The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:18:44 · Harry Stebbings, Luca Ferrari
[00:18:44] S1: No. It's not. But what did you learn from that failing? I'm intrigued again there. [00:18:48] S0: Well, I think it reinforced the lesson we had with the Everytale startup I mentioned earlier that we feel we have to be intellectually humble when it comes to our ability to predict what the market will want, particularly when it comes to very new things. And if you're replicating say something that works in The US and you do the same in Germany, I think you can be more sure that it will work. Still not certain, but it's more likely to succeed. But if it's something very new and at the time to my knowledge, what I just described was unique. I'm sure someone will have seen something similar and now claim, I'm uninformed. But based on our research at the time, there was nothing like it. Certainly not the mobile. And so when it's something so new, the likelihood that you are delusional as to the chances of success is pretty high. So I always suggest lower the odds in your equation, assume you're being positively biased toward your idea, the truth is probably worse than you think it is.
00:19:45 · Harry Stebbings
[00:19:45] S1: Can I ask you then, if we switch tags, because that's like creation of a product and again thinking that you can create product market fit with a new one? If we then switch, I'm sorry, you must be really fucking bored of hearing it. But then you switch to Evernote, which is a very well known brand and a very significant customer base. What was the thinking around that acquisition? Because I just call a spade a spade. People were like, that's a turnaround of brand is going down and declining, but you saw value there. Can you talk to me what you saw that others didn't and how you thought about that acquisition?
00:20:16 · Luca Ferrari, Harry Stebbings
[00:20:16] S0: Well, I I don't know what others saw in it or didn't see in it. We thought we could improve the product, monetize it more efficiently, and also run the company more efficiently in terms of costs. So we felt all three levers were offered a little bit of space for improvement. I was so very excited to acquire it and work on it. It's also, I won't deny it. It's particularly exciting to exciting to be able to work on something that is so relevant. Sometimes people have characterized Evernote as as you said, on a decline and it can be true in some ways, but it's still as used or more used than a lot other brands that people think are more successful or cooler. And I I don't want to name names, but Evernote is very important. I mean, are millions of people who have built their professional workflows on it and use it every single day and have thousands upon thousands of notes. So it was very motivating for us to be able to at least try to make it And I think we we have we have done... The team, I haven't done much, but the team has done a lot of work in that regard in just one year. [00:21:19] S1: How do you think about pricing these assets? Because, know, I'm in early stage venture where we all lie and say that price doesn't matter where it still does matter, by the way. But price really matters when you're you. How do you price these assets?
00:21:19 · Harry Stebbings, Luca Ferrari
[00:21:19] S1: How do you think about pricing these assets? Because, know, I'm in early stage venture where we all lie and say that price doesn't matter where it still does matter, by the way. But price really matters when you're you. How do you price these assets? [00:21:32] S0: The theory is simple. Now applying it successfully is difficult. Before you were asking me, how are you different from a private equity? And I said the biggest difference is that we are incredibly hands on product technology operators. So it's not just a financial play. The other big difference is that we acquire to hold forever. We never sell. I I won't say it will never happen. It may occasionally, but it's it's never happened to any of our significant assets. And so we we buy to retain for potentially decades. The the way we value these assets is consistent with this. We don't speculate as a private equity typically would on what the, you know, price earnings multiples or EBITDA multiples could be once I sell it in four years, you know. We literally just look at free cash flows. So we project free cash flows for as far as in the future as we can, discount them, and so it's an IRR NPV calculation that informs our willingness to pay a certain price. Again, that's... In financial theory, that's pretty straightforward. The difficult part is how do you project that accurately? That is devilishly difficult, of course.
00:21:32 · Luca Ferrari, Harry Stebbings
[00:21:32] S0: The theory is simple. Now applying it successfully is difficult. Before you were asking me, how are you different from a private equity? And I said the biggest difference is that we are incredibly hands on product technology operators. So it's not just a financial play. The other big difference is that we acquire to hold forever. We never sell. I I won't say it will never happen. It may occasionally, but it's it's never happened to any of our significant assets. And so we we buy to retain for potentially decades. The the way we value these assets is consistent with this. We don't speculate as a private equity typically would on what the, you know, price earnings multiples or EBITDA multiples could be once I sell it in four years, you know. We literally just look at free cash flows. So we project free cash flows for as far as in the future as we can, discount them, and so it's an IRR NPV calculation that informs our willingness to pay a certain price. Again, that's... In financial theory, that's pretty straightforward. The difficult part is how do you project that accurately? That is devilishly difficult, of course. [00:22:36] S1: And the hard thing is you've got to make the seller wanna sell at the price. Actually, you know, it's like secondaries today, is there's a big chasm between what what the buyer's willing to pay and what the seller's willing to sell at. How do
00:22:36 · Harry Stebbings, Luca Ferrari
[00:22:36] S1: And the hard thing is you've got to make the seller wanna sell at the price. Actually, you know, it's like secondaries today, is there's a big chasm between what what the buyer's willing to pay and what the seller's willing to sell at. How do [00:22:47] S0: you find seller response to your pricing analysis? So we we don't really convince anybody to sell. These people are always adults, generally highly competent, intelligent professionals who have their own clear view of value. What we try to do is be quick and decisive in determining our price. We try to make an offer that's not a bluff, it's an actual very good offer and close to the maximum we are reasonably willing to offer. If they don't like it, we we walk away. But historically, we have never lost a process. Meaning, every single time there was willingness to sell and we had a chance to bid, because sometimes you don't get to know about the opportunity and you only hear about it after the deal is done. Every single time, to my knowledge, our offer ended up being the highest. One reason could be we're terrible negotiators. Another reason is because of our model and being so operationally involved and trying to improve the product, the operations, the marketing, the monetization, everything so deeply. It's a lot of work. You don't scale it as quickly as buying just from a financial point of view would, but you can unlock more efficiencies. And therefore, you can offer a better price.