E352 | Tzlil Kovetz, Vintage Investment Partners: Deep dive about the state of VC market in 2024

0:28Welcome back, everyone, to another episode of the European Music Podcast. U.S. and Israel. And they have growth fund that targets early growth companies, usually B2C round, but they can't go later than that. And they have a secondary fund as well that invests in both funds and companies in different stages, targeting Europe, U.S. and Israel as set. And of course, investing across all sectors. They've made incredible investments like Vault, Miracle, Sentinel, One Monday, JFrog, Jotpo, Holido and many others. And of course, when you're looking at the EU fund investment track record, they are naming some good names, Axel, Crandom, 0.9, Seekamp, Blue Yard, and many others.

1:08So I hope you'll really just strap in for this episode. Tissil is quite the thinker and one who is talking from a very privileged position when it comes to evaluating what's happening in the European and US venture market. Here's a few words from our beloved sponsor. How to Web Conference is the leading startup and technology conference in Eastern Europe. The 2024 edition takes place on October 2nd to the 3rd in Bukhara. You tell him I'll be there! You can enter the most electric space for doing business and building technology in Eastern Europe. There you'll find 3 ,000 plus international attendees, 500 plus startups, 200 plus investors, 100 plus global speakers, and infinite possibilities to connect and get inspired for your next move.

1:53Venture funds joining include Creandum, Atomico, North Zone, Seedcamp, Kokoa, 3VC, Startup Wiseguys, Salesforce Ventures, Common Magic, and many more. How2WebConference also hosts Spotlight, the early stage startup program and competition for Eastern European founders, gathering the sharpest founders in the region. See you there.

2:27of 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. New beginnings. Let's start acting. This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Sleel, thank you for joining me on the European VC podcast and welcome to finally be on the podcast. We have been wanting to get vintage on for so long, so I'm super happy that we're finally making this happen. Yeah, thank you so much for having me. I'm really excited about it.

3:12So Sleel, before we start with everything, and we're going to dive into your perspectives on Europe and the global venture market, kind of what you're seeing, the trends and everything. But before we go there, I would just ask you to the audience that don't know Vintage that well already, could you just put a few words to your perspective on venture investing? Of course. So we invest both in funds and in companies and we do both directs and secondaries. And we've been investing in multiple geos in the US, Europe and Israel in multiple stages. And we've been invested in the dozens of venture funds.

3:48We have about 20 ,000, 25 ,000 companies in our database and about 5 ,000, 6 ,000 companies that we have indirect exposure to. So we have a pretty wide view of the ecosystem. We've been investing. We've been around for more than 20 years. We've been to the third cycle. So we always try to, one, speak with the ecosystem, see how things are evolving. to do some research. Obviously, everything, all the trends going on in the busy ecosystem affects us greatly in how we approach things. Yeah, and then you have 80 % of your capital today invested in the US and Europe. And the remaining 20 % is, of course, in Israel, where you herald from.

4:38Yeah, so we started from Israel, but today we're mostly US and Europe. Did you start with full allocation only to Israel or were you just founded there and then with an overweight of Israel because obviously you had stronger networks there? So we started as more of an Israeli firm in 2003. And over time, we waited towards outside of Israel because we understood at some point that in order to cover even Israel decently, we need exposure to all the U.S. firms that are coming to invest into Israel. And that we have an advantage in that sense as well. I think in Europe, we started investing 15 years ago.

5:26like it's an ecosystem we know very well and have been bullish on for a while. But yeah, it just like was the natural expansion of the firm. And then I just said in my introduction of you that you've invested in the likes of Axel, Creandum 0.9, Seedcam, Blue Yard in Europe. But can you mention some of the firms that you've partnered with in the U.S.? Yeah, of course. So in the US, we have both like some of the larger like platforms like andreason, Excel US, General Capitalist, Decimer, some of those, but we also have a lot of smaller seed funds, leading seed funds in the Valley and in New York, firms like Primary, Four, Flatgate.

6:15We have Abstract. So we have like local winners as well in different locations. So let's just get to understand your perspective on Europe within this global venture market. Could you give me a couple of your most important thoughts there? Yeah. So as I said, we've been bullish on Europe for a long time now. But I think, and we always thought there are amazing fundamentals in Europe as a venture ecosystem. But I think today we see this much more clearly than it used to be. A lot of things have changed in Europe in recent years. But it really evidenced, even from our funds, we just recently did a study on our internal data, and we saw a lot of, we saw over time when the ecosystem matured, our funds, and it was a pretty big sample.

7:09We took some of our funds and some of our external funds, and we saw that performance of European funds outperform US funds to some extent. And I think it speaks a lot about the ecosystem as well. Also about the structure of how the VC ecosystem in Europe is a bit more concentrated the way we see it than in the US. But also that there are a lot of things basically in the fundamentals, Europe, that have improved over time. So I can speak to some of them. Before you go there, you said Europe is a bit more concentrated. I usually call Europe fragmented. So I think we agree, but I think we're using, we're talking about two different things.

7:58So I'm talking when I say fragmented about the fact that we have so many ecosystems dispersed across Europe and things that happen in Romania don't necessarily travel super well to London, at least not when it comes to from a master perspective. So what do you mean when you say Europe is a bit more concentrated than the US. Yeah, definitely. So you're right. It's a funny word to say about Europe because there are a lot of ecosystem versus the US that is more unified to some extent. But I think in Europe, there were very few venture firms a decade or more than a decade ago. And the ones that were here and were successful were really successful.

8:43And so the brands or the leading seed funds, when I look at early stage seed, like I speak more about those earlier stages, there are pretty clear brands in Europe at seed stage. So you have the London ecosystem and you have the funds in Germany and Berlin and you have the French leading seed funds. But in each of those ecosystems, you have a few that are pretty clear leaders and you have pretty clear leaders for the pan-European VC ecosystem. I think in the US, if you ask different founders or different VCs about who do they think C is the leading seed plants, you'll hear from 10 different people, 10 different answers.

9:35Yeah, or at least you'll maybe have the same top five. And then if you ask for a top 10, you'll have fives that are mentioned by everyone. Sorry, that's for the A rounds. but for the smaller seed funds, I'm not sure you'll hear the same. Yeah, okay. Yeah, you're right, of course. And that's also because sometimes I think I'm generous with my definition of a seed fund in the US because many like to call themselves seed, but in reality, we should call them a series A funds, even though they say they invest from seed. Do you agree that there's a bit of too many paint themselves with seed feathers when in fact seed is just something they do ahead of their Series A?

10:25Yeah. Yeah, because Sequoia is always a Series A fund and onwards, but they also do per row stage funds. As an example, you would never comment directly on Sequoia, but that's the phenomenon that I'm commenting at. Would you agree? yeah i mean i think and we'll speak about it i think later on but i think a lot of the serious a funds have been doing a lot of seed lately so that the i agree that the the lines have blurred in the past few years but i still think like i i differentiate by what is there for what what where will they uh put their majority of efforts in and to zil i'd love to ask you just Just because you then said Europe is more concentrated, we have more or fewer names that would come up on a consistent basis when you ask for that top five or top 10 seat fund list.

11:26Would you see that dispersing a little bit? Or would you say, no, it's still pretty clear that these, and obviously we mentioned in in the top of this episode, at least eight or so of the funds that you would put in this list. But would you say that it, in your perspective, continues to be a pretty set list and there's very few new additions to it? Or would you say, no, no, we're definitely seeing the European venture market open up in terms of the number of funds that are at least contenders to be in the top 10 within their field? It's a good question. I think it changes over time. I do think there are names that are there for a long time and have been moved.

12:15But I obviously think the European ecosystem is changing. And it becomes less clear if I'm talking about the leading seed funds, then I think we see the movement from both directions where we see top brands, maybe US brands, investing more and more into seed. And we also see a new line of super angels, I would call them, that's starting their own funds that are a bit more institutional than angels. And I think that's a venture class that is gaining traction in Europe. we see more and more of those that are interesting and are getting into great deals. And those are the type of firms that actually knows how to collaborate with those multi-stage funds that come in early.

13:12So it gives them some sort of an advantage. So I do think that there are a lot of very steady brands. I do think there is room for new brands. and we're always in the lookout for the new 0.9 or creatine. So we're speaking all the time with new people in funds and we're investing in new funds that we believe can become one of those. And it also, like the ecosystem is also changing in general. I'm actually curious just because we're now talking about the growth of the European venture ecosystem, the European VC funds growing up or at least becoming bigger, however you would want to phrase that. How do you think generally about fund size evolution?

13:56Because that's always, you have Creandum there, which is one of the very large funds, but then you also have 0.9 for a seed stage focused funding here. And then you have 0.9, which is, you know, stayed a bit more, you know, to their fund sizes. What would you, what's your take there? What's your overall impression of how the European venture ecosystem is growing? and we're seeing the larger funds deciding to grow? I mean, I can tell the overall view is that I guess you can probably agree that in venture sizes is the enemy of returns. That's always what we say. So I think the best, if you want to stay a seed fund, the best seed funds are staying, not growing too much.

14:47If you're growing into the A rounds, you can grow to some extent. You mentioned Triandrum. They did grow, but not as many of their equivalent in the U.S. that have grown much more than that. But obviously, we see a lot of other players getting into the game. So it's not, and I think winning the best deals is not about having like the biggest fund. It's about being able to provide a consistent value proposition to your founders. And that actually depends on when you're usually able to maintain capacity and some sort of a reasonable size. But as an ecosystem, we do see a lot more capital flowing into the ecosystem in general.

15:41Yeah, and I think we share an affinity for Creandum. So when I said Creandum had grown, it was absolutely not in growing their fund size. It was absolutely not in comparison to, how should I put this, both their returns, but impact on the market and the firm that they have built. Because that is actually where I think that when you look at someone like Creandum and hold them up against peers that are of similar sizes, I actually think that that's where you can see, wait a second, I would have thought Creandum was bigger. If these guys are running around with 300, 400, 500 million euro funds, I would have thought Krannert would be bigger.

16:19So absolutely, just to state that very, very clearly. And the reason why I dive a bit into this, of course, is because we have so many that are thinking about fund sizes, both when they're skilling their own firms, but also amongst the LPs that are listening in. Okay, Tisil, I'd love to then dive into kind of your view on the state of the venture market in 2024, especially because you have this overview where you're seeing both the US and Europe and Israel and can compare the three. So I'd love to just ask you to tell me a bit about the roller coaster as you put it in your own recent report on this.

16:57How are you seeing the venture market developing through 2020 to 2024? Yeah, so I think everyone in venture, like we all saw the roller coaster in the past few years that the venture market have been through with all the capital flowing into the market in 2021. I think from mid-2022, when interest rates started to decline, capital became scarcer and companies started to prioritize once again efficiency over growth at all costs. And I think the news here is that, I don't know if it's news, but I do think that in 2024, we are starting to see stabilization like we would expect across all markets, which is good news, I think.

17:49We're stabilizing on multiples that are more reasonable and that really stimulate the entire ecosystem again to go back into investing once I think we felt like we've been through the worst. Yeah, I think if you want to compare Europe to the US and Israel, I think the U.S. actually saw the lowest or the most modest increase in capital and the modest decrease in capital. Europe was second. And Israel actually saw the highest increase in capital in 2021 and the lowest decrease following that. And I think it relates to what we spoke before. A lot of the U.S. crossover firms or venture firms had a lot of capital to deploy during those 2021 boom.

18:48And then they started to expand beyond their core. And the more reasonable place to expand to was Europe. And you saw a lot of this capital flowing into Europe. And less obvious, but the second one was Israel. And you saw a lot of growth capital flowing into Israel. And I think the decline was as deep as the increase, basically, once those firms basically started to pull up, we call it tourist money. So basically, the crossover firm pulled out of growth. And most of this capital was driven mostly by growth runs, inflated growth runs. Can I ask you, because this is a question that obviously when the Ukraine-Russia war started, we covered quite extensively on the European BC podcast, kind of how that affected venturing in the region.

19:49And I'd love to ask you, obviously, since the terrible happenings in Israel, between Israel and Palestine, I'd love to ask you, have you seen any effect on the tech ecosystem there in terms of the activity being lower because of that? Or is that something that one might just think from the media, but in effect, there aren't actually real tangible effects on the tech ecosystem's ability to mobilize capital and grow? Yeah, so I divided into short-term and mid-term or longer-term impact, maybe. In the short term, in October, I think there was a freeze in the market for like a quarter. but I think pretty soon after that everything pretty much came back to normal and I mean in terms of the political environment obviously nothing is normal here but in terms of the VC ecosystem we do see that things really came back to normal levels we even saw a few of the biggest US firms top tier brands actually putting foot in the ground post-October, which means I think that some of them think that there is an opportunity here as well to invest right now in the Israeli ecosystem.

21:19I don't think, I mean, obviously it's in our minds all the time and we're keeping track, but we don't see any evidence that the market is cooling down. Actually, if you look at, and I think we're going to speak in a second about the exit market, Israel has actually been, I think we have like seven M &As, big cyber M &As in the past six months. So it's been one of the most active markets in terms of exit markets since the beginning of 2024 and even before. So obviously it will depend on the political environments, But for now, I think we have a lot of reasons to be optimistic. Yeah, and that's good to hear, of course.

22:01Tezil, I'd love to ask you, because you started this conversation by saying we've been through three cycles by now. So I'd love to ask you kind of where we're at today compared to past cycles, especially if we look at the one around the dot-com bubble. I think that there's many that liken the current situation to that. So I'd love to ask you kind of your perspectives on that. So not me personally. I haven't been through recycles.

22:32But I think it helps a lot. We have, I think, a third of our GPs have been through three of them. And actually Vintage was founded in 2003 right after the dot-com bubble. So it was a direct opportunity we saw in the market after the crisis. So it helps a lot during the crisis and also helps a lot in understanding what's to come. And this is also like an analysis we did, but when you see a lot of similarities, when you compare the capital flowing into startups in 2003, between 2000 and 2003, and when you look at today, it's actually the same more or less percentage of growth in capital is flowing into startups, and we see more or less the same decline, again, across Europe, the US, and Israel.

23:27And I think what's different is that we actually would have expected, and we've been following that since the peak. So it gives us a good indication or a good forecast to what's to come. And I think in 2023, we expected to see a stabilization in 2024. And what we're seeing is, as of today, actually, as of age 124, is that actually across all markets, we see a recovery. We see a positive trend in capital. And we actually attribute that to the AI boom. So we're really seeing two parallel tracks in ventures today, or parallel motions, where AI deals are getting into like a bubble, sort of a bubble.

24:18I don't know what to call it a bubble, but the valuation are very inflated in AI deals, and there are a lot of them. while non-AI venture ecosystem is stabilizing, like we would have expected. How do you, let's just stick with that, the current rush, gold rush to AI or whatever we might call it. You're, of course, investing both in funds and direct. That means you're talking to fund managers about how they're thinking about AI, but you're also thinking yourself at the later stages about the different AI companies. So I'd love to ask you, how do you think about, and you said I don't like to call it a boom, but there is a bit much capital.

25:02So what's your take on the current situation? Yeah, I think everyone are trying to figure out where are the opportunities. And I think it varies between who you are and what you're looking for as a venture firm. I think there are very few fans that are built to invest in those large language models and very capital-intensive AI companies. I think the rest are trying to figure out where they can find value in the market. It is obviously going to be enormous and the next biggest opportunities in a venture, but where can they find the edge or the place to where they can get value out of it as a venture firm.

25:53And it's not free bill. It's not free bill with all the capital around and trying to figure out exactly where's the unique value proposition that actually is defendable over time. Let me just ask you before we go, because we should talk about the exit markets, but I'd love to just ask you about when you're looking at the early stage gap in Europe, could you maybe tell me a bit about kind of, and we'll overlay while talking about this, the chart that's showing the investments in the European VC-backed private tech companies by stage where you can definitely see, you know, how that we have gone in 2016 from having a good significant amount of capital to then kind of grow all the way up to many times that in 2021.

26:48And then in 2023, we're down to half, basically. So maybe you could comment a bit on the early stage gap that we have in Europe. When the market started crashing, we saw the valuation and capital started trickling down from the public market to late stage to growth stage, slowly adjusting valuation in multiples and capital flowing into them in each of those stages. And recently also trickled down to A and B. I think the most resilient part of the venture was seed stage. So we saw that crossover firms pulling out of early stage and growth to most extent. But we didn't really see to our early conversation, we didn't really see the A funds pulling out of seed.

27:41So seed valuation remained pretty high, which makes it a bit harder over time to invest in A and B runs. When you have inflated seed valuation companies raising at 20 million euros pre, and then having a lot of capital basically that they can deploy not necessarily that efficiently, it's much harder to find those that have operated correctly and that deserve an upround at the A stage. And I think it was easier for a lot of those A fans to just stay at seed and invest there. And what that caused is basically we're seeing that over time

28:34historically, the ratio between early stage A and B rounds and seed stage capital was about around 4x. Every seed stage dollars got 4 dollars in B rounds. And it actually dropped in 2022. And we see today stabilization, but it's still at around 3x. So it's still much lower than what you would expect. And I think we see it, it's an interesting trend, but we actually see it as an opportunity. I think there's a lot of opportunities today in A and B rounds. So we see it when we look directly at companies at early growth stage that maybe didn't have like the most clear path to get there, but today there are very interesting companies and there are less competition and less dollars being spent at those stages.

29:31And you're attributing that to the Series A funds preferring to go directly to seed and then so to say, take the earlier bet and stick with a company that they've seeded themselves, then enter at the A and B round. because I guess they're seeing it as both expensive, but they're also seeing it as, I guess, companies building in an era where they maybe set up their companies not to operate in the right way. Or what's your thinking? Do you think that there's anything in particular, that company specific that's keeping them from doing it? Or do you think that it's more connected to the investors that the firms are just saying, we'd rather seed them than we would come in an A and B.

30:22We're actually, it surprised us in the beginning because we kept looking at our A funds and thought every quarter we're looking at their investment and thinking, okay, this is the quarter where they go back into their natural place in the A round. Like the growth funds came back to their natural place. And we're actually not necessarily seeing it. Yes, we're seeing them staying at seed. And I think the reason if you're looking at the seed stage is that companies are still, like top companies at seed stage, are still getting sometimes more money than they need at a higher valuation than they need.

31:06So it's sort of, there is a flywheel to that. Because once a company is raising too much money at seed at a high valuation, it's harder to create a compelling A round. It's harder to get the milestone they need for an up round. It's harder to make sure they're efficient and not just throwing money and inefficient go to market when they have so much money at the seed stage. Do you think, Tisil, that it's also partly that in the period where they want to intercede, they acquired the skill to invest there and with that skill set, you would then say, well, why pay the premium of coming in at a round later when you actually have the capability to diligence and thus have a similar risk profile, but just at a lower valuation at the seed stage?

32:05Yeah, it might be. But then we come back to what is the core of those firms. When you have a fund that is, again, it all comes back to fund sizes, right? If you have a fund that is 500, 600 million euros or even a billion euros, the seed checks, they don't make a difference for them, right? It's more of an option value. They need to deploy capital in order to make returns. and the stage where you can deploy more meaningful capital with still a chance for meaningful or outsized returns is usually the A-B rounds. So maybe, I mean, maybe they will stay at seed because you're right and it's a skill set and they realize it gives them a lot of added value, again, as an option value, but I think they will need to do more A and Bs in order to keep deploying the economics of that.

33:08Very interesting. Okay, we won't come to the bottom of this in this conversation. So it's probably something we'll have to let play out for a bit. So let's go to the other end of the market and look at the exit market. I'd love to hear a bit about what you expect for 2024 and 2025, but maybe let's start it off by just looking backwards a little bit and you telling me kind of the overview that you have, What have we seen happen? And then what do you expect going forward? Yeah, sure. So obviously across all markets, the IPO markets have shut down and then we saw very few M &As. I think in Europe, it was even more drastic maybe than other geos.