E181 | EUVC | Isomer Capital defies industry headwinds with an early first close of new €250m fund III with Joe Schorge & Chris Wade

0:01Hi, and welcome back to the European VC. The go-to podcast for everything European VC. If you love the show, share with your friends and join our newsletter at eu.vc. Today we have a very special episode recorded live at the Superventure event in Berlin. This episode features two well-known voices within the EU VC podcast, Chris and Joe from Isma Capital, who have recently just announced their Fund 3. And now, some words from our beloved sponsors. How are you currently reporting to your LPs? Is fund administration taking hours? Are you getting lost in spreadsheet version control? Well, Flow solves all of these issues and more, allowing you to unlock the power of your fund's data by consolidating your work streams onto Flow.

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1:56All right, everyone. Welcome to this very special episode of the European VC. We have huddled up with Joe and Chris from Isomer Capital in connection to your very new fundraise. So everyone, we're in for a very interesting episode here because we're going to dive deep on Isomer Capital Fund 3 and what the announcement of that fund means for the ecosystem. Super nice to have you, Joe. Super nice to have you, Chris. As usual, nice to meet you in person as well. It was nice to see you yesterday at Superventure at the VC party. Super cool to see the whole ecosystem together, see the Isomer team as well.

2:35That's very nice. So let's start with the basics. Isomer Fund 3, give us a quick rundown. What is that about? What should GPs out there listening in and even other LPs know about that? Well, we're really excited that it hit the news yesterday, coincident with the biggest, best superventure conference ever so far. So big it has to move to a new venue next year. Isomer 3 follows the successful strategy of Isomer 2. We continue to back a range of Europe's exciting VCs to co-invest with them, to buy secondary pieces of funds and companies. And part of what we're excited about and thankful for is RLPs supported the launch of the fund about four months ahead of schedule.

3:28Yeah, and that's exciting, but also evidence that Europe's best GPs continue to move fast. There's been some great returns created with many of our partners, and so their funds launched quickly and raised quickly. And so part of the reason Isomer 3 raises now is to support them. So in fact, the fund has very quickly completed its first four investments and working on the next three already. So we're at market right now. So we hear a lot of GPs, unfortunately, having to postpone the fundraisers or just having a really hard time. And it's been a few years for Isomer now. That's exciting. But I'm really curious to ask you, looking back, as an entrepreneur, as a fund manager, what do you think allowed Isomer to build a platform to the state where you are today?

4:24Because you are a different beast today from what you were when you started, a very different beast, and the whole operation is different. So I'm really curious just to kind of try to tease out some learnings from building that platform as a firm as well. I think we continue to remain to be humble. I think we have to remember who our customers are and there's this funny thing in our world where the customers are our LPs and of course, you know, we are in the business of making money for them But what our customers are also the people that make the money which are the entrepreneurs and the VCs and remembering that and having processes that make that happen are are really, really important.

5:09And so it's just being focused on that, you know, that customer ideal is really important. We communicate frequently with our LPs so they know what's happening. We continue to strive to be the best LP for early stage venture. And that's tough because there's lots of them. You know, Joe just mentioned that Superventure is now so big there's a waiting list to get in. You know, when Joe first started Superventure, it was a couple of hours sort of by exception at Super Return. And now it's this sort of three-day conference where the first day you can't get into. So the challenge is always to be true and honest and transparent to the GPs that are coming.

6:00And there's lots of them. And we pick relatively few. But just doing that in a process that everybody understands and that we're clear is, I think, the secret here. And I'd be very curious to double down on that exact thing, which is not how you pick because we've spoken quite a bit about that. I think people can both go to your website and also go to eu.vc by now to understand pretty much how you think about managers. but there's one question that haunts every manager in Europe and that is the fundraise status of the fund of funds because you guys are everywhere, Isomers everywhere, Equation everywhere, AQVC everywhere with their messaging but then there's quite a few managers at the same time that also experience well not maybe that much investable capital right now.

6:52Both how do you see the market and also how do you tackle that yourself? I think everyone needs to hear more about this from the funder funds that we have. Yeah, that's a big question. It's a big market and I'm still recovering from David calling us a beast. It was meant with a lot of fondness. You called us a beast? I said you're a different beast today. different beast yeah that might be a different beast if i could just comment on chris's point as well i i think what's been very consistent from the beginning of icemate to now and what we keep working on really hard is to be a good partner and we we talk about that a lot but what does it really mean it means being a good partner to your vcs that when they need you you're there you know we run the extra mile in all kinds of cases that will never be in the news and we'll never talk about and but if you're really supportive that's what you got to do you know and and we continue and we don't always get it right you know but keeping in touch with i think our database now is more than 1 300 vcs that we keep in touch with all our vc firms all around europe that's a big job.

8:11So we keep adding two or three people every year to meet that mission, which keeps growing. But then to turn to your question, Andreas, being a good partner to LPs is also quite important. So, you know, when we first meet LPs, part of what we're doing in a discussion is to pitch them. Hey, we have a fund. We'd love you to invest in that fund. But a big part of what we're also doing and saying, what are you trying to achieve by investing in European tech? And can we be part of that? Can we help you with that? And what we've found over the years is that there's a range of missions. You know, I want to diversify my portfolio.

8:50I want to make returns, of course. I want to understand Europe. I want to understand Europe. I want to look for specific things that you as a scout could help me understand. I want to invest with you, around you, side of you, co-invest with you. So we've sought out, probably by our nature and by what we're trying to achieve, we've attracted around us a range of LPs who also have a mission. And we're playing our role in the marketplace. Of course, our role evolves, and so does theirs. So we have LPs now from many different countries of many different types. And I think you're right that the ecosystem now, because we've had public market correction, because interest rates are up for all kind of reasons.

9:37In other parts of portfolios, a lot of LPs are pulling back this year. And you see that by LP type, right? So, for example, in times where maybe, I don't know, just to take an example, if endowments need to add more to the operating budgets of the universities, then they'll maybe commit less that year, right? So if all your LPs are endowments, well, you're correlated to that. And for better or worse, we have a very diverse set of LPs. We've had to travel far and wide to find them. But the upside of that is that when we come to say, hey, we're going to raise a new fund, what do you think? They're very different in their thinking.

10:21And they span family offices, corporations, foundations, governments. And we don't say it often enough. We try to, but we're so grateful to them to be on this long-term journey with us. So we're not pushy about the new fund, but with the new fund, we just said, hey, there's some GPs really moving. We've got to run to support them. Can you run with us? We're probably overly transparent with the GPs about where we are in our fundraising. And this isn't a market broadcast. This is a communication individually. So, you know, you're always trying to manage this, you know, when do we have our clothes, when do we have capital available, and when we can invest.

11:12We're super transparent, sometimes I think too transparent, about where we are and what we can do, you know. We worked very closely with these four VCs that we've just committed to from this new fund to say, now here's exactly when we're going to be having our first close, our second close of fund tree to match their commitments. And that is the thing that I would wish everyone does. Yes, because that was exactly the question I was about to ask. Because yesterday at Superventor, I was talking to a GP they were raising, and we talked about this was one of the other funder funds and he said, well, it looks like they'll have money.

11:58You know, I think they're getting there by the end of the year and then I think it'll, you know, and then it was like he was really hoping that that LP would have money by then and kind of then also not assuming because he didn't know really if he was well positioned to get money from that LP But that LP had definitely given him the impression that he liked him a lot. And I said to him, well, do you think that when there's money that you'll then, you know, are you number three in the line or are you number 20? And he didn't know, right? And I'm always like, how does a GP navigate that? And how do you as an LP, because you also have a huge, you know, line of people that wants your capital.

12:44And I know some that for sure have said, well, I'm looking forward to see when Isomer has the capital to deploy into my fund if they like me. So it's something that people always think about. When we have these conversations about exactly where we are, when we come in, the first thing to say is, you know, as you've just noted about GPs, it's exactly the same for us. we never know precisely when LPs are going to come in. We don't have an agreement six months. Would you please come on the 31st of March because we need that for the first four? This is a moving... So first of all, there's always some ambiguity from our point of view.

13:30But we're not having discussions about where we are and precisely when we could join as best we can tell. with managers that we have not decided to invest in. And that's the important point. And I think just to double click on that for everyone in the audience, because I think that's so important that, and it might sound basic, but until you have that commitment from the fund, you don't have that fund. And you would also go to the length to say, you should not then be praying too much for that funds close to come, for that to then unlock a capital for you necessarily. Well, I'll say one more thing, and I'm sure Joe has good points on this too.

14:22You know, it always surprises me in GP conversations why they don't ask those questions. Yeah. They very rarely, they say, oh, it would be great. You know, I had hundreds of conversations yesterday. I'm sure you did too, Joe. oh, it would be great to catch up. What they're really saying is, are you interested in me? Are you interested in investing? But it would be great to catch up. And for those that, to be honest, those that we're not sure of, and we're still trying to figure it out. Remember, we're doing this. Joe talked about 1 ,300 managers. We're trying to get it down to some single-digit number this year.

14:59I'm smiling as we talk because ever since the very first days of Isomer, I recall myself saying and still saying, I'd love to invest in your fund, but I don't have any money. And I think, you know, we're GPs and they're GPs. And so just being straight ahead and saying, look, we're trying to put a close together and we're working with a group of LPs. It's exactly what we're all doing. So in that sense, we're really on the same side of the table. but you raise one of the difficulties of our kind of fund, Andreas, which is how do you build a pipeline, match up the timing on both sides of the table and we're constantly trying to understand the real timeline from VCs and VCs are constantly trying to accelerate the timeline by telling us it's closing tonight.

15:51And we have so many times over the years where, oh, it's the final close next weekend and six months later it's still open And let's just, because that's a tactic, right? Yeah. How do you as a fund investor think about that tactic? Would you ever have been about to commit to a fund or even have committed to a fund and then feel like they're pushing too hard, they're being transparent in their process, making us feel like there's FOMO around the thing? and then at some point you've said, guys, don't play those tricks with us? That doesn't... A little bit, but I give both parties, us and this mythical GP, credit for by the time we're saying, look, actually, we would like to do this.

16:46Let's... What is the biggest decision that Isomer makes about a GP? It's actually, are we going to spend detailed, dedicated time to really understand, to write an investment memo, to propose it to them? That decision is the decision. And the rest is ensuring we've understood properly that there's nothing, you know, in all the referencing, there's nothing that comes out. But that is the time commitment decision. and I think if you've made that decision, it would be very disappointing if you were being gamed to the extent that we're closing tonight, but actually it's six months. Do we get gently gamed?

17:34All the time. I'm really cranky about that because we sort of bare our soul. This is my point about being too transparent. As you say, we're probably overly transparent. where we're trying to be super straight ahead. Here's where we are. This is the process, blah, blah, blah, blah. So yeah, when you get on the other side, this kind of fake urgency, and it seems like real urgency, so we do our normal thing. We run hard and try to meet the timing that's being asked of us, and we really work hard for that. And then if you understand later that it was a fake urgency, that really leaves a bad taste in my mouth.

18:14I don't like that. Yeah, because it messes up your shop. we've gone through some trouble and pain to meet it, which, you know, I don't, it's fine to go through trouble and pain to meet it when it matters, you know. And that's the, you know, and the same when it matters for us, we're saying that to our LPs. Joe is fond of saying, when we're doing our fundraising with LPs, particularly new LPs that we've just sort of met and we're trying to decide whether they're, whether they're interesting or whether we're interesting to them, The second best answer is no. Because the quantity that Joe and I and the Isomer team, and in fact everybody in our business has that is so valuable, is this thing called time.

19:05And if Isomer isn't interested, then we should say so, because that GP needs to get on and go work with those that are. And could I ask you, because I get pinged by people saying, they know that I like them. And they know of our relationship. But you like everybody. I do like quite a few, but I think that there's also some that know that I like them less. But then they ping me on WhatsApp saying, could you check with the process with Isomer, where we're at? And I'm like, more than happy to, but why don't you ask them? It's not like they're not going to commit because you asked them for the third time over four months where they haven't really been moving their process with you.

19:54Where are we? Is this still happening or that we haven't touched base for a couple of months? Does that mean that I'm out? Is that how I should translate? Is that not perfectly okay? Yes, absolutely. Absolutely. You know, it always impresses me when, you know, occasionally we will meet a very mature manager that might be still doing early stage, but on their sixth and seventh fund, and they know what they're doing. and if you have an hour slot with us, 50%, in other words, 30 minutes is spent interrogating us. And then they get on to explain what they want to talk about in terms of their fund and stuff like that.

20:37But this is natural when you're a new manager or a new founder of any business. You're in the beginning. You're putting it together. You're creating it. So you're naturally in broadcast mode. So you know, when people first, even before they form a fund, right, a lot of people come to us and say, now don't tell anyone, but I'm spinning out of Big Firm X or I'm leaving Company Y or whatever. Hey, they're totally in broadcast mode because they're thinking through their ideas as they talk. So to take the next step, like where are you in your project, I mean, that's not even on their horizon. That comes later.

21:14But you're making me want to go back and talk a little bit about the difference between I like you and I'm committing to you. Because, Andreas, you keep saying, I like you, or he likes me, and is he committing? And there's a long road between I like you and I'm committing to you. And boy, I wish we could commit to everybody we like. We can't. We have a finite capital. We have a finite number of portfolio slots. We have a portfolio construction, which, by the way, every GP ignores and forgets. They just look to us like an ATM. I'm going to go to the Isomer ATM and take out some cash. It's not like that.

21:54And so when you first meet GPs, what you're really liking is the idea, the strategy. Hey, I've got this focus on deep tech. Hey, I've got this focus on Eastern Europe. I've got this focus on consumer, whatever it is. you're first liking and finding some alignment on the mission of the fund, the strategy of the fund. You're then finding something exciting about the team that's executing that. And you can like all of that, but you can also then realize, oh, there's quite a bit of overlap in the portfolio companies with a fund we've already got or a couple of funds. So we turn down sometimes really great funds, which is painful and I hate it, but really great funds simply because half their portfolios already in ours, you know, through other managers.

22:41Yeah, or their whole strategy is represented by a manager that we really like and is performing That you really like? Yeah, is performing well. Exactly. We really like. But it's more than like. It's like strategic fit, due diligence, and then commitment in portfolio slot. You know, we've been talking now for however long it is, and I know you're meant to be asking us the questions, but I want to make a comment about Superventure. The day started yesterday on June the 5th with a presentation from Adam Street, and it was very impressive. Europe essentially is beating the US from venture capital returns, and that is a remarkable thing.

23:30So anybody that's listening to this, there's a GP, should be remarkably proud of their contribution to that statement because that makes our job easier. It makes it easier for us to be able to go and convince, you know, as Joe says, LPs far, you know, we go to Japan, you know, you go to the Middle East, you know, you're going to the US, you know, to broadcast this message that Europe is really where it's happening. And I want to build on that because and come back also to the topic, the core topic here, Izemer Fund 3. Yeah, and if I could just interject there and say this episode, we announced to all of you in the beginning we're going to talk about Fund3 and as always when we're with you guys, we end up diving really deep into fundraising and how does everything work.

24:22So everyone who was hoping to get that whole Fund3 strategy lined out and all that, sorry guys, we dove into a rabbit hole as we always do. But sorry, go down. But before going there, I think it's just interesting also, you know, as you guys said, the timeline of this fund, right, it coming earlier is obviously a reason to be proud of. But I think it also shows what's happening in the underlying funds that you're investing in. And it goes to that point of Europe is quite interesting and awesome right now, right? The market might be weird. The market might be kind of tough to fundraise. But some managers are moving quick.

24:59That is exciting. So I'd love just to ask kind of what are you seeing happening on kind of your winners without necessarily naming funds, of course, but just what are you seeing and what is like the feel that you're getting from the market these days also? I think the best managers are raising exactly as they've always done, potentially even faster. I mean, that's just the reality of it. That's the fundamental thing that made us raise Fund 3, you know, many months before we had planned because these guys go out, you know, they have a set of LPs who have got very comfortable with them as managers, very comfortable with their returns, and they are re-upping, you know.

25:45There's this wonderful thing about venture. If you want to do venture, you have to do successive vintages to catch the sort of the ups and the downs, you know, and people would have absolutely invested in 20 and 21 and 22, and now they must invest in 23, 24 to get the swing of this, to get that overall average performance, which will be very strong. Another way to say it would be what's going on underneath. Well, great companies continue to be founded, and they need capital. And so these great managers are running their funds to meet that. on the LP side of things, if you read LP literature over the last 20 years, you will find the Yales and the Cambridge Associates and all of the kind of masters of the game tell the same thing.

26:36you cannot market time. You cannot, as an LP, jump in at a period of time, 20, 21, because everything's going up, and think that longer term you'll have better returns, you know, investing in a period and not investing in another period. And it was underscored on a panel I did yesterday with four long-term professional LPs, and they all said the same thing. You must commit evenly over time, and maybe there's tactical moves up or down on occasion, but that's how this long-term game works. And, you know, it's always, what's that saying? Every overnight success was 10 years in the making. And that's very true, that when you see a company go really large, well, actually, the real investment in that happened five to 10 years earlier to get it moving.

27:30And then it comes onto the popular imagination and radar when it hits the cover of the FT or whatever. But actually, what we do is back that thing five to ten years earlier when it's, I always talk about two guys in a garage. It's not necessarily guys and it's not necessarily a garage. But it always starts with two to four people with a big idea. And so if you're really investing in early stage, you need to do so consistently over time. And that's really what's going on with these strong managers raising, supporting good founders and looking to groups like us to continue our support. You know, the exciting thing, the really exciting thing, the thing that gets Joe and I up each morning, I'll speak for him on this subject, is that no one's told the entrepreneurs that there's a slowdown.

28:23They're still building new things, building new ideas, you know, because there's so much still to solve. The amount of digitization that is really done in any of the economies and industries is so little. There's so many challenges to fix. You know, that's before we start talking about the important topic of climate and all that good stuff, that people are just continuing to build and the best managers know that and they need to support them and want to support them. I feel we're in a strange moment in the market because we do hear a lot of talk of doom and gloom and public markets are down, so anything you IPO'd over the last year or two is really down a lot.

29:07And how do you get out? There's a lot of talk about that in the market, but in the conference as well. But I make the distinction between what's going on in capital markets versus what's going on in the operations of companies. And what Chris is saying is the companies in our portfolio that are growing and building are doing extremely well because customers are buying their products. They're building strong products that are needed. So it's a very odd moment because you talk to the entrepreneur, they're doing great. Revenue's up, customer's up, you know, not without the normal problems of building tech companies, but that's a positive upward trajectory broadly in Europe.

29:47At the same moment, you have capital markets, which is very different. And when you talk to the LP world and talk at Superventure, what you're really getting a read on is the capital market side of things. Well, I'm worried about interest rates. I'm making, you know, some LPs told me in the US, I'm making 5 % on cash. That's pretty good. Why should I commit to illiquid long-term stuff when I can just, you know, do some fixed income things? And so there is this trade-off within the capital market. However, we had our annual meeting a few weeks ago. you did a beautiful interview with one of our founders and one of our VCs where they told the weird and wild journey from trying to fulfill the first customer orders and then having to do it themselves to building a team, almost going out of business, getting a bridge around all this.

30:37And it reminds you that actually the business of building great tech and great companies is not really a business of capital markets. It's back to customer product, you know, the basics. and that's going really well. And one truism, whichever market, but it's particularly true of here, when that company, which is a company called Zenjob in Germany in the temporary workplace, tells that story of how he goes from nothing to a revenue of 100 million. There are 10 people who are going to say, I can do that. and it's just this pyramid that happens, which is why we're so excited about Europe, why we're excited about Fund 3, because there's going to be, as there always has been in Europe, remarkable things to invest in.