E559 | Chloe Dagnell⁠, Isomer Capital: From Saving the World to Backing Europe’s VCs

0:00What if the biggest myth in European venture is the trade-off between impact and returns? I did some maths before this podcast and actually the proportion of impact companies, so those that are SDG aligned in some way, account for both 40 % of invested capital and 40 % of NAV. Perfect parody. But here's the problem most LPs don't see coming. I don't think that we've seen the VC impact market really develop at scale. Large impact funds are able to do those later rounds as well. So where's the real edge? It's not the label on the fund. GP thesis fit, I think, is the most important thing when you're assessing venture funds.

0:37So why does this team have an ability to outperform on this strategy compared to their peers? You're looking to the output that they can deliver. Because when Isomer Capital analyzed their biggest winners, they discovered something shocking. Out of the 10 biggest value drivers that are SDG-aligned by NAV, actually only one of them has been captured by one of the more impact-aligned funds that we have in our portfolio. The best companies aren't where you'd expect. So how do you cut through the noise? A lot of pitch decks look very generic. You're really trying to cut through what is easily typed on a screen, but for what is actually acted upon.

1:12And so real evidence is always the thing that takes funds from being good to being great. Evidence over story, access over labels, but get the fundamentals right. Make sure those goals are aligned. Otherwise, you know, the relationship will break down. It may not be sort of a long and fruitful marriage. Discover how Europe is capturing impact without compromising returns with Chloe Dagnall of Isomer Capital, only on the Impact series by EUVC podcast.

1:40Welcome to the Impact Highlight series powered by EUVC, Impact VC and Impact Supporters. I'm one of your hosts, August Solve, and I'm the founder of Impact Supporters. And I have my co-host with me here today, Dougie Sloan. He's an LP at Better Society Capital, as well as the founder of the Impact VC community. We have a great episode today. We have Chloe Dagnell joining us from Isomer Capital. She's an LP at Isomer Capital. And what she really brings today is unique insights on how the market is currently performing, as well as sort of discussions around what defines a top-performing Impact VC fund.

2:14One of the things that stood out to me, I had three things today. So firstly, currently, Isomer is seeing that Impact Funds actually performing pretty much on par with non-impact funds. Of course, we're still early in the DPI phase, so that's going to be interesting to see at least. Secondly, Chloe goes into sort of how she DDs a fund and how she DDs impact funds differently or not from a general fund. And here I can give a quick insight. It's completely as any other type of fund. And the primary focus is GP thesis fit. And then lastly, Chloe goes into sort of how can you stand out as an impact fund and what really a funder fund like Isomer looks at.

2:56And here she says that it might be easier, for example, being a specialist looking at, it could be climate tech or biotech, because then it's easier to show how you stand out, how you get better access to talent and how your expertise really adds value to you as an investor. But that's some of the topics. Hope you find it interesting. Let's jump right into it. Here's a few words from our beloved sponsor. Impact VC is a global community of VCs accelerating impact within venture. Their purpose is to cultivate a community and resources to unlock venture capital's ability to tackle the world's most pressing challenges.

3:30The community is made up of over 900 VCs, including both pioneers and newcomers, including generalist VCs and impact specialists. Visit impactvc.co to join the community and explore their resources. including the VC Impact Playbook, the Founder Impact Playbook, and their impact investing for VC's online training, which is designed to help VCs integrate impact practices into their investment strategies. That's a lot of information to get in 30 seconds. Let's put their final down. Tear down this wall. It's more than just an alliance. 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.

4:19Welcome to the Impact Highlight Series powered by EUVC, Impact VC and Impact Supporters. I'm one of your hosts, August Oluf, and I have Dougie with me here today. Great to be speaking with you again, August. And then you, Chloe. Super excited to have you on. Welcome to you as well. Hi. Hi, guys. Hi, both of you. So lovely. Thank you so much for inviting me. Really happy to be here. I love to start this a little bit casually and just to hear a little bit more about who you are, what you do, how you came to where you are and why you like what you do every day. I actually started my career as sort of any 21 year old wants to, which was, you know, being obsessed with saving the world.

4:57So I was extraordinarily lucky to straight out of university to join an international development consultancy. It was very niche and I thought that I would be super focused on the sort of security conflict elements of that consultancy. But instead, I got put on the innovation entrepreneurship team, which was pretty new, pretty strange to me. I didn't really understand what it was all about when I first joined and very quickly became very enamored with the world of entrepreneurship. So I helped the World Bank to build a pre-Series A tech accelerator for companies down in Cape Town. And then I spent some time working on a project with the UK government, thinking about how they could better implement technology to their development services, running sort of a challenge fund and investment fund there.

5:45Had a lot of great fun and a lot of eye-opening experiences in understanding how entrepreneurs were really driving change in the world. But got a little bit disenfranchised with the development model and decided that actually coming back to Europe would be a far better use of my time. And so through a very strange series of events involving Entrepreneur First, one of Isma's portfolio funds, I got introduced to the Isma team back when they were deploying Fund One and have been very happy to be a member of what we're doing ever since. So as many people will know, we're a European VC fund of funds focused on early stage venture, really thinking about how we can build a portfolio that encapsulates the best European entrepreneurs.

6:32So that's what I've been focused on for the last six and a half years now. Now very focused on our fund investing side of what we do, our primary strategy. We also do some co-investments and have a secondary strategy too. But I spend the majority of my time meeting amazing GPs from all across Europe. Yeah, and from an impact perspective, that's a super interesting situation to be in, right? Because you kind of said you got a little bit away from the development model. What didn't you like about that? And where do you feel like entrepreneurship VC can actually add some of that impact that you were looking for?

7:04I think one of the things that I didn't like so much about the development way of doing things was just the capital structures that were being used. So sometimes the funding would dry up for certain programs. And so the long term effects that you could see it having would very quickly come to an end. The entrepreneurs were on the receiving ends of grants that maybe weren't structured in the most beneficial way to them. And ultimately, through some different exposures, including the accelerator that I worked on, I really became more familiar with the venture capital model and the private fund model.

7:35And it just made a lot more sense for long term investing horizons. And ultimately, the other thing that I got entirely uncomfortable with was that the fact that I didn't really know the local context in a lot of what I was doing. So I had some amazing travels in sub-Saharan Africa and Southeast Asia, but ultimately I wasn't knowledgeable about the problems that entrepreneurs were facing on the ground there. And so I have just felt far more useful and able to evaluate opportunities in the European sphere instead. And so you mentioned that your current role at ISMR is a commercially oriented fund of funds.

8:10I'm also aware that with my impact investing LP hat on, we've invested in some funds together that we would consider impact funds. So how would you describe the way that you consider or focus or don't on impact in your investments? And then also, as a fund of funds, you have this secondary or maybe primary other audience of your own LPs. How does that conversation play out as regards climate or impact or how you frame it with your LPs and their interest in this topic also? At Isma, we're completely focused on performance. That's what we're doing. But we're also trying to build a diversified portfolio of the best companies in Europe.

8:47That naturally means that some of what we capture ends up being impact orientated or somehow has, you know, a connection to having impact in the eventual product of what these companies deliver. So we don't have an explicit focus on impact, but we actually did an exercise back in 2019 when I joined, which was to better understand, okay, what are the underlying companies in our portfolio actually working on? And we sort of came together and we started tracking all of the companies against the SDGs, the UN Sustainable Development Goals. And we actually found that about 30 % of companies were aligned in some way or the other to an SDG.

9:27And that number has actually remained very, very steady throughout our capital deployment at Isma. So it has swung, you know, some quarters to being more like 32 % or something like this, but ultimately remains around this 30 % mark. And so we really started thinking, OK, well, we're capturing some of these great entrepreneurs that are obviously somehow impact aligned or want sort of value out of what they're doing beyond just financial success. So we should have a look at the funds that might also be backing these kind of entrepreneurs as well. With our LP hat on, we also see that other LPs around us are interested in getting exposure to these certain set of companies.

10:09So when we think about our own LPs, and many of them are corporates, they have their obviously corporate goals that they're going after. Some may be more interested in health and wellness. Some may be more interested in climate. But ultimately, the Isler diversified portfolio gives a very kind of strong overview on a lot of these different sectors. so we've both captured funds that have more of a sustainability or impact mindset at the core of them but also a lot of our generalists are also picking up a lot of these sort of more impact orientated companies as well. Maybe picking up on the point about being such a significant proportion of your underlying portfolio I'm imagining you're going into those investments it sounds like you're going into those investments with the same return expectations what is the data suggesting, if anything, on how those companies are performing relative to the rest of the portfolio?

11:01We do track it. It obviously can have a massive swing depending on if you have a huge outlier, which is, of course, you're aiming for in venture. But very interestingly, at the moment, I did some maths before this podcast, and actually, the proportion of impact companies, so those that are SDG aligned in some way, account for both 40 % of invested capital and 40 % of NAV. So actually, at the moment, it's completely flat in terms of, you know, the impact companies and the non-impact companies are not outperforming each other. I did a little bit of deeper research into that and to try and take a look at, okay, well, what's really driving these returns and and some of the more impact aligned outliers.

11:48And I think that you have to really start to understand that actually a company can have both kind of impact revenue and non-impact revenue. So if you take one of our big outliers, for example, like Revolut, yes, they are SDG aligned because they've made banking more accessible for many people and they've lowered the cost of remittances. But of course, the huge outlier kind of impact that they have on our returns is not all to do with impact revenue. So you have to kind of dig a layer deeper to understand what you're really getting here and what you're really buying as an LP. But I think it's an interesting point to make that, you know, Revolut has only managed to have the scale and the impact because it's got so big, right?

12:32And that's how it's managed to reach so many customers. So I think you have to sort of always go one layer deeper than the top line numbers are really telling you. Maybe another interesting point to note just on portfolio construction is that out of the 10 biggest value drivers that are SDG aligned by NAV, actually only one of them has been captured by one of the more impact aligned funds that we have in our portfolio. So it really goes to show that actually, you know, these companies are everywhere and sometimes they don't necessarily need an impact fund to be backing them. But in other instances, they will.

13:11Data in this case should always also sort of be read through a lens of these companies are still developing and they're still active in our portfolio, right? So yes, right now we only have one impact aligned company by an impact aligned VC in that kind of top 10. But ultimately that may change over time as those investments are younger, those companies haven't had the time to grow. So I always love sort of doing this data analysis piece on our portfolio. but even 10 years in, it's amazing how sort of young the data still is. So conclusions sort of yet to be fully drawn out of that. Thanks for sharing that really interesting data insights there.

13:49And as you say, there are caveats around the emerging returns data and also impact can mean different things in lots of different contexts. You've got to dig into that business model level to really understand it fully. But it sounds like the two headlines we can draw so far are performance financially is similar to date across a cohort of impact companies and, for want of a better word, non-impact companies in the portfolio. Secondly, seeing generalist funds pick up really high performing impact companies is really interesting. And I think both of those headlabs are things that we see in our own data and portfolio at BSC as well.

14:24And maybe jumping on that last point, because you kind of say that you handle impact funds and generalist funds pretty much in the same way, sounds like. Like, so when you're doing the due diligence, how does that look when you're looking more for like a GP thesis fit on the impact side or are there any changes really in that process? Yeah, so GP thesis fit, I think, is the most important thing when you're assessing venture funds. So you're really trying to understand why does this team, why does this firm have an ability to outperform on this strategy compared to their peers, right? You're looking to the output that they can deliver.

15:02And so it's really understanding, well, what in their track record allows them to have better access or better understanding than others? And that access piece is really around that set, that co-op entrepreneurs. So what insight will they have or what access will they have that allows them to evaluate these companies differently? And sometimes with impact funds, it's really that impact evaluation. So what value can they see in some of these companies that perhaps generalist funds will be overlooking? But I think it's also important to note that it's really about, you know, outperformance and talent spotting at the very early stage where Isma is often investing.

15:44So we're typically investing in funds that are focused on pre-seed and seed investments. And so we're really looking for teams that have had exposure to great entrepreneurship in some way through their journey, either having backed it before and therefore they have the track record to show that they can identify that talent or they worked in a very high performing startup or they've been in a role whereby they would have seen a large amount of entrepreneurs to enable them to be able to identify this talent or they have some sort of academic advantage. in being able to sort of understand where value can be created later on.

16:23And so that's what you're really looking for is that piece. And that doesn't change whether you are looking at a generalist fund or an impact fund. So our assessment is very, very much the same. I would say that when we are looking at a fund that's maybe more impact, more sustainability focused, we would have a bigger, more vested interest in understanding how they measure that impact, how they show that value that's created to shareholders, because in some way that is going to help those companies raise more capital, right? If they can show the carbon that they're saving or the lives that they've impacted, then therefore it's going to kind of help to add to their equity story.

17:00So that's why it becomes important to us. But in and of itself, it's not something that we're really looking for. Yeah, and in preparing for this, you kind of mentioned that the specialist side of a biotech and climate fund might also be more interesting than a general, impact fund because you kind of there's less of a proof of some sort of GP thesis fit and sort of special knowledge so I always try and keep a really open mind when I'm looking for funds so you know people always say all the particular areas or sectors that you're particularly excited about and I think no it's always really really about this GP thesis fit and and how someone has better access but you can really make the argument when you're thinking about biotech or climate that they're deeply technical subjects right and so having some specific experience in those fields really allows you to understand some of the dynamics and some of the technicalities of these companies much better than your generalist peers would be able to now you know arguments on both sides as to whether that's a good thing or bad thing some people believe that it can leave people to become very jaded right and that you can always do some tech dd but others you know you can really understand the argument for being able to cut through some of these ideas much much quicker and also have really really strong networks in these more technical spaces so I think when you think of fields like biotech or climate tech yes you probably are going to get more specialization around these funds and therefore we we look at them with that lens of the specialization being really quite important but some of our most valuable biotech companies have also been captured by what would be more generalist funds.

18:40But then again, you know, if you dig one layer deeper, you then look at the partners and yes, they're executing within a team that has a generalist strategy, but they have backgrounds in biology themselves or biotech themselves. So therefore, within a generalist fund, you can start to have some of these more specialist kind of focuses within that. And just to back quickly on one thing you also mentioned before and the sort of impact generalist tension or choice, you can call it, right? As you also said at some point that there is some sort of your LPs also have some focuses, right? How does that sort of play into how you or what your investment universe looks like and where you can actually go?

19:24And do they push more for, for example, impact or not? No, we're very lucky that we have a wonderful and diverse group of LPs for which, you know, we're not trying to build a portfolio that has you know access to to one area more than another because of that because of some of our LPs interest we're very much looking for okay what are the very best funds that we can find across Europe but really understanding that great entrepreneurship can come from everywhere so within that set we need to build diversification into it so of course we look across geographies and we look across different theses as well to make sure that we're really capturing that broad pool at the early stage which we believe gives us the best chance of finding the next kind of European outlier.

20:10So we have no particular focus that's been driven by our LPs but we do find that a lot of our corporate LPs are particularly interested around sustainability and the green transition as many you know large corporates are facing sort of transition challenges in the short-term horizon now and we also have some LPs that have a focus on health and wellness because that's where their core business value has been derived from. So actually within the Isma portfolio, you're able to build this really nice diversified pool of companies, which is of interest to a very diversified set of LPs. That's how we're really able to work with those corporate LPs, but we don't get pushed in one way or the other of what we'll be focusing on.

20:55Digging a bit deeper on this approach for finding those outlier opportunities in Europe. You've touched on some of the dimensions of this already, I think, but when you're evaluating funds for investment, what makes a really great fund stand out from a good fund? Yeah, I mean, there's the really obvious answer, which is track record DPI having done it before, right? But backing early stage funds in Europe, as you so well know, Dougie, a lot of them are much younger and they just don't have that track record to show yet. So you're really going off of other dynamics and other sort of pointers that you can take as evidence for how can this fund deliver and what gives me the confidence that they're going to be able to, you know, deliver those high returns in the future.

21:44And so we're really looking for, OK, what is it that this team has done that they have had exposure to in the past that gives us that conviction? And it's usually around a variety of things that they have done in their career to date. Right. So is it academic excellence that gives them some sort of, you know, insight to a group of entrepreneurs that others just wouldn't be able to evaluate in the same technical way? is it network you know are they part of a group somehow or you know have have created a following around them be it through their own you know amazing entrepreneurial activities or you know we see it more and more sort of media activities that they're able to gain access where where others can't or is it really about sort of track record and what they've been able to demonstrate in the past and they're now spinning off to do something themselves and take ownership of a strategy and so coming out of a larger fund.

22:39So, you know, you're always looking for this common thread, which is the ability to spot entrepreneurial talent and layered on top of that, the business acumen that you should have as an investor. But ultimately, it's taking different signal points and really trying to distill, well, how can I gain conviction that this person has or this team has the ability to execute on this thesis better than others in the market. And as you say, a lot of those dimensions read across between impact funds and generalist funds in a very similar way. I guess maybe one provocation in that regard would be many impact funds or some impact funds describe their edge as being really values aligned with founders.

23:20And I think that's a really important part of it. Values alignment is one of the most important things we assess as an LP. But we're also probably with a view that values alignment isn't enough to be edge in and of itself and you need to have some of these other elements that you just described there. How do you think about some of those dimensions that you described in the context of how do you see some that read across really strongly, some that don't really read across? What's your take on the values piece? Yeah, I think the values piece is really important. Number one in the long term, right?

23:50You build very deep relationships with your founders that last, you know, many, many years decades in some instances and therefore you know being values aligned is really important and it helps prevent clashes in the future if you're both after the same thing long term the other thing that values alignment allows you to do is to start building this virtuous ecosystem around you in this virtuous circle whereby you start to get a reputation of the types of deals that you're interested in and therefore you know founders will refer other founders to you based on those values and those areas of interest.

24:28And so you start to get that flywheel going around your thesis, right? And so I think that that is important. It's very, it's much easier to identify great entrepreneurial talent if you're not sifting through the largest pool on earth, but instead have more filtered deal flow whereby people understand, you know, what it is that you're looking for. And values is definitely a part of that. But ultimately, I think, you know, you touched on it, the values pieces is really important but ultimately you know these entrepreneurs want to work with great investors too that are going to help them build their business and so it's not just about the values piece but about the sort of wider and more and broader sort of impact that you can have at the board level as an investor so you know that's what we're really looking for is not only values but but sort of great skill in identifying entrepreneurial talent and then great skill in supporting that talent too.

25:20And maybe just for the DPs out there as well, what do you feel like is the difference between a good and a great fund? Or like, do you have some examples where you're like, okay, this really made it great and not just good, because I guess you can have a good GP fees instead of it could be great, or you can have a good network and then it could be really, really great, like something that really stood out. Very hard to say, because it's so unique in each case. But I think it's really, I guess, we're always asked like why don't we move super fast right when you are an LP you often take time building conviction around the investment that you're making when there's a lack of track record so you know I say this all in the context of if you're coming to me with multiple funds that are all over 3x then you know it's very easy to point to what what is making that fund great but when you're when you're younger and there's not those outliers yet how how do you evidence that and it's usually around the the community and network and group of people that you've interacted with over you know the the time in which you've been trying to execute on this strategy so you know either you're looking for for references from ex-colleagues or entrepreneur or entrepreneurs that you've worked with in the past to really get an understanding of okay well how does this team and and how do these this group of individuals that are going to execute on this strategy how do they really have better insight better access than others do a lot of pitch decks look very generic right and so you're you're really trying to cut through what is you know easily typed on a screen but but what is actually acted upon and so real evidence i i think is always the thing that takes funds from being good to to being great and that's what you're looking for in that dd process you've done a lot of thinking on sort of how dei should change in the venture ecosystem or grow.

27:10Would love to hear your take on what is important that we focus on now and what needs to happen as the next frontier for VCs. Always super happy to talk on this subject. It's something that I'm super passionate about, but realistically, we're all very aware of the fact that the venture ecosystem in Europe is still incredibly undiverse and how can we continue to build it to be a more inclusive place. My number one key principle in all of this is, you know, never clip the wings of diverse investors. We see a lot of programs be spun up whereby there's certain conditions that are put on capital for diverse investors to invest.

27:50And actually, you know, it's very much my core principle and core passion that diverse investors should have access to the open market in the way that any great investor should right and so really trying to think about how we can keep capital flexible and and how we can encourage capital into the hands of more diverse investors but through a very kind of open market way is is really really important to me but I guess some of the other thinking that that we've discussed in the past Dougie that I think is probably sort of really important to mention at this point is diversity metrics are are super easy to feign, right?

28:28You know, you can very easily hire more diversely and change the makeup of a team. And that is great in some regards. But what we really need to focus on in all of this is the equity part. Really understanding, you know, carry structures, key man clauses, and what they represent and what they really tell you about a fund. And the diversity that's represented there is really, really important. So carry structures, key man clauses they're often you know very reflective of the amount of capital that's been put at risk by the team and often you know more diverse younger individuals aren't in the same place to take that kind of financial risk that maybe sort of older counterparts are more experienced counterparts are so what we really need to start building into the ecosystem is a better understanding of okay well yes the financial risk can't be taken but for oversized kind of contribution in terms of sort of investment acumen and, you know, energy that's been putting into these things.