Great, welcome to this new session where we have the pleasure to speak to Carlos Conti, Partner and Investment Director at Inveready, one of the most well-known funds with also the longest trajectories in the industry. You’ve been active in Spain for 11 years now, as we discussed earlier. In this sense, we wanted to take this opportunity to ask you some questions that we hope will help our listeners to better understand your operative, investment strategies, and the lessons learnt by professional investors to date, fundamentally for the benefit of our Partners, CEOs, and well, for whomever is watching this. So, first of all, thank you very much for joining us, Carlos. It’s a pleasure. In fact, looking back at this wall behind us, we’ve already collaborated in several companies. Say, 2-3 as co-investors. And more to come, I hope. Certainly. We’ve been quite happy with our collaboration, indeed. So, jumping straight in… tell us a little about who Carlos Conti is and your career trajectory to date: Where did you start? What is Inveready? What is your focus? What is your value proposition, both in relation to your investors and the entrepreneurs that you work with? Well, it’s a pleasure to explain our story here. Inveready, as you mentioned has been operating for 11 years already. We have 9 funds and 120 companies. I entered during the third year of Inveready’s constitution. In regards to our focus, I believe that all venture capital managers and their firms have to be able to offer a combination of knowledge areas and ways of differentiating their offering, which should form part of the firm’s operative. In this case, Ignacio Fonts, who comes from HP, wanted to bring companies to market that had a vision, as I would say. Or Juanja, who came from Google, also believes in that same concept. Then we have our entrepreneurs, Nato, Josep Maria and Roger. Roger, for example, also knew a lot about the world of structural public finance. I, in turn, represented the slightly “boring” one of the group because I mainly contributed the financial element. I come from investment banking and structural finance. Among the four of us, we make up Inveready and make sure that all runs smoothly and the company moves forward. Regarding our vision, it is similar to yours. We always look to be the window into the world of tech companies for our investors. How to profitably invest in these types of companies and support them. Essentially, I believe that our work lies in finding a need for financing in a market that is not covered by banks or the companies’ own funds and we then find a way for that financing or investment to be attractive for our investors. When you manage to put these two together, what you’re doing is moving from the 1-on-1 savings economy to investment. With that vision in mind, we have about 150 investors, mainly family offices, private individuals with assets, as well as institutional investors such as ICO, ICF, ENISA. We have a portfolio of 120 companies that helps Inveready move forward and we always remind them of that. We wouldn’t be here today without the support of our investors that trust in us and indirectly also in these companies. Great. Well, there are many kinds of funds, and many times what we hear from entrepreneurs is that investors are a little “funny”, when in reality, each investor is very different from the next. Just as, among entrepreneurs, we see a lot of heterogeneity and do not dare to tar these same entrepreneurs with the same brush. Therefore, regarding different investor types, whether Business Angels, or other Venture Capital funds, what marks you as different? Are you more “hands-on” or “hands-off”? Do you devote yourself more to deep-tech? How do you define yourself? At the sector level, Inveready has 3 verticals: a part dedicated to Venture Capital investment in companies in their seed stages and where we are a seed investor that enters these companies as the first institutional investor, just after Business Angels. In this case, we usually invest in tickets from € 300,000 to € 1,500,000 in B2B software. This is usually our focus, with some exceptions, but this is also our main strength. We also invest in Biotech. This is with Sara Secall’s team. In this instance, we focus on the “pre-clinical” phase, or phase 2. This is a very specific issue within Biotech, which to date we have done quite well in. Then we come to my team, together with Carlos Floria and Lucas de la Vega, where we do hybrid financing and “Venture Debt”. This is a type of financing that is very common in the United States and that nobody here offers. Well, now there are more firms offering alternatives, I believe. If you want to finance yourself with a mixture of debt and remuneration in capital, it is a cheaper way for companies to finance themselves. However, if your question is how do you differentiate yourself? Each firm has their sectors and in itself, that is differentiation. However, in the end, investments can be the same. Therefore, we always say we are “those in the trenches”. Mainly because there are 120 companies where we contributed, so we can tell you 120 stories on which we base our reality on, where we learnt things that have worked, that have not worked. What we know is that the kind of company, where the common axis is cash management, how to maximise that cash flow, how to maximise the type of financing you get, to minimise the dilution of the entrepreneur that ultimately is a very important variable for the company and its team to remain motivated, is doing well. So, we help the entrepreneurs get on their feet a little, help them go the distance, making sure that the person that leads it gets to keep as much control as possible. The most “hands-on” part of what we do is, I would say, the financial structuring part and managing the day-to-day life of a company, rather than getting involved in the product etc., which is evidently what tends to guide us as well. It’s true that we have recently strengthened our team with the entry of Angel Bou, last year. He comes from the non-financial world, comes from working with companies in Silicon Valley, and he will help us with the “go to market” aspect, defining the product, and the entry strategy as we’re seeing that many companies and entrepreneurs also appreciate that type of input. I would like to go into a little more detail regarding “Venture Debt”, because I think it is a product that is probably still little known in Spain, especially for entrepreneurs. Hence it may interest them as it’s quite innovative. I understand that you were pioneers in Spain and the first to offer that product. What is the “Venture Debt” and who does it serve? In the end it serves a company. If you look at it as a balance sheet: you have an asset that can be composed of many things, and that asset has to be financed in some way. A balance sheet, for those who know a little accounting, always balances out. Companies can not only be financed with capital, which is the necessary financing type in the first instance, because the risk of the company is very high and you have to opt for a type of financing that is more inclined to accept that type of risk. Capital carries a lot of risk but infinite return potential, which usually comes from how well that company is doing. However, as companies grow they have to have access to other types of financing and if you take an extreme example, then, think of how a large infrastructure company is financed. The financing will range from equity, to different types of Senior-, Junior debt, Mezzanine, bonds of different types etc. Why? Because the balance can be financed in many ways and that’s where “Venture Debt” comes in. It plays a role when the company needs something better than capital. Venture Debt” is a type of investment that makes a lot of sense, especially with Tech companies. It offers a cheaper option for the founders, the shareholders of the company. Why? Because it’s a loan. Just like a loan from a bank? This loan does not compete with a bank because the bank will always be much cheaper. It does, however, compete with capital. In the sense that it seeks to cover post-capital pre-bank. How is that remunerated? With a high interest rate. It competes more with equity and capital remuneration. Why this additional remuneration in capital? The problem with Tech companies is that when things go well, capital gains a lot and the bank keeps what it has. But when things go wrong, you lose everything and that many times over. It’s similar to the government and workers, you recover what is recoverable, because there is no real asset. So, it’s a bit like home insurance, or car insurance. You take account of the insurance you have, or the type of risk you are exposed to and you then have two types of money for when things go wrong. It does not make sense in profitability terms that if the risk is the same that you would lose everything. Profitability should be different when things go well and that’s why you have “Venture Debt”. It is something that was introduced in the United States in the 70s by an entity that today is a bank dedicated to this very financing method. What you say is: well, share something of value with me that helps you create shares and I give you the larger part of it, as a shareholder. However, if things go well I also want to participate. With what? With a percentage of the financing that I give you in shares. Then what we’ve done is create a minority contribution in all the companies that we finance, without any additional cost of capital, which is a very valid option most of the time and carries no political cost because we do not even open a Partner’s Agreement … You don’t even attend Board Meetings… … We only ask for a “tag-along” to ensure liquidity, but we do not open the can of worms that is the Partner’s Agreement. This is because usually when you do so, it’s a tense subject, sometimes it’s better to keep it closed, depending on the situation, of course. Yes, I’m aware of what “Venture Debt” is and we’ve already got that in some of our investee companies with Inveready. In this case, I wanted to ensure that we explain this topic in more detail for those that are not familiar with it … Yes, we’ve done 25 operations already. In about two years, or a little more? Well, we started with “Venture Debt” in 2013, 2014. The truth is that it’s going well, although we had to explain what it was in the beginning. Now, there are 35 firms and more people know about it and see it as an option in operations, as you can clearly see that there are cases where it makes sense. Not in all cases, but in those cases where it does make sense, it can be an important ingredient in the financing cocktail. Coming back to the heterogeneity of investors. Everyone has their prerogatives when analysing a project, for example, in our case, as you know, you need to be able to demonstrate a minimum of 6 months of revenue generation. If there is no revenue then we have little to analyse, as we’re very financial. Which ones are yours? I understand that having different types of funds, this may be different. However, very briefly, what are the main investment criteria in each of the three major areas? Firstly, it has to be a sector where we have a focus. For example, B2B software or what we call “Enabling Technologies”. Those technologies make sectors work. That is, not one in particular, but one that is more transversal. That means, not necessarily a horse, but the wheat that the horse feeds on. In our case, something like, cybersecurity that is very transversal or application management, which is very transversal. Similarly, we don’t want to invest where a company has zero revenue generation, but prefer that they already have a product that has no technological risk and that the commercial risk is decreasing. We want to see that there are already 2, 3, 4 clients and then we help them take the next step. For example, achieve annualised revenue generation of € 300,000 – € 400,000 to achieve € 300,000 to € 1,500,000. On the side of “Venture Debt” we are more risk averse because we are cheaper and we cannot fail as much as the capital can. There we look for annualised revenue. There is an important nuance here because companies can grow very fast and € 250,000 can represent annualised revenue for the quarter, which would give you this one million Euros that we look for in minimum revenue generation. We also look for a business where we have visibility on our money or the money that enters into the company at the same time as us. It has to be financially sustainable. The company should not need constant capital contribution or at the very least, if it opts for that option of fundraising, which often happens, we want to see that there is an option for that business to be profitable, if necessary. The typical example is SaaS. In SaaS you can grow rapidly, but if things get complicated, we are able to slow it down and start generating cash. Generally, a good example is everything that has a good life-time value and a very powerful CAC. Above 3 is a very good metric for “Venture Debt” because it means that this investment has a lot of return and if that is recurrent, what better way to finance than with something that doesn’t dilute you, such as “Venture Debt”. Now, I was hoping to talk about the best or worst operations to date. This is not about multiples, that’s not it, but in those cases where you can say, what has been done well and what has gone wrong in your projects. What would you say to other investors? I always say that our greatest operation, which indeed is a very nice operation and continues to come up and make history every month, is Más Móvil. Más Móvil is a company founded by people who were in Instituto Empresa and who came to us in 2009. Today the company generates € 2,500 million and is Spain’s fourth largest telecommunications operator. It is the greatest unicorn in Spain. I defend this because we have lived it and it is an operation that we were very proud of and we continue to be shareholders and Board members. I would also tell you that what we are especially proud of, and I believe I speak for all of us that are in this business, is to support companies, teams and people with ambition. When they tell me that in Spain we’re not innovative, I think it’s clear that I live in another bubble that is pure innovation. We have been fortunate to support teams and companies that were integrated into companies such as Symantec or Intel. For example, a company in Seville, Symantec was sold to Password Bank, Indisys to Intel. Red Hat with 3Scale making APIS. SmartWear when it was bought by Lucierna that made APM applications. This is cutting-edge technology bought by leading American companies that have maintained their work centres in Spain because of the quality workmanship. This is what we are especially proud of, as people who form part of this ecosystem and who try to support entrepreneurs as much as possible. Many have failed on the way. We have sold companies for € 1 to save the company for the workers. We have lost everything in several companies, both in equity and in “Venture Debt” and Biotech. So, what common denominator do these failures have? Statistically it is impossible not to fail, so you know that it is possible and although it sounds a bit corny, and we have looked at this, and usually what has failed us in those cases was the team, which has not worked as it should have worked. And in the end even all of us together were not able to bring this company to fruition. However, I would also say that the main frustration when a project does not work out lies with the entrepreneur, who has been pushing the project forward from the beginning with a lot of effort, many tense moments lived, with his team and his workers. For us, if things go wrong, it’s a pity and no one is happy, but it is a subject that we have discounted and it is more of a pity for the project that did not become what it wanted to become, than for our investment loss. After these 11 years, having had a few very good projects and a few that didn’t make it, how has your analysis evolved regarding your investment criteria? What have you learnt in the process? Would you say today: I don’t make the same mistakes that I made 10 years ago? What is different? What have you learnt from these teams? Would you be able to tell in advance: I already know that this team will not work or will work well? Unfortunately, we do not have the intellectual capacity to foresee that or learn that much from it. Let’s say that in the overall weighting of factors, if I go back to the beginnings of Inveready, our initial pitch in 2007, we were pure tech. We would say: we’ll go and take this technology straight from university and this technology will have X amount invested and it has a market of X and this is going to be the bomb because we are going to sell it in the end. But that wasn’t all that attractive. Why? Well, because going from the invention to selling and selling recurrently and knowing how much it costs to sell, there is a very important step in-between. Considering our allocation, I guess we’re still very much tech, however, we are placing much more importance on the team now. We check that it has the capabilities to take the company from an invention to a business, then a larger business and a large company with 100 employees. These are all different stages and all difficult in themselves. So, you pay more attention to, say, the management and commercial capabilities of the team? …And how much it costs to go to market? Because that is a topic that Ignacio Fonts and Ángel Bou have a lot to do with, the “go-to-market”, the marketing strategy. How much does it cost to enter a market? We do a lot of B2B, so the cost of B2B marketing, aside from it not being so easily traceable, is very expensive. It is a sales cycle of 6-9 months. So, how much will that cost us? How much will it cost us to enter a new market in which we have no references yet? So we give that much more weight and we magnify the cost much more and we make sure that the team has the capability to push this company towards the peak. Because finding yourself dazzled by technology, which is very necessary because it is a competitive advantage, can make you fail on more occasions. Nonetheless, we remain faithful to technology, which we see as a global, international value. In the sense that technology has an intrinsic value in its own right. The price of this technology is not typical of Spain, it is more typical of companies that compete globally. That means that your skills are also global and here we are, able to participate in those projects that manage to take away market share from bigger competitors and with teams from Spain. Finally, we’ve been able to find out from conversations with several people in our industry, that there is a feeling of a small bubble, of an increase in unjustified valuations. Well, maybe not a bubble in this sense, this one will not have an impact on the global economy and mortgages. However, there is the perception of a gradual increase in the same revenue metrics or others in the last 2-3 years in the market. Do you think that’s the case? Do you think it’s good? Do you think that it doesn’t matter because it will lead to larger exits too? What is your opinion in this context? It’s a topic that we analyse a lot. Inveready came about at a very difficult time, which was the year 2007. We started fundraising when Lehman Brothers fell, which was a fantastic time to fundraise. So we have seen the current situation as it has evolved, both for companies, funds, and the ecosystem. It has been very positive for all I think. However, it is true that there may have been this increase in entry price and if we compare, we have 9 funds, we can compare a lot with 120 companies, we can cut funds and see that the entry valuation has gone up. It is also true that the exit markets are more liquid. When we started, if the average output value was x, I have to have this value of inputs and so this goes up, I can theoretically do this. Well, I can keep increasing, that’s what would give you peace of mind. Where we are strong and where we have not changed, and I would be worried if it affected our pace of investment, which it does not because we are still a very active investor, doing 15 operations a year. We simply do not enter in this situation. If someone wants to pay x for a company, good or bad, and we have seen many great successes where we said no, although we were happy for those who supported these companies in the end. We are not going to move on inflation and enter the price war. We are very systematic in what we invest in. We are lucky to have Más Móvil, so we are not looking for a fund-returner, the cash cow. We look for a systematic exit that will give you a return in a diversified way and that is what we have tried to do. We have sold, I think about 25 companies, we are very active and try to achieve a multiple of 4, 5, 6, 7X and we continue to have quality projects and with this discipline regarding the entry value we continue this business of fund management of ours. As I always say, it is a marathon and you have to provide returns in a regular, constant, and well-thought-out manner. We have 9 funds already, and I think we are more or less providing that return, which is what makes you survive in a market for 5 years, once the cycle has changed and the companies are still there. In other words, be firm in your valuations-based approach for the potential business that you think this company can generate. Do not base it on whether the market is hot or not. Indeed, we do not enter in that case. Very good and finally, what would your recommendation for those who are starting to invest in this early seed phase, either as Business Angels, small family offices or small funds that have at least 2-3 years of experience be? What are the 2-3 main recommendations for not getting stuck up to the neck in problems, so to speak? In the end, such a venture capital fund manager has a specific name, which is an investment management company of closed collective investment entities. This is a very technical name and regulated by the CNMV or stock market. We are fund managers and it is our job to propose attractive investment opportunities to our investors. In fact, Inveready invests a lot of money together with the shareholders of each fund because we are the first ones to believe in the investment options that we propose. As any investment option, it always has to be part of a diversified portfolio. Within a diversified portfolio, you will have your profitability, your bonuses, if you would like, real estate or whatever you consider convenient. If you want art, then include art, whatever you think fits best. This is an alternative illiquid investment, but it is an investment that creates wealth. What does that mean? That it is not an investment that you can easily undo or sell. It is a risky investment and it is possible and probable that you will lose money. It should not pose a problem for you and for your wealth if you lose that money because, if it does, then that means that you have invested too much in this type of asset. However, it is necessary to have it in your investment portfolio because it is an aggressive investment, in the sense that, if things go well, as I know it has for many Faraday investors or investors who have invested in our funds, and you multiply your investment value by 2, 3, 4, 5 times the value of your initial investment then it will be that part of your portfolio that allows you not only to defend yourself against the losses that you may experience in the financial markets, but it will help you to create that additional wealth. So, does it make sense to include it in your portfolio? Yes. It makes sense to include it in a correct way, according to the weight of the rest of the assets you own. Do not put 70% in start-ups because they can go really well, but they can also go wrong and I understand that wealth is something that must be managed with caution. Excuse me, for interrupting you for a second, because I think your point about diversification seems quite important to me. Diversification within a global portfolio, which includes other types of assets such as equity, art, but also diversification within the portfolio itself or through a diversified fund or if you are Business Angel a minimum number of companies, is essential. Taking into account, as would be in our case at least 6 months of revenue, what do you consider the minimum number of investee companies that would constitute a diversified portfolio? Each Inveready fund has a minimum of 20 investee companies. That is a very high number. To enter this asset, you may not need to have € 20,000, but look at the implication of that figure. We are going to define 10 as a valid number. If there are 10, and if you were going to invest, we have spoken with many people who enter the world of Business Angels, they usually invest around € 50,000 in a company that is known to them. That is, your budget is € 500,000 to invest in technology-based companies. This is because either you invest in 10 or you are betting a lot on that company investing € 50,000 in one. Is € 500,000, x% of your assets? If not, well, then do not invest € 50,000 in this company. Entities like Faraday, facilitate these investors who want to invest in tech-based companies, to invest but in a diversified and orderly manner and to not fall in love because the entrepreneurs have told you, like they’ve told me, they tell us so many stories each day and it is easy to become dazzled by them, and instead you do it in a calm manner. So, don’t be fooled by these stories by investing € 50,000 because there is a high probability that you will lose the money, and if you have not diversified your assets that is a big risk. So, I would say the number lies between 10 and 20 companies. Yes, I believe that is the correct figure. And then talking about funds, these new funds have very good people, surely better than us when we started and almost better than us now. However, you said something before that was interesting to me, that we are both financial, you have to have a wide range of skills in order to support these companies, but you also have to be conscious that these are companies, they are investments, like any other, and you have to manage them as they are and not let yourself be dazzled by other things in the sector. Beware of the price war, in this sense. Yes, and time will tell. Like I said it’s a marathon. These are cycles, investment cycles of 5 or 10 years. We have been in business for 11 years and we’re still here. We will see in 10 years from now if we’re still here and in business. Maybe, maybe not. We may be wrong and others better than us may have triumphed. Well, I do not think so. We’ll see in 10 years. Great, thank you very much, Carlos. And many thanks to the listeners, to our audience. Thank you very much everyone and see you next time.