Corporate Finance

“We want to invest in disruptive companies that have global potential”

Rodrigo Sepúlveda Schulz is one of Luxembourg’s most prominent tech venture capitalists. In 2015, he co-founded Expon Capital, investing in private technology companies, usually at an early stage. A digital native, he is a former strategy consultant, a serial entrepreneur, and a well-regarded business angel.

Rodrigo Sepúlveda Schulz is one of Luxembourg’s most prominent tech venture capitalists. In 2015, he co-founded Expon Capital, investing in private technology companies, usually at an early stage. A digital native, he is a former strategy consultant, a serial entrepreneur, and a well-regarded business angel.


Leaders League. What is the link between your firm’s two funds: Expon I and Digital Tech Fund?

 

Rodrigo Sepúlveda Schulz. Digital Tech Fund is a €20 million fund, whose objective is to grow long-term innovation and support the technology startup ecosystem in Luxembourg, so it is a very early-stage fund. Expon I fund has a different strategy, to invest in disruptive companies that have global potential, what we call exponential companies. The whole concept is based on the research on exponential organizations by one of the founders of Singularity University, Salim Ismail: markets and technologies that follow Moore’s law - that the computing power doubles every 18 months. For example, 15 years ago, DNA sequencing cost a million times more than today. Uber’s made its first billion transactions in six years, and its second billion transactions in six months. In June 2017, Facebook announced two billion monthly active users, which means it has taken eight years to hit one billion and about four years to hit two billion. There are some markets and technologies that enable this fast growth. After having interviewed over a hundred companies that grew very fast, Salim wrote a book called Exponential Organizations and has a framework with 11 criteria to find out these stars. So, Expon I adopt a very different approach from many other VC funds.

 

In addition, it’s quite normal for funds to have specific strategies which fit the market opportunities. The market is changing all the time. For example, ten years ago, mobile internet didn’t really exist, but now people use it everywhere. More than half of publishing now goes online, more than half of traffic comes from mobile devices, and all that has changed in ten years. If you start a firm and the firm can go on for over ten, twenty years or even longer, you can’t stick to the same strategy because markets change really fast. So, DNA is linked to funds, not to firms, and for funds, each market has a specific strategy.

 

 

With your firm’s preference for early stage investment, how do you manage risk?

 

Actually, we have a preference for early stage, but we could invest at any stage up to series B, after which we don't have enough capital to deploy and to have a significant role, and that’s usually when very large VC firms or PE firms come in. We can definitely invest in companies that are raising $10 or $20 million and have a stake there by putting three to five million euros.

 

There are two main reasons for our preference for early stage. First, potential returns are higher: we can go for 30x in pre-A series, but probably only 5x when in series B, and we can bring great added value for these companies. Second, if you want a big hit, all existing investors will try to re-invest their pro-rata so there’s no room for you to go in, especially for in-demand companies.

 

As for risk management, we have a five-stage process of investment, and for each stage, we do a thorough analysis. We have 12 criteria for evaluating a business, taking into account market size, growth rate, target customers, competitors, technology, differentiation, marketing, etc. We go through all the criteria and examine the compliance to our criteria before we decide to invest.

 

 

What hot sectors are worth investing in?

 

Once we’ve invested in a company, we won’t exit for eight to ten years, depending on the funding cycle. It would have been really hard to predict today’s hot sectors ten years ago, so we have to look at market trends and pain points where we can solve problems and that’s where the opportunities lie. For instance, we recently participated in a €2m series A investment in Nektria, a logistics business working on yield management. They have a great piece of technology, actually solving a real market pain point and have a customer base, so that’s a good example. E-commerce is an opposite example: it has low margins, and most companies in this area lose money and don’t see exponential growth.  

 

Several sectors seem hot to me. The first that comes to mind is AI, made possible today by almost free computing power and almost free data storage. Then there are eSports, where 20 to 30,000 people come to watch people have video game competitions. This is projected to be the second most watched sport on television in the next two to three years in the US, so we are really interested in it. Third, Facebook recently passed the two-billion user mark and the number is expected to reach 3.5 million in the next three to four years. The main service for communication is messaging (Messenger, WhatsApp...), and WeChat in Asia is rebuilding the internet with all the traditional online services integrated together on one platform (transactions, games, reading, etc), something we haven’t yet seen in the western world.

 

 

Which European city is best placed to replace London as the financial center post-Brexit?

 

There are several other competitors like Amsterdam and Frankfurt, but I know Paris and Luxembourg best so let’s speak about those.

 

Paris is a very large city with fantastic lifestyle in terms of food and entertainment. The world’s sixth-biggest economy, France has invested a lot in infrastructure. They have great universities and engineers. Some of the best engineers who work in Silicon Valley are French, and the AI lab of Facebook is run by a Parisian. So, France is at the top when it comes to access to talent; France also has great access to capital with a lot of VC firms and huge inbound capital flow, plus the government has tax incentives for innovation and research. The infrastructure is great, with a lot of incubators and accelerators like 42, the free coding school.  Disadvantages include the fact that France is not good at sales and marketing and the French culture is very closed-minded. You have to speak French to fit in. But in general, France is probably the best option after Brexit.

 

Luxembourg has great advantages as well. Located at the heart of EU, it has easy access to every city in EU, and the population usually speaks natively three or four languages. The tax regime is extremely attractive compared to other countries, so companies can pay higher salaries more cheaply. Luxembourg is also a great environment for some industries such as fintech or space.

 

 

What advice would you give to someone who wants to follow in your footsteps?

 

I studied computer science for my master’s degree and I really think programming is an essential skill ‒ knowing how to code is really useful. Nowadays everything is done by computer. Cybersecurity is an issue that I’m really interested in.

 

What’s more, being curious is important. Although I have two business degrees, I keep on reading to stay up to date on the latest market trends, and go out of my way to meet people with different backgrounds. For the past 10 years, I have been a co-host of a weekly technology show on a radio station and on podcasts. I have to read a lot to prepare for the shows as well. I think the media is a good way to keep curious, forcing me to learn.

Read the full Special Report: Luxembourg: Small but Mighty

With a population of only half a million, Luxembourg is one of the world’s most developed economies and a key seat of the European Union. Thanks to its strategic location at the heart of Western Europe, social and political stability, innovative and international orientation, as well as modern legal and regulatory framework, the Grand Duchy is the Eurozone’s premier private banking center and the world’s second largest fund center, attracting banks, insurance companies, investment fund promoters and specialized service providers worldwide. Both international firms and local firms need to adapt themselves to the changing landscape of legal market.
Summary Reinventing oneself in a fast-paced creative environment Building the industry 4.0: from cybersecurity to automation From the advent of Blockchain to the added value of RegTech Luxembourg at the center of the global space map Luxembourg to explore converging disruptions

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