20 VC 091 Daniel Waterhouse @ Balderton Capital on Investing Styles, Venture Landscapes and The Future of AI

In this episode of the 20 minutes vc, host Harry Stebbings interviews Daniel Waterhouse, a general partner at Balderton Capital, discussing his journey from a research scientist to a prominent figure in venture capital. Waterhouse reflects on his structured approach to investing, influenced by his background in applied mathematics, and the importance of balancing metrics with an understanding of human elements in business success. He delves into the shift towards consumerizing enterprise SaaS, highlighting the potential of SMB-targeted software and the role of unsupervised learning in AI advancements. Waterhouse also touches on the venture landscape's evolution in Europe, with a more supportive political environment and a growing acceptance of entrepreneurship. He concludes with insights on the significance of operational experience for VCs and the emerging sectors that may be overhyped or neglected.

• Bulderson Capital is one of Europe's most prestigious and successful venture capital firms.
• Daniel Waterhouse is a general partner at Bulderson and has been instrumental in scheduling interviews with various industry figures.
• Daniel joined Bulderson as a general partner in 2013.
• He sits on the boards of several companies, including Top Ten, Roley, Lovecrafts Trademark, Tictail, Ashika Thread, and Workable.
• Prior to Bulderson, Daniel spent five years as a partner at Wellington Partners, investing in fast-growing companies such as Halo, Yplan, Booker Table, Redmill, and Kip.
• Before Wellington, he was a sector partner at 3i, focusing on internet sector investments in North America and Europe.

"Daniel joined Baldston as a general partner in 2013, and he currently sits on the boards of some incredible companies."

This quote highlights Daniel Waterhouse's role as a general partner at Bulderson Capital and his board positions, indicating his influence and involvement in the growth and oversight of various companies.

• Daniel began his career as a research scientist at National Grid, working on modeling the UK electricity network and early AI technologies.
• Transitioned from academia to business through consulting.
• Had a significant career opportunity at Yahoo in 1999, which served as his introduction to the technology sector.
• Entered the venture capital world in 2006 with another fund.

"I kind of started my career actually as a kind of research scientist with National Grid... Did a little bit of consulting, got trained in the world of business... got to go and work at Yahoo for a few weeks, which turned into many years and kind of became my induction into the world of technology and all things online."

This quote provides an overview of Daniel's career trajectory, emphasizing his transition from a scientific background to the business and technology sectors, leading to his venture capital career.

• Daniel has a PhD in applied mathematics, which he feels contributes to a structured approach to thinking and understanding complexity.
• His academic background assists in appreciating technology and software solutions and applying rigor in understanding markets and businesses.
• Acknowledges that while academic training is helpful, understanding entrepreneurs requires different experiences.

"My PhD was in applied maths... ultimately, as a mathematician, you tend to be kind of reasonably structured in the way you think about things... I think it's been helpful in appreciating technology and software solutions."

Daniel discusses how his academic background in mathematics influences his structured thinking, which is beneficial in evaluating technology and market complexities.

• Daniel has learned to be less metric-driven over time, acknowledging the importance of human factors and market dynamics in company success.
• Recognizes that while data and numbers are important, a comprehensive understanding of technology's impact on the world is crucial.

"I've learned to be less metric driven... there's a lot of human stuff that impacts whether companies are successful... I've actually tried to unlearn being."

This quote reveals Daniel's evolution as an investor, highlighting his shift from a purely data-driven approach to a more holistic view that considers human and market factors.

• It's critical to understand the drivers of your business for success.
• Without this understanding, businesses are likely to struggle.

"Just numbers and metrics driven, but it's still super important because if you don't understand your business and the drivers, then you're going to struggle to be successful."

The quote emphasizes the importance of being aware of the underlying factors that drive a business, suggesting that a lack of this understanding could hinder success.

• Success can come from founders with varying levels of experience and rationality.
• Experience is beneficial for learning about pitfalls in business.
• Too much experience can lead to cynicism and hinder the necessary leap of faith.
• A degree of irrationality may aid in the entrepreneurial drive to succeed against odds.
• Some level of naivety can be an asset, especially if paired with adaptability and an openness to learning.

"But it seems to me that often there's a benefit of some experience because you've learned some of the pitfalls of what it takes to build a business. But if you have too much experience, you maybe become too cynical or unable to take a leap of faith and kind of have blind ambition in building a business."

Daniel Waterhouse discusses the balance between experience and naivety in entrepreneurs, suggesting that while experience is beneficial, excessive experience might stifle the entrepreneurial spirit.

"And similarly, if you're completely rational, then I think it can be very hard to be an entrepreneur, because being an entrepreneur requires you convincing yourself and other people that you're going to do something which frankly is highly unlikely to succeed."

Daniel Waterhouse points out that a certain level of irrational belief in success is necessary for entrepreneurs, as they often face long odds.

"Yeah, to a degree. I mean, look, I think naivety with open ears and listening and adapting, but being able to not be constrained by conventional wisdom."

Daniel Waterhouse agrees that naivety can be beneficial for founders, particularly when it allows them to challenge conventional wisdom and remain adaptable.

• Diversity in skills and backgrounds is crucial for a successful venture firm.
• Operational experience is valuable for VCs to empathize with entrepreneurs.
• Different perspectives and expertise from VCs can greatly benefit portfolio companies.
• Empathy with entrepreneurs can come from direct operational experience or from being a long-term investor close to the business-building process.

"So I think to a degree, we've all have some different levels of operational experience, but one of the things I love about where I am and the partners I work with is we have that diversity, because the reality is to build a successful venture firm and to be able to help entrepreneurs takes all sorts of different types of skills at different times."

Daniel Waterhouse highlights the importance of having a diverse set of skills and experiences within a venture capital firm to support entrepreneurs effectively.

"I think it's important to have been close enough to what it takes to build a business so that you can truly empathize with entrepreneurs as they go on that journey."

Daniel Waterhouse stresses the importance of understanding the entrepreneurial journey, which can be achieved through direct experience or close involvement as an investor.

• The European venture landscape has evolved significantly over the past decade.
• Entrepreneurship is now more widely accepted as a career path.
• Entrepreneurs recognize global opportunities, not just local ones.
• Investors have adapted in mindset and ambition to match the global scope.
• Increased capital, smarter people, and more interesting companies have emerged.
• Political agendas now include support for the venture and startup ecosystem.
• Technological advancements have made the world more receptive to new products.

"And I guess specifically in Europe? I think it's completely different. Frankly, the actors in the industry are quite different. By and large, the understanding of entrepreneurship and adventure capital is completely different."

Daniel Waterhouse reflects on the transformation of the European venture landscape, noting changes in the players and the broader understanding of entrepreneurship and venture capital.

"And so more capital, there's more smart people, there's more interesting companies appearing. It's become a bigger item on the political agenda."

Daniel Waterhouse observes an increase in capital, talent, and innovative companies in Europe, as well as greater political attention to the startup ecosystem.

• There is a concern about the balance of capital availability and the number of viable deals.

"I think in Europe the balance is not to"

Although the quote is incomplete, Daniel Waterhouse begins to address the concern about whether there is an appropriate balance between the amount of capital available and the number of quality deals in Europe.

• There is an abundance of seed capital available, with many new entrants interested in seed investing.
• Series A and B stages are relatively balanced in terms of capital availability.
• Growth phase investments are intensifying, with a surplus of capital chasing a limited number of high-quality deals.

"I think if we look today, there's probably a little bit more seed capital than potentially is there to find the great deals." This quote highlights the current state of seed capital availability, indicating that there may be more capital than necessary to fund the available high-quality investment opportunities.

"Which is primarily series A and a little bit of series B. It's pretty balanced." The quote suggests that the allocation of capital at the Series A and B stages is proportionate and well-distributed.

"The growth phase is getting more intense, and there's maybe too much capital chasing the few really high quality deals." This indicates a competitive environment in the growth phase of venture capital, where an excess of funds is seeking a small number of attractive investment opportunities.

• Daniel Waterhouse agrees with the notion of the barbell effect, where there is significant capital at the extremes (seed and growth stages) of the venture capital market.

"Yeah. By and large, yeah." The affirmation of the barbell effect suggests a consensus on the observed capital concentration at the seed and growth stages of venture investments.

• Workable targets SMBs (Small and Medium-sized Businesses) with powerful software tools historically reserved for large enterprises.
• The proliferation of cloud-based and mobile-first products is enabling SMBs to adopt advanced software solutions.
• User-friendly tools designed for SMBs are beginning to penetrate larger enterprises due to their ease of use.

"And what we now see primarily, often mobile first, but also just through cloud based web products, is the ability to deliver great software to small business owners." This quote explains the shift in software availability, with SMBs gaining access to sophisticated tools through mobile and cloud-based platforms.

"And what then happens, interestingly, is that is those kind of lightweight, super easy to use, but powerful tools actually start creeping up into bigger enterprises." The quote indicates a trend where tools designed for SMBs are becoming popular in larger enterprises, disrupting traditional enterprise software markets.

• There is a continued trend towards making enterprise software more user-friendly and accessible, similar to consumer software.
• Slack is used as an example of a grassroots tool that has organically spread within enterprises.
• The consumerization movement is expected to extend to SMB software and certain areas of enterprise software.

"Do you think there's still a long way to go then, in consumerizing enterprise software?" This question raises the topic of how far the consumerization of enterprise software has come and the potential for further development in this area.

"I think there's a long way to go in consumerizing SMB software, because I don't think there is much SMB software." The response emphasizes the opportunity for growth in the SMB software market, suggesting that this sector is still in its early stages of adopting a consumer-centric approach.

• Daniel Waterhouse's interest in AI stems from solving complex, non-linear problems that companies face.
• Investments in AI, like Curious AI and Trademark Now, target specific, intricate challenges such as pattern recognition and phonetic analysis.
• The expectation is for AI to continue evolving and impacting various sectors over the next two decades.

"And so kind of trademark now and thread, you could put in one cam, which is." This incomplete quote seems to discuss the categorization of AI investments like Trademark Now and Thread, which address specific problems using machine learning.

"And every company now is sitting on complexity in what they know about their user and the data points they have." The quote recognizes the complexity and abundance of data that companies have on their users, which AI can help decipher and utilize effectively.

"Curious is really kind of the next step beyond that." This suggests that Curious AI represents a further advancement in the field of AI, building upon the foundation laid by other AI-driven solutions.

• The discussion begins with the advancements in AI, particularly unsupervised learning.
• Unsupervised learning is contrasted with supervised learning, which relies on training sets to teach algorithms.
• The potential of unsupervised learning to expand the number of solvable problems is highlighted.

"A lot of AI today is supervised. Learning is basically where you have a training set and you teach the algorithm what good looks like. Unsupervised learning is where you don't. And the algorithm works out what good is on its own."

This quote explains the difference between supervised and unsupervised learning, emphasizing the independence of unsupervised algorithms in determining successful outcomes without pre-set training data.

• AI's application extends to various real-world scenarios, such as vision and self-driving cars.
• The necessity for AI to learn independently is underscored by the unpredictability of real-world situations.
• Current real-world problems are being addressed using existing AI methodologies.

"Real world problems like thread and trademark now are using existing methodologies to solve their real world problems."

The quote indicates that AI is currently being utilized to solve practical issues, suggesting that AI technology is already integrated into solving tangible problems.

• The conversation touches on public figures like Elon Musk and their concerns about AI safety.
• The complexity of AI's potential risks is acknowledged, but the speaker suggests that a scenario where AI becomes self-aware is distant.

"I think we're a long way from. A way where suddenly the AI becomes self aware and switches on the nuclear bombs."

The quote addresses the fear surrounding AI becoming self-aware and causing catastrophic events, but it downplays the immediacy of such a risk.

• The speaker expresses interest in neuroplasticity and the human brain's ability to adapt.
• A book titled "The Brain That Teaches Itself" is mentioned, which discusses the adaptability and learning potential of the brain.

"One of my favorite books I really like is the brain that teaches itself, which is about the adaptability of the neuroplasticity of the human brain."

This quote shares the speaker's fascination with the brain's ability to learn and adapt, aligning with the themes of continuous improvement and learning.

• The speaker shares a piece of investment advice that suggests a learning curve in venture capital.
• The advice implies that initial investments carry a high risk of loss.

"To you, the first 10 million you invest, you'll lose."

This quote provides insight into the speaker's investment experience, highlighting the risks and learning experiences associated with early-stage investing.

• The speaker identifies food delivery as an overhyped sector.
• Behavioral science's application to technology is mentioned as a neglected area.
• The speaker suggests that more attention should be given to the intersection of behavioral science and technology.

"Overhyped is food delivery. Okay, neglected. I think applying behavioral science to technology problems."

The quote categorizes sectors based on perceived market attention, suggesting that food delivery is receiving more hype than it may deserve, while behavioral science in tech is overlooked.

• The speaker expresses a longing for better-quality tech content.
• There is a nostalgia for a time when consistent, high-quality tech content was more available.
• The speaker suggests that currently, finding great content requires more effort to locate individual authors on platforms like Medium.

"I actually long for some better content. There was a period when tech quench started and when on Malik was blogging where there was great consistent content."

This quote reflects on the past quality of tech content and the speaker's desire for a return to consistently high-quality sources.

• The speaker identifies current partners and entrepreneurs like Daniel Ek as thought leaders.
• Joining Bolton is highlighted as a significant career milestone for the speaker.

"I think from a venture perspective, my current partners are people I take a lot from in terms of how to invest."

This quote acknowledges the influence of the speaker's partners in shaping their investment approach, indicating respect for their expertise.

• The speaker's most recent investment was in a Finnish AI company called Curious AI.
• The decision to invest was made quickly based on the entrepreneur's extraordinary qualities and compelling ambition.

"The last one was actually curious AI, which we talked about, which is, as you mentioned, a new AI company in Finland and I made the decision in 40 minutes because the entrepreneur is extraordinary and the ambition of what he wants to do is very compelling."

The quote details a recent investment decision, emphasizing the importance of the entrepreneur's character and vision in the decision-making process.

• The host thanks Daniel for his insights and mentions Matamark and Mattermark Daily for providing data and analysis.
• The host promotes the 20 minutes VC newsletter and social media accounts.
• Loyalty Bay's conversion optimizer tool is endorsed, with a mention of its free trial.

"And a huge hand to Daniel for giving up his time today to be on the show and share his amazing insights."

This quote expresses gratitude towards the guest for his participation and contribution to the podcast.

"And you must sign up to Mattermark Daily. It's their curated daily newsletter of all things startup and VC."

The host recommends a resource for listeners interested in startups and venture capital, highlighting the value of staying informed through curated content.

"Check it out at www. Dot Loyaltybay Co. UK. That's Co. UK. And there is also no financial obligation from the offset as they have an amazing 30 day free trial."

The host endorses a tool for increasing conversion metrics, emphasizing the tool's efficacy and the availability of a no-risk trial period.