. And that’s why Uber’s obviously raised a vast amount of money and expanded into many international markets very, very quickly, because you have to win the network effect war in every single market.
44:33 And there’s an interesting story there. I spoke to the CFO, Justy, and I said, you know, how much did we actually burn through as a company before we went public? And he worked out it was something like 25 million pounds, which is relatively little. And I think that’s just because people hadn’t cottoned on to this network effect model. And there’s actually another business in the food delivery space called Delivery Hero.
44:55 It started a few years later than Just Eat, and it’s the leading company in Germany. And I think they’ve raised 600, 700 million to get to probably not quite as big as Just Eat now. That just shows how much people have realized that it is a winner-take-all market in these marketplace businesses, and you need to raise a lot of capital quickly to expand very, very fast. So the question was around what do we look for in marketplace businesses, I think. But yeah, I think we look for a fragmented market, and it’s another acronym, fragmented market and frequency.
45:30 Ideally, if it’s a product or service, you use frequently, as Just Eat is and as Uber or the travel services are, those are usually good things for a marketplace business. Okay. And the P’s and C’s, the three P’s and three C’s? Yeah. I did write something about this.
45:52 Yeah. They don’t spring to mind, but I don’t have them down here, but yeah, I’ll have to look up that blog post again. I’m sure it made sense at the time, but you’ll have to… Is it a tough space to be in? We’ll link to the blog post.
46:09 Yeah. Please stick a link to the blog post. And so it is just a war for that network effect at the end of the day, and so just having the tech isn’t enough when you really have to pile the resources in to be a good marketplace. Yeah, yeah, I mean, it is a classic chicken and egg. You can’t get service providers on unless, or they won’t be bothered to join unless you can drive the consumer traffic and vice versa.
46:37 You can’t drive the consumer traffic unless you’ve got a good set of service providers in place. So you have to constantly sort of keep the two sides of the equation, build them up sort of in sync so everyone’s happy and there’s not oversupply or undersupply. So managing that balance can be a challenge. And expanding quickly is really, really important. Yeah.
47:02 Yeah. What a war, huh? Your recent fund, I think it’s 400 million euros, you’re investing it kind of globally and it’s not restricted to Europe or restricted to the US, which I think is fairly unique. Is that the way the capital is going to be deployed in the future? So probably about 60% will go into European companies and 35-40% will go into US companies or there or thereabouts.
47:23 We don’t have hard limits. Most of the other VC funds that invest in a transatlantic often have separate pockets of money, but we have the same pocket of money, which doesn’t mean we’re, always when we’re investing in a company, we’re trying to find what can be the global winner in a category, not just the local winner. So if we believed in a particular area that that’s a U.S. company and we’ve got a particular access or ability to invest in that company, we will back a U.S. player.
47:55 But we really, obviously there’s a strong venture ecosystem in the U.S. already and the reason our LP’s back us is to find great tech companies out of Europe primarily. Are you guys in Asia at all or invested in any companies that are big markets out there? Yes, so we realise it’s an increasingly important question and through many of the investments we make, it rapidly becomes a very important market. So for Croteo, for King, Asia has been a very, very large part of their business. We’re not sourcing investments out there.
48:35 I think you need to have local talent and my sense is if we’re investing in a company in China, they’ve probably caught spoken to a lot of other people before they’ve spoken to us, I’d suspect, so we’re not generally doing that. I think maybe four or five years that will be something, if we’re successful at doing what we’re doing now, that might be something we revisit then. Fair enough. I was wondering what you think it takes to be a good VC to do what you do You know, I come from the city We both come from finance world and a lot of those guys are like I can do what he does You just raise some capital, you know, put some bets out or whatever. But I’m assuming is not that easy. Of course What do you think makes a good VC? What qualities to go back to the point? I made at the beginning I think I think it’s being a nice a good person you you you generally win deals Not by you generally get good performance not by outsmarting other VCs but by out-friending them and winning entrepreneurs’ hearts and minds.
49:37 And there was a good story around Just Eat about why they did choose ultimately to go with Index, specifically where I think one of the other VCs really ruffled their feathers. So that’s first and foremost, that’s the key thing. see having a strong view about themes, what are going to be the trends which influence which create the opportunities where you can invest, that’s important. And having a good filter so you can fairly quickly make a first cut guess as to where it’s worth spending time and effort and where it’s not, that’s important.
50:21 But I’d say the filtrations, it’s a necessary skill set, but not necessarily a differentiating one. The differentiating one is being able to do the deals that you want to do and being able to help the companies that you back. Because whenever an entrepreneur is thinking about taking money from us, they immediately call around all the other entrepreneurs we’ve worked with in the past. who have been successful working with index and ones who have not been successful working index.
50:53 They take their references just in the same way we do. Whatever your financial performance is, if your references are bad, you’re finished in the industry. We chase reference above financial returns. We think that’s the long-term, that’s what makes you successful long-term in this industry. Makes sense.
51:15 That’s the last thing I would have expected to hear. that is about that relationship and I guess it’s a lot such a long-term game as well you’re going to be with these people for a long time and yeah yeah particularly if you know the tech goes in cycles and when you’re you know when you’re in an upcycle you know you might be investing investing and and divesting companies in one or two years but if you’re investing across the trough you might be with that entrepreneur for eight nine years so king A good example, I think we first invested 2004 or 2005 before Facebook, before Apple, or before the iPhone, and they had to navigate all these different technology transitions. So yeah, you don’t know how long the relationship is going to be, so it’s a little bit like a marriage, except if you’re lucky as a VC, you can have multiple relationships.
52:04 I guess it must be a little bit different depending on what level of investment the VC is doing. So for you often, you know, you might be investing in companies that are already doing pretty well, whereas, you know, your venture fund, it might be a lot more, you know, less maybe being a nice guy because at that stage, often the entrepreneurs are grabbing at you regardless of anything and they might have to make a bigger bet, I guess. Yeah. So there are certainly deals.
52:31 We target, we want to get to a 20% ownership or what we call a significant minority ownership in companies and obviously where that’s the case, we try and exert more influence and there have been deals where we’re not able to get up to that level of ownership because the company races away in its performance and they don’t need more funding and we may only end up with 5% or 6%. So yeah, naturally you act differently depending on whether you’re on the board or whether you’re an observer or whether you’re not even an observer and are just helping out a little bit more from the sidelines. But generally we like to be as involved as we can and as helpful as we can.
53:06 I just want to know, for all the people that are listening out there that want to know, what’s the best way and how do they contact a VC? When you talk about the filtration process, what do you want to see when people contact you and what don’t you want to see? So I think within each VC firm, there’s usually some degree of specialization or some partners and associates who are more interested in certain areas, so it’s definitely worth spending some time on the website or at conferences, finding out who’s interested in what sectors so that when you send an email in or whether you try to set up a meeting you’re not just spamming it to everyone in the firm, rifle shots are always a better approach than a shotgun when you’re reaching out to a VC, so both choose which VCs are the relevant ones to talk to and which people in the VC are the best ones to try and build a contact with and the other one is building a contact. I think other VCs have written out a written about this extensively and I think one of them said you know the relationship you know VCs like to invest in lines not points I think was the expression so if you if you can create a relationship with a VC and somehow it creates some meeting before you’re asking him for his money him or her for money that’s great so so it is worth attending the conferences it is worth you know, following the blogs and commenting on what people are saying and
54:31 So that there’s some history already there of a relationship with that you’ve got with a venture capital firm and investor before you come to that critical kind of pitch moment. Good advice, good advice and then be well-rehearsed when they do pitch and how do you feel? Be honest, I mean I’d say just be honest and strike the right balance between humorous a bit, sometimes we’ll say stuff and listen, it’ll probably be wrong but smile nicely, but I think that what we want to understand a little bit when we have meetings with people, we absolutely want them to be visionary and have real passion for what they’re doing, but we also want them to be able to listen. It’s not necessarily that what we’ve got to say to them in that meeting is a pulse of wisdom or even good ideas that we might have for them. They might be bad ideas, but if they’ve got no ability to listen, whether it’s to us or anyone else, then I think it makes them hard to back. So I think it’s being confident, but also trying to establish a conversation, not a pitch. If you’re in a pitch, then it’s wrong. I think usually we invest in people who we feel we’ve had a bit of a pitch, but then a good conversation with.
55:54 And how do you feel about persistence? Yeah, being persistent is good. Be careful. Being persistent is, you know, obviously, when you’re building a startup, you’re going to have to run through a lot more walls and a lot bigger and higher and thicker walls than just raising the VC funding. So I think being persistent is good with limits.
56:18 With limits, right. Okay, I don’t want to get picked. I know what you mean as far as that. Ben, we always ask everyone that comes on the show a few questions at the end and I’m gonna ask you, if you could make a phone call to the 20 year old Ben Holmes and give that young man a bit of advice, what would you tell him to do? I actually think, I mean I love the job that I’m doing, but I actually think if I could have replayed my life from when I was 20, I probably would have actually invested more, I actually studied engineering, but would have actually spent more time actually learning to code and develop.
56:50 And I think I might have been able to be successful in that vein. I think being a VC is the second best job in the world and being an entrepreneur is the first. And those are really the guys who are changing the world, not the VC. And I think in terms of how the world is changing, I’ve got young kids and I think the advice that I’d have to them is the only way they can guarantee that they’re always going to have a job is to be an entrepreneur because so I think I think that’s that’s when I think about them that’s definitely the skills and traits I’m trying to help them develop. It’s like what Rich Dad Poor Dad says you know yeah make sure yeah you’re not just trying to work for someone else but you know kind of creating value. Best advice you’ve ever received business or personal? It’s always a tough one. Yeah. Any VC advice from senior people when when you first started off at Index?
57:51 Well, Danny Reimer, he took me into Index when I first, it was just two of us in a basement in London. And he was a fantastic, fantastic guy to work with. And he used to have loads and loads of quotes from a guy called Jim Barksdale. And then you can actually read a series of his quotes. But I think the one that I like involves a snake.
58:15 Something around, if you see a snake, kill it. And never touch dead snakes. And the last bit of it is, great ideas, or whatever it is, always look like dead snakes. So I think what he was trying to get across was, I think it’s really important that when you have an argument or when you have a disagreement, make sure you park it, put it behind you, and move on. But always at the back of your mind, you’ve got to be testing the status quo and thinking about just because something was agreed in the past, a little bit of your mind’s always got to be questioning that and thinking, did you do the right thing?
58:52 So that one stuck with me. I probably misquoted it, but that was a good bit of advice. It’s tricky, because you’re looking for the next great idea. But if you look at all the great ideas, they didn’t look like great ideas at the time. Google was the 12th search engine.
59:05 Airbnb sounded like the most ridiculous thing ever. So you have to be looking for the great idea, but know that it could be disguised as a bad idea, right? Exactly, exactly, exactly. And yeah, many of the, as you say, many of the very, very best companies had to change and pivot a lot before they found that success. You know, Ben, we could sit here and ask you more questions for an hour, but I think we got the meat of it, right?
59:29 Absolutely. And I think anyone listening will now have a bit more of a feel as far as what you go through. And I was surprised to hear that, you know, you end up having to be a really personable, you know, guy, because I didn’t think that’s what would matter. but it makes sense, you know, and the fact that you’re in competition, you just, you think of all these top VCs and you think that you’re the one choosing, but ultimately, I guess if it’s a good deal, you should be competing.
59:49 If you’re not competing, it gets your word. Exactly. Exactly. You’re the only one who’s like, oh, that’s a bad snake. Right.
59:56 How can people get ahold of you? Can they email you directly to Twitter? Absolutely, yeah, yeah. No, no, no, so I’m on Twitter, I’m not a prolific tweeter, but Index Ben occasionally put stuff out there and we blog at indexventures.com, And yeah, you can always reach me at benh at indexventures.com and we get a lot of emails, so please don’t be afraid. If I’ve not, the one sad thing about this job is that stuff does slip between the cracks and it may be that people perceive that I’ve been rude or haven’t got back to them.
1:00:26 And if that’s the case, I apologize in advance, but please just keep emailing and calling and would love to meet almost all entrepreneurs I can. That’s the pleasure of this job. Wow, that’s fantastic. IndexVentures.com, excellent website, it’s got bios, great blogs, 1800 jobs up there. Seriously, you can go on and look and look at all your portfolio companies all over the world.
1:00:46 You can search by city, I don’t know, very well put together. So, that’s so impressive. I don’t know, Colin, what do we say? That was- It’s great, I can sit here for an hour, yeah, so. I know, and ask more questions, I know.
1:00:57 So, well, if you’re out there and you have an idea, check it out, IndexVentures. Email Ben, but like he said, find the right partner and do it the right way with the relationship. No one likes to be shotgunned, including Mike Butcher from TechCrunch. Or even us at Silicon Reel, we don’t like to be shotgunned. We like people to kind of pitch us with good ideas and- Do a bit of research.
1:01:14 Yeah, do a bit of research. So if you’re listening to us on iTunes, you can come see us, our beautiful faces on our channel on YouTube. And what can I say, we’ve got Uber next week and a lot of more exciting companies coming up. As we say on Silicon Reel, it’s about the people. It’s just kind of what he said, right?
1:01:30 Be a good person. Be a good person. And thanks so much, Ben. All the best, it’s such an exciting story. I love that you guys are having successes and still being humble, so thanks so much for coming.
1:01:38 Thank you very much, really enjoyed it. Cheers. All right, guys, take care.
