Defiance Capital's Christian Dorffer on what analysing 2,500 unicorn founders teaches us about alpha at Seed?

A discussion about underdog founders of unicorn companies, and what, including challenges they face in raising capital. Don't miss Christian's personal thoughts in the show notes. ✍️

Jul 30, 2024

Transcript

In this episode of the EUVC podcast, Andreas talks with Christian Dorffer, Founder and General Partner of Defiance Capital, about The Unicorn Founders DNA Report that Christian and his team recently published.

Defiance Capital is a €25M fund based in London focused on investments at the pre-seed stage. They invest in sectors like enterprise AI for companies based in Europe and the US.

The report reveals that a significant number of unicorn founders are immigrants and women, challenging the traditional criteria used by venture capitalists to evaluate founders. The conversation also discusses the challenges faced by underrepresented founders in raising capital and the need for a more sophisticated approach to identifying and backing non-obvious founders.

To receive a copy of the Unicorn Founder DNA Report, please reach out to Christian here: christian@defiancecapital.com

Takeaways:

A significant number of unicorn founders are immigrants and women, challenging traditional criteria used by venture capitalists.
Underrepresented founders, including immigrants and women, often face challenges in raising capital and are not given the same opportunities as their peers.
There is a need for a more sophisticated approach to identifying and backing non-obvious founders, who may not fit the traditional mold but have the potential for success.
The venture capital industry has biases against female and immigrant founders, and there is a need for more diversity and inclusion in the industry. Building a brand and network is crucial for attracting quality deals, especially when targeting non-obvious founders.
To stand out in a crowded market, funds need to create a brand that makes them relevant and differentiate themselves from other investors.
Providing coaching and support to highly accomplished founders can help nurture their winning mindset and increase their chances of success.
Young people in the industry should focus on a specific market, gain relevant industry insights, and seek mentorship from successful individuals.
The least hot deals often have the potential to perform the best, and investing in non-obvious founders can lead to significant returns.

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Chapters:

02:41 Deep Dive into the Unicorn Founders DNA Report
03:08 Christian's Background and Investment Philosophy
06:07 Core Findings of the DNA Report
06:50 European vs. US Unicorn Founders
09:09 Challenges Faced by Female Founders
13:38 VCs' Approach to Diverse Teams
15:45 Christian's Investment Strategy
17:02 Opportunities for Non-Obvious Founders
23:11 Defiant Capital's Operational Model
26:38 Christian Dorfer's Personal Journey
39:53 Advice for Young Entrepreneurs and VCs
48:17 Closing Remarks and Final Thoughts

✍️ Show notes

Deep Dive on The Unicorn Founders DNA Report

Being able to identify alpha is the single most important factor to build a top performing fund
In a highly competitive environment, micro funds are unlikely to beat top 10 funds on the top deals, so have to cast the net wider
82% of the TVPI of my past investments come from companies founded by non-obvious founders
We did the unicorn founder DNA report and are now using AI to build the most nuanced understanding possible to identify alpha at seed.
Interesting report by DocSend on time spent by VCs on decks and the challenges for underrepresented founders. couple of quick takeaways that i took on the 2022 vs 2023 analysis:
in 2023 all demographics took longer to raise by about ~50%. however all-white female teams took 67% longer and diverse female teams took 75% longer.
VCs spent 66% more time on the team section of an all-female team compared to all-male (30% more than the wider average) VCs spent 41% less time on the business model section of an all female team vs all male.
VCs spent 20% more time on the team section of a diverse team vs an all-white team VCs spent 29% less time on the business model section of a diverse team VCs spent 45% less time on the product of a diverse team Total time spnet on a deck for a diverse team saw a drop of 38% in 2023 vs 15% in non diverse teams.

Life learnings and investment philosophy

I’ve had a more unusual background from most VCs; lost my father at 16 and forced to figure a lot out on my own. Always forced myself into challenging but worthwhile pursuits. From exec advisor to tech entrepreneur, to community builder to VC.
Always focused on great humans and reciprocity, as opposed to following the crowd.

3 biggest learnings from last 10 years in your life

Founders with too much choice should be avoided by micro funds. Some founders, typically the ones that tick all the boxes, lose faith quickly when they realise that their startup didn’t quickly take off. As they know that they can raise new VC capital tomorrow for their next idea, they have no qualms shutting down early. Large AUM funds can afford the write offs as margin errors, but small funds can’t afford when founders aren’t “all in”.
The right founder mindset is the most significant driver of outlier company and fund returns. Not giving up and seeing every major obstacle as an opportunity to learn, is what sets the strongest founders apart. More often than not, the grittiest founders are the founders that don’t have a plan B and founders who are obsessed with winning at all costs.
The classic PE reserve model isn’t well suited for early stage investing. Funds under EUR 50m should prioritise maximising ownership at pre-seed and prioritise diversification. Reserving for substantial follow ons at Seed, Series A and Series B is a very risky strategy if it comes at the cost of diversification.

Advice to young people in the industry

Identify a problem you care deeply about or a huge but overlooked problem that you believe should be solved in ten years. Take time to study the problem and identify the top entrepreneurs you can learn from to give you a chance of getting on the right path.
Roll up your sleeves and join other startups in the same space to give you an opportunity to learn fast. When you feel you are no longer learning, switch to another company where you can learn faster. Don’t optimise for pay.
Assemble a strong team before launching your own startup. Take your time to get to know potential future co-founders, spend time together, try working together, meet regularly and compare notes on your favourite market and explore disruptive ideas.

Tips & tricks for emerging VCs fundraising

There are too many funds and capital is spread too thinly. This means emerging managers must develop a compelling strategy (focus, differentiation, portfolio construction) that works even with less AUM.
Your strategy must make you highly competitive to ensure that you can win deals. Specialised funds are much more likely to get a share of the best deals, as they can make better picks and add value.
Execute like you already raised your fund. Be in the market, find ways to warehouse deals, put your point of view out, demonstrate how you add value to founders, create LP FOMO. To succeed you need to make it happen every day.

One counterintuitive thing learned in venture

Most LPs in Europe are risk averse and seem to care a lot less about venture than they say. Venture is likely only in 4th or 5th place when it comes to most attractive asset classes. Similarly, there is very little capital for emerging managers in Europe.
The community matters more than you think. If you have a contrarian strategy and you are an emerging manager, it doesn’t feel like investor conferences is the best use of your time. Instead, leveraging your community of trusted investors to get your message out makes LPs listen and creates curiosity.
Raising a fund is not a binary outcome. You can decide to raise a fund if you really want to, but be prepared that your ingenuity and hustle needed to succeed could be 100x greater than you originally thought. I’ve developed a tremendous level of respect for successful emerging managers.

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