Mathias Brink Lorenz: My name is Matthias and I'm representing Delphino's Venture Capital. ⁓ I'm the fund as CEO and managing partner of the fund.

Alex Shandrovsky: Amazing and it's always good to see more funding go into the ecosystem. Can you guys tell us a little bit about the typical Sage and the check size you guys are putting into companies?

Mathias Brink Lorenz: Yeah, so the fund is focused on the pre-seed stage, meaning we would like to get in as early as possible, sometimes also even as the first check-in. Check size is ranging from 3 to 500k euros, but we can also deviate from that. The fund size means that we're actually targeting to allocate most of our capital at around Series A, somewhat also Series B, around 85 % of the AUM is going to go to that stage. we don't have the classical sort of pre-seed strategy, we want to build up a very large stake early on and then defend that over time, it's rather to get a foot in the door, convection in the case before we really ⁓ invest in series A. So we can also do much smaller check sizes if we want to be part of a syndicate. That us quite a bit of flexibility on ⁓ terms thinking around structures early on, ⁓ early possible. ⁓

Alex Shandrovsky: Awesome. That's exciting. the geography standpoint, are you guys only deploying into Denmark?

Mathias Brink Lorenz: Yes, unfortunately, that's a question we get a lot. Yes.

Alex Shandrovsky: Okay, so we'll discuss that actually a lot because I think this conversation should be very relevant to a lot of our listeners. You may think, oh gosh, it's only Del Mic, but you'll get to hear the mindset of the fund and how they're making decisions. And another thing is, I imagine if the...

Mathias Brink Lorenz: Yep.

Alex Shandrovsky: There are a lot of entrepreneurs that choose to move to new regions, right? Because the funding is there. So I've actually had quite a lot of entrepreneurs who are foreigners to consider Denmark as a location to start up, including South Korea as another location. know, people were in the Netherlands that they believe that there's a better chance of getting funding if they're regional. So I'm guessing a founder who decides to make their headquarters in Denmark and do operations there, you you consider that deal, correct?

Mathias Brink Lorenz: Absolutely, yes, and we would be super helpful in terms of actual relocation, office space, what have you. Yeah, absolutely.

Alex Shandrovsky: Okay, great. So I'm going tell my wife, honey, we're packing up and going. That's it. It's done. It's done. Great. So, know, ⁓ an evergreen fund. So can you talk a little bit about who the LPs are of the fund? So we get a sense of what's driving the conviction around a very, know, Denmark is an incredible ecosystem, but also it's a country of what, like 7 million people or so.

Mathias Brink Lorenz: Yeah. Yeah, slightly less I would say. If I remember correctly, like six, six and a half. So not that big, no.

Alex Shandrovsky: So when I think about $6.5 million and you talk about deploying a fund into a region that small, ⁓ which doesn't have a lot of entrepreneurs or startups, mean, relatively to the region it does, but driving the geographical focus of the fund?

Mathias Brink Lorenz: Hmm. Yeah. But that's really LP driven. So maybe also just on the fund formation, how it came about. So I didn't go out and fundraise for the fund as you would normally do with a perfect thesis. LPs, they found each other. ⁓ only have four LPs, three large corporates, some of the largest in Denmark and one ⁓ endowment fund. They found each other and had a wish for creating ⁓ Danish fund supporting research focused companies in Denmark. They saw a gap in the market and means a lot both for their own sort talent retention, &A opportunities, the dynamicism of the ⁓ innovation in Denmark. So that was sort of the core idea and then I got into the mix ⁓ around year ago and then we co-created the fund together in terms of the thesis, investment strategy, allocation strategy, team setup, all of the details that comes with building up a fund. So the core focus was Denmark as a starting point and then later we fleshed out sort of the investment focus. ⁓

Alex Shandrovsky: Okay, ⁓ were the LPs really saying Denmark only? Was because they saw there was the best talent or they felt because the ⁓ HQ the corporates was there, they could bring the greatest value out? ⁓ And add in another question is, are you able to share who the strategics are so we can get a sense of how the pipeline of innovation is for those strategics through the ⁓ fund?

Mathias Brink Lorenz: Yep. Yeah, absolutely. one of them is Norlys. It's one of the largest energy distributors in Denmark. It's Heartland, one of the largest, if not the largest, family offices in Denmark, behind Bestseller and a number of other retail stores. Then it's Selling, the largest food retailer in Denmark, and AUF, the University Endowment Fund from Aarhus.

Alex Shandrovsky: Okay, then it's quite unusual that you have corporates come together to form a fund. Like I find that, you know, like I mean to be at Oyster Bay, the founder ⁓ GP of the Oyster Bay, and you he went out and he got corporates and become LPs, right? This sounds like ⁓ ⁓ decided to form a fund and they formed it and then they did a, they they build a team around that fund and the thesis. ⁓ that's... I don't know if I've ever heard of something like that actually.

Mathias Brink Lorenz: No, no, it's really unusual. And it's also really a privileged position, right, because it means that our LP bass is incredibly tight and we have a super open and direct dialogue with the senior stakeholders in those large corporates. that just... means that everything from governance to decision-making processes is much slimmer. And we translate, of course, that into how the fund operates and how we want to act in the market, right? We can be swift. there's super close alignment between the parties in the fund. ⁓ came from ⁓ German ⁓ stage fund with also a lot of corporate LPs. That brilliant too. But having so many LPs in the fund makes it difficult sometimes to navigate as a funds team, right? To make sure that we take

Alex Shandrovsky: Mmm.

Mathias Brink Lorenz: of all the interests from all of the DLPs that might not all be 110 % aligned right and in the case for Delphinus at least it is really well aligned from the get-go.

Alex Shandrovsky: Yeah. ⁓ Are you able to share how much Delphinos has under management or is that kind of every quarter or every year you guys, they're actually investing from a balance sheet sometimes so it can change.

Mathias Brink Lorenz: No, it's like a VC setup in the sense that they are LPs, legally speaking, a limited partnership structure. They've in total 80 million euros or 600 million DKK and they're committed already and we just draw it down over time.

Alex Shandrovsky: I love when you have currency that sounds like a lot. I was just in South Korea and I was like, oh, this candy bar is 12,000 won. I'm like, really? Wow, 12,000 won. I'm a rich man. I felt like I became a millionaire overnight just by being a tourist. So the Danish crown, it's fascinating.

Mathias Brink Lorenz: Yeah. Yeah.

Alex Shandrovsky: Great, so that's a pretty significant size fund, especially for pre-C to A position. You can get lot of good shots on gold with that kind of funding, especially if it's within a very specific region.

Mathias Brink Lorenz: Exactly, and I think that's to answer your earlier question, Why Denmark? And can we actually deploy that fund in Denmark only? I think yes, if our main deployment is at Series A and beyond, think we can, yeah. But that of course means there will be a rather steep funnel, right, towards who we will allocate those amounts to. ⁓ then it's an evergreen structure, right? So we can also, over time of course, allocate much more than 18 million, because we can recycle capital indefinitely, right?

Alex Shandrovsky: Yeah. And just to make sure I heard correct, 18 or 80? Yeah, that's a nice number. That's a little bit difference. Great. So if I'm basically the thesis that was formed, right, because the thesis is quite unique as well, because you have, you know, it's not a single thesis fund, right? You have four components to the fund from dual use technology to agri-food tech to med tech.

Mathias Brink Lorenz: 80. Yep.

Alex Shandrovsky: Like, you know, why were the categories chosen the way they were? And do you think it's gonna be hard for you guys to deploy effectively when expertise is usually, you know, focused? No, SaaS fund, I understand, but when you talk about deep tech, it's very verticalized and you have four different verticals you're targeting some, like, ⁓ did they do that well? Or is it just because the country is so small? So the pool is very exact. So, you know, you can get pretty good, pretty fast.

Mathias Brink Lorenz: Yeah. Yeah. So the thesis part here in the verticals, that's really sort of what I've been working on since the discussions a year ago. So this has been my proposal on how to allocate the fund effectively within Denmark. So that is looking at what deal flow do we generate, where do we actually see real traction for companies. is of course linked to some macro drivers, to vertical instability as one, food security as one, decarbonisation and of course growing populations, right. So those are the four mega trends we're betting on. So I don't think they'll go away. And we do see significant deal flowing in those verticals in Denmark. then I think on the verticalisation, ⁓ been in really verticalised VCs before, ⁓ VCs from Rockstar, right, I think my own take is that it's tech.

Alex Shandrovsky: Mmm.

Mathias Brink Lorenz: looking at an ingredient company and a SaaS company in food tech is as different as anything else. So even if it is called food tech, they're starkly different, those two business models. So I think for me, it's much more about understanding business models. So if you understand a SaaS business, they're selling to one customer segment or another, you're still looking at the same underlined for ⁓ what a healthy SaaS model. ⁓ If look at an ingredient business, if they're supplying to household care or baking right, they're still the same things you're going to look at to understand if it's effectively a good ingredient business. And the same goes for biotech. So I think when I look at it and try to compartmentalize sort of competences in the team, we look much more at the business model rather than the segment or vertical. And that for me at eScripps was comfort that we are able to judge cases adequately before investing because we zoom into business models. We don't do consumer brands, for example, across the board. me, that's a really different business model compared to some of those other ⁓ tech ⁓ we see where it's in the low end, you will, or least deep is software AI solutions, right? And you have a middle component of

Alex Shandrovsky: Mm.

Mathias Brink Lorenz: hardware-based cases and biotech cases in the variant. And those groups are basically just thinking about timelines, time to market I would say.

Alex Shandrovsky: Is this fund seen more as like an open innovation platform for the LPs or is it treated as a traditional VC fund? you're going to deploy the cash in the next three to four years, there'll be a 10 year hold, and then you're expecting VC style returns. Like, what is this really? Is this just a form of driving pipeline for your LPs or is it a fund?

Mathias Brink Lorenz: a classical sort of limited partnership set up and we've only been measured on one thing and that's IRR. That's the only goal the fund has and so it's a financial return mechanism for the LPs. But I mean if they can be exit partners in the future, excellent. Can they help us with due diligence? Perfect. But of the LPs, the endowment has nothing but a sort financial ambition for the fund.

Alex Shandrovsky: Oh, okay, interesting, interesting. And in your mind, what was the thought process again of them saying, because I find this so fascinating, why wouldn't they just become LPs in a fund? Why wouldn't they just become a piece in an existing fund in Denmark, right? Like a cost capital, right? Why form their own entity and deploy from there? Why was that important to them?

Mathias Brink Lorenz: It's a good question and I am not equipped to fully answer, right? You also need to speak to them. But I think throughout the conversations I've had with one recurring theme, which also explains the evergreen set of relative to a 10 plus 2 structure, for example, is the return for LPs is not always super attractive, right? You pay a relatively high management fee. There's a lot of hidden work in a VC structure if it's a 10 plus 2 structure. That means that a lot of the senior layers are occupied by doing other stuff than investing, i.e. fundraising, and catering for their own business model, which is living off management fees. And that ultimately means that the net return to their fees is not always super attractive, coupled of course with most VCs don't really return capital at all to their fees. So think they wanted to have alternative investments in their portfolio, some of them. Heartland also acts as a pure financial investor, right. and they have lots of other options, assets classes to choose from. So if you want to have allocations to alternative investments in your portfolio as a financial investor, you need to have good net returns. You cannot just look at or Grosser, you need to really look at Net ARR.

Alex Shandrovsky: Mmm. Yeah.

Mathias Brink Lorenz: And this structure here allows us to do exactly that. No one in the team does anything but investing. We're only 16 members. We don't need to think about looking beautiful for the next fundraising process. don't optimize for short-term returns to look attractive in the next two years or so. So our mindset is really on long-term valuation for the LPs. I think that hopefully translates into a solid net RR going forward. We also operate with a lower management fee percentage than most funds for the same reason.

Alex Shandrovsky: Hahaha Yeah. Okay, that's interesting. I'll mention to our listeners, I think this is actually a key factor. again, if you look at this pitch book I think those are quite skewed, especially in agri-food tech, because you have ⁓ who are specifically not doing certain deals because they don't want to show a drop in IRR, right? they, you know, it's like, well, we can't, like, if we actually a down round, it'll show that we did bad investments. So we'll keep...

Mathias Brink Lorenz: Yeah.

Alex Shandrovsky: pouring money into safes and therefore you'll have this kind of ghost valuation of a good fund return, right? Because they had up other previous investments. So it looks positive on paper, but really if they go out to the market now, they'll have to cut the valuation by 75%. So I think for our listeners, think what Matthias is saying is actually quite important is that, you

Mathias Brink Lorenz: Yes, yes, yes.

Alex Shandrovsky: VCs have a business model where they have to go and raise another fund to be able to pay themselves salaries, right? fund only gets raised if you're showing positive track to return on paper because you haven't really got returns, you know, by the year four or five, it's going to be five years later. So you're this artificial valuations on ⁓ books that have nothing to do with reality, but you need them because you need to raise another fund to get paid salaries, right? So, so I think Mathias has really...

Mathias Brink Lorenz: Yes. Yes.

Alex Shandrovsky: opening up a little bit of a backdoor of how things happen, how the sausage is made in VCs that we as entrepreneurs often don't understand. But if you ask it, well, why are they keeping these bad deals in their books? Well, like they're keeping them on their books to show a false metric of a positive return. Would that be accurate, Mathias? I feel like your German straight talk could give us some insights into anything else you want to add on what I just shared.

Mathias Brink Lorenz: Yes, very accurate. Yeah, but I get but it doesn't stop with that one example, right? There's so many structures in place in a traditional 10 plus 2 VC fund that can be really hard for entrepreneurs to understand Often fees linked to capital deployment Right. So that means a traditional VC is under pressure to invest at a certain pace No matter the deal is good or not traditional VC is under pressure to invest at a certain pace No matter if the deal good or not Right. you will have targets for how many investments do I need to make this year? How much capital do I need to deploy this year? Of course, ⁓ as an investor, as a deal team, what do you do? You go out and find sometimes mediocre deals because you're under pressure to find some. You would also be under pressure maybe to increase the round size just to make sure that you deploy enough to keep up the management fee, right? Because it all comes back to what attractive for the ⁓ GPs, You out and find sometimes mediocre deals because you're under pressure to find some. You would also be under pressure maybe to increase the round size just to make that you deploy enough to keep up the management fee, Because it all comes back to what is attractive for the GPs, And that is just a dissonance between LPs and GPs that drives weird behavior. In our instance, we don't have that in our structure because I'm only being measured on one thing and that's the long-term malcreation. And the biggest part of our remuneration is to carry.

Alex Shandrovsky: Yeah. Mm-hmm.

Mathias Brink Lorenz: In our instance, we don't that ⁓ in our structure because I'm only being on one thing and that's the long-term And the biggest part of our remuneration is to carry. So we have all the incentive in the world to be picky with the deals, only do the round sizes that make sense for the company. So we have all the incentive in the world to be picky with the deals, only do the round sizes that make sense for the company. Can they actually deploy that capital in a meaningful way? It makes no sense for us to push up valuation at the seed stage.

Alex Shandrovsky: Hmm.

Mathias Brink Lorenz: to look pretty in the papers, right? Because that just bites in our ass in Series A. You see that for lot of pre-seed funds too, right? What is it ⁓ are solving for at seed stage? A high evaluation. Not looking into it, it's healthy for the company, it's good for the founders. Just a high evaluation and then you don't care about your say because you just need to get to the next fund. So of those ⁓ behaviors in the ecosystem of VCs, right? We're trying to go all of those ⁓ behaviors inherent in the ecosystem of VCs, right? We're trying not to go

Alex Shandrovsky: Hmm.

Mathias Brink Lorenz: to. to. And I think that has been a huge sort of point when talking about how to set up an ideal VC, not go into those traps.

Alex Shandrovsky: Hmm. So can you take us then now, especially applying that mindset towards agri-food tech, which as an asset class is underperformed pretty significantly again. think the vintage of 2016, 2017, 2018, they're really great. Like those 2016, 2017, early funds, they had great returns because they got out in secondaries or they got out at the peak of some of these

Mathias Brink Lorenz: Yeah.

Alex Shandrovsky: public companies and they got out early, right? So they did very well actually. But that when the older tourists came in at 2019, 2020, 2021, those vintages are probably underwater pretty significantly. I mean, you know better, obviously, speaking with your partners. But how, going back to this setting up the right asset class for our VC for our asset, which is AgriFoodTech, and its unique challenges. Do you think the VC model with its incentives is a model that works for this asset class or there's a different model like the one you're proposing or the setup that is more effective for the asset class of AgriFoot Tech?

Mathias Brink Lorenz: I think not just for agri-food but for all VC Investments, generally speaking, an evergreen structure is more LP friendly in terms of optimizing for net returns than a classical model. So that's just across the board. I fully understand the challenge with evergreens in terms of liquidity for LPs, but you can solve for that. You can create liquidity windows. But on agri-food tech, without sort of maybe too shamelessly promoting Rockstar, my former employer. We did, I think, well in avoiding going into ⁓ business or cases that were not VC cases, vertical farming, for instance, right? I see it also happening now in a lot of AI cases that you go into business models with really poor cross margins. And that could also be other verticals than agri-food tech, right? So you invest in a lot of cases that will make the cash flow, the free cash flow needed for you to generate venture style returns. ⁓ at the same time, you applied thinking from what you knew best, SaaS models, for example, and multiples evaluation techniques that are suitable for a SaaS business and use that on ⁓ ultimately manufacturing company or production company.

Alex Shandrovsky: Hmm.

Mathias Brink Lorenz: So you look at the top line, right? And you forgot about working capital requirements, capex requirements, poor gross margins because you have a distributor layer in between you and the end customer, et cetera, et So I think agri-food tech, also bioeconomy, also other verticals like health tech, for example, you really need to obsess about gross margins. And if you fundamentally cannot get to the really, really high gross margins, you cannot make a venture-style return.

Alex Shandrovsky: Mm.

Mathias Brink Lorenz: And that also goes for AI case that looks like software cases, but your token costs are so high that your effective cross margin is really, really low. You won't make a winter start return on that, if it's software. So think that's ⁓ much the recommendation.

Alex Shandrovsky: Yeah. Well, I guess the people who are selling the tokens of the cloud computer, the ones who have great margins, They're doing really well in the back of your business model.

Mathias Brink Lorenz: Yeah. But I think that's in VC world, that's classic ride. Often it's better to put on the picks and shovels right, than the ⁓ ⁓ I was just on ⁓ trip to the US. Sorry if maybe I'm going in a detail, you can take it out afterwards. Yeah. ⁓

Alex Shandrovsky: We're going there together. We're getting the car with you. We're going to the US. Take us there, Matt.

Mathias Brink Lorenz: I had kids with me to LA just a few weeks back and we visited an old mining town. And that was really obvious that what did you see in the mining town? You saw candle makers, axe makers, pig makers, all of those adjacent technologies to silver mining. And ultimately those would be the great set of bee seed beds rather than the individual miner going into the mountain and maybe striking or gold, but most likely not. But on all of the picks and shovels like in real life, that's where the experience come from, assume, make a ton of sense from a VC perspective. And think I see the same in agri-food tech, right? Maybe not that on the one making the cucumbers, but maybe on the one selling the high-tech high-margin ⁓ supporting technologies the cucumber manufacturer.

Alex Shandrovsky: I ⁓ I'll say that I grew up in San Francisco most of my life, so I think we need to organize a VC trip to one of those mighty towns. Like, it'll be an educational, Matthias will take all the European VCs. Let me show you something. This is how Levi Strauss made his money, is he was sold jeans, right? That's kind of, know, sell jeans. Don't sell, you know, the Bitcoin. So ⁓ ⁓ that, though.

Mathias Brink Lorenz: Yeah. Exactly right. Yeah.

Alex Shandrovsky: to very practical example of a friend of mine who I love, think is a great entrepreneur at the company Reduced. Let's take that back to now. You deployed now, right? So we can kind of think. I don't think we need to make this theoretical because you've given people cash, right? ⁓ So take us through Reduced. How did that fit? Because ⁓ going to say what people may think, right? Well, look, Reduced, they're upcycling B2B ingredients.

Mathias Brink Lorenz: Yeah.

Alex Shandrovsky: No upcycling company has really won of the high cost of upcycling that's baked into their production costs. So, man, that sounds like a low margin play. What real problem is there to solve? Will a pay a premium on this type of ingredients? ⁓ What made think differently, given your thesis?

Mathias Brink Lorenz: Yeah, I should be also clear on saying I know Reduce for quite a while now. So yes, of course, we did quite a bit of due diligence. But if we talk about the thesis later in general why we want to go pre-seed is also about reducing information assurance, right. And in the case of Reduce, I've done that for the past five years because I've been really close to the companies for a long time. Invested the first time back in 2020 from a different vehicle. aside. Exactly. ⁓

Alex Shandrovsky: You gave the money to Rockstar? Okay, so you follow them as a pre-seed investor through... Okay, great.

Mathias Brink Lorenz: Yeah, exactly. So I already had a lot of conviction and comfort around the case and Emil, of course, being a wonderful founder, really, really strong. ⁓ They are a high margin case, right? dressing, I wonder how ⁓ deep should go on this, but if you about flavor pyramids, right, you have a lot of the... Okay.

Alex Shandrovsky: Yeah, he's very good. You can go deep, the way, Matt. You can go deep as much... ⁓ by the way, to our listeners, I think, who are with us, right? This is actually... You need to understand how Matthias is looking at this. Why did he put money in the meat? What was the thinking process? Because I think they'll inform a lot of our listeners how they should be thinking, right? So actually, you can go as deep... Don't go deep on the technology side, but the business use of the economics, I think that's what's interesting. The technologies, that's kind of the how, you know?

Mathias Brink Lorenz: Yeah. ⁓

Alex Shandrovsky: Well, let's put that to the side. Let's just give them a high sense of where the technology is, but where the IP is. But really, let's focus on the business model and how it fits to the thesis.

Mathias Brink Lorenz: Yeah, it's difficult to do without also touching the technologies just a little bit. But if you think about food, ingredients as a whole, right, there's a hierarchy of ingredients. And here we talk about price, so the cocks you can get, but also, and that's of course really linked to the price, is the inclusion rates. So how much is a given ingredient do you need in a final product? And how important is that for the overall product? And I think in the case of reduced, they're doing savory flavors. And of course, if you think about what is flavor and you have a flavor pyramid in the bottom, you have all of the really basic flavoring agents like salt, sugar, tomato, umami, if you're familiar with that, you can get that dirt cheap from yeast extract. And some of the other upcycling players we've seen in the savory ingredients based dipping playing in that sort of base layer of the pyramid, competing against stuff that is already incredibly easy and cheap to produce. And here, course, the gross margins are terrible. So don't go into to a company doing glutamate blocks, they're not gonna win on Martins. Then you have a middle layer, which is more sort of complex flavoring notes, and then of course you have the top notes in the very top of the pyramid, where you, for example, have a very specific sensation of chicken flavor. Not just pure chicken, but also the mouth-feel sensation of roasted chicken. That comes from the Maillard reaction of changing sugars into complex flavor models. you have ⁓ compounds of course still glutamate. And if you can sell a product into ⁓ FMCG that has those traits, then you add a lot of value with a low inclusion rate relative to just selling salt or MSG. And is really at the heart of the value proposition for reduce towards the FMCGs. So it could be a manufacturer doing like a chicken soup

Alex Shandrovsky: Mm-hmm.

Mathias Brink Lorenz: mushroom ready meal and you might want to take down that component a little bit, reduce the actual chicken and put in a flavoring agent. Today you can't do that unless you put in artificial flavors. So you miss all of your labeling options, but reduced you can actually put that product in, that ingredient in, and still retain all of the ⁓ flavors, reduce the overall cost of the product from the FMCG's perspective, and have the ⁓ clean label. It reads really well. It's organic. It's made with real chicken right, or real mushroom.

Alex Shandrovsky: Mm. And Mathias, if you look at, if you can explain correctly, they have their own factory, is that correct? Now that's a concern for some, right? Because there's a pressure towards low capex, low CDMO, goes through a CDMO. If you're putting in machinery of your own, that's a risk. Because VC funds typically don't fund infrastructure. I guess you typically want to go through debt on that.

Mathias Brink Lorenz: Yep. Sure. Absolutely.

Alex Shandrovsky: but you can't get debt because you don't have the proven business case as a startup, right? So no bank will ever give you debt. So how did you navigate that question? Cause that kind of worries me, know, high capex, bad. Is that the VC dollars best spent?

Mathias Brink Lorenz: Yeah, but true. But of course... I think it's like finance 101, right? It's about free cash flow. So if you, with your cap expense, can generate a higher cash flow ultimately, right, it makes it worthwhile. The alternative is to go to CMO, of course, either of you across Martin. So I think if you can justify the cap expense to overall generate a higher free cash flow for the company, then it makes sense. In case of reduced, it's pretty standard equipment, right? You take stuff from the dairy industry, the brewing industry it's fermenters right it's ⁓ it's not that complex of there's a little bit more to it right but a lot of the cap expense relatively off-the-shelf components which makes easier so think here

Alex Shandrovsky: course. Mmm.

Mathias Brink Lorenz: Here it makes sense. A lot of the value in the company is the production process. Understanding how to combine the components in the factory, how to run fermentation process. It's both a solid state and liquid state fermentation process, so it's complex. So think the FTEs, the manufacturing team, the production setup adds to the whole enterprise value of the business. It's not always the case. There's also a lot of ingredient business where a CMO makes much more sense. But in this case, we believe it does. It was about the discussion, right? Which route do we want to take? Do we want to build? Do we want to rent? And we went for building.

Alex Shandrovsky: Mm. Hmm. Interesting. And was there an element of support from the government in Denmark specifically? this business being in Denmark, in Denmark is known for a lot of funding from public funding, from access to capital, alternative financing. Anything that we should know about that business that really benefits from being in Denmark?

Mathias Brink Lorenz: think one of the ⁓ in the company is Eifel, the ⁓ Fund of Denmark, but I don't think that's unique to this case. ⁓ ⁓ in Denmark have chance to get funding from Eifel ⁓ and act like a financial investor. So they haven't provided any grants or subsidized financing in the shape or form, but it's investor.

Alex Shandrovsky: Yeah. And I believe that reduced is not a novel food, So there's no regulatory gap there as well. It's about execution. ⁓ long as a product is good, you don't have to worry about regulatory path as well. You could just sell it into the market.

Mathias Brink Lorenz: No. Yep. And they had commercial traction from day one for that reason, which of course also helps a lot. ⁓

Alex Shandrovsky: When you look at a business like Reduce, again, I'm not speaking about Reduce specifically, but we're seeing good exits right now in F &B, unless it's a brand to play, half a billion dollars is considered to be a great return. Is there a certain number that you're saying, look, when we pilot, we try to understand how to get back a fund and get the returns that we need for our investors? We see companies that like...

Mathias Brink Lorenz: Mm.

Alex Shandrovsky: their potential is a half a billion dollars. That's when we know this business can be added, can be more, especially if it's a European rather than US based company. How do you do the financial modeling part of the value of a business?

Mathias Brink Lorenz: But I think that's exactly the starting point for my thinking is that's the exit space. And realistically in Europe within Deep Tech, we'll see a lot of companies that won't make it to a billion dollars in valuation, but may be capped at two, three, four, 500 million. And then you just calculate backwards, right? What is a sensible pre-seed seed valuation for us to reach our return requirements? So I think that's what we have to do.

Alex Shandrovsky: And how are you getting those benchmarks? if I was a startup, right, and I'm saying that pre-seed stage and I know Matthias, okay, I want to reach out to Matthias, I don't want to do some modeling for him, right? I want to give him a sense of, okay, what the modeling will be. I have a sense of how much money I'm going to need to raise in my milestones to get commercial and an exit. Like how do I do that job as a startup?

Mathias Brink Lorenz: Mm.

Alex Shandrovsky: What do I have to do to make it easier for Matthias to understand, like, this guy did some work. You know, I'm going to check his numbers, probably cut them in half at the very least, right? Because God knows how many, how many presentations I've seen of companies do this S curve to $350 million in revenue, like in five years. like, maybe, maybe you can. And then when I look at, you know, when I look at that so far, has anybody done that? No, in AgriFoodTech. So maybe you'll be the one out, you know, maybe.

Mathias Brink Lorenz: Yeah. Yeah, yeah, yeah.

Alex Shandrovsky: You know, you know, it's I've sold software before I've seen those escargot happen in companies with that does happen, but I haven't seen that agri food tech, honestly. So take us through the mindset of a founder to just, you know, look, this is what I'm going to look at pre-seed seeds ⁓ this is the modeling that I'm going to do. And, know, this is probably where you want to get off the bus at this stage of an exit.

Mathias Brink Lorenz: Yeah. I think the short answer is do too much. I myself have over my years in VC done tons of modeling and the only thing that's really certain about modeling is that it's wrong, for sure. when I see a pitch deck with an SKF or a budget for five years, just completely mentally discard it. Zero value whatsoever. You cannot predict that. So we obsess in our fund at least around ⁓ next value inflection point and that is typically six, 12 months ahead and it's very rarely a revenue. So it's all about removing roadblocks for scaling. Don't try to predict the future on revenue. It is just senseless for a VC case. Look at where you are today and at early stage, but even late stage when we invested in my former fund at A and B, we did so many predictions and you're never right. also revenue is a function of what you do day to day. So don't try to...

Alex Shandrovsky: at your stage, right?

Mathias Brink Lorenz: make a budget, try to hit that budget rather than obsess every day about how can I move faster, faster, scale faster. That's much more important than trying to hit a budget. ⁓

Alex Shandrovsky: So with a company like Reduce, were you just saying, hey, this is the next 12 months we think are going to look like from revenue, margin, hiring, headcounts, that's what we are thinking we need to be at?

Mathias Brink Lorenz: Well, they do have a financial projection of course. Some investors still expect that. I think most do especially in later states. But for me, looking at a case like that, all... is hugely important. Then we need to look at exactly what is driving the customer cross margin today. can we do internally to change that? Where in the production can we make tweaks and changes to increase it? It's throughput in the manufacturing setup. All of those small levers you can do ⁓ every every month to increase the case rate. How do we work strategically with the pipeline? Look at the conversion rate from stage to stage. Where can we make small changes? And that's not unique to an ingredient company. That also goes for SaaS. You need to obsess over, right? all of the small steps in your funnel to make sure it can scale faster. So that's what we're looking for in DD. Is the company able to understand that? Are they able to let's say the funnel for example, are they able to take concrete learnings from the funnel and make changes so they optimize? That's much more important than if the revenue was X or Y ⁓ week.

Alex Shandrovsky: Hmm. Mm. Last couple of questions that come to mind, a lot of our listeners are not in Denmark, but they may say, gosh, I think I could do really well with Matthias as a partner. There's not a lot of cash out there for companies like ours. I'm still at an early stage where could be little flexible move. What are the requirements for you to consider a foreign company? Should a foreign company even reach out to you?

Mathias Brink Lorenz: Yeah, that's perfect vibe.

Alex Shandrovsky: What do they need to commit MetaSys to press a button that say deploy? At what stage would you consider having a conversation with a foreign company?

Mathias Brink Lorenz: I think foreign or not, early stage for us means, we would pre-see this, a loose term, right? There to be a really, really strong founding team, goes without saying. And in particular within Deep Tech, that means commercial abilities. That is one reason why we decline for teams, that that you have pure technical founders. with no desire to speak to customers, no ability or motivation to speak to customers. So they wake up in the morning and want to iterate on the product and that's amazing. You need those in the team too, but you need someone who wakes up in the morning and think about the customers and how we can serve them effectively. that's in place, then ⁓ a current large market or ⁓ vision to get to really adequate market, just make the return profile attractive, and then a solid problem solution fit. problem solution fit. recently declined a number of companies where the answer to that question is like everyone can use our innovation is the best ever. That's not good enough. So they need to be hyper specific on exactly who is the beta customer is going to be. And I think ⁓ you have a solid commercial profile in the team, you will be able to do that quite effectively. If you have those three ingredients, it's a match.

Alex Shandrovsky: Yep. But then geographically you're only tied to Denmark, right? So do you mean to then have the founders move to Denmark and open up the business entity in Denmark or the HQ can still sit in say the Netherlands or Germany or like what legally has to happen? I think that's a question from the legal standpoint. What needs to happen for us to actually...

Mathias Brink Lorenz: Sure. Yeah.

Alex Shandrovsky: But there's amazing founders in India, right? I've known several that are doing incredible things from an execution standpoint, deep tech solution. They would love to come to Europe and open up a position ⁓ you. But ⁓ actually has to happen for that to work? Or do they first have to move to Denmark and then talk to you?

Mathias Brink Lorenz: I haven't had a concrete case yet. We've only been open ⁓ August last year. ⁓ I think ⁓ is the thinking from the LPs and the fund in general, right? It is to build on the Danish ecosystem. So if you just put a satellite business Denmark and live up to the minimum legal requirements of having a business incorporated, that's not really what we're looking for, right? We're looking to people to actually be there, be part of the ecosystem. Does it make sense for your business to be in Denmark? Right. ⁓ Would open a subsidiary because you want address the Danish market from a commercial standpoint. Okay, that makes sense, right? Do you need specifically to have people on the ground? Maybe not necessarily. It's going to be a judgment call, But I had a few inbound requests from, for example, India and also the US. ⁓ if we open a subsidiary in Denmark? Does that open door? No. There needs to be some relevance to Denmark for the business, not just a satellite so we can invest. And I think that... That makes sense when you experience like that to a founder. There needs to be a reason for them just getting cash.

Alex Shandrovsky: For lot of founders in our environment, I'll move anywhere for cash. people who homeless will say, ⁓ work for money. Take us through Orbiotics, please. Just give us that kind of use case. Why Orbiotics? How did it fit? It's a prebiotic, it's an ingredient, B2B ingredient. Is that really a high-margin play? It's not a brand, so love the margin cups for the brand part.

Mathias Brink Lorenz: Yeah.

Alex Shandrovsky: Here sounds like a commodity play. So how do you turn a commodity into something that's high margin? Why did you make a bet there?

Mathias Brink Lorenz: Yep. You told me earlier that you're also speaking to Ida and of course we have been quite transparent with Ida and Jens I our biggest concern is the margins, right? So how do we solve for that ⁓ if we're prebiotics? It's about inclusion rates again and it's about sort of the efficacy ⁓ of the individual And I think all studies so far they've done in the team indicates that you can go with low inclusion rates and therefore high margins.

Alex Shandrovsky: Yes.

Mathias Brink Lorenz: ride on the product. And therefore we believe they can actually get into a segment where it's not a product. Remains to be seen. It's a pretty steep case ride.

Alex Shandrovsky: So let's talk for second about low inclusion rates. So I was in a company that was focusing on cocoa from Plant Cell. Initially, that was previous company in that space. So that's a high inclusion Cocoa is the core ingredient. It's not ⁓ ⁓ It's not salt. It's not special. A chocolate bar probably should have chocolate. mean, that's probably a good start for a chocolate bar, as one would imagine. ⁓

Mathias Brink Lorenz: Yeah. Yes.

Alex Shandrovsky: So one would argue, know chocolate, that's a high value market. you have, it's a, know, what is it? Again, I to look back at the numbers, but let's say a hundred billion dollars of ⁓ entire chocolate industry. You know, that sounds like a really big market, right? High inclusion means there's a lot of business to be done. know, low inclusion sounds like, wow, that's a niche product with, you know, with a very small TAM. So take me through why low inclusion could actually be a more value add. ⁓ Play that can have higher margin, especially if I'm a buy if I'm ingredient buyer. Why is Probiotic maybe more interesting than chocolate

Mathias Brink Lorenz: Yeah. Yeah. So I have a background in Novo Nis, also the Danish enzyme manufacturer, and I think that was really an eye-opener on the ingredient side. They are ultra-low inclusion rates, but critical to the performance of the products they're in, and therefore they command insane margins. Look them up, look at the EBD and EBIT margins and grass margins, right, it's mind-blowing. They go into... Commodity segments like baking, for example, their baking enzyme is critical to the end product. But you put in so little that you can't command a really, really high price because even with a high price, it doesn't really matter in the mix of the product, right? You still have flour and yeast and water that makes up the bulk of the actual cost. And the same for other ingredient plates like pre-biotics, savory flavors. Flavors, fragrances, colors, those kind of things, they can make really high margins. Cocoa, not so much. Coffee, not so much. If we talk about sort of coffee alternatives, cocoa alternatives.

Alex Shandrovsky: Now, let's ask why. Just for our listeners, why is that the case? Why is... Why are you allowed to charge such a premium for something that's so small to the... Is that... is that the case?

Mathias Brink Lorenz: it doesn't affect the overall cost for the manufacturer. if you could... Yes, per unit basis, right? So if you sell a loaf of bread, the actual cost assigned to the enzyme is minuscule. What matters for your unit cost is the flour.

Alex Shandrovsky: on the per unit basis.

Mathias Brink Lorenz: And that's the bulk ingredient. And the same goes for a chocolate bar, right? The main ingredient is chocolate. So here any sensitivity and the price is hugely important for your own margins as a producer. The fats, oils, Also going into chocolate, a lot of other food applications, right? So if you are selling those bulk ingredients, have a really difficult time raising prices, right? affects the margins of the manufacturer. On the other hand, let's say yogurt, and you're the one supplying the red color. That color is just a tiny fraction of the ⁓ total of the yogurt because it's milk and what have you, right? Flavoring agents. And therefore, if color makes all the difference for how the yogurt is perceived, by the customer or end users, can charge a premium. So it's really about how much of the total product cost do you constitute with your own ingredient. That was a very long-winded explanation. Does it make sense?

Alex Shandrovsky: Mm. ⁓ Mm-hmm. ⁓ I think it makes perfect sense, but it sounds like you have two different factors here. You have that it has to, you know, it's a low inclusion rate, but it's critical to the product. And that product line is still enough to make it, you know, to make a valuable revenue line for the startup. Right. So you have to have both piece, right? The yogurt line is, you know, it's per unit is it's quite small, but for the startup, the volume is extremely high still. And you could... gross margins ⁓ really where you're driving anyway, so you can still be very bit of the positive on the other skew.

Mathias Brink Lorenz: Exactly, exactly. I think for some of the products from a former employer, they had a gross model of 99.99%. They were unusual of course also, but that was into some really high-end applications within medicine, for example. Here right enzyme, can charge almost ⁓

Alex Shandrovsky: And the buyer will not care because it's such a small unit. But it plays a key role in differentiation to the consumer. Awesome.

Mathias Brink Lorenz: Yes, exactly. That was more eloquently put than I did it.

Alex Shandrovsky: Well, no, think you did a great job. And again, I think for our listeners, this is really a master playbook you guys are listening to. You have a real gift that Matt has shared with us. As a way of thank you, how can our listeners thank you? If somebody's listening to this podcast, what are you guys looking to do the next six to 12 months? What are you looking for? And how can they find listeners this podcast and they say, hey, I think I could bring value. What kind of value is Matthias looking for as a thank you for his wisdom?

Mathias Brink Lorenz: I'm gonna be so boring instead of DealFlo. I think... We thrive off it, right? And I think that's always the biggest challenge for a VC, that is to get the right deal flow. best startups, they have no issues fundraising, right? Because they have the network and the ability to get the investors in fast. And a new VC, at least, I think that's our main struggle. We have team in place, we have the capital in place, but the deal flow is still really to my own network. ⁓ And I've been on a vertical before, so food, and now I'm focused geography, Denmark. So strengthening.

Alex Shandrovsky: All right.

Mathias Brink Lorenz: sort of the pan Danish investor and a startup network for would be really valuable. So do you know someone who knows someone who knows someone who's looking for funding in Denmark and is excellent founder or founding team? Then that is to us. I know it's a boring answer. ⁓

Alex Shandrovsky: Amazing. Well, I think that boring businesses make the most money, so boring answers get the most value. So thank you for what you shared with us. you so much for this. Really pleasure speaking with you.

Mathias Brink Lorenz: Yeah. Thank you.