Highlights from this week’s conversation include:
Multiple Capital is Europe’s first tech-focused fund of micro funds, founded in 2018 by Ertan Can. The firm invests in emerging and solo fund managers across Europe and the U.S., focusing on overlooked opportunities in niche geographies and verticals. With a portfolio spanning over 1,000 companies, Multiple Capital aims to democratize access to early-stage tech investments and foster innovation. Learn more: https://www.multiple.capital/
Silicon Valley Bank (SVB), a division of First Citizens Bank, is the bank of the world’s most innovative companies and investors. SVB provides commercial and private banking to individuals and companies in the technology, life science and healthcare, private equity, venture capital and premium wine industries. SVB operates in centers of innovation throughout the United States, serving the unique needs of its dynamic clients with deep sector expertise, insights and connections. SVB’s parent company, First Citizens BancShares, Inc. (NASDAQ: FCNCA), is a top 20 U.S. financial institution with more than $200 billion in assets. First Citizens Bank, Member FDIC. Learn more at svb.com.
Swimming with Allocators is a podcast that dives into the intriguing world of Venture Capital from an LP (Limited Partner) perspective. Hosts Alexa Binns and Earnest Sweat are seasoned professionals who have donned various hats in the VC ecosystem. Each episode, we explore where the future opportunities lie in the VC landscape with insights from top LPs on their investment strategies and industry experts shedding light on emerging trends and technologies.
The information provided on this podcast does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this podcast are for general informational purposes only.
Earnest Sweat 00:14
So we’re here, live in Miami, Florida, at an amazing event that SBB is holding, and they are our experts, expert sessions this month, and I have the pleasure of speaking today with Christopher Holland. Christopher serves as the head of Global Solution sales and delivery at Silicon Silicon Valley Bank, a division of First Citizens Bank. Christopher has two decades of experience in financial services, mobile telecom and technology. He has held leadership roles at JP Morgan world play and American Express. His expertise is in Treasury services, merchant acquiring and global merchant services. Chris, honored to have you on today. So when I think of SVB being a contributor to the innovation economy, what is Who does your group specifically serve, and where do you see the opportunities over these next decade?
Christopher Hollins 01:17
I’d say we are focused on startup and Tuesday, all the way into VC funds for Global Fund lending and almost everything in between. The way I’d like to think about our process is we are a specialized, free, sustained international bank. You can think about what normal banks do to go across industry. They patiently add their flood and flood their kind of P and G model for what they do in the bank. And what we realized appears to specialization units to the choir in order to help founders and funders not only find one another, but to be able to actually accept what they do, and that you’re not going to get that from BCB or branch bank or even from a daily, competent commercial thing. So
Earnest Sweat 02:04
you talked about this customization first, that seems like you all have a lot of experience. That seems like a tall task. How do you actually support venture capitalists and these startup founders and finding what is the right product and right kind of like you’re not doing a one size fits all. How do you find that perfect box with it? I think what we try
Christopher Hollins 02:30
to do, a part of it, is create the equivalent of maybe finding the ones cheering card for anything. I like that, and the way I want to think about that is there is a specialized read. There is a desire to be a part of something that connects you to a set of experiences, a set of people. And it’s also a little bit of the signaling around how important you believe your business is, or how serious you are about that business? If we are 6% of startups normally come through SBD their bank of choice. There’s a reason for that, yeah, because they know that we have expertise within our bank to help people different than the typical commercial or hold the bank, that we have a network of funders and founders who they can also connect with, and I think also importantly, we try to spread Richard and our product, connect with those folks along innovation in a way that’s natural for the way they running their visions. But the lake does participating
Earnest Sweat 03:40
to it effects
Christopher Hollins 03:44
deposits, yeah. Then run primarily to help people optimize that, either through some money market stuff or some working capital. Yeah. That should all make sense, yeah. What we’ve done is we’ve tried to look at the industries you reserve or the lentil economy and make certain that in particular, those foreign elements are special of in a way that allows us to be a patient lender, allows us to do our due diligence, or more so than other banks would be comfortable in doing, and ensuring that we are captivating those clients To watch peak here. We’re not only the first time, we’re founders, but the 789, time founders, because that’s the bill’s algorithm. As someone who’s not trying to do everything for everyone, it
Earnest Sweat 04:31
makes a lot of sense. We’re seeing growth, despite the challenges in the fundraising market. Of course, a new crop of emerging managers I see, I see, you know, friends who have spun off of new older funds a ton of times recently. And we’re also seeing a lot of another big audience for our podcast, allocators go to direct investing. So directly investing in portfolio companies. So those two groups, what should they expect from them? SVB that can help their portfolio succeed.
Christopher Hollins 05:03
Yeah, I would say there’s a couple of functions. So we’re committed to the level rolling function. So if you’re and that’s being looking to deploy funds, or very least, you are looking for high quality founders, and we want to connect you in a way that allows you to just partner. I think the other reason is that, as you know, revenue became a large metro and left as well, that the innovation, the power only, doesn’t just run along the post. Yeah, it actually runs across the entire country, and actually, in fact, the world. But let’s just say it if I choose for right now, the only innovation time, and a lot of places around the country. So we try to do is be kind of that lighthouse so that, that beacon that people can come to, can find us and
05:48
look, we’re not. We don’t
Christopher Hollins 05:50
have 7000 branches, not our car, yeah, what we try and do is make sure that we are out on the Marcos internet that we do, we’ve been
05:59
alone over 30
Christopher Hollins 06:00
you left the special debt, you know, Cincinnati, St Louis, New Orleans, were very mind my hand, all of which are regional partners that are the typical North Beach store, California house. And we’re finding those readers and refreshing here, connected to, you know, the overall pulling behind how we live, unleashing and joining on a vision from a bank infrastructure. And most importantly, that most of this stuff began digitally when you were heading to generations of people accustomed to using their own digital means to actually manage all of your finances, not needing to go to a post. Yeah, and we’re able to differentiate that in that way. What do
Earnest Sweat 06:43
you see as the biggest challenges facing this, this crop of emerging managers, and how can SVB banking solutions help mitigate some of those challenges? I think
Christopher Hollins 06:55
there’s a couple of public agendas. First, there’s always matches, the capital issue, absolutely irrespective of who you are and the anti idiotic fish it comes from the thing that you can create if you’ve got to be the fine opportunity. Actually did that fun, though I know as a first year work career march back that the underwriting for meeting the clients that we have would never occur, yeah, just because the folks of what the heated gear, the crumbling, the way the company is stuck for, is just not consistent with the way multi direction. So we find, except in there, we are accepting that, looking at data of what, and understanding, okay, how completely you want helpful g, in order to think about a capital whole line or a lot of credit to be fixed, about how what you can l, things, we’re stepping back and Looking like, what’s the portfolio underlying asset, as opposed to their personal assets. Those are hard ways to kind of cope all the aperture of where we could potentially provide a funding opportunity and look risk you are due diligence is not an easy way to get through that environment related to funding from us, but we feel like we’re touching on all of the correct points to ensure that we’re bringing the vast and most fair shot of having an opportunity to finance layups. That’s what the opportunity reflects, makes
Earnest Sweat 08:33
awesome, and I can see how those are your core go, tunes and expertise in innovation economy outside of financing, what other you know, things can SVB provide as bankers? When I see that there’s a movement to look in all functions and industries of doing more than just kind of like what your bread and butter is,
Christopher Hollins 08:58
I think one of the things we’re most proud of and we’ve actually done more.
09:03
Someone
09:10
called the
Christopher Hollins 09:11
Digital Washington really went to our car and said,
09:17
What is it about digital, black and then local and water, things that are we
Christopher Hollins 09:22
found is that the Abi ravation of action, the associate who will hang mentioned, will actually avoid a lot of things and thoughts as a pet to see them. How about awarding a series of companies thinking about, I have all of which stuff to manage. How can I do that seamlessly through my banking app, and say, we’ve built that energy, our CO bills and then made that purchase scale all the way to your larger East farms and join site actually do? For us, it gave us all unique words of being able to sell what our capabilities are and actually prove that there is special resolution within the innovation economy that can show up in the projects and services that we provide. And it also forward we would just like track the amount profitability and growth standpoint for the large VCs that had many portfolio companies, gives us an opportunity to market directly to them, because now we have a seamless way for a VC to actually see through your portfolio if they have their all their portfolio companies of making investment. So there is to be a benefit
Earnest Sweat 10:38
to us. You know, throughout this conversation you’ve spoken I can sense that SVB actually listens to their customer base, as you told me, in even building the SVB go, what are people clamoring for now, especially when it comes to like Treasury services and liquidity solutions from VCs as well as their portfolio companies,
Christopher Hollins 10:59
what we’re seeing is abilities. Can manage instant payments. Obviously, you know, we’ve called real time getting much of our others. We are on, I’d say we are on the practice of being able to just to have that function now or more consistent across the platform, when you think about the ability to actually understand what we need to maintain to be able to pay it immediately is also a recipient when you’re funding your portfolio companies, that when you say they’re going to have that money that they actually have, that they don’t have it two days later, you want to also make certain that you are tightly managing expenses and having ways to pay and one process, being able to see that not having to go to 50 different applications in order to manage that companies, whether you are founder on your so they’re maybe a theorist be you’re not running around with 150 employees. What you have is a room that has 10 of it to people it’s focusing on, but yeah, like you have to be able to manage that more effectively. And what we’re trying to do is ensure that all of our clients have the most efficient way of doing there, and that actually to serve the kind of elite potatoes on how you actually get free or that you pay out, yeah, and that still is a function like, you know, this is the last 15 years. It’s been kind of always lost in all types of applications to do that. And so while any one application you are super helpful back in management, when you’re managing your companies. You don’t have time to buy those 15 things. You all will need some consolidation. You need some way, either through the eyes or other functionality. You know, indeed, you see that in one dashboard. And that’s the direction that we’re going. Let’s say, also on as quickly as is a big buzzword we want to hole in the way that we are going to put that outward skin to market. I think that there’s ways to gather information as a researcher, from an AI perspective, but we want to be super careful about anything as transactions today, especially because we’re here to manage risk, because for the reason why you need deposit money with them is because we are looked at as being able to protect a your any risk on the downside and be able to fold that money. And we don’t want, you know, automatic withdrawals and things happening, they show some decision set for an AI coding issue. You stop walking. Yeah, and that actually goes against safety and sound messes with me.
Earnest Sweat 13:42
Absolutely So in today’s episode, we’re blessed to have Bertan Chan, Founder and Managing Partner of multiple capital Europe’s first tech focus fund of micro funds, he’s pioneered in the European venture capital landscape with over 20 years of experience, and today we’re going to, luckily have him speak about some lessons learned from trying to do venture within a family office. Insights on the rise of solo GPS and micro VCs in Europe, and how to navigate the Europe European fragmented but promising ecosystem. So with that, veteran, we’re happy to have you swimming with alligators.
Ertan Can 14:27
Thank you, and it’s great to be here, looking forward to speaking with you guys about that topic. Awesome.
Earnest Sweat 14:33
So first, we always like to start with how someone got here. So could you just explain to us your experience and how you got to the kind of allocator world.
Ertan Can 14:45
Yeah, so I, I’m born and grew up in Frankfurt, which is, you know, for the US, it’s one of the major financial cities in Europe. And interestingly. I ended up very early on in the fund industry, but not in the private markets or venture capital fund of the fund industry. So it was old school, fund of funds and and always criticized the idea of, you know, fund of funds for mutual funds. It doesn’t make sense. It’s an added layer. Everyone has access to all mutual funds now, when I and then, at some point, I had an opportunity to work for a family office. So I moved, you know, after a few years in the asset management industry, I moved to a family office, and at that family office I was hired to do venture. So I never did venture, and I had no clue about venture, and they wanted me. They wanted me to invest directly into early stage startups. And so I like the job. And I said, Okay, if you, if you believe in me, if you believe I can do it, I would love to do it. But so I started investing for this family office into VC or startups, tech startups, and then very, very soon I realized I think it’s probably not the right thing to do. So that’s what I you know, I went back to the family and said, you know, if you if you ask me, I probably suggest to stop that right and I don’t think that I’m the right person, you know, with no tech background, no real investment background in early stage startups and going and looking for the right startups and getting access to them. And second, we as a family office are not the right setup to compete against the top VC firms or top angels to get allocation into early stage companies. So it’s, it’s like, and the adverse selection risk and venture is extremely high. So you know, we are risking the wrong assets. Because you can be like 90, 90% of the time you can be in the wrong companies, and only 10% of the time you are in the right companies. And you need access to the right companies. So what I told them is, they should probably stop doing this. So. And they said, Okay, thanks, Adam, but what now? I mean, should we fire you? Right? And I said, No, I have another like, I have another idea that I would like to propose. And I said, let me build a Pan European fund. Fund. Instead of investing into German startups, I have a fund of one background. I think I have an allocator background. I understand that quite well. And I realized that compared to the mutual fund from the fund business, where mutual funds are transparent, now, this does not exist in venture. So venture is extremely intransparent. There is no Bloomberg for venture. You can’t go in and compare the funds and then call your bank and say, you know, I want to have one piece of that fund and one piece of that fund, and then trade and buy and sell. So I just realized it’s inaccessible in a transparent market. So a funder fund in venture makes a lot of sense. So I convinced them to start a funder fund instead, you know, to invest as a funder fund instead of investing into startups. So that was like the birth, you know what I of, what I call multiple one. It was still at the family office. It was a single LP, but it was my first portfolio, investing into what I call, back then, micro VCs. And the idea of micro VCs. Interestingly, I came from the US, right? So in the US, micro VC back then was already a thing, and fund of funds, investing into micro VCs were already a thing. So sandana just started around that time, and so I just copied the model of sandana. It made a lot of sense. It made a lot of sense to me, but applied it to a European ecosystem. And I think in Europe back then, the venture ecosystem was relatively small, you know, if I compare it, I think looking at small VC funds, investing at seed stages that are relevant enough, there were maybe 50 to 100 Max a year that I screened. So that was the whole ecosystem in all Europe, right? So it was relatively easy back then to screen the whole market to learn. I learned already in the first year I had that funnel fund background. I learned in the first year how GPS think, how VCs think, how startups think. So I think the combination of that and back then I was literally one of the first ones doing it. So no one knocked on doors in Finland on funds, VC, funds, emerging managers, and said, I’m a guy from Frankfurt, Germany, and I’m interested in your fund. They were like, completely like, surprised, right? And they said, No one ever knocked on our door outside of the country. That’s the typical thing, by the way, still in most of the European markets that, you know, a French VC fund typically raises from French investors. So German VC funds most of the time are raised from German investors. Even UK VC funds most of the time are still raised from UK based investors. And that’s, you know, the smaller you go, the more that’s the case, that the majority of their investors are local investors. Dollars, and back then it was even, even worse. So I think in several of the UK funds I’ve invested in, I was the only non-UK investor in the best performing fund that I’ve invested in, and they were a franchise product of a German brand. So all of the German LPS saw that fund, but it’s an Eastern European franchise. So all of the German LPS saw it. No one invested, except for me, right? So, and I think the whole idea was not that I’m smarter than the other German LPs. I just had the vision or the understanding that it’s not enough to invest just in German VCs. We need to build a Pan European portfolio to cover what, I think, a Pan European mandate, or a Pan European opportunity,
Alexa Binns 20:48
lots of foresight and self awareness, so that everybody
Ertan Can 20:54
and look, you know, it’s, we could have been all wrong, right? So it’s, it’s not like that. It’s a bet. It was bad and it went really well. But in the end, I was, of course, not sure that it would end well. In the end, what you do is you compare the data, you look at the data and does it make sense or not? And like the data shows that small funds outperform larger funds. Now it’s small funds. There are lots of small funds. You have to be in the right small funds. Now I did, let’s say the effort to improve the probability of being into some of the better small funds, that’s my work. But in the end, I think the real thing is still just the base fact that I’m investing in very small funds that invest in very early stage companies, and that the portfolio is so diversified that we always hit some outliers, and those outliers bring what we call power law to the portfolio. So if you have power law in the portfolio, then it doesn’t matter if it’s a US portfolio, it doesn’t matter if it’s a European or Asian portfolio. Asian portfolio. If you have companies that are outliers, the whole portfolio tends to perform really well.
Alexa Binns 22:08
Did your strategy change? Or were there any lessons learned going from the kind you described as multiple capital, 0.0 within the family office, to When this became your own fund.
Ertan Can 22:24
So lots of learning, I thought. First of all, I thought, based on the success of this first multiple portfolio, I thought it would be easy to raise money. And first learning was that was probably the most underestimated, hardest part of raising a multi LP fund, especially a funder Fund, in a market like Europe, where funder funds were very new, and most LPS were not really keen on investing into a fund of funds. Those who are interested, you know, are always keen to speak with me, of course, but more like it, and let’s build synergies. Let’s co-invest, let’s, you know, show us the funds and we can invest in them as well. Well, that’s not my business. My business is to raise money from you so that I can allocate your money into the funds. And I think that took me like that, one of the biggest learnings and surprises for me was that performance alone and being right and being lucky and all the things, at least in the European market, is not a guarantee to raise capital. I think several people told me, if you would have been in the US with this kind of track and with this kind of focus, raising a second fund, having these kinds of numbers behind you, it would have been probably much easier to raise. I don’t know. I know that in the US, it’s the same thing for a lot of emerging managers. That is not very easy to raise, but, um, but that was like, one of the big learnings. And the other learning, of course, is investing from a family office with a balance sheet from the balance sheet is very different to to investing into, like from a multi LP portfolio, we have different interests and and then you invest as a professional fund into different jurisdictions, which, because Europe is not one legal framework and one tax framework. So I think that we had a lot of learnings, like in the second fund from 2018 to 2022 on investing in different jurisdictions, different legal jurisdictions, different tax frameworks, and applying all this into one fund of funds. I think that was like the professionalizing part of our learnings. And other things that happened, of course, is the market changed a lot. I said, you know that in the beginning, I looked at 5050, to 80 funds, or something like that, per year. Today, we’re looking at roughly 1000 funds per year and we don’t even think that we capture the whole market, so it’s. Real part of the market. So if you’re focused on emerging managers compared to established managers, emerging managers, we are in a time today, at the moment, and I think Europe and US, there is not a big difference. Everyone wants to become a VC. So every operator who works in the tech industry wants to become a VC. Every Angel wants to become a VC. Every family office guy wants to become a VC. You know, every VC who works for a larger brand wants to spin off and become, you know, a solo VP brand. So there’s so many people in the market at the moment who are in every COVID vc guy wants to become a VC. And so there’s so many people coming to the market who want to raise a fund, who want to be a VC, and again, it’s a natural selection. Most of them will not raise a fund. So that is, I think, very different from, let’s say, looking at established brands. Because established brands are there already. They exist already. They know they will raise. So if you’re looking as an LP into an established fund market, it’s maybe 10% of the emerging fund market. The emerging fund market is much, much larger. So if you claim to screen the whole emerging markets ecosystem, it’s a much bigger task, in my opinion, to screen all the fans and have an understanding. And secondly, you don’t have any track. So you don’t have to like established managers. You can, you can play it if you know, in the beginning, as I said, the mutual fund of fund business, you can, yeah, you can. You can ask them for all the details. You can ask them for the track record. And then you can compare, you know, you can build shields sheets and say, you know, okay, we compare the track, who was the best track. And if you think that repeats, which it doesn’t, in my opinion, you could select in the past, at least best performing funds for emerging managers. That’s not the case. So you don’t have a track record, you can’t compare. You don’t have these kinds of numbers where you can say, Oh, now this gives me a lot of safety most of the time, if it’s not a solo GP. And I think it’s one of the topics that I would like to maybe speak about later on. If you have a team, it’s most of the time a first time team. So you have the risk of, you know, investing into a first time team. And data shows that a lot of those first time teams are not. It’s not realistic to expect them to stay with the same team for the next 10 years, or 12 or 15 years. You know, that’s typically what a fund lifetime looks like. So there’s a lot of risk involved. But again, screening the whole emerging market manager market is a much, much larger volume of funds that you have to look at, and it’s different things that you have to look at. So it’s not track and KPIs, but it’s more like, you know, vision and and kind of what is really the differentiator in that GP compared to the others, and why would I invest in them and not in the other 90 or 99 that I see?
Earnest Sweat 27:52
Arlan, you mentioned that you know the complexity of starting a fund to fund in a Pan European one, right, like the tax issues, the or barriers, the legal kind of barrier as well. Could you speak to how things have changed and made it more of an interesting opportunity for especially for like you across the pond, US investors to look at the European market.
Ertan Can 28:27
So I think what I’ve said for years now is that US investors typically are, you know, if you look at companies that are successful in the European ecosystem, most of them have US investors investing in them. I think the seed round again, we’re talking about, I don’t know, 10,000 plus companies. It’s not realistic. And most of the time, we don’t see us investors coming at seed stage in a lot of companies that you’re in Europe. But if you are a successful company, raised seed rounds in Europe, and you’re raising an A round, latest at your B round. Of course you will have international investors, including US investors, just a very natural thing. And then again, if you look at the exit market, and that’s also one of the claims that I have, I think it would be stupid to say, you know, European companies have to be excited in Europe. I just, I don’t understand that claim that a lot of Europeans have sometimes. And I’m a European, right? I’m Turkish by background. I’m born in Germany. I’m probably, today, more German than Turkish. I live in Luxembourg, so I believe in the European ecosystem. I call myself European So, but it will be like if I’m an investor in a company of shares in that company, and I want to accept that company. Why would I push that company to make an IPO in Frankfurt and not on the NASDAQ? So of course, I have an interest that the company will do an IPO on the NASDAQ. So it’s not like a limitation. It doesn’t say just because it’s a NASDAQ IPO, that European investors can’t participate in. That success of the company. I don’t think that’s the case. So it’s an opportunity for us in the European ecosystem that we benefit from, let’s say, accessing the companies in the European ecosystem as early as possible. I believe the tech companies today can be created anywhere in the world. It’s not, it’s not limited to any regions. So the best tech company in our portfolio is from Romania. So back then, when we invested in Eastern Europe, Romania, Romania had nothing to show zero. So my LPs, that was the only time when they questioned me they said, why would you invest in a fund that invests in Romania, Bulgaria, Turkey? It’s just that nothing happened in those countries. I mean, there’s no track, nothing. And I said, Well, that’s maybe the reason why it’s an opportunity today, right? Because nothing happened. It doesn’t mean that this will stay like that. So I think again, Romania, Bulgaria, Eastern Europe in general, is a great pool of tech talent, and it’s just that it would be unnatural, and you don’t have a lot of alternatives. You don’t have big companies paying you a 100k salary after you’ve graduated from school. The only way to be successful financially is and most of the time, most of the time, and still is, to found a company, or join a company, a tech company, and become a founder, or, you know, grow with a company. So that’s that’s still the case in most of those central eastern European regions, including the Baltics, for example. And so I think what I wanted to say is to conclude that the exit market is still the US, for us, in many cases, for the successful ones. So that means that we profit from entering the companies at in most times, most of the times, at lower valuations in the European market, which is a fragmented market, it’s difficult to access, but exiting the companies, at least for the super successful ones, of course, it’s a natural us exit, or at least they are competing as well, and you have potential buyers or An IPO market in the US
Alexa Binns 32:00
you’ve described Central European, European talent as one big opportunity. Are there other things that US investors might you know that you’re excited about that you might be able to share with us on whether it’s categories or themes or, you know, places, places where the market you’re looking at is really stand
Ertan Can 32:19
out. So I think it’s, it’s still so for me, it’s a game of, kind of an opportunity in Europe, in most of the case, the success stories start as you know, big fish is in a small pond. I think what the benefit for a funder, fund like us is, and how we differentiate, and how, why we think it’s still an interesting thing to do is we are in a very fragmented market. We believe that tech talent in all Europe, and I repeat myself, but all over the world, is available. So talent and technology is available all over the world today, but especially, of course, in Europe and starting a technology company, as you know, as well, like as the whole US market, fortunately enough, knows you don’t need a lot of capital to start a company. Today, you can be three engineers sitting in Romania and start a company that can change the world. And that is, you know, in today’s world, anywhere, that’s the possibility. So we, what we do is we capture that opportunity as early as possible. And I think this is, again, if we talk about, you know, US investors showing a lot of interest at the A rounds the B rounds the C rounds, participating in those companies that are, of course, coming out of Europe. So no one would say, you know, we’re not investing into a European company because it’s European, or Iranian, or Lithuanian, or whatever. So if it’s a red company, then of course, you’re interested as an investor to participate in that story. And those stories existed hundreds of times in the last 10 years, in the last decade. And it’s a flywheel that started late compared to the US. You know us started three decades ago, maybe or four decades ago, and Europe, I would say it’s just one or two decades where the flywheel started. But of course, it helps. You have many more founders. You have many more angel investors. There’s much more education willingness to back tech companies. You have many more VCs today. You know, again, 5060, that invested at seed stage to 500 to 1000 that invested at seed stage, right? So it’s a completely different market, I think, still with lots of disadvantages. So our job is not that we don’t think that the whole European market is great. We don’t think that everything that happens here is great. What I’m doing and what I’m proposing or saying is that there will be some outliers in the European ecosystem. There will be many others, because it’s a huge ecosystem, right? And we want to participate and try to identify, first of all those funds, who could participate, and identify in the companies, and when we do a relatively good job, then it’s just by this. Nine relatively, given that we have a portfolio that will work quite well, and I’m always talking about the you both know, 500 startups. The idea behind 500 startups was to invest in 500 seed stage companies and to have one to 2% outliers. That’s the power law, right? So five to 10 companies out of 500 will be outliers. And interestingly, you know, in 500 startups, I know at least one case, which is Canva, which was an Australian company. So, you know, it’s not all happening even for 500 starters back then, not all happening in the US. And I think, look at this kind of outlier and this kind of numbers, we have 1300 companies in the portfolio, and we have 24 unicorns. So it’s exactly those almost 2% that 500 startups 10 years ago pitched when they came up with that data set and said, you know, if you invest in 500 startups, you have at least 1% outliers. If you’re good, 2% outliers, right? So, and yeah, interestingly, we have exactly that 2% from seed to unicorn. That’s also mind blowing for me, because it’s kind of a proof of the whole idea of building a large portfolio and having these kinds of outliers. And if you have them at seed and they become unicorns. So in some cases, even Dec and corn, then the whole diversification model works. So it’s still a very good portfolio, because you enter them so early that the winners pay for the rest. And it’s not that you write off 99% it’s still like 10% to 20% exit double companies. It’s not that all of them become unicorns, but still, a 200 million exit is a solid exit if you had entered the company at a five to 7 million valuation. So I think this is most of the time not understood at the moment in the European ecosystem. I think it’s much better understood in the US ecosystem. So because there’s much more experience with these kinds of data sets and that is probably, you know, when I say or when you ask me, Why is Europe interesting? ” I think US investors understand the data in Europe much better than most European investors, unfortunately. So that’s probably the chance, or the opportunities for US investors participating in an ecosystem where they understand that this kind of data is possible.
Earnest Sweat 37:20
Erlan, how do you know, with such a wide range of funds you’re looking at and fund managers you’re meeting, what kind of criteria are you looking for? And I know, you know, looking at your website, and other times you spoke publicly, you’ve definitely been in favor of a lot of emerging managers and solo GPS. And so how do you determine when each of them could be looking at different markets or different verticals?
Ertan Can 37:51
So I think we have some hard facts. The hard facts are relatively simple. You know, we look only at small funds. So if someone pitches us a $ 100 million fund, it’s like a quick No. We only look at seed stage funds. So if someone says we do seed and it’s a quick No. Someone says we are a debt focused fund. It’s a quick No. Someone says we are multi stage. We want to do a secondary set growth stage. It’s a quick No. So lots of those quick notes lead to, realistically, very few, not very few, but a larger number, a smaller number of funds out of that 1000 universes, let’s say. And then, of course, there are lots of funds that we wouldn’t consider, as you know, good enough to continue. So it’s another quick note, quick notes that we have. Finally, I think we end up with a number of maybe 100 funds per year, where we go deeper, where we have conversations, where we have called, where we do reference calls. And then what we try to do is, in the end, we try to identify either a geographical so, you know, a fund that is focused on a geo we call them local winners, you know, as a generalist. So they would, let’s say they would do the Baltics, right? So someone who’s trying to be the local winner in the Baltics, and that’s quite there, was quite common for us in the past as well. So we did a lot of those funds that were geographically focused, or Meanwhile, in the last six years, I would say it’s a new large proportion of sector or vertically focused funds. We call them niche funds, and that’s more Pan European, focused geographically, but very narrow in the theme that they are investing in. That could be an AI fund in the past, in the past that were deep tech funds we had, you know, it could be a gaming fund, a life science fund, etc, where we think these are seed stage, small funds that claim to focus on an area, area where they are better. Then the rest, where they differentiate, where they build a brand for themselves, where founders and other VCs would say, Oh, these guys, they understand the topic better than the rest. And would be invited, for example, by local generalists, not if you are a Baltics based local winner, you see an AI company. You’re not deep in AI, you might think of the one or two funds that you think are really deep in AI, and you invite them to the round. So the one two funds would not identify the AI company by themselves in a different region. It’s very difficult. But if you build a brand around yourself that you’re invited by other VCs or recommended by founders, then this is like the moment where we would say, okay, that makes sense, and now we are betting, yeah. Now are we, are we right all the time? No, of course not. It’s, it’s, you know, it’s, it’s, it’s, it’s almost, if you would be right all the time, I wouldn’t be, you know, I wouldn’t be raising capital. Let’s say, like this, yeah, so yeah, but that’s in the end, I think the way how we break it down and select the portfolio. And we’re still what we will call a, you know, an ultra diversified fund. So we do 10 to 12 investments per year, and in each fund of fund, we have roughly 30 to 40 investments. That’s, that’s a rather large portfolio compared to 10 years ago, you know, I think we just adapted to the market a lot. That’s a lot of, you know, a lot of time this is asked by LPS and why did you like it? Why did you choose to increase the number of funds today? You know, compared to 10 years ago, where you did like, one or two per year, and now you’re doing 10 a year, because the market exploded. It’s not possible to have one or two funds and to cover all Europe anymore, right? So, or back then, 10 funds and to cover all Europe. Back then, there were no specialists, so it was only geographical focused funds, and there were less funds. It was easier to cover the market because there was not really a big competition. Today. There’s so many specialists. It’s so competitive, and you have so many regional as well as vertical specialists. You need if you want to cover that, you need a different number of funds today, in my opinion, just to give an example, if you want to do blockchain and crypto and blockchain, you know, as a Vc, Vc theme, it’s not enough to have one blockchain fund in Europe and cover everything that’s happening in Europe. It would be, you know, not very intelligent to think that today maybe five years ago, because five years ago you had maybe five to 10 blockchain funds, and you could have done one or two bets. Today, you have 50 to 100 blockchain funds in the European ecosystem. So how do you select only one and be in the right one? We don’t believe in that. So we still do, every year, one or two blockchain funds. Same for life science. It’s, I think, not enough to have one life science fund, so we have to do a few Life Science funds. Deep Tech is a very, I don’t know, it became a very hot topic for us, so we didn’t expect that. But the proportion of deep tech funds in our current portfolio is much higher than compared to before. But what we do is, we’re, we’re in general, we are agnostics. You know, we don’t believe in anything. So we don’t, I don’t say that blockchain will outperform life science, or vice versa, or deep tech will be the next thing. What I say is, wherever I see the best, most convincing GPS, GP quality, wherever they tend to be. That’s the place where we want to bet. And sometimes in some years, these are blockchain GPS, who are just in our opinions, smarter, more convinced in what they are doing. And sometimes it’s a very, very focused Life Science GP, or in in the last 12 to 18 months, I would say in Europe at least, it’s deep tech VCs, you know, deep tech GPS, solo GPS, who are extremely focused on deep Tech with the right background, the right mindset, the right focus. And if you see that, and that’s a big differentiator from the from the, what do you call them? From the everyday fund, right? So when, when a fund looks like 100 other funds that you’ve seen, even the deck is similar. The topics are similar, the brand, you know, everything is similar. There’s no differentiation for me, you know, it’s like not enough. But if then you have someone who is really differentiating by being focused on extremely narrow things, and have the right background to do that, and that is extremely convincing, that he might find the next you know thing that’s relevant, and founders confirm that, then this is the kind of bet that we are willing to do. It’s a narrow line, and it’s at the end of the subjective decision. So it’s not like, it’s not like a hedge fund or something, that we can’t be ultra quantitative in the end, we narrow it down, but in the end, we still have to make a decision where we like the people, where they’ll it’s a better relationship that we have at the. Um, things like, unfortunately, site letters, you know, legal jurisdictions, tax mindset, fund management experiences also play a role. So you have sometimes great angels or founders who never manage the fund, and they’re not like, sometimes that’s missing. So, yeah, that’s, that’s the that’s, that’s that’s the process of selecting the funds for us.
Alexa Binns 45:23
You mentioned that you prefer solo GPS. What’s the argument for the solo GP?
Ertan Can 45:30
Yeah, that’s an interesting topic. And I think the US is already much more experienced with solo GPS. I think the first solo GPS we saw in our market is maybe 2017 2018 and before that. So when I started in 2012 there were no solo GPS. So the first batch of funds that I’ve done did not have a single solo GP, not even seen a solo GP. The whole trend started in 2018 will be added again and again to a solo GP. And our thinking is, and I will, I will come to the current fund, you know, and what the percentage of solar GPS is in our current fund. Our thinking is that, I think, mentioned in the beginning that if you invest in a new fund, and it’s a team, most of the time, the team is also a new team. So it’s not an experience, you know, working together as a team, and it’s a partnership. It’s not, it’s not something where you can hire and fire people, in my opinion, and there’s always a risk, if you have a new team, that this new team will not, you know, have a conflict. And unfortunately, what I see in the market is that this happens more often than people think. So, the whole team risk is eliminated in a solo GP, why there is no team so you can’t have a conflict with someone else if there is no one else. Now what we are talking about, what some LPs are talking about, is about team risk, if something happens to that one single person, right to the solo GP. Now we are talking about life insurance risk. When we are talking about something that can happen to that single person. Now, life insurance risk, as you know, you pay $100 and are, you know, you can probably insure a million dollars with $100 premium. So it’s, it’s a very low risk that something happens to a 30 to 40 year old solo GPU is healthy today. Of course, there is a final risk, but the risk, compared to a team conflict risk, is tiny. So that is the risk that we accept. You know, something like that can happen. And I think, in my opinion, for the funds that we do, this risk is also only limited, really, for the first three to four years in the investment period, because most of the time those small seed funds don’t play a huge role after in the company. So it’s not like that. They are supporting the companies day in day out, and play an operational role and have to be on the board. No, it’s seed funds pre seed. Seed funds that invest that are maybe over one or two irrelevant until there is a round and there are larger investors coming in. So for us, the kind of risk that is involved compared to a team, risk in a new team is smaller in a solar GP. And what we believe in is the ability to have a strong opinion and to make decisions without having committees and consents, etc. So if you have a strong opinion on something, and you can convince us that you are a good investor in investing into various ventures, then a solo GP has, in my opinion, a great advantage compared to teams, because you can decide quicker. You can believe in your own opinion. You don’t have to share it. You don’t have to get conviction by others. So that is a benefit. And to say, in numbers, currently, I think 80 to 90% of the funds that we are investing in are solo GPS. It’s a natural process. We don’t want to, it’s just again, like we are agnostic and don’t want to do more deep tech. It’s a natural process that we did more deep tech, and it’s a very natural process that we do more solo GPS. They’re smaller funds most of the time. They can be smaller because they do not have a larger team. They’re very focused. They’re very clear in their vision, in their theme, in their thesis. And that helps us to decide and be convinced by one person who is strong enough, instead of trying to believe in a new team, where most of the time the team is set up because some public investors want a team behind it. So it’s an unnatural team, right? So it’s not the right setup. Most of the time those teams were probably better solo GPS, if they would start solo or single, then acting as a team. It’s a kind of as you know, in the European ecosystem, the biggest LPs are government LPs. You know, by number, by capital. So government LPS have a huge influence on the emerging manager scene. Government LPS always. Expect to have a team so they are not back in solar GPS because of the risk of solo GPS. Now this leads to that. This leads to these unnatural, in many cases, unnaturally created teams, because the government LP expects you to have a team to apply for capital. And I think that that’s not the right thing, or, in most cases, not the right thing. So that’s our take on solo GPS.
Earnest Sweat 50:27
It’s fascinating. And so I’m curious. Ertan, as you have, you know, kind of grew up with this European market. What do you anticipate is going to happen over the next 10 years. It, you know, if the US is an indicator, we’re going through this kind of seed fund, you know, market is becoming more institutionalized, more competition, more larger players going into that space, and it’s caused a lot of competition and a lot of high prices, and so it’s caused kind of this gap between seed and Series A, and graduation rates going down a lot. So what do you think that’s going to happen today in the European market? Or do you think something different is going
Ertan Can 51:16
to happen? You mean the graduation rates from C to A, yeah,
Earnest Sweat 51:20
because of so much capital going into seed and becoming more institutionalized.
Ertan Can 51:29
So this is a process that already happened, in my opinion, when I say institutional VC funds, right. So now, not talking about large VC funds, I don’t know exactly how that is currently in the US. We still think that seed, in most cases, is a game for small seed funds. And even though some larger VC funds also play the role of, you know, being a multi stage fund and also doing seed, I don’t see them very successful in seed, and it creates, it can create a conflict for the founders of those larger brands who back you at seed stage don’t follow in you’re a round, it’s a very bad signal, in my opinion. So our recommendation for founders is always to have specialized seed funds who are focused on seed, and then ideally have a fund who is focused on a and so on and so forth. So the graduation rates from C to A, I think that’s probably similar to the US. I think it’s it. It decreased over the last you know, let’s say one, two years. For me, it’s a very natural process. We’re not timing markets, so we’re not believing in timing markets. So what, what we believe in is allocating to venture. So allocating to venture means we try to invest currently, every year in 10 funds, you know, every vintage, because we don’t know what will happen in five to 10 years. There is, you know, if no one can tell me which of the companies in my current portfolio will be the outliers in five years. And because no one knows, we don’t want to play that role of being smarter than everyone else, saying, Oh, this year is a bad year, we will allocate less, and next year is a great year. We will allocate more both years we don’t know, and we might miss the biggest vintage adventure by having this timing thinking. So we don’t time markets, we don’t time the same thing vertically. So we don’t believe in specific verticals being more successful in the next five to 10 years. I think venture is a surprising business. If it would be not surprising, if it would be, you know, quantifiable, then there would not be these kinds of returns in venture for the few companies that would be surprising. So in the end, it’s about investing in something that you don’t know today. And that’s why you know we believe we have to invest every year. It doesn’t matter if, if the markets are better worse, if there is more capital in the markets or less, if there is invested more in seed or less, if there’s more grad if the graduation rates from seed to a are great, like in 2021 or not so great, like in, let’s say 18 or now in 24 and 23 doesn’t matter, because venture is still an outlier, a power Law game. So it’s not about surviving or having graduation rates for all of the companies that we have in a portfolio. So we expect 1000 companies in each fund. It’s not about all of them being successful. That’s not the game. It’s unrealistic, and it’s, of course, not happening, right in reality. So it’s all about hitting the 10% that can become an outlier, you know, or the one or 2% that become the super out layers. So the rest, unfortunately, is also a failure, or kind of, you know, not really returning a lot of the capital, maybe a few, a proportion of the capital, but not relevant for the real return. So the 10% can happen in any vintage. You know, that’s our core belief. So you can’t time. It doesn’t matter if the markets are better or worse. I think for us, if people think the markets are worse, it’s a better time to invest. And if people think the markets are great, we should maybe, you know, turn down a little bit, but we don’t. So we still think we have to be very, very consistent in how we invest. What happens, by the way, is sometimes that the funds we invest, they are, they are slowing down. So several of my funds, for example, slow down at 21 right? So they said, Ethan is not a great market at the moment, and we’re not. We’re not doing a lot of investments. There’s lots of competition, the prices are crazy. Let’s wait a year, right? So let’s, let’s be a little bit pickier. I am not. So I’m still investing to you know, I’m trying, still to back the right managers every year. But what we see, of course, is that these kinds of decisions are taken in the funds. And many of them, for example, extended their investment period for a year, because they were so slow in 2122 and now they still have capital to invest in 24. That’s more what we see.
Alexa Binns 56:09
No, this is a fascinating strategy. To hear that multiple capital. We hear some very numbers, data driven. This is you just need to get access to enough of the underlying portfolio companies that you have a chance at the ultimate giant winners you don’t know who they are, versus the people who are really bullish on manager selection. And what’s really interesting to hear is how you see these things actually tying in that both things are true, that, in fact, you need the exceptional managers, and there is a qualitative element to what you’re doing. But underlying it all is that initial fund offense training that you had. It’s really cool to hear how you plan to capture those outliers? Are there any final thoughts for this audience?
Ertan Can 57:05
So the maybe two data points that are really interesting, in my opinion, the current biggest outliers, okay, where one fund is a fund that, back then, was covering the CE region, so no one touched that fund. I mentioned it so it was not about manager selection, or it was not easy to select that fund. It’s probably the most surprising fund in our total portfolio. It’s the least expected, where we least expected this kind of return. It became the best performing fund in our portfolio. The second best performing fund in our portfolio is a UK fund, but it’s in Cambridge. So at the time Cambridge, even by London based VCs, was completely overlooked. So they were too lazy to go one hour by train to look at tech startups, deep tech startups, back then in Cambridge, everything they thought would happen in London. And I think this fund will outperform all of the funds in the London ecosystem. And it’s, again, I think no one expected that, and even we didn’t expect this kind of large outcome of the fund. So what I want to say with this is I think we are in a very, very random game. It’s very difficult to talk about manager selection, right? And, you know, being into the right managers, knowing in advance to be in the right managers. It’s, it’s, we accept the kind of hit rate we’re not always right. You know, it’s impossible to have all of the funds being a 10x fund or something like that. But it seems that the probability, the combination of small funds that invest at an early stage, has a specific focus, right? These three things, and then maybe our small added value of trying to find maybe some of them who are a little bit better than the others. Okay, those four things typically lead potentially to outlier returns. What do I mean by potentially? If there is a company that is a potential strong company, then the first four points of a small fund early stage, this leads to the company delivering outstanding returns for the kind of small funds. It is. It’s the same in the US, by the way. You know, there’s a much longer history with micro funds in the US. So micro funds, if you have the right company, of course, at fund size, at fund level, will be a much better return compared to a very large company in a very large fund into the same company. So a large fund investing into the same company, in a small fund, investing just at the seed stage of the same company, totally different outcomes. You know, a large fund will never have a huge impact, even if you have a super outlier, it will most of the time not even return the fund. Whereas a super outlier in a small fund. Can return the fund five to 10 times. One single company can even return the whole funder fund. Which happened in our first portfolio? The first portfolio was completely returned by one single company out of 333, 40 companies. That’s insane. I think in the fund of funds world, everyone who knows the funder fund world, maybe that happened in the US, but in Europe, in the European ecosystem. I think something like this has never, never been seen before in the whole fund ecosystem. One single company never returns the whole fund of funds right? And we’re talking about three and 30 companies. And that’s, I think that’s, that’s, maybe, if you break it down, that’s really the so the randomness in our business, yes, unfortunately, plays still a very big role. If it would be perfect in selecting the right managers, then it would be a very easy job. Yeah.
Earnest Sweat 1:00:49
Well, thank you so much for just, you know, providing your you know, insights, philosophies, and I love the search of conviction, both, you know, the conviction that your firm has and kind of your process, as well as the conviction you’re searching for in fund managers. Thanks so much for being on the podcast.
Ertan Can 1:01:12
Thank you so much for inviting was great to be with you and speaking about what we do
Alexa Binns 1:01:17
See you later, Allocator.
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