E388 | Avid Larizadeh Duggan, Ontario Teachers' Pension Plan (OTPP): Advantures in growth stage investing

0:28Welcome back everyone to the European VCBC Podcast. their betting big as well as AI. We talked only a little bit about AI and that was on me. I didn't want to do too much AI because we do that so much. So we're saving that for another time. And then of course, we end on talking a bit about advice to founders and VCs operating in today's world. I really hope you enjoyed this conversation as much as I did making it. And I hope to see you around in the ecosystem.

1:00It's more than just an ally. This is a union of values. 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. Avit, welcome to the European VZ podcast. Thank you. I'm excited. I was just saying before we started that I got a WhatsApp with a picture of you moderating a conversation at Kindred's event. And I was told I should look very much forward to our talk today. So I am. Next time, the bar is a tie. Absolutely. Evit, let me just start by recapping the core stats on who you are and the Teachers Venture Growth Fund so that we have that stated for the audience.

1:48And then maybe you can provide a bit of context what I got wrong and what I got right. So, Evit, you are a senior managing director for EMEA at Teachers Venture Growth. Tell us you have like zero fund size and that's because it's not available because you're structured differently. We'll talk a bit about that, obviously, as a pension fund. But you have 5.4 billion euros under management. The headquarters of Teachers Venture Growth is in Toronto. You're focused on Series B. So we're going to talk a lot about growth investing and contrast that with the U.S. And you're targeting globally, but you focus primarily on Europe, North America and India.

2:31And then, of course, you're investing in tech and you've done some incredible investments, including Allen, Beamery, Canva, which I'm a big user of, Comply Advantage, we all know, Databricks, Depot, Instagrid, Lendable, TaxFix, and this little known company called SpaceX. Did I get some of that right? Did I get something completely wrong that you want to say, Andreas, you're stupid? You got most of it right. I think that one thing I'll explain a little more is what you were saying around what Ontario Teachers is. So So Ontario Teachers is a$250 billion pension plan, which most people, when you say that, their eyes kind of open and they're like, how is that even possible that a pension plan would be so big?

3:20It's been around for 30 years and it's the Canadian model. And it's also been a pioneer in Canada where 80 % of what, and internally we call Ontario Teachers. So 80 % of what teachers does is direct investing, and only 20 % roughly is through funds. And so it has built an organization of roughly 500 investors globally. So you're right, across India, across Asia, across North America and Europe, investing directly in multiple asset classes. So infrastructure, private equity, public equity, you've got credit, you've got real estate. And we own a number of these assets or have very large stakes in them.

4:11So whether it's airports or agricultural land or gas networks. And so it's a think about it as a very large asset manager, but who's at the service of 340 ,000 teachers in Ontario, Canada. And our raison d 'etre is to make sure that these teachers get paid their pension securely and regularly for the rest of their lives. And that's ultimately what we do. As part of this, about five, a little over five years ago, teachers created a new asset class, which is technology venture growth investing, which is the asset class that I'm a part of. And there, that's where we invest. We take minority stakes.

4:57We do, like any growth fund, we will leap the round, we'll price them, we'll sit on the boards, and we will stay until whether it's IPO and sometimes beyond because we can cross over. So that's the main difference then with traditional growth investors because we have these asset classes and we have publics, we can cross over. And you just said that most people's eyes widen when you say$240 billion, yes. Yes. But at the same time, those people whose eyes widen are typically VCs, and that's because they see a very big potential LP there. Does Ontario teachers do any LP investments at all? Yes, we do.

5:46So we invest about roughly 20 % of what we do, even in the TVG asset class, is in funds. So we are invested in some of the great funds that you know and proudly so. And then 80 % we invest directly and we'll invest with some of these funds. Sometimes we'll invest, we'll lead some of the rounds that they may have been in previously. otherwise we don't need to have them in the companies for us to invest. So we create our own thesis on investments. Is it out of the same arm, the venture growth arm, or is it out of another? So for the venture funds, it's out of the same group, which is Teachers Venture Growth.

6:35And then we have a leader that leads the funds investing and works with each of the direct investors as well. So all the capital hungry VCs listening in, should they pitch you or should they shoot it to a colleague of yours? I'm very happy to introduce them to a colleague of mine. Yeah. OK. And Avit's email is. Wow. So, yes, you all know now there's a big player called Ontario Teachers Pension Plan that you can reach out to when you're looking to fundraise. Let's leave it at that and focus on growth stage investing. We actually had just one final note on the pension ecosystem in Canada. We had Mike McGraw from Inovia on the podcast.

7:22I recorded it yesterday, so it'll probably go out shortly before this one as well. And he talked about the MapleAid and how he used to be with one of the other pension funds. And he described the$1.3 trillion ecosystem of pension funds in Canada, which is obviously massive. So very interesting for anyone that's looking into how the pension funds work and why. There's also a big case study on why Canadian pension funds are so successful as they are. But now let's focus on you fully. and I want to ask you a bit about your journey. So how did you end up first here at the Teachers Venture Growth? So I joined about a little over three years ago and my background has been going back and forth between investing in high growth technology companies and operating.

8:13I'm an engineer by training. I studied, I have a bachelor's and a master's in engineering from Stanford and then I went on to be trained as a product manager at a number of startups and then eBay for a number of years and then went to business school and then had my first experience as a VC at Accel Partners. This was back in 2006. So that ages me. And it was my first experience in VC was when I came back from the, so I lived in the US for 10 years and moved to London to work at Accel. And after Accel, I went and started my own company, which was an online marketplace for independent brands, after which I joined Google Ventures.

8:58We sold Quetika and I was at Google Ventures as one of the GPs starting the European office back then. That was 2014. And I was there for four years. Then I went into one of my portfolio companies, which is Cobalt Music Group, where I was the chief operating officer. And then I joined teachers about three years ago. And the reason I joined teachers is after Cobalt, I kind of paused and thought to myself, what do I want to be? Do I want to be an operator? Do I want to be an investor? I got to make up my mind. And I took a bit of time. And during that time, I was investing with a group of friends and operators as part of the operators network.

9:41A number of us were angel investors or friends of one of the co-founders of Okta, Frederick Perez, who I went to Stanford with and whose wife is also a really close friend. And when he IPO'd Okta in 2017, very quickly he was getting a lot of inbounds from people asking him, can you help us? Here's my company. And so he decided to put together this group of buddies that would look at these investments together and angel invests. It's not a fund, but when we started doing that and mostly it was, you know, we had our, we have our Slack channels and we look at companies together and there's different people with different areas of expertise.

10:28I realized how much I love doing that with the right group of people, with helping entrepreneurs, being at that part of the journey where you're constantly talking to people who think they can walk through walls and change the world. And you get to see so much. There's so much breadth to what you see. For someone who's intellectually curious, it's incredibly satisfying and fulfilling. And so through that, I thought, okay, I want to see if I can find a place that has both this aspect of culture that I really like, of working together with people, being close to innovation and investing in it, but also building something.

11:13I've always liked the journey of building something, whether it's building a product, whether it was building my own company. Part of the frustration I had early on at Accel was I was very young and I wanted to be the entrepreneur on the other side of the table, which is what I did. I went and did that. So that's always been with me. And when I met the people from teachers, it combined so many of these things. It combined enabling me to build this new practice of teachers' ventures growth, which is a new asset class, and build it in Europe. It enabled me to do this investing, which I love, and helping entrepreneurs in an environment at Teachers where, you know, it's incredibly ambitious.

12:01It's constantly reinventing itself. It wants to win, but it doesn't compete internally. It really cares about its people, wants to grow its people. And that was really important to me. And it's global. So it enabled me to have a global view. and the cherry on top of the cake was the impact. Can I ask you, being in VC but at a pension fund, whereas almost everyone you're dealing with are at funds, what kind of do you look to the other side and may be envious about and what do you think, ah, I'm so lucky I'm at teachers? So you got to remember, I've been on both sides and there's pros and cons to everything in life.

12:48And no matter what you do, whether it's your job, personal relationships, decisions you make. And so you pick and choose what you're willing to compromise on. I think that the pros from a pension plan perspective, it's long, we don't, firstly, we don't reach to raise capital. So a lot of the job of a GP is to constantly raise money for the next fund, which takes away from the fun of kind of being with the entrepreneurs and finding the next company. But it also makes for almost better VCs because you become more empathetic with the fundraising journey if you've never been through that journey. We're also, as a pension plan, you're a long-term player.

13:36So we truly don't need to return capital within eight or 10 plus two years, right? We don't have any LPs. It's our capital. And if the company's doing well and accruing value over time, we can stay in it. We can go public. There's nothing that forces us to return capital, to raise the next fund. And so that makes it much more flexible and it makes the pitch to the entrepreneur more aligned and truly aligned. So that's the part. Now, I would say one of the cons or one of the things sometimes I'm envious when I look at the other side is that the teams are really small, right? Like I'm part of 1 ,500 people organization, which has a lot of governance around it, rightfully so.

14:26And so there's a bunch of internal reporting that I have to do that when I was at VCs, I didn't have to do. But it's a very small price, I think, to pay for a lot of the great things that we get. I venture to bet that were you in a venture firm, you'd be likely a managing partner, which means you'd be fundraising 20 or 30 % of your time. And I don't think that your reporting takes up 20 to 30 % of your time. I at least hope so. No, no, it doesn't. You're absolutely right. You're absolutely right. The last thing I'd say that I didn't realize before I joined how valuable it is, and it's completely changed my view of the world, is the ability to look across asset classes globally.

15:19There's so much interactions between the publics and the privates, between what's happening in real estate and infrastructure and energy today, especially with AI and what we do in the privates, what we do in the publics, what we do in private equity. And having the macro umbrella that we have our own chief economist that's constantly looking at what's happening in the macro and educating us. We have a total fund management team that balances the portfolio and has a view, you know, thought two, three, four, five years ahead. And that makes, I think us as investors much smarter. Yeah, maybe you could dive a bit deeper on how you ensure, you know, or how you leverage that you're a big organization.

16:07Like you just described, the economist that you can kind of like level everyone up across the organization. What other things do you think keep you better? A number of things. I think we have about a hundred portfolio companies outside of TVG across infrastructure, real estate, private equity that, you know, as I said, they go from utilities to dental practices, to agricultural land, to data centers, where all of these can be partners, they can be customers of the TVG portfolio companies. And there are very different sets of portfolio companies versus your typical VC, which will likely have mostly kind of companies that are at the same stage and life cycle as you.

17:02And so it creates a very different value proposition. And we spend a tremendous amount of time creating these connections for our companies, other than ourselves being customers of many of our companies. So we're customers of Comply, We're customers of BMRI. As Ontario teachers, we're soon to be customers of Vipel. So because we have this whole pension side, which is an operational side of 500 people that works like an operational organization and requires a lot of these tools and software. So the value of the ecosystem is tremendous. We have a huge presence and influence in Canada, which helps significantly with Canadian entry for our portfolio companies.

17:49So we recently announced Alain's entry into Canada. And so for those who don't know, Alain is a combination of an extremely efficient health insurance, an AI-centered technology company, and healthcare services provider. And they serve roughly 680 ,000 people across Europe. They recently obtained a license to operate in Canada where there hasn't been a license, a new health insurance company since 1957. And we've been incredibly instrumental in helping them navigate that and then building the teams in Canada and the board and then creating the outcome of this launch recently that we very happily and proudly announced.

18:39And so that's an example. We're working with DeepL to do a similar entry into Canada, given the bilingual aspect of Canada, where DeepL is, for those who don't know, a machine translation company, which has been around for a number of years and serves enterprises and mid-market companies with translations in over 30 languages. So if you're an enterprise who cares about your marketing translation, you're legal. If you're in healthcare, you care about quality and accuracy. That's who you use. And so that's, again, a place where Canada makes sense for them to enter. So we'll help a lot with entry into Canada, but also international entry into companies and portfolio funding.

19:29I mean, just to make something super clear to everyone, does teachers venture growth only do the late stages or do you also have an arm that does early? Just because I want to ask a question that's connected to that. No, we only do B plus post product market fit with roughly 10 to 20 million in revenue looking to scale. That's where we start. Is that because you are very much also looking to leverage? So first of all, you have a lot of capital to deploy. That's one good reason to focus at the later stages. But also, is it because you're also very much getting into rounds because you're leveraging the whole organization's strength and that just works better at the later stages versus at seed stage because a big corporate does not really work super well with a seed company and the seed company gets too close to the large one.

20:22Is that part of the thinking as well? I think it's a couple of things. One is, you know, we are 250 billion assets on the management. So putting 5 to 10 million to work on like 100 companies is not going to move the needle. It's also different. It's a different skill. And investing in kind of early stage versus late stage requires different skill sets. So that's really one of the major reasons. The other ones, and yes, there's a, going back to the skill set, there's a natural understanding of a growth stage company within Ontario Teachers culturally that makes sense to build for that and then use our existing network to plug these companies into.

21:11So there's a lot more leverage for them at a stage where they're trying to scale versus a stage where they're trying to find product market set. So that's also another reason why. And then there's a lot of the equation is a risk return equation. So how much risk are you willing to take for what kind of return? I was mentioning we have this total funds management that looks at how we balance the portfolio. And within that equation, having a higher risk, higher return asset class like TVG makes sense. Skewing the risk too high doesn't make sense in that portfolio construction, which is where seed and series A come in.

21:57Avid, I'd love to ask you because there's a dynamic and I really want to dive into this. There's a dynamic in European growth stage that I've been recently made aware of that I found incredibly interesting that I'd love to ask you a bit about. So kind of if I describe it from the top, we've very much for a long time in Europe fought that we have fought against, that we have had early stage investors that came with a private equity mindset, which meant that we did not, you know, we were structuring deals incorrectly. We were having what U.S. investors would consider predatory terms. We destroyed the cap tables and so on.

22:34This is obviously 15, 20 years ago. So we're way past that in the early stage. But what a couple of guys have said to me is that at the growth stage, we actually have a bit of this dynamic because, yes, we have great growth stage investors like yourself, obviously. But we also have a lot of, you know, crossover investors from private equity that very much comes with a private equity mindset and playbook. And now with the increased focus on profitability and so on, it's correct to say that we have enough capital in Europe at the growth stage, but that capital may sometimes a bit too often come from people with a non-venture mindset.

23:18So in other words, they come with business plans that do not set you up for what we might call a bleedscale growth trajectory, but rather more conservative one. Is that a fair characterization of Europe as you see it? And I know sometimes I lose nuance when describing this, but I'd love to ask if there is some of this happening. I haven't seen it in a broad brush stroke as you're talking about. If you talk about the last kind of two years, I can see why somebody would say that, because you've started to see a bunch of structure happening. But I don't I don't believe that's because it's a, you know, different growth investor that's coming.

24:09That's more private equity type. I think it's part of the challenge of what happened over the past two years, which is valuations were incredibly high, wrongfully so, and everyone was riding that. And when we had the rates kick in and inflation kick in and people realized that the cost of capital was no longer zero and was actually constantly increasing and that you couldn't justify growth at all costs anymore. Some entrepreneurs and some investors in those companies didn't want to take evaluation hits and wanted to kind of address that through different mechanisms of, you know, higher lick prefs or a higher downside protection in a fancy way with some structure or convertible or, you know, and you've had companies that have layered convertible on convertible.

25:08But that's been done in kind of coalition with the entrepreneur, the existing investors and a new investor coming in. I think that's wrong. I think that's actually the, unfortunately, it's a very painful way that oftentimes you then need to go and unwind if you want to give the company a chance. And unwinding these structures means recapping companies. And it's painful. It's painful for everyone around the table. So I think for a particular point in time, that might be true. But I don't think it's necessarily European growth investors versus others. And there's tons of growth investors in Europe that have come from the U.S.

25:54that are not necessarily private equity firms that are kind of VC firms that are doing growth here. whether it's like us coming from Canada but having a massive presence in Europe, or whether it's Index that does growth, or Sequoia that does growth, or Andreessen, or Lightspeed. I mean, there's tons of them. So I don't know if I agree with that statement. I think it underestimates the amount of capital, the diversity of capital that exists in Europe, the diversity of partners, and it also underestimates the influence existing investors have when they're accepting new investors in and the say of the entrepreneur.

26:43I'm going to be digging into this more in different episodes to get different perspectives. But thank you so much for debunking it, at least from your perspective. OK, then let me ask you a somewhat similar question. But instead of asking it as do you agree with this thesis, I'd rather ask you, where do you just see European growth do very well? Where do you think that we could be better or we could maybe just improve? So I think there's two aspects of it. I think there's an opportunity set in Europe, which I think is bountiful, whether you look into everything that's happening in the AI, even from a growth level, there's more and more that's interesting.

27:25Whether you look at the energy and climate sector, where there is tremendous companies, and there's also regulation that helps move faster. or if you look at a new area that we're spending a bit more time, which actually cuts across AI and cuts across climate, is this Industry 4.0, which really takes advantage of the manufacturing heritage that we have in Europe, which I think is now being unlocked because of the data that's being unlocked within these organizations. And this is something that actually we're talking about, Leila from Kindred, Leila Zania. She's on one of our walks. She's the one who is pointing this out to me and saying, listen, we, you know, yes, we do SaaS in Europe, but our heritage is manufacturing and we can now really focus on that, whether it's manufacturing or healthcare as well.

28:23So I think there's an opportunity standpoint that is there, that is rich. There's, and we can dig into each of those things if you want. There's also then, you know, how can we do better? I think some of the things that growth is harder in Europe. Why is it harder? Because it's not a single market. It is like if you build, you start your company in the UK or you start your company in Germany or in France or in Sweden, you will ultimately invariably have to go to another market. if you want to build a billion-dollar company. And getting to that either market is difficult. It's a new culture. It's a new set of regulations.

29:07It's new teams. All of that is tremendous amount of friction, whereas if you start in the U.S., you have less of that. So you might say, well, state-by-state things change are different. Yes, but it's not the same friction as you get in Europe. And so that if you're going to go from the UK, for example, to France and then from France to Germany and then from Germany to Spain, that's a lot of friction and it's incredibly difficult. it's not uh not doable it's absolutely doable but i think people need to just take stock of that and realize it's not the same as scaling into the u.s which is why you often see a company start in one european country and immediately go to the much larger u.s market the other part is is talent And that, again, takes time.

29:59So what do I mean by talent takes time? When I moved to London from the U.S. in 2006, the difference between the talent then in kind of technology and company startup building and what's now was night and day. And why? Because over time, you've got a lot of the big software companies, the Googles, the Amazons, the Apples, the Twitters, having built teams here in the UK, in France, in Germany, and training a bunch of people to become great product managers or great marketeers or great engineers. and those people have gone and joined other startups or have started building their own companies. We've also had over time companies that have startups that have grown, that have had successful exits, that then those entrepreneurs or employees become angels or they go and start their own company.

31:06So it's a whole ecosystem that builds on itself and that just takes time. It constantly builds on itself. And today, I think we lack still talent at the growth stage who has built companies that are, you know, we're talking about 100, 200, 300 million in revenue, global businesses that are that C layer of individuals that can help with that scale of growth. And we often get them coming from the U.S. That, with time, will also improve because we will have more of those in Europe and we'll train those and those will come. But I think that that talent today relative to the U.S. is still lacking, which makes it more difficult.

31:57calls. I'd love to ask you a question because every time I find myself in conversations with politicians and policymakers, they oftentimes want to talk about the strength of their ecosystem, and especially in Eastern Europe. Is our ecosystem and its development stage, is that an inhibitor to growth stage investors want to come in? Can we build companies? Can we today build a company like UiPath, which is like a complete outlier and incredible that they managed and so on. But is it plausible to imagine these companies being built everywhere or are there just requirements to the ecosystems that they're born out of that for you as a growth stage investor, when you look at a company that's Series B or C in whichever geo, where you then say, I like the company, but I'm just afraid of the region.