E321 | EUVC Awards | Xavier Lazarus, Partner at Elaia Partners on the rise of AI in venture capital and future trends

31:18The first one in 2000 was a small wave in France. But you're a second wave with more seasoned people investing, more seasoned entrepreneurs starting to repeat or to advise. And then you have major public effort to help the ecosystem to just exist. So there were money from the state into seed funds. There were BPI, which is the French state bank, that was created by just merging everything that we had for entrepreneurial things. There were some pushing into private money to come. There were then some tax understanding changes that, you know, flat tax on capital gains, better option policies in taxation, etc.

32:06So you have created waves and waves. And it's lasted now for three governments, well, three presidents in a row. So even if it's Hollande, Macron 1, Macron 2. so it's something that starts to become a pillar of our development and this gave all this French tech part and because of the momentum of technology globally and also the momentum of AI in Europe etc then we had on top talent pools but you had on top early customers, you have now international VCs betting early in our companies you have people like us who have become now more platform and who can really make checks bigger and bigger but also earlier and earlier years.

32:47So everything has happened, but it's a long process. But there was a massive public impulse to promote and help the people who were, we were not a handful in 2012, but we were maybe 100 people really working hard to create an ecosystem. Now it's tens of thousands of people just playing there. So really it was about take promotion, change of laws, and letting also some people, the private market, because it's a really private market thing. Yeah. They let the private market happen to. And it's incredible that it's moved that quick, that it really started forming just 12, 15 years ago. It's incredible looking at the strength of it now and the investments we're seeing.

33:32You said bigger and earlier. That's a good segue into talking about the ATI's round then. 220 million euro seed round. That is a big one. When we saw Mistral, everyone was shaking their head saying, what are these guys thinking? I haven't checked at all if anyone said that about the age round. But it's definitely something I could imagine some would say. And I'm sure that it's also something you've been debating inside. How do we make this big bet fit into our portfolio model? because we all know, you know, doing if, you know, if you take, if you do a too big round, then you're overexposed. If you go for a too big percentage, right, compared to the full fund size, or you go the other way and say, well, we don't want to, you know, we don't want to fuck up our fund model, but then we're also going to have to say, okay, we're happy with 1 % or whatever.

34:31So how did you think through this? And so the answer is quite simple, is that you need to be sophisticated in your fund model. A fund model for many of our competing friends is just an Excel with a few cells and you have, you know, in CIDA, you need to have 15, 17 % of the company for that check, etc. But if you put that in math, which is, by the way, a decent sample of what could happen, then you don't realize how much you're concentrating on things. How much you are focusing yourself on something without having realized how much we're focused on something. So what we did is that, that's my mathematical background, we used the little data that we have and experience.

35:16And since 2012, every new generation of fun, we do a backtesting reward, review our strategy. And now we have a very sophisticated model called EMI, E-M-M-Y, like Emi Nauter, the German mathematician. You can create portfolios, you can simulate many things and use a very useful tool, normally not for VCs, which is the Monte Carlo approach, which is to play a million scenarios, randomize and see what happens for the fund development, deployment and for the fund returns. And this is how we make our decisions. The model will never say what we can do, what we should do. It says what are the impacts of whatever we can do.

35:57so when we are facing a usual question we don't need the model because this is core strategy we do the math by heart apply the thinking but actually it was decided previously but when we have a weird question yeah a natural case partial exit on a very large company should we take it on or at the same time we have two companies being acquired by PE firms should we roll over should we exit which one So this kind of question, which is portfolio management, then we simulate and go. And for companies like H, we did that because it's out of our envelope of modeling. You shouldn't make a fund with only H kind of companies unless it's a fund that you don't care to lose everything because it's the risk you're taking.

36:49So what we did is that we did finally two thinkings. One is that we realized that one company shouldn't be enough. so we are creating a mini portfolio of Gen AI bets inside a larger portfolio. This is where we have Flex AI for example but we have other companies there, we have Gscal etc. So we're creating more bets and all are different but in a way or another we are indexing a bit more I would say. And then what we do is that each bet that we do is calibrated on the return that it can provide under not completely crazy scenarios. so of course you could create a scenario justify everything with that and what we saw is that in companies like H you go big or you don't play because if you try to apply rounds regularly with gross valuation etc you realize that you're going to put before you know if it's working or not a lot of money anyway so what the H manager was doing he said hey, instead of doing four rounds let's do just one because everyone is going to put the money anyway so let's put it day one because we need it for computing power this and that is the risking a lot we will have results for sure with that and then you know what everybody takes the risk to just say hey it's not working period but if it's working then at the end you have a scenario where you can have a strong return for the fund so we model we just modelized it and say hey it's good enough and inside this portfolio of generic risk inside this portfolio it makes sense but it's portfolio management and construction And this is where your roots as a VC are key.

38:28Because either you are a gambler, and you know what? A gambler is lucky and lucky. It's better than a casino. You have a better chance to be lucky in VC, but it's still lucky and lucky. So it's very hard to go to institutional people and say, give me money because you know what? I'm lucky. It's really hard to sell that one. Even if it's true, it's very hard to sell. Or those are the risks I'm taking. this is what I'm trying to achieve and by the way, I'll never make a 20 times the money back fund normally. If it happens, it's that I've been more than lucky. It should not happen. Yet, here are the reasons you're taken.

39:09Here is why the capital is quite productive. Here is why I believe I do a minimum return. And it's all about portfolio management and construction. So it's understanding in our VC world, people believe they are just pickers, stock pickers and gamblers and I think it's a very bad idea. We are just money managers and there's an industry called asset management doing it properly. Yeah. Can I ask you a couple of things? Your EMI simulator, that's a proprietary Alaya developer and not something that you're productizing or sharing with anyone? We are not doing it for one reason is that we believe it's a competitive advantage.

39:53We believe that makes us better portfolio manager. We don't select better companies because of that. They would never tell us this company is better. But I do believe we are optimizing returns with the same portfolio. We'll do more returns than others. Which, based on the data that just came out recently, I can't remember the fund name now, but I think everyone saw it, right? That the best funds, the funds that returned above 5x, the real difference between them and the others was not really what they picked, but it was how big of an asset concentration they had in those winners. Yeah. Which is exactly.

40:30And by the way, you don't have a crystal ball. So day one, you can't say this one's going to be better than the other one. No, no. You may have a guess. So it's really, if you go back to the gambling, you are playing the lottery, you pick six numbers. The only thing is that you can bet more on your ticket at every number out of the ball. So if you have the first number, your lottery ticket is a bit more likely to return. So maybe you bet more. If you get a second ball, good. Then maybe again you should bet more. So it's how you bet over time and when. And clearly there's a moment where you should stop betting.

41:09There's a moment where you should bet more. And it's clearly something that we have put in math because principles are simple, but decisions are not simple and you need to have the ICA to agree. One final question on this front then. I don't know if you have disclosed to the world what you ended up investing but if you did because we know there's that round size but is it public how much you invested? No, we don't. I would say a strong ticket. Yes, meaningful ticket. At the level we can manage the risk at our fund level. The ticket we decided was not about the money left or the available, we decided using our model that we should invest first ticket this amount.

41:53And we went to Charles and said, is there room for it and what kind of relationship we can establish with this ticket? It's not a small one, neither for us, neither for them, but we don't disclose. And the latest fund you invested out of is then a 200 million euro one. It's actually a co-investment from two strategies because we have this one and a new one we're raising called Deep Tech Seed, number three. So that's co-investment because at the same time, we qualify for a deep tech company. Because if H is not deep tech, what is deep tech? And also a digital company, quite exciting. So we could qualify to two strategies.

42:29So it helps us also increase our ticket by making funds co-invest. So Xavier, from this, I think we should go directly into then explaining a little bit more about Elia and where you are. So maybe you could give the big introduction to Elia. assets under management and that type of thing. And then what really makes you stand apart from other firms? And then we'll dive into that. So we are a VC firm with 21 years of existence. And we are known and quite focused on companies with strong IP assets, a lot of technology, and more than half the portfolio is qualified as deep tech companies working in a B2B model kind of go-to market.

43:17This is what we did in majority since day one. It's not a recent trend at Delia. And this is our only focus for the last seven, eight years where we have these two strategies. One is digital ventures, which will play in the digital world. So a lot of software is strictly, but every model using IP and software-based. And we have Deep Tech Seed, which is dedicated to seeding companies out of university or created and launched by PhD and researchers or using key research results to create something that will scale. So those two strategies are currently representing 800 million capital under management.

43:57And we are raising every other year a new fund and clearly growing. I think at some point in 2025, we'll be crossing the billion threshold. And clearly here, we are developing our strategies by adding also more technologies. So we started purely digital for many years. Now we do also biotech, medtech, energy, materials, et cetera. And we also are scaling by being more and more present in investing in Europe. So we do this historically in France, then Spain, then some Israel deals, then German deals, then Benevolent deals, et cetera. We did some UK deals too, of course. Even it's very competitive.

44:41So currently, UK is not a big center of focus, but we did so. So we're expanding also geographies. And the other thing we will do is also expand stages. So currently, we can do checks from a few hundred K co-creation and go up to 10, 12 million at the Series B, kind of. And we have announced in April a partnership with the Lazar Asset Management Group, this large financial global institution to create together a new management company called Lazare Capital addressing later stage deals so checks between a few tens of millions and several tens of millions at the end of the day to fund series C and above kind of companies and at the same time Lazare is investing into Elaya to promote our existing strategies to fund our own business and to grow and we are also having like this massive global distribution agreement, because Lazare is very well known for its advisory business, but people don't know that they represent 240 billion of assets and management listed funds.

45:48So they don't have a lot, if any private asset. This is why they want to expand, this is why the partnership with us. But for us, it's also interesting because they have all the listed funds available, meaning that at one day, we hope that we'll be able to create together a platform that will be funding entrepreneurs in tech from co-creation and to post IPO life for the best ones. So this vision of platform will be embracing all the alliance but with the angle that technology makes the difference and of course entrepreneurs are the real ones that we are backing here. I think it's fair to say that many successful VCs in Europe will at some point have that opportunity to partner with a large private bank or private equity house or something like that, because we fit a good whole.

46:40VC fits a good whole in typically an asset managers portfolio or for a private bank, their portfolio of available investments. So I think it's very interesting to kind of touch on why or not why, but how did you go through that process of deciding to go into bed with them, right? Because that is a tough decision, running a VC firm as your own, partner-driven, founder-partner-driven. That's like you hold the reins as a completely yours. And then taking someone in massively upscales the opportunity. But it's also, okay, now it's getting to be a different beast. First of all, it's an opportunity base that we are not looking for a partner, especially, even if we started to think that maybe at some point a question on the table, but the meeting and matching with Lazard was so unique that we decided to think it different.

47:43And it was unique for many reasons. The first one is that I was not into merging, partnering, creating a joint venture, whatever would be the outcome, with a local guy. Why? Because I'm good enough in my own turf. even in Europe I feel I'm good enough so maybe I should acquire small teams but not really being partnering with someone in Europe so this needs to be global and Lazare is perfect because it's French founders 200 years ago in the US have been creating a global company yet with a bit of DNA and a strong Parisian office so if you mix that up it's quite unique the mark second When you do a partnership like that, the first thing you should ask is cultures.

48:34How are they going to merge? They're very different in ours, but they're very compatible because we have the same vision of performance, quality, discipline, investing, and asset management kind of behavior if we do different jobs. So that was the easy part, but also they don't do private assets in Europe at all, and they just have a tiny thing in the US. so the group I was partnering with I have nobody to fight with I have nobody who knows how to do my job or at least believe that and I don't have anybody I believe can do this job to this is pretty unique take any bank, they have a PE branch they have a venture branch so the first thing you have to do is to know your enemies it's not a future so here it's internal blue ocean for us.

49:27And they're very excited because also we are the first one. Because if you look at what Peter Orsak, the CEO, said, they're going to expand there. So we're also the ones starting the process. So it's very exciting. So this is pretty unique too. And finally, they came with a project and idea to discuss that was exactly a matching part of my own project and idea. Because I wanted to expand too. Because I do believe where we need to expand because I can't see why VCs shouldn't expand. You know, there's no reason why you should see a small is beautiful or maybe not, you know. So I think, well, everyone wants to expand why not us as a VC.

50:05And to expand, clearly to go to the later stage where I believe there will be a massive opportunity in 2025 and after that. If we want to expand there, what was, I was missing capital because I needed to hire a new team and it's quite expensive, hire a new team in growth. and I needed distribution channels because I need to raise, you know, if a VC raised a billion, it's okay. Over 10 years, 15 years, it's a very good result. If a late stage firm wants to survive, you need to raise this every two or four years at some point. So I didn't have the network, especially international one, to raise that amount.

50:42So I was facing, I want to go in the late stage, but I need capital in my company and a network of distribution. And as I can say, we want to do the exact same what we want to do, but we don't know how to invest, yet we have capital and we have net worth of distribution. So this is quite unique for us. So I know, because this is my job, to see an opportunity when one happens. So we changed our mindset, we discussed with them, and we ended up finding a fantastic industrial project together. And we decided to go and proceed with that. Even if we lose a bit of independence at some point, the most important thing in independence to be fair is IC independence.

51:23If the investment committee is independent then the rest it's okay. And this is what we have agreed with them because they do believe also that investment committee should be independent. So clearly the independence for me is kept at the right level and they're always partnering with them and they're good people and we are good people so so far so good. Incredibly cool to hear how you thought Freud. I think that's rare to hear described as clear as you did. So thanks a million for doing so. I also just want to say to the audience, because you said, you did say, I don't see why a VC firm shouldn't scale as well.

51:59That of course, because we constantly have on LinkedIn and X, the continued messaging from micro VCs that the only way to go in VC is small. It's just like you serve two different purposes as a VC firm, whether you're small or you're in the LP portfolio. You can definitely argue, why would a small FO pick to invest in a large VC? Because you then say, well, you might as well stay in private equity or it doesn't look a lot like private equity then. You don't get the potential outlier performance. That kind of thinking, but from an ecosystem perspective, from a GP perspective, I completely agree with you.

52:41you know there's just so many ways to play venture uh and one of them is 100 scaling that the company as well so i think that's super important to say it doesn't mean we will change the size of our funds the size of any fund we create a VC is first modelized with ME and then we raised it we need to have performance because for the most style of company is not the asset management and the management or fees or EBITDA it's the performance of our funds So even if we are able to raise one day half a billion for early stage fund, we will not raise it unless we believe we have an opportunity to perform with half a billion fund.

53:21Currently, we don't have it. We don't see it. Not yet. So it means that even if we are larger, the platform will be larger, but every fund will be designed by a model where the assumptions and the expected returns are strong enough for us to proceed. We will not raise more because we can. But you can optimize for pure alpha? Or you can optimize for a slightly smaller risk because it's better diversified? That's our product design for management. We have a risk-reward approach for every fund. But the fact we have a problem, we won't change that. We do believe that if the funds are not performing based on the level of risk that is acceptable by the investor, but it's quite high, if the funds cannot perform, then we won't survive.

54:07Whether we have a big friend from the US or not, we will not survive. We need to perform. That's it, period. Yes. All right. So now, otherwise, the access to the LP distribution network in Lazarus will probably quickly end as well if performance is not there. Let's go to a quick touch on the person behind, meaning Xavier Lazarus. Tell us a bit about yourself, your principles, philosophy for living in life, being a person in this life? Just to understand my passion for deep tech and science-based companies that actually most of my career, I started to invest in 99. I'm becoming more and more one of the people of the old world of VCs in Europe.

54:54But before that, I had a very different life. I was a researcher in academics and doing something that is As interesting that it's useless, which is number theory, arithmetic, pure math. So I was trained, educated, and based on the idea that difficult things are interesting things, that if you don't do something very, very difficult, then maybe you're using your time, et cetera, and a lot of patience because when you work on a problem that is hard to solve, it will take years to solve it. Creating a theorem is not a question of weeks or quarters. Sometimes it's a full life. So this part, which is, and also I was teaching a lot.

55:35I really enjoyed teaching. So this part of my life is finished in a way, but it irrigated everything I've done after that. So between the two, I've been briefly an entrepreneur in learning to discover entrepreneurship and I want to stay there. And then I was hired by a bank to become an investor and then creating Elias 21st years ago with Philippe. And when you look at what we do, there are things that are coming from my whole life. I care about science. I believe that science could be more solution than an issue in the Western world, especially. I believe in people who use a lot their mind and the capacity to create.

56:11So I believe in people who are very patient. Actually, even if they're in a hurry every day, they work on the long term. So all these kind of things, the kind of beauties we like to find, the deep tech angle, the relationship with academics. Most of my friends are researchers and now they run the world of science. It's my pro bono part of it. I'm raising money for the foundation of my alma mater to fund research and students at postgraduate level. I'm still very active. I'm having a mission now for the French Research Ministry about the importance of the PhD in the students in the further economy, etc.

56:49So there's a lot of things that are relating between this whole life and my current life as an investor. And a bit also the professor part, Well, I love to talk, but also I love to train people. So part of my own balance is if I'm a good investor, I would have done right in the companies I've been backing, in the funds I've created, in the company I've co-founded and are running, but also in the people I help to become what they could become and not only what they thought they would be. so really it's very important to me to always have around some very talented people who are really just a bit of help and training to become more than that could be entrepreneurs could be team members could be a thing so this is really part of what makes me come to the office happy in the morning is that knowing that we'd have an impact on some people by just helping them move to the next level before we close uh we could have spoken forever i feel but before we close i want to ask you one question and that is what strongly held Belich do you have or did you have because I want to ask you which one you've recently had to change your mind on so it's not recently recently but it's something that really changed my day-to-day life and my job is that it started, I would say, six, seven years ago, and it's scaled, and it's every day more, that I realized that actually running a VC, it's half of the time being invested, you're half being a regular entrepreneur and CEO.

58:34So I need to really build teams. I need to manage the company. I need to deal with HR. I need to do a lot of communication marketing. I really hated that, before, so I was like to live happy, live hidden. But this is part of the job, and I think that I've always been very entrepreneurial, but for many years, I was believing that VC was not a business. It was a function. It was a collection of people. It was investing money and sharing outcomes and sharing decisions. So the team was here to make a good decision, but there was actually no team. it was a collection of people making in common their breaks to make better decisions and raise a bit of money and invest more and we couldn't scale for that and one day I said well you know what maybe you're right maybe you're completely wrong and yet to keep an off-start which is performance so don't do just scaling for scaling but creating a company so I spent more and more a larger part of my time doing that and with the deal with Lazard I discovered big partnerships etc.

59:41So everything I've seen as a board member and invested in companies, actually I said, why should we end up late? And this is the big challenge of my mindset. And I think that part of what we do well is not only investing, but also looking at Elaya as a company with its quality and flows and developing it and being Justin and Mark and Mark and Mark. Even if, to be fair, we are in a very, very protective sector because we don't need to raise really money. We make profits for 21 years of existing, 21 dollars profit in a row. So we are in a very, very nice place to be an entrepreneur. I'm not bearing to the complexity of someone doing difficult things in the basement.

1:00:28Yet, it's still a company like another. That was the big change. Yeah, I think what you're describing, there's a difference between building a boutique firm and a franchise. right? Because you can just be an investor in that, but you'll never grow bigger than 200 million probably or so. If you want to build what you're building with Elaya, you need to be able to put on the CEO hat and build a scaling organization. From time to time, yes, I need that. Amazing. Xavier, I cannot wait to see you at SuperVenture this year. It has been incredible to have you on the podcast. And again, congratulations on being a finalist in the at EUVC Awards.

1:01:05It was a pleasure to have this chat this morning. Thank you, Andreas. Thank you. Bye-bye. Here's a few words from our beloved sponsor. This episode is presented with our good friends at Haines Boon, proud sponsors of the Firm of the Year Award. At Haines Boon, they understand the complexities and challenges faced by VCs. Specializing in fund formation, they expertly manage the establishment of multi-billion dollar funds and innovative private fund products, ensuring their VC clients are equipped to attract global investors and excel in competitive markets. Beyond fund formation, Haynes Boone is deeply involved in the life cycle of startups, providing nuanced guidance on everything from entity structuring and capital raising to navigating exits through IPOs and strategic acquisitions.

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