Cem Sertoglu: Lessons from the Greatest Venture Investment in European History | E1228

the best single Venture investment you know 16.5 million Investments that has brought us back $2.1 billion in proceeds so fund one is 20 time multiple on invested Capital 2.7 of that is non uipath so about 85% of the proceeds of fund one have been uipath I believe uipath went from a million to 100 million AR in 21 months at the time that was I think the fastest ever ready to go [Music] gem I excited for this dude we first did a walk around the park and I was like God I wish this was recorded So

first thank you so much for joining me thank you Harry it's great to be here now I would love to start how did you make your way into the world Adventure first and come to where you are today let's just start there I'm a Founder turned investor uh I started my first company in 1999 in New York horribly timed arguably the worst time in history to start a tech company um it was a company called select Minds uh we were building in social networking software uh one of the earliest uh participants in that space But

hit the crash pretty hard we survived ultimately did okay had a nice exit and uh decided to move to Istanbul which is where I grew up I'm Turkish born and raised in Istanbul and uh initially thinking that was going to be for two years uh when I moved back I started meeting young Turkish tech companies mostly consumer internet businesses and got excited because I at the time I think I saw two things that not a lot of people agreed with me on um one is the fact that people behave similarly everywhere uh especially in their

interaction with technology with consumer technology so uh at the time for example people were telling me Oh you know uh people in France will never buy SHO online and I'm thinking I look at the US I look at the UK and I'm like I that's not right people are people they're going to buy shoes online so uh I saw the playing out of consumer internet uh in the west and looked for opportunities to uh partner with companies that were trying to do the same thing in the rest of the world and so you an angel

in these early companies I was an angel in these early companies I got very lucky I uh a few of my early Investments turned out to be the biggest exits uh at the time in in the Turkish market a e-commerce company got sold to eBay a food delivery company the leader in Turkey got sold to delivery hero these were big outcomes largest exits so it started to build what was the multiple on your angel track I haven't done the math I can get it to you later on but it must have been about uh 10x

overall so why make the transition to venture then you're super successful Angel and you're liquid great question it was out of getting nervous because what I saw is I was able to Syndicate the first couple of million dollars into these companies but then the moment they needed anything above $510 million there was no uh nobody that targeted that stage uh in in our region so I'd have to come to Silicon Valley or New York or London and convince people who didn't really understand uh our part of the world so I thought if I raise a

fund to focus on opportunities in in Eastern Europe and turkey then uh I can follow on and maybe support these companies for the couple of rounds after my initial entry uh because I thought if I couldn't do that some of these companies might actually go bust so it was out of fear you'll learn that we have these beautiful schedules and then I kind of just go off pieced on them but you know you mentioned that kind of the post5 to10 million the lack of funding that was very clear to you I think we have this

huge element of tourist Capital that we saw in 2021 moving to geographies which they weren't normally and we've seen them all retract corre have you seen a huge retraction cash out of your Market at the A and Beyond of course it happens uh in every cycle uh they Rush In And then they rush out uh very very quickly and also when they rush in they miss out miss out on the nuances of the region what nuances did they miss uh well the thing is startup Venture Capital Playbook is now visibly uh played out around the

world so Founders know what to say uh so they come and a VC that they're meeting for the first time from Silicon Valley sitting with them in Bucharest and they're able to tell a very very compelling story irrespective of what you know whether there's anything behind it so um I think you know uh being able to reference Founders to understand where they come from get a sense of where they go to school which companies did they work at like what's the environment they developed and is there signal there is that what you would expect a

great potential founder to be coming from uh I think you get that only with immersion when you have a damn podcast like 20 VC just give people such good storytelling um but uh when when you actually have that explosion of capital coming into the region a lot of tourists prices go way up is that when you just sit on the sidelines and go hey this is a crazy time or do you still play the game on the field I think our job is to play the game uh I think we're you know our our business

structure is defined by timelines you know we raise 10 10e uh life funds so our job is to expose our fund to the strongest opportunities in every vintage not to try to time the market uh when it's a you know bull market the prices the entry prices are up hopefully the exit prices are up as well so it's uh kind of Balan each other but no I we we felt that our job was to continue to invest in terms of the explosion of capital it's tied to a statement that Doug leany said on the show

he said van has gone from a high margin Boutique business to a commoditized low margin industry I disagree with that um I think there have been attempts to try to commoditize the early stage Market I don't think it happens and uh I think Doug Leone would be the first to agree that if it were a commodity it would be the same thing to raise from a seoa or from us or from 20 VC or or from your you know dentist who's Angel Investing and we all know that that's not the same thing for a Founder

to be it's you know it's not cash is green and all equal so I don't think it is getting commoditized because it's limited it's you cannot scale it by just pouring money on it I think that's what commodi commodation implies does the volume and multitude of multi-stage funds having very deliberate seed strategies not mean it is a commodity the fact that literally every multistage firm is seed investing you will come out of a Great Peak games top tier School here's 5 million bucks on 25 million it's it's kind of like if you take these boxes

here's your application signed commoditization could could be argued I think if you look at those firms as kind of a one strategy one Investment Portfolio uh I think you could come to that conclusion but what I see it is at the core of their portfolios if they are early stage investors so I don't mean the later stage or crossover type investors but if they're really early stage rooted the way uh you know index deoa Benchmark are then uh I mean actually that's a great point where Benchmark has stuck to their seed strategy so they're keep

playing the game that they know they have an edge in which is uh keeping fund size constant and just deploying you know concentrated portfolio after concentrated portfolio the other firms decide to build essentially a an asset management business adjacent to their early stage strategy and I think that's where they start to look like commoditized products but I don't think they are Jim I'm going to be honest with you I sit in the early stage bucket with you uh and in that kind of hopefully artisan Boutique business honestly Founders want quick cash at a good price

and generally don't want someone to be involved too much is what I see and the multi-stage funds are producing harder and harder competition for me and for other seed players because they say we'll give you a higher price than Jam or Harry will we'll give you more money and we'll leave you alone I think it looks at the it's it depends on the contract that the founder is looking for if they're wanting cash and they want to turn around and run their business I think what you're saying might be right most of the best Founders

we partner with are looking for a contract where they try to align with co-founder like Partners to be on the journey with them and in that case I think they start asking themselves the right questions and that's why for uh some of the top Founders you'll see out there that their Market that their cap tables are not filled with only the sort of very large multi-stage uh firms they pick their investors as as people they almost pick them as if they found they pick uh co-founders will you play the game and what I mean by

that is it's a five on 25 with a great operator coming out of a great uh Peak games or you name your kind of great outcome will you say hey we're going to go head-to-head with index and try and win that round or that's not a round for us um no well well if if we think this is a Founder that we can align with and if we feel that chemistry with a found found uh if we see that the founder also understands us and can understand what we bring to the table absolutely and we've

we've gone into situations like that where the founder ended up choosing us over some of the brand names you're bringing up how do you feel about price I think it's is it Scott fgalantai biggest outcomes and we do an analysis of what would have happened what the return would look like if we paid twice as much at the first check and the answer is that it doesn't really matter that much for uipath if we' done the seed round at at twice valuation it wouldn't have really you know made a made any difference it would have

still been a fantastic outcome it would but it would have hared your multiples yes but in that case I mean you know when you're uh at the type of multiples we're at uh I mean that's a you know 16 and a half million Investments that has uh brought us back $2.1 billion in proceeds so uh yes I'll take half of that any day 16 and a half about 2.1 yes and that's after the that's after the selloff so it wasn't even the high water mark wow it is it's one of it's It's power law in

action and it's it's actually a very humbling uh experience to to see because it it shows you you know where you have to play a very disciplined game but you also need to get lucky can I be unfair and ask how much of all your other games been if that's 2.1 billion so fund one uh is a a 20 time uh multiple on invested Capital uh 2.7 of that is non uipath so about 85% of uh the proceeds of fund one have been uipath but if you take it out it's still a 2.7 times Fund

in fun one which is a very good fund yes it's I think it would make it a top quti wow that's amazing okay so like two opposing thoughts at the same time yes so on the one hand we know that valuation doesn't matter on the other hand we cannot operate like that so we also as a as a firm we are ultimately Tethered to some idea of value uh and and you know what are we paying for and does this does the company we're looking at warrant that so uh I think you know we we

try to not lose on price but constantly question us about the you know is this entry price a fair price that we're coming in or are we now at a point in the cycle or is this firm just getting you know this is this round getting so competitive that the the the term sheet is getting um getting bit up and we've uh We've passed on price uh in the past and uh I think we have a a mixed track record on you know whether that was the right decision or not what did you not do

with the benefit of hindsight you wish you had done and what did that teach you we've lost uh or we we didn't understand a few businesses I mean one example that's probably our biggest loss is uh we met Bolt the car haing company and uh they were called taxify at the time a small baltics ride hailing company and uh even though you know Marcus the founder was extraordinary we really couldn't see the trajectory to be a global leader in that in that space we also had question marks about take rates warranted take rates for an

app where you just signal your location uh we felt that the you know what Uber was uh establishing as the as the market pricing wouldn't really warrant that take rate so we had question marks about the market as well so there we what would I have done differently is maybe been more open-minded about what the ultimate margin structure of the business would look like what round was this uh that was their seed round respectfully the margin structure of their seed or the margin structure of their business the take rate that they have who cares no

of course if I if I'd been able to see that they they'd be a global Contender uh of course it wouldn't have matter but they were just a little baltics uh player in right hailing so I mean I can I can Trump you every day that we one the biggest loss I turned down deal and vant at preed and I did both the times because I knew the founders were amazing but I just didn't like the business I didn't like the category something else other than the founder and so now I have this and I'm

kind of intrigued to hear your thoughts because you know you're much wiser than me I just have this Obsession on Founder and I don't care what they do if they're an amazing founder they get a check for me how do you prioritize the stack between founder market and traction um in that order founder number one uh because ultimately at our stage I think it's the only thing that matters we've seen uh great starts get bungled badly because of uh founder problems character problems ethical uh problems values uh so the founder trumps all we've passed on

few very interesting promising companies because we just could not see ourselves partner uh with the founder across the table um secondly would be Market because everything we do ultimately needs to be able to return our fund if all goes well uh we're in a sort of a high return uh business by taking high risk so the high return should be there so if it's a small Market if it's a crowded Market we'll pass uh the traction at our stage is tells us something in some cases but it's a it's it's it's it's a distant third

can I ask on the it needs to return the fund I agree and I take the same approach do you scenario plan on outcome sizing and where you think that would be we do but then in hindsight sometimes we do the you know post exit we look at our early memos and we laugh about it um again you know for example in in the case of uh uipath I mean we thought it could return the fund uh I mean has it has returned 12 and times the fund already so uh that's that's been you a

very miscalculated analysis but we we do do it it's a part of the I think the discipline of just making sure that the the Market's there so when we go back to the kind of cottage industry like vibe that we both sit in and then also the multi-stage asset class vibe that is also there Founders have a choice what do you advise Founders who are sitting looking at these two very different products contemplating racing a c I think the word we end up coming to is care when you are a small partnership I mean and

our firm uh for every fund each partner writes about four or five checks per fund uh so in kind of each vintage we're talking each year we're talking about one or two Investments at most so uh in terms of the capacity attention and care that that founder stands to receive from that founder um I'm sorry from that partner is uh probably very distinct from what you would see at a firm with a much broader portfolio um and a you know turnover uh of personnel uh we've had very very low turnover uh do you need a

board seat with every chair um if it's warranted if our if our check is big enough if our space in the uh cap table warrants it uh yes we usually like to get a board seat but not every time will you do a single digigit ownership deal we will we we try not to be dogmatic uh if it makes sense if the math Works uh I mean our typical first check ownership is between 10 and 20% but we've gone on either side of that yeah that's it's always a hard one my biggest mistakes most recently

11 labs in particular is right I you got like 2% and I was like it's just not enough and actually 2% would have been great in hindsight yes but then you know I think I think you should stick to principles I me and we do that as well we've passed on uh in some cases because of uh the ownership just because it's we have really a certain number of bullets we can uh we we have only you know four or five Investments per partner per fund how many how many companies per fund um we fund

one had only 15 but I'd say that's probably extraordinar narrow concentrated yes uh fun two had 18 and this is seed uh seed and a okay and we've done selective precede and selective B round Joiner checks as well from both funds are the B round Joiner checks good you know fund one uh we have one of them uh we'll make money from it uh it's not uh it's not the strong performance driver uh for the fund uh but again if it if that company goes into a billion dollar outcome which it might uh then it'll

it won't return the fund but it'll it'll carry its way a lot of Founders hear from us that signaling is very real and the dangers of it do you think signaling does exist or do you think it doesn't I think signaling does exist very strongly uh and we try to in every investment we make we really try to analyze the signals we're getting from the capital table uh from really everyone and how they're behaving how they're voting with their shares uh you know uh not literally but like you know their follow on decisions lack thereof

uh I think they they provide lots of interesting Insight what are the biggest reasons for you from your experience companies don't scale efficiently from 0 to one from C to a raise a great a around what are the biggest commonalities and why they don't I think the biggest impediment to that scale uh for some companies is assuming product Market fit prematurely and being tempted into going into hyperscale mode prematurely why do they assume it prematurely do they have the wrong data do they have the wrong objective do they just believe the hype what is it

I think it's a combination of all all the three you mentioned uh first of all ours is a is an industry that fetishizes growth and I mean as you know the easiest metric to grow for a Founder is headcount and uh it it creates this sort of uh perverse validation sense uh they've just raised a large round very successfully they have the budget they put out the ads they hire the recruiters and Off to the Races they go and of course uh when you're especially on the goto Market side if you're scaling your go to

market team then you give them a script and they start working off the script if that script is not a perfect fit for where that company is at the moment then the sideways trailing uh starts to starts to happen and uh yeah losing the ability to adapt and iterate especially on the go to market side is is what we've seen as the as the biggest cause of that kind of sideway sideways trailing off when that sideways trailing off happens do you communicate that super clearly to the founder and how do you think about when enough

time is you don't want to be jumping in too fast you don't want to be too negative too soon how do you think about correct uh first of all we we believe in being quiet on the board and uh it's it's it's a it's a skill that we have uh spent a lot of time thinking about and and also uh through our kind of apprenticeship model internally we uh try to distribute within the firm why because first of all I mean we're you know we're we're the only asset class where the asset chooses the investor

right so there's this enormous pressure to demonstrate value ad and what this means um is and and and social media unfortunately compounds this that there's this temptation for VCS to be coming up with uh aphorisms around you know uh what a company story should look like whereas every company is unique every company has its own pace its own trajectory and uh we think that you know you of course learn from your experiences in other Journeys uh but then synthesize that and distill that to very carefully chosen moments to provide input to the founder I think

your job as a board member is to understand the company be very well prepared on any interaction like the board meetings Etc where obsessive about preparing for uh board meetings but we are very careful in choosing when we share strong opinions so I'd love your advice then when I have tough topics that naturally come up in a board meeting I'm always torn in two ways one I should air my thoughts and opinions and concerns because gem might have something important to add someone else might have something important to add in it might be a valuable

exchange of perspectives but then also C at that with it's also sensitive topic it's maybe personal towards the founder that it might be a criticism in a bad way and I want to be just respectful of not throwing them under the bus so to speak how do you balance between the two first of all I think the the board Dynamic should the healthy board Dynamic is one where with all the board members around the table but also in one-on-one conversations with the founders as well so I think it's very difficult to uh have that conversation

come up for the first time in a board setting if it's sensitive like that I think you know the valuable relationship with a Founder that the board member or VC has should allow for uh a better introduction better timing etc for that uh sensitive topic but um you know I think beyond that uh again uh as long as you're choosing what important few topics are carefully then uh bringing them up should not should not be a problem you said most investors have lost the skill of being quiet my push back on that is we sell

the most obvious commodity of all which is Cash yours is the same as mine and mine needs to be greener than yours and so we are marketing and we are marketing machine as an asset class do is that not understandable I disagree with that I think our what we sell is not our cash the cash is available it's uh I mean the seed and a uh rounds are flush with new capital coming in all the time so I think what we sell is our time and attention and capacity and we're selling one of those 20

slots in that funds portfolio that I'm going to be devoting my entire set of resources for the next 10 years that's what I'm selling do you think the best Founders really need their investor the best Founders need a group of smart aligned individuals that they know are on their side and and pushing in the same direction rowing in the same direction as they are when they're trying to create this miracle called the successful startup because I think every successful startup is a miracle they shouldn't happen do you think the boards that you're on are valuable

to the founder I hope so not you but the boards I hope so I mean we've seen we've seen board Dynamics where uh alluding to what I was saying uh minute ago um there just so so much pressure to demonstrate value ad that we find some board members just get overly eager to to contribute to add to maybe even uh iterate over and over uh topics uh that maybe don't warrant it but I think it's important to understand that first of all the founder always knows their business better than us a lot of times they're

smarter than us they're certainly harder working than us they have more skin in the game with us so our job is to just sport support them when we can um and when they need us how do you advise Founders on the valuation they raise at early I'm sorry for this being an off field question I was just going through it and I said to the founder raise it evaluation you feel incredibly confident you can raise it 3x the price of on the next round it's a good heuristic I think for practical reasons that's a that's

a good Benchmark whether it's two two and a half or three that could be discussed based on the stage but more or less I think that's a good heuristic a good rule of th what we try to align with our Founders is the early rounds are not real rounds they are contracts where you're demonstrating alignment around around a Target that is very far out ahead I mean every early stage check you're buying a very outof the- money call option on these businesses so it's it's not a trade I think a lot of people get that

wrong it's not a trade it's a it's really a construct for an alignment for a partnership where the founder is saying you know what I'm going to have a few people around this table on this journey with me and uh what I'm saying in return is you know this company and your team the founder team is going to be one of my four or five slots for this fund so for the next five years I'm all in with you on this I think the early stage the seed round a round is really a contract that

establishes this alignment it's not a a real investment it's not it's not the same as buying Apple shares in the market what are the biggest ways that Founders and VCS become misaligned I think you know we usually try to uh sort of disagree with the with the founders uh in the term sheet process at least once so that we kind of see the Dynamics of what uh what happens uh around then but uh so usually what uh what we see companies sort of go in a wrong direction and the board Dynamics go in a wrong

direction is if there was a L of attention in the in the early round discussions if this was a very contentious negotiation around specific uh governance terms Etc sometimes that leaves a bad taste in the mouth on both sides and there's this uh lack of trust that is in place as soon as the investment is done we've had very few cases of this but it's a very uh negative environment to operate in a lot of Founders are told like run an efficient process you know make sure that you line meetings this week's first meetings this

week's second meetings this week's term sheets do you mind feeling part of a very manufactured process if we feel rushed we mind and we will not get rushed into decisions in 2021 when the market was uh in a frenzy we would never categorically pass on a valuation so we've written very expensive checks in that period but we would categorically pass on not having enough time to understand the business and digest the opportunity and sometimes the process that gets communicated us will not let us understand and digest a company in those cases we'll pass and it

doesn't feel good because categorically passing is not right and uh I'm sure there's probably some good companies in there uh we may have pass passed on because it felt rushed can I ask the expensive checks that you wrote have they matured into GR great companies and the real question I'm asking is do high prices lead to high quality the JW's out on on the entire Set uh a few of them a few very critical ones have matured into into and GRE have now grown into the multiples that we ended up uh paying for them at

the time uh a few others are still on their way there um and it's a young portfolio so I can't really it's inter the worst performing segment of our seed portfolio on our farm one was 5 on 25 because they had too much money too soon there was a lack of focus a lack of urgency and actually they struggled to raise that next round because it was already at too high price for the round that they were going to go and race right thought that was an interesting analysis um I think one difficulty in uh

sort of analyzing our track record and and mistakes is the the round parameters have become quite fungible you know what's called a precede what's called a seed what's called an a are a bit all over over the place sure I mean last week was an announcement of a a seed round $100 million seed round at a billion dollar valuation so that's not really a seed that's a unique case that's something else but it's not a seed round so you agree we've seen the eradication of preed rounds I never see precedes U to us precede is

that there's nothing to look at that's what we call a precede okay so I'm looking at one now which is $5 million for the round are do4 million but there's nothing there's two people just with an idea okay that sounds like a very big seed round I'm sorry very big preed round if there's nothing to look at what you do that if we're sold on the founders and the markets since there is no traction we can't look at that do you find it hard to get com I'm finding it hard to get comfortable in this

situation Hony J which is like I get it they're great they come from great companies they're mature product leaders but it's forming in on nothing it's our job to be uncomfortable because we're writing very highrisk checks that that should lead to high return so but high risk always feels uncomfortable so I think it's normal to feel uncomfortable I think it got easier over time for you uh no it hasn't it hasn't no Venture investing is never easy no it's uh I I think it's a very hard profession what's the hardest thing that people don't often

see do you think how long things take and I'm saying this as a very fortunate VC that you know the big performer in our first fund you know matured very very rapidly but uh things take long I think one thing that I think about a lot is wealth and how that impacts on investor mindset does the fact that you are now incredibly wealthy make you a better investor in other words are richer investors better because they only see upside you did very well from your angel portfolio and from being an entrepreneur before do you think

richer investors are more successful I think being so it it should help with the with that risk uh equation um we think a lot about uh GP commitment size uh we have a very high GP commitment in the fund and uh what is it it's uh it's close to 10% of a a $250 million fund um and uh you know we we were very proud of this saying that look you know this shows our confidence in in in in what we're doing and it gets us aligned with our uh with our LPS uh a very

experienced P challenged me on that and said uh wait a minute I don't like that I have you know what I'm allocating to to your fund is the highest return but the highest risk part of my portfolio so I don't want your team nervous because you personally have a lot of money in this fund I want you to take very very high-risk uh Investments as long as the return is there will this High GP commitment make you nervous make you more risk averse I thought that was a brilliant challenge brilliant question um so I think

uh it it kind of plays out on on both sides I also think GP commits are actually flawed in many ways because you a lot of people will say with total respect look at me and look at you and you know RGB commit is is 1% right but it's just me and it's the start of my career and I don't have the liquidity that you you've done very well with and they go well you know other funds have much larger and it's it's so much about proportionality of course no and and if LP can't see

that shame on them I I I think that's inexcusable to to hold a a young emerging manager to to that uh to that hurdle I mean without my first fund outcome I wouldn't be able to put the large GP commitments in fund three totally have you seen institutional American LPS come to your region on mass and allocate or has it still been a gray area for them it's too exotic for most traditional allocators to VC funds so our LP base is is very diverse uh but it's not concentrated in large uh North American institutions what

should they know that they don't know they should know that I think Venture Capital has made the mistake of following private equity in terms of LP allocation categorization and in private Equity Regional investment strategy ultimately is exposed to the regional macro Dynamics whereas in Venture Capital because the outcomes are typically Global outcomes you're uh you may have you may be hunting in a region with certain macro Dynamics but the outcomes are never impacted by the macro my my portfolio is a global portfolio my outcomes are American outcomes you know London Stock Exchange outcomes you know

acquisitions by Global Tech companies they're not uh outcomes that are subject to the turbulence of whatever you know country that founder team may be coming from how do you respond to an LP who goes there's political risk there's currency risk oh building a business is hard enough um we go to our track record and show them that there was not a single case where any of our portfolio companies were impacted by those risks when things when bad things happen to our portfolio companies they're the same bad things that can happen to a a silicon value

based company when you lose a deal why do you lose the deal sometimes on price um you know uh ultimately we have to underwrite to a certain level of return I always feel that there are Venture investors out there with a very much lower cost of capital than us so somebody will come and underwrite the same opportunity to a lower uh outcome in those cases our offer ends up being not high enough so we we've lost on price sometimes we've uh lost on uh ownership Des you know desired ownership where uh we find the existing

investors would not let a new lead investor get to the level of ownership that they would they would like to get um those have been some cases we mentioned turning 16 a half into 2.1 billion I do want to discuss that I spoke to Daniel before the show I think it's probably one of the greatest Venture deals in European Venture history probably the the best single Venture investment that's pretty good intro to the show isn't it I mean let's be honest uh so I wanted to start on that how did you meet Daniel for the

first time so Daniel had been building a company called desk over uh I think since 2005 or 2006 uh it was a more of a Consulting uh firm uh that was doing custom uh Automation and uh different sort of back office uh uh applications for uh different workflows for various clients um we met him in Bucharest I think the company was 12 people uh when we met him and he struck us as having being at the right place where you know here's a Founder who was deeply immersed in the problems that his clients were facing

on a day-to-day basis very technical so had a very strong Vision on the immediate problem he wanted to solve he didn't start out with painting a ultimate picture of what uipath would look like 10 years out as a you know large Global enterprise software company but he was very keenly focused on what is the next feature he would need to add and how long that would take and what would that solve at what customer or what new customer would that then allow him to sign so very pragmatic very iteration focused very technical very Hands-On he

also wowed us on how he saw what he was building to be so applic able in so many diverse situations and uh he came and convinced us that at one point every single company in the world could be his customer was he immediately exceptional being honest in in these regards that I talked about yes now what we were worried about when we first met him and we spent a lot of time with him we met him in 2014 we ultimately wrote the first check in 2015 so we had maybe six to nine months that we

were able to spend with him and team uh one concern we had was is he a goto market leader and because you know our Eastern European rooted Founders are not polished you know his English wasn't fluent uh he was not a great narrative Storyteller at the time you know can he be the sales leader here we introduced him to a few either sort of early hires or potential co-founders to to to kind of join him uh with with sort of uh you know uh very senior responsibility in the company and then but along the way

the way he interacted with them one we saw how Earnest he was and how much he wanted to make this happen so he was giving these people the the time the effort to try to see if they would work in the process we got convinced that no Daniel will be able to handle all the responsibilities of a of a of a leader and and a founder of the company so we didn't in insist on this go to market question being fully answered uh at the time uh but yeah he didn't fit the fit the enterprise

software founder mold so when you finally build that conviction to go you know what we want to back Daniel and we want to do this what did the deal look like he was Raising one and a. half million uh initially we thought we should do the full one and a. half million I mean this $150 million fund we would have been able to uh write that check but then we thought uh this is a big enough vision uh that this company also I mean you know at the time he was struggling to raise we showed

the company at that first seed round we showed it to 14 funds to co-invest with us kredo ultimately uh came in with a half a million check we LED with a million dollar and then seed Camp joined us with a $100,000 check so it was 1.6 million raised I believe it was just south of 7 million pre um so that was the that was the initial round 7 million pre this is a company doing about half a half a million in revenues the amazing thing is we had Daniel on the show and it took nine

years to get to that stage yes although I mean he he it's not the same business I mean he he started out as more of a Solutions provider uh and then uh ended up finding the product idea along the way and building a product with respect it's $150 million fund doing a $ 1.5 million check is a 1% check correct why didn't you um because you know the most you can invest out of a $150 million fund is $520 million and we know that it costs more than that to build a global software company and

again this looked so off the beaten path you know London base or New york-based Growth Fund to come and uh invest into we thought we may have to support the company in fact uh probably about a year later year and a half later we ended up uh then showing the company to about 40 firms everybody passed I think there I think there every single European VC has passed on uipath at least once um so we had to bridge the company by ourselves I mean not by ourselves uh our co-investors came in as well was it

doing well it was yes it was headed in the right direction the the the numbers were not exceptional but we could see how the clients were getting value out of the product it was certainly headed in the right direction and that's what we that's what our reserves are for our reserves are for those companies that will be misunderstood by the market or overlooked by the market because they don't fit into the mold and uh so we we were able to write that check with a conviction sorry that's that's too good okay so we have this

kind of tween around yes and I spoke to Daniel and he said uh you proposed to the deal at 20 and he would have taken 25 yes and we couldn't agree he said about this three times yes there one that he clearly remembered love about Daniel like even with the success he still remembers this yes yes so uh there's a learning from there like when the numbers are pointed in the right direction double down you know go and do the do the price round we felt uh that the the feedback from the market was so

poor that nobody else was interested what was the feedback the feedback was uh okay yeah keep us posted you know this is not uh not enough traction for us to Care at the moment okay and this is coming from 4 a very large number of firms okay and so we get that feedback right so we then do the do the we agree on a convertible structure I think ultimately it converted at something in the $60 million range uh because the a was was uh at 80 I believe but uh so we we did the convertible

we then regretted the price but of course I mean from that point when the numbers start to show then the picture changed 180° all of a sudden everybody was how much did you do in the convertible uh two and a half so you do two and a half in the convertible so we did one in the seed round two and a half in the bridge round and then we put in $3 million at the a round we we introduced them to excel what changed in that business uh the numbers the traction numbers essentially the all

of a sudden the proof was there out there for everyone to see in that case everybody got it everybody it clicked lots of Interest everybody was wanted a piece of the company you know uh Exel came in and led the a round uh we joined um and yeah it they raised at that $80 million valuation and then uh about a year and a half later or two years later then uh Rich Wong at XL growth came and led uh the the be round at a billion dollar valuation did you do more at the bill in

yes we did we wrote a 10 million late check uh with our hands shaking at the time uh but again that's a bold check for that yes um that's uh actually I mean this is uh the the way we ended up uh continuing to uh invest into what looked like a very strong uh performer in our hands is that's why we raised the size of fund we we raised at a billion dollars that's a tough one to underwrite right how did you think about that the trajectory just the trajectory and the fact that there were

a few things in place one we saw what happened in Japan Japan was a very important early market for uipath and uh the Japanese uptake was very very fast so we could see that when the market conditions are right uh I mean back office clerical work in Japan is hard to fill by uh Enterprises there uh because of the demographic reasons so but we could see you know if one market behaves like that we could see this in other markets as well so the revenue trajectory at the Cy I believe I believe uipath went from

a million to 100 million ARR in 21 months uh at the time that was I think the fastest ever for a company to to have grown that fast so we could see early signs of this this trajectory I mean that is insane my question to you is you said reserves are for the overlooked when they get money from Excel and then Excel growth at the prices they do with the brands that they do this isn't overlook corre at that point no this is this is more let's ride that big momentum that we have our at

what stage do you think actually I'm no longer getting paid for the risk that I'm taking and I could put this into three more new companies no and that was that was an internal question for us at that billion dollar valuation we ended up deciding to write that 10 million and that was that turned out to be the right decision but it was not a fast decision for us then when seoa led the $3 billion next round we set it out we did not participate and then when uh the 7 billion uh valuation series C

happened was it C or C or D I can't remember but then we started to uh carefully devest uh so start to I mean again you know this had been such a big uh Win For Us in terms of returns our kind of prudent investor responsibility to our LPS would be to then try to start to realize uh some of these some of these uh gains 100% I think very wise I think we've told a generation of investors it's all about leaning in and actually the best we have a huge amount of data on this

but the best lean out strategically over time how much do you sell in those increments um it was in in in each case it was uh between probably one and 10% of our holding at I mean I don't think we ever went up as high as 10% is there a kind of strategic thought process behind how much you sell it's an analysis at the time of what our holding of that asset that uh company looks like uh at the time and we try to just uh triangulate to you know uh the price we may be

able to sell at I mean our uh our secondaries were uh all at a premium to the primary round so there was each round was so over subscribed that we were able to actually sell at a premium are share class uh you know shares that are at at the lower class on the on the liquidation uh stack what did the subsequent sell down like uh we ended up I think our high Watermark ownership was 18% in the company and we entered the IPO uh slightly below 10% so we sold uh about I mean I can't

I can't remember the the dilution uh effect on that but uh you know we were still the largest shareholder uh going into the IPO uh in the company uh but uh you know we had also realized uh uh you know already I think three four times uh the fund at that point and then you just sell down 10% a year for the remaining five years um post IPO yeah uh post IPO we uh executed an A A investment structure that was faster than that uh of course we didn't want to impact the price of the

shares but as you know once the stock is public we felt that we have lost our entire Edge in trying to manage that investment and uh I think as early stage investors our job is to then leave that decision to our LPS uh we were able to distribute in kind uh to our LPS Who prefer to receive shares as supposed to cash hard question when the firm does so well it is as you said probably the greatest Venture investment in European history there's a concern of like actually people just don't need to be here anymore

people can go and be an angel they can stop Venture it's a very big concern for a lot of firms who are very successful how did you think about that problem I think it's a very personal uh question a personal decision uh you're absolutely right uh but uh for us I I understand that my team it wants to work for a firm that one day they will inherit and I want this to be bigger than me that this is around uh for decades if not longer and when I look at the best most inspirational Venture

firms out there I see that the ones that have done the best are the ones who were able to create that institutionalization and that doesn't happen with your family office you said you lost your Edge when it went public in terms of what you know and how you act there are firms which feel that actually they are best place to manage positions because of asymmetric information we've known Daniel for years we know the market we know you know all these things Public Market doesn't so we should manage that why do you feel you've lost Edge

when companies go public and they don't um in our opinion Tech sector moves too fast for your Edge to remain uh it it decays your your whatever Insight or asymmetric information you have until the point of the IPO starts to Decay if you're still on the board if you're still an Insider in the company then your ability to manage that position is diminished right I mean then you're essentially like a Founder longterm and our uh our funds have uh a very specific lifetime so you know even if I wanted to hang on to my uh

stake it would only post IPO it would only for a few year be for a years uh for a few years because then uh we have to devest anyway you know because structurally you speaking of structurally you said there about kind of the biggest hardest thing that most people don't know is the length of time it takes to achieve liquidity do you think Venture structures need to change I'd love for them to change I think a 10-year life for a c then uh a focused uh fund is too short this is evidenced by the fact

that almost I don't know a single early stage VC fund that was Liquid by year 10 uh so uh you know and there's is there extensions Etc but it's also probably a healthy pressure and friction to put on a GP team so that they're actually thinking about liquidity as they approach that 10-year Mark even though there's perhaps understanding implicitly around around the table uh with all the investors that it'll probably not be fully liquid by uh by the end of fund life uh as defined as the by the first LPA is there anything with the

UI path process where you look back now and you're like I wish we' done that differently in hindsight we should have participated in that $3 billion round uh by um by seoa um we post IPO uh we did some block trades that felt again uh that as if we were playing in a in a market that we're not naturally suited for um so maybe the divestment strategy post IPO would have been a bit different 16 to 2.1 amazing sadly it's not all that there is sometimes a loss of course uh what's been your biggest loss

and how did it change you as an investor fortunately we haven't had big losses uh I don't think we've lost uh the number that you mentioned in a in a single investment uh and we've had relatively low loss ratios which is maybe even a criticism of what is a low loss ratio in fund one out of 15 Investments only three of them did not return capital for us now six companies are still Al but we expect to make money from all six of them so they will not be loss Mak so we will have made

a positive return out of on 12 out of 15 investments in fund one now when I think about it uh some of the those returns um were capped returns uh they were probably lower risk Investments than we should have made even though they returned us uh Capital they uh probably cost us two higher risk higher return opportunities we should have probably backed that was a learning for us from fun one do you think about downside protection when investing I do because maybe because I was an angel investor before or maybe I'm human uh because I

I know I shouldn't be thinking about downside protection but uh it's it's it enters the thought process it enters enters the equation I think it's overrated why you know as I mentioned before our deals our investments are not real Investments the way you go buy Apple shares on the stock market they are long-term contract around a vision and ultimately it doesn't really move the needle that much whether you have a liquidation preference that can lock in some asymmetric returns if things go bad many times we've seen those type of structures get renegotiated at the point

of liquidity because it just serves one right purpose or another um and uh again you know they've we've never really seen downside protection measures make a big difference in any outcome what has been your biggest loss realized loss uh has been uh about 6 million in a in a company that uh was faced with some regulatory uh it was an HR uh business uh that faced some regulatory uh issues around it and uh laws changed that made their Vision very difficult to execute and they ended up liquidating did that that impact your mindset moving forwards

in any way in that case we had written a followon check where I think about that follow on check uh that uh we maybe didn't have enough data to evaluate that follow on check so that would that could have been a smaller loss uh I think there's a bit of uh learning there that was an early investment of ours uh in our in our first fund so uh I think we were still somewhat novice around uh fund management and fund investing as opposed to personal investing um so the learning is around maybe dcing a followon

investment more thoroughly how do you approach the dilcy and follow on investments today depends on the follow on investment I think it's different when you've written a half a million dollar check and you're writing another half a million dollar check early on in a journey uh whereas you're really doubling down with a 10 million um UI path late check so it's like point. n they have the rule which is like you know what if a great if a great fund does your nextest round we do it to you of course that's a very strong signal

uh but we've we've done I mean the bridge round at uipath no great fund was touching the the company and we had to build our conviction internally I think if you have the luxury to get validated the way uh you mentioned of course final one for you are you worried by liquidity markets today you know we've seen m&a markets close up a lot of competition uh prohibits m&a happening today we've seen IPO markets you know almost shut down entirely are you worried about that if it's a sustaining Trend I am I suspect it's not I

think markets are cyclical I think you know uh exuberance will come back uh We've started the rates uh change direction recently you know we'll see what the FTC governance will look like post election so I think those are cyclical I think it'll come back um great companies uh are defined by sustainability that that they're uh they're not going to they're not dependent on the mood of the markets again you know the the outcomes are very dependent on the Vintage you know the uh I think a very humbling fact is the biggest predictor of a fund's

performance is its vintage uh so you know irrespective of how we will get a pass for last vintage depends on how you played it I don't think you get an automatic pass I think you know the the question rightfully that will get asked would be what did you say you would do did you do what you said um if there is a performance issue can it be attributed to the markets or was it other factors that led to it if it's pure vintage related I think I think uh again it's not a uh coincidence that

funds get benchmarked based on Vintage the majority of funds from 21 will not do 1X agree or disagree uh I haven't seen the underlying data I would suspect that is probably the case I I I I'm afraid that is a right prediction I'm really worried actually about now it's it's a really hard time to be investing gem I feel pricing is insane the AI bubble is just almost more prolific than 2021 from my perspective do you agree with me and do you share my concern I agree I agree um is it more difficult than it's

ever been I'm not sure I think in these uh kind of in between Cycles situations I think things get things get a bit more murky that's why it's important to have clear strategy it's like what's the game you're playing what do you think your edges there are you sticking to that game I think that delivers that gives me confidence I agree do you play the game on the field for AI companies or do you just say this is a bubble right now everything that touches software today is AI there is no software company that doesn't

utilize machine learning and artificial intelligence in some way to do their job better so of course every investment we've made out of fund three the last five Investments are all in one way or another AI companies now are we investing into you know hundreds of millions of dollar rounds of you know foundational models we're not we're not in that come on Jam just it's only a hundred billion did you see that Larry Ellison on stage he's like it costs a hundred billion dollars to enter the race yes I saw at like you know 1:00 a.m.

well he he'd like that to be the case because then you know there's only four players in that game right yeah I mean I'm not sure that's the that's the game listen I want to move into a quick F so I say a short statement you give me your immediate thoughts what do you believe that most around you disbelieve I think I alluded to this but I believe that most people believe wrongly that an early stage investment is is a trade you're you're buying something for uh you know you're buying a share for for a

price uh I believe it's a contract for long-term alignment to build a great company which Venture investor do you most respect and learn from outside of your own firm Fred Wilson was the first person to tell me that I he thought I might make a good Venture investor this is back in 2005 when I just sold my company did he say why he thought I was well-rounded um and he's been an inspiration and a source of learning for me like through his writing uh online uh as as I developed into an investor I also have

a lot of respect for uh USV and uh and Benchmark in how they kept their discipline around you know what they think they do better than anyone else and I think the the results show so those are the two firms I would name most memorable first founder meeting one of our fun two Founders I met when he was six years old and I uh I I picked him for my uh soccer team how old was he when you funded him 12 no he's uh he's about 42 I think when we founded wow that's amazing okay

uh that I did not know that one tell me what's the most contrarian or unorthodox advice for Founders listening Founders usually underestimate the leverage they have on their cap table um they negotiate things for very obscure situations Etc I think experienced Founders know that it's their company and they will have a lot of flexibility around managing things when it happens uh when the opportunity comes down the road so uh I I always find myself smiling when you know we're negotiating a very sort of obscure one-off uh you know far-fetched scenario uh where I just know

in my actual portfolio I know how much weight the founder carries and it's their company you know this is kind of funny what def Founders most care about in the term sheet that they shouldn't I think it goes to my last answer is uh you know they for me the founder for the founder I think the most important thing is probability of success you know is this round that I'm closing is this going to impact my potential of getting where I want to get to as a percentage will it make up for the dilution I'm

suffering so if I'm giving up 20% in this round after after this is signed am I 20% more likely to get to that Vision if the answer is yes then they should they should sign have we seen predatory terms come back in the departure of tourist Capital very rarely we've seen a few uh but usually they're in um essentially very very difficult situations uh so I doubt there will be any good outcomes coming from uh those dirty terms what concerns you most in the world today technology has been a factor in concentrating resources in the

hands of very few uh and I think that is causing a lot of problems right now and it's I think it's going to get worse before it gets better is there any way that can be solving that is that not by Nature just capitalism and Innovation that is I'm hoping you know uh with the with the existential threats uh that our world and Humanity faces uh I think you know uh solutions that are compatible with capitalism or how resources get allocated will also uh emerge however in the short term technology has been a an a

very strong accelerator of the trend what do you know now that you wish You' known when you got into Venture that things take long which so I should be patient final one what question are you not ever asked that you should be asked more I'm surprised Founders don't ask us about uh data around our follow-ons uh I think you know at the seed stage early stages I think that's an important when I mentioned that Founders are buying Care by investors that's actually a very good indicator of care J listen I'm so appreciative of you doing

this as I said I W around the park and I was like I really wish that we were doing this as the show so I'm so grateful that you did this and thank you for joining me thank you for having me I've been a fan of yours for a long time it's it's fantastic to be here thank you