Inside the mind of a VC
7 questions with Suranga Chandratillake, General Partner, Balderton Capital
As a venture capital firm, we invest primarily in early stage companies, which means quite a bit of risk. We invest in companies where there's a long way to go, so the two big things that we care about are:
Is there a large addressable market? In the end if there isn't a big chunk of the world with a bunch of money filled in it, that you're heading towards, then it's difficult to build a business?
We spend quite a bit of time thinking about what the addressable market is, what they know about this and what the value is of what they’re building.
The second thing we care about is the people, the founders. Our experience is that the product you back, if you're a seed or series, an investor is rarely the one that wins in the end.
What you really need to do is back people you think have the ability and the energy and the commitment to figure out the right path. It can be easy to focus on the now, but what you’re doing is focusing on either market (the long term opportunity) and finding the right team to figure out what the real business and product should be within that market.
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Because we’re looking for those two things, we can generally investigate the addressable market ourselves. We focus a lot of our time and our questions on the people and spend a lot of time understanding the motivation for someone starting a company. What's driving them to do it? What kind of person are they? Are they someone who, once they get obsessed with something, just won't let it go. We want to know, that they understand their own abilities but also their limits and that they can inspire others on what they’re trying to fix. It is about understanding what makes them tick and why are they doing what they are doing and if they can be a great leader.
We invest in Europe, and there's no doubt that there are some cities in Europe that are very strong. The obvious ones are Paris, Berlin, and London. But then there are also several strong cities in Europe, like Stockholm, Copenhagen, Amsterdam, Lisbon, Dublin, etc. We spend most of our time in these obvious regions where there are most startups and most entrepreneurs. However, we’ve found amazing companies in Istanbul, Athens and Madrid. It's important to spend some time everywhere, but those big ones, inevitably is where we spend most time. In terms of strategy, we are opportunistic. Right now, there is a lot of interest in clean tech and sustainability tech, because there is finally a recognition of the challenge of the climate problem, and a lot of regulation in particular that's going to force change. This creates a huge market opportunity, as it’s an area with an explosion of companies.
Right now, there is a lot of interest in clean tech and sustainability tech, because there is finally a recognition of the challenge of the climate problem, and a lot of regulation in particular that's going to force change. This creates a huge market opportunity, as it’s an area with an explosion of companies.
You can never expect to eliminate it (risks). Typically, about a third of the companies we invest in will go to 0 and we know that we’re going to make some mistakes.
The aim is to focus on the high returns and companies that will deliver that. Part of it is about being prepared. We have our entire investment team involved in producing internal research reports on a regular basis in different areas, to understand the sector before we meet the company and the context of where they are. Who else is like them? What opportunities have we seen in the past? That gives you a great starting point: You can do that work before you even meet a company.
Secondly, we spend time digging deep into that company. What is the product? What is the business model, how it's traction performing, etc. All of that is done by our own team. We don't believe in outsourcing any of that. We think we need to own that problem. Because we are often investing in early stage, there’s a limit to how much that analysis can do you.
Rather than asking: Why do you do what you do? Why do you find it interesting? What motivates you? Ask them what the thing they built exposes? How ambitious are they, how much risk they think this will take, and so on.
We do a lot of analysis on the company itself, but it's interesting. It's often a proxy to learn about the people rather than the thing itself.
We saw a decline in investment levels in 2020. I think we will see a little bit of a decline from ‘20 to ‘23 basically as people get used to that new speed in the market. However, it looks like there will be as much activity as much capital put to work as in 2018 or 19. We are seeing a lot of activity in terms of startups. There’s a lot of small new companies, so the raw ingredient is there and firms like ours have the capital to back them. Some of those companies will fail. Some of them will start to really take off, and then once they do again, I think there will be interest in backing them more in the later stages. I that we'll see a slow recovery over the next 3 years and that what we'll find is that the new norm is much higher than it was 5 or certainly 10 years ago. It may be lower than the peak of a year or 2 ago, but it's still going to be a healthier level of activity.
My biggest piece of advice is the onion skin strategy. You need to be able to tell your story very quickly and very straightforwardly in 2 to 3, certainly 5, minutes. Then you need to go deep into any area that that investor wants to go into, and that's the onion skin, where you start to remove layers and look at what’s underneath – which is the hard thing to do. A lot of founders, because they're so focused on everything, go very deep, very quickly.
That means you end up spending a lot of time talking about one aspect of your business and you never even get to the others, and actually it is important to give people an overall view. You need to realize that most VCs are fundamentally generalists, even VCs who focus on a particular vertical like enterprise software, they're way broader and way more generalists than you are as a founder, who's selling one specific thing in one specific market. Your job is to grab them from wherever they are in that large map of businesses they know about and anchor them to excactly what you’re doing. Once you've got them there you can unveil more detail in different areas as they ask for it.
It’s a real trick though, because as a founder you are focused on the details, and lifting yourself up from that is a hard gear change.
Suranga Chandratillake (left) speaking at SuperVenture 2023
