Index Ventures’ Danny Rimer: ‘The talent is what’s going to drive the difference’

Danny Rimer is one of Europe’s leading venture capital investors (second in the Forbes Midas Europe list last year), who has built a reputation among his peers as a top talent spotter and start-up champion.

After stints as a West Coast banking analyst, working on the IPOs of Amazon and Netscape, and as a general partner at investment firm Barksdale Group, Rimer moved to London to open an office for Index Ventures in 2002. A decade later, he opened Index’s San Francisco office, giving him a good comparative perspective on both the US and European tech scenes, before returning to London in 2018.

Rimer has mostly invested in start-ups in the software, consumer and creative sectors, including Figma, Dropbox, Farfetch, Glossier, and Etsy. “Venture is a really hard business to do well, but Danny has a special ability to find really talented and extraordinary people,” says Kathryn Mayne, managing director at Horsley Bridge International, which has invested in Index for almost 20 years. “There are not many investors who have taken start-ups from seed to multibillion outcomes on both sides of the ocean.”

In this conversation with John Thornhill, the FT’s innovation editor, Rimer insists the future remains bright for VCs and stresses the importance of start-ups keeping “the main thing the main thing.”

John Thornhill: There’s a view that the golden age of VC is over, for three reasons. One, we’re now in a higher-interest-rate environment. Two, governments are intervening very heavily in the economy, whether it’s industrial policy or antitrust — there was an example last year when Adobe abandoned its acquisition of Figma [part of Index’s portfolio] because of regulatory pressure.

Then there’s the development of massively capital-intensive sectors like large language models (LLMs) at the moment. We’re talking hundreds of millions of dollars to train some of these models. All of that tends to favour the incumbents over the insurgents. So is the golden age over?

Tech Exchange

The FT’s top reporters and commentators hold conversations with the world’s most thought-provoking technology leaders, innovators and academics, to discuss the future of the digital world and the role of Big Tech companies in shaping it. The dialogues are in-depth and detailed, focusing on the way technology groups, consumers and authorities will interact to solve global problems and provide new services. Read them all here

Danny Rimer: It won’t surprise you that I will say no. What’s interesting is that the second and third point validate the idea that we are in a particularly exciting environment for venture capital. The fact that there is significant regulatory scrutiny underscores how important technology has become.

Then, the fact that many of the deployments that are necessary at the core infrastructural level require so much cash to be spent underscores again how central technology has become to our daily lives.

The interest rate point I would counter by saying that, actually, there’s probably too much money in different venture firms chasing too few companies today. There’s certainly going to be a washout of the number of VCs that are out there, but it will take a long time for that to happen because of the nature of venture capital — it’s early and there’s quite a longevity to a fund. It’s a decade-plus.

JT: And does that surfeit of VCs at the moment mean returns over the next decade are likely to be lower than they were?

DR: Again, I don’t think so. If you look at the distribution of returns, it’s always been concentrated . . . the really significant companies are going to be even greater because of the pervasiveness of technology. So I think that the concentration of returns is still going to be acute, but you’re going to have many companies that are probably going to fall to the side.

JT: And does that world favour the big brand name VC firms, do you think?

DR: Brands are really difficult to rely upon. I’d like to think that a brand is created as a result of experience, and as a result of pattern recognition, and doing something well for a long time. But we’ve seen repeatedly in our industry that, if you don’t figure out succession, for instance, from one generation to the next, or if you take your brand for granted, then you’re not going to be associated with the best entrepreneurs.

Certainly, brands are better positioned to capitalise on seeing great entrepreneurs and deal flow, but it’s not a given that they can continue to generate returns.

JT: What about the exits? Adobe [abandoning its acquisition of] Figma [over regulatory concerns] was an example of [you being] stymied from exiting a successful company you had invested in. Is that a more general problem for VCs in this antitrust regulatory environment? It’s going to be harder to exit?

DR: Yes. We’ve always assumed that, if an entrepreneur comes to us with the intent of selling their company to someone else — “I want to build this and in three to four years’ time it’s going to be the perfect target for this incumbent” — then we would never back them, because you can’t really rely on everything going well, and serving it up, and someone being interested.

We always talk about companies getting bought, not sold. So we certainly never invest in companies unless they want to be a standalone company, which means that they want to go down the IPO path.

It implies that more companies are probably going to be better companies, because they actually move to that maturation of being IPO-ready, or they’ve IPO-ed. But, on the other hand, it’s going to take longer to generate returns, because the M&A track is going to be much more challenging to go down.

JT: Let’s talk about the distribution of returns. Sebastian Mallaby, in his book The Power Law, highlights that you absolutely want to be in the top decile of VC funds because the returns for the rest are really no better than the Nasdaq. So how do institutional investors go about picking which VC firms are most likely to be in the top decile over the next decade?

DR: They have to do their job. Our job is just to make sure that we’re in the top decile and we do everything we can to make sure that we are executing as well as possible. We have a bunch of ideas that are pretty unique to us. One of them is being a “scaled artisan” — which is oxymoronic, but it’s the concept that it is an apprenticeship business, being a VC.

We will always back a phenomenal team in a crappy market, rather than the inverse

There’s so much that you get mentored to understand, and to figure out how to be as helpful as possible to teams, and it takes a long time to actually develop the skills of sourcing, of winning, of operating, and exiting.

Another aspect is that we have to be at scale. We have to continue to be relevant for the incredible, explosive growth that some of our companies achieve. As my first mentor [Jim Barksdale, CEO of Netscape and founder of The Barksdale Group] said: the main thing is to keep the main thing the main thing. We really are very disciplined on keeping the main thing the main thing.

JT: If we’re talking about the history of VC, there are three philosophies, as it were, associated with three industry pioneers: Arthur Rock, Don Valentine, and Tom Peters. You either invest in people, the market, or technology. Which do you think is the best approach?

DR: From an Index standpoint, it’s always been the people. So, of course, you need to have the markets and technologies aligned. But the talent is really what’s going to drive the difference. We will always back a phenomenal team in a crappy market, rather than the inverse.

JT: How do you assess that talent?

DR: We spend an enormous amount of time assessing talent. I would say it all starts with their storytelling. We can understand a person pretty well by just listening to their story and asking questions that highlight whether what they’re saying is accurate, is sincere, whether they’ve learned from their mistakes.

An example is anyone who’s previously worked at WeWork [the co-working space company that went bankrupt last year]. When they come to pitch their business to us, we ask them: what did you learn? Why did you work there? What are the cultural tenets that you won’t compromise on in any company you go on to build? And, if they don’t have a good answer to that, then they’re probably not the type of entrepreneur we’re going to back.

In a lot of ways, you learn more from your mistakes than from the successes. So, if you’ve taken great lessons from those, you’re likely to be very well positioned to start a great company.

JT: Do you think entrepreneurs are born or made?

DR: That’s a great question. Both. You can be born an entrepreneur because you’ve just been that way from the get-go. You can also be an entrepreneur because you’ve been so frustrated in your [non-entrepreneurial] day job that you’ve learned the skills to then become an entrepreneur. In both cases, they’re very lonely lives.

JT: And how can you make an entrepreneur? Sometimes you come across brilliant AI researchers. But you would not want to invest in their companies because you don’t think they have the necessary entrepreneurial drive. Could you take that raw talent, as it were, and mould them into a successful entrepreneur?

DR: We have a difficult time believing that we can mould people. We don’t like connecting the dots for the entrepreneurs — they have to come with a pretty set understanding of what they’re going after.

So many of the researchers we have met are more interested in the complexity of their technology, and in trying to find a reason for that technology to be used, than in having the goal of actually creating a phenomenal business.

JT: I’m intrigued by the idea that you’re focusing a lot on talent and people, because opinions about those can be very subjective. How robust are the discussions that you have at your investment meetings?

DR: We’re multi-stage. We do everything from seed to growth. So we invest anywhere from, call it, £1mn to £100mn with one cheque, depending on the maturity of the company.

In the case of a $100mn cheque, we obviously have a lot of data that we can rely upon. There’s a lot of information on the product-market fit whereas, in the earliest stages, it’s really more about the team and our conviction about the team. Of course, you need really table-pounding conviction at any stage. We make sure that we see that in the partner proposing the investment — that they genuinely believe this is going to be a transformational company.

What’s exciting about AI is that sectors we were less excited about are being reinvented

JT: Everyone is talking about generative AI at the moment. How does that change the game for VCs?

DR: Well, for VCs, what’s exciting about AI, generally, is that a number of verticals or sectors that we were less excited about are being reinvented.

Generative AI is putting a lot of pressure on the traditional advertising industry. The large ad agency conglomerates now face existential questions, because gen AI tools can enable companies to replace a lot of the work done by ad agencies. We hadn’t looked at the ad sector since Criteo, which went public in 2013, and now we’re looking at that sector again.

We weren’t really looking at the insurance sector. But, with AI, insurance becomes much more interesting, because of all the information that you can call on, and the ease with which you can provide services that previously were really difficult to deliver at scale.

JT: When I spoke to VCs on Sand Hill Road [home to many Silicon Valley VC firms] last month, one view I found very interesting was that there’s going to be only one LLM in the future, just like Google dominates search. Is that right, do you think?

DR: I’d be really surprised if there was just one LLM. I think there will absolutely be consolidation, but I would probably make more of a parallel with the cloud providers.

Fundamentally, you have Amazon Web Services and Google Compute, which have been duking it out, and Microsoft has become more and more of a clear peer to them. But most of the other players have stopped that race of being the cloud provider. I suspect that something very similar will happen in the LLM space.

But, back to your first question: the fact that LLMs are so costly to implement actually implies that there’s going to be a much greater opportunity to invest in the application layer.

The infrastructure layer is spoken for, and you will most likely have to be an incumbent to participate in the infrastructure layer. On the application layer, which is probably where a huge amount of the opportunity is going to be created, that is going to be left up to small companies that are specialised and really focusing on particular parts. So we’re seeing really exciting companies that are very verticalised.

The biggest challenge for Europe to date has been surrounding great entrepreneurs with great talent

One of them is DeepL, which is in the translation space. Clearly, what DeepL is doing is a vertical play on top of the infrastructure layer. They’re leveraging the infrastructure that the LLMs are providing to then go deep into the machine learning layer for translation purposes. That’s really difficult to replicate.

JT: Has it also undermined the valuations that you attached to some of your software-as-a-service portfolio companies — because someone could set up anew and outcompete your existing investments?

DR: I think it’s premature to decide that today. We’re not seeing that take effect yet. What is clear is that all of our SaaS companies have to understand, in a way that’s not contrived and forced, what their AI component is. How are they thinking through AI for their value prop[osition]? Because if they’re not, then the likelihood of them being replaced is very high.

JT: You are a bilingual technology investor, if I can put it that way, in that you have great experience of working in Silicon Valley and in Europe, as well. It’s clear that Europe has come an enormous way over the past 10 or 15 years. Where do you think it still lags behind America?

DR: The biggest challenge for Europe, to date, has been surrounding great entrepreneurs with great talent — in other words, talent that scales. At certain tiers of growth, we find it challenging to recruit that talent from European companies.

Some of it is that Europeans tend to be much more loyal to their employer than the Americans. Some of it is that they just haven’t seen scale in the same way as their US peers. So we find ourselves hiring a lot out of the US when a company gets to a certain scale.

A second issue is that Europeans tend to be much more humble, and to assume that the more polished US peer is actually ahead of them because of what the US peer is broadcasting to be a fact, when, in fact, it’s just a perception.

JT: That’s a polite way of saying that they’re bullshitting.

DR: Right. So making sure that Europeans are more comfortable with not only spotting the bullshit, but also being willing to express how well they’re doing and how likely they are going to do is another area where we lag.

JT: What about growth capital? It’s often argued that this is a weakness of Europe: that, at the early stage, Europe is pretty much comparable with the US in terms of the number of start-ups that get created; but then they get to a certain stage and they just can’t scale.

DR: I don’t think that’s the case. I think that great companies are being created everywhere. So, as a result of that, when you need to raise money, irrespective of where you are, you’re going to be able to raise it in the same way that, if you have a great company, you can go public in any market. You don’t need an IPO window to go public.

Google went public using a Dutch auction in the worst possible market and it’s Google. Google might be the best business that the world has ever seen, or is certainly one of them, but it also holds true that, if you have a great business, you can go public or you can raise at any moment in time.

JT: But does it matter, say, that when [self-driving car company] Wayve, one of the most promising start-ups certainly in London, raised $1bn, it all came from SoftBank, Microsoft, Nvidia. Is that a problem for Europe? Or does it not really matter because all capital is fungible and, as long as you’ve got the money to spend, the origin of the money doesn’t matter?

DR: So, in other words, would it have been better if it had come from European pools rather than international pools of capital? I don’t think so, because the way that Wayve is going to win is if it’s a global phenomenon, not a local phenomenon.

When we look, when our companies are fundraising, we’re looking for smart investors who are going to be helpful. Usually, strategic investment is not necessarily the same, or you take it at different stages, because a strategic investor is going to invest for different reasons than necessarily returns.

You have to be very thoughtful as to when you bring in a strategic investor. It can be too early and it can really veer the company off to a difficult place that is hard to recover from. So we really look for the right type of capital at the right time. But where it comes from geographically makes no difference to us.

JT: We’re on the verge of an election in Britain. Does the outcome make much difference to people in your industry?

DR: My sense is that it doesn’t. Obviously, we reflect on this a lot. I think that, as a firm, we probably over-rotated and thought that Brexit was going to be much more detrimental to the entrepreneurial spirit than it has actually been. But it certainly has taken a toll — specifically on folks from different countries wanting just to come to the UK and join teams.

Maybe Labour is going to improve those relationships with other European countries and make it more of a no-brainer, to move to London and join a start-up. Pre-Brexit, it was very clear that London was becoming the centre of entrepreneurialism in Europe. Since then, it’s actually become much more distributed between Paris and Berlin and Amsterdam and London.

The reality is, the better that Paris does, the better it is for London, the better it is for Europe, from an entrepreneurial standpoint. But could it be better for London to make it much more frictionless for folks, from wherever they are in Europe, to move to the UK and join start-ups? Certainly.

JT: What have been your biggest mistakes in your career? What have you learnt now?

DR: One of the biggest mistakes was to try and predict total available market size. We really view TAM as noise.

The example that comes to mind for me was Airbnb: we saw Airbnb early and we were like, OK, what’s the size of the market? How many hotel rooms are going to be cannibalised through Airbnb? Rather than thinking: actually, Airbnb is just going to add to the travel and leisure sector in an unprecedented manner, and it’s going to open up an entirely new market space. So that was a regret.

Another lesson is about being as transparent and as helpful as possible to the entrepreneur when it’s clear that the company is not doing well — just telling the truth and sharing our assessment in a very clear and honest way that the company is unlikely to work. That’s really helpful because it creates clarity. Should we shut it down? Should we pivot? Should we give the money back?

What often ends up happening is that companies get into this mode of being small businesses forever. While it might be a profitable business, it’s a profitable business that employs 20 people rather than an incredibly talented team that could have shut down and started afresh and built something that had global significance.

JT: That’s interesting. I remember seeing brokers’ reports when Amazon first listed, saying that, if you added up all the profits that all the booksellers in the world were making, then Amazon was massively overvalued.

DR: Well, I was one of those research analysts [at investment bank Hambrecht & Quist]. I took Amazon public. So, at least, I got that right. Even though Jeff Bezos had the vision — I remember it distinctly — that he wanted to sell everything online, what was incredible was his discipline on how long he refused to sell anything but books in order to really nail that market before he added CD-ROMs and DVDs and other categories. That’s such a great example of keeping the main thing the main thing.

JT: Finally, VCs, like entrepreneurs, are in the business of raising money. So what is your table-pounding conviction story to a limited partner that they ought to put money into Index?

DR: We’re fortunate that the LPs that have backed us have been backing us for 20 years. So we have to pound the table a lot less today than we did in the early days. At this point, they can see what our returns have been, and, also, whether we are actually delivering on what we talk about: namely, the scaled artisan approach. We have not only investors but staff that we think are the best in the business.