Editor's note: This interview has been recorded and published as part of a content project in collaboration with the Japan External Trade Organization (JETRO).
With €100 million raised for its first fund, byFounders bills itself as a VC firm created by founders and for founders. We sat down with Tommy Andersen at the TechBBQ conference last year to learn more about how this works in practice, and what entrepreneurs can expect from “the collective.”
This interview has been edited for clarity and brevity. Listen to the conversation in full on our podcast.
Q: What is byFounders, and how are you different from every other early-stage fund out there?
I think the key difference of byFounders is that we call ourselves a “for founders, by founders” fund in the sense that we’re not just a financial institution that brings money to startups. We hope we bring a lot more because we're a founder-led and founder-driven fund. As previous founders, we want to fund the next generation of startups with global ambition.
Q: What does it mean in practice?
It means that we have a group of accomplished founders investing in the fund. It's a group of more than 50 people; they provide deal flow, due diligence, networking, exit opportunities — like a wingman to the fund and to the portfolio companies.
Q: You raised €100 million for the first fund. How many investments are you planning to make from it?
We are a Nordic and Baltic-focused fund, and we're supposed to do 40 investments over four years. We've been around for two years and done roughly 20, so we're on pace.
Q: How big are stakes of the collective members compared to institutional investors?
The 50 founders' commitments account for roughly 10 percent of the fund, or about €10 million, and we have a range they can invest within. When they invest, they don't pay carry or management fee, they just provide their help to the fund.
Q: Do you actually think that a VC has to have entrepreneurial experience?
I think it helps in the selection of the best startups. If you come with a financial background, you don't really have any idea of what it's like to be in a startup, to not be able to pay salaries in 14 days' time. We know that, we know the ups and downs of being in a startup. I think that helps in the selection process, but also in the actual aid that we can give the portfolio companies after we've invested.
Q: But still, there are quite a few successful VCs whose partners don’t have entrepreneurial experience at all.
That's true, but then they probably surround themselves with people who do. We're one of the first funds that are founder-led and founder-driven. We think that it gives us a competitive edge in the market versus the other funds. There is money everywhere, so I think it adds a bonus to what we can do for a startup.
Q: What's your sweet spot in terms of stage?
We thought we were going to be a seed and Series A fund, but then we looked at our pockets and found out that Series A territory has become so expensive — we can't do that. So, we're a seed-stage fund.
Q: I’ve listened to a panel with you about the pre-seed funding issues. Can you recap on that a little bit?
What used to be a Series A round is now a seed round in terms of money put in, and what used to be a seed round is now a pre-seed round. The stakes are getting higher, the amounts are getting bigger, the valuations are growing. To that extent, everything is being pushed down in the market, and what you see now is that the clash between angels and institutional money happens at the pre-seed and even the seed stage.
There was one question on that panel — is the pre-seed stage dead? Wealthy angels who have gotten their wealth out by bringing their startups on IPO of whatever they had, they're now buying their way into the good startups either as angels or angel syndicates. Nordic Makers are a good example: ten wealthy guys doing investments as a seed-style fund but with private money. So, the pre-seed stage is the battleground now to get access to the best startups.
Q: But you are not competing there, are you?
Well, we do foot-in-the-door type of investment, so it's not a strategic stage for us to be at. But sometimes to get access to a seed round you need to be in at the pre-seed stage.
Q: If we look at the Nordics tech landscape, what do you think is not there in order to build a healthy ecosystem?
I don't think the Nordics as a whole lacks anything. The ecosystem has grown considerably stronger in the last five to seven years, the Baltics are also catching up quite quickly, so I think with 30 million people we have critical mass on our own now. You see all the foreign funds that are setting up shop in Stockholm, Copenhagen, or Helsinki, so money-wise and resource-wise, I think, we have the ingredients to be a healthy ecosystem.
Q: I read in one of the previous interviews that you said that “today you don't need to relocate your business to get funding and be successful, and this is a trend that we are increasingly seeing and contributing to in the Nordics.”
Ten years ago, if you wanted to raise money, it was super hard to do it locally here, and I saw a lot of good people moving to the US, to Silicon Valley to get the first round of money. These days you can raise three to four of your initial rounds, up to Series B, locally — and then for Series C you'd probably need to go abroad. But the first money in is definitely here now.
Q: At byFounders, do you have any special interest in industry verticals?
We deliberately took a wide mandate, so we don't have any verticals that we're specifically targeting. We're a tech fund in the classical sense, so I think 80 percent of our investments are going to be software, services, and data, and maybe 20 percent are going to be hardware with a strong software or service component. But being a classical tech fund means no biotech, no medtech, no farming tech.
Q: How do you keep the members of the collective still closely involved with startups?
We've been two years into operation now, and one of the things that we've learned is that you can’t have 50 startup founders being active at the same time — and it doesn't make sense either.
We see it as what I call rings around the founders. The inner ring — that’s about two-thirds of the collective — are very active, answer calls and emails quickly. Then there's a middle ring of people who answer calls and emails regularly but not all the time, and there's the outer ring with people who are busy with their own businesses or whatever they’re doing, and they rarely answer calls and emails.
The thing is that people move between the rings. People who used to be inactive become active because they either step down from their startup or get another job, change career, and so on. I think we have critical mass in having more than 50 members now, so it doesn't really have to be every one of them being active at the same time.
Q: What is their involvement like, what do they do?
It can be very different. Some of them are very good at providing deal flow because they are angel investors on their own. They co-invest with the fund, and they are like a radar that shows us what's going on in the ecosystem.
Then we also get a lot of help in vetting investments. If we have a specific investment within the healthtech space that we may not know a thing about, we can reach out to a couple of people in the collective and ask — is it interesting at all, have many other companies done this before, etc.
Q: And after the investment has been made, do they work with startups from your portfolio?
We assign at least one or two members of the collective to each portfolio company. They're supposed to be aiding the startup with operational stuff, opening their networks, getting access to technology partners or other VCs, maybe even customers. We're trying to be an all-around 360° wingman around the portfolio companies using the collective to do so.
Q: So, you got two more years to make 20-ish more investments — what happens afterwards?
We start the Fund II. Once you do all the investments, you can only reinvest in the stuff you already invested in. If you want to do new stuff, you have to start a new fund.
Q: Do you think it's going to be different in terms of the mandate, ticket size, etc.?
Depends on the macroclimate. Everyone says that we're at the top of the current financial cycle. Two years from now it may be another story. So come back in one and a half years and ask me again.
Okay, sounds good. I will send you a calendar invite.
Image credit: Startup Norway / Benedicte Tandsæther-Andersen