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EUVC Newsletter | 18.10.23
Fundraise strategies, navigating institutional raises, first closes and minimum viable fund sizes. I why you shouldn’t just expect recommits or govt money and advice to get off the ground ✈️
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Considerations for raising in the current market
We’ve done the hard work of teasing out the core considerations from our LP Roundtable on Raising a VC fund in the Current Market with David DANA, Head of VC Investments at European Investment Fund (EIF), Joe Schorge, Founding Partner of Isomer Capital, Christian Roehle, Head of Investment Management at KfW, and Michael Sidgmore, Co-Founder & Partner at Broadhaven Ventures by Broadhaven Capital Partners.
Let’s dive right in.
A change in fundraise strategies by GPs
As we all know, venture has undergone a notable transformation from what it has been in the past 5 to 10 years, but the changes have been particularly evident in the fundraising dynamics. Going to market today with the expectations of yesteryear will for most lead to sore disappointment.
One example of this change became clear when the Governmental LPs of the roundtable (KfW & EIF) described that new managers increasingly seek commitment from them before securing funding from family offices or similar entities, which we assume is largely due to the escalating difficulties that first-time teams face in securing funds. While these institutions don’t hesitate to back first time managers in that situation per se, they don’t do it for novelty’s sake.
Emphasizing the need for differentiation
While it’s almost too obvious to mention, this point seems particularly hard to internalize. So bare with us for restating, if you feel you have this 100% covered. Here we go. Competition is fierce so now more than ever, you must be uniquely differentiated and stand out from the crowd.
In our panel, Michael Sidgmore underscored a similar sentiment, emphasizing that LPs should be able to summarize the essence of a fund's strategy in just a few sentences. He illustrated this with clear-cut examples:
Goodwater: “Data-driven venture capital”
Tiny VC: “Indexed exposure to Europe at pre-seed and seed stages”
Lower Carbon: “Chris Sacca’s - 100% committed to climate”
Don’t take recommits or govt backing for given
In our panel, our LPs issue a stark reminder to fund managers regarding the precarious nature of presumed support, stretching from governmental to private funds and spanning new investments to subsequent fund iterations. The presence of entitlement, rather than a value-driven approach, is as a strong deterrent. Furthermore (and almost incredible that it needs to be said(!): coercive tactics or attempts to politically sway govt LPs do nothing but solidify any pre-existing reservations, potentially jeopardizing the collaboration.
A stark counter example to this behavior is that which Hampus from Pale Blue Dot describes in a soon to be released eu.vc episode when recounting how an LP enquired if there’d be any first close incentives. To this, Hampus replied that they don’t believe in that and if the LP had any reservations about joining first close, they should definitely wait for the final closing so they could work through that together. The LP responded to that by doubling his commit.
Understand and respect the complexity of institutional LPs
Navigating partnerships with substantial institutions presents its unique labyrinth. Fund managers must recognize that securing an investment partner's advocacy is merely the opening gambit. The institutional landscape is multifaceted, encompassing several dimensions such as risk management, compliance, legal protocols, executive leadership, and board governance. Achieving a harmonious consensus across these diverse segments is crucial. An initial nod of approval demands unanimous reinforcement from each internal department, a critical factor that accentuates the importance of maintaining momentum and consistency through these layers, especially in the current, unforgiving market conditions.
Navigating First close and Minimum Viable Fund Sizes
Fund managers must identify the leanest fund size that ensures operational viability. This consideration is particularly critical as the risk that the fundraising journey will extend beyond anticipated timelines is very high in today’s market. The notion of minimum viable fund sizes is not one only to apply to first time managers as a second time fund manager who raised Fund I in the hey-days might find the raise of this fund just as tough and unpredictable as the first one.
When planning out the first close it's crucial to meticulously calculate this close’s capacity, considering the potential number of transactions possible and our panel advised that managers apply a more conservative approach than earlier so the fund doesn't overextend its commitments. This market has seen bad stories written on the back of tiny first closes, often to the detriment of the first close LPs who backed them early. The last thing you want to do is risk their trust.
Early engagement and transparency takes the front seat
As always, to streamline the fundraising cycle, managers should initiate discussions with potential LPs at the earliest opportunity. Early engagement facilitates an understanding of LPs' perspectives and investment criteria, enabling managers to tailor their strategies accordingly. Similarly, building trust with LPs hinges on transparency. Whether it's responding to inquiries or disclosing performance metrics, clear and honest communication establishes credibility which is paramount. It’s often advisable that managers avoid overcomplication in their presentations, as directness often resonates more effectively with potential investors. For a great example of trust and transparency at play, give a listen this episode with Chris from Isomer and Alexis fro HCVC 🎧.
In these conversations, managers must prepare for In-depth Valuation Discussions as the ability to justify and defend portfolio valuations robustly is essential. Managers need to provide clear rationales for maintaining certain valuations, reflecting comprehensive knowledge of their portfolio entities and market trends. Proficiency in these discussions, including fluency in the relevant financial metrics, reinforces confidence in a fund's strategic acumen and is central to any sophisticated LP.
Getting off the ground: Advice for First Time Managers
Our LP panel emphasize the old adage to fund managers, particularly newcomers: actions indeed speak louder than words. To make a substantial impression and build credibility, managers must transcend beyond mere promises. Here's how they can tangibly demonstrate their prowess:
Facilitating Co-Investments: Offering co-investment opportunities serves as a practical showcase of a manager's strategic approach within a real-world fund environment. It allows potential investors to witness firsthand the decision-making process, investment style, and, importantly, the value-add that the manager brings to each deal.
Initiating Preliminary Transactions: Executing several well-chosen deals before the complete fund is raised presents a live portfolio that investors can assess. However, managers need to exercise caution with the use of Special Purpose Vehicles (SPVs) as a means of establishing a track record. Overdependence on these instruments might satisfy potential LPs' appetite for investment, leading them to skip participation in the main fund, an occurrence frequently observed among family offices.
Highlighting Relevant Expertise: Institutional investors often vet the fund management team's background for pertinent experience. Here, Samir Kaji's GP - Thesis Fit framework is a great tool, emphasizing the fit between General Partners (GPs) and the investment thesis. The team's history should resonate with the fund's proposed direction, ensuring coherence in strategy execution.
Showcasing a History of Successful Exits: In today’s market and the learnings from the past year present in every LPs mind, a record of deployment capital is just a starting point, but what truly distinguishes a fund management team is evidence of successful exits or fruitful portfolio oversight. Today, many consider it insufficient to merely participate in deals; managers must exhibit their acumen in steering these investments to profitable conclusions or stable growth pathways. This aspect attests to the team's proficiency in not just spotting promising ventures but also nurturing them to fruition.
That’s it for today’s learnings from the roundtable - hope they were useful! If so, please do share the message 💌
Stay tuned for next week’s edition which will lay out our learnings regarding Fund Terms and Conditions 📜
Rewatch the full roundtable below 👀.
Time stamps - Jump to what matters to you 👀
00:02:17 - Meet the LPs
00:08:55 - The Current State of the Market: Light at the end of the tunnel?
00:12:22 - Taking Time for Thoroughness
00:14:34 - The Challenge of Raising Funds in the Industry
00:17:08 - Challenges for Private Investors in Fundraisings
00:19:40 - The Need for More Private Investors
00:21:54 - Trends in the Private Wealth Channel
00:23:49 - The Strength of the European Ecosystem
00:27:42 - The Exit outlook in Europe
00:30:10 - Outlook for IPOs in Europe
00:34:38 - On Track Record Performance in European Venture
00:36:50 - The Potential Impact of IPOs on the Tech Market
00:39:13 - IPO Pricing Differences and the Future of Exits
00:41:26 - The Role of Secondaries in Providing Liquidity in Venture Capital
00:44:00 - Exit Strategies for Early Investors
00:46:27 - The importance of knowing your USP as a VC
00:48:58 - Building and Demonstrating Track Record
00:50:58 - Articulating Your Edge and Building a Team
00:53:24 - Evolution of Fund Terms and Conditions
00:56:01 - Creating a Smooth Road for Incoming LPs
00:58:25 - The Importance of Bringing More than Returns to Investors
01:00:39 - Building Relationships with Potential LPs, from HNWs to Institutionals
01:05:19 - Considerations on Spinning Out Firms
01:09:50 - LPs' Criteria for Investment Decisions
Put turnedVC on your watch list 👀
Our good friend Marcin Lewandowski is launching turnedVC today. Definitely one to put on your watch list 📺 Check out the trailer below.
We’re Proud to Be Part of CO-INVESTIN
We are excited to announce that we’ve joined forces with Found.ation, Booster Labs, Techcelerator & Tech Tour to launch CO-INVESTIN, an innovative initiative aimed at bolstering cross-border co-investment in emerging EU ecosystems, particularly focusing on the critical Series A funding gap.
Launching first in Greece, Bulgaria, Romania and Portugal and later expanding to at least ten additional ecosystems we’re looking forward to help catalyze robust cross boarder investment networks 🚀
To us, CO-INVESTIN is not just a project but natural extension of our promise to help deliver a more connected, inclusive, and dynamic investment environment across EU's emerging markets 💞
📺 Virtual events we’re hosting
Winning in The Secondaries Boom | 📆 Oct 31, 2023, 3:00 PM - 4:00 PM CEST
🤝 In-person events we’re attending
Hit us up if you’re going, we’d love to connect!
GoWest | 📆 6 - 8 February | 🌍 Gothenburg
Super Venture | 📆 4 - 6 June | 🌍 Berlin
Nordic LP Forum & TechBBQ | 📆 September | 🌍 Copenhagen