This is an exclusive interview with Itxaso del Palacio, Partner at Notion Capital.

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A little bit about Itxaso del Palacio

Itxaso del Palacio is a Partner at Notion Capital, one of Europe’s strongest early-stage SaaS and enterprise tech investors. Notion Capital was founded in 2009 and has invested in more than 60 startups and has more than €500 M assets under management. Itxaso joined the team of entrepreneurs and operators turned investors with a laser focus on product-led growth and a truly founder-centric perspective that has quickly made her a central figure in the SaaS space.

Some things you’ll learn from Itxaso:

• What is product-led growth and why it’s one of the best growth routes for B2B SaaS in Europe.

• Why product-led growth companies are extra resilient during hard times.

• How Itxaso views startups advisors and best practices for working with them.

• Key lessons from Itxaso’s work with some of Europe’s best SaaS success stories.

David Cruz e Silva (David): Welcome Itxaso! We like to kick things off on the personal side and, since you practised classical ballet what are, in your opinion, the biggest misconceptions regarding ballerinas?

Itxaso del Palacio (Itxaso): That’s an interesting question to a start! There are lots of things written out there, but the reality is that ballerina breeding is a very, very competitive and individualistic environment. We work very hard to be a dancer and when there is a play, all the ballerinas within a team are trained for different roles. Until almost the last day, you don’t know if you will dance or not, and in that way, we are made to compete with each other. You want to improve every day and show how good you are because everyone wants to be the first dancer.

And so, when you are 10 or 12 years old, this might destroy the friendships that exist in the class because of this highly competitive environment. You’re left in the dark until the last moment, without knowing if you’re even going to dance, and that’s a very tough situation for a 10- or 12-year-old to deal with, especially after having trained for the whole year.

It trains you for the future and teaches you a lot that is usually valuable for the rest of your life.

Andreas Munk Holm (Andreas): Would you say that the environment is as tough as an outsider would think it is?

Itxaso: Yes, it is really tough. The daughter of one of my colleagues has been training until now at the Royal Ballet in the UK. She’s absolutely fantastic and was just selected to be of the first dancers. She trains day and night and, and she’s right now, 17 years old. So definitely I would say it is very, very tough.

Andreas: As you know, a lot of our readers are trying to break into venture and I’ve been meaning to ask you, Itxaso, how did you get into VC?

Itxaso: That’s a great question that I get asked a lot! My entryway into VC came by chance, it wasn’t planned. I have an engineering background and, went to work for a big manufacturing firm, as it’s usual for engineers. I went to work for Daimler in Berlin for a couple of years, but it really wasn’t for me and I was not enjoying it. So, I went back to the university to do a master’s in engineering, and I started my PhD. Through my PhD and my research, I ended up at UC Berkeley researching entrepreneurial ecosystems and, as you can imagine, in 2005 or 2006, Silicon Valley was the place to understand those entrepreneurial ecosystems. Then I got embedded in this entrepreneurial venture capital environment with other stakeholders in the ecosystem too. I got into venture back then and I’ve since been working with the startups either as a founder, as an investor, or as an academic. That’s why I would say it happened a little bit by chance.

Product-led growth companies use their product as a way, to engage, sell, upsell, to build loyalty, with their customers.
Itxaso del Palacio

Andreas: Itxaso, let’s shift to Product-led growth (PLG), one of your recurring topics and a passion, I imagine. I’d love to focus on this from the perspective of VCs so, what is your playbook when it comes to investing in PLG companies, and what are the most important things that VCs can learn from it?

Itxaso: I think SaaS investors have traditionally been thinking about SaaS from the enterprise perspective. Notion was started by three or four guys who built a couple of internet companies in the past and one of them was SaaS. In the early days, SaaS was mainly for enterprises. That meant that you were going to market with a sales team, account executives, long sales cycles and procurement processes. So, in the early days, SaaS investors were focused on those enterprise SaaS companies.

Now the reality is that the market has shifted towards having also mid-market and smaller companies using software as their main productivity tools on the cloud. It has become much more agile. So, it’s not that they are using office 365 and that’s the way they live anymore, right? They do have their tools on their verticals and for smaller companies.

That has created a great opportunity for what we call the PLG companies. Those companies use their product as a way, to engage, sell, upsell, to build loyalty, with their customers. That is exactly what PLG is.

But I would say that, within my team, I am probably the most PLG oriented. And maybe that’s the reason why the rest of the team loves the enterprise investments, and they are really patient in all these long cycles of enterprise investments. Once you get in those, it’s very difficult to get you out. It is a different go-to-market strategy so, for investors, it has changed the mentality a little bit. And other investors in Europe are already investing in PLG companies.

If you are introducing a new product category that nobody knows about, the market needs a little bit of education. In those cases, PLG doesn’t work because people don’t search for your solution.
Itxaso del Palacio

David: Itxaso, I’m going to ask a question as a complete layman since SaaS isn’t a space that I have much exposure to. What about PLG in less mainstream verticals? For example, I’ve had a lot of exposure to the healthcare sector, and we have a lot of SaaS – such as solutions being sold directly to doctors or small clinics. What’s your view on that?

Itxaso: I think that’s a good analysis. I believe that PLG is more suitable for some types of companies. And I’m saying type specifically, I’m not using the word vertical. What I mean is that I think PLG is much more suitable to operate in markets where there is already a high education of the buyers. It’s usually a red market, it’s pretty competitive, in such a way that buyers know what they want, what they can look for when they try a new product, and they search for it because they need it. They are used to use those tools.

If you are introducing a new product category that nobody knows about, the market needs a little bit of education. In those cases, PLG doesn’t work because people don’t search for your solution. You need to educate them a little bit, right?

PLG also doesn’t work in ecosystems, or in situations, where the product needs deep integrations to be useful. Or, it doesn’t work either in situations that have a very long time to value, which means customers need to train a tool or to have data within a tool to get some value out of it. You need to bring those customers to what we call the “Aha!” moment very quickly in a PLG model.

To answer your question, about using PLG in health: Yes, we can use it in health. As far as the product that we are selling has a very easy, or short, time to market and a pretty low price, which in some sectors is easier than in others.

In health, there are many cases where there is high regulation or where the product needs to go through hospitals or big institutions to be bought. Maybe doctors cannot reach for their credit card, buy whatever they want and start moving the clinical records there because there is a lot of compliance involved.

You need to think of what the application of the product is, and I wouldn’t limit it to some verticals, but rather to some types of situations, markets, and so on.

David: You just said that PLG it’s more suitable for specific types of businesses and markets, but what about stages? How do you see the development of the venture from “inception” to “wild success tech story” and how PLG plays a part in there?

Itxaso: That’s very interesting, in fact, I was talking with a colleague about that, today. I believe that you can have a company in which you sell through PLG and enterprise. However, I do think that the transition from PLG to enterprise it’s much easier than the other way around. And the reason is, when you build a product for PLG, you need to take into consideration some points like the onboarding process. It is critical, really, really, really critical. So it needs to be very quick and very short time to value.

Often, when you build an enterprise product, you are thinking of a much more integrated solution within the customers. Now, when you start with PLG, you can always include capabilities that are serving enterprises. And not only that but also requirements for enterprises, because the authentication, the security, the data volumes that you are using in a small company, usually are not sufficient to sell to enterprises. But you can start building those. And obviously, you would build an account executive team to take that to the market, but it is absolutely possible to build both strategies within a company.

Andreas: Itxaso, we often see startups thinking that they will growth hack through PLG, but then it seems the hockey stick gets too wild. What are your views on this?

Itxaso: I’ve seen many of those [laughs], as you can imagine Andreas! As you said, I talk a lot about PLG so, many of these companies who have this PLG strategy in mind come to me. Some companies come to me and say: “We are PLG but, just in case, we are calling all the leads and helping them getting on board.” And what does that tell? Either you don’t think your product is ready to onboard your customers in a self-service way, or it is very difficult to use, or you need some sort of integration.

I’m seeing those things happen and I think we are still in the early stages in this PLG learning curve. I think many companies have succeeded in the process and therefore these companies – like Slack, Pipedrive and a couple of others in Europe – will create the next generation of founders who know what takes to build a PLG company. Many people are trying to do it and they come to me either saying that they are already doing PLG, or, looking for help to do it.

I talked about how resilient PLG companies are when compared to other, more traditional, business models. And the reason is that PLG companies get embedded within their customers through a test. So, you go, and you try, before you buy.
Itxaso del Palacio

David: I once heard you say that founders need to understand that no churn means love. And I’ll use that as an entry line to ask you about the resilience of PLG vs. non-PLG startups. Maybe we can use COVID and the lockdown period as an example there, but I’m really curious to know if investors and LPs get it. Do they grasp the resilience of those startups and how do you pitch that to potential LPs in the fund?

Itxaso: I usually don’t pitch that to LPs [laughs]… But they have started to ask about it because I wrote an article in May 2020, that was specifically around this topic. I talked about how resilient PLG companies are when compared to other, more traditional, business models. And the reason is that PLG companies get embedded within their customers through a test. So, you go, and you try, before you buy. You might try four different solutions and you choose the one you like. It is not one account executive that comes through the door and tells you how the other three work. You have tried the other three too and you have made your mind. If you stay with them over time and there is a crisis in the market, that is not going to change your mind. If you start using the product and in two weeks, it’s not working for you: “Hey, I’m done with this. I’m moving to the other one that I tried, that I thought it was, in fact, worse, but it might be better.” But the crisis is not going to change my mind. I still like that product. That’s one of the reasons.

The second reason is nicely explained this way: imagine you have a smallish company, of about 250 people. In that company you have ten or 20 individuals within the organization who have taken their cards out of their pockets, bought the product so that product has gone through expenses, rather than a SaaS expense line within the CFO. And getting rid of that is much harder than getting rid of a line within the CFO, who is the one looking at all of the things the company must cut. The CFO usually has a view of the biggest ones, because these things are all around the company and are invisible, therefore more difficult to catch.

If we think specifically about SaaS, we had around 16 unicorns just in 2019 – one of them was UI Path valued at five billion at the time. If we look at 2020, we had over 25 SaaS unicorns. Note that I’m only talking about SaaS.
Itxaso del Palacio

David: Itxaso, when we first spoke you talked about the fact that VC returns in Europe have now shown to be better than in the US. What’s your take on the future for VC in Europe and, specifically, the SaaS space?

Itxaso: When we first spoke about this interview, I mentioned that because I am very, very optimistic about the European startup ecosystem.

If we think specifically about SaaS, we had around 16 unicorns just in 2019 – one of them was UI Path valued at five billion at the time. If we look at 2020, we had over 25 SaaS unicorns. Note that I’m only talking about SaaS, there were more than 16 unicorns in 2019, but I’m talking about SaaS, specifically cloud solutions. In 2020, ten of the unicorns were valued at over 2.5 billion, which gives you an understanding of not only the number of big companies but also their scope.

To me, that means better returns, a better growth mindset within the companies and the teams, and new entrepreneurs building companies looking much more towards this growth. It also means investors becoming much more bullish because, whenever you have already returned your fund, then you can go and be bullish. Instead of looking too much at the numbers, you can focus much more on the future and bigger opportunities. I think all of that is positive, it will only accelerate, increase and give bigger returns in the future.

No churn is love! So that’s probably the one I would say I look at a lot because, when we move to smaller customers, we really can suffer from churn. And that is important to track.
Itxaso del Palacio

Andreas: I’d Like to shift the focus back to the companies and “due-diligencing” them. What do you look for when evaluating these PLG companies? Are there certain metrics that you’d swear to for each stage?

Itxaso: There are some metrics that I look at more than others, but I’m a very product-centric investor. I like to find founders who are obsessed with products, with user experience, and that comes with engagement metrics.

Engagement metrics, meaning:

• How much your customers are using your product.
• How are you measuring the value?
• How do you know they are happy?

Founders who know the answer to these questions are measuring all these KPIs, and they are, basically, my target, and bring me to a position where I want to invest in the company much faster. When you are a SaaS investor, there are some metrics that are the typical SaaS metrics and need to be there. Those are more related to the unit economics on the CAC payback and so on. But, in my case, I go really deep on understanding engagement metrics.

And obviously, as you mentioned in our previous conversation, churn. No churn is love! So that’s probably the one I would say I look at a lot because, when we move to smaller customers, we really can suffer from churn. And that is important to track.

I test those founders in their ability to think business and commercial, and not feeling worried about putting a product in front of the customers, which is not perfect.
Itxaso del Palacio

David: When you’re working with product-centric people, that eat, sleep and always think about their product, how do you, as an investor, address the risk of them not having a commercial vein developed when it is necessary to go enterprise?

Itxaso: That’s a very good question because we’ve seen it. I test those founders in their ability to think business and commercial, and not feeling worried about putting a product in front of the customers, which is not perfect. I test them on that a lot, and I do test them on their next hires – in many cases, we need to help them hire those commercial people. If you think of somebody who is very product-oriented and technical, how can they interview someone for marketing and search for the most adequate characteristics? We help them a lot with talent, through the interviews, by looking at the characteristics and so on. They’ll be hiring very early in the company’s life to fill these gaps and it is important that they are aware of what they don’t know.

I think that, if you are thinking of pursuing a PLG strategy, you need to start doing that from day one. This is not something that you change overnight.
Itxaso del Palacio

Andreas: To people being inspired by the PLG route, what would you say are the main takeaways? And how far down the line as a non-PLG company can you realize that PLG is the way we go and build it into your existing product?

Itxaso: I think that, if you are thinking of pursuing a PLG strategy, you need to start doing that from day one. This is not something that you change overnight. There are strategies that you can use if that enterprise or mid-market approach is not working as well as you thought and there are ways in which you can involve your account executives and salespeople in building a much more PLG go-to-market strategy, but it is super complex.

You need to be thinking of that from the start, because everyone within the company is incentivized through product-related metrics, and everyone is responsible for those. That means that if you haven’t hired people with that mindset, you are not going to be able to change it next week.

Andreas: And I guess it’s both mindset and also skillset.

Itxaso: Correct! That’s why I was saying that some companies that have been successful throughout the process are very good examples. And I think companies that today are trying to build PLG and don’t yet have those capabilities should be looking to bring in advisors who have built such companies. There’s no need to bring them full time, maybe they can’t even pay them, but bring them in as an advisor and let them help you throughout the process.

And I think companies that today are trying to build PLG and don’t yet have those capabilities should be looking to bring in advisors who have built such companies.
Itxaso del Palacio

Andreas: You just brought up a topic that is very close to David and me: bringing in advisors. I’d love to hear your thoughts on how do to do that? What is important to remember both as a founder, but also as a VC, when looking at startups, engaging with advisors?

Itxaso: I think the advisors that I’m talking about are the advisors that are experienced, have seen the movie before, are operators 99.9% of the time. I’m not sure if you are referring to the advisors who help companies fundraise [laugh].

Andreas: We can talk about them as well…

Itxaso: I thought you were talking about those, but they are not our best friends. I’d love for founders to approach me, to be able to sell to me without the need of going to someone who needs to sell. If they are not able to convince me, themselves, to put money in their company, then how can they convince a customer to buy the product? How can they convince another employee to join their company? They need to sell their company themselves. So, I don’t believe in those advisors.

I do believe in the advisors that were operators and can help founders. And I do believe in mentors for everyone, in every sector. I’m a big believer in advisors and mentors in that sense.

I think you need to move forward and propose to them a much more formal connection or advisory role. And that can be paid, options, or a mix of both. I’m keen on doing it in a mix of both or options that vest over time.
Itxaso del Palacio

Andreas: Itxaso, what is your opinion when founders engage these advisors? What kind of terms should they do it on – Is it good just to have them loosely connected and base it on trust or should you quickly get them committed?

Itxaso: I think there is no time to waste, but at the same time, you need to make sure that you like them before you get to a more formal engagement. You must make sure you like their style and guarantee they are valuable for you because you really need to feel comfortable taking the phone, at any point in time, and calling these people. I think you need to move forward and propose to them a much more formal connection or advisory role. And that can be paid, options, or a mix of both. I’m keen on doing it in a mix of both or options that vest over time. For many of those advisors, if they’re working for another company, that amount of money is unnecessary, it’s not what drives them.

But, in some cases, some advisors only do that for a living – and I’m not saying they are bad. They were successful in building a company from one to 10 million, and they are now helping every company in that sector building their one to 10 million revenue. These people are expected to be paid a little bit and get a little bit of options but, either way, I think is very, very valuable. And it helps companies without assuming the risk of hiring somebody full-time before there is a product-market fit. In some cases, companies end up hiring a lot of salespeople before there is that product-market fit. If you bring in an advisor who can really help you close those contracts, you can realize if you are ready to scale those contract sales. And so if you can do it with an advisor, then bring somebody on board, specifically in the enterprise sales.

David: Very cool! We always end our interviews with a quickfire round where we ask you quick answer questions, with 30 to 60 seconds for each. Are you ready?

Itxaso: I think so… [laughs]

David: I’m sure you are! What would you personally like to change about VC in Europe?

Itxaso: Probably having more operational partners within the venture teams. We do have an operational partner at Notion, and he has been a game-changer for our companies. Andy Leaver has been at five IPO’d companies, he knows how high growth looks like, and that’s what it’s in his mind and what he brings to the companies. It’s fantastic to see how the companies react to it and improve.

David: Second Question, Itxaso. Of the most common SAS metrics, which ones do you love – as you said, engagement metrics, right? – and which ones do you hate?

Itxaso: So, engagement metrics are the ones I love and I hate churn! [Laughs] I hate churn, I don’t want to see any churn! [laughs]

David: The third question is: What’s what do you strongly believe in that most people around you don’t?

Itxaso: I can’t speak for the belief of others, but I do believe that the European venture ecosystem will be at the same level as the US, in terms of the amount of money invested and the number of unicorns, growth, and the critical mass of talent. I know there is incredible talent in Europe, but maybe the critical mass of talent is going to be at US level very soon. And I truly believe that is going to be the case.

David: I hope that’s more of a premonition than a belief [laughs]. Finally, what can we expect in the future from Notion and, obviously, from Itxaso?

Itxaso: Definitely, many more investments into cloud. And I say that because Notion traditionally has been much more about SaaS, but cloud is more of a developer-first approach, a bottom-up approach, open-source infrastructure and, obviously, PLG. I am the one who’s leading many of those investments within the team, and we are very much looking forward to doing more of those.

Andreas: Itxaso, we really appreciated this conversation, it’s been awesome to deep dive with you on PLG today! Thank you so much, and we’re looking forward to our next opportunity to chat with you again.

Itxaso: Thank you so much, Andreas and David, it has been a great pleasure.

And this wraps up our interview with Itxaso del Palacio, Partner at Notion Capital.

If you happen to know one you think fits these interviews, we’d love to hear from you.