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Jörnow was previously VP of Mobile at King Digital, and now invests heavily in gaming startups
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh, how times have changed!
While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Lars Jörnow is a founding partner at EQT Ventures.
Jörnow joined King in 2009 and spent his first year there playing more than 10,000 different flash games. Testing and deciphering what game mechanics and characteristics work for a mass audience helped him produce King’s first Facebook games and then later on set-up the company’s mobile games division. As VP of Mobile, Jörnow led the team that went on to develop and launch the global, cross-platform phenomenon Candy Crush Saga - the most downloaded and top grossing mobile game in history. Whilst at King, Jörnow was also responsible for starting the company’s Growth team as VP of Growth and heading up King’s experimentation unit, King Labs. With his track record, he has been at the forefront of the casual gaming revolution, opening up gaming to people that had never played (or even thought of playing) games before.
As a founding partner at EQT Ventures, Jörnow is passionate about ideas and products that have mass-market appeal and is always on the lookout for the next generation of consumer-centric companies. Having joined King at the start-up phase - with around 50 employees - and supported its growth into a global industry giant with more than 2,000 people, he is able to share his learnings from the journey. At EQT Ventures, Jörnow has partnered with the Small Giant Games team and continues to work closely with WarDucks, Popcore, Natural Cycles and Holidu, among others.
Jörnow has three young kids, loves to play games (both with and without the kids), and tries to stay in shape physically and mentally by playing chess, poker, tennis, and sometimes even a short run.
VatorNews: What is your investment philosophy or methodology?
Lars Jörnow: EQT Ventures was founded by myself, Hjalmar Winbladh and Kees Koolen, and what we wanted to do was create a venture firm that we, ourselves, would’ve liked to have when we were raising money as entrepreneurs. In Europe, we wanted that firm to be an operator-led firm, with people who had actually experience with running tech startups themselves. That’s the positioning and the reason for being we’ve have since day one, to have this operator-led investment firm out of Europe. Once we combined that with being not another seed stage fund, since there are a lot of great operator-led seed stage funds, what we wanted to do was to raise a fund with a size that had the muscle to be a multi-stage investor. So, when we raised our first fund, we went out and really set the bar very high and we raised our €566 million venture fund to be able to multi-stage and back the best entrepreneurs coming out of Europe.
VN: There aren't many operator-led funds in Europe?
LJ: Like in many things with venture, the U.S. has been a bit ahead of the curve compared to Europe, but I think we’re catching up now. If you look at the number of operator-led firms in Europe, there are actually very few. There are a few of them who had one or two partners with operational experience, with more junior team members, but in terms of having a full partnership and a full investment team that has operational experience with tech startups, we think we’re pretty much the only one when it comes to a multi-stage investment firm. There are great investing firms in Europe as well that are not operator-led, this is not a criticism of other firms, it’s just that what we’re bringing to the ecosystem is that entrepreneurial experience and investing in everything from seed up to B and C.
VN: What are your categories of interest?
LJ: The category I’m closest to is gaming. My background, before starting EQT Ventures, was I was at gaming company King Digital for six and a half years. There I had a bunch of different roles; my first year I played 10,000 flash games, this was in 2008, so I spent the whole year playing games and I licensed 200 of those games from indie developers and put the tracking code in them to start learning how mainstream players are playing games on the web. This was before Facebook, before mobile phones had to games to play, and, based on that, we started producing Facebook games at King in 2009 and 2010. Those games became the start of King’s transformation from being a skill games company on the web, powering the Yahoo games page, to being one of the most popular game developers on Facebook and then, later, one of the biggest mobile game developers in the world. I was VP of mobile, in charge of of recruiting the mobile games team, at King and launching Candy Crush Saga in November 2012, which went onto almost $2 billion in revenue in 2013. Since then it has been downloaded more than two billion times, one of the most downloaded games ever. The six and half years at King made me even more interested in games, but now as an investor, rather than a producer and product manager.
In EQT Ventures I we have done five gaming investments; the first one was Small Giant Games, a Finnish gaming studio in Helsinki, making a mid-core game called Empires & Puzzles. We led the Series A in March of 2017, so this was more than two years ago, and at the start of this year, on January 2, the studio got acquired for $700 million. So far, that’s our most successful investment, and a quick exit, so we were very fortunate to catch that rocket ship on the way up. Since then, we’ve done first four mobile gaming investments in Europe, though not all of them have been announced. One is WarDucks in Dublin, a mobile gaming studio which has, among others, John Romero, the game designer behind Quake and Doom; he’s one of the game designers and advisers. The studio is run by a fantastic entrepreneur named Nikki Lannen, who lives in Dublin and worked at Facebook before starting this studio
So, mobile gaming is one of our sectors. Otherwise, I do consumer apps in general; I was the lead partner on Natural Cycles, which is one of our other consumer investments. Natural Cycles is the only digital contraceptive with FDA clearance marketed as a contraceptive to women in the U.S. We led the Series B about a year and half ago, a €25 million round.
VN: What's the big macro trend you're betting on?
LJ: It’s the continued dominance of mobile phones across the world. Today, most people in the world have a smartphone and most people are spending more and more of their disposable income on their smartphone, on services and products. Gaming is part of the entertainment category of apps, and that’s actually becoming more and more of a hobby for hundreds of millions of players out there who play games every day as a habit, like brushing their teeth. They play some mobile games on their way to work, and then at work they go to the bathroom and they mobile games for another half hour. Then they travel home and commute and they play again. It’s increasingly a part of people's lives, and that’s something we want to be a part of. We want to back the best entrepreneurs who can create fantastic mobile games, as well as consumer services and utilities, that match cycles for people all over the world, enabling them to use their phones to solve everyday problems.
VN: What is the size of your current fund and how many investments do you typically make in a year?
LJ: Venture I was €566 million. We’re three years in, so the close for that fund was late May 2016. So far we’re averaging between 10 and 12 new investments per year, so we’re roughly on pace for one per month.
VN: What stage/series do you invest in and how much is that in dollar amount for you?
LJ: Our sweet spot where we spend most of our time, and invest the most money, in new companies is around Series A and B. We sometimes do seed bets where we find a great team in an interesting space, and then we make an exception. And sometimes we do Series C or even Series D, but at those stages it’s more following up on investments in our current portfolio.
The framework for Series A and B is ever evolving, but I would say, for us, Series A is somewhere around €4 to €8 million, and we typically target 20 percent ownership. At Series B, it’s around double that, so let’s say €12 to €16 million. Sometimes it’s bigger and sometimes it’s smaller.
VN: What kind of traction does a startup need for you to invest? Do you have any specific numbers?
LJ: If it’s a consumer app it can be pre-launch, and we look more at the team and the vision and the space and the theory of how big it could be, and, though it’s difficult to estimate, we make our own estimates. Then, at the A round, I would say that you have a product that we can try out, and you probably have a bunch of early users. What you probably don’t have, though, is a one year retention number, because you probably haven’t had your product for a year. So, what we try to look for are proxies for long term engagement. At Series A, maybe we look at day seven retention, or day 30 retention, and see how frequently, and how long, the users that were exposed to the app how often they come back and how much they like the game. For us, that’s the most important part of a consumer bet at that stage.
If you look at enterprise or B2B SaaS companies, it’s probably good to have 10 plus customers, for sure, and ideally a couple of good logos that are telling your potential investors that they would die before they churn from this product. You don’t have a lot of renewals, you don’t have three or four years of data on your customers, but, as investors, we need look at what the current users are saying, how they’re engaging with the product, and how happy they are, and use that as sort of a predictor for how big it could be in the future.
It varies depending on the type of product and if it’s entertainment or if it’s a utility. Obviously, if you have a Natural Cycle type of product, you ideally want to see users tracking daily almost, and if you have a game you want to them to also ideally play daily. But let’s say you have a transportation app, you don’t expect people to transport themselves every day, so it’s very dependent on the type of app. One metric we look at is the DAU divided by the MAU to get a sort of overall stickiness. If you have a DAU over MAU of 50 percent that means that the average user is in every two days a month. That’s one example. We also look at the slope of the retention curve, so if you look at the cohort of users, let’s say 100 users installed the app today and used it for the first time, if you look at a slope of how that user cohort is developing over the first month, usually it's a good predictor of the future engagement. And then you can look at what the delta is between day 30 and day 60; once you get to day 30 you expect the people who tried it out and didn’t feel like this game or app or whatever was for them, they should have churned by then. But, if your players or users had app for a month, and then stopped using it, maybe you have a different problem. It could be a lack of deeper content, or maybe a product people enjoy using but only a month, and that’s probably not going to be a great long-term foundation for a company. I’m hesitant to stick my neck out and give you a number, it’s very difficult and very dependent on the industry.
VN: What other signals do you look for? Team, product, macro market?
LJ: I think that’s one of the toughest questions to answer, what do we look for in people and humans? We try to spend enough time and discuss, as an operating person to operating person, or entrepreneur to entrepreneur, and see if we can find a good way to collaborate. The first thing is to figure out are we a good match, both on a personal level but also on a team to team level. Are we thinking about this in the same way? Are we seeing early signs that we can collaborate and be one plus one equals something greater?
We also look competitiveness of the space and what’s needed to win. That’s also very dependent on the industry. It can be very different to find the best founder or the best CEO for a B2B enterprise company, versus a consumer app company. In the B2B enterprise company, if you’re at seed stage, what lies ahead of you is to build out a sales team globally and build out offices. You need to have a global ambition to recruit the best sales people in a continent where you are not today. Whereas if you have global ambition and you’re a consumer business, then what you really need to do is double down on hiring people in your own office where you are today, and then work with platforms to distribute your service or product globally without necessarily being there physically. It can be very different personality traits that we look for, depending on the business. We talk a lot, in our team, about both founder/market fit, but also founder/product fit. Is this person in front of us, are the strengths they have in favor of the business they are in? Sometimes you can have a great founder, objectively a great person, ambitious, global, everything, but maybe their strengths are not perfectly aligned with the problems that need to be solved in that business.
VN: What do you think about valuations these days? What's a typical Seed pre-money valuation and Series A?
LJ: I wouldn't say all valuation are going up, I would say we see more and more differentiation. The best founders with the most impression traction or the biggest vision, the most global, those who say, ‘I’m going to build the biggest company in the world,’ those type of teams and companies tend to get higher valuations today than a couple of years ago. But I wouldn’t say that the average valuation is going up, it’s just that the more competitive the rounds are the higher the valuation. Valuation in general, maybe this is controversial, but I would say they are necessarily drawing on financials in our space. If you’re doing a Series A or a seed round, or even sometimes a Series B, they’re not PE multiples we’re looking at, it’s much more market valuation. So, the more demand there is for a company, the higher the valuation.
The European ecosystem has seen quite a nice growth on the VC side, but especially on the founder side over the last couple of years. It’s really exploding in Europe right now. In Sweden, they publish these, ‘What do you want to do after business school?’ rankings every year, and 10 years ago it was all Goldman Sachs and seven years ago it was McKinsey and in the last couple of year it’s been, ‘Start my own company.’ That’s a real transformation for the ecosystem in Europe. Now the most ambitious thing you can do is to start your own thing, it’s not being selected by an established, global company to work for them as one of their thousands of employees. The number saying they want to start their own business is growing, for sure; if it was five percent 10 years ago, it’s 50 percent now. There’s always great entrepreneurs starting companies, it’s just, in our world, the top of the funnel, the number of newly started tech companies, is just exploding, growing much, much faster than number of VCs being started. Even if the VC ecosystem in Europe doubled over the last five years, the number tech companies started up has been growing at a magnitude of that.
VN: There are many venture funds out there today, how do you differentiate yourself to limited partners?
LJ: My perception is that the LPs look at us like we look at the entrepreneurs that we’re backing: they’re looking for a great team, a strategy they like, a strategy that matches what they see in the market, and ideally some traction. We have all three at this point; we have a team of operators and people with a lot of experience running companies; we have an entrepreneur culture in our team, we built products, we built our Motherbrain around data-driven investments; and we have a multi-stage strategy that I think if you ask most of the more well known LPs, they would say that some of the best absolute returns are from the multi-stage VCS, where you invest early and then keep backing your winners in round after round to defend or even grow your ownership in the best companies. In our case, the combination of team, strategy and early traction from Fund I has been, I hope, what the LP were hoping for when they backed us three years ago.
VN: Venture is a two-way street, where investors also have to pitch themselves. How do you differentiate your fund to entrepreneurs?
LJ: I’m going to sound like a broken record here but it also depends on the type of company. If we’re looking at a B2B SaaS company selling into big industrial companies, maybe part of our pitch is we’re EQT, the private equity house, and EQT owns a hundred plus other enterprise companies that could be customers of the company we’re meeting with.
The core pitch is that we’ve been there, we’ve been running companies, we have experience with being on their side of the table and we would love to team up as real collaborators and bring our experiences from prior startups in helping them accelerate their startup.
We also have operating partners, people on our team who have a specialized expertise; we have an analytics partner, we have a finance partner, we have an international roll out partner, etc, people who have been doing something specialized in a startup before, or a growth stage company, and are now helping our portfolio companies with exactly that part of running the business. Maybe that’s not the most unique pitch in the U.S. but in Europe there are very few funds with this sort of operating model and support up this point.
VN: What are some lessons you learned?
LJ: I was fortunate to be a part of the King rocket ship, growing from 50 people to 2,000 people in just a couple of years, and explosive development. I was fortunate enough to make some money out of that as well so I had a lot of options after I decided that my King journey was coming towards an end. I was contemplating, ‘What should I do next? What do I want to do?’ I concluded that I wanted to do something very long-term, and, at the same time, something that could itself change over the long-term. Venture capital, even though the job description is sort of the same, we invest LP money in hopefully the best companies to transform the world, it's the people you meet, on our side of the table, that change over the years. The ideas we hear, the discussions we have on our team, are new every month as well. It’s a very changing business in the day to day, even though the framework is the same. That appealed to me, that I could really dive into something that I could do for the rest of my career. I’m 37 now, I was 33 or 34 when we started EQT Ventures, but I could probably do this until retirement because of the learning and the people you meet in this business.
It’s also very much aligned with the questions you just asked about the pitching and selling. When you’re on the founder’s side or the operator’s side, you think the VCs are sitting in their ivory tower and decide who gets the money. On the VC side, we’ve been fundraising as well, we’ve met several hundred LPs, so we’ve been doing the begging as well, and sometimes when we really find something we want to invest in, we need to do much more selling than I thought we would be doing before we started this. That’s part of my learning over the last couple of years. It’s almost like a two- sided marketplace to be a VC; you have customers on the LP side, and you have you customers on the founder’s side, and we need to be customer-centric and deliver a great return to both sides.
VN: What excites you the most about your position as VC?
LJ: To really enjoy being a VC, you have to be personality type that likes risks. Most of the investment decisions that we make will end up being, statistically speaking, not great investments. It’s kind of depressing to know that I spend most of my time working on things that will become nothing, but I do it to find the ones that do become something. In order to enjoy that over time, I think you need to be a very risk friendly person who enjoys making a decision where, ‘It’s likely this will not turn out but I’m happy to make the bet. I’m doing to out €10 million behind this entrepreneur and we’ll see where it ends up.’
VN: Is there anything else that you think I should know about you or the firm or your thoughts about the venture industry in general?
LJ: Maybe I should mention a bit more about about Motherbrain, which is our own tech system. It helps us with deal sourcing, so we buy data, we collect that data from third party sources, and then we combine that data into a signaling system that gives us notifications when certain companies, perhaps, are somehow breaking away from the norm. That then gives us a reason to proactively reach out to that company and have a discussion around if there’s an opportunity to team up. Secondly, we use it as our own day-to-day tool, so I work in Motherbrain every day. We have our deal flow, we have our communication, we have our assessments, and everything we do is being we logged into the Motherbrain; we’re accumulating our own proprietary data as we are operating the firm. We think that, over time, that’s going to give us insights and data that no other firm will have.
We have a dedicated team of about 15 people working on Motherbrain. That’s also something that’s enabled by being part of EQT, a bigger private equity firm that can share the cost of that, because if you’re a standalone VC firm you probably can’t afford having 15 engineers working on a tech product. We’re kind of a startup, in the sense that we have a product with a vision and a team working on that product every day. The way we see it, today, Motherbrain is maybe the not differentiating factor, but it will be very soon; if you look five to 10 years from now, if you’re not investing in building the best data-driven VC firm yourself, you face a big risk of not being around. So, we think we're investing heavily right now in the future of becoming one of the best VC firms down the line by using all the data being accumulated to find the best opportunities where nobody else is finding them, hopefully, and that will also allow us to work for them in the best way when they are part of our portfolio. That’s also something that sets us apart; it doesn’t help the entrepreneurs so much, but it’s definitely something we’re very proud of, that we are sort of a tech company and not just a money manager.
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