According to Gartner, in worldwide offerings that support or deliver public cloud services, Software as a Service (SaaS) remains the largest market segment and is forecast to reach $145.3 billion in 2022. In Europe, we have seen SaaS becoming one of the most viable and profitable models for startups to scale globally with VCs taking notice and investing in them.
One VC that pioneered SaaS investing in Europe is Notion Capital. Notion is a European VC fund in the B2B SaaS and cloud space with more than $700 million in assets under management. Having made 80+ investments to date, the Notion team founded, built, and exited two successful SaaS businesses – Star and MessageLabs. The fund’s investments include Go-Cardless, Paddle, Currencycloud, and Tradeshift. Notion is also the founding fund of Included VC, the venture capital fellowship for individuals from diverse and overlooked communities from around the world.
We recently caught up with Itxaso del Palacio, a Partner at Notion Capital. Itxaso shared with us her unique background, her journey to becoming a VC and the work she has done so far at Notion. She also spoke about the European VC landscape, Notion’s investment criteria and what sets it apart from other VCs, product-led growth as a way to grow businesses and much more.
What first got you into investing?
I got into investing by chance. I completed an engineering degree, before gaining a PhD, but early on in academia I realised that I really wanted to start a company. The area that I most enjoyed was talent: building teams and culture. So for eighteen months from 2010-12, I started and ran my own company to help entrepreneurs find co-founders.
The product was based on building a big database of founders so, during this process, I became very well connected to many founders and VCs in London! One of the investors I knew was looking for an Associate, and so I joined them. Through that role, I fell in love with working with entrepreneurs from the other side of the table.
We saw that you have a unique background before becoming a VC – from classical ballet to master’s in engineering to PhD in Entrepreneurship. How did this diverse background influence your work as a VC? Do you believe that there is no one route to entering the VC industry and one-size-fits-all path doesn’t exist?
Everything I have done throughout my life has affected the way I operate; the way I interact with companies, evaluate deals, and how I function as a board member.
My early experience as a classical ballet dancer set me up well for venture capital. Ballet is a very competitive and uncompromising career path. It is also very methodical. It is a detail-oriented art form and has a very specific routine that dancers follow day-by-day, class-by-class. This routine and self-discipline has stayed with me throughout my life and career.
My technical background as an engineer — the field in which I obtained a PhD — starts with the analysis of a big topic and finishes focusing on a very specific question, in which you become a subject expert. This process of starting big and then the emphasis on laser-focused learning and striving for mastery, has served me well in VC. When we are evaluating companies, we usually look at the big picture, the big vision, and the opportunity as a whole. Once the investment is done and I am working with companies, I like to go deep on the details.
I do believe that there is no ‘one way’ into VC. Having a very diverse and generalist background helps you to look at deals in a holistic way. In the same way that it is advantageous to have a very diverse group of investors in a room, leveraging the diversity of backgrounds, experiences, and skills within an individual hugely benefits a firm.
What practical actions do you think need to be carried out to shift the European funding landscape (i.e., towards availability of funds, improvement in support for startups and founders, cohesion in the entire startup ecosystem, etc.) in the next 5-10 years, and by who?
I am incredibly optimistic about the European startup system and believe that it has significantly evolved in recent years. In the last year alone, many European funds have outperformed those in the US in terms of IRR.
In the last few years, Europe has generated more than 100 unicorns. There has also been a lot of exit activity across Europe, bringing liquidity to investors. Money and talent is circulated back into the ecosystem, which results in a new generation of experienced founders and investors playing in Europe. I am confident that we will see many more great businesses created in Europe, and returns will keep improving over time.
Notion Capital invests in European SaaS and the cloud. Do you believe that PLG will be the key to the expansion, explosion, and even domination of European software companies globally?
Back when we launched in 2009, Notion pioneered SaaS investment in Europe. Today it has become evident that SaaS investing is probably one of the most lucrative and revenue-generating business models that also result in sustainable growth. As a result, it has since attracted a lot of capital — with numerous VCs now investing in this space — which endorses Notion’s decision all those years ago.
I do believe that product-led growth (PLG) is one of the most efficient ways to build a business. PLG enables any individual around the world to test a market without a physical presence in that location. It means that European companies and founders can tap into US markets, without having a team on the ground, and incurring the associated financial costs. This gives European teams a fantastic opportunity to build global companies, without the costs traditionally associated with the ‘enterprise sales’ model.
Additionally, as software markets have become increasingly crowded. Users want to test products before committing to a purchase, mostly in cases when buyers are replacing existing products for incrementally better solutions. The ‘try before you buy’ model that is unique to PLG companies forces excellence, as only the best products will survive.
What is your investment criteria at Notion Capital? What will make you pursue a startup for investment? What traits do you look for in founders? Beyond their entrepreneurial vision, what can founders do to blow away investors?
Personally, I’m a product-led investor. I favour founders who are obsessed with building products that users will love. I really like when founders have a clear vision of how to acquire, engage and retain customers through their products. I very much enjoy discussing an opportunity by looking at the product roadmap and the value that companies are able to extract from their customers through their product. I can’t get excited when I feel that founders are building a product as a result of a contract being signed with a customer. If the product is not good enough, that customer will churn, and other customers will not follow.
How should founders (and startups themselves) prepare for fundraising? What are the do’s and don’ts when approaching Notion Capital for investment?
Venture capitalists are looking to generate extraordinary returns and as such, we are looking for founders who can build massive businesses, fast. As an entrepreneur, you should be able to articulate that vision clearly and convince the investors that you are the best person to win in that market. Founders should focus on communicating a clear opportunity, their unique value position, their competitive edge, and their long-term vision for growing a global business.
As my colleague Jos says, at Notion we like to invest in founders that are insiders in an industry but look at it with an outsider’s eyes. These founders are willing to transform an industry that they know very well. I do like that statement very much, as many of these founders are product-driven because they are aiming to build the products that they would like to have as insiders in that industry. In my case, if founders are able to communicate a clear value proposition, product vision and roadmap, as well as a scalable strategy for reaching customers and users, they will trigger my imagination and begin a powerful conversation.
Startup founders are always asking how to get face time with investors. How do they get to meet you/Notion Capital?
The best way to get in front of investors, we believe, is through introductions. We get numerous cold inbounds, and we try to respond to all of them. But good founders will already know that they need a warm introduction to get in front of an investor. The best way to achieve this is by building your network, and importantly, your credibility within that network.
Today, the founders in our portfolio are one of the best sources of opportunity. They refer us to other founders they know, who they believe could be a good fit for Notion. There are also many early-stage investors who send opportunities to us. Many of these early-stage investors have already worked with us in the past, and they like our hands-on approach and the value we bring to the companies, so they are usually delighted to refer to us some of their best SaaS businesses. Finally, we also work with an extensive network of angel investors, which is another great route for introduction to Notion. Any of these channels can provide a good introduction for an entrepreneur into the Notion team.
It is common knowledge that startups’ failure rate is very high (over 70% according to some studies). How do you think VC’s/investors should be involved in a startup’s journey to improve the success rate of startups?
Some of those reasons for failure are related to scaling too fast. Companies scale too quickly when they build very large sales and marketing teams, before reaching product-market fit.
In my opinion, companies should start by focusing on product and reaching product-market fit before scaling GTM teams. Many founders blame their sales teams for missing their budgets. However, in some of these cases, the main problem relies on the product and the lack of product-market fit. So going back to the three main reasons for companies to fail (no market need, run out of cash and not the right team), many companies end up failing because they get outperformed by competitors who get their products right, or they realise there is no need for that specific product in the market. In many of these cases, it is already too late to pivot, and companies run out of money before they reach the product-market fit.