Spotify’s Early Investor Shares His Blueprint for Outlier Founders | PJ Pärson (Northzone)

Just because you were the 120th employee at OpenAI doesn't make you automatically a great founder. Conditions change all the time. All of a sudden there's a new update from ChatGPT, and 10 or 20 startups are, overnight, rendered irrelevant.

The really strong entrepreneurs, they find ways to address that, and it is existential for the founder. Some of them have that inherently. And then there are some bad examples where it's more about having control over events. And those are the ones that have more difficulties, both in growing and also with the idea of that you always hire people that are smarter than yourself.

But if you do that, then your own learning journey will be so much more rewarding and powerful. Outlier founders come in very different shapes and forms, and no one is like the other. But I think they have a few traits in common.

One is that—

PJ, welcome to the podcast show. It's great to have you here.

Thank you. It's a great pleasure to be part of it.

Northzone has been around for a while, so let's go back to the very early stages. How did PJ first make his way into venture that led you to joining what today is one of the most respected VC funds in the industry?

Yeah, so I actually started in the VC industry before I joined Northzone and built one of the earliest platforms. So I'm almost like a venture studio back in the '90s, and we gave birth to 12 startups, of which 2 became consequential.

And what's more important, though, was that within that venture studio, there were some really influential people that later became sort of the building block of the Stockholm ecosystem that really built great companies such as Spotify, Trade Doubler, iZettle, Avito, and many more.

But then I sold that company at the peak of the dot-com bubble, and I wanted to

start a new venture fund. And then I started talking to my former colleagues at McKinsey who had started Northzone in the meantime, and I tried to lure them over to my firm, and that was about to be launched.

And then they said, "PJ," and they put their heads like this, "PJ, you're describing Northzone. You should join us." Which I did, almost 23 years ago, and that's a decision I surely did not regret. And we're also now, today, I'm the longest-serving partner at Northzone.

Many of the early people, they sort of churned out at different points in this almost 30-year trajectory.

20-plus years. So you've definitely seen a lot, and you've always seen.

Oh, yes, indeed.

You've seen all the cycles. And now we're in a very different cycle. Founders are raising crazy valuations. Little DD is being done on some of these startups. What do you actually think is going on, or what do you see going on in this kind of AI space?

So I think there are—let's unpack it. First, you have the infrastructure layer, including the large language models, which has one set of logic that is largely driven by the large platform companies that are sort of fighting turf warsright now to sort of establish their respective walled gardens and draw people and businesses into that.

And that is an area that I think sees crazy elevated investment levels, but also valuations that is more of a function of getting access to that kind of talent than anything else. The second part is basically the application layer on top of that, which is quite often there are applications that are tools, AI tools that help businesses to sort of access AI in a smarter way.

And we have invested in a few of those, and that's probably where the main thrust of the AI market is currently. And some of them that get massive traction, which you do get these days when considering that most companies that are

deploying AI, they do that from a platform of being already digital. And so the friction is very low to deploy a new type of tool. And that's why you see these massive revenue spikes and consequently massive valuation hikes also.

The third phase, which I'm anticipating will start very soon, and some of them have already started, is where you see new companies being formed with a new AI stack, and they're addressing sort of general business problems, not as a tool itself, but as the business powered by AI, the new AI stack, so to speak.

And I think that is sort of the next big wave that will start to hit us.

What is incredible is all of this has really just happened in really just the last few years. Have you been surprised just how quickly this has evolved? And did you actually see it coming a few years ago?

Yeah, so when the large language models started to hit the market in late '22 and early '23, I think it was pretty much a consensus around the table in the investment community that these products were incredibly useful, incredibly fast, but to a very small set of users.

And the trick was to say, how do you broaden the appeal? How do you shore up the security around them? How do you make them reliable? Which a big theme in the beginning was this idea of hallucination, which is a lot less of an issue these days, although it still exists.

And

I think

I wrote out to my colleagues back in December 2022 and said that this is probably the biggest change we will ever see. So let's spend the Christmas vacation on sort of reading up on this and come back with a new perspective on what we should do in order to address this massive change.

Yeah, so going back to 2022, December, this is when ChatGPT came out,right?

Yeah.

So actually, a week later, or even a couple of days, we published one of the first generative AI market maps. This was the text to video, voice, and so on,right? I think there were only about a couple hundred companies at the time.

A year later, all of this around AI agents, maybe 80 months later, AI agents, now it's vibe coding. The shift just keeps changing and changing and changing. And hundreds of companies are launching.

Yeah, yeah, indeed. For instance, one of our portfolio companies is an AI scribe for the healthcare industry, and it basically records the conversation between the doctor and the patient and then automatically inserts into the electronic health records, but also starts a number of other processes, including getting theright charge code,

summoning for a revisit, checking scheduling for if there should be a blood test drawn or something like that. So a number of additional processes can be addressed with that change. And that's something that in the very early innings, the first entrants to the market in the US, like ABridge and the likes, they scaled very fast.

But then there were a few, like our investment in Tandem in Europe, that basically had the chance to take a better look at this market and the market dynamics in Europe and created products that now in bake-offs between European companies and US companies, they basically kick their butts because they have sort of gotten one step further and are using more elaborate models to create a product that works better for the customer.

So it's not like just because you're early in AI doesn't mean that you win.

Something I also think a lot about is around how do VCs now compete and what's their value add? If you're seeing all of these AI startups, and aside from capital, is that enough anymore? Or do VCs need to start having their edge on something else?

Maybe it's a massive distribution channel for media, maybe it's a very specific fund. How does Northzone think about this long term?

Yeah, so we have a couple of ways to interact with founders early in the process

when we're reviewing whether we're theright partner or not. And one of the key ones is to see if we can connect to prospective customers and also prospective employees. And if we do that well during a review process, two things happen.

One is that we understand very quickly how well the company is sort of taking the opportunity to leverage those kinds of resources that we offer them. And the second thing is that we get the word back from these people that, yeah, this is really interesting, or, well, maybe there are 10 others or something like that.

So it's a combination of value add and diligence. And I think we may not be entirely unique about that, but we also use quite a lot of our founder network as a way to reference not only that we're good to partner with, but also how you interact with us and what you can expect to get.

What is the day-to-day conversation about, and how can that help you as a founder? And me personally, for instance, I have a tendency to always end up in the same role, which is I get sort of the compensation committee chair role.

I get to sort of solve conflicts between founders. I get to all that stuff. For some reason, they don't want to be involved in the strategy, but the soft stuff, they want me.

Yeah. This is one of the things I'm also seeing is what actually makes a great VC fund today. Is it the value add? Is it the reach? Is it the distribution? Aside from obviously meeting great founders, it's becoming harder and harder.

Yes. Yes and no. I would say that

the work is largely about

identifying outlier founders addressing really big problems. And the more you work in this industry, the more you understand that outlier founders come in very different shapes and forms, and no one is like the other. But I think they have a few traits in common that we try to sort of discuss at great length in the partnership.

And

if we truly understand the outlier founders and start to communicate them early about what they want to achieve, then the chances are that we will

hit theright notes and consequently get off to a good start and potentially partner up. Because the very best founders, they have tons of alternatives when it comes to funding. And you really need to make them understand how you fit in their world, so to speak.

How do you do that? I mean, also, so many founders now are looking to go and build their own company,right? Especially former operators, which I think actually now is the biggest not only is it a really great opportunity to go and launch a company, but we're seeing these network effects,right?

Operators who are working at these AI companies, they're leaving to either angel invest or go and start their own companies. The appetite of becoming a founder, I think, has changed. But what do you think makes a great founder today?

And is it different than five or ten years ago?

Yeah. So I think it's also important that just because you were the 120th employee at OpenAI doesn't make you automatically a great founder. So

there has to be some qualities, like founder qualities. And I'm not particularly found in the idea of founder mode, but it sort of encompasses this idea that there is something that is incredibly important, and it is existential for the founder.

And it's something that goes above and beyond every other priority in the world. And then the ability to articulate that to not only

investors, but most importantly to other potential employees, to customers, and to the ecosystem that, yes, this is very important, and this is the way to address it. And

the founders that have that type of intensity, they can also typically maneuver when conditions change, because they do all the time. And like has happened, not least in the AI space, where all of a sudden there is a new update from ChatGPT, and like 10 or 20 startups are overnight rendered irrelevant because of functions that were very hard to code or that part of like a free package.

And that will happen and continue to happen. And it's very hard to second-guess. If you have an inroad into these platform companies, you may have a certain chance to not do the wrong call. But that is very different.

But the really strong entrepreneurs, they find ways to address that.

How have you found any scenarios where they do address this? For example, we just said ChatGPT is like they introduce a new feature, then all these companies are dead overnight. Part of me thinks this is also it sucks for the founders,right, who only have a couple million dollars in the bank versus a couple billion.

Oh, yeah. I think that is kind of

comes with the territory of addressing this market, because it's also the same reason why you scale so fast, because it's a function that is really in demand. And obviously, the ChatGPTs of the world are looking at that and are addressing their own proposition accordingly.

What we did relatively early on following that mail I sent to my colleagues was also that, how do we address this market? Do we address it by taking the stuff that sort of really flares up and sort of be strong at identifying momentum?

Or do we want products that are addressing difficult problems that have another set of difficulties apart from the AI, apart of the equations, like regulatory frameworks, like high risks if you do it wrong, like high value per query, because the person is doing it is like a very high-cost person, for instance.

And that led us to do a number of investments in typically, rather than the consumer/prosumer end of the spectrum, we took some really complicated B2B type of bets in the application side.

Where is the opportunity now? Is it to go very niche, or is it to focus on just one big massive market?

So I think the one doesn't necessarily exclude the other, but I do think also now that's like a clear-cut AI play is getting harder to address. I think we're sort of slowly morphing into this idea of that the companies will be having AI as a fundamental value in their proposition.

But there are a number of other values as well, which makes it harder to sort of, or rather, it makes it easier to differentiate in specific customer use cases. And then the question is, how narrow should those use cases be?

And I think that I would rather probably back a company that is taking a new AI stack and addressing an old, stale market with an entirely new value proposition, like happened in 2010s with the neobanks like the Monzos, the Klarna's, the Revoluts that basically came to the market with a digital offering where the incumbent commercial banks were really slow to digitize and did not sort of keep up with the demands that came out of this rapidly evolving digital infrastructure that was sort of becoming more and more of a key part of doing business, regardless if you were a business or a consumer.

And I think this will happen in industry after industry and with a lot less

friction than back in 2010 because of the fact that the entire society is basically wired up now.

Exactlyright. And also, so many of these stale industries are being reinvented so quickly: healthcare, construction, electric vehicles. Where do you see the big opportunity at the moment?

Yeah, we're spending a fair amount of time in healthcare. And over the past couple of years, or maybe five years, probably 30% or 40% of our investments have been directed towards the healthcare sector. And we think over the next 20 years, the healthcare industry would not look the same.

Because if you think of

the infrastructure is so shattered, it's not only shattered, it's also siloed at the same time. And there are almost no standards. And all the regulatory frameworks make it really hard for the incumbents to address that. So coming with a new value proposition, I think, is something that can make a massive amount of change to also the care delivery and the care outcomes, and not the least the costs of care, which need to

be under control. If you look at the US, for instance, you have, I think it's 18% or 19% of the GDP is spent on healthcare. And they have worse health outcomes than many countries in the OECD despite that cost.

So there is a tremendous opportunity in the US healthcare system, but also in the publicly funded ones in Europe.

For sure. For the US, I mean, there's a couple of interesting things going on now. One, especially on consumer drugs,right? Mark Cuban from Shark Tank, he's got this company now called Cost Plus Drugs. So

whatever the drug cost, they just put on 15% extra. That's a huge opportunity. Can you imagine? I mean, if they crack that, power is massive.

Yeah. And just look at what some of the sort of in-vogue drugs like Ozempic today cost like three or four X in the US compared to Europe.

Crazy, isn't it?

I just wonder how that can happen.

Yeah. Well, you've met many founders along the way. And one of the outstanding founders, probably in the portfolio, is obviously Spotify. And some interesting news which came out a few days ago by the time this goes out. And how did you first meet Daniel, and what was that first encounter?

Yeah. So Daniel, first I met him when he was asked to be an interim CTO in one of my portfolio companies in this venture studio. And he could only take that on as a part-time gig because he was still in high school.

And then later on, I bumped into him again

when the founder of Trade Doubler, who actually he was Martin Lorenzon, he was previous to that employee in one of the venture studio companies that actually failed. But he started discussing with Daniel to acquire his company that he had started post this part-time gig.

And then in the meantime, I had also invested in a couple of music-related startups. So when they came up to me and said that, "PJ, now we want to show you what we're starting."

And they started talking about the music industry. I said, "Oh, my God, you two are so talented. Why the fuck are you addressing the worst market in the world?"

But

obviously, they wereright, because I think they understood how to create an absolutely outstanding product that was heads and shoulders above any of the others. And they had an idea on how to change

the industry, not by, let's say, breaking the rules and asking for forgiveness, but by sort of securing that they could do it by the rules, which was a contrast to pretty much all the other startups at the time.

That was very, very complicated. And it took that kind of resilience and grit that Daniel and Martin together possessed to get them sort of over the finishing line and actually have a product in the market that was superior

to any. And when I first met Daniel, and he said, in the context of Spotify, he wasn't sure that he wanted to be the CEO even. And I said, "Well,

we can't invest unless you're the CEO," which now, 20 years later, has proven that he was not only a great CEO for Spotify, he's probably one of the best CEOs of all times in Sweden, because he has truly developed through all this time.

And in fact, with a $150 billion market cap, it's actually Sweden's most valuable company.

It's amazing, isn't it? Really, in 20 years. And what? So back then, it was Napster, iTunes, and I guess Spotify. There are probably a bunch of smaller players, but.

Yeah, yeah, indeed. Yeah. Napster had already was really on the ropes, basically.

Wow.

And Pandora, one can say also.

Yeah. You've probably had many conversations with Daniel. What is the greatest lesson you've learned from him?

I think he has a very structured way of learning.

So he puts himself to the task of every quarter, finds something that he needs to sort of learn and become good at. And typically, they are elements that are important for the business, but not necessarily. So it could be indirectly.

And he's very structured. And then he basically seeks out the best possible teachers or

mentors in those particular areas. And then he just peppers them with questions. And he reads a lot. So I think

this is I think that's the part that's probably the most impressive, that he has this insatiable learning appetite that has never stopped, and which also has made him that he can have very different perspectives also on things when there is a new challenge arising.

And then he's a great communicator. He has the ability to very quickly take a very specific detail in the business and connect it to the strategic direction and make everyone understand why it's important.

The communication, for those of you, for many of our audience who haven't seen Daniel's updates, especially, I think, when they do the quarterly earnings, the communication is so clear, especially on video,right? And it's just a masterclass in how to communicate properly.

Indeed, indeed.

So many founders go along this journey. 20 years, obviously, is a long time in Daniel's case. When is theright time for founders to step aside to almost accept the hard challenge that maybe they're no longer the best person to run the company?

Because you've probably seen a few of your companies. And what are kind of some of the words of encouragement you give to other founders?

I think it starts a lot earlier than that with the idea of that you always hire people that are smarter than yourself. If you do that, and if you have that as in the idea that, oh, if I can only work with this really, really talented person who has this to bring to the table, then your own learning journey will be so much more rewarding and powerful.

But after a while, then you kind of feel that

the company is in good hands and you're not as pivotal to things as you used to be. And that some startup founders, they have that inherently. And then there are some bad examples where it's more about

having control over events and being a little bit of a, let's say, controlled personality. And sometimes smarter people can be threatening to the control gene that you're carrying along. And those are the ones that have more difficulties, both in growing and also to relinquish control when it's time to do it.

And that's very hard to see from the get-go, but it's something that you experience over time as an investor with specific people.

Especially on the founder side, and you probably had a few of these. What is the best way for founders to approach that conversation with their investors if they're deciding to no longer

be in control of the company? They want to hire somebody else to do it.

Yeah. So

I think just like Daniel did with Gustav and Alex, who now are the co-CEOs or appointed as co-CEOs to assume that role within short, they've been in the business for a long time. And they were already sort of owning the agenda.

So then it's almost like a seamless transition out. I think what rattles investors is that when you, from one day to the other, come and say that, you know, I'm burnt out, or I don't have the fire in my belly anymore.

And that sort of puts the company in a difficult position, because then you need to

not only hire a new leader, but you also have to sort of see where is this relentless grit going to come from, and who's going to inherit the soul of the company? Is that sitting with enough people in the company already?

And if this happens too soon in a company's

development, then typically, it doesn't end well.

It can be really disruptive. Then at the same time, there could be founders who say that, you know, I'm at heart a product person. I want to continue to be a product person and let someone else deal with investors and the finance department and the salespeople and such.

And that could be a very strong

evolution, too. Then you sort of continue to play up your strengths rather than sort of forcing yourself to be in the wrong position. I think the advice I have is to

have this conversation

not long in advance, but have a master plan for it that will take quite some time to execute on. And also, as most people know, that the moment the CEO starts to basically throw up his or her hands and say that, you know, I will resign, then they become lame ducks.

So it's also that's the other side of the coin. That's very, very hard.

And then it's down to the investors to try and at least help, I guess, find a replacement.

Yeah, indeed. And the best companies, they find a replacement from within.

Exactly. Exactly what we just saw with Spotify,right?

Yeah.

So much to cover, but maybe switching gears a little bit. Obviously, now what's happening in the US with the talent visas, this probably opens up a huge opportunity for Europe.

I do think so. And I can only conclude that even if

this may not be executed in the way that it's been described, I think it puts enough question marks in the heads of very talented people where to go next in order for it to actually meaningfully change the direction of their professional plans.

And I just hope that Europe will step up to the plate and see this as an opportunity.

And I'm sad to conclude that in Sweden, for instance, we still have

a situation where people are being extradited for administrative mistakes, for positions they have which give them hundreds of thousands of euros in annual salary with core competencies. But all of a sudden, there was something they didn't file three years or their employer didn't file three years ago that basically makes them non-wanted in Sweden.

And that is horrible. That is such a waste of talent. And I understand that that has happened elsewhere as well.

It's funny you say that. Actually, I happen to close a friend of mine. She's from Vietnam. She's lived in Sweden for eight, nine years. And her employer didn't file something five or six years ago. And she had, I think, a week to leave the country to go back to Vietnam.

And it took three or four months to get her back to Sweden just for a tiny, tiny mistake. And it wasn't a big thing.

But maybe, hopefully, these things change over time.

Yeah, I hope so, too.

Where do you see the biggest opportunity for talent to go in Europe? Is it London, Sweden, Paris?

So I think there are some 20 to 25 cities with meaningful startup activity across Europe. And some of them, they're a little different flavor depending on what kind of background you have. So if you're into robotics, you probably are looking at south of Germany around

the Munich area. If you're looking into sort of the AI applications, it's probably Stockholm or London. If you're looking into sort of the foundational layer, then it's probably Paris. And so there are a number of different places to look into.

But I think one thing that is a common denominator with these places now, that they're big enough. They have a critical mass of talent. So if for some reason, it doesn't work out, say that you apply for a job at Klarna, and then you just don't feel and you move there with your family.

And you feel that it's not working out for you there because for some reason, you don't get along with your coworker or something. Then there are like five, seven other companies that would love to have you on board.

That was nonexistent just 10 years ago. Absolutely nonexistent. So it's a massive improvement from that perspective.

Then, of course, we have also seen improvements in some of the conditions, such as

options, taxation, export tax, and stuff like that that has made it more attractive to come to the different parts of Europe. So it really boils down to what kind of flavor you have as a talent.

If you were to move from the US to Europe and you were building an AI company, we can keep this quite broad. What are the two to three cities you would love to explore?

So going from the US to Europe, I think

if you're into companies that are, let's say, very much about sort of executional excellence, fast-moving, but not necessarily

groundbreaking innovation, I would go to Berlin because they are extremely good at building that kind of company. If you were to be a part of the sort of AI application layer development trajectory, it's a very vibrant scene in Stockholmright now.

There are like

50, 60 companies that are really fast-growing. And

it feels like there are new unicorns every month popping up here. And then

if you

are into sort of the fundamentals

in the AI, the sort of the application layer, the infrastructure layer, then I would probably go to Paris. And if you're into gaming, I would go to Stockholm or Paris, actually.

Those are probably the most interesting marketsright now.

I have been amazed how well Stockholm is doing just in the last 6 or 12 months. I mean, you've got Lovable, obviously. This is probably the big example.

So much is happening. And it feels Stockholm is potentially top three, maybe four, cities to go to in Europe now.

Oh, yeah. I think so, too. And it's good

because we had a phenomenal run from 2010 to 2017 or so where

it seemed like we were unstoppable here in Stockholm when it comes to building really, really consequential companies. Then there was a little bit of a slump. And I think that a little bit

we stepped into the trap of thinking that there was something magical in the waters here, that you could combine lifestyle quality with building consequential generational companies. I think that idea has been largely ditched. And now

they have hackathons starting at 6:00 p.m. on Friday nights. And they go on until Saturday night. And it's a very different vibe again, which more is reminiscent on how it was, let's say, 15 years earlier.

What do you think we need to make it one of the top one or top two cities? Do we need more accelerators? Is it better talent, IPOs happening?

So I think this is probably like a European-wide

observation is that

the entrepreneurial talent is there, is present. And it's some parts of Europe where failing is still a problem, like Southern Europe, for instance. It's still a big stigma to fail with your startup. Whereas I think here, you can sort of pick up your pieces and then start anew, provided that you did it theright way and didn't screw people along the way.

And I think we do have

access to lots of talent, lots of talent that probably was thinking about moving to the US that will stay in Europe instead. And also, we have a capital ecosystem now that is complete. And I claim that the capital ecosystem was incomplete until maybe up until 2015, 10 years ago.

So the fact that we are producing as many unicorns per capita as they do in the US is actually pretty impressive.

And given that the capital market is so recent in that regard, and if there is something that's still missing, I would say it's

the scale-up capital for the very later stages where pretty much all the capital that is being provided now to sort of the $100 plus million checks into maybe three, four, $500 million rounds, they are almost exclusively coming from the US.

And that's a shame because there's still a lot of value that is created post that financing round. But just going back to how it was in 2008 when we invested in Spotify, there was almost no Swedish capital in Spotify ever.

And they came in. I think the first serious Swedish capital came in in 2015 or something.

Wow. It kind of feels also if we have more of these later-stage funds in Europe, maybe that provides new opportunities for European companies to list in London or other places in Europe. Becauseright now, it just feels we've seen it in the news.

And this is maybe a more in-depth conversation at a later stage. But these companies who want to go public in London, they're ditching London to go to the US.

And I think that is largely

also a communication problem because now we're having a pretty big IPO, one of the biggest ever, which is a service company as part of the it's a very short it's a huge IPO. But there is also an investor base that knows how to analyze and follow that kind of company.

Whereas we're very light in Europe and too fragmented on looking at and analyzing and following tech companies that is so much more sophisticated in the US markets. And that's probably what needs to be fixed in order for the tide to turn and make the European-based tech companies also list in Europe.

If you weren't running Northzone, maybe you should actually go into European governments to go and fix all of this.

Yeah. At least we have a good dialogue with the European government on this particular segment because I think it's in everyone's interest to fix it. But at the same time, and if you look at New York Stock Exchange, the annual trading volume of New York Stock Exchange alone is significantly larger than all the European stock exchanges together.

And then they have NASDAQ on top of that. So it's a scale issue that I think we need to also bring together somehow.

If we can fix this talent opportunity, that might just move the lean either a little bit. But let's see.

Yeah, indeed.

Awesome. PJ, this has been so much fun. So many ways. Words of wisdom for founders and seeing what's happening on the horizon. So thank you so much for your time.

Thank you, Ollie. It's been a pleasure.