#7 Megumi Ikeda - Venture Capital

The Nalu Finance Podcast

In this episode of Nalu Finance, we sit down with Megumi Ikeda of Hearst Ventures to explore the evolving world of venture capital.

Megumi breaks down the dynamics of early-stage investing, including:

• What separates venture capital from private equity

• How to assess a founding team beyond just the business plan

• Why not all startups need VC funding to succeed

• How capital structure and cap table alignment impact long-term motivation

• Key trends like climate tech, social impact, and data-driven B2B innovation
  

She also shares examples from Hearst’s investments, including commercial real estate and on-demand manufacturing platforms, and offers candid insights on the realities of startup success.

🎧 Listen Now On: Apple Podcasts | Spotify | Youtube | Podomatic

🎙️ Transcript:

Stefan Wagner: 00:01 I'm here with Megumi Ikeda, who is the Managing Director of Hearst Ventures and the General Manager of Hearst Ventures Europe, where she oversees investments and non-organic acquisitions across Europe. Previously, Megumi ran the European arm of the Peacock Equity Fund, GE Capital and NBCUniversal's 250 million venture fund. Before that, she worked in corporate M&A and distribution deals at NBCUniversal. Megumi started her career in Tokyo as a reporter for Dow Jones and as an international business manager at Wired in San Francisco.

Sponsor: 00:43 Welcome, Megumi. This podcast is courtesy of the Zurich branch of Commerzbank AG, which offers over 20,000 publicly offered leveraged structured products in Switzerland. These structured products are accessible through a multitude of channels, including the BX, SIX Exchanges and Swissquote Bank. More information can be found at certificate.commerzbank.ch.

Stefan Wagner: 01:09 In my experience, people's opinions about venture capital come in three extreme categories. One, I could do it better myself. When I see a good idea, I will invest. Two, they take over businesses and destroy them. Three, they are incredibly profitable and double your money every year. So what is venture capital actually? And what is the difference between venture capital and private equity?

Megumi Ikeda: 01:33 I guess those stereotypes, like all stereotypes, might have a kernel of truth in them. But venture capital is the funding of early stage companies that are, by definition, private, to help them launch their product, find product market fit, growth capital grow that business. It is different than private equity, although the lines are starting to blur at the later stages in the sense that it is equity funded. There's usually not much debt involved, although again, that's starting to change. You are not expected to be generating a cash flow. You're not expected to be in a cash flow positive business. You are EBITDA negative, usually, not always.

And so it's just a lot earlier in terms of the stage of development of a company versus private equity. There's also a difference in mindset. I believe a lot of private equity companies will invest a controlling stake. Venture capital is by definition almost always a minority investment of 20% or less in the company. And it is still run by the founders or by the management team, as opposed to private equity putting in their own people, for example. To address your point of I can do it better myself, I can find a better idea, that could very well be true, perhaps. But like any sophisticated financial marketplace, there is an ecosystem that exists in and around that space.

And it is more than simply finding a good idea. Finding a good idea is very difficult. Executing on a good idea is even harder. uh and finding the team to execute that and having the right people around it supporting it is just as hard as well uh to your idea of they take over the business and destroy them yes there are very negative stories that we all hear but keep in mind that a VC doesn't own the majority of a company. They certainly have a lot of control in the company. But at the end of the day, as much as a VC might want to take credit for the success of Google or the success of Cisco or the success of what's another hot company right now, Airbnb. At the end of the day, it's the management team that's running that company. And we venture capitalists can help support them as best as we can, but we're not running their businesses.

Stefan Wagner: 04:33 I think that's also because slightly people put venture capital and private equity in the same bucket. And you find that comment probably more, right, addressed, right, the private equity.

Megumi Ikeda: 04:42 Doubling your money every year, gosh, if that were consistently true, the venture capital asset class would certainly be better funded than it is right now. Yes, we all aim for outsized returns. We're all looking to get well over 10x, right? This is about, to use the overused term, the unicorn or the mega unicorn company that you're trying to get to. Because effectively, if you're a fund, that's how you return your money. You need to have an outsized return to make up for all the other investments that you make. But let's remember a few things. This is not a liquid market. That's starting to change a little bit, but it's not like they double your money every year and it sits in your bank account. It's captive for seven, 10, 12 years. It's not that simple. And so you need to have the ability financially and psychologically to wait for that.

Stefan Wagner: 05:43 So when you actually invest in a company, what's your sort of process in a sense? What are you looking for? Is it the business model? Is it the market? How much you look at macro environment, the team, execution, track record?

Megumi Ikeda: 05:57 I think this changes over, the emphasis of where you spend your time changes depending on what stage of venture capital you're investing in. So while people view venture capital as one financial asset class. Within venture capital, there's many stages. There's seed or even what is now called pre-seed investments. There is then series A investment. There's an investment where you're really investing for growth. People define that slightly differently. Is that from series A onwards or series B onwards? But there are various stages by which you look at the company.

But I think when a company is first starting out and they're first getting that initial outside money or money into the business, it could even be their own. It really is, I believe, a question about team and market size. I say that with a caveat because companies can change the size of a market, actually. But initially, you're betting on the team and their ability to execute on that product.

Stefan Wagner: 07:04 So how do you look at that? What research or background check?

Megumi Ikeda: 07:09 So I don't do seed stage. When I talk to my friends who do seed stage investment, I think Again, this is also about the sophistication of this market. Like people who trade all day, if you are talking to teens every single day and have been doing this for years, there's a certain level of pattern recognition that is achieved here. And so people look at the dynamics of the group.

So the management team, have they worked together before? How do they interact with each other? Do their skills complement each other? What kind of background tenacity do they show? Skillsets do they show? You can, of course, look at execution track record, but remember, you know, Zuckerberg built Facebook and he had no quote unquote track record to speak about. So that can be a double-edged sword.

So it's really understanding the team and whether that team works well with one another and works well in the product market that they're trying to go into. I think when you look at a the next Instagram or the next Facebook, you're going to measure whether that team is qualified much more differently than if you're looking at the company that is going to break apart Prologis as a next generation warehousing company.

Stefan Wagner: 08:38 Yeah. So what advice would you give somebody who is a founder and now is looking for venture capital? You know, at what point should they actually ask for that? Or right at the beginning, you know, just an idea with a PowerPoint presentation or proof of concept or first client or, you know, and how much should you give up? And maybe, you know, in what format should you get the capital? Is it equity? Is it loan? Is it rights? Is it, you know,

Megumi Ikeda: 09:06 First, I think that there are many paths to fund your company, and venture capital is just one. And it doesn't need to be the path that you take. I think venture capital, by definition, if you do take VC money, they are expecting outsized growth and outsized performance. And you need to be willing to accept the pressures and expectations that come around that. That might not be for you, and that is fine. You might choose to take a different route, be that you have access to private capital otherwise. Maybe you have access to bank money. That is a very difficult thing, but perhaps you do. Perhaps you have your own Personal wealth, that's a whole different path. There are many ways to build businesses. I think, for instance, MailChimp, which is a highly successful private company based in Atlanta, Georgia, they've never taken VC money, and it is growing like gangbusters, or I think they only did very recently.

So there are ways to build very high growth companies without getting outside venture money. If you do choose to decide to take venture money, at what point, again, it's a dependency on what your needs are and what your resources are, but I would say always take a fund that's appropriate for your stage of investing. So again, venture is not a big block. There are discrete stages within venture capital. If you're a seed stage company and you're taking money from SoftBank, you should really pause. Because how much support are you really going to get for the million dollar check that you got from SoftBank? versus the size of their fund? How much do they really care about you? How much will they invest in you? Or is it just sort of a exploratory check for them? And if you do well, they'll follow up, but if not, you're dismissed. How much support will you get? So you should pick the fund that's appropriate for the stage of your business.

Stefan Wagner: 11:17 Should you also look at what other companies they already have funded? Is there sometimes also overlap that, you know, there's growth potential to link up with other companies in that network for that venture stage? Or should that not really be your concern?

Megumi Ikeda: 11:34 I think you should look at who else is in the portfolio of the fund that you're investing in, in terms of doing your reference checks and making sure that this fund supports their other portfolio companies, most importantly, in good times and in bad times. I don't think you should rely on that portfolio company as a source of business or partnerships. At the end of the day, you have to perform on your ability to execute on your own and to believe that you're going to be able to curry favor from another portfolio company in the same fund is a bad thing to rely on. It could happen. but that's up to you.

Stefan Wagner: 12:27 And how much would you give up?

Megumi Ikeda: 12:31 The problem you see in immature venture capital markets, and let's be honest, this has been happening in California for far longer than any other market, is you will see as an investor cap tables where the founders own so little that you're unclear whether they're incented to continue to push the company and get an outsized return because they own so little of the company.

So, you know, typically 20 to 30% dilution depending on the stage, I'm throwing out really It could be more, it could be less, but, and it depends on frankly how often you're raising, is what you'd expect to see. But you want as a Series A or Series B investor to still see that founder or founding team to have 30, 40% of the company to be aligned, because there will be many rounds after that, and preferably more, honestly.

Stefan Wagner: 13:52 So these mega technologies like Facebook and stuff like this, they have, at least from the outside looks like way, they seem to buy up a lot of successful companies that suddenly come out of this. venture capital originally funded and then, you know, you're the next Instagram and, you know, in order to make sure that, you know, you're not going to encroach on their market, they're gonna just buy you up. Is that good or bad for the venture capital business? Or is it?

Megumi Ikeda: 14:16 It's just another, you don't have to sell to them if you don't want to.

Stefan Wagner: 14:22 It's but you risk that they will then try to compete with you and crush you. Sure.

Megumi Ikeda: 14:27 I think a healthy M&A market is fundamentally always good for venture capital. All companies cannot IPO. Yes, it might be frustrating. But again, if you take two steps back, you know, the reason why venture capital has done so well is not just because these companies IPO, but because Cisco and Oracle were always active buyers as well.

Stefan Wagner: 14:50 So you mentioned already one theme, clearly more and more companies looking into Europe as a venture capital market. Is there other themes and trends you see lately? I mean, latest thing that everybody talks on the investment side, traditional investment, stock pick, it's all ESG, social impact investing. Has this made its way into venture capital?

Megumi Ikeda: 15:09 Climate tech investing right now is very hot. We'll see how that trend goes. There's an increased emphasis on social impact investing. I think that's probably happening across the board because frankly a lot of the pension funds are requiring it. Again, we'll see how that trend goes. Frankly, if you talk to the average VC on the street, they are looking for outsized returns as opposed to a social impact investing. There are a few funds that are combining the two, and it'll be very interesting to see how those go.

Stefan Wagner: 15:50 Next question from my side is, you know, about the company you currently work for, Hearst Ventures, you know, what is your specialty, what makes you invest in the company, and maybe an interesting example that you can tell the listeners that was a success story and why it was a success story.

Megumi Ikeda: 16:06 So Hearst Ventures is the venture arm of the US company conglomerate Hearst. I can quickly speak about Hearst. We started our business in newspaper publishing. We have 20 daily newspapers, 40 weekly newspapers across the US. We have a 20 to 25% footprint at the local television market. We are the largest monthly consumer magazine publisher in the world, 30 titles in 30 countries, JV license or fully owned. We own Stakes and Pay channels, A&E, History, Lifetime Channel and ESPN.

And then on the B2B side, we own Fitch Ratings, the debt ratings company. We own automotive databases and SAS businesses, such as used in new car pricing. We own health care databases, such as the largest drug reaction database in the US, medical procedure databases, and software for that industry. Because we're privately held, we have the liberty of expanding into new industries, as you can see with our B2B side. Hearst Ventures exists first and foremost to make money. We are a small team. When you get a return, it goes straight to the bottom line. Everyone likes that. So we first and foremost invest to make money, but we also invest to provide learnings to our C-suite. And that means you are disrupting our core businesses, we should understand the technology.

You're disrupting our clients' businesses, we should understand the technology and trends. Or you're in an industry or sector we'd like to understand better. And that's the rationale, or that's how we determine what sectors we invest in. So we've been spending a lot of time broadly in data and analytics plays in specific industries. So in Europe, we've invested in GFI, which is commercial real estate technology, building a semantic model around proprietary and non-proprietary data in commercial real estate, and creating products off of that.

Stefan Wagner: 18:13 Can you give an example? This is… I don't quite… So, sure.

Megumi Ikeda: 18:19 GFI pulls together non-proprietary or public data such as… Census data, Uber drop-off and pick-up data, they get access to proprietary information. And with that, put that into a semantic model, and one of the first things they're doing is launching and they have launched an automated valuation product for commercial real estate specifically for multifamily home.

So automated valuations have existed in the real estate world for a long time. Companies like Open Door are building businesses based on the ability to properly value a single family home. It's been a difficult thing to do in commercial real estate. GFI has started in multifamily homes and with the information can come to very highly accurate valuations of multifamily homes on the fly as opposed to, based on the data they have, as opposed to going through a longer human process using appraisers.

Stefan Wagner: 19:31 And who uses that technology?

Megumi Ikeda: 19:34 It can be the fund managers, it can be the investors, it can be the banks, it can be the insurance companies, it can be the people underwriting the risk. So it is a tool for the financial players in the space. So that's an example of a data play in a large-scale industry that's interesting to us. We have invested in on-demand manufacturing. This is also a company in the Netherlands that is taking advantage of excess capacity at manufacturing facilities to do CNC manufacturing and 3D printing. And it's a very interesting Dutch auction model that they're using for their business.

Stefan Wagner: 20:23 Funny enough, it is in Holland. Yeah. Calling a Dutch option.

Megumi Ikeda: 20:26 Yes, that's right. And what else? Recently, we've done some insure tech deals. So again, large scale industries, technological innovation is lagging, finding interesting players in those large scale industries.

Stefan Wagner: 20:45 Making it more efficient.

Megumi Ikeda: 20:46 Making it more efficient.

Stefan Wagner: 20:48 Fantastic. Thank you. My last question to everybody is, What are your three favorite finance movies and why?

Megumi Ikeda: 20:56 Oh, finance movies. I didn't see the finance caveat. I don't see finance movies. Movies are for pleasure.

Stefan Wagner: 21:04 You must have seen anything from Barbarians at the Gate, Boiler Room… Movies are for pleasure.

Megumi Ikeda: 21:09 I don't watch movies for work.

Stefan Wagner: 21:12 I'm sorry. I watch them for entertainment as well. Okay, give me your three favorite movies then.

Megumi Ikeda: 21:19 I like LaLa Land, Mary Poppins and Annie Hall.

Stefan Wagner: 21:23 Very nice. Thank you very much.

Megumi Ikeda: 21:25 Thank you.

Stefan Wagner: 21:26 Thank you.