E402 | Cem Sertoglu, Bek Ventures: Avoiding the temptation of AUM and staying disciplined

0:00Welcome back everyone to the European VC podcast. Today I have a gem for you. So I'm talking to Jem Sertullo from Beck Ventures, what you might know as before being early bird East, digital East. Jem and his team at Beck closed the$250 million fund just recently. And this episode, of course, follows up on that and talks all about Beck and the source of their success, the edge that they have in what they call the dynamic Europe market. So that is basically Eastern Europe and Central Eastern Europe. In this episode, we dive into everything about the edge behind Beck, as well as, of course, why Jem does not believe that venture scales and why he has had to rethink his stance on GP commits.

0:47I really hope you'll enjoy this episode as much as I did making it. Here's a few words from our beloved sponsor. This episode is brought to you in partnership with Zero 100 Conferences, which organises intimate networking events connecting LPs and GPs in private equity and venture capital firms across Europe. A more legitimate setting makes it easier to stand out, get noticed and leave a lasting impression. Don't miss the opportunity to engage in highly effective networking with investors focused on the Dach region. Their upcoming event, 0100 Dach, will take place in Vienna from February 18th to the 20th at Hotel Savoyen, Vienna.

1:23Attendees will include LPs and GPs like Bolton Capital, Lennart & Co, KFW Capital and many more. Whoa! Thank you! Save the date. February 18th to the 20th at Hotel Savoyen, Vienna.

1:54This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Jan, welcome to the European Easy Podcast. Thank you for having me. I am super excited to finally be doing this episode because I've actually been wanting to have you on the podcast for a long time. And finally, it's happening. I don't really know. So I'm really bad at pursuing people for some reason. And I don't think you even know that I've been wanting to have you on the podcast, which makes it all on me. but I'm super happy we're finally doing it. Likewise. And we tend to be somewhat introverted.

2:27And also, I don't think this is a strong muscle of ours either. Well, I'm sure you will do perfect. Jem, let me just read your bio out and then you can correct me and add some context. Is that all right? Of course. Absolutely. All right, Jem, you are the managing partner of Back Ventures, which everyone would know as Early Bird Digital East from earlier. You have just done a$250 million close, which is translated into 238 million euros. And you have a total AUM of$610 million. You're headquartered in or you have offices in New York, London, and Istanbul. And your funds are, of course, domicile Luxembourg, as so many others.

3:11You typically invest in seed and series A. And you're investing in what you call dynamic Europe. So that is Central and Eastern Europe in founders with global ambitions. You're vertically agnostic and you have been an early bagger of multi-billion dollar outcomes such as UiPath, PayHawk, Peak. And those are, of course, the first unicorns in Romania, Bulgaria and Turkey, respectively. What an incredible track record. What did I get wrong? Fantastic. I don't think you got anything wrong and summarized it very, very well. So, yeah, I'm very much looking forward to sharing more of our story. We're very excited.

3:48And let's start on that. I, for one, didn't know too much about you. So now let me ask you, the person behind, who are you? Where do you come from, so to say? Of course. I'm a founder turned investor. I'm Turkish. I was born and raised in Istanbul, studied in the US. And after a few years as a management consultant, I started my first company in New York back in 1999, probably the worst time in history to start a tech company, which taught me quite a bit. Of course, as we were just getting up and running, we hit the crash, the dot-com bus, pretty hard back in 2000. We survived, ultimately did well, had a nice exit.

4:31And I decided to move back home without really any plans about what I wanted to do next in 2005 and move back to Istanbul with my family. Through that move, I started to meet young, mostly consumer tech businesses in Europe, including in Turkey and the region. And I started to get excited about where those companies were in context to how I observed the consumer internet landscape develop maybe about a decade earlier in the US. And this was a time where there was absolutely no startup capital in the region. And thanks to my exit, I kind of emerged as an accidental angel investor into these companies.

5:23And I was very lucky. Some of the first checks I wrote, some of the first companies I got to partner with turned out to be the big outcomes, biggest outcomes in the region. And that was my step into my role as an investor for the first time. The process taught me a lot for the following five years until about 2011. I was a solo operator, bringing my own capital into backing some of these companies and syndicating to friends or sometimes small institutions to join me on these investment rounds. Along the way, I learned quite a bit about the differences between thinking about investments as a portfolio as opposed to distinct single investments.

6:10I learned about what it means to not have reserves when some of these companies require further backing. and of course, you know, follow-ons on the opposite side of that equation. Maybe because we do have quite a few angels listening in and we might as well touch on that point. So your learnings when it comes to reserves as an angel, I'm sure you have so many friends that ask you, how should I navigate this as an angel? Because what characterizes most angels is you have a limited checkbook and you're not in this game to manage other people's money. And for that reason, putting together an SPV later down the road is not something you would do either.

6:55So what do you typically advise on this reserves and portfolio model side? It has a lot to do with the landscape. In an environment where you feel a company that is still cash burning but headed in the right direction can get follow-up funding at fair terms out in the marketplace. In that case, I think, and I would put Silicon Valley in this bucket, New York for sure, perhaps even London, Berlin, Stockholm, some of the more mature startup hubs. I don't think you have to worry about reserves as an angel investor. However, back 10, 15 years ago in the geographies I was investing in, such as Turkey, I made a few investments in Russia, you know, the Gulf region, you couldn't take this for granted.

7:48And almost every investment that I made were into companies that were still cash burning. And we realized that the moment the needs of the company go above$5 million or so, there was no source of funding that was allocated or focused on these regions. So you either had to go to the hubs that I was talking about earlier, such as Silicon Valley, and convince growth investors who might not really be attuned to the nuances of some of these regions I'm talking about. But if you can't convince them, that the companies would go out of business. And that was actually one of the strongest motivations for me to decide that maybe I wanted to raise a fund so I could maybe control the destiny of my portfolio a little bit better, not be really so dependent on the insights that I can transfer on to follow-on investors about why we thought these companies would deserve the follow-on check that we were trying to source for them.

8:52Specifically, back then, this was the case in dynamic year, to use your nomenclature. Where do you see it being today? Would you still advise or would you say not if you have a good company that catches the least bit on fire? No, I would. Yeah. If I were to generalize about the region, I mean, of course, there are exceptions. You know, Estonia is a very well served market, but the rest of our sourcing region, you know, as you mentioned, we try to focus our investment effort on talent that's rooted in what we call dynamic Europe, which is the Central East European countries, Turkey, Greece, to add to that list.

9:34And we're very big fans of the talent base in this part of the world. Now, most of the companies we back are global companies. So they're typically headquartered in other, usually Western hubs to be closer to their end customer, perhaps their exit market. But the technical talent base is usually closer to back home for the founders and where they have a competitive advantage in sourcing talent. So for most of these types of companies, still to this day, the region is extremely underserved. There is probably an order of magnitude too little capital focused on anything that starts with Series A.

10:21I would say at the pre-seed and seed stages, the hubs are now well-formed enough that there are a lot of high-quality seed funds in each of these hubs. Also, that's been a great source of opportunity flow for us, our relationship with these high-quality upstream investors from us. But as soon as you get to Series A levels where, you know, the companies start to need, you know,$10 million or up, the landscape is still quite starved when it comes to early stage VC. That is super important to hear from someone like you, I think, because it really isn't necessarily what you always hear from everyone.

11:03Like there's a lot of people that say, well, capital is not scarce. It's not that much of a problem. But I think it's interesting to hear from you that you, because it translated what this means is that we do have good series A companies dying along the way because they weren't able to raise capital, basically because they're outside of the main hubs. That's probably the case. I mean, as you know, we keep investing in region, but our fund sizes are capped at where we think the optimal size for a firm of our focus can bear. So that means we write four or five checks maximum per year. And I can guarantee you there are a higher number of companies then that will get to great outcomes.

11:53And unfortunately, I'm also certain that a few of them cease to exist along the way, whereas in a more liquid capital market, they would continue to get funded and go on in their journeys. Let's transition into talking a bit about BEC and the edge that is BEC, so to say, and how dynamic Europe fits into this. Maybe before we go there, let me precursor it with, I love this word edge because most LPs have been taught, you want to find out what the edge of the VC is. And every VC that has ever read a piece on how you might build a firm, any emerging manager that has read that will have come by this word edge and be like, okay, what's your edge?

12:43And there are as many ways to answer that as there are GPs. And there are as many expectations to what that answer should be as there are LPs. And I unfortunately think that a good part of these, a good majority of these are actually not very good answers, neither from the GP side nor good questions from the LP side. So for that reason, I'm super excited to hear what you will say when I ask you the question, what is the edge of BEC and how does your focus area, the region that you invest in, fit into that? The quick answer is our edge is our focus. And our focus is this region that is really, in our opinion, second to none in the world when it comes to quality of technical talent.

13:35Through our focus, we've been really able to map the talent landscape in our region. And again, because it's a well-defined, finite universe that we're looking at, it's a manageable task. You can really keep an eye on talent movements in the region. And by doing that, you're able to get signal in terms of where extraordinary young companies might be emerging. Because you spot them on this talent map. Because an unknown, obscure company is starting to get activity that touches extraordinary people. So there has to be some important story there. We need to understand that better. So through this focus, we're able to really see a very high quality opportunity flow, about 3 ,000, 4 ,000 opportunities per year.

14:42And of course, a large subset of this gets eliminated very, very quickly. But then we narrow this usually to a few hundred opportunities per year where we engage with and spend meaningful time with. Of course, then the funnel narrows. We have what we call a focus set where probably about 40, 50 companies per year where we spend significant time with. And then that yields three to five new investments, new portfolio companies per year. So this finite focus gives us the ability to be very, very selective. Also has to do with us keeping our fund sizes constant and limited. It almost becomes a forced ranking function in terms of the quality of the opportunities that we're seeing.

15:33And I'd say that's our biggest edge. It's a big region. A lot of people think of Dynamic Europe as being a homogenous region. It's not. It's actually lots of languages, lots of biases, and of course, we're dealing with people. So we have a very heterogeneous group of companies that we deal with. But through our focus and through our immersion in the region, we're really able to, I think, discern some of the nuances that educate us towards making hopefully good decisions in picking. But I'd say our biggest edge is our access and the fact that we see the vast majority, if not all, of the relevant opportunity sets that fit our strategy.

16:27When I ask the edge question, I am always very interested in understanding the operating model of the firm. It's funny. So you happen to be Turkish, which is also the origin of one of the favorite VCs or emerging VCs in the ecosystem, my good friend Enes Huli with E2VC. And so he calls it emerging Europe, you call it dynamic Europe. You're also a bit more northern than he is, also probably a bit more western with central Europe in there. But I'd love to ask you, because his operating model to capture the best opportunities that's in his view in emerging Europe is very much of a very aggressive branding strategy to make sure that he gets a ton of inbound.

17:11They're also very aggressive on outbound. I love his operating model to ensure that he sees everything, which is I don't have a single person on my team that's not spending at least, I think it's 50 % of their time doing sourcing. Whether you're a CFO or you're recruiting or platform or whatever, you might consider your main task. you're also doing sourcing and you're doing it heavily. That is his operating model and it's radically different from most VCs. I'd love to ask you, and he ends up then doing a very aligned investment strategy to that, which is a lot more investments per year than you are.

17:49He often has one or two deals per month where you're the opposite. So I'd love to ask you, what's your operating model that underpins this edge that is investing in dynamic Europe? It's actually not terribly different in terms of the focus on sourcing. I mean, it's very important. Probably our biggest KPI is what percentage of opportunities that fit our strategy are we seeing? And we're very keenly following it. Now, as you also mentioned, we have a slower deployment pace, much more selective in terms of number of investments. And given that our typical first check can go up to$10-12 million for that first check, I think with the likes of E2BC and his team, we're quite symbiotic.

18:41And in fact, we have similar symbiotic relationships with many of the high quality sort of seed specialists that are active in our region. And I'd say they're probably one of our highest quality source of referrals as well. But again, our focus is a bit more on portfolio construction ownership, the relationships that we're able to establish with our founders. We try to be the, and I know it's a bit of a cliche, but the closest board member to the founder, the first call when there's an important topic on the founders month. But I think our experience does show us that we've done a very good job of occupying that space, sort of being top of mind with the founders as an aligned, we use the analogy, sitting on the same side of the table with our founder teams.

19:37So I don't think it's in conflict with other models that are more actively deploying. But ultimately, the portfolio we form with our$250 million fund is about 20 investments, a portfolio that's constructed over longer than usual investment period. We typically take four or five years for forming this portfolio and reserving very carefully and deliberately so that we're able to continue to support and build ownership in the companies that we have been able to build strong conviction on. I want to ask you something, Jim. And by the way, I wanted to have said in the beginning of this, you've also done an episode with Harry Steppings with 20VC and anyone who hasn't yet heard that one, definitely go and listen to that because it's a great one.

20:34I want to ask you, because you've now built back and taken it out of the early bird brand. And I'd love to ask you, what are some of the core learnings when it comes to defining a firm and deciding on this is the identity that we want? As always, we have a ton of emerging managers and founding partners listening in. And you are one of the biggest leaders in our industry. So not asking you that question would be remiss. It's a great question. Thank you. We are, I think there we hold a few somewhat contrarian beliefs. I mean, first of all, we do not believe early stage venture investing scales very easily.

21:23I think we're a bit old fashioned in that the way we've built our firm has been on an apprenticeship model. We have a largely homegrown team, very, very low turnover. And the coverage that we have for each of our portfolio companies is laddered so that there's a succession model that's built into our relationships with many of our portfolio companies as well. With that belief that early stage venture doesn't scale today sits in contrast with many firms we're seeing, especially those who've done well. And I would include us in that bucket with our performance. The temptation to just grow fund size and bring on new people to build new products, offer new products, both to your investors and to the founder community is quite tempting.

22:23It grows your AUM. It grows your income stream. You're able to pay yourself better along the way. But we feel it comes at the expense of performance, return performance. That's why we very deliberately kept our fund sizes in check. Our last two funds have been very oversubscribed. And we've been tempted by new LPs coming in with very large potential checks and saying, if you're able to expand your investment focus to include XYZ geography or sector or stage, here's, I don't know, 20, 30,$40 million from us for you to pursue that strategy. But we looked at, going back to our edge, we looked at what we think we're good at and decided that that's the only game we want to play.

23:18We only want to play a game where we think we have a sustainable, structured, competitive advantage. And it kept us really focused on this, you know, Eastern Europe-rooted founders building global, usually B2B software companies. So I'd say that's probably the one sentence summary, easy to understand summary of our strategy. What ends up driving that is, one, our belief that the primary product offering, The primary value proposition that a venture capital firm can offer a founder is partner time attention and most importantly, partner care. And I know you can't scale that. Today, our pace is maximum three, maybe four investments per partner per year in an exceptional year.

24:11And beyond that, I just kind of know not only my mental capacity, but my emotional capacity to really care about a larger number of firms that stack up year after year in a portfolio cannot be scaled beyond that. So in our existence, that's over now 11 years since the launch of our first fund in early 2014. We have to date invested in 15 companies in fund one, 18 companies in fund two, and now five companies in fund three. So that adds up to only 38 companies. So it's a very, very concentrated pool of companies to which our attention gets delivered in a concentrated manner. I'd love to better understand the organization, Beck, just because I want to double click on a few things when you're talking about venture not scaling.

25:11So maybe you could first describe how many partners are you, principals, associates, that type of thing. What does the organization look like? Today, we're a group of 10 investment professionals. We have two full-time GPs on board and two senior principals who've been with us nine years and eight years respectively. So we're very stingy when it comes to titles. We have seen title inflation as a problem in early stage VCs. So we've stuck to really well-defined milestones before one of our investment team members becomes a partner. One of my co-founding partners in the firm, Roland Munger, is now on a part-time basis with us.

25:58But he's a partner in our investment committee today. And as I said, we're a total of 10 investment professionals in the firm. And the reason I ask you this is because I very much agree with you that venture doesn't scale from a returns perspective, multiples perspective. It can definitely scale from a total nominal value in the sense that you can put more money to work, which everyone is happy about, so to say, if that is what you're looking for as an LP. However, you do, as you say, really end up in a situation where you don't have the money that you're entrusted with managed by the senior team.

26:50And I always say, just as you have specific or very special talent with founders versus hired guns, you have that with VCs as well. We're doing a founding partners track specifically because we recognize that founding partners are made of something different from most others. Then there are, of course, partners that go on to found their own firms as well. But it just is different to be an entrepreneur versus anything else. And I think that that is incredibly important to recognize. And I really think that we're missing that. I think many LPs, when they come with a small ticket and have that to put to work, when they put that with a large firm, they really should think about this fact that venture doesn't scale from a performance perspective.

27:39It's super interesting to also hear you're thinking about the inflation of titles in early stage venture. I think you're absolutely right there as well. I still don't know what it means to be an investor at a firm. So interesting. You're saying 250, though. Could you maybe contrast the capital efficiency of Eastern Europe to Western Europe to the U.S. and how you're thinking about that? Because 250, in most people's eyes, is actually quite a bit for dynamic Europe, so to say. but this is also important to say majority is seriously right I would not only contrast our region to the US but I would actually contrast it to the rest of Europe Western Europe and then also against the US so part of it I think comes from the DNA of many of the founders we end up partnering with they tend to be less exuberant I think for even in frothy cycles, you know, I can point to 2021.

28:51When we look at our checks in 2021, I think our founders were smart enough to realize that there was money raining from the sky and they, you know, took their umbrellas and turned it upside down to capture it. But then when we looked at the runway that then translated into how the companies ended up managing that, we saw that it was very much for a rainy day, so to speak, that their pacing of the capital outlay and the investments that they were making and the burn that they imagined host fundraising, even in a very frothy environment, was much more measured compared to what we were observing.

29:36the landscape and you know we've experienced this in uipath when uh they were raising uh you know uh uipath turned down an opportunity for for a new investment by by softbank uh just because softbank wanted to invest too large amount they then turned around and invested in a competitor of the company and uh so our founders uh i think tend to know the value of a dollar uh they understand dilution They understand the value of a strong runway and the value of being default alive when the tide turns and when the capital pulls off and market goes into a risk-off mode. So I think it really usually tends to do with the exuberance that we find in a typical founder team in our region.

30:29One area where I think people are a bit misinterpreting some of the success in the region is, I hear people talking about Eastern European talent arbitrage in terms of that might cost less to hire a software engineer in the region, which to a certain extent is true, of course. but I think the big arbitrage is not on the cost side, but it's on the quality side. What we're seeing in our portfolio is, especially for a team that's building a global contender, the aspect of pride in joining a team from your home country, from your neighborhood, with your peers, maybe that since you've known from high school or university years, that drive is quite strong.

31:25So we'll see the top software teams in one of the hubs that our companies operate in. They'll come and join one of our companies, sometimes at a lower compensation level, rather than going to work at Google or Meta where you're one of thousands. and you become a part of a team that is creating something extraordinary in your hometown, which perhaps doesn't have that many previous examples of this. So there's quite a bit of motivation and pride. Yeah, I was about to say this. We might even, so in Europe, at least in Denmark, that's very much what I see, that we don't like the word patriotism. What I've seen when I've been traveling in Eastern Europe is it's very patriotic people.

32:20And that is a great thing. And that is exactly why you want to join a local startup and help build the next big UI path success rather than take a higher salary and go and do something for Google. Yeah, I'd say it's the right type of patriots. I think this is the right type of input where you're attracting direct investment into your region, creating a bit of a role model, and ultimately also then contribute literal outcomes that then flow back to your home country. And we've also then seen examples of some of these success stories spawn many new startups because everybody who's then been a part of that journey is now more optimistic about their capabilities to maybe do something similar.