#177 Chris Wade & Alexis Houssou, HCVC on doing co-investments with your LPs

0:04Hi, and welcome back to the European VC, the go to podcast for everything European VC. If you love the show, share it with your friends and join our newsletter at eu.vc. Chris is an all-time favourite guest here at the EUVC podcast. The co-founder of Isma Capital is undeniably one of Europe's true OG LP. With an extensive career as a founder, startup mentor and LP with more than 50 venture fund investments under his belt, Chris co-leads Isma Funds Investments and leads their co-investment programme. And today we've brought along for this episode Alexis. the founder and managing partner of HCVC, a community-first early-stage venture capital firm that helps hard tech founders tackle problems with capital, resources, and collaboration.

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1:42Chris, Alexis, welcome to the European VC podcast. This is a special episode on doing co-investments with your LPs. Chris, you are somewhat of a repeat offender with us, so super nice to have you back. But I will focus a bit the limelight on our new guest, first time guest, Alexis Houssou. Alexis, how are you today? Good, how are you, David? Awesome, Alexis. give us a quick personal intro of yourself so who you are where you're from sure yeah the name is Alexey Usu I'm the founder and managing partner of HCVC which people also know with the name Hardware Club which is the community we started what I thought when we scheduled this interview was I really wanted to bring you two together in front of our audience to tell us the story about how Isomer and Hardware Club came to be such a good partnership and Chris you're nodding away so I'll maybe ask you to take us to the floor where it all happened.

2:35We have to go back to June 2017. Isomer is started and going, and I'm on a wild goose chase in Singapore looking for LPs for Fund One. It may be shocking to some listening to this that Fund One's emerging manager is quite tough to raise. It takes time. So you go to any corners of the world to find it. I find myself at a big tech conference in Singapore. And I'm in the audience. I'm just a regular dude in the audience. And there on stage is Jerry Yang. Not Yahoo Jerry Yang, but the more famous hardware club, Jerry Yang. And he's talking about this fund that actually invests in hardware. And I think, wow, that's kind of interesting.

3:22So I go find him after the conference and didn't find him. And I was disappointed and I was emailing the organizers to get his email. But then I found ourselves at a VIP, which wasn't very VIP actually, but sort of speaker dinner in Singapore that evening. And there he is sitting in a corner looking very handsome. And I went and chatted to him and we chatted and we chatted and understood that he's a European VC and he's raising capital and all that stuff. And we had some nice exchanges. and I said, well, we should get to know each other and told them what Isomer was doing. Alexei, I think you came to London in Victoria Street.

4:05I want to pick up the story from an Isomer point of view, but I let you say something. What's funny is I had very little context. So my partner, Jerry, was like, oh, there's this British guy I met in Singapore. If you have some time between your meetings, you should go and meet him. And I was like, well, sure. Is he like an entrepreneur, a VC, like an LP? He's like, yeah, I think he's an LP. You should talk to him. We had just done our first close for Fun1. Literally, I was there. I didn't know what to expect. And I think I met Hugh and I don't know if it was Joe. It was Catherine. Yeah, I was there.

4:34I didn't have any material or anything that was kind of ready because it was not really fully briefed. But yeah, I tried to kind of tell you the story of what we're trying to build and why we felt there was a need for a fund investing in hardware in Europe, where there were a few in the US. I did this on my side. I didn't even know what I was going to be in a pitch meeting with an LP. More like a friendly chat with someone that ended up being quite nice. I think you guys were probably the first kind of proper fund of funds in Europe that we've met. So I was kind of new to the idea that someone would do that in Europe.

5:06And I was like, oh, okay, interesting. Like you guys invest in micro VC as well. What I tell people we're raising, like they're like, I need to tell them what venture capital is. I need to explain why we're not raising 200 million. I need to tell them like we're not like 20 people. You know, why do we not dress in suits, et cetera. You already knew what we were talking about, what building a strategy for micro VC was about and differentiation. So I remember leaving the meeting and actually texting Jerry and he was like, that was a very good meeting. Thanks. And he was like, OK, he was surprised.

5:36Well, you know, look, I went and found Jerry, which I think, by the way, for all of us invest, wherever you invest in the chain of venture capital is an essential ingredient, which is this idea. or you go out and find deals, whether it's VCs or whatever it is. Well, Catherine and I spoke after that, your visit, and we said, hmm, kind of like this. And we convinced our partner, Joe, that we should jump on a Eurostar to come to Paris, which we did. And I remember the discussion with Joe, which says, because we did actually have a pitch deck by then, and we were looking at all the interesting companies that they were investing and said, this is very cool.

6:16I could get quite excited about this. I just sure hope that they know about venture capital as well as all these exciting, because we're getting excited about what they've invested in, right? I mean, the companies and the products that they're doing, endorphin emitters, mobile TVs, all kinds of exciting sort of project, electric bikes, which came to be a major part of our life in the future, which we'll talk about. And I remember Joe saying, well, I just hope they could be good VCs. And we came to Paris, we met Alexei. I don't think Jerry was there, actually. Maybe he was. I don't think so. And you did a beautiful presentation.

6:49And it wasn't a sort of arm-waving sort of, you know, I'm marvelous, I'm wonderful. It was the characteristic, very low-key Alexei. Here's what we're doing. Here's how we're thinking about building a portfolio. Here's what we've done already. Here's what we see the outcomes. Here's why we think hardware could be quite interesting because it has this downside protection from an IP point of view. And actually, there's lots of valuable hardware companies. And basically, on that meeting, we decided to do this. There was a few steps along the way before we actually committed. But essentially, that's the story.

7:26What Chris didn't say, and I think that one of the best part of this relationship, I think, was that in between that first meeting and even this meeting in Paris, we kind of went through what funds paid to do, which is like restructuring the partnership. We had one of our, well, actually my co-founder kind of left at that time, which is a process we kind of went through. And, you know, on both sides, it's ended up being a great transition, I think, for her and for us as a fund. But, you know, it was hard as a six-month-old fund one to be going to our LPs and saying someone's transitioning out.

7:56At that time, we hadn't closed Isomer, I think. But one thing we did, and I think that's where I appreciate it, because my assumption when this happened was like, okay, well, we had had a good chat. They barely know us. We're going to have to go and tell them, you know, what someone in our team is living. I don't think you had met her necessarily. No, no. So probably that helped, I guess. But the whole relationship was, I remember going with my other two partners to London and meeting you guys and letting you know what was happening. And the fact that we were going through a restructuring of our partnership.

8:25We had talked to our LPs. Some of them were not very happy at first. And we were having those conversations. And what I liked was we were expecting like, oh no, this is not possible. You guys, this is very disappointing. This is not, we got the exact opposite. We get like, okay, that happens. We've seen great funds go through this. It's a normal process almost with a first time team that, you know, there's going to be some changes. You guys seems like you're transparent, which we were trying to be as transparent as we could. And I think that really, really helped. And I think to a point that maybe I don't think Chris knows because it was a very, very hard time, you know, on a personal matter.

8:59I had just lost my mother at that time. During those times where, and sorry, I don't know if I should get this personal on this podcast, but I think I should tell the story as it is. It was probably one of the worst times in my life. And I remember going after that meeting and feeling hopeful again and feeling like, OK, well, I can go back to the other LPs and tell them, well, there's a new LP that wants to come in with the new team. We're able to kind of convince new people to put money in us. While some of the other LPs were not necessarily thrilled at the opportunity of changes we were kind of offering them.

9:28And that's something that I think everyone in the team remembers. They ended up closing on their commitment, introducing other LPs that they are. And I think that's the single most value-add thing an LP has done for us. And it probably explains that the relationship with Isomer is as strong as it is, just because we went through all that and they were here during tough times, I guess. Many in our audience will, of course, be going through similar things or thinking, what if that happens? How do you then deal with it? So, Chris, now we've heard the perspective from the GP side, but what went through your head back in the days?

9:58And what do you kind of advise today when you meet GPs where this is going on? The overwhelming, most important thing an LP can ask of a GP is to be transparent and that we can have a trusting relationship. And this act of the three partners, in the words, all the partners, jumping on a Eurostar from Paris, coming specifically over to meet with us to deliver this news personally, could have been a call, could have been an email, could have been not sold at all. And just laying it all out for us was more affirmation than we ever needed that we were backing the right manager. Venture capital, company building, anything to do with innovation is a windy, windy, twisty road where there are horrible days, there are great days, and a lot of okay days.

10:53And we can't be in this business if we expect every day to be a great day. There will be bad days and we have to be ready to be supportive there. And you're right, Alexei, that meeting really defined our commitment to you. We'd already committed, but actually defined it in the way it was going to be in this extremely open and honest relationship, which remains to this day. Yeah, I mean, 100 percent. And I think there's two things. you know like people talk about managers and different cultures you can set up i think it's also true with the relationships between vcs and companies if you are building a certain type of very hard relationship with founders they may not come to you when there's problems and they may try and avoid those conversations i think that's true with the lpgp relationship and maybe because we met kind of a way that was not necessarily the classic kind of pitch meeting it's about where we get to know each other more maybe personally i think the great thing that an lp can do and i that was the case in this specific scenario with Vice Summer was that they basically told them that they were interested in what we did, that they didn't expect everything to be perfect.

11:56They didn't expect the story from a micromanager that had just launched their first fund to be the exact same as the one from someone pitching them a fund seven or an eight, you know, and I think that helped create a space where we could be transparent and where we could be vulnerable and say, well, this is what is happening. We don't have 100 % of the answer. We're working on it. What's interesting is I think I've had a few managers come to me since I want to say maybe two or three every year come to me, either other LPs send them away or which are going through similar situations. And this is very common.

12:25It happens in most funds at some point. It's never fun. It's always quite complex, but as with any company or in a team, at some point, there's changes, people's interest kind of moves. Some people end up performing very well. Some people sometimes are having difficulties and even building a VC first time team, you know, like you need to be aware of that and understand that it's actually pretty unlikely that after two or three funds, team would exactly be the same. I think in general, the approach of LPs, and I know some of them sometimes don't want to hear those stories because at certain places, being an LP and having to deal with these situations is seen as a failure.

12:57And I think it's probably not the right approach. I think you want an LP, your managers to come and tell you those things. You want to create a space where even before that happens, right? What's happening with the team? Someone's not performing, that person is having issues that they are like trying to kind of prevent those situations from escalating at the point where you know managers can talk to each other like you want to avoid having lawyers in the room and things like that and i think there's a great deal of maybe educating more around those topics i think lps that have been through those events give the right advice at the right time as it was the case for us this is a beautiful story and thank you for sharing to both of you i think it really goes a long way on showing you know how to build strong long-lasting relationships between GPs and LPs, which I think over the last, let's call it the hype season, I think it was a bit overlooked.

13:42It's always good to bring us back to reality, and I appreciate you both sharing. Shifting topics, whilst I think there's a lot of similarities, but shifting topics at the core of this episode, which is co-investing between GPs and LPs or co-investing with your LPs. I think the best way to start this conversation, and Chris, I'll ask you to start it off, which is why do you co-invest with your GPs? What is the reason for you to do that? I mean, first to say we love doing it. We run by this fundamental inconvenient truth. Funds don't make money. Companies make money. So the closer you can get to those, we have over 2 ,000 portfolio companies today.

14:20We can only get close to a few. But we do co-investments to back the winners. We've got this fantastic flow of data and information about portfolio companies, and we're sifting it. We're looking at it. We're understanding it. We're talking to GP managers like Alexi. Could it be interesting? Could it be possible to do that? Fundamentally, we're looking to back the winners. Now, I'll tell you in five years whether we've backed a winner or not. In this case, because these things always take a long time, but we're doing it for financial reasons. But let me tell you this, doing it for the non-financial reason, which is really building an extra depth and an extra layer of relationship between the LP and the GP is very significant.

15:09It's vulnerable as a GP. You're kind of getting into the inner workings of your fund, right? And can you share your investment memo? I remember asking one GP and they said, what investment memo? It's a way of really getting understanding. So therefore, you must go in it with a degree of trust and openness, remembering that in our case, you know, our co-investments from a capital point of view are a fraction of the amount we commit as an LP. And so therefore, one has to lead the other. We care about the LP relationship very significantly. But it is a brilliant way to have a very detailed conversation about something when we've done a deal, we jointly are passionate about.

15:58Now, follow-up question to that, Chris. I'm not pointing fingers or naming anyone. It's just like different strategies, different approaches, because some look at LP investing as a way to get dealful. And what you said really goes in an opposite direction to some extent. You're saying it's all about that LP relationship, and it's about GPLP relationship, and about adding a layer of depth to it. I'd love to just hear you comment on that, not say that your strategy is the best and Isomer is the best. We can say that, but that's absolutely not the point. Why do you think of it like that and not the formal way?

16:31We spend about 30 % of our capital doing non-fund activities. That could be secondaries with LPs, that could be secondaries in company founders, and it's doing co-investments. So first of all, there's a relatively limited amount of capital available for co-investments. But our objective is to look every quarter at all the company data and all the company information that our GPs kindly give us and try and figure out where are there some trends, where are some interesting things going on, where could we be helpful, which is another point I think that's really important. Can we be helpful? We're putting this investment into a company with the full understanding that the GP that the portfolio company belongs to has the prime relationship with the company, and that never changes.

17:27In a way, what we were doing in the case of Hardware Club's co-investment in a company called Cowboy was we were extending the range of Hardware Club's funds because they were going to be at capacity and just because of the age of the fund, etc. And we were doing that. And I think that's had some tremendous benefits to the company, because it has meant that Alexei has remained a vital member of the board to this day. And that is somewhat help, not entirely. Most of it's because he does a very good job. But some of it is due because actually he is bringing additional capital in B rounds, in C rounds.

18:06He's a seed round investor, remember? Yeah, in the case of Carbac, we were also in the seed, but we actually led the pre-seed five, six years ago. You never want to hear about a cowboy again, right? Yeah. Yeah, I think there's various LPs, various ways of doing that. There are definitely, as you say, David, those that are just looking for deal flow, so investing in a few funds for deal flow, and then we just build a relationship with a manager. It's always a complex thing. And talk to people that have been in business for longer than they have. I remember a discussion with Rob Hayes at first round that told me, oh, no, you should never share deals with your LPs.

18:41if the fund does well, but the investment doesn't do well, like they're going to be resenting you and all that. Like, be careful with that. We never pretend that we're making decisions on behalf of the LPs. We're always trying to be transparent. Here's the situation. We usually offer those opportunities when we're actually investing ourselves. If we weren't, I think there would be maybe a bit of a conflict and, you know, we wouldn't necessarily be comfortable. But yeah, but in general, I think the way that Isomers does it, which is extending or trying to kind of offer GPs the opportunity to continue to invest in businesses that they really like is the right way to do it.

19:11The relationship between LPs and GPs, when the founder enters the room becomes even more complex. There can be a lot of things that go wrong and maybe the VC or the GP wants to present things a certain way to their LPs. And then the founder, you know, is just talking to any investor and sharing the updates away. So you have to do this with people where I think there's a lot of trust on both sides and thinking of ways to make it work. And I think there needs to be a clear alignment early on of how that relationship is going to work. Some people want to be more involved. Some people want to be more hands-off and just let the manager run the relationship.

19:41I think both can be great. In the end, the interest is what is the most helpful to the company. Everything, I think the rules have to be very clear. The only times where we've had a bit more discussions or difficulties with some LPs were like, you know, when initially we thought things were going to be a certain way. And then during the process, things started to change a bit or the LP really wanted an end zone relationship with the founder. Sometimes the founder doesn't want to have that relationship with the LP. He just thought he was going to have one contact with the GP running the relationship.

20:07So I think the rules have to be set at the beginning and have to be clear to everyone, the founder, the GP and the LP. And as long as it's the case, then you end up in great relationships, as it's the case for Carboy, where actually Chris is almost as involved as I am with the company now and built a great relationship with the founder. But you're in charge. And I don't mean that you're responsible because we're both responsible now. But I'm making a very serious point. This is Hardware Club Fund One portfolio company. We're an LP in that fund. We've had the privilege of being able to co-invest with them.

20:41I do occasionally talk to the founder. I'm always reporting back to Alexei of any conversations. If I have any ideas or thoughts, I am giving them to Alexei. And it must be that way. It must be that way. Otherwise, you confuse everybody. It's very much, I think, for the founders. I think the most important is not necessarily the GP itself. In this relationship, I think, as you said, companies make money in the end. Founder, in the end, is responsible for the success of the company. So we're both like coaches trying to kind of help him and here to bring resources and introductions and advice at the right time.

21:18So I feel like where I've seen things go wrong is when the founder is confused. Oh, but you're telling me that. Your LP is telling me that. I don't understand. What should I do with that? And then could have an impact on the relationship between the VC and founder, which I think VCs typically don't like, and founders also try and avoid. and it could also have a long-lasting impact on relationships between LPs and GPs. And that was actually one thing that I wanted to kind of double-click on, Chris. You said it is Alexis' relationship. It's him first. I don't bypass him. I would expect that not all LPs think about it like that.

21:50I would think many LPs probably think about it as once I've done a co-investment, well, I'm just as much direct as the GP that I invested in. So don't come and tell me that I shouldn't go. Well, I'm not. They can do whatever they wish. but they can do it with a company that I'm not involved in because you are getting a huge amount of value from something called experience and history with the founder and the GP, in this case, Alexei. And that is worth its weight in gold. The LP comes in, in the case of Cowboy, in the B round. B round. Alexei's been there from the beginning. This is a general point, by the way, about Isomit, not a specific point about Cowboy or Alexei.

22:32This is how we feel about this subject. If we start going direct, suddenly we're assuming things. We don't know things that might have happened in the past. We just miss so much information and context and history that the probability of screwing it up, it's a family show, so I'll say screwing it up, is incredible. Yeah, I think that's a very good point. And whenever we talk to founders way back, I try and avoid telling them what to do because I've got a one-tenth, if not one-fiftieth of the data points that they have on a daily basis. They manage teams there. They're trying to solve a problem and get to product market fit every day, 60 hours a week, if not 90 hours a week.

23:14And I usually speak to them, yeah, once a week, maybe once every two weeks. I get a glimpse of maybe some of the problems that they come up with or account for advice. But yeah, the data points I look at, if they make decisions just based on my recommendations, I think most likely they're not making the right decision. At least they should use my feedback. I'm not saying that. Obviously, I hope that they, to some extent, use that. But they should do this in light of all of the data points they have. And I think it's a bit of the same thing when you think about the LPGP relationship here. You've been early, usually in one or two rounds ahead of your LP.

23:42You know a lot of the history of how the companies work. And sometimes you also know how to deliver the message to the manager whenever something needs to be said or done, etc. I'm now quite convinced that it's less about the message itself. It's more about the way you deliver it and the way it's taken and digested and how it's acted upon. And I think a lot of that, the psychology of the founder, the way they're going to react, the way they're going to take that feedback. A lot of that knowledge comes with time. And so usually it's helpful even when GP or NLP thinks about as a specific idea about a company to just talk about it with the GP and say, hey, listen, we think about that.

24:15But you're thinking, what's the best way to talk about that with founder? How should we communicate? and I think usually yeah that kind of serves the company in a better way than various messages come from various parts and now we've spoken a lot about the relationship part and what you might call the softer side if you could dive a bit into how you think about this from the terms side because there's some parts that are defined up front in the LPA and when you do your initial investment and then there's tend to also be stuff that comes up along the way because the opportunities are different and all scenarios require different hammers and tools.

24:50I'd love for you to kind of dive into a bit how you think about the different instruments and where you think there are important takeaways for our audience. Well, first of all, an LP, at least in my understanding, although I know there's some US funder funds that lead co-investments, is in every case, by definition, we're not leading around. We're coming into a round that one of our GPs is already in. So I think you have a fairly fundamental conflict if we start leading around. So in terms of what is the deal, whether it's convertible note, whether it's equity, the terms of equity, that is determined by others.