A fund of funds viewpoint on Global Venture Capital

Given my modest experience in the Venture Capital sector, take this post with a pinch of salt… because my opinion is restricted to what I have seen in a short time period. My sample is not large enough.

I started to work at Talenta a multi family office in Barcelona the 20th of May 2015 (a week later of my birthday!), and I executed and developed the idea of being able to build a portfolio of VC funds in Europe with not much money behind. The issue was, are we going to be able to deploy money in the best VCs here with not large tickets? Are we sexy for these funds to date us and «go to bed» with us?

That was the birth of our Mastertech Capital SCR, a Spanish closed-end fund, with 8.900.000€, in December 2016. And with operations approved by CNMV (Spanish SEC authority) in March 2017. I thank Jordi Jofre, Talenta and Mastertech President, the opportunity of do this and lead the project. Thanks to our LPs for backing the investment.

We analyzed almost 400 VCs in Europe, most but also in the US and Asia, most of them in China (some of them are unique!). We have invested in only 9 to date. We are selective. The first people in the VC sector that helped me told me the rule of the 3Ts. Team, Track and Thesis (Jordi Viñas of Nauta Capital, thanks!). I further elaborate.

VC is iliquid, and the divergence among top fund managers and worse are awesome. The best can do 28x (you invest 1m€ you got back 28m€) and the wors 0.2x (you loose 80% of the money)… Stocks and organized markets are more efficient among time, so info is public so you can compare. So in the VC market there is a kind of smoke and myths… It takes time to learn the performance of a manager.

After some time I got in touch with major Fund of Funds VC in the World, in Europe, but also in US and China with success behind, some with 2x and 3x behind their track records. We exchange information and dealflow and comunicate regularly.

And after almost four year of analyzing Venture Capital Funds for some time, hours and days talking to VCs these are the conclusions I draft here:

• Team: the partners experience is the key issue. How much money the managed before as investors, AND MORE IMPORTANT: how much they returned to investors (see Track below!). We prefer to find investors experience rather than just founders with success. The more years in the market and the Roman Numbers in the funds the better. The founders fund is also fine, but some investments track record help to take them seriously as being a founder is not a guarantee of being a good investor too. Partners are the relevant guys there, the ones that lead and close the deals (shot the gun). It is also relevant to know how they share the carried (success, usually 20% above 8% hurdle IRR) and the compensation structure (salary + bonus) they have. How many people is in the investment team, whats the back office, where are they based? Who does that? Fund size and team size is not a lineal function but there must be some kind of Balance. Partners number is also very relevant. External advisory board helps but it is not relevant to take a decision. EIR and other people are interesting but not decisive.
• Track record: I like to find DPI above 2.5x and TVPI above 3–4–5x with funds of the same size or similar to the one fundraising. If the GPs do not have experience as VC partners it is relevant to look their business angel experience and success. Prefer DPI (actual cash returned) above TVPI (book and paper values) figures. But what I like the most, is to find GP that systematically score and do it again, with more than 1 company per fund. We do stress tests dropping the star of the fund, and sometimes the VC fund would have lost some money (only dropping one portfolio company).

Investment Thesis: The tricky issue, be careful

• Investment Thesis: this is basically how a fund expects to earn money. Say for instance, we do pre-series A in Spain, with an entry ticket of 100k€ and we keep 50/50 reserves for each euro invested with a 30m€ fund. We plan to do 25–30 companies with 5 years, which is 5–6 per year. The other issue here, is that they proved before this is a good enough investment thesis, so it works, they have done this before. A major change of the investment thesis is a noise to our ears. So imagine a fund I with 30m€ and now they do 150m€ with the same strategy… Stay away! We prefer small funds as returns are better than «mammouth» funds, of bilion funds… We like seed and early stage, but also early growth. Pre-IPO funds are riskier in case of a new crisis…

If you are fundraising your fund I will like to have a look at your deck and schedule a call.

Best, Roger

Rmiralles@talentagestion.es +34 638682227