Focusing on the fintech fat tail
Aperture Capital’s investment approach
When too many VCs focus on the power law, a lot of great companies go unfunded.
We’re not a VC firm…
Aperture invests in companies with which we work closely, but we’re not a VC. The investments we make are often unsuitable for VCs, unlikely to ever generate 100x+ returns, but we believe they will generate a strong risk-weighted return. And we don’t have a fund. Instead, we set up every investment as an SPV, in which we also invest. This offers our investors a stream of carefully curated deals, where they retain the discretion to choose the ones they like best, knowing that we have skin in the game and will do everything to make them a success.
…But a marketing company with an investment edge
For early stage B2B fintech firms, Aperture offers an alternative to building their own marketing team. The proposition works best when a company has started to get commercial traction and wants to quickly scale its go-to-market. In this case, it can seem too slow and too risky to hire marketing profiles one by one, knowing that they might not work out, and knowing that your budget won’t extend to all the skills you need to deliver a balanced program of activities. Instead, you can hire us. We can start straight away. We can put in place a team, part dedicated and part liquid, to cover your complete marketing needs. We know what we’re doing, with hundreds of years of marketing and financial services experience across the team. And we get the results: in the five years we’ve been doing this, we’ve helped 14 fintech companies to grow revenues by more than 300% a year on average.
The catch with our model is that it’s difficult for us to charge high marketing fees. If we are to offer a cost effective alternative to an internal marketing team, self-evidently we can’t blow up the budget. So we needed to find another way to capture the value we generate for our clients, which is why we started investing.
It turns out that marketing and investing do mix. Quite well, in fact. What we’ve realised is that, now that people know who we are and the gap we can fill, we get an influx of inbound requests to use our marketing services. This generates a healthy pipeline of fintechs, where we can cherry pick the most interesting potential clients. In Q1, for example, we had conversations with 57 companies and chose to work with two of them.
What’s more, working with companies provides a great deal of insight that you don’t get through pitch decks, data rooms or calls with the founders. We get to see first hand how the founders interact, the customer success the company generates, the velocity of the pipeline, the quality of the broader team, the willingness to learn and change direction etc. This is why we don’t invest without having worked with a company first. This Inside-out Due Diligence gives us our investment edge.
And then, through the services we provide, we get to play an active role in each company’s trajectory and success. We help simplify and refine the value proposition. We help to raise market awareness. We help to create a self-sustaining lead-generating engine. And we work with the sales teams to ensure the highest possible pipeline conversion. This gives us an advantage in managing our portfolio of companies and accordingly helps us de-risk early-stage investing. In many ways, this approach gives us much more transparency and control over our investment than a board seat ever could.
Microeconomic rationality can lead to macroeconomic misallocation
We specialise in helping companies with complex value propositions sell to financial institutions with complex buying behaviours. We work mostly with fintech solutions, but it can be broader than this. Cyber, for example, is within our scope.
Many of the companies we invest in are not VC investable. These are companies and markets that rarely have winner-takes-all dynamics, and are unlikely to generate 100x+ returns.
However, we are ok with this. In truth, we see this as an opportunity. Many VCs follow the power law. This is the notion, as Peter Thiel puts it, “that the best investment in a successful fund equals or outperforms the entire rest of the fund combined” such that every investment a VC makes should have the potential to return the fund, i.e. a 100x potential. While perfectly rational on a micro VC basis, at an aggregate level this leaves a lot of very good companies unfunded.
We see this every day. Our clients are businesses with long sales cycles, selling complicated solutions to customers who seldom switch providers. This makes these businesses difficult to scale (and why execution risk is high). But, once at scale, they have high defensibility, high revenue predictability and high margins. Where, through our marketing work, we can get comfortable with the technology and market risk, and then control for the execution risk, we think we can build an investment portfolio with very robust risk-weighted returns and the evidence so far supports this — our IRR is ~30% on nearly CHF10m of deployed capital.
SPVs are a feature, not a bug
We set up our investments as SPVs. Compared to a fund, SPVs have downsides, such as not knowing how much you can commit to a deal before you have fundraised. But, there are many positives, too.
SPVs impose discipline. Like VCs, we must convince our investment committee before we invest in an SPV. But then we have the added discipline of having to convince our investment network, often individual by individual, deal by deal. If we’re not able to convince them, maybe we missed something.
Our investor network is a value multiplier. Our investment network is made up of highly savvy people. Many are experts in the industries in which we’re investing. Many are successful entrepreneurs themselves. During the fundraising, they help us with additional due diligence, and once they’ve invested, they want to help, sometimes actively, sometimes indirectly, but in ways that bring massive value given the knowledge and connections they have.
We don’t depend on recurring management fees for the success of our business because we are also a profitable growth services company. In addition, it’s administratively complex and time-consuming to charge an annual fee on an SPV when all the funds are collected and deployed at the start. As such, we charge an small upfront fee, to cover the costs of setting up and running the SPV, and put our focus on the carried interest that we charge: we only make returns when the investments perform. This aligns us with our investors and our portfolio companies. And it means we don’t have the incentive like VC funds to deploy ever larger tickets, or deploy funds within a certain timescale. We invest what we can in the businesses we believe in, whenever the time is right.
Curated deals, never giving up
VC has been through a tough couple of years. In 2023, according to CB Insights, inflows into VC funds ($255bn) were down over 60% vs 2021 ($654bn). And while there will be a cyclical rebound — which may now be in train — in our view the VC landscape has been profoundly changed.
Our expectation is that we’ll see VC splinter into three distinct groups:
- the mega, highly successful funds like Andreesen Horowitz or Sequoia, who have access to the best deals and who can deploy capital through the whole investment lifecycle;
- the artisanal funds, deploying relatively small tickets into earlier stage companies, funding the moonshots of the future; and,
- the VCs that behave more like PEs, helping small companies to realise their potential, giving them the money they need, not the money a VC needs to deploy. As Paul Graham once said, “Like steroids, these sudden huge investments can do more harm than good.”
Our intention is to be the third kind. We want to invest in businesses we understand, applying known playbooks to accelerate and de-risk their growth. And we want to be the kind of investor who stays the course and does whatever it takes to make our portfolio companies successful.
A true growth partner.
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My thanks to Eleanora Angeliniadis, who co-wrote this article and who appeared with me on the Swiss Venturing podcast talking about Aperture Capital.
