00:29:03 · Mikk
[00:29:03] S0: You're working so closely with the operators. So here I'm trying to compare being an investor versus being an operator and really the difference between inside a machine, being inside the machine versus being responsible for the machine itself. Where do you see the biggest difference or disconnect between investors and operators? And what does each side consistently maybe underestimate about the other's job?
00:29:34 · Frederik Brandis
[00:29:34] S1: I think the difference in incentives is much stronger in venture capital than it is in what we do. You know, in venture, you have the strong portfolio logic, where you need to have an outlier return. And otherwise, it's not really worth your time. So you always push the founders to have that outlier case while when you're a founder, you know, having a €5,000,000 or a €1,000,000 exit even can be life changing. So that creates a bit of an asymmetry in incentives. And I think in our case, that is not as strong given that we as a fund, we want to have no write offs. And so we want to return money in every single investment that we back. And we will fight like lines that every single one of our investments will return money indeed. So there's no case where we ever drop a founder because that's part of the philosophy and also of the portfolio logic. Having said that, I think as with everything in life, everyone underestimates from each other the complexities of the detail, so I think as an investor, I'm obviously through the experience very sensibilized towards it, but I think these conversations that you have with the sellers, the patience you need to have to lead these conversations, the individual, you know, stories that play a role, you cannot, like, you will never overestimate that because there's so many, and as long as you don't do it as an operator, you don't feel really for every story what could be the blockers. Know, I have a board meeting. There has been a company that we've been discussing with six months, and I guess, like, what's going on? How can we bring this to closure? But then, you know, like, it could be that the owner had dinner with a friend of his and or hers, and that person then said like, Hey, have you considered this and that? And then they sleep badly, then they don't want to do it. Or the daughter of the owner said like, Hey, that... Maybe I do wanna take over the company after all. Maybe when I finish my studies, could kill the deal or prolong the deal. So these kind of details and the work it requires from an operator is, I think, chronically can only be be underestimated. Vice versa, I think I don't own the execution in the platforms, but I own the design of these processes.
00:32:07 · Frederik Brandis, Mikk
So I'm speaking to all our investments, trying to understand how they've done things, why they've done it that way, which tools they've used, how did they use the tools, and basically centralize the learning and then build their best in class process. And that also takes so much time and just getting the learnings. It's never prior A for a company to share with us, but we obviously kind of enforce it, given the mutual benefit to everyone, and then building out this process and these learnings and making sure it's really our opinion that this is the best way to do it also takes a lot of time. And I think that is probably also underestimated. [00:32:52] S0: Now you being this so called designer and at the same time building for exit, you mentioned doing this three, four, five year sprint of consolidating a market. And you again, having this great experience of doing it successfully, looking back at this experience or experiences, what decisions were actually made on the early days. So you know that when this day comes, we are actually ready and prepared for a larger private equity to come in, whether it's growth equity, selling 100%, but you know you're ready.
00:33:30 · Frederik Brandis
[00:33:30] S1: So first, want to say, you know, design for exit. We are a fund, we want to exit. But I don't want to create the impression that what we do is like, you know, we just push them together and fast and let's go and sell it at whatever cost. Like, I think there's a world, especially with these companies that have so much value creation possible where, yes, we design for exit. Yes, our journeys are quick, but we are never quicker than we can excite the people for us. I mentioned that earlier. And one of the metrics that we use is that our groups are always net net profitable. So the subsidiaries will always cover the cost of the headquarter, and we will never have a headquarter that is as big that they would eat the profits of the subsidiaries. If you want to grow insanely quick, that's probably not going to work out. Same for debt. So we don't take debt levels where we have the feeling that if something just goes slightly wrong, the company, because the covenants are so tight, the company is taken away from us, but we rather take lower levels of debt, and it makes sense anyways because the psychology of people, again, is the limiting factor, where we also have some breathing space for times that may be not as shiny as we all want them to be. And at scale, we think that is the best risk return. Now having said that, or when do we know that you're exit ready, I think it's hard to generalize. It depends on market momentum. It depends, obviously, what company is in their life cycle. Generally saying, we think you need to have crossed at least 10,000,000 of EBITDA. And you need to show that you have built a functioning system in itself that can be the centerpiece for further growth. And that is the old magic code word for this integration. And that is the foundation for any exit. And then, you know, also designing for an obviously an outlier multiple, everything else is on top.
00:35:35 · Mikk
[00:35:35] S0: I wanted to ask this because I had a private equity GP of a B Fund on a show a half a year ago, Kai Doveska. They buy companies in Northern Europe. And he said that the mistake he sees constantly smaller private equity firms making is just squeezing everything out from this opportunity and then trying to sell. What they've done and what they see works extremely well is they leave quite a lot of upside for the next buyer. And by doing that, they've seeing many great outcomes.
00:36:08 · Frederik Brandis
[00:36:08] S1: I mean, I'm happy I've said it before in the podcast where you didn't prompt me towards this answer, where I said we do leave value creation for the next one and everything is a return on time. So I fully agree with that. If we do diligence, one core point is the equity story of the next owner. So you don't need your diligence like, hey, can I get a company to go to $10.15, 20,000,000 EBITDA, and is there enough and so on? What is the story of the next person? And they obviously want to see what you've done. They want to have it as easy as possible, and integration is kind of the foundation for that. But they also want to see that you have synergy potential. And of course, I can tell the story of synergies, but to give the story gravitas, I also want to have done it. But I don't need to do it in all of them because you leave value creation for the next owner. And that's also how you achieve outlier multiples. And that's also how you have enough space or time space is the wrong word, time for the founders to actually spend time on integration and M and A. So it's all a balance of where you spend your time and value for the next owner is 100% crucial to the entire journey. So I fully agree.