When to Raise VC - and When It Destroys Discipline

If capital is supposed to make companies stronger, why do some of the most efficient companies emerge when they can't raise any venture capital? What actually determines whether venture capital creates value or destroys discipline? Today's guest sits at the intersection of venture capital strategy and long term capital thinking. He is a partner at ParTech VC and previously worked at H14, the family office associated with the Bilosconi family as well as the consultancy Bain.

We connect that perspective with real founder outcomes, including companies like Flix, which scaled with significant capital, and Emma, which reached over 400 million euros in revenue with minimal funding and strong discipline. A little disclaimer, the most recent numbers are not available to me, but since they sold half of the company to conglomerate, they are close to getting to 1 billion euros revenue. Hello and welcome, everybody. Simona, great to have you here.

Hi, Joe. Great to meet you and thanks for having me. Totally my pleasure. You had quite an illustrious career so far.

When you look back at your own career, what shaped your philosophy on capital and risk? Absolutely. Let's take it from here. So let's say that basically I always wanted to be an investor even before I started the Bain & Company.

So when I joined Bain, I proactively decided to, invest most of my time and spend 50% of my time on the project on due diligence, for private equity funds, strategic planning projects, cost-cutting projects across multiple industries from luxury, med tech, pharma, oil and gas, diversified industrial, B2C. That helped me basically learning two things, how different industries work and especially how a P&L looked like, especially a top-notch P&L looked like in each industry. Um then i basically when i moved to age 14 i learned how to invest in the growth stage and so i really, uh understood how to apply what i learned at ben and company more on the tech side especially because i was investing already uh at the later stage and so, i had the opportunity to help also some entrepreneurs in scaling.

Their businesses. Now at Partec, basically, I'm investing at Series A and B, so much earlier on compared to what I was doing at age 14. And basically, I'm using what I learned in the first 10 years of my career to, A, to understand which are ideally the companies and the business models that work better than others. And B, when my portfolio companies reach already a certain scale, I can help them in identifying early on the issues that they have and, you know, solving them and scaling them.

Uh scanning basically the the business uh ideally becoming uh you know large businesses and also profitable. I was wondering you you talk about learning what did you believe early on for example when you started at main um that you now think is wrong In terms of uh you mean for venture capital or in general? In general investing, but especially, of course, 91 percent of our audience listens for professional reasons. By the way, there's always audience feedback link.

You can take it every time, wherever you're watching this or listening to this. So especially in venture capital investing. So listen, I think that is, you know, consulting. I think it is good when you start working because you learn a lot.

Maybe what the output that you generate is not super useful, but for sure you learn a lot. So what I would say is that I wouldn't use or I wouldn't hire consultants for any kind of need and assessment. That I have to perform on my portfolio companies because by the way, I can do it by myself. But very often, you know, CEOs were hiring consultants just because they were, they wanted to put the finger to the consultant and blame them just because they said what the CEOs wanted, to tell to their managers.

Okay. So this is a little bit how it worked. But consulting is a good school, as it is also investment banking. Pros and cons of the two experiences.

Of course, you learn different skills. Little disclaimer for my laughter here. It was not about Simone. It was not about the consultants.

It was about my memory starting out in consulting. Simone, what was the most common misconceptions founders have about venture capital. Usually I would assume the most misconceptions are cleared out after seed. But there should be some misconceptions at the very start.

For example, what I see with most early stage founders, it's venture capital. So I pitch it. They don't understand that it requires different expertise, different stages, different industries. Yeah.

So let me say that today in the venture capital industry, both on the investor side and on the founder side, there is a big ego topic. And a lot of decisions are made also driven by ego sometimes. I'm not saying always, but sometimes. And not rationally.

Okay. And I can understand, you know, young founders with a lot of ambition that they see their peers raising massive round, you know, hundreds of millions at super high valuations. And they probably just look at the positive side of that and they do not understand the implications, that those rounds have in terms of, you know, the liquidation preference stack that you might have on top of your head, especially if things are not going well. So I think, you know, it is very much important to understand early on if you want to embark in a journey with a venture capital Because the moment you race around, this is not just.

A first milestone of success, but basically you are automatically raising the bar and you are embarking on a journey where the speed has to be much faster compared to what you did before. And, you know, capital is accelerating things, is accelerating growth, technically, but it is also accelerating issues. So if you don't have the right machine, the right people in place, you might risk to hit the wall. A very smart friend of mine told me, basically, all venture capitalists are sharks that will hunt you if you're not fast enough.

Would you agree to that? He didn't instantly say no Let me tell you something. Private equity funds can be considered as sharks. Okay.

For venture capital fund, I wouldn't define myself a shark when I pay very hefty valuations, okay, at enterprise on a very limited traction just because a company wants to raise a certain amount of money that is typically quite big. And of course, there is a rule of, you know, 20% or even less of dilution. The thing is, our job on paper is to make money, to deliver our clients, are both the entrepreneurs, but also our investors, the LPs. So at some point we need to generate money.

If of course we see that things are not going well, we need to take actions and to explain to the entrepreneurs that things are not going as expected and he has to change something. Then of course it is market standard to have the 1x liquidation preference on each round. And then, of course, okay, you might blame and you might say that that is not fair. How can I say?

Welcome to life. Life is not fair. For sure, there are some funds, you know, the very large fund that are very much power load driven funds. They tend to you know invest in a high number of companies but just to spend time on those that are going very well and they tend to forget a little bit about those that are not going well, the other VC funds that are not focused on power law and that basically they, in a way tend to minimize a little bit the loss ratio, my view is that they are a bit more supportive also in companies that are not performing super well, just because they want to try to have maybe an early exit and to sell the company, I don't know, to a corporate.

Yes, of course. I wouldn't define venture capitals as sharks, but my personal view. I still find it funny that you didn't not instantly say no. But we are already talking about scaling companies fast when you invest venture capital.

What we say is the first sign you look for that capital, venture capital, your venture capital will actually improve a company? Look, I think that companies are made of people, okay? And, you know, I don't think that companies with more revenues are better than smaller companies. Companies that have a solid tier one top management are better than others.

So the sign that I want to see is a willingness and ability, both things together, of the founding team of being surrounded of top talent, top managers. Because, you know, and by the way, it is very difficult and I understand that because typically the company is your own baby. So sometimes it is difficult, you know, to let it go and to delegate. But it is important long-term to have someone that has more experience than you and that can do things much better than you.

So the ability of selecting people and then, you know, also the willingness of hiring those people is a key point for me. What would you say is a signal that capital won't improve this company? We've been talking about the human factor here. Would you say that's also the most decisive one?

Probably, yes. Absolutely. Absolutely. Because it is when you have the right people in place, it is when the magic happens, right?

If you don't have the right people in place, and of course, not everyone is the right person for the right company, but when you have the right mix of people in place and the right culture is created, it is when you have the magic happening. We've seen companies here at Startup Radio, for example, like Emma Sleep, they scale to the last available public numbers on 950 million in revenue, million euros, with very little funding. What did they get fundamentally right? So let me say first that I never had the chance to look deeply at Emma, okay?

But I know quite well that space. So Emma basically was playing in a vertical where the consumer have a very low. Repeat rate, repurchase rate. Okay, so if you buy a mattress basically this year, probably you won't buy another one in the next two or three months.

That means automatically that you need to have a customer acquisition cost that is lower than your contribution margin post cost of production, post cost of goods sold and post, logistic cost. Okay. And so I guess that, A, since day one, they set up the operations in a very asset-like way because basically they didn't have their own logistics. They didn't have their own production.

They just had a sourcing team in Southeast Asia. And then they basically relied on third-party provider. And then more on the customer acquisition side, again, I'm not sure, but I think that they did what my portfolio company, Coro, did also. So meaning using the microbloggers on Instagram because that can give you a lot of variability, because, you know, they give a lot of discount codes and basically you pay only on performance.

And I think basically they were in the right vertical at the right moment because then COVID started. So probably there was also a pickup of the revenues and, you know, multiple e-commerce companies were pretty high back then. Post-COVID-19. Who knows what would have happened?

But, you know, they sold the company at the right moment. And I think that, you know, it was a massive journey. So congrats with them. Chapeau, as they say in Paris.

By the way, we interviewed the founder. Basically, he said they were too honest in their pitch decks. They had realistic numbers, but everybody inflates them apparently. And so everybody thought, oh, the real numbers are the inflated numbers and nobody invested.

So that was the bottom line of the interview. Let's get back to that. If that company had raised significantly more capital early on, what would likely have broken first, like culture, product or economics? I see three potential mistakes they could have made.

A, setting up their own operations, warehouses, logistics, that is very difficult to operate and is very expensive, so from a CapEx perspective. B, they might have been tempted to increase, to push up the customer acquisition costs to increase the revenues, basically reducing their margins and overall unit economics. And C, they might have been tempted also to hire a lot of an army of developers that for this specific business, I'm not sure they are so necessary. Just because they might have been tempted to say, hey, I'm a tech company.

I think I know what you mean. Like now everything can be tech. We've also seen spectacularly that co-working is not necessarily tech. I was wondering because I also see that here privately in my company, you're tempted by more available funds that you ask outsiders to do more.

You just try to do more. So does sometimes capital make companies worse because it removes their financial discipline? Well, the reality is that for sure, so let's start from one very common thing. When a company raises a round, there is, a moment in which the founders and the rest of the team, they are so tired at the end of the process, so exhausted because the team basically pushed art, for really for a month to deliver results and not to disappoint the investors that are about to invest.

That they tend to, of course, not always, but they tend sometimes to relax a little bit. And the abundance of capital might trigger what they call the champagne mode, meaning that, you know, you have abundance of capital. So you are not really caring too much whether your employees are taking on subscriptions, they are taking consulting services, headhunters, any kind of expenses. And if you don't check, you don't have processes in place, you know, you might have bad surprises.

Also, more on the people hiring side. Again, if you do not establish and design a target organization and understand which are the right roles that you need to go from point A to point B. You might end up basically overhiring. Mm-hmm.

A number of people that is too high and the wrong type of people. And in that sense, this is not adding value at all. This is destroying value. Because by the way, founders and existing investors got diluted with this round.

And you're not creating value. So this is an issue. So this is typically what is happening when you are raising money. Not always, but when you raise too much money.

What will stick to my mind for the next few years is champagne mode. I like that. You've described that pretty nicely with an outside view. What would you say breaks internally first in those companies?

Again, I think that the most tricky thing is going back to the hiring of the wrong people, because, when you hire, typically you realize that a person is not right for that role after six, nine months. And after six, nine months, you have already spent a substantial amount of time on onboarding and training that person for that role. And therefore, if after nine months you need to get rid of that person and restart from scratch, re-spend money on hiring, well, I think that you might start to create a lot of friction, on daily operations.

So having a core group of people that are there with an average tenure that is much longer than the average is really important because you have one third or more of your employees that change every year, still to be tough, in my opinion. Yes, like in consulting, when on average every year 20% change, it's completely common to have an I'm leaving the company in your mailbox like almost every week. If I would ask you to choose what creates more long-term value, is it capital efficiency or aggressive scaling?

By the way, that's also very interesting given the current scaling race in artificial intelligence. Absolutely. So let's say that, when you are small, let's say sub 10 million in revenues or even five, I think you have no choice, but just scaling aggressively, okay? Because you are too small to become profitable.

If you start reaching 15, 20 million, I think you can have a choice. Let's start from what, by defining what aggressive scaling means to me. I think I see three categories. A, one is price dumping.

That is basically the art of using the VC money to subsidize the price of your product. Two, conquer market share. Okay uh and this is basically very good because later on, once you have a dominant position in the market you can always increase the prices uh b, you can flood your local market with sales and marketing in a super aggressive way and it is basically the other side of the coin uh, of price dumping, because on the unit economics, they have more or less the same impact.

But basically, if you flood the market with your sales team and marketing, again, same stuff. And then basically, you can go international and open multiple markets at the same time. This is really assuming you have a business model that is really exportable. These are the three measures of aggressive scaling that I think are good and okay.

But the moment you see that basically to add one euro of additional revenue, you need to spend an, always higher amount in sales and marketing, I think you need to stop. If we go back to. Basically to capital efficiency, I think that if you are already at 15, 20 million, you can afford, if you want, to say, okay, I still have, I don't know, 10 million on the balance sheet or five, I don't know, something like this. I'm very close to profitability.

I can decide to grow 40% every year, making selected investments. And when selected means I make a proper assessment of what is the input and what is the output. If you grow 40% every year for seven years, basically you reach, this is the amazing effect of compounding, you reach 200 million. That is overall a nice outcome and probably you would have generated a decent amount of cash flow.

And in that case, by the way, in the middle, you can always change your mind and decide to raise capital if there are the right opportunities out there. But it is a nice outcome. And the overall dilution in some cases, of course, is way lower than if you raise $150 million to get to $200 million in revenues. It's a matter of personal choices.

This is how I see it. Which one would you say fails more often? Of course, it isn't an easy one. Well, aggressive failing, because you need always to be in control at each point in time.

And if you have your company that is growing that fast, it's going, I don't know, let's say from one to 50 million in revenues. in, I don't know, let's say two years. Well, there are a lot of things that you need to fix. You need to change constantly processes, people.

So you need really to have a proper, I think, finance department, in place to make sure that you need to track everything because otherwise you can really risk to go off-road. Talking about tracking everything, do you think venture capital sometimes compensates for weak business models? We work! 100%.

So there are two cases. The first one is when there are hypes. Yeah, we've seen this, like ride sharing, fast delivery, whatever is out there, right? There's always a hype in startups, right?

There was quick delivery. There was marketplaces. There was social media. What else did I forget?

Blockchain. Cloud first. I could go for quite some time. Yeah, yeah, exactly, exactly.

Roll-ups more recently. Of course, during a hype. It might happen that the venture capital wants to deploy absolutely into that vertical, into that model. And so if the first company is already gone because it is already too big, I say, okay, let's invest in company B.

But maybe company B is not that great. And so, but if that VC ends up investing there, you say, well, it's good for the entrepreneur. The other case is when you invest in a company, the business model doesn't work super well or founding team is not great, not amazing. Overall growth is not really there.

Maybe you have burned a bit too much. And existing investors don't want, you know, to cut their investment and to put it at zero for multiple reasons. And they continue injecting some capital into the company. And that company might end up selling to a corporate for $150 to $100 million.

And in some cases, the VC will end up having a nice 1x return on their investment. And founder with a little bit of luck might have, I don't know, 20, 30, more or 50 million in return because they have common shares. And so in that case, why not? I was wondering, as we've seen, even weak business models can make tempting acquisition targets for established companies, but what would you say as a VC?

What metrics exposes this the faster? Does you cover up a weak business model with venture capital? It may not always be the losses you are incurring. Sorry, can you just repeat the question?

What's the metric you think is the number one that would expose a weak business model compensated, hidden by injection of venture capital? It cannot always be losses. Sometimes pretty good long-term companies make losses in the start. But what would you say is the number one metric?

Look, I think that at some point, companies, when they raise too much capital, you have the ratio between capital raise and, revenues that they have that start to be a bit too high. And that is not a good this is the first signal that you see, as an indicator of you know issues on that company that's why in some cases when you announce a round, it is also it is always a little bit tricky to announce the true size of the round or to pump it a little to be tempted to pump it a little bit, to show that you are better than competitors and you have more money than compared to yours.

I vividly remember the dot-com boom area where traditionally your losses have been larger than your revenue. Let me ask differently, where do you draw the line between necessary investments and really unnecessarily burn. So, listen, I think that unnecessary burn can be everything related to expenses, due to lack of tracking, reporting, measurement, processes in place, or budgeting choices made without having a proper assessment framework that are not in the end delivering results.

OK, so this is what I define unnecessary burn. Necessary investment to me is something that is absolutely required to protect the existence of the company in its core market or to defend the company from external threats. For example, I don't know, cybersecurity. OK, everything is a middle, in my opinion, is up for discussion, you know.

So these are the two definitions that I have in my head. Also, picking a little bit on your head, what would you say is the first bad decision companies make when they have too much money? Change office. Sorry?

They want to change office. Ah, bigger, more fancy. Okay, okay. They want to move to an insanely fancy office.

This is part of the champagne mode that I mentioned before. They want to change office. And if you go to, if you visit the company in person and, well, you say, wow, amazing office, congrats. I mean, still as a startup, I don't think that having an amazing office is a good sign because I don't think, okay, I understand the corporate culture, but I mean, you are not Google, you know?

Yes, I understand. We've been going over our guest Emma for some time because they grew with almost no external capital. They did have a little bit of investment. But let's go to companies we also interviewed like Flix.

They required significant capital to scale. What made that justified? So maybe let me remind for the audience a little bit how the Flix model works, right? Because I think it is useful.

So when they basically decide to open a new market or to launch a specific route from city A to city B, they select a certain number of local bus partners that basically allocate specific buses to work with for Flix. And same is for the driver they have to be, they need to have the Flix branding and basically Flix is sharing the economics, with the bus partner of each trip once you achieve a certain utilization rate on each trip on each line basically, Flix achieves a pretty interesting margin that I cannot disclose because the company is private.

So on overall, I think that the company has been pretty disciplined in launching new market, on the customer acquisition side, because I remember when I was supporting them, even on TV advertising, they were really spending a very limited amount of money. They were super, super disciplined on that. Flix basically spent a lot of money in acquiring in asset-like M&A to buy basically local players. Okay, so the big chunk of the money was used to that.

They acquired Greyhound in the U.S., the iconic bus operator in the U.S.

They opened India, Brazil, Turkey. They acquired the largest, basically, bus operator in Turkey. So that is where the big chunk of the money actually went. But what I really liked back then of Flix, of Flix's model, on top of the three founders that personally I think that were amazing and I still believe that today, is that it is one of the very few business models that has a global potential that is easily exportable in any kind of geography, and where you can have a global repeat because basically people, when they travel, they can use Flix in any kind of geography where Flix is present.

So this is basically the nice thing of Flix and it is basically quite difficult to replicate. So it is highly defensible. What would have happened with Flix without that massive VC investment in capital? Listen, I think that basically, it was one of the very few business models where VC investment were really required to scale or, in case if they had failed in raising additional capital, basically they would have.

Stopped acquiring other businesses and so they might have found themselves just on a couple of geographies, let's say Germany, Italy and France, they were the three core geographies. They wouldn't have expanded into the UK, into Turkey. And so they would have gone basically, they would have become profitable way sooner. This is how because basically Germany and Italy they became profitable pretty early on, so the business was you know.

Cash generating what would we say if Flix were built today would you find it the same way? So I think yes maybe Maybe they would have required less capital on the tech side. Because, you know, they had a good number of developers in Munich that are expensive, as you can imagine. Today, with the AI that has completely transformed the way developers write code, basically, they might have needed a much lower number of developers.

And so, you know, the cost automatically goes down. But on the rest, I think that, it was the right way of doing it. What types of companies do you think truly need venture capital to win? And which should actually avoid it?

So I think that the, listen, the companies that absolutely require, venture capital are companies with founders that have global ambitions and where the business model has numbers, you know, unit economics that work and that can be exported, outside of your core market, basically where you can create, a massive outcome. uh, this this is the uh this is the reality on the other side to be a little bit provocative here companies that should absolutely avoid vcs, are roll-ups, because it doesn't work vc doesn't work for roll-ups and i'm and actually.

If you want, I can explain you why. But so, keep in mind that every round, for sure, Series A, Series B, has to be done with NVC with 20% or more or less the standard dilution. Okay? You raise the first round, and that one is more or less okay.

So seed round is more or less okay. You use the money to acquire companies that are valued, let's say, 3, 4x a bit. And let's say that they have, I don't know, 10 million in revenues. Then, if you want to grow, because you have just acquired companies that are not growing, you need additional capital.

So you raise another round. You raise another round, and of course, you don't want to dilute yourself. So you raise the bar, you just ask for a standard 20% dilution, and automatically the valuation, the multiple on revenues goes up. So you just spent, let's say, I don't know, 7, 8 million to acquire 10 million in revenues, and you are automatically valued, let's say, 80 million.

Okay. But down the line, if you just end up being basically a package of non-integrated, companies that on the market standalone would be valued at 3, 4, 5x EBITDA. Down the line, you raise to be valued 3, 4x EBITDA. But the problem is that in the meanwhile, you raise tons of venture capital rounds that put on top of your head 1x LickPref.

And so if that happens, basically, you are squeezed after some time. So this is for which I would prefer to avoid that. Guys, if capital can both accelerate success and hide structural weakness, what is the decision rule that separates the two? We are already doing 45 minutes.

We'll do a second part because we are already running 45 minutes.