Klaus Hommels: Why "Portfolios are Merely a Construct to Make LPs Happy"? | E1231

1. 0:00 – 1:03

   Intro

   1. KHKlaus Hommels0:00

      Venture is not sitting in a nice office with borrowed power of LPs and playing like in old Caesar's times, thumbs up, thumbs down. I'm not so keen of building portfolios. If I find cool companies that make a difference, that is where the beef is. And if you have one or two of them, every portfolio looks great. I do believe that if you see the right company, you should take a lot of risk and over-proportional risk in those.

   2. HSHarry Stebbings0:25

      Are you price-sensitive, Klaus?

   3. KHKlaus Hommels0:27

      Absolutely not.

   4. HSHarry Stebbings0:29

      Ready to go? Klaus, I am so excited for this. I wanted to make this one happen for quite a few years, so thank you so much for joining me.

   5. KHKlaus Hommels0:47

      Thank you very much. Uh, it's a pleasure. So, (clears throat) to finally, after that long years, uh, the wait was worth it because, uh, you have become an icon. So, uh, now I'm the underdog here.

   6. HSHarry Stebbings1:00

      (laughs) Well, I mean, flattery will get you everywhere. But I wanna start with

2. 1:03 – 3:13

   Adidas or Puma: How Puma Sparked Klaus’s Investing Journey

   1. HSHarry Stebbings1:03

      a crucial first question, which is one that I haven't phrased quite like this before. Adidas or Puma, and how did Puma lead to the start of your investing journey?

   2. KHKlaus Hommels1:12

      Well, (clears throat) so you obviously did your homework. This is a very crucial question. So not in terms of the sports shoes, obviously, and as a Swiss German, I should say, that is on, but as a life lesson. Uh, Puma made a very big impact, and I guess that you always have, like, two or three of those in your life. And Puma was, was the halo moment for me. So as you know, (clears throat) I grew up in the German countryside, hence my crazy accent here. And, um, it was close to Mönchengladbach, and I was the son of a farmer. So, um, at 16, 17, 18, I knew a lot about how to work in the fields and do all this nasty work that nobody ever wants to do in that age. But I was lucky that my grandma wanted me to hate banks. Uh, and the way she thought about it was, "Look, I give you, um, 20,000 bucks, and you buy stocks. If you gain something, it's yours. If you lose it, I cover it." And she thought I go to the local saving and loan bank, get a bad stock recommendation, lose the money, and I'm mad at the bank. But, um, as it turns out, my, uh, affinity to, for football, yeah, and Mönchengladbach, (clears throat) was that they played in Puma shoes. And Puma did the IPO, and I said, "Look, Grandma takes the losses so I can go in fully leveraged." And at the time, I was making 10 bucks pocket money a month. I made 100,000 with Puma in three months. So I said, "Look, two phone calls, 100 years of pocket money, I become investor." So and at that moment, um, the, the, the s-, the, the sail was set for what I wanted to be in the future.

   3. HSHarry Stebbings2:51

      What did your grandmother say?

   4. KHKlaus Hommels2:53

      So she (clears throat) obviously was delighted, also for the wrong reason, so to say.

   5. HSHarry Stebbings2:59

      (laughs)

   6. KHKlaus Hommels2:59

      Um, so it's, uh, I still did a banking apprenticeship, yeah, so that she probably disliked, but she could, she, uh, thankfully lived long enough to, to, to be able to see how, how part of the story d- uh, develops.

3. 3:13 – 5:28

   Am I a Good Investor? Dealing with Early Career Challenges

   1. KHKlaus Hommels3:13

   2. HSHarry Stebbings3:13

      Can I ask, did you ever go through a, a trough of disillusionment, so to speak? And what I mean by that is, like, as a young investor, make a series of mistakes early in the career that lead you to question whether you are a good investor? I think there's a lot of investors today who are sitting there going, "Gosh, 21 was a boom time. My numbers look great. Am I still a good investor?"

   3. KHKlaus Hommels3:33

      Well, um, yes, I think that was the other purpose. Of course I lost the money afterwards, and that was probably her, her real mission with it, so that you lose the money and make the lessons when you don't have a lot of money. Because, uh, when you are young and lose a little bit, which is still everything you have, it's, it's as painful as if you lose a lot when you, you are older. So and, um, so this, this has been a very, very thoughtful lesson for me. So I had a rule for long that when I had a exceptional hit, I would stop investing for three months because, um, success makes you, um, fear that you can walk over water. And you needed to h- to force yourself to have this humbling moments to say, "Oh, no, no, no, no, that was luck. Yeah, keep cool, yeah, and don't make, uh, uh, silly mistakes now."

   4. HSHarry Stebbings4:23

      It's so interesting you say that about kind of when you have success, you pause, because I actually think when you have success, maybe that is the time as an early-stage investor to double down more than ever. I often think, "Are richer investors better investors?" Because you're not afraid of downside. You see the beauty in Spotify, in Revolut, in Helsing. And you don't see the many reasons that many people say, "No."

   5. KHKlaus Hommels4:45

      Well, not sure. So I think there's a difference between, um, (clears throat) a lot of different genre of investors, yeah? So there are people that have a lot of money that, um, if they have successes and, uh, uh, think there's a momentum market, they pour a lot of money in the market, but for very different reasons. I'm always intrigued by the technology or by the founder. And this doesn't scale with money so much. So and it has to be that f- final moment, yeah, and a special moment because I do want to fall in love with the founder and the, the business, because at the end, I'm a, I look at myself as an outsource business development guy. And so I do spend a lot of m- time, so I do need to like

4. 5:28 – 6:57

   Why Klaus is an Outsourced Business Development Guy

   1. KHKlaus Hommels5:28

      everything with it.

   2. HSHarry Stebbings5:29

      Why are you an outsource business development guy, Klaus?

   3. KHKlaus Hommels5:31

      Because that's what venture is. Venture is not, yeah, sitting in a nice office with, with borrowed power, yeah, of LPs and, and playing like in old Caesar's times, thumbs up, thumbs down. So no, I think the entrepreneur is the star because he has a single asset risk, and he is, uh, super passionate for one idea and for, for with this idea, yeah, advancing society, and I'm more just a feature to increase the odds that, that he succeeds.

   4. HSHarry Stebbings6:02

      When you get a pick on an entrepreneur wrong-What is it that you don't see?

   5. KHKlaus Hommels6:07

      Good question. I don't know. It is, uh, always very different. So what I really, really despise is vanity. So there, um, is a high correlation between people that post a lot, or tweet a lot, or whatever, so u- using social media a lot, and efficiency. Uh, so, um, that has always been a s- ... Is I think this for VCs similar than for entrepreneurs themselves.

   6. HSHarry Stebbings6:33

      Please.

   7. KHKlaus Hommels6:33

      But it's this ... But it's implicit sometimes, ja? So it's also mistakes aren't bad by design. You know, you just need to understand (clears throat) and find a rule that you can avoid the same mistakes. And, um, so if you, if I d- wasn't set up to have certain mistakes, I would also not get into the companies that finally make

5. 6:57 – 9:51

   Handling Transactional Founder Relationships

   1. KHKlaus Hommels6:57

      it.

   2. HSHarry Stebbings6:57

      Klaus, for me, this shows that, like, why I love what I do because, uh, to me, you're, uh, in most respectful way like a wise elder of venture that I can learn from and-

   3. KHKlaus Hommels7:06

      Methusalem.

   4. HSHarry Stebbings7:07

      (laughs) The challenge that I have though is on the founder side, we've seen the industry so transactionalized, where founders say, "Klaus, I want Lakestar, thank you, but I'm deciding on Friday." And you have a much shorter time to build a relationship, to build conviction in a founder. How do you embrace and feel about that transactionalization?

   5. KHKlaus Hommels7:26

      So (clears throat) , first of all, I do not get involved in a lot of companies, ja? So ... And I'm totally fine, um, if, uh, a founder rejects it, for, for some reason. Because, yeah, there's young and, uh, in, in, in most cases young and, uh, there are a lot of new things, um, coming to him at the same time, and it's very difficult to get them into a certain chronology. And, um, at the end, I made a ... might have also made a bad job in, in promoting what I, um, what, what I can contribute. So on the flip side, for me, it is way more satisfying to see that those top entrepreneurs that I've backed, I've always when they did the second, um ... it's the second business, I was always allowed to be one of the leading investors, be it with the sum up of or with, with other businesses.

   6. HSHarry Stebbings8:20

      The other question I had is that you mentioned that, like, the frequency of tweeting and posting and how that correlates. Venture's become ... (sighs) I don't know how else to say it, um, a marketing business above everything else, um, with venture investors tweeting, writing, uh, you know, doing podcasts, believe it or not, doing video series. W- we've all become content creators. How do you feel about the evolution of venture, where we all have to bluntly sell our wares, being our cash?

   7. KHKlaus Hommels8:51

      I do believe that, or I ... That's always how I've done it. So if you have a certain mission, and the mission requires you to, to be a little bit, uh, more outspoken or to reach a broader audience, then I think this is a perfect methodology to do this, ja? So, uh, then ... Because you cannot achieve that aim in a different way. But what you are alluding to and what I'm despising is the, the self-promotion stuff, jas? So thinking, "Oh, look, I'm a cool entrepreneur," and for them, entrepreneur means sitting in SoHo House in Berlin with an avocado toast and a cappuccino and thinking, "We rule the world," ja? And then just in the afternoon thinking of some random, some random entrepreneur say, "Hey great, uh, thankful to be part of the journey."

   8. HSHarry Stebbings9:43

      (laughs)

   9. KHKlaus Hommels9:43

      So this is something where I say, "Look, jeez, uh, yeah, there's so much more, uh, urgent things to do for a VC than doing those

6. 9:51 – 11:57

   How Is Venture Misunderstood on Macro-Level Today?

   1. KHKlaus Hommels9:51

      kind of things."

   2. HSHarry Stebbings9:52

      Can I ask, on a micro level, how do you think venture is more misunderstood today? If that's on a micro where it's like, it's not about avocado toast and cappuccinos and thrilled to back, you know, Klaus, on a macro level, how is it misunderstood?

   3. KHKlaus Hommels10:05

      So (clears throat) , the macro level, it's pretty simple. For me, the progress of a society is the way how they can handle risk. And qu- enti- entire Europe has had societal and economical progress, especially in the '50s, '60s and '70s. And we were basically very good at financing innovation at the magnitude of 4% of GDP. So the banks financed it because they were in a regulatory framework where they were allowed to, uh, to do this kind of investments. And the innovation at that time was Bosch, Siemens, Porsche, you name it. Um, so today, the regulation has changed. Banks do not finance innovation and startups anymore. So ... And today, the only regulatorily compliant way of financing innovation is venture. And in Europe, we are at 0.5% of GDP. So we are under-financing innovation by factor eight in comparison to the levels that made us wealthy in the '50s, '60s, '70s.

   4. HSHarry Stebbings11:12

      Two kind of spin-offs there. One, do you think then that we should have banks and government institutions filling that hole and doing the three and a half percent to meet us at the 4%?

   5. KHKlaus Hommels11:22

      Look, at the earlier stages, that doesn't work. So if you discuss with banks, this is a rather, uh, complex discussion always, jas? So I think they have not been trained and experienced in this kind of, of, of, um, um, (clears throat) financing. And the banking side is the wrong one, but we should get our equations straight, meaning we cannot expect to, to create wealth in the, in the way we have created if we are under-financing the reasons why we created that wealth by factor eight. So this will probably not work.

7. 11:57 – 16:39

   Is Europe Overfunded & Lacking Quality Startups?

   1. KHKlaus Hommels11:57

   2. HSHarry Stebbings11:57

      I don't feel like we are under-financing innovation in Europe. When you look at deal cycles, when you look at deal pricing, when you look at quality of deals, I think we have dramatically too few good companies for the amount of cash that we have, which is why we're seeing the exorbitant prices that we are in Europe.Am I wrong?

   3. KHKlaus Hommels12:17

      I think this-- what you're describing is a cyclical element to it. And there's no, no doubt that we do need to finance innovation and there will always be, um, phases of more liquidity, of exuberated pricing and the pendulum always swings between the left and the right. So and, if you think about the, the fact that basically from a start where we accompany a company until we exit, it is easy 10, eight to 10 years if you really want to make sure you get all the value curation. All of the phenomenons that you would be describing will happen at least once, yeah, in the lifetime of that company. So, um, (clears throat) this is something, well, I'm not concerned. Structurally, there's a lot of signs that, um, the world has changed a lot. If you think about the two- 2000s and early 2010s, there were no technical founders. So that, uh, I thought lengthily about the fact, why is that? Because we had the copycat nations where the, the, the ........................ built the machine rocket internet. But this was basically an absence of technical innovation, and the reason was an interesting one, at least the one that I thou- thought was a plausible one, is that at that time, (clears throat) in Continental Europe, very few people that had an affinity to technology, they had economics at school. So they were basically really afraid of becoming self-employed.

   4. HSHarry Stebbings13:54

      Mm-hmm.

   5. KHKlaus Hommels13:54

      So and if you see the first, yeah, uh, German value at a tax declaration that you need to do as an entrepreneur, that can be pretty intimidating.

   6. HSHarry Stebbings14:02

      Mm-hmm.

   7. KHKlaus Hommels14:02

      So basically, I even have sympathy for that. So this has thankfully all changed. If you now look at ETH or the Technical, uh, University Munich or the KTH in Stockholm, the quality of the, the founders is very, very different. You barely have any copycats anymore. You was really have general, genuine technological innovation and ideas.

   8. HSHarry Stebbings14:25

      The quality of technical talent is there. The quality of local liquidity markets has gone through the floor. Right? The LSE, I mean, I didn't actually ever remember it being good, but I'm, I'm too young. But I mean, now, uh, uh, uh, it's terrible. Um, I, you know, I didn't think, you know, the German stock market's hugely better, I didn't think Amsterdam's hugely better either. I mean, Bill Ackman's running away faster than anyone from, uh, you know, whatever it is, Euronext. Like, how much of a problem is the lack of liquidity markets in Europe?

   9. KHKlaus Hommels14:54

      Um, you can answer it in a little broader scope. How much is, especially Continental Europe, the financial illiteracy a problem? So basically, you see it at politicians, you see it in a lot of instances. We are not thinking through how, the same way what can you do with money that the US doesn't. And also, so my weirdest moment, it's a funnic- funny anecdote also, is when we had, um, the SPAC and we listed it in Frankfurt. So and then we, we were speaking, I was speaking to the CEO of Frankfurt Stock Exchange, I said, "Look, this is cool. Can we have this photo? Because the founders are really, really proud and this is, uh, the culmination of their journey so far." He said, "Yeah, yeah, we can do that, um, but, um, there's a price list for that." And I said, "What do you mean there's a price list? Yeah, we are doing sort of an advertisement that this IPO is happening at the Fr- Frankfurt Stock Exchange." He said, "No, no, no. The price list is..." Make a guess for the photo.

   10. HSHarry Stebbings15:56

       400 euros? I mean-

   11. KHKlaus Hommels15:58

       400,000 euros. Just for the photo. And what we did is we did a CGI of the interior of the Deutsche Börse and put it on a tapestry in our office, and then we, we stood there, had our own bell and rang it, and it looked 100% authentically, but we did really not pay one to pay the 400,000 bucks. And I spoke to the Deutsche Börse and said, "Guys, you can, it's fine to have a business model. It's also fine to take a certain margin over lifetime of a quotation. But don't tax people at the highest emotional moment when they are so proud to go to the stock exchange." So this is what I mean with culture. So it is still something

8. 16:39 – 21:15

   What Can Europe Learn from the US?

   1. KHKlaus Hommels16:39

      awkward.

   2. HSHarry Stebbings16:40

      I mean, that's absolutely nuts. So they're having Michelangelo take the photo. Um, what can we do that the US does? You said there, we don't get financial literacy like the US does. We don't do it the way the US does. What does Europe not do that the US does?

   3. KHKlaus Hommels16:54

      Uh, so (clears throat) in, in terms of, first of all, I think we do suffer the, the different aspects of the heterogeneity of our continent. Yeah? So there is no point in having, uh, three stock exchanges. Because at the end, liquidity is everything and, and we should basically say-

   4. HSHarry Stebbings17:16

      So we should have a European stock exchange?

   5. KHKlaus Hommels17:17

      Yes. We should, uh, so there was an attempt, yeah, um, but it was blocked by politicians. Um, so it's, it's still a little bit like a, a regional egoism, yeah? So which, um, which, which is understandable, but which basically is part of the problem, yeah? So the second one is, we do not have deep, deep capital pools. So I mean, when you think about a huge step was in 1974 when you had the ERISA Act, yeah, so that pension funds in the US, uh, were to invest in, in venture funds, so and-

   6. HSHarry Stebbings17:53

      Mm-hmm.

   7. KHKlaus Hommels17:53

      ... this made a big difference. And we don't do, we don't do this in, in Europe. So in, I think the eco- uh, the most pension funds invest according to the endowment model in the US, meaning you get basically, uh, a venture allocation of 10 to 13% plus, and the European pension funds invest 0.02% in venture. So and-

   8. HSHarry Stebbings18:16

      Mm-hmm.

   9. KHKlaus Hommels18:16

      ... this is- (clears throat) First of all, it's, it's already shocking because, um, the numbers in the US, it's not that the risk has risen, it is that the, the, also the return has over-proportionately risen. Um, and if you think about it in a different way, basically what ... If you forced and you ... I'm, I'm, I'm, I'm very careful with the word force. You have to force pension funds to do it, uh, because then A, you would get a way higher return, which makes a huge difference for the pension, uh, on the buying power a pensionee has. So for example, if you have a normal worker that pays in a thousand Euro a month at the age of 20, 20-something, and when he is 64, with a German pension fund, he has 750,000 bucks. In an American one, 3.5 million, just because of compounding of higher yielding assets. So meaning, we all say we have problems with the retirement system, so this is a very easy fix. We are adjusting two conservative asset classes. But at the same time, this money being unlocked from the pension schemes would solve the entire problem of financing innovation. And the best, you would solve two problems and nobody had to pay for that, except one politician needed to tackle this problem and they all are very afraid to touch anything that has to do with r- retirement.

   10. HSHarry Stebbings19:46

       You mentioned that kind of the in- the inclusion of pension funds being more active in venture funds. My, my worry, and then I promise we will get back to schedule, my worry is that, respectfully, they need to write such large checks, 100 million plus in the US's case for some of the largest pension funds. They are investing, respectfully, in immensely large funds that everyone in the business knows will do at best 2X, at best. They are enormous. The three, four, five plus billion dollar funds and bluntly, they're not very good. They're not great assets.

   11. KHKlaus Hommels20:17

       I think y- yes and no, but there's still a luxury problem because we're coming from a world where the, the life insurers are discussing that they could not even provide a two, 3% minimum yield.

   12. HSHarry Stebbings20:29

       Mm-hmm.

   13. KHKlaus Hommels20:29

       Yeah? For, for the pension years. So I mean, e- even if you're a mediocre fund, you're into 2X, this is, uh, this is, uh, on a logarithmic scale in a different orbit to what we currently have.

   14. HSHarry Stebbings20:41

       Are you worried by the lack of liquidity in venture's state on a more broad scale? We've seen M&A and IPO at its lowest level since the last 20 years.

   15. KHKlaus Hommels20:50

       No. Um, so it's always better if we have it, but it will come back at some point. And good companies are always worth something and there are always a lot of people be willing to engage with them. There's always an exit market for them. Um, so I'm, I'm relaxed because at the end everything boils down to the qualities of the assets and, um, and th- then you mitigate a lot of these risks.

9. 21:15 – 24:04

   Is Defense Too Small to Build a Venture Portfolio Around?

   1. KHKlaus Hommels21:15

   2. HSHarry Stebbings21:15

      So I want to dive into, you know, the quality of the assets element there, and the assets themselves w- being, in this case, defense. Specifically when we spoke before, uh, and when I had a founder actually of Anduril on the show before, he was fascinating. He was like, "No, no, defense is not a category. You can't build a portfolio around defense." Really, the Anduril effects is just Anduril. Do you agree that it is not a large enough category to build a venture portfolio around?

   3. KHKlaus Hommels21:42

      No, I don't. Uh, um, so it, it, it, it's not a this, it will become anyways, yeah? So it ... Look, my o- f- famous quote always is when Uber started in, um, in San Francisco, people said, "But the taxi market is only 250 million." And today, U- Uber's revenue in San Francisco is 600 million. So and if you do the math on, on, um, on, on defense, which we can do a little bit later, you will see there's massive money coming into it, creating this market and creating a lot of opportunities there. Um, but at the same time, (clears throat) I'm not s- so keen of building portfolios. If I find cool companies that make a difference, that is where the beef is. And if you have one or two of them, every portfolio looks great. Yeah? And we, there's a lot of things, uh, you don't know about the market and we have to work very much in building the ecosystem. Hence, my willingness and drive to, to serve as the chairman of the NATO Innovation Fund to exactly build this ecosystem.

   4. HSHarry Stebbings22:46

      Why do you not like the idea of portfolios for many people brought up in the last 10 years, it's, it's what venture is built around and, you know, early stage you are told 20 to 40 is the right number for the right levels of diversification. And there's the standard portfolio tropes. Why do you?

   5. KHKlaus Hommels23:01

      It is a, it is a mean to an end. Uh, you have to build portfolios in order to get money from institutional investors. But on the way there, you make a lot of concessions. So you have to think about, how much do I reserve per company? Am I at some point shut out or what is the, can I reuse proceeds to get to a pretty high investment grade? Because if you do three times the money, but if you have 100 minus 20% or 10 years management fee, that's 80 times 3 it's 240. But if you have 100% investment grade because you can use proceeds then three times is 300. So you see this has nothing to do with any company that's just trying to please the framework around the rules of deployment, so to say. And, um, I think this is, um, something we need to obey to because we are, we, we do need this money, but this is for me, something that has nothing to do with investing. So and if you find the cool companies, this is basically what, (clears throat) what, what, what

10. 24:04 – 24:50

    How Klaus Views Capital Constraints Per Company

    1. KHKlaus Hommels24:04

       I'm intrigued by.

    2. HSHarry Stebbings24:05

       I remember Bryan Singeman at Founders Fund is a friend of mine, and he once told me that Founders Funds' great performance lies in the truth, but that fundamentally they do not have capital constraints on a per company basis.... which means they can concentrate huge amounts of money into the same company. How do you feel about capital constraints on a per company basis?

    3. KHKlaus Hommels24:25

       Look, (clears throat) I, I, I don't know if I should pride myself for that. But at least I am regularly asking my very understanding investment advisory board to, um, to be a little bit more generous on these rules. Yeah. So, um, so (clears throat) I'm, I'm, I do believe that if you see the right company, you should take, yeah, a lot of risk, an overproportional risk in those.

11. 24:50 – 26:44

    How Geopolitics & NATO Are Shaping Defense Startups

    1. KHKlaus Hommels24:50

    2. HSHarry Stebbings24:50

       Listen, part of a venture portfolio, uh, whether we like it or not is, and building it is kind of an element of why now? Why is a company more exciting today than it was in prior years? Specifically around defense, I want to dive into, in what ways is the perceived risk from Russia worsening, and how is support for joint defense in NATO changing?

    3. KHKlaus Hommels25:09

       So there's a, a, a, a variety of things here. So first of all, I would not necessarily categorize it as defense investing. At the end, it is all, um, it's f- it's, it's deep tech, uh, deep tech, and one customer emerges and that are the MODs. And there's a, there's a, um, there's a very good reason for that because, um, suddenly you are forced to think a little bit more about the technical sovereignty, about the, uh, capacity to defend yourself, yeah. And the limitations are in the classical equipment, you cannot, um, you build it or buy it so quickly because there are limitations in that. And secondly, um, the, the way the efficiency works on the different technology versus established equipment is very, very different. You have a 1,000-euro drone that takes out a 10 million tank. You have a 500,000 submarine, yeah, uh, unmanned, which can take out a, (clears throat) 500 million, a submarine, the classical one, and the same for basically every category. So, there is a huge shift and the Ministry of Defense need to see, where do I allocate? And deep tech can make a big difference in, in, in these kind of mechanics. And so that's why, yeah, we are very committed at, at NATO level to invest in technologies that enhance the defense capacity of the NATO member

12. 26:44 – 29:48

    What Must the Electorate Understand About Defense?

    1. KHKlaus Hommels26:44

       states.

    2. HSHarry Stebbings26:44

       So, when we think about enhancing defense capacity, when we chatted before, you said, "When it comes to defense, we need to make the electorate understand how bad the situation is." What do you think we most need to understand that we don't understand?

    3. KHKlaus Hommels26:58

       There has been a long time of, of, of the peace dividend, so to say. Yeah. I mean, me included, I had never thought that we would get to this kind of a situation where, um, we, we have, we, we are at, um, we have a, we see a, a war in, in, on Europe territory. And, um, and if it then comes to the fact that we seriously need to think about being able to self-defend ourself, then you start to make up the math. So what has, what has been achieved? What did we do with, with the, in the Ministries of Defense? And some numbers are very misleading. So for example, everybody says, "Yeah, but Russia has the capacity or the economic power of something between Portugal and Spain." But in terms of purchase power parity, they're spending more on defense than the entire NATO member states. And there are, for me, these kind of things happen gradually, more with facts of observation. So for me, it was not or still very difficult to see that an entire continent is depending on, yeah, availability of internet if Elon Musk with Starlink has a good day, and if he has a bad day, he shuts it down. And this is basically what, what defines an availability of a certain technology. For, I think for a continent, this is too poor. There needs to be a consistent strategy how we basically level ourselves up in terms of, of, of our capacity there.

    4. HSHarry Stebbings28:25

       Does Germany and the UK have significant munitions to defend itself today, do you think?

    5. KHKlaus Hommels28:31

       The ammunition is, it's a cruel one. Yeah. So, so, the, the, the numbers I have from the military is like, four days in Germany and UK and five in France, which is 25% more (laughs) but it doesn't make a difference. Um, and there are other facts which are just mind-boggling. So for example, (clears throat) that with the new hypersonics, if they have a warhead, the reaction time of any US president is 12 minutes. Yeah. Before when the rockets weren't that fast, you had a way higher reaction time. So basically, there are new, yeah, there's a new reality that, that forces us to think more technologically about it. Or the other example, which I found very, very, uh, surprising to say the least, is, um, (clicks tongue) even if you buy US fighter jets, yeah. So, the way how it works is you are the owner, it stands somewhere in the hangar and you want to, you know, start flying, you have to put in the way wh- where you want to fly. And then this data is sent to the US. And if they like it, the machine starts. If not, it doesn't start. So, this is not exactly how a sovereign, um, how a sovereign, uh, spirit works, I would guess.

13. 29:48 – 31:56

    Will Defense Winners Be Nationalized or Continentalized?

    1. KHKlaus Hommels29:48

    2. HSHarry Stebbings29:48

       Will we have nationalized or, uh, kind of continentalized security winners? And what I mean by that is, Anduril wins the US, Helsing wins Europe, because you have this sovereignty of provider. Is that what will happen?

    3. KHKlaus Hommels30:02

       (clears throat) There's, this will have a very big in- influence. Yeah. So that's why I, for example, also believe that some, (clears throat) the player like an ISA Aerospace, yeah, is a, (clears throat) is a perfect situation for sovereignty investing. So, you do, the space will be a very, very big.... opportunity and a very crucial technology, um, ecosystem to, to co-own, so to say. And, um, think about it like the Starlink. So Starlink, if it can connect to a mobile device, like a, uh, Apple, theoretically, the entire European telco industry would be obsolete. So, and if suddenly the self-driving cars are more dependent on low orbit satellites, do you think that in the competition between Tesla and the European car industry, we would have easy access to the Starlinks? And even if we wanted to have our own constellation, would we have easy priority on the transport on SpaceX into low orbit? So these are very, very fundamental technologies, where we're either left out, or we have a very stringent plan how we get into those.

    4. HSHarry Stebbings31:09

       Talk to me about our ability to launch satellites.

    5. KHKlaus Hommels31:12

       Yeah, currently, we, either, um, we get a slot in a, in a SpaceX, yeah, with all the, um, with all the restrictions that there are. Or we, we have Ariane. But Ariane base lastly sold, um, 100% of their defense, uh, transport capacity to Amazon. So basically, as Europeans, we are, for the time being, not able to, yeah, send own satellites at our own discretion whenever we want to.

    6. HSHarry Stebbings31:42

       For how many years?

    7. KHKlaus Hommels31:43

       Six years.

    8. HSHarry Stebbings31:44

       Six years? So do we just wait? (laughs)

    9. KHKlaus Hommels31:47

       So, or speed up and build the next champions, yeah, that guarantee us this technical sovereignty that we need in many, many

14. 31:56 – 40:03

    Does Europe Truly Understand & Prioritize Its Defense Needs?

    1. KHKlaus Hommels31:56

       fields.

    2. HSHarry Stebbings31:56

       (laughs) It's not exactly chirpy listening, is it? I mean, like, what worries you most?

    3. KHKlaus Hommels32:03

       So what worries me most is that you, at some point, we need a unanimous, a European unanimous view on what is important to us. And then we need to act on it, and then we need to support this. But this doesn't happen, so-

    4. HSHarry Stebbings32:19

       Do you think, do you think we know what's important to us? You know, Trump is consistently saying, "We need to spend a significantly higher portion of GDP on defense, and we need to start paying for defense ourselves." And we're going, "Whoa, whoa, whoa, whoa, you, you keep saying."

    5. KHKlaus Hommels32:31

       Yeah, that's what I mean, that's what I mean. Uh, that you are perfectly right with this. And, um, I think also, um, uh, in this case, I, I think that Trump has a point, uh, because it's pretty naive to think that everybody else pays and, and we don't need to pay, yeah? And it's even worse. So look, if you think about the German budget, um, not only didn't we pay 2%, uh, but whatever we paid on the 1.4, 60% of that is salaries and pensions. It's not that you buy equipment and become more, um, able to defend yourself. It is, yeah, conceptually wrong. So, I think that's what, um, the, coming back to the question, what worries me most, is a very, very clear view, what do we, what do we need and execute on it?

    6. HSHarry Stebbings33:17

       Can you just help me understand. I always try and understand the other side of the argument. I always try and put myself in their shoes. Why are they thinking, "No, we are right to limit defense spending, and it is in the best interest of the budget to prevent this expenditure"?

    7. KHKlaus Hommels33:31

       Be- because, because the electorate doesn't, um, b- uh, give them d- benefit of the doubt. So, you know, the politicians fear they cannot win by doing that, historically, which was probably (clears throat) they have some sympathy. Because if everybody thinks we'll never have a war, then, um, all the, the inhabitants of a country probably say like, "Why do we invest in that, if we will never have a war?" So, but if they knew the, um, this is the ammunition level, this is the constant, yeah, um, threat that we have, then you will have probably a very, very different, um, uh, view.

    8. HSHarry Stebbings34:09

       We have that now. We, we have Israel-Gaza. We have Russia-Ukraine. The ability for Putin to bluntly move into Lithuania, Belarus, surrounding nations, is very real. So, now is the time when the electorate would say, "Sure, let's increase defense spending," no?

    9. KHKlaus Hommels34:27

       Yes, and you still need to explain a little bit more. So funnily, as you see, Rheinmetall has become sponsor of Borussia Dortmund. So this is, uh, also done this deal in, in sync with the politicians to bring this topic in the midst of the population and, uh, make it visible to everybody. So I think there, there is this explanation that is currently happening.

    10. HSHarry Stebbings34:48

        All the Ministries of Defense incentivized in the right way to purchase military equipment for best performance. What I mean by that is, if you try something new from Helsinn, you could get fired if it doesn't work. But if you try something from Lockheed...

    11. KHKlaus Hommels35:04

        Yes, so you always have that. So you never get fired for buying IBM, right? Um, so (clears throat) this, this is the mental thing. Uh, um, there are some advantages, uh, uh, as, as facts because you, you cannot get either the equipment we bought, um, in, in, in, in rough numbers, and the efficiency, um, in, in Ukraine shows that you have to buy other stuff. So, there is a very clear, um, you know, way so that, uh, that people need to understand we, we get, need to get into a very different, let's say, asset class of, of, of, of, of defense equipment.

    12. HSHarry Stebbings35:43

        Klaus, do you think it is realistic for us to move our percent spend of GDP from 2%, I believe it is now, to three and a half? Is that a realistic ask?

    13. KHKlaus Hommels35:53

        There's a overview. Uh, I, I, I, I commissioned a study, so which, uh, in which I analyzed all this kind of stuff, yeah? And, um, so I, um, c- clearly came out that in terms of threat, historically, most of the European countries have spent in the vicinity of three and a half percent. Poland is at 6 or 7. The Baltics are even higher, and Finland is also way higher. So this is actually not...... a crazy number. So, and, um, (clears throat) I, I tried to understand what are the repercussions if we went in, as the Germans say, three and a half percent. Basically, that meant we had to spend 100 billion extra, roughly, right? So with all the, um, economic theories, if you drop 100 billion into an economy, provided you can spend a lot of it in, in the home base, so let's say Germany or even Europe, then you immediately basically get back 80 to 110% of GDP effect. You would get 25, 30% of immediate tax effect, yeah, that you would get back, and you had something like 40% of, of, uh, of household income. So if for a period of four or five years, the net effect on Germany, to put it a little bit polemically, if you ask the German electorate, "Do you want to be indebted with 63% of GDP and not able to defend yourself or with 68, 69% after the five years and you would be able to defend yourself?" I think that's, that's the ultimate question that, that we have to ask, and there's, this is basically the, the choice that, that will be made in the next months.

    14. HSHarry Stebbings37:39

        If Trump says, "Hey, I'm not gonna continue subsidizing your defense. Good luck," what happens then?

    15. KHKlaus Hommels37:45

        What I described, we do have to come up with our own sovereignty, so that means investing now. If, if we can provide it fast enough, that's fine. If we can't, probably there will have to be other options that-

    16. HSHarry Stebbings37:58

        On the 100 and, like, 50 billion that we need to spend, the additional 100 billion, say we have that. Say we move to that three and a half percent. What's the right allocation of the extra 100 billion? Uh, how do we do that effectively?

    17. KHKlaus Hommels38:11

        Constraints, capacity constraints is the one, but you still need to have some of those. So that will be a, a fight for the scarce resources. And the others basically is, (clears throat) along the efficiencies. So you do have drones, and if you extrapolate the, the development, what, what will be happening there, you, so you had, like, one drones, yeah, that got flown by one sol- soldier, and then you have the next little development would be swarms, and then you will have the attacking swarms and defending swarms. And so there is so much going on here that I think there has to be a, a little bit of foresight. Where does electronic warfare go? And then, um, we have to equip ourselves in, uh, to be efficient in that field. So this will probably be in the technical part of the equipment. And that is also why I do believe the chances for deep tech investors that have the, uh, good ties into the MODs have a fantastic chance now. Because if we think about, uh, 2, 2% investment in defense of GDP and 5% of that in, in, basically in tech buys us 50 billion demand from NATO member states in Europe. So if you think it's a three times revenue multiple, we're talking 150 billion market cap. If we do the same with three and a half percent GDP and 10%, uh, then we are at 150, 160 billion, yeah, and four- more like 400, 500 billion market cap a year. So this is the, the chance where, uh, where you would say from economic understanding, this is the, the, the, (clears throat) the reason why this is a very attractive field as investors to go into

15. 40:03 – 42:55

    How Many European Investors Are Linked to MODs?

    1. KHKlaus Hommels40:03

       that.

    2. HSHarry Stebbings40:03

       How many investors in Europe do you feel are closely tied to MODs in the way that you mentioned there?

    3. KHKlaus Hommels40:10

       Currently, very few.

    4. HSHarry Stebbings40:11

       Yeah. Do you have to change your mindset as an investor when investing in such a different category? This is fundamentally different from enterprise SaaS investing.

    5. KHKlaus Hommels40:21

       Look, it's not that different. Uh, so technically you have deep tech companies that have a superior sensor, that have a, a software, uh, instead of managing the operating system of an Android phone, it manages, like Otairian, the operating system of a drone, yeah. So you, you, you have very similar traits. You have one customer, one different customer, and, um, who has a very special procurement process, which probably you have to learn a little bit. Yeah, but that's, that's basically at the beginning what is not so much the difference.

    6. HSHarry Stebbings40:57

       What do you find the hardest thing that we have to embrace as we think about spending the 100 billion effectively?

    7. KHKlaus Hommels41:04

       Well, you have to reinvent an ecosystem and an ecosystem that basically hasn't ever worked together. So there are very few startups that ever worked with pri- uh, primes. There are very, uh, few, uh, startups that have worked with the MODs and, and vice versa. So this has all to be, um, to reinvented. Everybody has to get to know each other. Everybody has to develop a certain level of trust. And the interesting way, what I'm currently thinking is how does this, um, ecosystem develop? What is the, the mature market? Is it a little bit like the pharma industry? Because the pharma industry, if you think about a Novartis, they are basically a gigantic organization if it comes to distribution and regulation, but not invention. So a, a big prime is a moloch in distributing because they have years and years of lobbying into the MODs and they're pretty good at regulation. Because if you wanna sell something, you need to fill out 800 pages of what do I know, uh, and they all have that. And startups will never have that to, to some extent. Only the big ones like the Helzings and the Aindrales. So the question is how many-... of the startups become sizable companies and become a prime in their own sense, or will we have a market like a pharma market where you have basically a lot of innovation that gets, um, accelerated through the corporation with, with primes?

    8. HSHarry Stebbings42:40

       How do you think that plays out? And do you think there will be a new generation of primes where there are 10 Helsing-style companies of the world?

    9. KHKlaus Hommels42:48

       Too early to tell for me, uh, because we are so early in the process, um, that it still has to

16. 42:55 – 45:15

    Do Defense Startups Need Bigger Seed Rounds?

    1. KHKlaus Hommels42:55

       come.

    2. HSHarry Stebbings42:55

       Do the capital requirements fundamentally change and does venture as a product need to change to fit this changing landscape? If you think about Helsing's first round or Anduril's first round. I, I don't have the data, but I would imagine it is significantly more than a traditional seed or pre-seed round.

    3. KHKlaus Hommels43:12

       Look, of, of course, and not only if it's a pr- pro seed or pre-seed round, it's also, if you think the process through, has to be to some extent also at the gross capital stage, because if the gross capital is always provided from the US then basically you are abolishing your own sovereignty at that stage already again. Uh, because then you have the influence in the boards which then comes from the big investors which might have at some point uh... yeah, um, a, a different interest than as if it was, uh, uh, a European one. Um, so let's... Interesting to see, um, and the examples we have in, in the US are... might not be 100% transferable to, to Europe because the US (clears throat) defense budget has like 14% R&D which translates into 94 billion own R&D a year, which is a lot and which is proprietor findings that then finds its way, its way. In Europe it's 4% and so nine billion. So the necessity, when it comes to embracing innovation, um, to cooperate with the VC world and VC-financed, uh, innovation is way, way higher in, in Europe than it is in the US even.

    4. HSHarry Stebbings44:25

       Wow. What are the biggest ways that we could make mistakes?

    5. KHKlaus Hommels44:30

       So, this is a trust thing and if... Um, there's this very fragile situation now that you have to sell into the MODs, you have to break the procurement processes as they are, and if you, if protagonists get into the game that just do it because it's easy or they perceive it's easy to raise the funds in defense and then become active, yeah, there might be a risk that this fragile trust level there, uh, um, is, is, um, is jeopardized. So, I think we do need... It's very important at the beginning we are very serious, yeah, and very sober and honest players in that field so that we, we do not lose that there's this beginning trust thing.

17. 45:15 – 46:57

    Is Founder Skill Set the Key Challenge for Defense Startups?

    1. KHKlaus Hommels45:15

    2. HSHarry Stebbings45:15

       I remember speaking to Trey at Anduril and I said, "What did Anduril have that made you successful?" And he said, "Oh, well, I know how to sell to governments, Palm is a product genius, Matt Grim is an operations expert, and then Brian Schimpf is a phenomenal CEO." And I was... And he's like, "It's the unique combination of our team which makes us successful." And I've met many defense companies today as an investor and they're a product expert, but they've got no idea how to sell to MODs and they've got no CEO ability. My question being, do you agree with me that the biggest challenge is the unique skill set of founders to sell into this market effectively?

    3. KHKlaus Hommels45:50

       Oh, yes, of course. And th- basically they... it is their gift and they are fast-tracking the development of the ecosystem, huh? So basically when I started with AOL in 1995, I was responsible for online banking, right? So to bring online banking to the German banking landscape. There was nobody in German banks that wanted to do online banking.

    4. HSHarry Stebbings46:13

       (laughs)

    5. KHKlaus Hommels46:13

       So you... there was no way how to sell online services into banks. So it is all a process. So as much as it's a process to do that now in an MOD. So that is why the, the mission of the NATO Innovation Fund is, yeah, bringing this trust levels. So because now people say, "Oh, we get financed so we can start a dual-use company." That which wasn't the case before. The entrepreneurs basically were left alone. And then, oh, with NATO, yeah, there are some people in the MODs that now are responsible to embrace early innovation and, and adopt it. So, these processes need to be accelerated and this is how, how the ecosystem will be

18. 46:57 – 52:08

    What Drove Klaus’s Conviction in Neko Health?

    1. KHKlaus Hommels46:57

       developed.

    2. HSHarry Stebbings46:57

       Can I ask you, we, we've spoken a lot about defense. Uh, defense is one huge area of expenditure for, for governments and for people. Um, but, and another other is health. And you actually led the investment in NACO, which is... I spoke to Shak obviously before and Daniel before. Can you just talk to me, why, why did you have such conviction on NACO? Because I remember when you did that deal, actually, Klaus, and you moved so fast. Just talk to me about that and how you came to move so fast on it when other people didn't.

    3. KHKlaus Hommels47:27

       (clears throat) So I, I think this is the, the entrepreneurial spirit, yeah? And basically, it's a little bit the spirit that, yeah, we can take very fast decisions in the organization. But I was on my way to, to Munich at that day and I, I was discussing with Daniel for long, yeah, if he ever wanted to open it up, and, um, so if he, um, felt like, uh, he wanted to have... open it (clears throat) to investors. And at that, at that moment then I said, "Okay." He said, "Look, uh, Klaus, I, (smacks lips) I think I should open it up. I'm cont- cont- contemplating." I said, "All good, all good." So I changed the direction and didn't fly to Munich, I flew to Stockholm, I was two hours later in Stockholm. Had my scan, went through everything and I issued the term sheet the same evening.

    4. HSHarry Stebbings48:12

       (gasps) .

    5. KHKlaus Hommels48:12

       Yeah, so, um, so the, the... And sometimes this has to do with...... with total uncorrelated experiences you have. So I'm regularly going to Landzer Hof, which is a clinic in Germany where you have, like, precautionary examinations. And they talk with you about how important it is to have it in certain intervals, so not only have you all the parameters of your blood, but you also have it over a period of time, so you can see it. So I basically was subconsciously trained for a situation like with Neko, where you have the same phenomenon with, um, with, with, um, the, the moles, the skin examination, also with the blood, uh, so that you have it over a certain period of time. And everything that I thought was very cool with the Landzer Hof, yeah, that you get like a, like a report where they say, "This is your number, this is the interval in which your number should be moved for a certain parameter." And then an explanation what... Too high and too low has, uh, uh, cause and effects. So all this I thought was very, very cool for, for way more people than, than we think. And people become more cau- uh, health-sensitive, and that's why I personally felt there's a very, very big market. And as I've always been a product guy, starting from AOL, and, um, I fell in love with the product. And that's, that was a very quick, quick consideration.

    6. HSHarry Stebbings49:40

       Are you price-sensitive, Klaus?

    7. KHKlaus Hommels49:42

       Absolutely not.

    8. HSHarry Stebbings49:44

       Why not?

    9. KHKlaus Hommels49:45

       Because the good things, I would still do them, the good companies I've invested in, even if they were 30% more expensive. And the shit, I don't want to have it, and it's not 30% cheaper.

    10. HSHarry Stebbings49:54

        (laughs)

    11. KHKlaus Hommels49:54

        So the beauty is I'm not in the buyout where buying makes a difference. I'm in the business where right judgment makes a difference, yeah? And even if you misprice it at the beginning at 20, 25%, um, it doesn't make a big difference at the end. And what people... People are always stuck on, on this valuation thing and valuation is, for me, a, a hygienic thing, because it... The first of it, the first hygiene factor is I would... If, if the founder tells me a decent price, and a decent price is interesting. If it's too expensive, I think, "What the heck, did you smoke?" Yeah. And if it's too cheap, then I say, "Look, you don't understand what it is." Because at the end it is a pact that we both do, which honors everything I've done in my life, as an entrepreneur, the aspiration, and the perceived execution skills. And this is... The result of that is the price. And this is kind of a confidence interval around it, but, but that's not, not rocket science.

    12. HSHarry Stebbings51:04

        So do you care about ownership or is it percent of cash deployed from you?

    13. KHKlaus Hommels51:08

        This is a typical, um, uh, fund question, yeah.

    14. HSHarry Stebbings51:11

        We just see so many focus around ownership and especially... Yeah. The joys of podcasting, as you can refill.

    15. KHKlaus Hommels51:20

        (laughs) I do think that you, you need to have ownership i- in that sense that some of the, the crypto funds that I'm seeing, they invest many, many, many companies, very, very small sums, so it never makes a difference if you're right. So you need to make sure that, uh, uh, it makes a difference if you're right. So... And, and the reason why I sometimes argue this is, look, I feel I'm an outsourced business development guy, so I have a certain number of hours available to help you, and I need to make sure that the compensation level, as it should be right on your side, must be right on, on our side as well. So... And that's basically how you come up with finding a common sensitivity to agree on.

19. 52:08 – 58:23

    Early Investing in Spotify, Airbnb, Revolut, Facebook

    1. KHKlaus Hommels52:08

    2. HSHarry Stebbings52:08

       Can I dive into a couple of companies? We, we mentioned Daniel calling you and you flying to Stockholm. How did you come to be an early investor in Spotify?

    3. KHKlaus Hommels52:16

       So I, uh, was, uh, lucky to, to be, um, to be investor in, in StarDoll, which was led by Matthias Bikshaar, a great entrepreneur in, in Stockholm. And Daniel was CTO there, and, um, we got to know each other, and, uh, obviously there was, uh, uh, for sure a, a unilateral appreciation for him, but obviously also a reciprocal one. So... And then, at some point, when he started, uh, uh, Spotify, he asked me whether I would be willing to, to be on board again.

    4. HSHarry Stebbings52:50

       Was it an easy yes? It was not an obvious company at that point. It was dealing with music rights, intense IP challenges. This was not, like, an obviously easy company to build.

    5. KHKlaus Hommels53:02

       But look, I mean, all the big ones I invested in were not obvious ones. So you could say when, when... The time I was looking at Spotify it was... I'm not sure, I wouldn't say it's illegal, but we had music and we didn't have the rights, yeah?

    6. HSHarry Stebbings53:17

       (laughs)

    7. KHKlaus Hommels53:17

       So, um, at the time when I invested in Skype there was no business model, because Skype Out wasn't even, um, invented. Uh, and the time when I invested in, um, in Airbnb, it was also very, very early. So-

    8. HSHarry Stebbings53:33

       How did you come to be in Airbnb? You were in Germany, in Europe. How did that come to be?

    9. KHKlaus Hommels53:39

       So it's a lot of luck. So in these situations... So in the case of Airbnb, it was a discussion I had with a Guy Ozeri, who is the manager of Madonna, and, um, we were chatting and, uh, he basically was advertising it so heavily and, well, tried to convince me. And I think at the end I saw, um... I, um, I followed his logic, and, um, and luckily I made the decision.

    10. HSHarry Stebbings54:03

        (laughs) Okay, so we have that. Uh, tell me, what about Revolut?

    11. KHKlaus Hommels54:09

        Yes. Revolut is, uh, it's... I think it's, uh...... the biggest blessing that we have in the European ecosystem currently-

    12. HSHarry Stebbings54:16

        I agree.

    13. KHKlaus Hommels54:16

        ... as a company. And, um, and we basically, we missed it in, in, uh, in, uh, the UK team at the time and, uh, I still remember then that my son came along and said, "Look, I have found this cool app," yeah, and he was raving about it with his friends at the dinner table. Yeah. And I looked at it, and with my product affinity I said, "Wow, is this cool?" And then I just ordered.

    14. HSHarry Stebbings54:42

        Yeah.

    15. KHKlaus Hommels54:43

        Literally, I ordered the team to get into that cap table, uh, and this was a very short one.

    16. HSHarry Stebbings54:49

        (laughs) Well done, team. I mean, it's impressive. Um, okay. So we have that. Uh, another one. You got into Meta or Facebook at the time. How did that happen? And when we were chatting before, you walked me through kind of why it was exciting for you. Talk to me about getting into Facebook when you did.

    17. KHKlaus Hommels55:06

        I was following the social media stuff as there was a company called, um, Xing in Germany and there was, like, Friendster and then you had, like, Myspace and it was fascinating that Friendster being, like, the sort of first social media, yeah, the only thing they basically invented is I could see through whom I know somebody else, uh, the six or seven degrees of, what, knowing each other. So and then suddenly Myspace came and they just added music to it and the whole herd moved away from Friendster to Myspace and suddenly Myspace was the hottest thing on earth. And then Facebook came along and suddenly introduced, like, clear names or voyeurism, right? So and then everybody moved there and so until then, I did not feel that there was one single argument why the, the, the value was captured. And then they, uh, they s- they announced that they were willing to do introduce the API and at that moment I said, "Jesus, if that's the AA- AAA- API, then all the music, all the innovation is easier to happen within Facebook because you take advantage of the network and don't need to build a network again, and then the v- the value will stay." And at that time, I needed to figure out how I get into It. And then I, for two months called everybody I knew in, um, in, um, in the Valley and I ended up with Matt Cohler, like a little coincidence because I was, uh, at Benchmark, um, as, as a VC and he was with Benchmark and so that was the established, uh, the connection and then I bought some, some, some shares that he could organize and yeah. Thanks, Matt, by the way.

    18. HSHarry Stebbings56:53

        (laughs)

    19. KHKlaus Hommels56:53

        (laughs)

    20. HSHarry Stebbings56:53

        The commonality amongst these when I hear them is, these are not rounds happening, this is in between, in a lot of cases, very serendipitous events. Is that how it's worked when you reflect on it?

    21. KHKlaus Hommels57:05

        Pardon?

    22. HSHarry Stebbings57:06

        Is, is that the commonality when you reflect on the winners that you've had? They are all tweener rounds making something happen when a round does not exist?

    23. KHKlaus Hommels57:14

        Yeah. So look, I mean, it is, it also it's a little bit like a personality. So if I want to have it, I want to have it now. Yeah? So and then you try to preempt it. So and in these times what examples I was saying there was the market was not in the same professional state as it is now, so there was always room for, like, cowboys like me that tried to get into some, uh, situations in a different way.

    24. HSHarry Stebbings57:39

        You, you did CRED in India. Not a b- very similar market at all, completely different really to the European and the US market. Why? And how?

    25. KHKlaus Hommels57:51

        So, hmm, um, look, fintech is good. Yeah, I like fintech and, um, I was always working, uh, with, uh, Shailendra, uh, Singh from, from Sequoia in, in the Indian market so and we looked at it together and he was so kind to, um, help me getting into it and, um, very early innings and, um, I backed also Kunal Shah's company yet before and so, um, he was happy to, to have me again on his tab- cap table.

20. 58:23 – 1:00:55

    What Was Klaus’s Biggest Loss and Its Impact

    1. KHKlaus Hommels58:23

    2. HSHarry Stebbings58:23

       Amazing companies there. Sadly, it can't be all winners and, you know, sometimes we make the wrong decision. When you think about your biggest loss, what was your biggest loss and how did that shape your mindset?

    3. KHKlaus Hommels58:37

       Uh, it's also a mentality thing, yeah? So I come from that area in Germany called Cologne, Bonn and Dusseldorf who are very easygoing people, yeah? So they have, like, a little bit like I would say the, like, the Dal- Dalai Lama. Sometimes it's good if you get what you want and something is good when you don't get what you, what you want. And, um, I have felt that in many or a lot of, lot of cases, even if you don't get what you want, it turns out well and it's for a good reason. Yeah? So I still remember, yeah, c- being son of a farmer I didn't have a clue about anything what I want to do in life and that didn't so much change after, uh, my studies so I thought, "No, that'd be cool to be in, uh, uh, Goldman or McKinsey or BCG or Amongst Tenly," and I applied several times everywhere but they never wanted to give me a job. So, um, they are... So kudos to their smart H&R departments because I would have been a terrible employee. Uh, but so it was clearly not what I wanted but in hindsight it was, yeah, the savior of my life, yeah? So otherwise it would have been way worse and it's the same with, um, um, with, with companies. So my, my biggest, uh, um, yeah, nightmare I wouldn't say but boy at that time it was a pretty nightmare was a company called Wunderloop where basically I worked with a friend of mine like three, three and a half years just to lose 60% of my wealth, yeah? And, um, and, um, the, the market wasn't mature enough for it. Well, I was a little bit too early. It was a cookie-based advertising platform that was probably like one, two, two years too early. But I, during the process I got to know somebody, uh, who wanted to buy this company but at the end didn't.So, um, I, we then hit it off and thought we, he was half-Turkish, half-German. We decided to found Macafoni together, uh, a company in Turkey that we sold for 150 million several years, two years later, two and a half years later to Naspers. So it overcompensated the loss of, of that one company. So I'm a big believer, if you are ethical in the things you do and you're friendly, then luck comes to you and you, you can make a, a positive thing also, uh, from a lot of

21. 1:00:55 – 1:01:57

    About the Timing When to Sell

    1. KHKlaus Hommels1:00:55

       losses.

    2. HSHarry Stebbings1:00:56

       Can I ask you, when you look back at winners that became losses, how do you think about when to sell? So for example, I was in Clubhouse, I was in Hopin, I was in BeReal. Klaus, all of these I could have sold for 20, 30X. (laughs)

    3. KHKlaus Hommels1:01:11

       Look, I, everybody has that. So be cool, everybody has that. There's a common trait with all the entrepreneurs and investors. So, um, I, I got in at King.com at 2.5 million and sold something at 100, and I could have sold at 5 billion. So I didn't do it, obviously. Uh, so, but I basically the, uh-

    4. HSHarry Stebbings1:01:30

       Is that the one you think about most?

    5. KHKlaus Hommels1:01:32

       No, I don't think about it, yeah? So I think it is, I think at the time this was still an arguable call because, uh, Candy Crush didn't even exist. It was a very different company at the time. Yeah? So, um, but it's a fantastic team and they deserve very much to be so successful as they were or as they are. So I'm totally relaxed. It is a little bit like a certain number of criticism that you get. If you don't get it,

22. 1:01:57 – 1:03:37

    How Do You Instill Ambition in Children from Affluent Families?

    1. KHKlaus Hommels1:01:57

       you're not there.

    2. HSHarry Stebbings1:01:57

       Final one before we do a quick fire, y- and I hope it's okay for me to ask personal, but you have incredibly hardworking, ambitious children. Like, I, I know them. And respectfully, it is quite hard to bring up children in, uh, affluent families to have that hunger, ambition, work ethic. What's the secret?

    3. KHKlaus Hommels1:02:19

       Look, at, at the beginning it hasn't been like that, very affluent. So the beginnings weren't that, that, um, uh, that glorious. It was a, a long journey to, to get where, where we are now. And, um, we had a ver- a ver- very normal and very tight family life. So I very consciously, uh, decided to be basically during the twe- 2000s at home at, at five-ish, six. Yeah? And then we had supper, then we did homework, and then I brought them to bed. And then at 9:00, I sat down at the, at the desk again. So this was a very conscious decision, yeah? If it is unilaterally exp- uh, ex- explains, yeah, uh, why, uh, why, why this is the outcome, now I think there has been a, a, a l- a lot of, um, um, very valuable input my, my then wife was, was giving to the kids and the love and, and the, the home that, that she created. So this is probably everything working together there.

    4. HSHarry Stebbings1:03:18

       You talk about work a lot with them.

    5. KHKlaus Hommels1:03:19

       Yeah.

    6. HSHarry Stebbings1:03:20

       Is that important?

    7. KHKlaus Hommels1:03:21

       Oh, yes. So, um, they all got the same, uh, the, the, the grandma test, so they have some exposure and that's the best way to see if they like what's, uh, what, what they're, what they're, what they can experience. So now look, it's a very open discussion I

23. 1:03:37 – 1:13:20

    Quick-Fire Round

    1. KHKlaus Hommels1:03:37

       have with them.

    2. HSHarry Stebbings1:03:37

       Listen, I want to move into a quick fire round. So I say a short statement and you give me your immediate thoughts. Does that sound okay?

    3. KHKlaus Hommels1:03:43

       Yes.

    4. HSHarry Stebbings1:03:44

       Okay. So which venture investor do you most respect and learn from, and, and why?

    5. KHKlaus Hommels1:03:49

       I think Lee Fixel is a very cool guy. So ba- b- when he was at, um, Tiger, so he was in MercadoLibre, he was in Yandex, he was in Flipkart, and it basically it was a, a one-man show on the plane starting there with 28, 29. This is an amazing achievement. Also, the, the way he applied thoughts to conquering markets, um, very, very, very, very impressive.

    6. HSHarry Stebbings1:04:18

       He is also an LP in 20VC. A lovely, fantastic guy. Um, biggest lesson from working with Daniel Ek for many years?

    7. KHKlaus Hommels1:04:26

       Crazy persistence and patience, things at least two levels more profound than others. He's very logical and is always a very friendly and well-rounded character. Yeah? And he has uncompromising ethics in everything he does. Very important to me.

    8. HSHarry Stebbings1:04:45

       The funny thing for me is I actually saw a video of him the other day, and I didn't recognize him. It was like from 15 years ago of him starting Spotify. And like the incredibly fit Daniel today is very different to the Daniel that started... it's like, wow, age has been kind to you, Daniel.

    9. KHKlaus Hommels1:04:58

       (laughs)

    10. HSHarry Stebbings1:04:59

        Uh, he's a fantastic guy. So single best performing investment by multiple?

    11. KHKlaus Hommels1:05:03

        Yeah. If, um, investment defined as, uh, the, the returns delivered, then I would say every single cent I invested in any of my four kids. Multiple is not measurable. Uh, but if you want to, um... as I said, I have a different coordinate system with that. But if for what it's worth, if you insist, I have something like six, seven investments more than 100 times money, one even 1,000 times, and some more like six or so in the range of 30 to 60 times money. Um, so it is... but this is not the currency then. The very nicest currency I have to tell you is I have s- some very, very crazy cool thank you emails from the best founders worldwide that say, "Thank you for your help. You kept your promise and made an impact on my journey." So this is what makes you proud. This is when you sit e- when you are 80, you sit in front of the chimney and have a glass of wine, yeah? And then you say, "This is what you have lived for." You didn't live for six or eight percentage numbers of funds that, that doesn't matter at the end. It is more like the, the impact that you made for people.

    12. HSHarry Stebbings1:06:09

        The heaviest things in life are not iron or gold, but unmade decisions. Which unmade decision weighs on your mind most?

    13. KHKlaus Hommels1:06:17

        It's a little bit like Seth. It's, it's not my... that's not how I think about it. It's a little bit what we just discussed with the Dalai Lama thing. Um-... I'm fatalistic about it. So everything that I thought was bad... Or a lot of things that I thought th- those, I thought were bad turned out to be good, and a lot of things that I thought were good turned out to be bad, so time will tell. So in term, so I'm, um, easy on that.

    14. HSHarry Stebbings1:06:42

        If you are an ambitious entrepreneur wanting to build a company, do you build it in Europe today?

    15. KHKlaus Hommels1:06:47

        Um, you still can, I would say. Um, first of all, also because, yes, you are an ambitious entrepreneur, but it's not everything in life. Yeah? So you are also a, a human being, you have friends, you have family. So I think there's sometimes an equilibrium in life and not a, a single parameter that needs to be optimized. Yeah.

    16. HSHarry Stebbings1:07:10

        The A- the American, the Americans say like, "Oh, the Europeans, they just don't work very hard." You're like, "You morons. Not true?" Are you like, actually, our work ethic is generally much lower?

    17. KHKlaus Hommels1:07:19

        I think it is, um, more nuanced. So I think on the very top of the pyramid it's exactly the same. You will... People fight like maniacs and there is everything that you do in order to get somewhere. But I think the, the, the broader base under the bell curve is more complacent, more entitled. Yeah. Um, you have more discussions on this crazy woke shit. Yeah. And on, on, on ESG and what do I know. This is, this is not that some- some- that you see it in, in, in different, um, in different geos.

    18. HSHarry Stebbings1:07:59

        I, I, am seeing. (laughs) Uh, that's, uh, too funny. I love the crazy woke shit. I also love the... (laughs) .

    19. KHKlaus Hommels1:08:08

        (laughs) .

    20. HSHarry Stebbings1:08:08

        Here. Um, I, I mean, I said to you, "Which investor would you swap portfolios with today?" (laughs) . And then your comment. What's your comment, Klaus?

    21. KHKlaus Hommels1:08:19

        Um, I said, uh, "If you saw my portfolio, you wouldn't have asked that question." (laughs) .

    22. HSHarry Stebbings1:08:27

        (laughs) . I mean to be fair, I didn't see the portfolio before. So I'm happy to put a, like, pin in that one. Um, I do want to ask you, you're incredibly successful angel turned venture investor, what element of being an angel do you miss out most? That's from Shaq.

    23. KHKlaus Hommels1:08:43

        So I know I've... Uh, I would have guessed this from Shaq because we have this discussion very often and there are clear, um, advantages of being an angel. So you are very, um, you're very free. You, you do not need to do fundraising. Yeah? So you basically all... So the decision takes as long as you want to. Um, so but, you always die one death. Uh, so meaning, a platform is also something interesting and you can achieve something with a platform that you cannot achieve as an angel. So, and I think there's maybe... There's a right time for, for being the one or the other. So I think, um, Mark Evans, whom I admire a lot, he was spectacular good at, at Benchmark, but afterwards, now even better as an angel. So, um, so I think maybe that everything has its time.

    24. HSHarry Stebbings1:09:40

        Mark is incredibly special. Uh, also incredibly behind the scenes. The man does not even have LinkedIn. Um-

    25. KHKlaus Hommels1:09:47

        That's what I mean with social media.

    26. HSHarry Stebbings1:09:49

        Unbelievable. Will NACO be bigger than Spotify?

    27. KHKlaus Hommels1:09:53

        I believe that there's a very, very high chance it becomes super big for a very reason. So you have the execution skills, um, that are, are unparalleled and, and proven. Um, and the markets are so much bigger if it comes to health. So it's, but at the end, music is not a big market. It's a okay market, it's a... But it's not a monster big market. Uh, and, uh, as Daniel said last, that the, the, the pay, the, the, the sum of, um, what the US spends on heart diseases and medication, all that kind of stuff in the US, is, is, uh, in the vicinity of Apple's revenue worldwide. So that means if you are moderately successful, the, the sizes is so much bigger. And I do think that with the product we have currently at NACO, with the ideas that Daniel, Yama and the team have, yeah, there is a, um, a very high chance that they will absolutely smack it.

    28. HSHarry Stebbings1:10:56

        Final one for you. What question are you not often asked that you think you should be asked more, Klaus?

    29. KHKlaus Hommels1:11:02

        Yes. Um, that's an interesting one because everybody asks me very factual things, um, and y- geared short term. There are very few people that sit down and say, "Look, yeah, you're basically, I'm doing a journey for like 10 years. So, and what makes me happy over a period of 10 years?" Because there will be some fatigue moments, uh, from the normal work. Uh, and, um... Or what, what did you make and, and what do you individually make out of it? Because happiness can have many facets and just being successful and eight times divorced is also not the ideal dream of happiness, right? So it is not only factual things, it's a lot of things of what makes you proud, what were the moments? Uh, what should, how should I design my life? Yeah. So this is things that I always ask. So I think, uh, it is very great luxury if I can have some, some friends that are 10, 15 years older that have, have mastered the next ten year, uh, period in terms of, of prioritizing your... The, the, the pros and cons and the important ones.

    30. HSHarry Stebbings1:12:15

        A weird one, everyone always does that, "I'll be happy when. I'll be happy when I have X, or when I do Y, or when something is achieved." You know, for, say, say for me, I'll be happy when I have a, a personal track record like this.

Episode duration: 1:13:20