20VC Why Your Fund Model Should Not Rely on $10BN+ Outcomes, Why the Large Funds Got Too Large, The Rise of Solo GP's; The Pros and Cons & Is Consumer Subscription Even a Good Sector to Invest in with Nico Wittenborn @ Adjacent



In this episode of 20vc, host Harry Stebbings interviews Nico Wittenborn, founder of Adjacent, an early-stage venture firm with a focus on consumer subscriptions. Nico discusses his journey from refurbishing iPhones in high school to investing in Apple stocks, which sparked his interest in entrepreneurship and investing. He shares insights from his time at Insight Partners and .9 in Europe, emphasizing the importance of thesis-driven investing and the potential of consumer subscription models, despite their high churn rates and challenges. Nico argues that these models are just reaching maturity, with companies like Calm and Duolingo as benchmarks, and believes that more multi-billion dollar companies will emerge in this space. He also touches on the importance of balance in life, the role of fatherhood in shaping his long-term perspective, and his cautious excitement for navigating the evolving venture landscape.

Summary Notes

Venture Capital and Industry Challenges

  • Nico Wittenborn suggests the coming years will be difficult for most firms, especially large ones.
  • The challenge is operating under the assumption of needing multiple billion-dollar outcomes to significantly impact a fund.
  • This is Nico's first time discussing these challenges publicly.

"I think the next few years will be pretty difficult for most firms. I think the big ones have become too big. Operating under the assumption that you need 10 billion billion dollar outcomes to move your fund is a very hard one."

The quote highlights the difficulty venture capital firms face, particularly larger ones, in achieving the high number of billion-dollar exits required to make a significant impact on their funds.

Harry Stebbings' Introduction and Sponsorship Mentions

  • Harry Stebbings introduces the podcast and expresses excitement about the guest, Nico Wittenborn.
  • Nico is praised for his skill in the venture business and his kindness.
  • Harry mentions Nico's past experience and current firm, Adjacent.
  • Sponsorship plugs include Tigas, Secureframe, and Deal, offering various services for research, security compliance, and HR management.

"This is 20 vc with me, Harry Stebings and I'm so so excited for the show today."

Harry Stebbings sets the stage for the podcast, showing enthusiasm for the upcoming conversation with Nico Wittenborn.

Nico Wittenborn's Venture Journey

  • Nico began his venture journey in high school by importing and reselling iPhones.
  • He invested in Apple stock, which taught him about making money online and investing in what you believe in.
  • Nico was inspired by Team Europe and their seed fund, which led him to intern and work with them.
  • He joined .9 (Point Nine) as the first long-term worker and learned early-stage SaaS investing.
  • Later, Nico moved to New York to work with Insight Partners, focusing on Series A investments.
  • In 2019, Nico founded Adjacent, an early-stage fund investing in Europe and the US.

"So I started my journey in high school in the first step towards investing, which was I imported iPhones from the UK, unlocked them, refurbished them, resold them..."

Nico recounts his early entrepreneurial activities and how they led to his interest in venture capital and the founding of his own firm, Adjacent.

Consumer Subscription Market

  • Harry Stebbings questions the viability of the consumer subscription market, citing high valuations but long maturation times.
  • Nico discusses the evolution of the subscription model, highlighting companies like Calm and Duolingo.
  • He argues that the market is still emerging and that the willingness to pay for software subscriptions is growing.
  • Nico acknowledges challenges such as high churn rates but suggests that churn stabilizes over time.

"Let me start by talking about the time of getting these companies to scale, right?"

Nico addresses the time it takes for subscription-based companies to mature and the evolving perception of the subscription model's value.

Churn and Customer Acquisition Costs (CAC)

  • Nico explains that while churn is higher in the first year, it resembles SMB SaaS churn in subsequent years.
  • He emphasizes the importance of recovering CAC within the first year and the potential for high-quality mobile companies to have SaaS-like margins.
  • Nico advocates for steering acquisition to ensure immediate CAC recovery and sustainable growth.

"The companies I work with have at least 50, the 50 cent journey. And if not, then I made the wrong decision based on two early data points."

Nico discusses his experience with the churn rates of companies he works with and the strategies employed to manage customer acquisition costs effectively.

Organic Growth and Paywalls

  • Nico recommends aiming for at least 50% organic growth to balance paid acquisition.
  • He notes that showing the paywall often, coupled with free usage, can drive conversions.
  • Nico also mentions that paid conversion can lead to increased user engagement.

"The guideline I give is 50% and this is mostly for not forgetting about it."

Nico provides guidance on the level of organic growth that companies should aim for to maintain a healthy balance with paid acquisition.

Acquisition Channels and Market Volatility

  • Nico acknowledges the risk of relying on a single acquisition channel and the need for diversification.
  • He discusses the importance of taking advantage of effective channels while also preparing for changes.
  • Nico stresses the ability to adapt to new acquisition channels and the necessity of discipline to avoid being caught unprepared by market changes.

"No. I think that is one of the major risks to manage because you cannot be dependent on only one channel."

Nico responds to concerns about the volatility of customer acquisition channels and the importance of not relying solely on one channel for growth.

Annual Upfront Payments

  • Nico mentions that the majority of conversions he works with are annual upfront payments.
  • He discusses the use of discounts on annual plans and the varying willingness to pay for valuable products.
  • Nico points out that price sensitivity can be lower for high-quality products, and people's willingness to pay is increasing.

"This is the majority of the conversions that we work with."

Nico talks about the prevalence of annual upfront payments in the subscription models of the companies he works with and how they impact customer conversion and retention.## Cash Efficiency and Seed Investment

  • Seed rounds can lead to significant revenue with minimal initial investment.
  • The seed stage is less dilutive for founders.
  • The seed stage is an attractive entry point for investors.
  • Cash efficiency is an important aspect of the seed stage.

"What other companies do you have where a seed round gets you to tens of millions in revenue?" "And I think the seat is a great spot to invest in these companies."

These quotes highlight the potential for seed investments to rapidly scale revenue and the attractiveness of the seed stage for investors due to its capital efficiency and the opportunity for significant growth.

Expansion Beyond Initial Product

  • Photo room began as a mobile prosumer product and expanded globally.
  • The product evolved to include web and team versions, as well as a high-value API.
  • Expansion demonstrates the potential for initial products to grow into broader platforms.

"Take photo room. It's a prosumer product. We started on mobile. It's successful not just in the US, but also in emerging countries." "Now we're bringing the same product to web, to teams, and we have an API that people are paying 600 digits for a year."

These quotes illustrate the evolution of a product from its initial offering to a more comprehensive suite that caters to a wider market, highlighting the scalability and adaptability of successful startup products.

Seed vs. Series A Investment

  • Seed investment offers a balance of upside potential, downside risk, and future dilution.
  • Seed investors may anticipate multi-billion dollar exits, rather than $10 billion exits.
  • Nico Wittenborn believes in a smaller fund size to achieve strategy goals and provide significant returns even with $2 billion exits.
  • The decision to raise follow-on funding is contingent on seeing clear opportunities for acceleration.

"I believe that seed is the best in terms of upside, potential downside risk, and expected future dilution." "Even if it's a $2 billion exit, it should return the fund once, twice, maybe three times."

These quotes convey Nico's investment philosophy, emphasizing the strategic advantages of seed investing and the importance of fund size and exit expectations in venture capital.

Market Dynamics and Valuation

  • Founders often face pressure to raise at high valuations due to market comparisons.
  • Nico advises caution against raising at too high valuations too soon for the benefit of all stakeholders.
  • There is a tendency for VCs to criticize business models until they become successful.
  • Early-stage investing should be thesis-driven, focused on the potential for market change.

"I caution not to raise on too high valuations too soon, always, because I want everybody to win." "But generally, and this has different reasons, $10 billion outcomes are very rare."

These quotes reflect the challenges and considerations in startup funding, including valuation dynamics, the rarity of extremely high-value exits, and the importance of supporting long-term success for all parties involved.

Fund Model and Portfolio Construction

  • Nico's fund includes 20-25 companies, primarily seed investments.
  • Ownership targets are around 10%, with flexibility in the definition of seed rounds.
  • The fund's check size ranges from one to seven million dollars.
  • Board involvement is strategic and selective, with a focus on early-stage support rather than long-term governance.

"So the model is that I have somewhere between 20 and 25 companies in a fund." "I try to lead at seed and I try to co-lead at a."

These quotes outline the structure and strategy of Nico's fund, including the number of companies, the approach to ownership and investment, and the philosophy behind board participation.

Price Sensitivity and Deal Selection

  • Nico is mindful of being fair in valuations without being overly cheap or generous.
  • There is a balance between fund strategy and what is optimal for the company.
  • Successful partnerships with founders involve open communication and finding common ground on terms and valuations.
  • Nico reflects on instances where he has broken his usual investment criteria for exceptional opportunities.

"Don't be so cheap, and you can take that to the extreme and become too generous at the same time." "We will only be successful if the founders that we work with are happy with how we're collaborating with them."

These quotes emphasize the importance of fair valuation practices and the need to align fund strategy with the best interests of the companies being invested in. Nico also acknowledges the occasional need to deviate from standard practices for particularly compelling opportunities.## Solo GP Model

  • Solo GP (General Partner) refers to an individual who operates a venture capital firm alone, without partners.
  • Nico Wittenborn became a solo GP by gaining confidence in his specific investment interests and not wanting to conform to the positioning of existing institutions.
  • He values autonomy and the ability to find his own investment style, which led him to start his own firm organically.
  • Solo GPs can avoid partnership breakups, which are a common reason for venture firm issues.
  • The model allows for following one's own thesis and making decisions without the need for consensus, which can be beneficial in early-stage investing.

"The term solo GP? I think also when you started was not yet a thing, but the way that it happened for me was really that I became confident in what I wanted to do."

This quote illustrates the speaker's journey to becoming a solo GP, emphasizing the importance of confidence in one's investment focus.

"And so I think the same for me. I've been employed and I'm grateful for the time and the learnings, but I also always operated in a very autonomous way and I think I'm getting better with the ability to fully find my own style."

Nico highlights the value of autonomy and personal growth in his decision to become a solo GP.

"I think you're absolutely right that partnerships can be one of the biggest reasons for it not working out, especially if it's a forced partnership."

Nico agrees that partnership issues can lead to venture firm failures, suggesting that a solo GP model can mitigate this risk.

Decision Making as a Solo GP

  • Solo GPs must develop their own decision-making processes.
  • Nico uses a set of frameworks and perspectives refined over 12 years of investing to evaluate opportunities.
  • He challenges his opinions on deals and operates based on a strong personal conviction.
  • Nico acknowledges that decision-making can be tough alone, but some people, including himself, prefer to test their convictions internally rather than with others.

"Yeah, I guess you have to find your own process."

Nico explains that as a solo GP, creating a personalized decision-making process is essential.

"First I have to actually have a hypothesis and have one opinion. Right. So this is before I even challenge myself."

The speaker describes the initial step in his decision-making process, which involves forming a hypothesis and opinion.

Evaluating Founders

  • Nico does not have a fixed framework for evaluating founders but relies on instinct and mutual attraction between himself and the founders.
  • Different types of entrepreneurs can be successful, and Nico looks for ambition and the fit between an entrepreneur and their business.
  • He believes that ambition can grow over time and that not everything about a founder's potential is apparent from the beginning.

"I don't think I have a great framework for evaluating founders. At the same time, I think I've worked with amazing founders."

Nico admits to not having a structured framework but has successfully worked with founders based on instinct.

"It's like how driven are you? What's driving you? How ambitious can you be?"

The speaker highlights the importance of a founder's ambition and drive in his evaluation process.

The Adjacent Possible

  • The "adjacent possible" is a concept from evolutionary biology that Nico applies to investing, suggesting that evolution in technology and markets happens through the combination of existing phenomena.
  • He believes in identifying macro trends and changes that can drive company growth more significantly than the company's execution alone.
  • By understanding the "adjacent possible," investors can anticipate the types of companies that will benefit from these trends and succeed in the future.

"Based on what is available at this point, the combination of the things usually leads to the next step."

Nico uses the concept of the adjacent possible to explain how innovation and company growth often result from existing conditions and trends.

Consumer Subscription Models and AI

  • Nico discusses the impact of AI on consumer subscription models and the value of companies that integrate AI to enhance their products and services.
  • He challenges the idea that companies leveraging OpenAI models have no proprietary value, suggesting that the application layer that adapts AI for specific use cases is where significant value is created.

"The way I look at AI from an adjacent perspective is we're going to have companies that are already consumer subscription companies that are implementing this to make their products even more sticky, more functional, and give features that were not possible before."

Nico explains his view on how existing consumer subscription companies can benefit from integrating AI into their products.

The Future of Venture Capital

  • Nico believes that the venture capital industry will continue to innovate and accelerate.
  • He anticipates that the next few years will be challenging, especially for large firms that may become too big and face internal issues.
  • Small funds and early-stage investments are seen as advantageous, despite the potential for increased competition from larger firms moving into the seed stage.

"I don't have any doubt that there will be innovation. If anything, it will probably keep on accelerating."

The speaker expresses confidence in the ongoing innovation within the venture capital industry.

"It's certainly hard to make a blanket statement, but I think that franchises will go down. I think people will leave."

Nico predicts changes and potential downsizing within large venture capital firms.

Impact of Market Dynamics on Seed Investing

  • Nico discusses the influx of capital into seed-stage investing from larger firms that are hesitant to deploy funds in later stages due to market conditions.
  • He acknowledges the challenges this creates for seed investors but believes that larger firms have other priorities and will not focus solely on seed investments.

"I guess you have a point that this is happening at the same time. It's a temporary issue where these funds, they have to also work on their growth funds that are sitting untouched, otherwise they're not raising it."

Nico recognizes the trend of larger firms moving into seed investing but views it as a temporary issue.

"Like their core existence is in peril if you describe it like this. Right. And so will they come down and just fully focus all of their energy in competing for seed? Is that really what will save them? No."

The speaker suggests that larger firms have more significant concerns than competing in the seed space, implying that their core business may be at risk.

Founder Preferences and Geographic Influence

  • European founders often seek US investors due to a perceived bias that US investors are superior.
  • Nico finds it disappointing that European founders idolize US investors, though he acknowledges encountering many impressive investors in the US.

"So one thing I've actually noticed is that the european founders care about having a us investor."

Nico comments on the preference of European founders to have US investors involved in their companies.

"I think it's a little sad that we have this as Europeans. This bias towards the US investors are clearly better."

The speaker reflects on the bias among European entrepreneurs toward US investors, which he finds unfortunate.

Challenges and Opportunities for Adjacent

  • Nico discusses the challenges of ensuring portfolio companies can realize their full potential in the current market environment.
  • He considers the possibility of private equity roll-ups, strategic acquisitions, and public outcomes as ways for companies to succeed.
  • Nico remains cautiously optimistic about navigating the market and believes in the potential of his investment thesis and portfolio companies.

"It is also clear to me that we have few data points. Because of what I've seen and because of thesis that I have formulated over the last eight years."

The speaker acknowledges the limited data points but remains confident in his investment thesis based on his experience.## Anti-Establishment Views

  • Nico Wittenborn and the host discuss their anti-establishment tendencies, despite having different outward appearances.
  • Nico attributes his perspective to his upbringing with a single mother and limited role models, which fostered his independence and unique worldview.
  • The host and Nico agree on their anti-establishment vibes, despite the host's "posh boy" appearance.

"Where does your anti establishment vibe come from? You're a hipster, you're cool, like the clothes, the shoes, the socks. People don't see it, but you're an anti establishment." "Why is it? I don't know. I think. I mean, for me, I grew up with my mom, and I didn't have a father figure."

The quotes reflect the host's curiosity about Nico's anti-establishment attitude and Nico's explanation that his upbringing played a significant role in shaping his independent mindset.

Family Influence on Career Drive

  • Nico discusses the impact of his father's absence and his mother raising three children alone on his drive and independence.
  • He emphasizes the importance of being a present and supportive father and husband, learning from his own experiences of feeling hurt by his father's absence.
  • Nico's family background and the limitations he faced growing up contributed to his desire for agency and independence.

"I think when your dad leaves at a young age, it just leaves a mark. And I think that's part of where my drive comes from." "We grew up with very little money. My mom had three kids from different fathers by herself."

These quotes illustrate Nico's reflections on how his father's partial absence and his family's financial struggles influenced his determination and values in adulthood.

Optimism and Belief in Human Goodness

  • Nico disagrees with the host's cynical view that people are driven by money, arguing instead that he is an optimist.
  • He believes people's negative behaviors are often a result of their environment and circumstances, not inherent faults.
  • Nico feels fortunate for his upbringing, despite its challenges, and credits his drive to a combination of factors, including genetics and serendipity.

"I do believe that people are ignorant and in pain and suffer because of how others have treated them or because of their circumstances." "So there's very little things. But still, do I have some trauma from how I grew up in my circumstances?"

These quotes convey Nico's optimistic belief in the fundamental goodness of people, despite acknowledging his own challenges and traumas from childhood.

Perspective on Wealth and Happiness

  • Nico expresses concern about the potential negative effects of growing up with too much money and aims to provide security without over-pampering his children.
  • He values the freedom that money brings to choose his work and provide experiences for his family but does not see it as the ultimate goal for happiness.
  • Nico's perspective on wealth has evolved with the birth of his children, leading him to think more long-term and focus his investments on companies he feels good about.

"I don't think for me, money is any ultimate goal. I need money to be independent and have the freedom to do the work that I want." "I think kids are a very smart invention by nature, or forcing function to force us to think long term."

These quotes reveal Nico's nuanced view on money, highlighting the balance he seeks between financial security and not allowing wealth to dictate his or his family's happiness.

Investment Choices and Founder-Focused Approach

  • Nico shares his preferences for investment firms, highlighting 0.9 for its founder-focused approach and low ego, USV for its thesis-driven strategy, and Founders Fund for its independent thinking and adaptability.
  • He appreciates these firms for their alignment with his values, their operational models, and their ability to generate high returns.

"I like them. Two, the returns are great, and three, I think they're doing it in a way where it's very founders focused, smart, low ego." "They are willing to think independently and act on that without too much concerns about what other people think."

Nico's choices for investment firms reflect his admiration for their focus on founders, their strategic approaches, and their willingness to think independently.

Personal Growth and Work-Life Balance

  • Nico discusses the importance of finding a balance between work and personal life, drawing an analogy with athletes who have seasons of preparation, performance, and rest.
  • He emphasizes the need to take breaks and disconnect to return reenergized to work, acknowledging the challenges of not being consumed by professional drive.
  • Nico values learning from others, including non-VC board members with operational experience, and strives for a broader perspective influenced by his role as a parent.

"I check my emails in the morning and the night. But we had a coaching session at insight and there was a guy who is like that's sad. You have to take a view like an athlete." "I don't feel guilty for going on vacation and for a week, turning off my phone."

These quotes highlight Nico's approach to maintaining a healthy work-life balance and the analogy of viewing work in seasons, similar to an athlete's training and rest periods.

Future Plans and Strategic Partnerships

  • Nico is open to the possibility of taking on a partner in the future if it happens organically and with someone he trusts and has a history of successful collaboration with.
  • He remains focused on consumer subscriptions and will reassess his strategy based on the data points available in five years.
  • Nico's approach to partnership is cautious and considers the importance of trust, complementary skills, and a shared vision.

"I want it to happen organically, because my role model, again, Pablo Christov at zero nine, was that Christov was an LP in the zero nine fund." "There has to be more data points for consumer subscriptions in five years from now. If there's not, I will have to reconsider my strategy."

These quotes indicate Nico's thoughtful approach to potential partnerships and his commitment to evaluating his investment strategy based on future market data.

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