29. Pioneers. with Filip Felician Dames, Entrepreneur and Investor at Cherry Ventures

"Filip told me during the interview that the organizational culture was crucial for them at Zalando and is still a recipe for success. I asked what this means in practice and how it affects his rating of startups now at Cherry. Cherry invests in open-source and developer tools, a topic that is especially close to me :-) The latest Cherry investment is an amazing product straight from Wrocław - Saleor Commerce developed by an amazing team led by Mirek Mencel and Patryk Zawadzki. Enjoy!" Piotr Karwatka, Host.

Topics discussed:

What were your key learnings from your journey with Zalando? 

How did ou get into a VC fund - tell us about the early days of your career.

Cherry VC- what's the story, who are the partners, and what's the investment strategy?

How to become a Cherry VC’s portfolio company?

"Founders First, Investors Second"- what does it mean?

What are the investment criteria at the early and late stages? What makes the difference? 

What works and what doesn't at the companyies you review? Maybe some examples?

How should the successful founding team look like and who should it consist of?

The key features of a successful founder?

You recently invested in Saleor. Investing in Open Source products - how does it look from a VC perspective? How does it differ from typical software products?

We are investing in Open Source products vs. developer tools.

What other (if any) criteria do you take to assess the traction and market fit?

What business models work best from a VC perspective: on-prem, consulting,  cloud, mixed?

As open source: can you pivot towards a business model, or you need to have it in mind from day 0?

The product development strategy: starting from scratch vs. the spin-offs?

The deals you’re most proud of and the one you missed?

Most over and under-rated tech trends you observe and are excited about?

What’s the next ideal startup you’d invest in just if you could find it?


Transcript:

Piotr Karwatka: [00:00:47] Hi there! Today my guest is Filip Dames - co-founder of Cherry VC. Cherry’s founders have been involved in Zalando, Quandoo, and Groupon, and the fund has previously been among the first backers of Auto1, Flixbus, Flaschenpost, Dash Dash, Rekki, AMBOSS, and many others. We're going to dig into how Cherry works, how to become a portfolio company, what makes the founding team successful, and how investing in developer’s tools and open source differs from other software companies.

What makes the founding team successful and how investing in developers tools and open source differs from the other software companies. Hi Filip, thank you for accepting my invitation.

Filip Dames: [00:01:21] Hi, good to be here. Thanks for having me. 

Piotr Karwatka: [00:01:23] First of all, I would like to start with I guess, very important point in your curriculum, which is Zalando.

You were in the very, very early funding team of the project. What are your key learnings from Zalando? 

[00:01:41] Filip Dames: [00:01:41] Yeah. So, I mean, Zalando continues to be an amazing company. I mean, that left the company with the IPO in 2014 and they just published the numbers this week and company's incredible, right. Targeting 30 billion GMV. Yep. And and, and still super innovative on opening new markets. And if you ask me, what are the key success factors or like maybe the things that we've learned. I think two, two things stick out, right? I think you realize this as an operator and you realize as an investor first, that the team makes all the difference.

[00:02:14] So I think what Zalando  has done really well is thrive for a culture of trust and transparency. Adding people to the mix that are different. That are better than you know, the people that are already in the company. And that's, I think something that's an Zalando has done super well. And then I think the second learning, or the second thing that really matters was timing as well.

[00:02:34] Right? So Zalando was a winner of the last financial crisis. 2008, we got started. The advertising budgets were down. Nobody was really doing any marketing. And so then under acted very fast and sort of became the winner of this. And I think this is also generally something that we will now see with COVID is the company who act fast and the companies who act with conviction, once things are starting to pick up again, we'll be able to capture a significant market shares regardless of the industry. And that's definitely something that happened in the case of Zalando as well. 

Piotr Karwatka: [00:03:07] You said the team. Let me stop for a moment. Before we get for, I mean, I had Jan Hegewald from Zalando, he was my guest and then Victoria Schmeirer, who runs the Zalando pre-owned project. And those two talks were absolutely great. The people were great and they told me something like the culture is the differentiator. You know the way we are led to do our things without being too much pushed on the numbers too much with the constraints, we have a lot of freedom. But we are all motivated into the same direction. So that's that's super cool. So I guess you put a lot of effort into building this culture.

[00:03:58] Filip Dames: [00:03:58] Yeah, for sure. I think it's about empowering people and letting them take responsibility. And I think by doing that, you will. You know, we would just create much better outcomes than by micromanaging people. And I think that's, that's super key. 

[00:04:13] Piotr Karwatka: [00:04:13] Where are your tools for implementing such a culture? I mean, you know, different companies do that in a different way. I mean, OKRs onboarding process, very tailored to your company and a lot of different tools. I know from Divante that we struggle for I can say a couple of years into finding the right set of tools that are natural for the people and also very effective. What was the key in Zalando?

[00:04:39] Filip Dames: [00:04:39] think this has also evolved over time with the teams getting much bigger, but even when we started and when the team was very small to promote a culture where failing was allowed, this is, this is absolutely important. So people weren't afraid of experimenting of trying out new things, a culture where you would be able to invest a certain amount of your time also in moonshot topics. Maybe things that weren't part of your daily business, but allow you to sort of think beyond the day-to-day. And yeah, of course we also had tools like OKRs and stuff, but I think generally more important is I think the management style that you have towards your people is that you really enable them and, and they have the feeling that they are trusted and their computer contribution is taken seriously.

[00:05:29] Piotr Karwatka: [00:05:29] Gotcha. That makes perfect sense. Now you are building Cherry VC, dealing with you know, a lot of different teams I suppose that you are getting thousands of inquiries from startups or different sort of product companies over the, the demand as you go. And the culture is something you are also, you know putting a huge, huge priority on picking the companies like to get into charity. Is it more important to have a great product or having a great founders? 

[00:06:03] Filip Dames: [00:06:03] I think both it's important. So the thing is we are very focused on seed. And that is a very important part of our strategy. And we can talk about this later, but typically when we invest there are some things to look at. But we spend most of our time actually on the team. And I think we're going to talk more about them. Like what makes a successful founder and what are the traits that we're looking for, but at the end of the day as a VC, you have to think about the potential outcome, if everything goes right.

Right? So if everything happens like you're dreaming it could happen then what would be the outcome of that company? And I think when it comes to the team, it's important to look at, to look at it in a way it's like, if everything goes right. So of all the circumstances, if all the stars are aligned, is this the team that could, could build it?

And I guess that's sort of the, the most, almost the most important question that we have to ask ourselves.  

Piotr Karwatka: [00:07:01] Yeah. That's a very interesting answer. Not, not not that long ago. I had the conversation from other colleagues from a different VC. And we were discussing one particular project, which is enterprise software for managing the the products for eCommerce and we were discussing like if it's what are the USP's of the, this product tech trends, not the team maybe, and, you know, I was asking him like, man, you need to make such difficult choices as a VC which one to invest? Which one not? Because you are making this choice before they got the right action usually, right? 

Filip Dames: [00:07:48] Yeah, I am. And I think if you think about it, like if you have the choice to invest in a great team in a product that's maybe not perfect. And in the mediocre team, that's maybe a little bit further ahead with product. You always go for the better team, right. Because they also, you know, they will be more flexible when it comes to changing strategies, strain, changing roadmap, replying to customer demands and so on. So I think team definitely, especially at an early stage, but actually to be honest, across all stages is most important.

Piotr Karwatka: [00:08:23] It's pretty much was like hiring, right. I heard this famous quote. I really like it when I was into HR demanded that. You just simply don't motivate people, you search for motivated people. And the same with teams is you search for the right teams. Not trying to build one because it's not a casting on something there.

Filip Dames: [00:08:49] Yeah, I think that that's generally true. And I think also something as investors, you have to remind yourself, right? You are not building these companies, the founders and the founding team of leading the company. So you can only, so part, you can also only be the sparring partner. Right. So and with hiring the same, right?

I think you, as a founder, one of the biggest. Skills, the most important skills that you need to develop is the ability to hire top talent. If you don't get that right, your company will fail at the end of the day. Right? So the best founders are able to identify people that are better than them in certain dimensions and get them. Excited about the project and get them on board. 

Piotr Karwatka: [00:09:29] Absolutely. Yeah. That's, that's absolutely huge. Okay. Let's take a step back because we went into people into what makes the founding team successful a little bit, but let's take it back. Back in the day you exited Zalando, and it was a huge success. How did you get into VC? For me it’s a little bit, you know… People of your career, because from being an entrepreneur, a founder into operations, you know, all these companies stuff you got into investing, how has this changed for you? What, what motivated you to start sharing?

Filip Dames: [00:10:09] Yeah. So for me, the entrepreneurial journey started even before Zalando.

So I had my first startup when I moved to Berlin and that company failed. It was not a success. And then afterwards I joined the Zalando team. And and of course that was a very different trajectory. And I think it both experiences taught me a lot. Then after Zalando I actually thought about, okay, what is the next company I'm going to build? And you know, as most sort of serial entrepreneurs will do, you know, I started making lists of interesting business models and so on. 

Piotr Karwatka: [00:10:45] You mean you were searching for like a typical company. I mean like normal, not investing fund, nothing like this, like a regular startup right?

Filip Dames: [00:10:54] Yeah, at some point I wanted to do something in the U S potentially. And I had lots of different ideas and I kept investing. I kept angel investing and we had lots of you know, founders that came to us asking for advice and, and that's sort of how our first couple of investments they just happened.

So I didn't really plan them. But it was very much based on teams and founders. That inspired me and I was excited about what they want to do. Yeah. Built. And that's how we build our first angel portfolio. And that was still during my time also, even before, during my time at Zalando I already started angel investing.

So, yeah. So I kept, we kept investing and then actually realized how much fun we had doing it. And at the end of the day, the idea behind Cherry was then to build the VC firm that we would have liked to have by our side as a founder. And that was, that was the vision. That was the big idea.

And. So in a way, Cherry is also a startup, right? We are not just, you know, wiring money somewhere, but we are really building a firm and we think very hard about how do we build the brand? How can we add value to our portfolio? What is sort of the value added that our founders appreciate the most and is most helpful. So in a way that's, that's also a company we're building, 

Piotr Karwatka: [00:12:27] I read your claim that Cherry VC is founder first  investor second. What does it exactly mean? 

Filip Dames: [00:12:35] Yeah. So Hey this, because with everything we do with every way we designed the companies and we designed Cherry. We try and have the founder in mind. So we see as I said, we don't want to build their companies at the same time. We see us as true sparring partners on eye-level. So with every interaction we put ourselves in the founder's shoes and things like what is the best way to act as an investor? And also like what we're optimizing for the single most important KPI for Cherry is found NPS.

So Net Promoter Score. So will our founders recommend us to other founders and we believe that we're not the only ones that are doing it is that this term got coined by the benchmark team. But I think it is absolutely key for if you want to be successful in a venture or long term. Is that, for me, that is the only strategy that will win sort of long-term, it's pretty unique.

Piotr Karwatka: [00:13:29] I heard many different KPIs for VCs, cash on cash. The multiplier, the ROI, exits.

Filip Dames: [00:13:36] like I think that will all come, that will all come NPS. I think this is, this is the thing 

Piotr Karwatka: [00:13:43] It's a long run game, right? You need to keep, you know, meeting the best founders. And the best way is to get them from records, from recommendations. And that makes perfect sense for me. No talking about this criteria and the KPIs, maybe  let's talk about the criteria for the startups to get on board that would Cherry, what are those criteria? And what's your investment strategy?

Filip Dames: [00:14:09] Yeah. So on the investment strategy, as I said, we're very focused on seed rounds. So we typically have the first institutional check into a company and that's, you know, that's what we're best at. And that's where it will stay this way. So on the criteria you know, VC is an outlier game, right? So it is quite a strange game, to be honest you look for outliers, right? So you, you think about The company that you're investing in, you think about like, what could that company become if everything goes right and you can, you need to believe that they can sort of become a unicorn.

It's a little bit crazy. Right. And, and we obviously know that not all of our companies will become unicorns at the end, but the potential needs to be there right? So that then comes down also to the ambition level of the team, right? We would probably not invest if a founder says hey, look, I'm looking to build a nice business that pays me a nice dividend at the end of the year and if I'm very lucky I can sell it for 20 or 50 million. There's nothing wrong with that at all. But that company is probably not a venture case, not the case for us. 

Piotr Karwatka: [00:15:16] I heard that VCs often have a criteria that. Every single company to pay off the whole fund. Is it something like this?

Filip Dames: [00:15:25] Yeah. Yeah. I mean, whether you define it in absolute valuation that the company could get to, or where you related to your fund size and you say the signal, the investments need to be able to return the fund. I think the strategies are quite, quite similar. 

Piotr Karwatka: [00:15:41] Okay. And is it, you know oriented  into some specific verticals or is it more generalistic? 

Filip Dames: [00:15:47] So we're a generalist fund, but stage focused stage four. So within, within the team we have our areas of expertise and we have our focus as well. So we're going to talk about open source. We're going to talk about dev tools is an area where I spend a lot of time and I also work a lot with FinTech companies. And then the last area where I have always spent a portion of my time is within digital health. So this is me, but then my partner is looking at completely different things. So this is also the way we, you know, we develop our thought leadership internally. So we try and go really, really deep on specific industries understand the value chain in large detailed, very deep detail. And then look where in the value chain do we see sort of potential for disruption through technology?

[00:16:39] And then we often turn it around and we actually do a lot of outbound. So we find our founders rather than, you know, looking for them to write to us. And so in the case of Saleor that we spoke about earlier, I actually reached out to Mirek on LinkedIn because I saw that attraction on GitHub, but I saw you know, how the company was developing.

And I really liked what I saw. So I was just, you know picking him to have a chat, to get to know each other. And, you know, a few months later that ended up being one of our lessons 

[00:17:11] Piotr Karwatka: [00:17:11] Before the recording, we learned we were discussing this pretty fresh news today on Tech Crunch about Sailor and we get into this particular project for a couple of minutes, but first let me just wrap it up or maybe you're going to have me to wrap it up. If let's say I'm a founder of a company looking for some VC money to grow. Right. And as you said, it probably is better that you find me than if I apply to you to share it directly because it's, it's probably more chances to to have a fit. But what does it exactly mean? What my company should be doing to be a perfect fit to Cherry. [00:18:09]

Filip Dames: [00:18:09]Oh, okay. So of course, you know, not all of our companies that we invest in are outbound or we find them through throw up and we  get actually a couple of thousand applications per year and we look at all of them. So I think the first thing, if you want to get in touch with us, it's like try and find a way to stand out. Don't write to the team at Cherry. We don't have the team, frankly. It's not because we don't want to, but we don't have the capacity to look at everything in detail. So try and find a way, have someone that knows someone that knows someone that can make an introduction. And I think there, you will already. Sort of really increased the probability or the likelihood that we would invest. And I think the criteria, I think it comes down to what we just discussed. So like, what is your ambition level as a founder? Like what do you think you can build? And and, and do we believe in that vision?

Right. And of course, there are certain markets that we're more interested in than others. And, and and that also plays a role. But in overall, I would say most important is the founding team and it's ambition level.

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