In a new format for Startup Europe — the Sifted Podcast, once a month Amy and Eleanor will take a little breather from the news cycle and introduce you to some of the biggest names and up-and-comers of the European tech scene. For the first instalment, Eleanor had a chat with Carolina Brochado, partner at London-based VC firm EQT Growth.
EQT has invested in companies like Dutch electric scooter and mobility platform Dott and Finnish food delivery platform Wolt. Brochado led the investment into secondhand fashion marketplace Vinted, where she now sits on the board. Before EQT she was an investor at SoftBank Vision Fund and Atomico, making investments in companies like Gympass and Hinge Health.
She talked us through her perspectives on how issues like inflation and public market volatility are affecting founders and her behaviour as an investor, as well as how she sees the war for talent today and how EQT uses data to make decisions.
To listen to the full conversation, and hear the craziest thing that Brochado has done to try and win a deal, listen to the episode here.
What are your favourite anecdotes that show how the European market has matured?
There are a few from my time at the Vision Fund: I remember sitting in the investment committee and in literally one committee, billions of dollars would get approved. That was wild, because I remember at times there was more capital there that had ever gone into the European landscape.
You look at some of the stories of these individual companies and remember when you met them at seed and they struggled to raise — and then they managed. And then they struggled to raise the Series A — and then they managed. And now I meet them again, and these companies tend to have a really strong product-market fit and attractive talent from places that you wouldn't believe talent would be looking to move from.
Recently, one of my companies hired senior team from Red Hat, from AWS, from Marqeta. Attracting that quality of talent and moving people from Seattle or New York to Amsterdam is something that in 2013, wasn't happening, and now really is.
How have changes in the market affected your day-to-day behaviour as an investor?
We've spent a lot of time with our portfolio companies this year, as you might imagine, just trying to think. If you think about the role of the board, which is to support the management team with strategy and capital allocation, this is a big year for that. To consider how you operate in this environment? How do you take advantage of this environment? So those have been a lot of our conversations with our portfolio companies.
We've spent a lot of time doing work around M&As and benchmarking, and thinking “what is the shape of this business that wasn’t profitable for five years, and really just went for market share?” Now, maybe it's to think about being profitable sooner if the capital markets are where you want to go from an IPO perspective, for example. So that's certainly been on the portfolio side.
We haven't yet seen the big crunch that we thought that we might see
On the new company side, very few people will disagree that growth has been very slow this year — and I think there are several reasons for that. One is that a lot of companies have raised over the past two years — and with full coffers, there's really no need to put yourself out there. That's probably been on the advice of their boards.
But we have seen great-quality companies come to market for different reasons, whether that be investors selling secondaries because their funds are now under pressure for liquidity, or for M&A, or expansion. The market is still dislocated where the entrepreneurs, the boards and the company's perspectives are on valuation and most investors — but there is still cash in the system because people will invest through the cycles. And so a lot of rounds did end up getting done for the best companies.
We haven't yet seen the big crunch that we thought that we might see — I imagined that crunch might also happen at an earlier stage. But for the most part, I think entrepreneurs have been pretty smart, when they've needed cash, to perhaps take that hit on valuation to get something done.
What does the M&A market look like now? And how have some of the currency moves impacted what founders are thinking about acquisitions?
I think it's a great opportunity for the growth-stage companies, because the biggest currency that they have is equity value. They're sitting in businesses that, at scale, often have over $100m in the bank and have proven product-market fits and go-to-market motions. And so I think, especially in Europe’s many different markets, sometimes it's lots of different behaviour.
There are a lot of very local businesses that might have a great product and gathered historical traction, but can't scale. And those will make great product tuck-ins or acquisitions. And the difference between now and the last two years is that those smaller businesses might have had access to capital, which might have given them a chance as a standalone — but now, with the markets being tougher, being part of a bigger platform might actually be the more interesting option.
Even as we see the market go into a bit of a downturn, it is still so competitive to hire in Europe. What are you hearing from founders about the war for talent?
I think founders still feel it. Although, I'd say from the data that we see across EQT, it does seem like it's starting to soften, particularly in tech and engineering where so much fat was built over time. However, people are having to make difficult choices, and the back offices as well are trying to be leaner and more efficient, so there is a world where this is likely to change. But for sure, there's also a world where your salary costs have to increase because you have to allow your employees to continue to keep up with inflation as well.
We can't talk about EQT without talking about Mother Brain. Tell me a little bit about Mother Brain, and how do you use that data in your everyday investing?
So Mother Brain is our proprietary AI engine, which we use in many different ways, made up of a team of over 20 people. These are really impressive AI engineers that we would love to have in any of our portfolio companies. They started as the brainchild of the ventures team, who knew that several things in investing could be improved through data — and the first piece is how to track company traction and make sure that you capture a company at the point at which it's starting to explode in some direction, whether that's number of employees or app downloads, app visits et cetera.
How do you make sure you keep up with where the capital is coming from in those businesses, who within the platform are connected to those entrepreneurs or people on that team all in one single interface? If someone leaves and starts something new, how are you the first one to hear about that? It has grown a lot from there.
We have a big problem with bias in investment committees, which is only a reflection of the humans in that room that tend to not be very diverse, and often aren't very data-driven either
It now connects us all across our business lines across private capital, as we call it, but it's really ventures growth and private equity. So, if someone has met a company, their notes and thoughts can be connected. It’s really become the company's IP: for example, if one of our companies says there's an exact space that they’re looking to find companies, Mother Brain can do that for us in minutes, as opposed to you having to hire a team of consultants to do that manually.
We have lots of hopes for what it can do in the future. One is we have a big problem with bias in investment committees, which is only a reflection of the humans in that room that tend to not be very diverse, and often aren't very data-driven either. We do all our voting in Mother Brain, both on growth and ventures, and we hope that Mother Brain will learn over time to perhaps vote herself and tell us where we're wrong. That is one of the things that we're exploring.
One of the things that our companies struggle with the most is finding great people, and as an investment platform, we come across thousands of profiles for ourselves, but also for our portfolio companies. We interview people across the world and today, not a lot of that is gathered anywhere. But actually, we think that we could have quite a powerful recruitment engine, because there's 1,500 people at EQT across the world, and we have Mother Brain, so we should be able to put these two things together in a way that our companies could leverage as well.
Speaking of diversity — have you seen the profile of the investor change at all in Europe?
Yeah, I think that's been slower to change. What I like about the change in operator VCs working with more investor VCs is that the diversity makes it really special. If you go too much one way or the other, you really miss out on learning from each other and also in building a portfolio that is diverse.
That also goes to this question on gender and other forms of diversity. I think, unfortunately, when I look at investment committees, if you think of that as the purest form of where decisions are made from an investing perspective, it’s still very non-diverse in Europe. That’s a real shame, I think. Certain things about working in venture capital have shifted — maternity leaves have become better, people can talk about them, people are mindful of where they host their events, so that they're just not as super “tech bro” as they once were. But I don't think that enough has changed in many organisations when it comes to the diversity of investment committees.