E279 | EUVC | Acing LP Relationships with experts from Cavalry, Cherry, Isomer Capital, No Such Ventures & Bunch

32:49It's a really nice way to say, hey, you guys matter a little bit more than everyone else. And so you get some time with this information to ask any questions before others do. So I think that's a really, really important part of LP management is actually just making sure that, you know, as a partner in the fund, as a limited partner in the fund, you have some sort of advantageous seat as to what is going on. Yeah, absolutely. Let me pick up on the no surprises there and having 300 investors. Simon. Yeah, perfect. I actually wanted to add on this one because, Chloe, what you said is absolutely right.

33:28So, for example, at Cavalry, we do an LP segmentation. So we segment our LPs into groups. For example, individual investor, mid-market investor, and then the enterprise investors, the institutional investors, the big investors. And they get different level of transparency and information from us. We have like a quarterly newsletter that we send out to every LP. There we have more updates in the quarterly report. We have some qualitative update, you know, in the team or biggest, you know, with new customers of relevant portfolio companies and so on. So some updates. But then we also do an IR quarterly call with all the mid-market and the bigger LPs where we actually give a little bit our opinion on asset level, how good are there actually capitalized, what is the runway and so on.

34:20Do we have to do a down round? Do we have to make changes in the valuations or not? How safe are we with the investment and the returns? So a little bit more of context and background information. We also like to add actually our opinion on the market. So sometimes we have a strong opinion on macro environment and so on. And sometimes there's just some emergency communication to all LPs. For example, we had last year this Silicon Valley Bank situation where it's super important that you are transparent, that you are quick and that you are communicating with your LPs because they want to understand what is the exposure in our portfolio and so on.

35:03And that's super important. so that's why we actually have these processes in place and also try to segment it because otherwise it's not manageable with the 300 LPs, right? But what we also do, of course, we don't not only do this onboarding and then ask things in the survey, we also close to our LPs and like to communicate with them and work closely with them. So, for example, what we do a lot is we reach out to LPs after we did this onboarding and we know where do they actually have experiences and where do they have a good network when we see something in our current deal flow. We like to reach out to the LPs and then try to engage them in our deal processes.

35:50So for example, as an sparrings partner in general, but maybe also as a potential customer, we ask for feedback on this kind of product. Is there really a need in the market? And so on. So we really try to be close to our LPs and build up a real operational working relationship, because in this way you get higher engagement and they also have a level, like a more natural level of transparency, which gives a lot of trust. And trust in the end is the most important factor, I would say, when you do investment decision next to returns and everything, of course. but trust is very important and if you do this and you really work with them then the probability is higher that they will keep investing in your future fund generations and that's what we try to do and try to be really close and engage with our LPs and lots of interesting things there that were said and you know we of course we've developed our I would say investor relations apparatus over some time and And one thing that's definitely true, I can say, better make sure your LPs know also the bad news before they are in the news.

37:04You know, you want to stay on top of things. And that's sometimes not so easy, right? I mean, you'll have events in the portfolio that are not so much in the public. But if you have invested in a B2C company that all your piece are using privately or whatsoever, it will be in the news and they will know about it. And then you need to know what's in the news is not necessarily even true. And it's like it's made for the public. It's not even has a sufficient level of detail. So I think that's definitely key for anybody who starts to do this. Very, very important. and then other than that I think what's interesting is also if you look at the stage of the fund in the lifetime you start out with a fund it's obviously very different what you can report to LPs then versus a fund that's in year eight yeah but that's also how we treat it right so very early in the fund lifetime we talked to LPs about portfolio construction are we on track to with regards to portfolio construction, what we actually promised.

38:13So investments per year, the themes that we are looking at, why are you investing in these teams? What's so interesting about them? And that doesn't mean that you have to, in the end, to be factored. In our funds, they're investing into a blind pool, but obviously we have laid out a strategy, et cetera. And you can be opportunistic also, and you have to be as a VC. If you aren't over 10 years, then I think I'm not sure you can generate alpha. sustainably but um you need to like I think provide background why certain themes are now interesting maybe they weren't interested they were weren't interesting in a low interest data environment how does that change etc so portfolio construction themes that we think about um how do we think the year shapes up that's I think an important in the early days of the fund lifetime and yes it's nice to communicate follow-ons because it's early validation you know that there are up rounds in the portfolio but of course it I think Chloe said in smart LPs they know that it takes years for a fund to settle in the kind of in the quarter there and you know I think most of these think this is six to seven years um so what even in the second part of the fund lifetime now think of a fund and you know as opposed to that think of a fund that's in year eight portfolio is ideally quite segmented you know who the drivers are you have some dpi and i think then you can do you can provide a lot of value add if you have a pretty good idea what this means in the portfolio as in where do you think what an exit timeline is we never promise exits because in the end you know we can't there's many things that need to happen for an But we can provide visibility on where do we think a fair valuation is, where does this might end up.

40:02They do a lot of work around that. So that's very different work than we do in the early days of the fund. You just made me think of something we have to come back to, which is, of course, fair valuation and how you communicate that throughout the fund's lifetime. That said, though, I will just ask Sophie to come in here before we go there to a big subject that will overshadow for a while, I think. Sophie, tell us a bit about, because you run that syndicate model as we spoke about, how do you facilitate that your investors are best possibly, how should I put that, best possibly acquainted with what's coming in and what's happening across the portfolio?

40:44or how do you think about that? Do you think that everyone should know what's happening across the portfolio or do you only report on a company by company basis and all the things? And after that, Enrico, I'll go to you and ask you about the whole tech setup for both a fund to allow for all this type of reporting and communication during the investing phase and then contrarily on the same thing for syndicates. Sophie, you go first. I think it's very similar. actually to what was shared before. So we do very detailed reporting on a company level, both financially and qualitatively to talk about management, market trends, et cetera.

41:25We do report on a company per company level. So if you invested in five companies with us, you will receive five detailed quarterly reports. And of course, we are open in LP conversations about how the whole portfolio is doing as a whole, right? But in the end, a lot of people are not that interested in that because if they chose to invest with us in four deals, they don't really, yeah, are concerned with the other five or six or how much other deals we have been doing. So it's very individually focused, and we should also approach it from that angle because we are not structured as a fund. So it's a bit of a less, it's a bit of a diversification play, right?

42:01So we should keep spending attention on companies that might not be in the top 10 % highest performers, make sure that they also can still realize a decent return or at least have a decent trajectory ahead of them. So I think that makes it a bit different. But in terms of reporting requirements, I think it's very similar. So I like what Simon was saying about the SME mid-market and enterprise customer kind of thinking, because that's also true for us. You see that a lot of people are just reading an exact sum of a report and that's fine for them. And some people just want to know all the details.

42:35So they want to know every number and what's behind that. And we have to find a balance in reporting to have an approach that works for everyone. But I normally really like it to get our feedback and get their expertise. Also, what the others were saying, if we're working on an M &A deal, it's very nice to spar with some experienced M &A investors or dealmakers or entrepreneurs who have been there just to get their take. So in general, it's also a nice interaction moment, again, to get our view on things. And I really like to overshare in that sense, because I very much agree with what Chloe was saying.

43:13You just want to make sure that everyone's up to date and it always helps to get our perspective. Sophie, you said something there, which I found a bit interesting, because you said we share, of course, on a deal by deal basis. Because if you're a massing company, you actually don't care about Y and C necessarily. But at the same time, both as a syndicate lead and also as a VC, you are interested in sharing firm developments and you're interested in also kind of, yes, you committed to this fund, but I'd like to tell you that my fund one and two are already in the green. um so so how do you think about that both from your perspective and and also chloe alex and simon how do you think about the strategic communication through this period because one thing that you're reporting what's happening on the on the fund level because you need to but then there's also the marketing speech towards your lps in this period yeah no i very much agree and it's it's also a natural process right so some people only started investing with us like in the past year and they haven't been part of previous deals.

44:22So it's always good to share with them when we made what decision there and how those companies are progressing. Also for them to get a feel for the opportunities that are still coming up. So we do, of course, look at it and also calculate for ourselves what the portfolio performance is as if it was a fund. Because I think it's still a strong tracker to see how we do. but in the end that's also by the way how we sometimes can report to LP so we can show their performance as if it is a fund with I don't know five investments or ten investments or how many they've done but you see that because they specifically choose to be involved with specific deals they also like to to get that deal by deal yeah attention there and reporting because it's kind of their their driver yeah obviously there's the two parts to it and yeah Alex, Simon, Chloe, any reflections on the marketing side of communication to LPs during the investing period?

45:23How do you do that strategically, optimize it for positioning towards your LPs? Look, I think a lot of the things, you know, I agree with a lot of things. Of course, you can be strategic to some extent, but then also, you know, it's, we're pretty clear, for example, when you start investing, you know, the fund is launched. We already know when we want to raise the next fund, always subject to market developments. But it's more like tracking towards that rather than kind of trying to be opportunistic. I mean, I'm talking about next fundraising timeline. You know, of course, there's a few things that you could potentially do to strategize.

46:10You know, I think you want to show a nice performance before you actually go out. But at the end of the day, it's little marks on a quarterly by quarterly basis. What was very strategic going back to the market downturn started at the end of 2022? if I'd say what was the most strategic thing that we did we proactively adjusted our valuations without waiting for any corrections so we did that up front yeah and I think you you also wanted to talk about fair values we were in for many years in the market where you could just lose use the last price because there was always a new price you know and and I think sometimes then you you have to come up with a new price because the one's old but then we were in a scenario where you could anticipate that the new price is not going to be the old price so and that's tricky right so how do you stretch how do you also when you think strategic because i would say that's strategic you can wait for prices to happen and you're like look that's the price that was paid now i'm marking it down or up and and then i think many people had to mark down then but that's also a lot of piecemeal kind of a piecemeal approach right then you may end up marking down and marking down and we said look we want to find a way where our portfolio now shows the most adequate value that most adequately reflects the current market environment now that's hard to do yeah but you can get there you can in an iterative approach manage that and i think that was strategic if i come back to that question that was the most strategic thing we've done in the last three four years and i think maybe to jump in on that it's strategically building trust there with your lps right which goes back to that point what we were saying earlier you know trust is the most important thing here i don't think especially existing lps really do not want to feel like they're being sold to when it comes to the next fund, right?

48:19The best way to get your existing LPs to re-up is to have this trusting relationship whereby they feel that they know the truthful vision of activity of what is going on inside your portfolio. And so if you're trying to be too strategic and trying to sell too much to your LP base, I don't think that's going to end up well for anyone. So I think, you know, taking that proactive approach And, you know, giving that honest overview of what is going on is ultimately the thing that is going to lead to better trust, stronger partnerships, and therefore most likely make your LPs want to re-help with you.

48:57Maybe to add on this, because we did the same as Alex just described, and it's super tough because in private markets and especially in early stage venture investing, you don't have actually like, I would say, standard market valuation methods. So it's really interesting what people actually did. So I reached out to a lot of our LPs, like the bigger ones that are invested in several GPs, you know, that are maybe invested in the same assets. So our co-investors and ask them, what is the valuation in your books and in their books, actually, you know. And we also reached out, of course, directly to our co-investors because there is not like a real method how to do it.

49:41Some people then actually adjust the valuation by the company in 25 % steps. Some others really like to or try to calculate something. And it's really interesting. And you have to find your own way. But what is very important, as Chloe and Alex mentioned, is that you're communicating with your LPs and that you let them know. And also what is important now after this happened in the down market or when the market turned, We now have a new process in place where we sit down with all the managing partners and myself together in the room once a quarter. And we go through the portfolio, all of the funds, asset by asset, and ask ourselves, do we have to adjust the valuation or not?

50:27And then we discuss this. because I think it's really important to have a process in place and not just always keep the last money valuation in the report, as Alex mentioned, right? And one other strategic thing, of course, would be something like when you do a new fundraising, maybe you don't have so much DPI yet or something like this, like different instruments like secondaries, partial exits, and so on. Maybe you want to show more DPI to make it easier to raise your future funds and stuff like this. But I think this is really a tough decision. And I wouldn't do that because you have different LPs in your different funds.

51:10Right. And I think you always should increase the interest or align the interest of all the LPs. And you shouldn't sell any assets where you have a lot of upside potential and stuff like this. But this is, of course, another instrument to think strategically about fundraising and expectation management that maybe make your life easier. But I think you should always think this decision through. And it's not that easy to actually do. And there's a lot of discussion that we also have internally when to sell and stuff like this. So when you're in like year eight or so in your fund lifecycle, it's not about the follow-on rounds and new investments anymore, as Alex said, but it's more about when you sell actually and when you distribute the money to the LPs.

51:58Absolutely. We're going to get much more to distribution here in a second. And Enrico, I'd love to ask you because we had just a conversation now, but we also had a conversation a couple of weeks back on the UBC where we did a panel on portfolio management and data-driven decision making and so on. And there, one of the big topics that ended up coming up was exactly how do you measure performance of a fund before you start having real markups and so on? Because that's typically the situation that you raise fund two and three on the back of. So I'd love to ask you, Enrico, how do you, with Bunch, make sure that your investors can, in the easiest possible way, give good guidance on where the portfolio stands and the fund stands, other than just the very, how should I say it, boring statistics?

53:02things uh it was super super good question and super good discussion i think simply like first simple answer right the you guys are looking looking a bit at everybody else they're they're there for for good reasons so um at the moment we are not giving anyone advice how to value a company but what we are trying to do is actually giving them the perfect data set to take decisions So what we actually have seen, and I'm also the founder and I'm also reporting. So we've seen that obviously founders sometimes are good in reporting and diligent reporting and some founders aren't. That's the first level of flexibility that, yeah, we've seen now more and more come up.

53:46And the second way that we've seen it all, and that's probably more relevant for Chloe, is that for funder funds or investors into funds, they're extracting information out of the reports from the underlying funds and that's something that we are currently working on very very holistically where we actually extract this information as data-driven as possible so you always get pdfs but they're very similar we have a good standard of of ill power and west europe reporting that most fund reports on and therefore give you a more data-driven yeah database to work and take decisions on rather than look through pdf reportings and then it sounds super super super trivial but but also for those investors and and some of the lps it's it's really what we call global cap tables because some investors don't actually know what the underlying assets what their ownership in the underlying asset is because obviously if you want to invest into three four five ten fifteen gps they sometimes tend to invest into the same assets and sometimes they also report different valuations a bit to to to simon's point so i think two years ago when we started the company we were like okay every single startup that we have on the platform or that is invested through our platform should be one startup and has one valuation has one reporting and and maybe at one point this is actually also the founder directly being access but we learned quite quickly that this valuation yeah level between funds is super, super huge.

55:20And some funds take this decision very early and some funds follow on. I think in the end, most funds took the decision to change a couple of the valuations. But in the end, to summarize, we are a data provider and we are currently extracting data mostly out of reports for funder funds and investors into funds. And then secondly, we are currently thinking about how can you make this portfolio reporting a more holistic, more standardized approach? Because in the end, that's the only thing that we can do, right? We can only provide Alex or Simon or Chloe or Sophie with the information. We are not, that's why we're in private markets.

56:02We are not the ones taking the, giving the feedback and doing the price adjustment at the moment. Even though they have found it super interesting that Chloe said, okay, we do quarterly earnings calls. So one's been in public markets and things that are so similar are super, super interesting because obviously the liquidity, the tradability is something that shows potential but also risks through private markets. But to summarize, we provide the data. We are already quite powerful when it comes to data that we know best, which is actually portfolio reporting or fund reporting. And we are getting better to understand what is operational reporting, what are operational KPIs and what is maybe even a market standard on certain sectors.

56:50But that's something that we are currently learning, that we're getting better at. In the end, the decision is with the GP. And now to the final segment of our roundtable today, and it's going to be a short one. And it's very, very, I would say, I was about to say fitting because what I had written in my script here was that it's an often overlooked but crucial part of the LP investment journey. And here we are making it an overlooked part of the journey by only dedicating a couple of minutes to it. But Chloe, I'd love to ask you to go first here and tell us what you see as the best practice as an LP.

57:29Yeah, I think best practice as an LP really differs upon what the exit scenario is, right? So you have a few different things that can happen. Either a portfolio company exits kind of early in the journey. it's a trade sale as an LP you don't really have much influence on what happens there if there is an IPO maybe there is more influence as an LP because sometimes your GPs will ask you okay well when do you want to sell when when do you want us to sell the shares and that can vary from LP base to LP base right maybe you have a super small LP base to all want to hold in that case do that I think it's again this communication point right really understanding what are your LPs positions and what works for them sometimes you can distribute the shares in specie and you know that way you can do different things that for different LPs but really it's this asking your LPs what they want which can be a really important part of that journey secondly you know you can get to the end of your fund and maybe there hasn't been much liquidity and as Simon mentioned you You know, maybe there's an opportunity to sell some things in secondaries or maybe there's an opportunity to do a continuation fund.

58:43Again, I would just say, talk to your LPs about it. Like they're there, they're around the table, they are limited partners. They will have an opinion on it. Discuss the possibilities, the outcomes, the eventualities. Make sure everyone understands that it's on the same page. And I think, you know, that's a really, really important standing starting point is just really, you know, having those conversations with your partners to get a view on where your LP stand and what's important for them. Sometimes it will be really important for people to access liquidity. And so, you know, they'd rather sell quickly and at a lower price.

59:19Maybe your fund already has great DPI, in which case, you know, they're willing to ride it for a little bit longer to get that upside. Maybe one point is that you can also involve your LPs when it comes about exit in your portfolio. For example, if you have corporates or bigger family businesses as LPs in your LP base, they can actually also be the buyers of your portfolio companies. Sometimes you even have a lot of potential inside your portfolio. If you have like a late stage or more mature former portfolio companies that you already exited or that went public or so, they can be buyers with newer portfolio companies, stuff like this.

1:00:02So I would always try to help the portfolio companies when it comes to exits and try to leverage your LP base as well. I know it sounds repetitive, but the outcomes is important. We had one larger M &A trade at the end of 2020. We did keep LPs updated in our quarterly calls, but only to a certain extent that we're actually able to, right? And I think it's also around managing expectations. If I had said back then early on, yeah, I'll think it sells for$1 billion. dollars every LP goes crazy and they're like oh great let me tell my clients in front of funds and stuff money's coming right and then but there's so many things that need to happen right there was an antitrust uh case that first needed to be solved that takes a few months so we just try to manage expectations also until it's really done now with an IPO again it's very different also right so and we we also had that and i was asked you know i think they weren't even a pre marketing and in my prior career i've done a lot of ipos so i also know a lot of things that can happen in an ipo it's just amazing that you get asked a lot of questions so okay so when is it happening i heard the pricing is in four weeks so do we get the money in five weeks that's so far away from the reality i mean the sophisticated lps no but um maybe some are newer to the business or they just you know if this happens you know late in a fun lifetime which ipos usually just takes some time it's not a phenomenon that you see all the time and we just try to manage expectations because and if you've seen in a down market um there's so many things even if the ipo shows priced let's say it's done you know Roadshow worked well it's priced you're still in a lockup yeah you'll be six months in a lockup at a minimum we have seen shares not we luckily in the portfolio but others also have seen shares trade down 95 in the lockup period so if you had told LPs five for five years how great this is and it will return the fund multiple times and then you You actually lose the value, 95 % of it in the lockup period.

1:02:23It's tough. So we kind of, whenever we mentioned something, you know, for example, price range was set. They went out to the roadshow. We let LPs know that. They can read it online, but, you know, they also got it from us. Pricing was done. What happens next? You know, okay, lockup period is done. How do we, and then it's more around how do we think about the company in general? world what's the sell down strategy like do we want to sell everything in the bargain the block trade or uh do we want to do there's lots of things you can do you do we want to sell down our stake in a dribble down over three months or you know what's our plan are we long-term holders because we we've been with the business since day one we know you know we know the founders we know the business or is it actually we're quite far away from the business so we want to sell short to medium term because we're not in the end we're not stock traders right people invest with us because we're vcs and not stock traders i think that also got a bit diluted during the boom years with some of the u.s funds and at the end of the day it's around that why do we want to sell within the next three months what's our strategy is it we wait for the next we basically when we did that sale we basically said here's our macro calendar those are the events that could potentially impact the stock we've spoke to a few people this is the next quarterly reporting date this is our sell window we don't announce it but that was my answer when they asked and then we just pulled the trigger yeah we did it before some very unfortunate events happened in early 2022 which was in the thing in the end the right thing to do but i think it's more around that how do you think about the process and how do you what's your thinking around it and not just saying oh you know seems like a a good day for the stock let's sell maybe sex sequering a bit on this I think overall what we've also seen is education right transparency I mentioned earlier and we discussed this but education on on this element across the board helps tremendously we all we all wanna wanna make private markets grow as they have been growing or even more and and it needs education for more people to participate or more people to understand what is the IPO process and that there is a bit of uncertainty even though that it might be an IPO.

1:04:46I mean, we also saw Figma and Adobe. I think that's also something that probably everybody was already spending the money on Figma, which is an amazing company. I think everybody works probably even with it. And then in the end, they cannot do the deal. And I think they still had a billion of just a cover-up fee if the deal didn't happen. But overall, what I want to say is education is key and a lot of things can go wrong. And if you are hyped up and already spent your money before the DPI actually has been returned, then you might run into two issues. Rico, I think you segued us perfectly into the ending where I can say, let's close on the line of a lot can go wrong.

1:05:42Everyone, thank you so much for tuning in to today's roundtable on ACNLP management. I hope you enjoyed it. Simon, Sophie, Chloe, Alex, and Rico, thank you so much for joining us here today. I hope you had some fun as well. Thank you. Thank you.

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