Parenting advice from a godfather of start-ups

by Michael Juul Rugaard for Money2020
(related Børsen Article -  here )

Giving money away in a clever manner is a difficult and delicate business. Start-ups need smart investors to parent them, just like children need clever parents in order not to get either spoiled or bullied in the school yard. Smart parenting of money and companies is key for Copenhagen to succeed in the international Fintech space.

This is one of the messages from the internationally known Danish serial investor and entrepreneur, Morten Lund, who has parented more than 100 companies and four children over the past 20 years. Some of the companies got spoiled, bullied or eaten up, while others - like Skype, Zecco, Bullguard, and Maxthon - grew up to become strong and viable businesses. All four children are doing well - two of the boys even called their father during this interview!

Over the last few years, and especially since he met his kindred business spirit, Danish Lone Fønss Schrøder, known as one of the top business women in the Nordic region, Morten Lund has been very much into Fintech.

He currently runs eight partially secret Fintech projects. These are united under the enigmatic brand OnlyXO, which has a website that only a select few can view. We will come back to that.

My first question to the casually dressed guy with long hair seated across me
in big leather Chester eld chairs in a Copenhagen cocktail bar is about whether or not the idea of making Copenhagen a leading Nordic Fintech hub is realistic. It turns out that he is far more optimistic than I would have expected.

Morten Lund (ML): Of course, it’s always difficult when it comes to realising visions, and we’re probably not going to be as lucky as we were when the great Svend Auken (former Danish minister) enforced the bottle-return system. But by pushing an agenda you can often be successful, as was demonstrated by the Danish windmills. There’s always a certain degree of luck needed, but if we push from all directions, and if we get the regulatory authorities to be more flexible and convince the Danish Financial Supervisory Authority (Finanstilsynet) to provide more than just yes or no answers, then of course we can do it. People tend to forget that Copenhagen already has some of the most successful European Fintech companies, including SimCorp, Saxo Bank, Nets, Tradeshift and CashWorks.

So, I think it’s definitely possible although finance is not really in our blood. But that could turn out to be an upside.

Michael Juul Rugaard (MJR):
How can that be an upside?

ML: In the existing Fintech hubs and big established systems people are often blind to innovation. Even if it’s right next to them they cannot see it because they’re part of a hierarchical structure. If they get a new idea they’re afraid that the guys underneath or above will disagree or perhaps steal the idea and make a career out of it. They lack the juice of innovation that I think we have here in Copenhagen at this very moment in time. Denmark wins the European championship of technology soccer again and again, although we’re a tiny country with only a small talent pool and limited access to capital.

Denmark is ranked by Forbes2 as the world’s best country for business.
The formula behind this is a unique combination of ingredients, such as the fact that Denmark has a fundamental layer of social security in place, which gives five million Danes a creative freedom allowing them to be more innovative than 1,4 billion Indians. In short, I have big hopes and expectations for Denmark and my home city of Copenhagen.

MJR:
If you had to mention three areas that require strengthening before Copenhagen can claim its position as a Nordic Fintech hub, what would they be?

ML: We have to turn compliance into an upside, and we can do that by making the banks contribute with people who have the skills to solve compliance problems such as KYC/AML.3

Secondly, we need to convince talented people living abroad to come back and feed the ecosystem. Copenhagen is a strong place, and you don’t have to be in London, New York or Silicon Valley to realise your career ambitions.

Finally, we must develop a new balance between access to and demand of capital. Everybody wants more capital, but I know from my own experience that the important part is to be able to spend it right. You have to be careful not to overfeed the start-ups - they’re simply not supposed to have too easy access to capital. It’s like a horse, it will eat until it dies if you just give it unrestricted access to food. I know that I will be unpopular for saying this, but believe me, it’s the truth.

In some ways start-ups are like children, who need responsible and wise parents to guide them, and I’m afraid that there are too few good parents around. You know, there are no stupid kids, only stupid parents. And there is no stupid money, only stupid investors. In order for the investors to act as responsible parents, they have to be guided right too, and that is a very important task.

MJR: But I guess you do believe that we need more risk capital too?

ML: We can always use more risk capital, but we’re even more hungry for smart investors with lots of experience, and we have to be able to attract them. We simply need experienced coaches to go with the money.

MJR: In order to turn Copenhagen into the Nordic Fintech capital, we have to
be able to attract top talent, foreign investors and foreign companies. Why should an investor or a company choose Copenhagen instead of Stockholm, Oslo or Helsinki?

ML: There are a number of reasons why Copenhagen is more attractive than Oslo and Helsinki, but I’m not sure we can compete with Sweden. Stockholm has a very international DNA because of the many international companies made in Sweden. If Copenhagen could just get up to the pace of Stockholm we should be proud, since that would put us in the global top ten.

MJR: Let’s talk about your own interest in Fintech. I have tried to look into your OnlyXO website, which is apparently all about Fintech projects, but it’s not easy to get access. Could you reveal something about the Fintech projects you’re currently working on?

ML: Well, I’m trying to build a variety of financial technology companies that
are taking advantage of the sudden openness within banking driven partly by new international regulations. This openness combined with the digitisation that has happened over the last few years offers a completely new set of opportunities.

I’m trying to explore these opportunities in close collaboration with my brilliant business partner, Lone Fønss Schrøder, who has in-depth knowledge of banking and finance and many years of experience from key positions in large, international corporations such as Maersk, Volvo and Ikea.

Lone and I have been working together for three years now, and one of the solutions in our OnlyXO portfolio is called CashWorks (with a rockstar team from the banking industry). It turns the boring process of factoring upside down. The problem today is that when you, as a provider, have done some work for a big company and send them an invoice, you’re at a disadvantage because you don’t get paid until three months later. What we’ve created is a digital solution for early payment of invoices against a dynamic discount.

"In some ways start-ups are like children, who need responsible and wise parents to guide them, and I’m afraid that there are too few good parents around."

CashWorks benefits the buyers, the providers and their banks as well. Nobody wants to pay for banking services anymore, and banks are looking for something positive to talk with their clients about. So, we introduce a solution that can actually give them more business and make the CFO area a heavy profit centre. The solution is bank-independent, and there is zero integration for the banks. They can just flip on a switch and get going, and the same goes for their clients.

It’s unbelievable that this solution has not been made before, but that is a fact, and we have already sold it to a large Danish bank and to some of the largest banks in the world.

MJR: Just recently?

ML: Yes, within the last quarter, and actually even before we managed to register the company. At the moment, we’re about to sign an agreement with another 3-4 banks. It’s almost like selling candy to children.

Besides CashWorks we’re working on six disruptive solutions. One of them is about SME lending and another is a new concept about payout accounts. Every large corporation that pays out a lot of money to partners and suppliers could use this new solution and actually take advantage of the cash flow one more time, if they choose to pay out within their own payment infrastructure. If a company pays you for a consulting service, why should the money arrive in your existing bank? Why not in a new bank together with a bank account and a payment card? Normally you forward the money to your existing bank, but perhaps a new bank and bank account could have some features attached to it that would be interesting for you as a consultant.

MJR: Sounds interesting... have you published any information on this solution yet?

ML: No, you cannot find anything about these projects. It’s too early, but stay tuned for more!

MJR: Okay, but tell me, when did you get interested in Fintech?

ML: I have been playing around with Fintech since I co-founded the brokerage rm Zecco 12 years ago. Back then we didn’t call it Fintech. Later, I got involved in establishing the business platform Tradeshift, which is partially a Fintech company. Tradeshift was actually founded in my basement,4 and today it’s probably the largest invoicing network in the world.

I got a really big appetite for the potential of financial technology at that time, and I saw how the processes around money are just unexploited territory. It’s so beautiful!

MJR: One of the challenges when we talk about making Copenhagen
a Nordic Fintech hub is to convince the Fintech companies to stay in Copenhagen when they start growing and – some of them – eventually become successful. How do we make them stay here instead of moving to London or Silicon Valley?

ML: Listen, you cannot fight or compete with Silicon Valley! It’s simply the perfect ecosystem in terms of technology, and if you want to be really global you should probably consider going in that direction, mainly to get investment fuel.

The only way for Danish society to get a share of companies started here is
to make public funds invest at an early stage and keep their equity when the companies become large and successful. But it’s not a problem because, as I said, Copenhagen is a strong place, and as it gets even stronger. It’s likely that even the most successful companies will keep at least part of their business in Copenhagen.

MJR: Do you believe in an increasing role for the public funds?

ML: We already have the largest public funds in the world - both the ATP5 and the pension funds, which is something that doesn’t exist anywhere else except in the Netherlands and Canada. The pension funds have put money into the Danish Growth Fund (Vækstfonden), which has actually been fairly successful. We have a great infrastructure for injecting money into start-ups. We need money so that we get equity before they leave, and the way to avoid companies leaving without society getting the full impact is to have smart investors, who invest at a very early stage.

As I said earlier, giving money is really difficult to master, you know it from your children. If you give them too much they become spoiled, and if you give them too little they might not get that perfect education. The parents of the money have to be smart, but of course it’s interesting to make some big bets.

Copenhagen is a strong place, and as it gets even stronger it’s likely that even the most successful companies will keep at least part of their business in Copenhagen.

MJR: When Tradeshift became successful, they moved their headquarters to San Francisco.

Why didn’t they keep it in Copenhagen?

ML: By moving the headquarters we raised the valuation of the company approx. five times. But you must remember that Tradeshift still has a big office in Copenhagen – a huge office, actually. And we have no intention of changing that.