Mads, you are a very well- known person in the start-up industry, how would you describe yourself to people who don’t know you yet?
I am ultimately just an entrepreneur who just loves building companies. What I like very much, and what I find this to be one of the most fun things to do in the world, is building companies and creating jobs.
I consider myself in the risk reduction business. Investors have super upside from investing in companies, but returns have not always been stellar in VC. So my job as an entrepreneur is to lower risk, while keeping returns constant.
To mitigate risk you need to look at the three key risks of building companies:
- Business model risk
- Market risk
- Execution risk
First of all, you need a clear and winning business model. Not all business models have equal risk/return characteristics, so we dedicate a lot of time to establish which business model is the best one to build. We then often spend months to fully understand and appreciate the complexity of the respective business model and market. We do this by speaking to subject matter experts from around the world. Secondly, we conduct a global screening for the best markets to execute the business in, visit the markets, interview potential customers and suppliers. Last but certainly not least we bring people with deep experience and expertise in the business model on board. Achieving that execution excellence is absolutely key.
So, to answer your question, you could see me as an entrepreneur in the risk mitigation business, because I focus on building large and rapidly growing companies with a controlled amount of risk for the investor.
Prior to founding Nova Founders Capital you were Managing Director at Rocket Internet. What did you do during that time and how is Nova Founders Capital different?
After graduating from MIT and working for McKinsey in Switzerland, I joined “Groupon”, where I managed Asia and around 3000 people together with my partner in Nova Founders, Raphael Strauch. This was when Oliver Samwer (Founder and CEO of Rocket Internet) was running the global expansion of Groupon around the world. This was an incredible experience going from being a consultant, to all of a sudden managing 3000 people. I was in super deep water, made tons of mistakes, but learned even more.
When Groupon was about to go public, Oliver Samwer said: Why don’t you come back to Rocket? We make you a Global Partner and you get equity all companies globally. This was the point in time where we at Rocket realized that this “internet thing” actually happens everywhere in the world. Before “Groupon” most of what Rocket had done had been with a single focus; “Germany”. At this point, we realized that online fashion, where we had Zalando, could be done in completely new and emerging internet markets, such as Russia, Brazil, Australia, Middle East etc. ”Internet” was happening on a global scale at a more rapid pace than it had in Europe. This was a huge leap in the learning process. So, I decided to go back to Rocket and became a Global Partner. When I quit, Raphael Strauch, Alexander Kudlich, and I, held global equity across the portfolio beyond the Samwer brothers themselves and the investors.
As a Global Partner Raphael and I had to live in Hotel rooms out of a suitcase and I didn’t have a home for a couple of years. I travelled from country to country to set up businesses. Our job was always the same:
Figure out with Oliver Samwer, which business model we should build in a market. Oliver would then raise the capital, which he is incredible at, and Alex, Raphael and I would start looking for people to run and launch that business in particular markets and we would then coach and work with them.
This is really similar to what I do today with Nova Founders Capital, but the big contrast is that now I also have to raise the capital. The global perspective is very similar, but there’s a big difference: Nowadays we spend a huge amount of time figuring out the right business model. Back then, the decisions were made based on: „This is hot in the US, let’s do it“. Today, it is more like a whole McKinsey project and presentation before we build the company.
Today, we are really much more in the business of building companies as if we were KKR or Blackstone. If they would be building a company, then my guess is that they would spend a lot of time upfront to understand the opportunity, interview the smartest people around the world, get in touch with all the competitors and everyone related to this industry all over the world. This includes making sure that it does not just have the potential of creating ROI, but that it will definitely generate ROI. This is for example the reason why we have decided to build comparison companies in South East Asia, as we were sure we would generate great ROI, no matter if we were number 1 or just number 3 in the market. And these are the business models we are looking for.
We like business models that are hard to copy, rather than easy to roll out, which is always a trade off. While getting something that is harder to copy, you get something that is not so easy to roll out, and it usually requires a lot more thinking.
Last but not least, the guys we tend to build companies with are much more experienced. So if you look at the management team of our comparison business, the average age is 40 and the guys have already built 4 billion dollars worth of comparison business before they built our Asian comparison platform as one example. So we get guys who have done exactly these things before and bring them together.
Lowering risk while keeping the upside kind of consistent.
But the purpose of Nova Founders Capital isn’t limited to financial success. Beyond generating ROI, what else is Nova Founders Capital looking for?
M: Correct, there are always two sides: The investors are in this business because they want first and foremost to generate a return; they might find it exciting, might like the things you build, but ultimately they just judge you by the return they get. The other side of course is to build something that makes the world better. For us, and our investors, both points are super important, and a must for everything we do.
We like to do things in financial services because it makes a difference in peoples’ lives. When you provide people with access to for example a mortgage, then they get the chance to own a home.
One of the biggest challenges in creating progress in developing countries is the lack of access to capital, which has meant limited financial development. Taking Africa as an example, as many people didn’t have titles that show they owned their own land, they could not borrow money, and as a result it is very difficult to make capital available and deploy it across a country. Because a bank will never accept giving you a loan just because your house has been in your family for three generations. If you cannot prove it with a title, people couldn’t borrow money. So no investment could take place, the economy couldn’t be productive and nobody was able to grow the local businesses.
Or take our financial comparison business as an example. Often the price difference between the cheapest and the most expensive insurance is above 200% and the same can apply to mortgages. We create this transparency in the markets by building financial comparison businesses similar to check24.de, moneysupermarket.co.uk or comparis.ch.
In Mexico, where we are very active, we even receive letters and emails from people who literally thank us for helping them save money and that is exactly what makes a big difference for me.
My objective and focus is to create positive progress in the world, while also hiring and nurturing people – I love the people I work with, and a lot of them are now my best friends.
In another interview you have mentioned that the current return structure in the startup industry is not great. Could you explain how you have reached this conclusion and what you can do to change that?
There is this general belief that everything you do is an overnight success. Looking at the average expected return and failure rate, I think that for a lot of people, building a company is definitely not a huge financial success. If you look at many sole business owners they work harder and less compared to if they took a job. Now that of course is not to say that they don’t love what they are doing and the freedom that comes with it, which is even more important.
If you look at finances from an entrepreneur’s perspective it’s to some degree overrated to build a company.
I think it’s very important to have great entrepreneurs, but it’s really tough to be one and can get very very lonely. This could for example be when you have to say goodbye to your friends, and team members. Usually people tend to completely underestimate how though this is. What I can say is that I surely did. Being the top guy in a company is emotionally very different from being the #2 or #3.
The financial return again ties back to having emphasis on selecting the right business model. Many people fall in love with a business model, which is also important, but forget to figure out if the financial aspects work. I am all for urgency and getting started, but I find many failing companies could have avoided closure by doing a back of the envelope calculation.
I believe the most underestimated thing is the research of a proper business model.
Very few people follow a structure and say: “Let me throw a glimpse at some business models in the world and then let me research 20 of them, understand them and then build a strategy.“
The truth is that you can be the best founder in the world but you will not become a millionaire with a bad business model. At the same time average founders build billion dollar companies on the right business model.
When you have the model, then it becomes key to have a talented team, made up of people who are either better or smarter than you. That is the hardest thing to do.
Last but not least you have to research and find the most suitable market globally and you have to find out what the right timing for the right market is.
For example, if you want to build the new Apple watch, Pakistan is probably not the right timing, while classifieds may be perfect timing.
In my opinion, the three factors to succeed are:
- Spend much more time on researching the business model and being really critical about it. So make sure you select the right one.
- Getting team members who are very, very good, potentially better than yourself, and very experienced in the industry
- Select the right market / timing.
You just said that the market is very important and so is the timing. What role does the competition play? And how would you say competition has changed during the last decades?
Just looking over the past three years, competition has largely exploded. So, when we started “Nova Founders Capital” in 2012, raising capital was not as easy as it is today or was 6 months ago.
When the internet started, you were able to build a company for very little money and if you raised money at all, you had an extreme advantage over everyone else. Business models were available everywhere and were pretty obvious things like e-commerce in general, classifieds, etc. But time passes and those things were done. These days you can no longer just build a generic Amazon, but rather have to build an ecommerce company focused on some sub-segment of the market, with some special features.
As a result, the new business models become more and more complex to understand and so require a lot more research and smarter people.
Today, you also get more money to build a business, but as everyone else is raising money as well you just end up investing more in bigger warehouses, big data guys, explosive marketing cost, etc.
Take a classified site like the Scout24 group as an example. In a lot of markets around the world these businesses were built more or less organically with very little capital invested and the founders lived from their profits. This was possible because back then it took ten years to build a company and only very few people were going after it.
In contrast, if you look at emerging markets now, all the media companies are investing 10, 15, 20 million dollars a year into building the biggest classified site in that market. So when building the same business model today, you often end up having to spend a lot of money. . Not because the emerging markets are worse but because there are three other companies going after it. After making a huge profit on the developed markets, they expected the same success in the developing world. The will to generate return combined with the increased availability of capital for more companies, raise the expectation of building business models faster and better than in the past.
Being faster, means also being global, right? Do you have to be everywhere in the world at the same time?
I think being everywhere at the same time is definitely the repercussion of the “global phenomenon”. And to some degree Oliver and Rocket made that their case. Although it might be disappearing again. For example, there were companies, like Homejoy, in the US, which went global very fast and had to shut down though it was doing very well. They expanded on way too many markets without having the operational capacity and finally couldn’t even fix the problems in their home markets. I believe that this scared many entrepreneurs, who think nowadays: “Well, the US is such a big opportunity, why don’t we go get this right before we go global”. We see the trends changing back and forth. The first wave of companies did not think about global, then Rocket and a few other companies made everyone go global from day one and now we see most being more concerned about their home markets.
But of course there is no doubt that transparency, capital availability and the awareness of investors to invest in global business models causes people to have to go global faster than they did five years ago.
So in this context you often mention the job position „Globalizer“. How would you describe this position and what skills do you need to become a great player in this field?
Yeah, that’s a very good question. The best example in Germany is probably Oliver Jung. He has done an amazing job helping “airbnb” expand. Raphael and I, together with Rocket, also got the chance to help Groupon expand globally, which was a really amazing opportunity.
As a “Globalizer”, your job is to expand a business, which is doing really well in a particular market, to new markets. This is ideally done while the core team stays focused on the original markets to ensure minimal disruption. What people often underestimate is that if you are a German company going to take over 15 markets, it takes a huge strain on capital and management. By deciding to do 15 more countries, you put your chance of winning the German market at risk. So your job as a “Globalizer” ultimately is to go to such a company and say: “Look, I’m going to do all the other markets, but I want you guys to focus on the market that you are in.” In case of Groupon that meant that Oliver would go to Eric Lefkofsky and say: “The US is going to be very competitive. You guys should continue to focus 100% on the US. Don’t mind what is going on in the rest of the world. Instead, I will build the rest of the world for you”. And I think this is the same situation here. You need to be able to go to someone like me and say: ”I see that you are really busy building financial comparison businesses in these particular markets. Why don’t you give me your IT and your knowledge, then we raise money together and we expand to more markets while you focus on your home markets?”.
There are basically three key skills you need to have:
- Knowing how to launch a business
You need the know-how to pragmatically launch a business in a market. You have to be able to say: “Now I want to launch Fabian’s business in the UK.” And you then need to know what the things are you have to do and how you can execute on them.
- Leadership and Management
I think you have to be very good at leading people. Expanding a company to many markets means tough leadership challenges. You have to deal with different languages, personalities, vast cultural differences etc.
- Hiring the right people
You have to be great in attracting the right people because this is the key to a successful start-up. If you look at Oliver Jung, he was not building airbnb himself in Australia and 30 other markets, but what he basically did was hiring the right people in Australia and then he lead their activities in a very professional way.
But you also need to build up some experience and also a track record to convince great companies to trust you.
In order to succeed you cannot go straight out of school and say: “Now I’m going to do this.” But, you start by either being part of an international roll-out team for an already existing business or you become the country manager for one like UBER. After managing 2 or 3 countries for UBER then you can ask, whether you can be part of the international rollout team. After doing that, you can go to a company in Silicon Valley or a German company or a UK company and say: “How about starting to roll out your business to other markets?
So what you see quite often, it also applies for Oliver Jung, is that people move to distant countries, where they haven’t been a single day before. They successfully build a company there or take an existing company to that country. How is that even possible?
That is a very good question. It is really difficult to build a company in a market you have never been in before or if you do not understand the culture. But I think you have to be excited by different challenges, which is required to build a business. There are potentially 4 different attributes that you have to have:
- Cultural understanding of the particular market
- Deep insights about the industry
- Functional skills: You have marketing, sales, and capital raising skills
- Personality skills: Discipline, you are outgoing, very well-structured
Many Europeans have a huge advantage , because they are used to multiple cultures and languages. If you are from a small 5mio person country like me, then you always have to think multi markets. If you don’t have the right amount of cultural understanding or experience, then you can definitely compensate by having more of the three other skill sets, but what you need above all is to be open about listening to other people.
Ultimately you have to realize that you have to hire a very professional team. For example, if you want to go to Brazil and build a company, you have to make sure that you hire the best team in town and it is crucial to listen to your team as they adjust your business model to the market. If you don’t know the country your team has to provide this understanding to you.
It is always a trade off for everyone you hire. Sometimes you look for the perfect person, who has all the right industry knowledge. On priority #1 we tend to look for people with the right personality treats (discipline, structure, sense of urgency, willingness to do whatever it takes, etc.) and then for priority #2 we look for qualities like having a deep business model understanding and functional skills, easy learning etc.
For our top guys, market understanding ranks behind these priorities and if you go down the hierarchy, this mix changes. For example, for the telephone sales guy you value the local understanding higher than you would if it is the top guy in the company.
So what you basically do when you go to another country is that you break down the task on the people who are best for whatever job has to be done?
Correct. And I think you break it down to these four areas that I mentioned; cultural understanding, industry insights, functional skills and personality. If you are searching for a telephone sales guy, you need him to be good at phone sales and also have a very good understanding of the local culture. But you don’t need him to be as disciplined as a board member. You don’t need the guy with industry understanding, you can teach him that.
For the top guy you need a different combination of skills than you need for the phone sales guy. It really just depends on the level of the business you are talking about.
If you are in operations, a great cultural understanding is essential to manage people and because you want to understand how to run an e-commerce business at its best for example. An similarly, if you are in marketing, you want to have a really good understanding of the culture in that particular market to know how to market your product.
When we had our first phone call some weeks ago prior to this interview you also mentioned that you often succeed in markets because you don’t know the limitations and you challenge every market. Can you give some examples on that?
In the comparison business we are in a market, where all of our competitors basically charge around 5% – 6% commission to the insurance companies. Therefore, whenever we sell to insurance companies, we get 5-6%. When I asked what was the highest anyone in the market gets paid, the answer was 10% and the difference between them and us was the volume.
I actually believe volume is a made up thing. If somebody tells you that you need to have volume in order to succeed, that is just a personal rule, not a global truth. It is not something God came up with, it is just an invention for a discount. Sometimes you have to have large volume; sometimes you have to be a large company or a new one. People just invent things why you should not get a discount.
So if somebody can get 10% based on volume, I think we can get it as well with no volume. At least if we tell them that we are going to bring volume in the future. People didn’t believe me and were convinced this was not possible in that market but I said: “I am sure you can get that and I even think you can get more than that”. Now we are at 15% and charging more commission than the rest of the market.
I think our job, not only in financial comparison, but also in all other businesses, is to constantly challenge what people believe is true.
The most important thing is the moment you go into a meeting and negotiate with a bank, and the question is whether you are the guy who asks for 5 $ or 10$ or 100$.
The best deal we have in the world is so much better because the guy asked for 3 times the price of what he thought would be appropriate. He gets 20 $ every time somebody clicks on a link. The only reason for why he got there is because he asked for 100$ and then said himself: ‘there are no limitations in this market’.
But unfortunately, we always limit ourselves, our beliefs, our own opportunities. The toughest market where we built something is actually Denmark where I am from. Because every time I land there, I actually feel I can hear my parents voice, my teachers, my friends, how they all tell me what is possible and what is not.
You also gave an example on the payment and delivery at Lazada. Could you elaborate a little bit on this subject?
The moment we came and built the first amazon type business in South-East Asia, which has 700 Million people, we started 17 years after Amazon had launched in the United States. We came across three limitations you find when building e-commerce in emerging markets and everybody warned us about them:
- Nobody was used to buying anything online
- There is no DHL service ready to deliver the goods to the people’s homes
- There is no payment infrastructure
The first one is a self-fulfilling prophecy. If there is no one building a company like Amazon, nobody can buy online. If you don’t have a high advantage of buying online such as better prices, then why would you go online? So our fundamental belief was: All around the world people search for the same qualities: convenience, selection, attractive prices, choice and freedom. So, building online whether it’s a supermarket, or an Amazon type of business, like Zalando, just seemed the perfect idea. That’s just a matter of time, we are convinced that people will adopt and start buying.
The second thing was the delivery service. While in the US you can deliver anything with US post, or DHL or FedEx, in Indonesia there’s no delivery service that could deliver to all households. This basically stopped everyone else from entering the market. But it’s not as big of an issue as it might sound. We figured out that we needed 17 delivery companies to deliver to every household. So we just made contracts with all these 17 companies and at the end of the packing line we just had someone put the packages in piles that go to Java, another pile for Bali and another one for Lombok or whatever. So this isn’t so operationally difficult.
The third thing we talked about was payments. We found that very few people could pay online because they had no credit cards. But first of all, this will change. And apart from that, we tried to find another way we could accept payments and came up with all the different ways. You sit down and brainstorm: Can people go down the street to the bank and transfer money? Yes. Can they go down to 7-Eleven and pay? Yes, maybe. Can they pay by mobile credit? Yes, maybe. Can they pay directly to the delivery company in cash? Sure.
Coming from a different country might help to solve these problems since you don’t know the local limitations. Having seen companies overcome challenges such as these around the world, you start to have a different belief.
Let me take one step backwards. I believe one of the most important skills when you build a company is the ability to think. And that is actually very difficult, more difficult than people may believe. Therefore, the question becomes: If I want to be a better thinker what is it, I need to think? What does it mean to think? I personally believe, that thinking is the process of asking and answering questions. So by saying „What is it to think?“ I am asking myself a question and I’m trying to answer that question, right? Therefore thinking is the process of asking and answering questions. Now if you want to become better at thinking you either have to become better at asking and/or answering questions. So the question becomes which of the two skills is more important?
I personally believe, that the most important thing is the ability to ask the right questions. As Anthony Robbins says, the quality of your life is determined by the quality of the questions that you ask. I think that is very true. So what I see is that we are very good at asking the right questions. We don’t ask: Is it possible to collect payment? Which is a yes or no answer. But instead we ask open-ended questions: How would it be possible? What are all the different ways that we can collect payments? How can we get people to compare products? How can we get people to buy over the phone?
Those are the kind of questions that we are asking and as a result we get solutions that answer these questions. So I think we probably become better and better over time to ask questions like this. Or at least ask questions that get us to the right answers.
Most of our readers are students at European business schools. Is there any piece of advice you would like to give them?
I think the challenge is to figure out what you want to do, which depends on your own belief. I personally love to work. I don’t think it is work, I rather see it as fun. For me water-skiing, building companies or working until midnight is all equally rewarding. But I am aware that to some extent sometimes people’s desires in life are very different.
One big challenge we face now is complacency. I remember my parents told me many, many times: “We cannot afford it.” I think this is still rooted in me and I think also in Germany it’s still in people’s heads. I know people who come from very rich families in Germany who work and save money like they came from nothing. It’s this you-kind-of-never-know-if-times-change-mentality. But I think in many European markets people became quite self-complacent which can be heard when 19-year-olds talk about work-life-balance when they have not even worked a single day yet.
Firstly, I think the most important thing is to really go for it for a couple of years and see how far you can get. The second thing is to really set your expectation high. Because today there are high expectations but very low willingness to do what it takes. Thirdly, I think it is important not to let other peoples’ expectations and limitations set the bar. My life can be really tough some would argue. And I am not talking about my personal life but about building those companies as my job. There are always people that tell you: “It’s not possible”. You always have employees to tell you how to run your business better. You always have parents who tell you to watch out. You always have investors’ money, which is not your own. Sometimes you have competitors, which go way beyond what they should to try to harm you. And so I think you shouldn’t stay within these limits. You really have to go out and say: I really don’t care what is possible and what’s not.
With the level of education we have comes also great responsibility. We have a chance to make this world a better place and we can’t do that by watching Netflix movies at home.
Interview by Fabian Baldauf.