Who are the hipsters, hackers and hustlers of European VC?
We all know the famous triple H's of the start up world. But who are the equivalents in VC? Read on to get Joe Schorge and our's take on it.
Editor’s note: Last week, we unveiled the partnership between EUVC & Isomer Capital leading to a plethora of gratulations and fist bumps from friends across Europe (well received, thx everyone 💖). But it also led to loads of questions: why are you partnering? What will this mean for managers? And so on...
A key part of the answer to these questions is that we’re partnering to bring more and better content to the ecosystem - and in particular, content that sheds light on the LP perspective on VC.
And this article is the first of many to come where we join forces with Team Isomer to demystify how LPs think about VC(s).
We hope you’ll like it and invite you to let us know where you’d like us to focus our writings next 🙏.
These days it seems like everyone wants to be a VC. Between EUVC and Isomer, we meet with more than 5 new/aspiring VCs per week.
Honestly, there are more great new managers out there than we can back.
So for us, the challenge is finding the best early stage investors, because European entrepreneurs do not get their first professional money from the household-name VCs run out of the European super-hubs. They get it from what the local digital champions as they tend to have the most relevant value-add capital for entrepreneurs as they start out. A uniquely European characteristic that is only poised to strengthen as we're seeing an ever increasing number of specialized micro VCs coming up.
Luckily, we’re also seeing more LPs who, like us, are open to assisting new teams as a cornerstone investor. Governments in many European countries now have support and investment programs. Some startup accelerators have refit their model to work for the venture fund creation process. And some of the big VCs have also opened up (parts of) their playbook to aspiring and emerging managers.
And then there’s a growing trend of established VCs investing in new and early VCs to get privileged access to deal flow.
This is typically done as an LP commitment, either out of their fund or as a personal investment, but it can also take other forms such as a starter loan, cornerstone LP deal, or as a direct investment into the management company.
Given this increase in new VC fund formation, we thought we’d put to paper how we think about the most fundamental aspect any firm: the GP team and answer the question:
Who are the hackers, hipsters and hustlers of VC?
Who are the hackers, hipsters and hustlers bold enough to set up new VC firms and funds? There is no one formula, or one profile that dominates, however many of the highest potential teams we see include the three E’s: Entrepreneurs, Ex-investors, and Executives. Here's why.
They've been there before; started it, built it, and sold it. They're the Players-Turned-Coach. Obviously, not every great player can be a great coach, but their experience in going from zero to one, building product, getting to know customers, searching for product/market fit and securing the first rounds of capital is invaluable for any founding team. And from an LP perspective, they're often strong in their access to new and future founders, based on networks built by being insiders in entrepreneurial circles, with an empathy and rapport that is high from the get-go. And as VC is a game of access and winning deals, the shared entrepreneurial background can be an important advantage over other firms.
Aside from working with founders, all new VC firms need hustle - to generate a proposition, talk to the market about it, raise capital, build and execute an investment plan, a team, etc. And the Entrepreneur has hustle, and can be an important source of inspiration to fellow team members.
One of the first new VCs with this profile I was involved with in Europe was Atomico, famously started by Niklas Zennström, one of the founders of Skype.
At the time of the firm’s first institutional fund, the entrepreneur-turned VC was not common in Europe. More standard at the time was a strong finance or consulting background and track record investing. For some of the more conservative LPs, it still is. But today in Europe we know hundreds of VC firms that have at least one Entrepreneur in their partnership. We also see increasing numbers of LPs who show an understanding of the multifaceted skillset needed to be a great VC.
- Joe Schorge, founding managing partner of Isomer Capital
What's the caveat?
As so often, entrepreneurs' strengths are also their weaknesses. It's definitely not a universal truth that a great player will make a great coach. And as such, the big question is if they will transition into the new role well. Can they step back and learn how to use influence and to be a good board member rather than as a take-charge-and-action executive? Can they internalize that portfolio companies aren't theirs to run? We've seen plenty of entrepreneurs break into VC just to find out that they miss building. And that's when they either become meddling VCs or return to the operational side.
These come in two flavours - let’s call them; “The Angel” and “the Big VC”.
The Angel ran a program with their own money, but decided it would be beneficial to leverage other capital, networks and ideas, for which they need to raise a fund.
The Big VC is an individual typically at one of the high-profile large VC firms we all know, but they hit a block of some kind, and decide to leave to set up their own shop. The blockages encountered often fall in three categories:
Funds getting larger and investing in later stage deals leading to a discontinued focus focus on early stage investing
The partnership not having room or economics to share with upcoming talent
Disagreements on areas of focus or new investable innovations, etc.
We have heard quite a few stories, but what they have in common is that it can be super exciting and fruitful when the experienced Investor is freed from the Big Firm and enabled to follow their own vision and investment thesis.
As with the ex-entrepreneurs, Europe used to only have few star players of this profile. But over the last decade, we've seen a real uptick in the number of great investors spinning out of the VC giants, or growing organically from the many business angel networks across Europe:
At Isomer we've backed lots VCs with this profile, for example people leaving Accel, Index other well-known European firms, corporate VC and even family office direct investment programmes, as well as Angels that became dominant in their sector/geography and we are lucky to partner and help them on their journey of ‘going Pro.’
Obviously it is powerful that the Ex-Investor knows many of the ins and outs of running a VC firm; how to run thoughtful sourcing, DD and investment processes, work with founders, co-investors, LPs and so on.
The big idea 💡
But what we really love about this profile is that they often have an incredibly strong thesis. A big idea even. An idea that they've formed and really honed during the years they worked at (and typically got frustrated at) the established players.
We have many examples of ‘VC Unleashed’ in our portfolio, for example the experienced successful corporate VC who was repeatedly shot down at the investment committee for some of his best deal ideas. His anti-portfolio was flying so high he decided to leave a great job to set up shop with a partner. They’re now also flying high, with a top quartile first fund, strong team, and clarity of investment visitation. We have another similar example in the Crypto space, demonstrating the inability of some large organisations to pursue radical innovation internally, and there are at least two examples of women-led firms we partnered up with, where they were unable to act on their own particular deal flows and investment convictions. By backing them we not only get access to the unlocked talent of the Experienced Investor, but also to segments of startup/founder markets that are not served well, and therefore offer differentiated and attractively priced deals.
Finally, ex-investors come with rolodexes full of past co-investment partners and down-stream investors. These contacts are crucial for any emerging manager as their fund size will likely be on the smaller side, making it difficult to complete funding rounds alone, not to speak of carrying companies through the rough periods.
What's the caveat? This is the profile that's most likely to be an all-around player ready to run their own firm. But often, having worked in a big firm, they may also have only experienced one aspect of VC. For example, they may never have had to fundraise, or get involved in reporting, or fund accounting/admin issues that are critical, but back-office functions. Often they can be great managing partners in emerging VC firms, but if they're starting a solo-VC, there's the skill/experience gap risk. What is more, if their value-add is more generalist, they may be competed out of rounds because founders may look for more focused/specialised investors. However, in this case, they may very well be the best positioned to prep and lead rounds, which can also be extremely valuable for a founder to have done by an experienced investor.
The ex-executive typically worked in areas like strategy, business development, or product development at a big tech company like Google, Apple, and Microsoft. They came into contact with lots of founders and startups, maybe investing in them or even working within them at times - all at same time as they grappled with the problems and needs of the big tech company. What's great about the ex-executives is that they often know how to design and scale tech products, and they have a good understanding and network in the corporate landscape, which helps a lot in generating customer and exit opportunities. Understanding and accessing the corporate context is something the two other profiles often struggle to deliver, making the executives great sparring and BizDev partners to founders - and a strong addition to a fund investing in startups that sell to enterprise customers or where a trade sale is a likely exit path.
The executive VC is also a profile that we're seeing more of in Europe. Obviously, they share many of the characteristics of both the experienced investor and the traditional executive as they've navigated both worlds. We’ve backed Executive VCs focusing on areas where corporate understanding and involvement is critical, for example in the non-consumer side of Fintech, Industry 4.0, and deeptech computer science.
What's the caveat? For recovering big corporate employees there's a risk of over-applying lessons learned from a large corporation to a startup, over and above the personal adjustment of working and being effective without a giant support structure of corporate functions and budgets around. Big corporate resources are not available in the startup world, meaning very often the same solutions will not work. The executive sometimes works on different timeframes, with false expectations of business data precision. This can lead them to waste time on activities like excessive planning, process and reporting, which make sense only later in company development. What is more, if an executive wants to pursue the path of being a standalone manager, they must adapt to the cadence of investing as a closed-end fund all at the same time as they fundraise and run their fund - generalist multi-tasking that is vital for any new VC.
The VC Dream Team
So, just before we draw any clear conclusions here, just like startups, VC firms come in all shapes and sizes, there is no one formula that works for innovation. However, continuing with the thought experiment of forming “the VC dream team" would have:
An Ex-entrepreneur who has real-world startup experience, and contributes the unparalleled value-add and access that only those who have ‘walked the walk’ can;
An Ex-investor who contributes the trained muscle of having been in VC for years, with a deep understanding that underpins the thesis and operations the firm is built around;
An Ex-executive who brings understanding, scale and access to the corporate world.
Notice that we in this treatment have been talking about teams. While each of the profiles mentioned could work as solo GPs, the strengths and weaknesses that we would highlight for each would be different, as running a firm alone is very different from being part of a firm. Let's leave that for another time.
Thx for reading and being awesome 💗 we love you for it.