In this episode of Zero One Hundred Conferences, we hosted Sabine Flechet and Joshua Haynes, Founding Partners at Masawa, a venture capital fund supporting European founders focused on wellbeing and mental health. Sabine's diverse background spans private equity, investment banking at HSBC, strategy consulting at Solon Management Consulting, and investing in over 70 companies at LeadX Capital Partners. With over 20 years of experience across 35 countries, Joshua has driven innovative initiatives at the intersection of technology, social impact, and investment. Together, they leverage their extensive expertise and global perspective to identify and nurture startups that can significantly impact mental health. Masawa's mission-driven approach exemplifies how targeted investments can drive meaningful change and improve lives on a large scale.
Before we jump into our topic, tackling mental health through the nurture capital fund, I would like to hear a little bit more about the 70 companies you invested in Sabine, and then Joshua, the 35 countries you work in. I mean, I think that those are very large, impressive numbers, so maybe you can start Sabine.
Sabine:
I invested in 70 companies. You have it right, 7-0 at LeadX Capital Partners in pre-seed seeder.It was quite a challenging journey because you can't have a lot of touchpoints with 70 funders and sometimes more. After all, the companies are not usually single-funded. So it was a tough job. I was helped and supported by an analyst and an associate.
And these 70 companies had one thing in common though, they were all spanning across the food tech value chain. So, all directly or indirectly selling to restaurants, hotels, retail, but also along supply chain and logistics or agriculture. So, we had pretty much a very kind of an overlap in the market, which helps a lot in identifying kind of the different stakeholders or the go-to-market strategy for that specific sector.
But that was also kind of a challenge when the pandemic hit, because when you have a portfolio, which is scattering to that crowd of restaurants, of hotels, of retailers, then when you have a pandemic, the entire market vanished. And I think the toughest part was to deal with this challenge and this COVID crisis for our founders who from one day to the other had a complete market vanished and couldn't sell their products anymore. And I think they're the touch points became quite challenging and time-consuming because you need to support and help the founders on a one-on-one basis, daily.
And I think that's where kind of my interest in the mental health of the founders came from because it was such a tough time and such a difficult time for the founders to keep surviving through this challenging market.
Now I remember you mentioned it like we spoke before the podcast, you were their therapist at some point, right?
Sabine:
Yes. A secure base, exactly.
A secure base for the founders so that they feel that someone is there to help them out through these challenging times, that they don't burn out, and that they can find resilience, adaptability, compassion, and empathy, right? That was really what was needed at that time. Yeah.
And I guess that's, as you said, that's one of the reasons why you chose mental health as the topic for this.
Sabine:
Exactly. That's when I also at the same time met with Joshua, who was setting up Masawa, which was a fund very much focused on mental health and wellbeing, but also having this value add of nurturing to the mental health of the founders, right? So helping the founders through the ups and downs of scaling a company, and starting up an entrepreneurial journey. And this is what drove me really to join Joshua on this fund set up and to create Masawa with this kind of value add to a portfolio to the founders that we backed”.
So, Joshua, you already had Masawa on your mind. Maybe you can build on that a little bit and tell us how this idea of Masawa came alive?
Joshua:
So my 35-country experience comes in two phases. The first phase was as a software technology developer, working on projects, implementing large B2B SaaS projects in Europe, Germany, the Netherlands, United Kingdom, but also working in emerging markets, countries like Morocco, Niger, Mozambique, Bangladesh, Haiti, developing different types of software solutions for clients and organizations.
My second career was as a diplomat in the Obama administration, where I managed a large social impact portfolio for the Agency for International Development that took me to Central and South America, Southeast Asia, and Africa, both developing programs in countries and then also doing a lot of the what we would call due diligence or portfolio management of the projects that I had been inspired or been a part of.
One of the things that nagged me when I was the steward of almost $200 million of U.S. taxpayer money was that we focused too often on the outputs of the projects and investments that we were making, but very rarely, if never, did we look at how were the relationships between the individuals in the organizations, be they large or small, and how was the leadership effectiveness and the resilience when things got tough because I have many examples of when the outcomes weren't as good as they could have been because there were some issues individually or as a team.
And so, the crux of Masawa as a mental health fund, though, comes from my experience dealing personally with mental health. I come from very humble beginnings. I was raised by a single mom on welfare and was lucky to get out of the poverty trap in the United States by being good at school and getting scholarships, but that experience weighed down on my mental health.
And it wasn't until in Berlin when my family had moved, I broke down. My depression, anxiety, and issues with food came to the fore, and at once I felt I was useless. I, again, was lucky to be able to use things like meditation and nutrition and other modalities to help me recover or become more aware of who I am and what drives me, but it was super clear that the challenge or the size of the mental health crisis was so large, and at the same time, the excitement and opportunities for the technologies and innovations that were especially coming from the private sector weren't being funded in a way that was conducive to ensuring that the founders could create enabling environments and warm cultures that were focused on growth and financial sustainability and success.
And so, I was fortunate, as Sabine was saying, to meet two years ago, Sabine, and come together to put this fund in place.
How do you see the industry doing right now? Because you are a nurture capital fund, you could please also explain to us a little bit more about that? What are you seeing right now and the opportunities?
Sabine:
Yeah, Massawa is focusing on New York because we think that there is a great investment opportunity in the region for mental health innovation and well-being innovation.
And the reason why, I think it's at least my theory, we have a very strong public health care system here in Europe, at least in France and in Germany, where I come from and where I live, but also across continental Europe. And if you look at those more fortunate, like the US or the UK, who don't have such a favorable public health care system, you have a lot more innovation. You have a lot more private capital flowing into tech, into solutions that will treat serious mental illnesses like ADHD, PTHD, bipolar syndrome, eating disorders, anxiety, substance abuse, and addictions.
So we see a lot more momentum in the US and the UK, just because you don't have a public health care sex system that covers most of the, I would say, traditional medicine. But if you look at continental Europe, and especially France and Germany, you don't seem to get a lot of innovation from the public health care system. You don't seem to have a lot of non-traditional medicine, especially tests or new scope of work.
It's quite an old system that tends to be maintained by also a very old generation of practitioners, of doctors. And so consequently, you don't have such an innovation market where you can finance those innovations, but they exist. And they exist because COVID has also revealed a lot of challenges when we talk about mental health.
Mental health before COVID-19 was very stigmatized. Now I would say that people come out with their mental health issues, and they are publicly mentioning this. So, we have on one side, a demand for mental health innovations and for taking care of mental health in a different way, not just purely medication, but from a non-traditional medicine.
And on the other hand, the public health care system does not favor such medicine, but also not financing such non-traditional medicine. So the private capital market needs to come in and start investing in this innovation. And that's where Masawa is very well positioned to provide private capital into this inflow of tech solutions that address mental illnesses, which is much more needed as we've seen with the mental health crisis that we are facing after COVID.
And where are you seeing the most innovative companies within Europe when it comes to mental health? Because as you said before, we are not that sensitive towards mental health.
Sabine
Yeah. So we look at mental health actually from a very holistic approach.
And I think this is what I refer to by kind of moving away from medicine 2.0, from traditional medicine, which is very much focusing on medication and biotech. We see mental health in two pillars.
So we invest in solutions that are medically oriented because they will offer services for treating mental illnesses, as I said, ADHD, bipolar syndrome, anxiety, stress, burnout, substance abuse, etcetera.
So you have a strong, very much medical involvement from a practitioner, a psychiatrist, a clinical hospital, a caregiver. Usually, you have to have an evidence-based or clinical trial to showcase that this solution is working. Here, for example, we see very exciting opportunities alongside brain tech, so brain-computer interface, or using new technologies like AR and VR to fight depression or digital biomarkers, for example, in games to detect early signs of ADHD within children.
But these are very medical-oriented and you probably would need a go-to-market that indirectly kind of brings the insurers, the public healthcare system, etcetera, and the doctors into a successful go-to-market.
But we also look at mental health more holistically, including anything that can indirectly affect your mental health and well-being. That means any social determinants, which are external factors that can influence indirectly your mental health, as I said. So that includes nutrition, for example. We're very, very keen on nutrition and the connection between your microbiota, your gut, and your brain energy. We have right now a company in due diligence that provides and offers dry blood samples as a test-at-home kit that can measure the deficiencies of your microbiota, so any nutrient deficiencies.
And they couple their package of test-at-home kits with a go-to-market towards the supplement provider, the nutrition service provider, or the food and beverage manufacturer. So the diagnosis of your nutrient deficiencies is kind of sold via another type of offering that brings a call to action, a recommendation as to what type of supplement, what type of nutrition diet you need to follow to kind of solve and mitigate your nutrient deficiencies. So nutrition is a very key area of investment in mental health, but we also look at education. We look at financial wellness, especially for women and minorities, because being financially dependent can cause a lot of stress and anxiety. And we look at any solutions or treatments that would address the categories of populations that are more exposed to mental illnesses because of their age, looking at elderly care, Alzheimer's and dementia, or even youth mental health, for example. Looking also specific to age, specific to gender, or sexual orientation.
So we look at LGBTQ-specific types of mental health. And then we go even beyond. We go into how, where you live, and where you work can affect your mental health.
So mental health of employees, mental health due to the climate crisis, eco-anxiety, and climate resilience would be also among our scope for investment. And within all these areas, enormous innovations are being made. There is enormous demand.
If you look at elderly care, for example, and how you can personalize the mental health support for patients suffering from chronic disease from neurodegenerative illnesses or cancer, for example. We also have a company in due diligence at the moment, which is specifically attuned to patients suffering from cancer because the mental health support that they get might reduce the number of days in hospitals and might be also leveraged for healing. And then youth mental health is another topic that I'm very fond of because this is, I think, where we need to focus for the next generation.
If we look at the younger generations, 14 is the age by which half of mental illness begins, 14 years old. And suicide is the second leading cause of death for teens and young adults aged 10, to 34. So there is a tremendous crisis coming up and I'm not sure everyone is aware of it.
So youth mental health will be another area of focus.
When you talk about all the areas that you cover, there are many. Mental health has to do with everything, which makes sense, it's taking care of ourselves. But if I were an LP and you have to tell me, what are you best, what's not on your scope, for example, when it comes to investing?
Joshua:
So the two things in the mental health sphere, both direct and indirect that we're not investing in are those that require long clinical trials and those that are biotech-heavy. It's not our expertise and it's not something that we feel equipped to invest in. You're very right to say that we're investing in, however, a very large swath of the mental health sphere.
And because of that, we've also made sure that we have experts in our advisor tribe who are specialists in very, very specific things like psychedelics, for example, child psychology or child psychiatry. And because of this expertise, we're able to more comfortably cover a wider range of companies. Okay.
The idea is we're not going to work with pharmaceuticals or big types of companies.
The most important thing when you think about mental health, it's about things you can do as an individual to help yourself, not only relying on drugs, as Sabine was saying, which is the exact way of tackling mental health nowadays. It makes a lot of sense. And how are you doing with fundraising? How are your conversations with LPs about this topic? Do they understand? Are they being able to separate and see the business opportunity in going beyond pharmaceutical, beyond most technical stuff?
Sabine:
Yeah, most of our, I would say, early adopters, and most of our target audience are high net-worth individuals, family offices, impact funder funds, and foundations. So all these profiles of LPs are usually investing also on an individual perspective or from more of an emotional angle.
And we are the first, I would say, and the only European mental health-focused venture capital fund. So we provide for all these individuals and asset managers a very strong, I would say, sector-specific investment thesis.
And as Joshua said, because we are coupled with a lot of different advisors, who are experts in their fields, being in certain medical conditions, but also be in terms of go to market, we ensure that we have like the right skill sets on board to be able to do the due diligence, so assess, but also manage the portfolio accordingly.
I wanted to know, where are your portfolio companies in Europe?
Sabine:
Two companies, one in Berlin and one in the Netherlands. And we are currently in final due diligence with one in Switzerland. And so, the expert tribe that we have helps us not only on the medical conditions, as I said, and giving their medical expertise on certain mental illnesses, but also providing support on go-to-market.
For example, one of our key advisors is the head of digital therapeutics at NHS in London and, therefore has a strong experience as to how these types of solutions like digital therapeutics can enter markets. What are the different stakeholders you need to identify and get the buy-in to be able to successfully scale in the region? And so we try to have this type of individuals and experts throughout the European region with foundations specialized in mental health or centers of research that can help on the clinical trials or the evidence base for startups, or being the private insurers or the public insurers, right? So finding these connections helps with scaling our startups.
But to go back to your questions on LPs, I mean, as you might know, the current market is not the easiest one to fundraise. Still, I think we have a unique value proposition because not only we are sector-specific and can provide a very strong deal flow in the area of mental health and wellbeing, but I think we also have a unique positioning with our value adds about nurture capital, right? So we haven't talked much about it, but this is also the reason why in my intro, the reason why I joined Joshua on his journey to secure and cap our downside scenario as a VC by providing mental health support to the founders. I explained myself. On top of focusing on mental health, we also cater to the mental health of our portfolio companies and our founders.
That means that during the due diligence, we assess how they're dealing with their mental health, and their relationship to money, success, to power. We try to anticipate any human capital risk that could be generated through the scaling process or the entrepreneurial journey of the founders. We try to understand if there is any field or any potential for co-founders conflict.
We try to assess the transformation from a founder to a good leader, to a CEO, and his leadership effectiveness. So all these allow us to then co-design a framework or roadmap with the founders to help them satisfy certain needs, right? It can be, that they need some coaching, they need some therapy, they need some leadership expertise. They need to be able to manage better or empower others.
They need to delegate. And we do this at the seed stage because that's when they need to build the team, right? And that's when they start recruiting other C-level executives. That's usually when the ego starts catching up, right? So by helping them with coaching, therapy, with leadership effectiveness, we try to minimize any people's problems that could put the business at risk.
We try to minimize this human capital risk. By doing that, we reduce the number of failures because, at the seed stage, 65% of startup failures are due to human conflicts. So if you can minimize this, reduce the number of failures, and then increase your returns.
And that's how we cap our downside scenario as a VC. And that value proposition for LPs is of significant importance because that means for them, financial returns increase. We've managed to, if we realize 30% less failure on the portfolio, we can gain 1.5X in terms of incremental financial returns.
And that, of course, talks to limited partners, which are also financially driven. So they come with the emotional drive because mental health is a topic that is at their core, something that they're very keen on. But in the end, also, they also recoup their investment with an incremental add-on because, with our natural capital approach, we can minimize the downside risk and increase the financial returns.
I think you are the number one in the team, no Sabine?
Sabine:
Well, as you said, I've been through investment banking and strategy consulting. So I've done my fair share of M&A and IPOs and leveraged buyout, but Joshua has a strong quantitative background as well with being a software engineer. So don't get me wrong, we're both very complimentary, but we help each other out on the numbers side.
No, but I think like the other question, which is the other part of the equation, the emotional part, how do you approach the conversations? Because Joshua was sharing with us a very personal experience and that's the one that made him like decide this journey, right? So how do you see in general that part in the investor's world?
So I think that the ability to be vulnerable is a superpower that very, very few investors have. I can't tell you the number of times that we've been on calls with founders or LPs or follow on investors where just by opening up a little bit and sharing what we've gone through on the human level, they're able to connect and they realize that it's not just about the ones and zeros, although those are very important at the end of the day, it's about finding the place that we have in common and the places where we can bond. And so we do that, not only of course with our LPs and sometimes I feel that some of our discussions with the LPs turn into mini therapy sessions, although we're not trained therapists, we listen very well, but with our founders, it's really not only building the trust and helping to rebalance the paradigm that is askew in the investor-founder relationship, but it's also to ensure that they understand that we're not going to just squeeze as hard as we possibly can to get one more euro of valuation when it's time for an exit, that we fundamentally do care about their well-being, how they're doing, how they're sleeping, yes, how their relationships are, and as Sabine was saying, provide them support for the first amount of time that we've invested in them, but we also see them as partners for the rest of our careers.
An important element of the nurture capital approach is our soft-landing package. That's because we in the financial world usually just focus on the acceleration, but deceleration happens as well. When a founder transitions out, either because they've been successful or not successful, from a point of view of mental health, it's a very hard day the first day that they don't go back into the office, because they've effectively just lost their baby, and so by providing a landing package before that transition happens, we can help to work with them to get a bit more closure and to ensure that they can get back on their feet and start innovating again, because we'd like to invest in them again, but by then we will certainly have known them for quite some time, or potentially they invest in us, or we do something else together.
So that's kind of the power, the superpower of, you know, unfortunately, the misnomer is the soft skills, but especially in seed state investing, those are the most important skills.
In the end, what you're doing is you're humanizing, no? You're humanizing us, you're humanizing them. No, but yeah, but it makes sense, because yeah, you're humanizing the founders, and the relationship with them, which is basic for success, and how do you see the conversations with investors? You've had conversations that ended up like in therapy sessions, no? But it is still a very numbers-oriented world, right?
Sabine:
So yeah, I guess you need to differentiate between the traditional financially driven investors, where as I said, the natural capital approach provides a cap to the downside scenario of a VC, right? If you can reduce the number of failures, and increase the financial returns just by taking care of the mental health of the founders, then it's pretty attractive for traditionally driven, financially driven investors. Another kind of audience that works quite well is serial entrepreneurs, because serial entrepreneurs have been successful through an exit, or even athletes, sports athletes, they've been through the ups and downs of an entrepreneurial journey, and they know what it means to build up a startup, to a scale up to a large company, and they know the suffering they've been through, in terms of mental health and well-being, but also from their team perspective. So they understand what we're trying to do with our natural capital approach, and they wish they had this natural capital approach, and the support from their investors.
But traditionally, those that have committed, and we have already 5 million committed in terms of LPs, are traditional investors that want to innovate, or kind of disrupt a little bit the traditional VC model, which is around maximizing shareholder value and being able to exit at unicorn status. I think we kind of want to change that status quo, and want to kind of rebalance the relationship, the trust between founders and investors. And that's why we have these different elements, as Joshua said, the soft lending package, but we also have this solidarity capital and a cap on our GP carry.
So, from our GP carry perspective, what Joshua and I would earn at the end of this fund, we have 10% of our GP carry, which is reserved for founders. Why do we do this? It's because we want to be solidary, but we also want the founders to work together, right? We're here to change the way mental health is perceived. We want to have a system change to make sure that we can improve the mental health of society, we can improve the quality of life of people, and that is not going to be a shift if we are just in silo, working alone on one or the other startup.
We need to collaborate, and that provides also a great field for best practice and knowledge sharing among the founders. And we have also what we call founder circles so that they can exchange and help each other. And so by having 10% of our GP carry, they are incentivized to be kind of, they are influenced on the portfolio level and not on the company level anymore.
And then the second element that is also quite innovative and is also changing the paradigm between investors and founders in terms of relationship is the GP carry cap that we have. So, anything above 4x in terms of multiple uninvested capital on the GP carry will be distributed to a foundation, which is co-managed by us as GPs, the LPs, and the founders, towards a mission that will be also improving mental health or improving quality of life of society. That means that if we are successful with Masawa in terms of venture capital investing and investing into for-profit startups, anything above a certain amount of proceeds can be reallocated to invest in other type of projects, maybe non-for-profit, maybe things that we will not be allowed to do within Masawa but can still help the system change about mental health improvement.
And that way we make sure that all stakeholders are involved in that journey as well, because this foundation, this Masawa foundation, to which our extra GP carry will be allocated, will be managed by our LPs and our founders as well. And that is something that they found very attractive because that means also that you can leverage different types of capital. So having different blended types of capital going after the same mission but through different projects.
And so the foundation is a project still, it doesn't exist yet. I mean, the idea is to create it once you start with what you are done with fundraising.
Sabine:
As soon as the first close is scheduled, then we can start the foundation because we have already investments in the portfolio.
So any exits and any returns that we get from these exits will be calculated to calculate this 4x on multiple uninvested capital.
Then maybe you can talk a bit more about what you mentioned before about the mental health crisis coming up. What does it mean? Is this worldwide? Why aren't the governments doing anything about it? Why is the private world the one taking care of it?
Joshua:
Those are great questions.
So, if we just look at Europe specifically, a quarter of adults, one-fourth report depression, either mild to severe, but in places like France and Estonia, it's closer to a third. That's because not only of several issues that people have had with COVID, with the job situation, the economic situation but also looking at the stress in their lives, issues with social media, connection, loneliness, etc. The cost, however, to the economy is also exorbitant.
The figure from right before COVID is that for the European Union, it costs about 4% of GDP, so 600 billion euros a year. That's both in the direct health care costs, but also in the lost productivity. These are staggering figures, and the European Union, of course, is earmarking additional funds.
But traditionally, and unfortunately, as an American, I'm saying this, Europe has seen mental health as the purview of the public sector or of the philanthropic sector. But the philanthropic sector, in terms of mental health funding, provides one-half of 1% of health philanthropy to mental health. You can't do much with that.
It's 2% of a country's health budget usually goes to mental health specifically, and a lot of that has to do with clinic beds. We don't have a Marshall Plan or a DARPA for mental health. There's now in the U.S. a lot of capital going into the private, the public, and the philanthropic sector to be able to bolster the things that are happening there.
I would say, though, that because of the divisiveness of the United States, the lack of true connectivity that has led to a number of the political crises that we have in my country, that mental health crisis is a bit more exacerbated, but in Europe, it's coming. That's why it's an opportune time now to focus and work hand in hand with others to be able to get capital to those changemakers who are driving the changes that we need to see. Because at the end of the day, it's about our ability not only to connect, but also provide a system so that our children, as Sabine was saying, aren't dealing with the mental health issues that we are dealing with today.
I think that we're worse. Do you know that depression is the number one cause of disability worldwide? The cost of dealing with depression is more than the cost of issues with the heart, with cancer, and with several other diseases combined. Because of the stigma, we can't talk about it because of various reasons, cultural, gender-specific, et cetera, that we can't address this issue.
But I suspect that within two or three years, the number one addiction specifically will be screen addiction, which is one of the reasons why our first investment was in a company in Berlin that is focused on problematic smartphone usage. It is rampant and we have to get a hold of it. It's also really taking away the economic livelihood of other startups that have their products and services on their phone as well.
There's a lot of excitement and also a lot of ground that has yet to be covered that we are in the process of walking down.
You haven't even spoken about the emerging markets yet, no?
Joshua:
I mean, yeah, okay, the US, they are raiding stuff. People have access.
We get to the point where in Africa, in some places, for example, Guinea-Bissau, a Portuguese-speaking country in West Africa, doesn't even have one psychiatrist in the entire country. Or that in Ethiopia, some 90 to 98% of people don't have access to any mental health services. This is our attempt and what we can do as a small fund, first-time fund, to be able to not only show that how we're investing in mental health is as important as that we're investing in mental health.
Through this nurture capital approach.
Yeah. Well, I hope you have a successful fundraising period because this is something that we need to tackle as a society. And not only from the private sector but of course, from the public sector as well. I don't know if you have anything else to say. We covered a lot of things and we're running out of time.
So if there's anything you would like to say before we leave.
Sabine
No, thank you very much for your time, Laura. It was a very nice conversation and a very nice talk.
And for anyone interested in mental health among your audience who would like to know a little bit more about how we execute and implement this nurture capital approach, happy to dive deeper into calls or meetings at conferences. Maybe there was your 100th conference in Amsterdam in April. Yeah, of course.
And I think that I mean, thank you very much for putting this topic on the table because I think that is not on the agenda in the investor's world in general. And that's why you are the first VC tackling this topic. Now here in Europe, I don't know how it's in the US, but I can tell you maybe in Latin America, it doesn't even exist.
