E305 | EUVC | Stephan Heller, Founding Partner at AQVC on AQVC's investment strategy and approach

0:00Welcome back to another episode of the European VC podcast. Today we are talking to Stefan Heller from AQVC. Stefan, of course, is a great thinker and a great entrepreneur building in the venture space. And I think you know AQVC. And as I also closed the episode saying, we will give you a big update on AQVC together with Stefan. But this time around, we're going to talk only and exclusively about how Stefan and his team diligence is track record with and performance with emerging managers. so fund one fund two fund three how do they look at that Stefan has an interesting framework for it so I think you're in for a great episode tear down this wall it's more than just an ally this is a union of values united and determined we can serve as a model for other regions of the world The nature of a problem requires a European response.

1:03Europe is a story of new beginnings. Let's start acting. Here's a few words from our beloved sponsor. This episode is part of a series dedicated to raising venture funds across Europe and come together with the launch of the European VC Fundraising Bible. Together with our friends at Isma Capital and Flow, we've spent the winter digging into the past nearly 300 episodes, as well as the latest market data and Iceman's vaulted data treasures to uncover how the tech reset impacted the fundraising market in Europe and how leading VCs across the continent have changed their strategies, tactics and operational handbook.

1:44Filled with graphs, beautiful narratives and video interviews, providing an entirely new and engaging experience, the fundraising bible promises an experience only surpassed by the actual hitchhiker's guide to the galaxy. Don't miss it. Go get it now at flow.io forward slash raise. That's F-L-O-W-W dot I-O forward slash raise. And the revelation doesn't end there. Join our live roundtable with venture capitalists Apostolese, Speed Invest founder Daniel Kuyper-Kanor, and SuperSeed's very own Dan Bauer, alongside disciples of LP Investing, Christian Hortz-Pedersen from IIP Denmark and Joe Schorge from Isma Capital.

2:27Sign up for it via flow.io forward slash raise as well. Your venture journey redefined. This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Stefan, welcome back on the European VC podcast. Today we will not be talking about AQVC much, but I do think it is correct of me to ask you to just give a really quick intro to yourself. Thank you, Andreas. Glad to be back again. Yeah, my name is Stefan Heller. I'm one of the founding partners of AlphaQ Venture Capital, in short, AQVC. We're an emerging fund-of-fund, and we set out with a unique product or structure where we're offering investors vintage diversification out of the box through an evergreen structure focused on early stage VC funds and we invest 50 % in emerging managers.

3:19So I think that's why I'm very excited about some of your questions. So let's get right into them. Stefan, when an emerging manager comes to you, that means fund one, fund two, fund three, what do you look for when you're maybe let's start at the overall criteria? What do you look for? And then we'll dive into the track record session afterwards. I mean, for us, what is always important that there's an alignment to our thesis, right? So we work based on mega trends. So we have identified six mega trends that we think, you know, that they will hold true regardless of short term hypes. And we always have to see that the fund managers fit into these mega trends.

3:57But then they also need to fit into our white spaces of our portfolio construction. So if you're looking for geographic space and we've just done a fund in France, for example, we're not going to do another seed fund in France that is kind of competing with our existing portfolio. So we really have to also look at this. And when we then take these managers, then, you know, especially first-time funds. And I mean, we are building a first-time funder fund for us, at least. It is an entrepreneurial journey. It's really, really hard. So we have really high respect for the GPs building these funds and often this very cool, interesting, cutting edge strategies.

4:33But for us, it's really important to have this uniqueness, right? So is this fund really unique in their thesis, in their strategy, or is it like another badly copied climate tech fund? Like two years ago, everybody was raising a climate tech fund. And yes, climate is one of our themes, but there were so many people that didn't understand anything about climate and climate tech raising a fund. And this didn't make them very unique to us, at least. Ventures and outlier business also for funds. So some of these funds still managed to raise capital. But let's see when the vintages are fully matured, who comes out at the end of the tunnel?

5:09This, I think, is the second big element that we look for is this hustler mentality. Right. So we see it is sometimes we see it as it's almost for tourists. Right. So very often we see people that find tech exciting, that venture exciting, which is great. But then they build a VC fund. But the average investment duration in venture lasts longer than the average marriage. Yeah. In our prep for the call, we just talked about prenups and getting married and all the, you know, long term commitments in your personal life where you really put some effort into thinking this through. In venture, people underestimate how long it takes when you do a seed investment.

5:46And this is really a hustling mentality, right? So you really have to think very long term. You hustle your AUM up in a conservative way. And you need to be there for founders. So this is really, really tough. The third thing I want to mention is building a firm, right? Having a vision to build a firm and not just a one-hit wonder, at least for us, right? There are some funds and ATs that are happy also to invest in one-hit wonder funds. this can be okay for some. But for us, we really want to build a relationship. So if you're raising your first fund, we want to see your thinking about what are you raising when you're raising your next fund, your third fund?

6:23How are you thinking of even transitioning? What is your goal? Do you want to just get rich, right? Or do you really want to support entrepreneurship? What is your long-term goal for yourself and for your firm? Then it's getting more technical. So with first-time funds, we also see very often that fund managers have to do three things in the core, right? They need to be good investors, good operators and good fundraisers. Mostly this is mutually exclusive. So if they're good fundraisers, they are not great investors. If they're great operators, then sometimes not great investors, nor great fundraisers.

6:56So this is not very easy to do all three things at the same time. And so one thing that we look for is really fund modeling and understanding kind of, you know, what is your strategy? We prefer funds that are, for example, lead or co-lead versus tag along funds, right? You have these first-time funds who are just getting into good deals because they have a good network, but they don't care about ownership. They don't come in before Sequoia. They come in with Sequoia or after Sequoia, in that sense. And this is, I think, when you are a first-time fund and we are looking for this unique edge, and we are looking really for managers who have access to founders, have access to an ecosystem, and can come in before household names, find these startups.

7:36This, I think, is the skill set. And then, obviously, having a right-sized fund. Yeah. So having a first time manager, we've done one of our best performing funds and we are very happy with them is Nucleus Capital. I know you know them very well. One of the really stellar funds in Europe, I would say, starting with a very small fund, really hustling, really working hard, very, very good strategy. Great with the portfolio. And now they're raising a much larger fund for them. Right. It's still not a crazy jump. but obviously right-sizing this is a super important skill set and i think there are especially if fund managers are great having that discipline also to not raise a huge fund as a first fund because this is also you know it's sometimes very hard to then actually go and deploy all that capital and to learn all of that is not not easy this is all for first-time funds right for second-time funds this is all of this right obviously what we look for but it's it's again, it's then it's more about the execution, right?

8:36With first-time funds, it's almost like a startup at pre-seed. You can raise on PowerPoint almost. You know, you can get away by saying what you want to do. And it's very hard to check. We usually kind of don't invest directly. We get to know the manager. We get to see what they're really building. But with second-time funds, you really want to see that they've executed on what they set out to do in terms of portfolio construction, firm building, and then we also do more reference calls on them. So reference calls, I think, are one of the most important ways of doing due diligence. We do a lot of them, even for first-time funds, because we never invest in first-time investors.

9:12But once they are building this firm and they've hired people, then it's really important to do a lot of reference calls to CEOs, co-investors. And yeah, for third-time funds, I think, you know, once you get into fund three, we do like to see some liquidity or capability around being a good money manager. so this is one thing that i as you know my background you know it but i was a founder before i still see myself as a founder but you know some of the best funds in europe as a founder that you as a founder you find super aspirational to invest into you once you look at them from an lp perspective they're not actually that great yeah and if you're coming out of this bubble that we've just come out of and you didn't make any dpi you didn't do some secondaries you didn't do some clever money management tricks that could have still kept the positions in the company.

10:05So you're not taking away much upside, but you at least create some velocity of capital to your LPs. I think that would have been much better for the European ecosystem to kind of create that flow. And I think this is sometimes where we really try to understand that a fund manager understands sometimes doing a secondary, selling a part of the position at a high ground to a larger investor who doesn't care so much or doing also early M &A sometimes for the companies that may not be the unicorns over outliers, but helping them also to find, you know, 15 million, 20 million, sub-100 million exit.

10:40This also can, you know, be meaningful at least to show to your IPs that you can create these opportunities. You spoke about how you look at track record with second funds. Second funds, you had to focus on their ability to execute on what they had promised. Basically, that's a very important part. And then on the third fund, it's starting to be more also, do they have the ability to generate DPI and be thoughtful about that? What about the first time fund? When a GP comes to you with, or the aspiring GP in this case, comes to you and they have a limited track record, what do you do there to then say, okay, well, I want to see something.

11:25I want to understand. Yeah. I mean, we don't do first-time investors, right? We are very clear about this. I mean, this is also not necessarily, you know, you can say fair. Also, there's a big argument in the venture world around diversity of teams, and not everybody got the chance to be an investor. Not everybody comes from a privileged background or made money, whatever, right? So however they started being an investor. But I think it's probably better to build your track record as part of a firm. So get yourself hired by a VC fund, start working on the investment team and start building some good deals.

12:01So I think this is also important. And what we do then is obviously we need to validate that track record. So validation of track record is also something that is very important because just because you worked at, I'm not saying any names, but a big fund. And you sat maybe in the room as a junior on the investment team doesn't mean you have done a deal. But sometimes, or very often, actually, the juniors bring the deals. It's not actually just the partners. And then, obviously, junior, obviously, in our industry, is still very senior people normally. And then if they spin out at some point, because, you know, whatever, they want to focus on a specific strategy, they believe they can do it better than being part of a bigger firm, then making sure that this track record can be attributed to them is super important.

12:50And this is done by reference course, right? When you call a founder, he will tell you who did the deal. Is it really the almost retired partner or is it really the younger person on the investment team that really hustled to get a deal that found the founder and helped the founder also through multiple issues potentially? This is what we like to hear. So going really deep and understanding that track record. So it's not just like, oh, here are my numbers. Here's my Excel spreadsheet of track record. Yeah, this is part of it. But it's really going down this rabbit hole of reference calls where, you know, the GP usually provides you with three, four references, but you really have to be plugged into the gossip, right?

13:29The grapevines of Ventureland in each ecosystem to then do your own research, find out, okay, who have they worked with and validating the track record. And this is an important part. And before we started the recording as well, we also spoke about the sophistication levels of LPs. And you said earlier in this conversation that you oftentimes, let's see where the apples fall once we're further into the generations with the climate funds as an example. But you're absolutely right. Funds are being backed that many of the more sophisticated LPs choose not to back. And I just want to, in connection to the reference calls part, it's incredibly hard to do reference calls in a very networked industry if you're coming from the outside.

14:19And this is one of the big issues for non-VC native LPs. How you can't call someone up that you don't have a great relationship with and then ask them to rat someone who they've done three deals with. That's going to be difficult, right? And now I said rad, but that's to put it up. You're making the case why we recommend most family officers to start investing through a fund of funds and not going directly into funds or startups if they have no network and they have no experience in it. You know, this is usually the case, right? Where people that and this is actually a problem, right? I think we need to unlock more private capital to venture and there needs to be more allocation to venture across the board.

15:04but everybody always starts with direct investments yeah without being completely sucked in and if you which is the worst thing right as an angel investor you know not that i regret my angel investments yeah but i mean it's a hobby right at the end of the day it's not something where i would plan my retirement on and most of these families they have obviously a generational obligation they need to you know make sure the capital is preserved for generations to come and it's not like a hobby course where you can just gamble on some of these companies and they all become Facebooks. This is just not the reality.

15:34It's kind of like fishing. You choose to start to fish with a fishing rod instead of a net. And the professionals fish with a net. And you might actually think about fishing with a net instead if you were really looking to catch some fish. Stefan, I want to ask you more about these second-time funds because now we spoke about how your diligence track record on the first-time funds. When you're then looking at, and of course, you do all the same things for the second-time fund, But then you add in the layer of really looking at their ability to execute on the thesis and their strategy. So I'd love to ask you, how do you diligence that?

16:08How do you go in there now that the fund has some 14, 15 investments typically or 70 % of their initial tickets deployed? That's probably where you'll meet them because you're one of the first ports of call, of course. So what do you do then? Yeah, so it's really building this relationship to these managers. So I think we've also very often, we've been either too slow to invest in some funds that we wanted to invest into. We also missed opportunities, either by our fault or by the manager not following up properly. There's multiple things. But it's about building this consistent relationship and keeping your prospective LPs that are actually interested in you, keeping them up to date through your journey.

16:52I think some fund managers are very good in marketing. So we really see a proliferation there in content. I mean, this is the whole podcasting scene, the newsletter scene, the LinkedIn scene. All of this is exploding. It doesn't mean they're all good funds, by the way. Yeah, but there's generally a lot of marketing. And I sometimes wish that also you stay in touch with these fund managers and you get part of the journey. Not everything is about – it's not always perfect. So I understand and we understand totally that if people set out on their first fund and they're going through a learning journey, they're correcting, they're also adjusting, which is also fine.

17:29But sharing that with your prospecting LPs where you know they're really committed, they want to back you. And obviously, we being a 100 % venture-focused fund of fund with an evergreen, we are a very long-term partner. We don't have to do any kind of recalibration. If the fund manager returns capital to us, we recycle 75 % of that into the next vintages. So we will grow and kind of continue to back them as long as they perform. So that's a really nice idea to have in the long term. And so building this out, building these relationships and sharing openly along the journey is important. So when you've done your 16 investments, we've usually watched that over a period of time.

18:09So it's not like, oh, suddenly there's this fund. Sometimes this also happened, especially when we started out ourselves. But by now, we've probably built the relationships to most fund managers and even people thinking about building a fund. And so I think this is really a key skill, how to keep your potential LPs also in the loop and finding that fine balance between being informative without being annoying. So I think that's also a bit of a skill. If you were to say specifically when you make this deep dive of diving into what did they do versus what did they say they would do versus the performance of the established portfolio, what are the things that you look for there?

18:53Can you share any metrics that you say, okay, for a fund manager, this is what you want to be doing early? It's quite simple, right? It's ownership percentage, it's ticket sizes, it's stages. When they tell us, okay, we are going to be lead investor, we're going to get 10 % to 15 % ownership at seed, then you look at the portfolio and it looks like a mixed bag of whatever, can be great deals. I'm not saying there won't be great deals in there. But if you're getting 1 % or less because you went into hype party rounds with your buddies and you know venture is also friends investing together. It's a super small industry.

19:31Everybody knows each other. like WhatsApp channels, everything is connected. But you need to be disciplined. And I think this is really the hardest part of it, is really having that discipline of also saying no. So you have to say no. You have to stay true to your mission, what you set out to do. And that is going down to fulfill to a certain extent. I mean, there's always a bit of flexibility, I guess. But in most cases, at least we don't like to see these opportunistic fund managers that pitch you a very sophisticated strategy and very, very clear ownership percentages and targets, et cetera.

20:07And then you look at the portfolio and it's all this mixed bag of stuff, which again, also going back to the topic of climate or any other sector, right? If you tell us you have a sector focus, you have an expertise and you're, oh yeah, we've then done this investment in whatever, we are burden-based fund. We've done this investment also in the Middle East because we thought we can raise funds there. Whatever, you just go kind of weird in your geographic expansion or what we call nodes. So we look at fund managers when they pitch us also that they have access to a certain node, a competitive edge.

20:44So this can be the PayPal mafia that they were at a big firm before and then they spun out and they now invest in SpaceX founded or former SpaceX employees companies. So this can be a node. This can be a regional node. So they say, okay, I'm the best. seed investor, angel investor in Tallinn or like whatever hub and region. And now I want to professionalize and build a fund. So again, this is a node. I'm like super plugged into AI because I've been writing an AI newsletter and organizing a conference and I know all the AI founders. So all of this needs to then match against what they've then actually executed on.

21:18Finally, before we close off, I want to ask you about the third time funds where you added in the layer of DPI creation, basically. How do you deal with that? How do you think about that? Because this is one of the places where there's many schools of thoughts as well. And in Europe, we are very light on it. Many fund managers have not generated big DPI yet. So oftentimes you have to go with philosophies and networks and so on. Personally, I moved to the Middle East, right? So I live in the Middle East now. And we are a European team mostly, but we also invest in the US. And when you look at it from a global perspective, the Europeans, they're kind of obsessed with short-term DPI almost, which, again, I think is because of our lack of sophisticated LP base in Europe.

22:09But when you look at the US, they have a much longer investment horizon. And also, when you look at most of the success stories in venture over the last 30 years, then it's also having a very long-term holding understanding. But it's also about being good asset managers and money managers, right, in that sense. And there are always ways to make money along the way. And I gave that example earlier that you can actually do a secondary part of your position while still keeping the upside, while still making kind of great returns, but while unlocking some liquidity, right? And I think this is for us important.

22:43And we like to see a kind of 1x EPI after, you know, when you get to the end of the fund lifecycle, right, when you come to seven, eight years. Yeah, this idea would be nice to see. Obviously, more is better. But if you can get to something in that direction, it's good, right? If you're still at like 0.3 or even zero, it's going to be tough. And especially if then you look at the underlying assets. So we also, you know, we always look at the entire portfolios. And when the startups were extremely hyped, their massive leg press suddenly, you know, all these really structured, complicated rounds, then it's like, is this really going to get any better after this?

23:24So maybe, but I don't know. So I think being fully aware of the financial engineering behind venture and the discipline of a fund model and also the power of it, right? This is, you know, this is why it's an institutional fund. If you don't want to care about this, then build a syndicate, run it like an angel, this is also fine. But if you want to really be a sophisticated, institutional-ready fund, you need to think about these things too and learn about financial structuring and financial engineering and venture that can produce small KPIs that will convince more APs to invest in you. And thus, we came all the way back to fund construction, fund model construction, which is beautiful.

24:04So Stefan, thank you so much for joining us for this conversation. It was amazing. Everyone who tuned in today, I do hope you enjoyed this episode. I promised Stefan as well as we'll do the same thing to you now that we will do a catch-up call with Stefan where we will get the latest and greatest on AQVC and their journey. Thank you, everyone. The good, the bad, and the ugly. Yes, the good, the bad, and the ugly. Thank you for tuning in today. Do make sure to subscribe on you.vc and drop us a review if you enjoyed this episode. Here's a few words from our beloved sponsor. This episode is part of a series dedicated to raising venture funds across Europe and come together with the launch of the European VC Fundraising Bible.

24:46Together with our friends at Isma Capital and Flow, we've spent the winter digging into the past nearly 300 episodes, as well as the latest market data and Isma's vaulted data treasures to uncover how the tech reset impacted the fundraising market in Europe and how leading VCs across the continent have changed their strategies, tactics, and operational handbook. Filled with graphs, beautiful narratives, and video interviews, providing an entirely new and engaging experience, the fundraising bible promises an experience only surpassed by the actual hitchhiker's guide to the galaxy. Don't miss it.

25:23Go get it now at flow.io forward slash raise. That's f-l-o-w-w dot i-o forward slash raise. And the revelation doesn't end there. Join our live roundtable with venture capitalists Apostolis, Speedinvest founder Daniel Kuyper-Kanor and supersedes very own Dan Bauer, alongside disciples of LP investing Christian Hortz-Pedersen from IIP Denmark and Joe Schorge from Isma Capital. Sign up for it via flow.io forward slash raise as well. Your venture journey redefined.

26:03down this wall. It's more than just an alliance. This is a union of values. United and determined we can serve as a model for other regions of the world. The nature of a problem requires a European response. Europe is a story of new beginnings. Let's start acting.