TMRW Ask-Me-Anything: Frédéric Court, Felix Capital on VC Funding and Community Building
We had the pleasure of hosting one of London’s most successful and creative VCs, Frédéric Court, Founder and Managing Partner at Felix Capital, for an Ask me Anything session at TMRW.
Felix, launched in 2015, operates at the intersection of technology and creativity. Their 1st fund closed at $120m in 2015, and their second one at $150m in 2017, both oversubscribed. Fred was the lead investor in Farfetch (an online global fashion marketplace where he was the first investor), and their other notable investments include Deliveroo, goop, Olapic, Yoobic, Papier, Houzz, Mirakl and, most recently, Highsnobiety.
Francois: what’s your background and how did you come to becoming an investor?
Frédéric: I first came to London in ‘94, spent a few years as an investment banker at Lazard, then left the company to become an entrepreneur in ‘99, in the middle of the dotcom boom, creating an online marketplace for the textile industry. I did that for just over two years; I joke and say it was my MBA, paid for by the venture capitalists who backed us generously. We were wildly ambitious and going after a big opportunity which we had very poorly assessed and timed. There was a market opportunity but we were way too optimistic about the speed of change and tech adoption in the textile industry…needless to say it wasn’t a success.
I came back to London (my startup was started in Nice, my hometown) and joined a firm called Advent Venture Partners, one of the first VC firms in the UK. It was very tech-centric and very old-world British, so I was clearly the odd one out, being neither an engineer nor British!
When I became a partner there, I started to invest differently than the other partners in terms of sectors and style. We did pretty well and I’ve kept to some of the fundamentals.
Francois: so, you now set up on your own; a new fund named Felix Capital; tell us, what is it and what’s different?
What I’m doing now is to implement all the things I’ve learned over the past 18 years as an investor but within a new venture firm.
We have two fundamentals – one is thematic, investing at the intersection of technology and creativity, what we call ‘digital lifestyle’ businesses (consumer-facing brands across multiple verticals and technology that enables them to grow fast) those businesses and brands using technology. Everything in our portfolio is therefore connected and relates.
The other fundamental is our total alignment with entrepreneurs; being a truly good and valuable partner. That’s something that many investors talk about and say but we actually act on it; so we lead by example and let other entrepreneurs speak up (to convince founders on a deal we usually ask them to talk to the other founders we’ve backed, who can vouch for our style and help).
We are a small team – six full-time staff today. We have roughly $300m under management. We raise capital for later stage investments. The most recent in the U.S. is Peloton and is a great example of what we like. When we invested, the company was already very successful. They have created an amazing community of people who really love their bikes and the experience.
We are very interested in businesses that are building communities – as authentically and slowly, organically as possible – companies that are crafting a different kind of customer experience or relationship.
We’ve been in business for close to four years and we have 25 companies in our portfolio from seed investments all the way to companies at scale like Farfetch and Deliveroo. The bulk of what we do is invest in Series A of investment rounds of $5-10m, where we would typically invest $3-6m. Our sweet spot is $4-5m. We invest in fewer deals so that we’re more concentrated and have time for them – crafting a portfolio. Each company is a product on its own and it’s important for entrepreneurs to understand where they stand in the portfolio because that will dictate what kind of capital will be there in their future.
Francois: it seems that UK early stage funds have all moved up to Series A’s and B’s because they statistically perform better: so what’s left for seeds? Is there a new type of structure about to form for early and super-early investments, or is it just a mess until you get to the A round?
Frédéric: it’s very difficult for an investor to resist the temptation of raising bigger funds. The way that compensation works in private equity creates an incentive for managers to raise bigger and bigger funds. Even if you deliver just OK performance, you still do very well.
What’s interesting is when investors keep to small funds. The best example would be Union Square Ventures in NYC, led by Fred Wilson, who could have raised a billion dollar fund but decided to stay at the $150-175m mark and is massively successful. We’re in that camp, we want to keep the boutique style.
Generally, round sizes are increasing. Some of it is price inflation because there is a lot of capital around but also because opportunities are getting much bigger. You look at the adoption curve of any successful service – everything just grows bigger and much, much faster. These companies consume more capital faster and need more money to compete. We see that from round one to round two: the average size of investment has increased. We may increase the size of our next fund so our companies can remain competitive.
When I started in venture, Series A was £2-3m and now that is a seed investment. The degree of product market fit you have will dictate how much capital you can access. Every situation is different. Maybe to start something that has huge potential you need £20m – we are investing in a company raising £20m before launching. For what they do, they need at least that. But our preference is companies that start with little and can find their product/market fit as efficiently as possible. We don’t want to be cheap; we think it is the best acid test – is there something that is truly high demand – especially on the consumer side, which is where we invest.
What we love the most are companies that do not start as companies, bit entrepreneurs who follow a passion which grows into a business opportunity. Two of the companies we’ve backed just turned ten this year. One is an online community for people in the fashion industry called ‘The Business of Fashion’; it began as a simple blog. The other one is a streetwear community called High Snobiety which started with the founder, a student, writing a sneakers blog, now a very large and influential community. We backed an entrepreneur who started a newsletter business from her kitchen table that is called Goop, with the help of Gwyneth Paltrow and is based in the U.S. Those three founders never started with the idea of raising money or growing their business, they just started something.
Then we’ve got businesses that need capital from the beginning like Deliveroo.
So you see, it’s hard to pin down, there’s no one-size model.
James (TMRW member): I had a meeting with a Series B investor last week and the feedback I received was, “I love your idea but I didn’t understand your proposition.” What does a proposition mean that makes it investible?
Frédéric: Again, no one-size-fits-all here, you must spend the time finding out what makes the investor tick, what they’re after, what they to see and hear.
Each time we invest in a company we write a blog post that explains why we invested and the strategy behind it. Now that we have a portfolio it’s easier for people to see if they would fit in it.
James: What did you take from investment banking that helps you invest and what do people with ideas and passions not understand about propositions that need to be aired. Is there something in the language used by investors that need to be understood, or learnt?
Frédéric: Investment banking is great training: you must be able to analyse things, pay attention to detail and able at multi-tasking. But being a banker doesn’t teach you empathy or patience, and to invest well you need those skills too. Bankers are great growth stage investors because it’s then mostly about numbers. To be a VC, you need to be curious.
In your case, I think either of you was having a bad day or it was just not meant to be. I don’t know your personal circumstances but it’s for you to match your proposition to a particular investor
You need less than a tenth of a second to form a first impression of someone, and it’s very difficult to change it afterwards. Many of the entrepreneurs we’ve had the chance to back have become very good friends. We spend time with people whom we like spending time with. That personal chemistry is very important, especially early on.
After the C or D round, you start to analyse a business with a calculator. When we invest early, the data is almost non-existent so it is really hard to extrapolate; so you focus on the person.
Francois: So, you’re looking for stories then?
Frédéric: The best advice I got when I raised our first fund from scratch was that fundraising is a numbers game. The more people you talk to, the more likely you are to raise money. In our case, we talked to a lot of people who were not relevant then but would be in the future. Keep having meetings. It’s very difficult to predict what will happen. Persistence is a key skill.
A guest: What does your strapline, ‘capital for the creative class’ actually mean?
Frédéric: It means we can invest in whatever we want (laughter). The creative class is people typically living in urban environments in activities that are not just simple execution but about creativity. We are talking about new ways of doing things, new forms of expression or consumption, new ways of transportation. These are the people we are going after. It’s an ambitious tagline and we caveat it by talking about digital lifestyles – services and brands that you can’t live without. They live on the home screen of your smartphone or first page on google. We like companies that are often discovered via word of mouth.
It’s much broader than people think. We like to combine the hardcore analytical with things that have a very strong emotional component. Loving a brand is completely irrational. We are looking for those virtual queues – people queueing for a service or something where there is an element of customer love involved.
A guest: I have not heard VCs use the word community before – can you explain why you’re so interested in it?
Frédéric: with technology being everywhere now, you need to pick your battles, choose a field. Ours is people and products that we personally like. I can’t invest in what I don’t understand, such as semiconductors. I love retail. I love consumer in general and creative people and businesses. For us, a brand is a community and it’s alive and, especially with social media today, it’s really interesting to see brands being formed completely organically. It’s interesting to see brands who have lost their souls across multiple sectors. We’ve seen the emergence of digital brands, created completely organically online.
Francois: If communities are huge, conversely are there some that are shrivelling and about to die?
Frédéric: Sure; lifestyles are changing so fast; Communities are like life forms. If you have children aged 8-12 years, then you’ll know of the flash emergence of ‘slime.’ It was popular for a year to eighteen months and after that, it was gone. Your own Facebook usage has already morphed and changed too, with many of us now using Instagram (but even that will hit some kind of a wall and then we’ll be using something else).
Beyond Fashion, Wellness is a big area of interest for us. We started with food – we invested in a vegan food brand and a farm-to-table community business. We invested in a mental wellbeing service targeting women in the U.S. We invested in goop which is around organic and wellness for a high-end audience. We think it’s a strong trend: people are more educated about what they eat, what they should be eating, beauty.
A guest: How do you weigh up which communities are investible?
Frédéric: We look at how we can build a business on top of it. We’ve looked at people that have built large Instagram accounts and it’s harder to see how to build a business on top of it. We like things that combine content and commerce and community, where you can monetise through a media business and some form of transaction. Subscription to content in the case of goop. We like to find the time when we think it’s right.
We recently backed a Canadian online jewellery company called Mejuri: fine jewellery by women and for women. They have a female founder. We found them on Instagram. They were sub 100k followers on Instagram and they were doing around 100k/month so starting to build a solid business. We tracked them using the tools we have developed. They announced publicly they had sold 150k pieces of jewellery in the past twelve months so we could see it’s a nice business forming; we felt this was the right time for us to engage. The founder was very passionate and we liked that. On Instagram, we’d notice tens of comments from women, often tagging their girlfriends. We counted the hearts and we have our own benchmarks on the emojis so when I tell my children that I spend time on Instagram for work, that’s what we actually do.
A guest: You’re spread across multiple companies, supplying finance and advice and you’re obviously monitoring these companies all the time. I’m curious, are you seeing any trends of best practices that you could share with us?
Frédéric: There are definitely some common traits amongst all the companies with whom we work.
The number one is recruitment. This is going to give your company the best chance of success. You shouldn’t be cheap with people as you grow; luckily there’s never been a better time to hire talented people: young, bright people now aspire to work with the tech/digital giants of tomorrow, not big corporates or banks.
The other is to be very clear on a few key metrics that impact the business and simplify everything else. There are actually very few things that really make an impact on the business.
A guest: When you have Series A funding, you can afford to hire good people but what about when you’re just starting out and you have no money, no product, nothing to show people. Is it just passion? How can entrepreneurs attract talent at the very early stage?
Frédéric: Let me give you an example. When I first went to see Farfetch, there were 15 people, mostly in Portugal and a couple of people in London. The founder was using his own money and brought in the CTO with whom he had worked before. He wasn’t paying him too much and he was a partner in the business. When we invested we introduced him to three people, one of whom, Andrew Robb, became COO. That was just over 9 1/2 years ago. Fast forward and the company is public and worth about $6b on a good day. There are now over 2,000 staff and seven on the management team. The original founder, CTO and COO are still there.
A guest: How do you come across the businesses you invest in?
Frédéric: Network is very important. Being connected to people. They find their way to us but not necessarily when they are raising money. That is why it’s important for us to get out there and let people know what we’re looking for. Probably half of what we do is knock on the door and explain to businesses why they are relevant to us.
We do thematic searches. We look at everything that goes into e-commerce – logistics, payments, fraud, all kinds of different tools and we also have our own signals and data led tools that can indicate a company is doing very well.
There is an element of serendipity of what we do. I met the founder of one business at an event and we ended up having a great evening afterwards in a nightclub. We ended up working together.
A guest: Did running a business during the first dot-com boom and what happened there inform how you approach venture capital investment?
Frédéric: Yes, absolutely. We ended up not having the right mix of people around the table so that taught us the importance of picking your team. We were all aligned when things were going well and not so much when things were not going well. Pick your partners, not just within your company but also investors, well.
We also, massively, overestimated the pace of tech adoption in the B2B world. It takes far longer for people to change the way they work vs the way they live. We see companies coming to us saying they’re going to change the way the industry works because it doesn’t make any sense. Often more than a decade later, the industry is still working the same, inefficient way.
A guest: Once you’ve invested, what tells you whether a management team is good or not?
Frédéric: It’s pretty straightforward when you have a budget and objectives. Typically, we set the objectives for the year and quickly you can see whether the company is doing well or not so well. It’s rare that the company meets its budget – it usually does better or not – it’s usual that entrepreneurs are not accurate on revenue or expenses. It’s very easy to build a team on excel but the reality usually takes much longer.
The key metric to me is cash. It’s OK to not grow as fast as planned as long as the company is not burning through cash.
There are situations where we have to sit down with a founder. I did this recently and had to tell the founder that he was going to hit a wall if he carried on with his current strategy. I advised him to take some time off and he did, changed his co-founder, reduced his burn rate by 70% and he extended the runway by 2 more years. Usually, entrepreneurs know when there is something wrong. We lose our money sometimes, which does happen, but it’s much harder for entrepreneurs who put their entire life into their business.
A guest: Aside from receiving cash, what else should an entrepreneur look for from a VC?
Frédéric: We have made introductions to co-founders, found commercial partners. There are lots of ways we can help because of our networks. But I don’t think companies should put too much value on this. What you don’t want is a VC to screw up your business which can happen because our money comes with some strings attached; it’s easy to get the wrong terms, VC contracts are so complex. You can let nasty clauses be slipped in if you are poorly advised. Companies can screw up because they have the wrong investors and bad terms.
Francois: I always advise to meet with investors outside the office. Go for walks, to bars and restaurant. Watch how they handle other people. It could be waiters, someone opening the door for them. You can read an awful lot by how people interact and treat others. As entrepreneurs, it’s your biggest single decision, so take investors out and see how they behave.
Marcela: What are you paying attention to when you invest in terms of soft metrics like engagement on social media vs. hard data.
Frédéric: Sometimes you have to make bets. The Business of Fashion had no idea if anyone would be willing to pay their Premium subscription; Highsnobiety is going to create their own products and launch a range of merchandise. We are making assumptions at the moment about what the level of conversion will be. We are assuming a high level because people explicitly go on that site with the intention to find things to buy. We have some benchmark data and typical conversion on an e-commerce site but we have to make an informed bet.
A guest: Do you invest more in B2B or B2C products?
Frédéric: About 70% of what we do is consumer. That’s where we are most comfortable; we’ve been pretty successful in B2B too, even if we are not known for that. In our second fund, we have two investments in travel, one in jewellery, one in mobility, one in beauty and one in media so roughly 30% in B2B.
A guest: Have you ever invested in a business and the next day thought you might have made a mistake?
Frédéric: Not the next day. We like to take our time before making an investment; we don’t like it when there is a competitive rush to invest and we feel pushed to make a quick decision. We have made seven investments in a fund, five of which were with founders we knew anywhere from 2-5 years before investing. So in two cases, we didn’t know them so well.
The biggest risk is to love the business more than the entrepreneur and we have fallen into that trap because it’s easy to have a strong conviction in the market but back the wrong team. Our biggest challenge currently is time. We are adding more people and have more companies in our portfolio so it’s all about time management.
Francois: We haven’t heard any questions about blockchain or ICO.
Frédéric: That’s good because I have no clue!
Francois: We read quite a bit about how funding is changing and that in the future everyone will be investing directly and that there will be no more VCs.
Frédéric: I don’t believe this. I think of us as crafting portfolios, which takes time, skills, people and luck. Few individuals can get all four, especially the spare time. We are in a business where there isn’t a right or wrong way to do things. You have VCs with large billion dollar funds, sector-specific funds, local funds, smaller funds, growth funds. What’s more important is to have investors aligned with your way of thinking because they’re going to be with you for a long period of time. I think it remains a kind of structured, cottage industry where the human element is really important.
A guest: How involved are your investors in your decision-making process?
Frédéric: We have a slide at the beginning of our presentation to our investors that have not changed. The first says, “We are doing what we said we would do.” And we’re quite unusual in this way and it’s one of the reasons our investors like us and find us unusual. We stick to our strategy.
A guest: What are the important traits a VC needs to have?
Frédéric: Besides a great french accent? (laughs) I think it’s important to be professional but also enjoy the journey and the work. It actually is really hard work. We do have investors to answer to, deadlines and critical meetings, and we do have to work very hard. I work long hours and my emails never stop. I love what I do and feel privileged to do what I do. Curiosity is a key trait you need, and many investors will be smart people but lack the soft skills. I believe VCs can be active partners in the creative class.