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

Daniel Waterhouse is a General Partner @ Balderton Capital, which he joined in 2013 and he currently sits on the boards of Top10, ROLI, Lovecrafts, TrademarkNow, Tictail, Achica, Thread and Workable. Prior to Balderton, Daniel spent 5 years as a partner at Wellington Partners and invested in a number of fast-growing companies including EyeEm, Hailo, YPlan, Bookatable (also a Balderton portfolio company), SumAll, Readmill (sold to Dropbox) and Qype (sold to Yelp). Before Wellington, Daniel was a sector partner at 3i where he worked on all of their venture and private equity investments in the internet sector in North America and Europe. In Today's Episode You Will Learn: 1.) How Daniel made his way into the wonderful world of VC? 2.) How has Daniel's mathematics background impacted his investing style? 3.) At Balderton 50% of the partners have very operational backgrounds and 50% are much more investment rooted. What has Daniel gained and missed as an investor from having a outside view of the startup world? 4.) How has Daniel seen the landscape change in the last 15 years? What was his first pitch meeting like? What was his last like? 5.) What are Daniel's thoughts on the enterprise SaaS space? Do Daniel think there is further to go in the consumerisation of Enterprise Software? Does the announcement of Emergence moving from the sector signal a turning tide? 6.) Daniel led the investment in Curious AI and Thread, using machine learning to augment its stylist approach, so what makes Daniel excited about the developments in AI? How is the sector going to develop over the next 20 years? Items Mentioned In Today's Show: Daniel's Fave Book: The Brain That Teaches Itself Daniel's Most Recent Investment: Curious AI As always you can follow Harry, The Twenty Minute VC and Daniel on Twitter here! If you would like to see a more colourful side to Harry with many a mojito session, you can follow him on Instagram here! I would like to say a huge thank you to our sponsor for today's show: LoyaltyBay. Have you ever wished more of your website visitors would convert into a sale, signup or referral? If so, you need Loyalty Bay. With their saas conversion optimizer tool they increase any conversion metric by offering potential customers a choice of personalised rewards to get them to convert. They work with large enterprises like Virgin Media through to startups and have increased conversions on average by over 100%. Free 30 day trial at www.loyaltybay.co.uk

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Harry Stebbings?

  You're listening to the 20 Minute VC. I am your host, Harry Stebbings, and following our amazing interview with Sir Anger on Monday, we are back at Balderton Capital, one of Europe's most prestigious and successful VCs. Today, I'm so delighted to be joined by Daniel Waterhouse, general partner at Balderton, who also unbeknownst to many of you, has helped me in the past with compiling schedules for our interviews with the likes of Balderton's Investment, Tictail and Carl Waldecrans, and Roxanne Vazza at Tech.eu. And Daniel joined Balderton as a general partner in 2013, and he currently sits on the boards of some incredible companies with the likes of Top10, Rowley, Lovecrafts,

• 0:41Harry Stebbings?

  Trademark Now, Tictail, Achica, Thread, and our Founder's Friday guest for this week, Workable. And prior to Balderton, Daniel spent five years as a partner at Wellington Partners, and invested in a number of fast-growing companies, including Halo, Y Plan, Booker Table, who's also one of Balderton's portfolio companies, Red Mill, which sold Dropbox, and Kype, which was acquired by Yelp. And before Wellington, Daniel was a sector partner at 3I, where he worked on all of their venture and private equity investments in the internet sector in North America and Europe. Finally, before we meet the man himself, have you ever wished more of your website

• 1:21Harry Stebbings?

  visitors would convert into a sale, signup, or referral? That sound familiar? Then you need Loyalty Bay. With their SaaS conversion optimizer tool, they increase any conversion metric by offering potential customers a choice of personalised rewards to get them to convert. I always think you can judge a company by their customers, and Loyalty Bay work with amazing enterprises like Virgin Media, right through to startups, and have increased conversions on average by over 100%. Free 30-day trial at www.loyaltybay.co.uk. That's a free 30-day trial at www.loyaltybay.co.uk. But now it's time to jump into our interview

• 2:06Harry Stebbings?

  with Daniel, so without further ado, meet the man himself, Daniel Waterhouse, general partner at Balderton Capital.

• 2:19Speaker 01

  You have now arrived at your destination.

• 2:22Harry Stebbings?

  Well, Daniel, absolutely fantastic to have you on the 20 Minute VC. Thank you so much for joining us today.

• 2:28Speaker 02

  It's a pleasure to be here. Thanks for having me.

• 2:29Harry Stebbings?

  Now, I'd love to start off by hearing a little about yourself and how you made your way into the wonderful world of VC.

• 2:37Speaker 02

  Sure, it's a bit of a, bit of a random walk with a few lucky twists along the way. Um, and a few, a few interesting moments, but I, you know, I, um, I kind of started my career actually as a kind of research scientist with National Grid who do the, uh, the kind of transmission network for the, for the UK. And I was doing all sorts of kind of wacky modelling of the UK electricity network and doing a bit of, uh, bit of AI, what's now called AI. I don't think it was called AI then. Um, did a little bit of consulting, got trained in the world of business after being a bit academic. And I had a very, my kind of an amazing lucky break in the middle of 1999 when I got to go and work at Yahoo for a few weeks,

• 3:22Speaker 02

  which turned into many years, uh, um, and became my induction into the world of technology and all things online. Um, and that, you know, turned out to be a great, a great backdrop to then get into venture capital. I started in the venture capital world in 2006 now, showing my age, um, with another fund and kind of being able to, uh, spend a long time now, uh, doing venture, which has been fantastic.

• 3:52Harry Stebbings?

  And you mentioned there a bit about the academic background and a little birdie, maybe named Seranga, you might have to, uh, check that one out, uh, told me that you had a degree in applied mathematics and theoretical physics. So how do you think that's impacted your investing style with that, uh, very theoretical background? Do you apply that to your investing?

• 4:13Speaker 02

  It kind of has, no, I don't know. My, my, my PhD was in applied math. I didn't, I didn't quite, quite do the, the theoretical physics bit, so, uh.

• 4:19Harry Stebbings?

  You can never rely on those little birdies.

• 4:22Speaker 02

  No, you know, there's always, there's always a bit of Chinese whispers. Um, look, I think, I think it's, it's kind of hard. I mean, that was, that's a long time ago now, but ultimately, uh, as a mathematician, you tend to be, um.

• 4:36Speaker 02

  Kind of reasonable structure in the way you think about things and I think it's also kind of helpful in terms of understanding complexity and. And and you know, sometimes the the technical aspects of the business we we look at. So, you know, I think it's it's hard to know. I think it's been helpful in. Appreciating technology and software solutions and then applying enough rigor and discipline in. In understanding markets and businesses, um certainly doesn't help you. Understand entrepreneurs, uh that takes a takes a whole bunch of so different experiences, but uh I think it helps in in many regards.

• 5:13Harry Stebbings?

  And would you say you're a very metric driven investor then, or are you slightly more of a gung ho?

• 5:21Speaker 02

  Yeah, plus kind of people, I guess. I mean, I think I've I've learned to be less metric driven. Uh I think as a kind of mathematician and then as a. Something I already quite a finance stuff in some of my other earlier career, you become very obsessed just about numbers and. And data and the reality is, um that's important, but there's a lot of human stuff that impacts whether. Companies are successful and there's a lot of um. Uh market dynamics and understanding of how technologies change the world becomes becomes important. So I've actually tried to unlearn. Being 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 gonna. Struggle to be successful.

• 6:06Harry Stebbings?

  And we mentioned there founders. So in terms of evaluating founders on the two axes of of youth versus experience. And sanity versus insanity, where do you lie? What are your perspectives on this?

• 6:18Speaker 02

  I kind of think it's somewhere in between the uh on both axes, um. You know, we we we know, and and there's no, there's no, there's no perfect answer to this. And we've met all sorts of entrepreneurs and. Who have been successful and they don't all look the same, but it seems to me that often there's a benefit of some experience because you. You know, you've uh you've learned some of the pitfalls of what it takes to to build a business, but if you have too much experience, you maybe become. Uh too cynical or uh unable to take a leap of faith and kind of have blind ambition in building a business. And similarly, if you're completely rational, then I think it's it can be very hard to be an entrepreneur because being an entrepreneur.

• 6:59Speaker 02

  It requires you convincing yourself and other people that you're going to do something which frankly is highly unlikely to succeed. And so having a little bit of psychopathy or uh insane this uh seems to be helpful in in overcoming that's uh. Uh overcoming that and having blind belief that you can change the world.

• 7:20Harry Stebbings?

  So naivety can be quite an asset for a founder.

• 7:23Speaker 02

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

• 7:35Harry Stebbings?

  Do you do you think VCs then with operational experience? So, you know, Boston, you've got obviously. Uh it's it's about fifty fifty, isn't it? Operational versus more career style VCs.

• 7:46Speaker 02

  Uh, yeah, I guess so. I mean, look, at the end of the day, we're we're operating our own firm as well. So I think. To a degree, we'll we'll we'll have some different levels of operational experience. But um, you know, 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. Um to build a successful venture firm and to be able to help entrepreneurs takes all sorts of different types of skills at different times. Bit um, you know, building our own firm, being advising entrepreneurs on how to scale firms, helping them raise money, helping them think about the exit. Thinking about portfolio management, there's a whole bunch of different disciplines required and there isn't actually one person who can do that, I don't think.

• 8:27Speaker 02

  Uh and so it's great to have actually all those perspectives and we, you know, we try very hard to give our. Companies, the portfolio companies, we've invested in the ability to tap into all those different types of expertise, not just the person who sits on their board because. Yeah, each of us have things, things are different. Different set of things to the table.

• 8:48Harry Stebbings?

  And do you think it's been very important to have an operational background as a V C?

• 8:53Speaker 02

  I think it's important to have been close enough to what it takes to build a business so that you can truly empathise with entrepreneurs that go on that journey. Now, whether you do that by having done it yourself in one particular field, one particular second circumstances, or whether you do it by having just been in enough situations, I mean, close enough to them. As a, as a long-term investor, I think both of those things work. And so I think, you know, in our own ways, with our different backgrounds, we're able to give a lot of perspective on what it really takes to succeed. Um, you know, I've seen lots of different companies uh win and fail in how they've, how they've uh

• 9:34Speaker 02

  built their operations, um, and that, that gives me one way of helping companies who are now doing it, think about it and you know, others of my partners have actually done it themselves in a very specific circumstance and they can relate those experiences.

• 9:47Harry Stebbings?

  And you mentioned that you joined the industry in two thousand and six, so obviously next year will be your tenth anniversary in venture. So in that time, how would you say you've seen the, the venture landscape change?

• 9:59Speaker 02

  Uh, and I guess specifically in Europe, I mean, I think it's, I think it's uh it's kind of, it's completely different frankly, I mean, the, the actors in the industry are quite different by and large, the um, the understanding of entrepreneurship and of venture capital is completely different. So I think we live in a world where, you know, an age where entrepreneurship is very well accepted and regarded now as a career path, whereas that maybe didn't happen so much ten years ago. And entrepreneurs now understand that this is a, a global opportunity where they can, where, where they can take it to the world, not just take it to their backyard. Um. And the investors are keeping pace, I I hope and think uh in terms of their mindset and ambition.

• 10:44Speaker 02

  And so more capital, there's more smart people, there's more interesting companies appearing. Um. It's become, you know, it's become a bigger item on the political agenda and the different governments across Europe have done more or less to support the kind of venture and startup ecosystem um. And uh you know, clearly globally, we're uh we're in, we're in the, you know, much further through the shift, everything moving online and this uh this kind of technological cycle than we were ten years ago, which means that the the world is ready for the products that people are launching.

• 11:23Harry Stebbings?

  Absolutely. And you said there that there was uh obviously a significant increase in capital over the last ten years. Do you think ever that there's too much capital chasing too few deals?

• 11:33Speaker 02

  I don't, you know, I think, I think uh, I think in Europe, it's, the, the balance is not too far off kilter. I think, you know, if we look today, there's probably a little bit more seed capital than potentially is there to find the great deals. Uh, you know, a lot of people have decided they want to be to do seed investing, or there's some very small venture funds coming up that are doing kind of some small checks. You know, where we spend our time, which is primarily Series A and a little bit of Series B, it's, it's pretty balanced. But then perhaps at the moment, but maybe the market changes, the, the growth phase is getting more, more intense and there's maybe too much capital chasing the, the few really high quality deals.

• 12:13Harry Stebbings?

  So you do agree with the barbell effect that's often cited in venture with, you know, a lot of capital in seed and growth, but.

• 12:19Speaker 02

  Yeah, by and large, yeah.

• 12:21Harry Stebbings?

  Okay, absolutely. And I'd love to discuss then some of Balderton's investments and, and your role in them. So, so let's first talk a little about workable. Yeah?

• 12:30Speaker 02

  Yeah, sure.

• 12:30Harry Stebbings?

  Huge congratulations on the recent raise. Fantastic.

• 12:33Speaker 02

  Thank you.

• 12:34Harry Stebbings?

  But what are your thoughts on the enterprise SaaS space as a whole now then?

• 12:37Speaker 02

  Well, so what's, what's fascinating and, you know, and workable primarily talks, targets SMBs. And that's that area in particular, I think is fascinating, you know. For you know, up until recently, most small businesses have not had powerful software at their fingertips to help them run their business.

• 12:52Harry Stebbings?

  Mm-hmm.

• 12:52Speaker 02

  You know, that's been the, the purview of big enterprises who can buy big enterprise software tools and.

• 13:00Speaker 02

  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 who now realise that they can use it and are ready to use it because they're internet natives now as well. And so this is a huge opportunity and I think every small business owner will have their own bespoke software suite which sits in their phone in the next five years. Workable is doing that for recruiters in small businesses. And what then happens interestingly is that is those lightweight, super easy to use, but powerful tools actually start creeping up into bigger enterprises

• 13:45Speaker 02

  because they're actually much more functionally easy to use than the big old fashioned software suites that sit there. And so you see probably something like Slack, which probably is more of a grassroots effect going into enterprises than being the decision of the CTO that they're going to deploy Slack in the organisation. Probably comes more grassroots because it's such a super easy tool to use. So I think that's going to continue to impact the enterprise market, both big and small companies, and provide opportunities for firms like us.

• 14:20Harry Stebbings?

  So then you mentioned Slack there and obviously Slack, the kind of poster child of enterprise SaaS and consumerising the enterprise space. Do you think there's still a long way to go then in consumerising enterprise software?

• 14:33Speaker 02

  Yeah, I do, I do. I mean, I think, well, I think there's a long way to go in consumerising SMB software. Because I don't think there is much SMB software. And I think there will be them pockets of enterprise software which continue to make the leap to be mobile first, to be much lighter.

• 14:52Speaker 02

  Uh easier UI driven tools um as well.

• 14:56Harry Stebbings?

  And then I'd also love to delve into A I and you also led the investment in curious A I and thread. Uh use obviously uses machine learning to augment its stylist approach. So what makes you so excited about the developments in A I and how do you see the sector developing then over the next twenty or so years?

• 15:15Speaker 02

  Yeah, look, I I I when I also did an investment in a company called Trademark Now, which is. Using machine learning for doing a real time trademark analysis. Um and so you could trademark now and thread you could put in one camp, which is um. And this kind of goes, that's my really early career when I, in my first job, when we were doing. What what used to be called operational research, which is basically how do you solve difficult nonlinear problems to find out the the the best answer? And every company now is sitting on complexity and what they know about they their user and the data points they have. And in the and in Fred's case, you know, how how do you abstract all the.

• 15:55Speaker 02

  The insights they have on pe- people's tastes and then provide great recommendations to them and you know, they're they're obviously. Uh that that's a real problem. Uh if you solve it, you provide a significantly better customer experience. And so there's a. Uh there's a great, that's a great computer science problem to solve. Um trademark now. If you if you're trying to understand whether you can use a trademark, it's not very easy. You have to go to a. Uh trademark attorney who will spend quite a lot of time searching through all the trademark databases to try and look if there's anything similar. And that's really fuzzy logic because you have to be able to match um phonetics. Uh so words that are spelt similarly but not exactly the same.

• 16:38Speaker 02

  Uh the the shape of the logo and a whole bunch of other things. And that's that's a great machine learning problem in terms of. Pattern recognition, phonetic analysis, et cetera. Um so tho- those two things are real problems, really difficult to solve where. It's it's not a linear solution where you can write a formula and solve it. It's a set of set of uh equations which uh don't have an ex- an exact answer. So you have to devise some pretty interesting technologies to try and get to the. A good answer. Um curious is really kind of the next step beyond that and. The guy who founded that has been doing A I for twenty years, he's already founded one successful A I company and. They're trying to go into the the realm of um.

• 17:18Speaker 02

  Uh untrained unsupervised learning. A lot of A I says supervised learning is basically where you have uh. You have a training set and you teach the algorithm what good looks like.

• 17:29Harry Stebbings?

  Yeah.

• 17:29Speaker 02

  Unsupervised learning is where you don't and they kind of the algorithm works out what good is on its own.

• 17:34Harry Stebbings?

  It's like a synthetic brain.

• 17:35Speaker 02

  Very synthetic and I you know and so that that that then applies to uh to vision to you know self driving cars needs to have unsupervised learning. Because there's no way you can tell them every situation they're going to expect as though they need to they need to learn from themselves that brain needs to learn from itself and so that's. That's a very exciting kind of pioneering campaign. Everybody wants to build the next generation of. Of uh of A I because that then that then expands the number of problems you can solve using those algorithms, uh real world problems like. You know, threat and trade right now are using uh existing um methodologies to solve their real world problems.

• 18:11Harry Stebbings?

  And do you think Elon Musk then is is justified in being so concerned by the developments in A I?

• 18:17Speaker 02

  Oh boy, I'm not sure we have long enough to go into that. But you know, I I think it's uh.

• 18:23Speaker 02

  Look, it depends on on how how A I is. Uh put out there and A I A I is is an algorithm, right? It says, it's you know, it's going to, I'm going to call you a dip rather than he or she. It's it's devised by the the operator and I I I don't know. I think we're a long way from a way where suddenly the A I becomes self aware and. Uh switches on the nuclear bombs.

• 18:45Harry Stebbings?

  Absolutely. And basically with you, we're going to dive into a quick fire round now.

• 18:49Speaker 02

  Okay.

• 18:50Harry Stebbings?

  So your favorite book and why?

• 18:53Speaker 02

  Okay, I mean, I I the the one of my favorite books I really like is The Brain That The Brain That Teaches Itself, which is about the uh the adaptability of. The neuroplasticity of the human brain. I quite read a lot of books on neuroscience and how how the brain can readapt. If this gets damaged or the body changes and. In these new signals, it's a really fascinating book and it talks a lot about how uh how we can can continue to improve how our brain operates and. And how we learn over time.

• 19:19Harry Stebbings?

  The best piece of advice ever given to you.

• 19:21Speaker 02

  The first ten million euro vest you'll lose.

• 19:25Harry Stebbings?

  The most neglected sector and then the most uh overhyped sector.

• 19:32Speaker 02

  Overhyped is food delivery.

• 19:34Harry Stebbings?

  Okay.

• 19:34Speaker 02

  Um neglected, uh I think um applying behavioural science to uh technology problems.

• 19:44Harry Stebbings?

  And then the most your favourite blog or newsletter?

• 19:47Speaker 02

  You know, I actually, I actually long, I'm gonna, I'm gonna answer a different question.

• 19:51Harry Stebbings?

  Yeah.

• 19:52Speaker 02

  Um in terms of blogs and newsletters, I actually long for some better content. There was a, there was a period when TechCrunch started and when Om Malik was blogging where there was great, consistent content. And now I think great content is very dispersed by author. And so you've got to dive into medium and find individual articles rather than uh one place to get some really good fix.

• 20:14Harry Stebbings?

  Mm hmm. And then who's a thought leader to you in the industry?

• 20:18Speaker 02

  I think from a venture perspective, um you know, my current partners are people I take a lot from. Um in terms of how to invest, I think from a entrepreneur point of view, you know, I look at people like uh Daniel Lecker, Spotify.

• 20:35Harry Stebbings?

  So far for you, obviously many more to come, but career highlights so far?

• 20:38Speaker 02

  I think joining Bolton probably the career highlight. I mean, it's not a, it's not an outcome, but um as a, as a milestone of becoming part of it's been, it's been fantastic.

• 20:48Harry Stebbings?

  And then finally, the most recent investment you've made and why you said yes?

• 20:53Speaker 02

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

• 21:13Harry Stebbings?

  Fantastic. Well, Daniel, thank you so much for coming on the show. I've hugely enjoyed chatting with you.

• 21:19Speaker 02

  Thank you. It was, it was absolutely my pleasure talking to you.

• 21:23Harry Stebbings?

  And a huge thanks Daniel for giving up his time today to be on the show and share his amazing insights. I would also like to say a huge thank you to Matemark who have provided all the data and analysis for today's interview with Daniel and this week with Balderton. And you must sign up to Matemark Daily, it's their curated daily newsletter of all things startup and VC. And you should also follow their curator on Twitter and that's @Thinker, that's a must. And you can go to www.matemark.com to find out more. And if you cannot get enough of the 20 Minute VC, head on over to www.20minutavec.com where you can sign up for our newsletter so you never miss out on the latest episodes and releases. Or follow us on Twitter at 20minutevc.

• 22:08Harry Stebbings?

  And do not forget to check out Loyalty Bay. With their amazing SaaS conversion optimizer tool, they increase any conversion metric by over 100% on average through offering personalised rewards to potential customers in order to get them to convert. Check it out at www.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. And as always, thank you so much for your support and we look forward to seeing you in the next episode of the 20 Minute VC with, wish me luck on this, naming Niko Moraitakis, founder and CEO at Workable, one of Balderton's most recent investments.