E574 | Paul Morgenthaler, CommerzVentures: Why CVC Works Best with a Single LP

0:00What if the biggest question mark around corporate venture capital could simply disappear? Given that they know we will behave exactly like any independent financial VC, that kind of question mark that might initially be there goes out of the window. But when incentives blur, chaos follows. And if your motivation is ambiguous and you have a double bottom line where you need to add strategic benefit, but also somehow you need to make money and so on, then it becomes really hard for your companies and their founders to predict how you will behave. Here, the rule is simple, one KPI. It was clear from day one that financial success and financial return is really the benchmark or the KPI that we want to measure ourselves.

0:46Rigor shows up in the filter. Is this really AI first or to what degree is it an AI opportunity or is it just some AI sprinkle on top of something else, right? And the bar higher than ever. To be successful, actually, the bar is higher because you really need to have a product that is super innovative, that employs not just a business model, but actual fintech, actual technology. So stop feeding bureaucracy. Build. Let's close the podcast on the message of getting away from bureaucracy and getting out there building stuff instead. Paul Morgenthaler from Commerzbank reveals how a single LP structure converts corporate constraints into founder first speed.

1:26This is the European VC Podcast.

1:49This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Welcome, everyone, to another episode of the EVC podcast, the show that is bringing together the voices shaping the future of European venture. And as part of that, of course, also our beautiful friends in the corporate venture capital space. It is a critical and sometimes overlooked piece of the puzzle in building a stronger and more resilient European innovation ecosystem. And for that reason, Yabba and I are truly doubling down here together. Today, we're bringing our good friend Paul Malkenthaler, partner at Comments Ventures, the CVC arm of Comments Bank, a firm known for pioneering the single LPVC model with huge both financial and impact success across the European ecosystem.

2:36This conversation is for all of those out there trying to understand what you can actually do as a CVC that operates as a VC, because few have been as financially successful as the Kermats Bank team. Paul, welcome to the PubMed Run. Thank you so much, Andreas, and really excited to make it today. Jaap, I said some stuff here about the fact that it's a single LP model and the Kermats Bank team are incredibly successful when it comes to pure financial success. Could you, Jaap, say a bit about why you think that Kermats Ventures and Paul is such a great guest for the pod. What we have here on the show today is what a successful CBC looks like because you do not just create a single LP structure.

3:27A single LP structure only comes from success and I think, you know, Paul will be able to share that success and why it happened, right? So I think this is a clear transformation of one of the entities in Europe and in the world that have succeeded multiple CEOs and which we can then basically claim here on our show that this is one that will last for a long period of time. So super, super interested and eager to learn from Paul and what they have built at Commerzbank CBCs. Thank you, Jeppe. And I'm more than happy to share our experience. And as in the introduction, you said, Andreas, It's a relatively unusual setup for a VC that is affiliated with a large bank or with a corporate, right?

4:17But what really helped us and what also guided that decision to have that single LP, actually to have a GP LP set up in the first place, was that it was clear from day one that financial success and financial return is really the benchmark or the KPI that we want to measure ourselves. And that's not a given, right? because you see with a lot of corporate VCs that you have kind of double bottom line where you should deliver some return, but you should also deliver strategic benefits. And then you really don't know what should you optimize for, right? And if you're trying to mix the two things up, it can be difficult.

5:03So what really helped us to have that clear, let's say, hierarchy of KPIs that we want to deliver a financial return that is in line with the return expectations for the VC asset class, ideally top quartile. If there is any other benefit to our LP, Commerz Bank, that's obviously great and we want to see that. But really what we measured on is the financial return. So that's why we chose that GPLP structure and it really helps us optimize for that objective. So just to make it clear for the people watching in, what is the link to Commerzbank, right? The outcome, pure financial, how do you link in?

5:57So it is really a standard GP LP setup, but with a difference to most other funds that we only have one LP with Commerzbank. But otherwise, it's really like any independent VC firm. The structure is exactly mirroring that. Sometimes when I talk to other VCs about our structure, they are intrigued because we only have one LP. We don't have to manage dozens of different LPs. You might think that that could be an advantage. And an important point to make here is also that our network in the financial industry, and we focus on fintech, so the financial industry network is super important, and that extends well beyond Commerzbank.

6:47Paul, you know, as I've also been an operator of VC funds in the past, right, You always have an investment committee or LP forum or the like. How does that work in your setup? Yes, that's true. Like in any other GPLP setup, we have an advisory board. That advisory board is prominently featured at our LP, Comments Bank. We meet regularly. So, and there it's really an opportunity to share with our LP, Comments Bank, what we're up to, what we're seeing in the market, the kind of companies that we're seeing, the kind of potential investments. So our advisory board will also advise on their experience and why they think an investment could be successful given what they're seeing.

7:43And ultimately also it's to hold us accountable on our performance, right? If you have to report regularly on where the fund stands and where your individual investment stands, that's also a very good discipline to have. No, and I think it's super nice. It's a true advisory board. It's people from the industry that know what they're talking about. So fully subscribe to that part of it. Can you share, has there been any or the most pivotal learnings for you in this setup? What is really good is that when you look at a specific opportunity, for example, let's say in corporate tax, right? A startup that has a new technology for streamlining corporate tax processes, to have immediate access to an expert who has done that for a long time and who knows all the ins and outs, that is super helpful.

8:43And obviously those experts, given they are part of our LP, they really have an incentive to share. And so we get that information firsthand. And obviously there are also other ways you can get these data points and, you know, this advice. But having someone who is really bought into your success, giving you that advice, is different to rather than just hiring a consultant in the market. So you have some years behind you since you were established, right? How have you seen that collaboration work, right, with these pivotal learnings? Have you always, since the beginning, been able to get these, you know, advice on Didi?

9:28Or how has it developed over time? So this is something that we find very valuable and helpful. So obviously we spend time in cultivating those networks within our LP. But on the other hand, we are not beholden to it. So even if some experts at our LP have a critical view of a certain opportunity, given their experience, doesn't mean we can't invest in that. In the end, we'll make our decision based on many different data points and inputs. One could be from our LP, but our network extends well beyond. We have been in the market now for almost 11 years. And of course, if all you do is investing in fintech for 11 years, you will just organically build that network.

10:22We get advice from the entire network. And in the end, It's about triangulating all these different data points and then making a decision. But it's definitely helpful to have that input from our LP. So if we flip the question, can you recall a moment where, you know, it's been the other way around, where, you know, Commerzbank has a pivotal moment where they have learned something from you? Is that something you can recall? we are regularly asking you know if the companies or the new technologies that we're presenting to them as a part of the investment process if that's something that helps them right because they also have to make a lot of decisions which technologies to prioritize which startups to cooperate with and making all those decisions also like make or buy decisions Yeah.

11:20And so what I definitely can say is that they find value in that because, you know, as an investor, we get unique insights and access. You know, you could also as an alternative, you could hire a consulting firm and ask them for a study. Right. But given that we have this close relationship and we see those topics very intimately. Yeah, it's definitely advice that they value. This financial motivation for commercial ventures, how do you see it play out when you're fighting, so to say, to get into the best deals? Because it's always one of those discussions. I had one with another CVC just a couple of days ago where they said, well, it's not always that founders, the top tier best founders are looking to bring on a CVC.

12:16And for that reason, I'd be curious to hear, is it something that you often lead with or try to explain very clearly that this is how we operate? I'd love to hear how it works in the fintech sector amongst the best founders. Yeah, that's a super important point, Andreas, because what you really want to have is access to the best founders and opportunities, right? So it is important to make sure that you communicate the value add. And as a financially return-driven VC with a GPLP setup, we are predictable, right? We have a financial motivation. So we are totally aligned on that with the founders and with our co-investors and opportunities.

13:05and if you don't have that and if your motivation is ambiguous and you have a double bottom line where you need to add strategic benefit but also somehow you need to make money and so on, then it becomes really hard for your companies and their founders to predict how you will behave in certain scenarios and certain situations. And that makes it harder or can make it harder, you know, to get access to the best opportunities. But given that they know we will behave exactly like any independent financial VC, that kind of question mark that might initially be there goes out of the window. It's interesting because you tend to fight that a lot, right, as a single LP fund, right?

13:54So it's nice to hear that it's for some people go away. And of course, initially when we started out, it was harder to make that point. But now with almost 11 years track record and close to 40 companies that we invested in, we can point to so many examples of this being not only in a narrative, but being true in the daily doing that founders are very receptive to it. I'd love to ask both of you for your take on this. the CVCs often operate in the later stages and here the competition is oftentimes fierce once founding team has proven very very strong I'd love to and maybe this is mostly a question for because you've made your decision and you'd obviously speak for this model just as you just have now yeah but where are you seeing competition around these very top tier founders becoming an issue for the CVCs that do have the double bottom line or the potentially muddy governance structures and motivations.

15:05Is it a real problem, as Paul is saying, or are there ways that you can navigate around it when you do both? It's the same as for the VCs, right? For the CVCs with a double bottom line, it's a matter about what you actually offer the founders when you invest. You know, I think a critical question as a founder to ask a VC is, well, this VC claims to be an active board member and an active investor. What does that mean, right? When you look at the CVCs with a double bottom line, you know, they promote themselves with offering their asset, brand, customer, data, and expertise, right? So no matter what you offer, whether you're a VC or a CVC, you have to follow through, right?

15:51You have to basically walk the talk, right? I think the unfortunate side here is that CVC carry a lot of legacy when you have the double bottom line approach where you have to explain yourself because the average lifetime of a CVC is 3.7 years, right? And I don't think, you know, Paul does not have that anymore with his single LP setup because he is a VC, right? It's a little, you know. For me, what Paul does is a VC with an awful lot of expertise around them that can be added at the same time as the VCs and what they do, right? Yeah. So in other words, there are definitely other models than the single LP structure that can work.

16:37It's just a matter of maybe you carrying a little more a burden of explanation when you don't have that structure. Paul, are you ready for us to shift into a discussion more thematically focused around fintech? Totally. Let's go for it. So let's do the thematic deep dive here. I'd love to tee it up with the question of saying you're investing heavily across Europe and, of course, looking at all the global trends as well. Where are you most excited about the strategic position of Europe compared to other geographies today? So indeed, as a, you know, Europe-based, we see Europe as our home turf and we're really actively scoring the whole continent.

17:24I was in Finland, for example, whereas one of my colleagues was in Spain at the same time. So really, Europe, we feel at home in Europe. So Europe for us includes the UK. These days, it's not as obvious as it might have been at some point. But the UK and specifically the London market is also super important for us as a fintech investor. Having said that, we are open to opportunities in the US and in Israel. And it actually was very beneficial to be that. So just a few weeks back, one of our portfolio companies, Etoro, had their IPO on Nasdaq. So this is a company that was born out of Israel. another successful portfolio company that also IPO and Nasdaq a few years back was actually from the Bay Area.

18:17It was good for us to be also able to invest in these markets. However, there is a different bar. And for us as a European investor, we need to be able to articulate why we should invest in a US-based or an Israeli company. What is the value add that we can really bring to them? Why should we be a value added investor to them? We need to be able to articulate that very well. In the case of eToro, the company that IPO'd or the other IPO company, Markeda, it was very clear in both cases, we were able to help them with their international expansion in Europe. and they were specifically looking for a European investor to help them do exactly that.

19:07So, you know, the case was very clear. If we're not able to have a very clear case, you know, why should they choose us, right? I mean, the U.S. is flooded with VC money. Why take a European investor, right? I'd love to ask you, and maybe I'm repeating myself a little bit, but I'd love to ask you because many say the next phase of fintech will be deeply intertwined with AI and infrastructure. I'd love to hear your perspective on what kind of startups that you're seeing in this space specifically, and maybe again, comment a bit on your position here compared to the other geos. As a fintech investor, you need to make sure that you actually capture the way that the space is evolving, right?

19:53Fintech today is a totally different beast than it was 10 years ago. You know, many of the foundational opportunities around fintech infrastructure or some of the business models around lending and investing. I mean, you know, this has been played out to some extent and they're huge companies, they're unicorns, they're companies that IPO'd. So we always need to make sure we capture the next wave or the next generation. And in that, let's call it the class of 2025 of FinTech, AI is really the one big thing. It's very hard to not have a company these days and it doesn't have some AI component to their product, right?

20:44But then obviously you need to go deep and understand, okay, is this really AI first? Or, you know, to what degree is it an AI opportunity or is it just some AI sprinkle on top of something else, right? I think that that is what you have to figure out. What I can say is that the last investment that we announced was a very typical investment for FinTech Meets AI. The company is called Unique, based out of Switzerland, and they are helping banks to enhance processes that historically have been very manual heavy, especially around compliance processes or around research, really to help banks to augment these processes and to semi-automate these processes through AI.

21:39And they have use cases live with several large European banks. Just announced a big use case with BNP Paribas two days back. So really with large blue chip banks. So that's an investment we're very happy about. And we want to see more like that. Just one hour ago, we actually finished up a pitch. we're a company that is also AI native and that is helping companies with their ESG reporting which is a big pain for most companies so many different Excel sheets and formats you have to deliver not only to investors but also to your hundreds of different customers who all want it in a different format and it helps them to unify that and automate it, make it more efficient, make it more accurate, make it auditable.

22:37So these are the kind of opportunities we are seeing these days. Now, you mentioned you have done investments in different geographies, as we are the EU VC and CVC, right? How do you think Europe has a structural edge in fintech compared to US and Asia? So Europe is definitely a very strong geo for fintech. I mean, just look at the big fintech success stories that we have, right? A Klarna as the poster child or a Revolut. I mean, these are gigantic European success stories and we should celebrate them every day. Or also in our portfolio, a company like Membu, which is the back end now for many banks globally, which banks are run on based out of Amsterdam and Berlin.

23:25You know, there are so many role models for European fintech. Europe is definitely a great place. And we have an edge because a lot of problems that needed solving in markets like the U.S. or in other geographies around the world actually kind of had been solved in Europe already. the financial market in some aspects was actually more efficient, even though the cliche is a different one. And in capital markets, the US obviously has the edge, but there are many other spaces of their financial industry where Europe was traditionally advanced. Just look at payments, right? So that means that to be successful, actually, the bar is higher.

24:14And that, of course, that is an opportunity because you really need to have a product that is super innovative, that employs the latest technology, not just the business model, but actual fintech, actual technology. And that's what we're seeing in Europe. So a provocative question may be a terrible question. Do you think the Coulson brothers would have founded their company in Europe if they founded Stripe today? Who knows, right? I would say that today, given everything that is happening in the US, arguably, Europe is just as good a place to found such a company as the US, right? I mean, there are definitely shifts happening.

25:01You know, the availability of talent. You know, I just heard that Meta feels like they need to pay top AI talents $100 million every year. Yeah, I think in Europe we're slightly more modest here. It was only a signing bonus. It wasn't even the only signing bonus, right? Not the salary. Yeah. Yeah. So we're doing with slightly less here in Europe. And of course, just, you know, that Europe, frankly, is now a much more welcoming place for international talent. Also, you might say that disruptions in the U.S. capital market and, you know, where investors are actively shifting the assets away from the US to Europe also creates or will create an environment down the line where capital availability, also for the later stages where they have the huge funding rounds, might become comparatively better for Europe than what it is today.

26:02So I think there is a lot to be optimistic about for Europe. Also, if we look in AI, you know, straw seems to be really catching up on some of the U.S. foundational players. So I think, you know, it's a great place to start companies like that. What fintech verticals do you think that we venture normally tend to disregard or not pay enough attention to when it comes to the fintech space? Yes, that's a very good one. I mean, fintech is super broad and fintech is almost more horizontal than a vertical because at the very least, every company needs to be paid. So payment is a huge topic and there have been great successes.

26:54And you just mentioned Stripe, but there are many other successful, super successful fintechs in the payment space. However, it's also a bit of a difficult space to get your head around if you're not really specializing into this. So I think if you invest in payment, it definitely makes sense to have the experience of a fintech investor and to really be able to go deep into that. Then there are a lot of solutions for small business. and you know the the mantra has been for quite some time that the way to go is enterprise you know enterprise is where the big tickets are you know where the strategics are looking and so on and that is true but on the other hand if you're able to crack distribution for small and medium sized business and if you have an offer there that really delivers value to those kind of companies you can scale those companies almost infinitely because there are just so many out there and you can build huge businesses based on that.

28:00So I wouldn't disregard the S &P space at all. I think it's just as interesting as enterprise. And the same goes for consumer, by the way. I mean, consumer has been super unsexy. But I think that tide is starting to turn. also given the with the opportunities of making ai work for consumer i think it's a whole new paradigm it will just become much more efficient we will you know and capital efficient i mean by that um to build a great consumer company so this is also something that um we at comments managers really want um to you know keep an open eye on and keep an open mind oh and when we discussed ai before, right, you mentioned that you had an, you know, AI ESG company pitching a little earlier today.

28:54We met a couple of months ago in Berlin because we both fell in love with a German-based company called Cargney. You know, you have the intersection of climate tech and fintech right now. So do you think there are more opportunities in the space that you can invest into, or how do you see it right now? Yeah, that climate tech, fintech intersection is a space that we have been investing in since the last five years. And actually, we like to think that we coined that very term, climate fintech. So when we started out looking at that space in 2020, there was really only a handful, or call it two handful, of companies that did that.

29:42We track these companies and now we have in our database more than 700. So that just shows the trajectory that that space has taken. Now, given, you know, some of the geopolitical developments, we have seen some subsectors in there facing a tough time. We believe it's a matter of time until that will come back. because, I mean, climate is not going away and the challenge is not going away. If anything, it's going to getting worse every year. We're still super comfortable around that space. You just have to make sure you're addressing the challenge of the time and maybe monitor your cash burn, be capital efficient and just stay there and stay in the market.

30:33Yeah, and how much in there, right, is actually regulated? In Europe, there's 27 countries, there's a lot of going cross-border and so forth. How do you see that in a more global perspective? Is Europe still leading some of those initiatives or how do you see it? So the regulatory environment that we have in Europe around climate or ESG more broadly, that created an environment that in a way incubated many of these companies because there was a very clear near-term opportunity to help enterprises addressing those regulatory challenges. However, the companies that I'm most excited about are those that go beyond the pure regulatory use cases and can actually deliver business value and even help their customers grow revenue.

31:30And if you have that, I think then you really have hit the spot. And maybe as an example, one of our portfolio companies, ClimateX, so that is a company that is helping to quantify climate risk for anyone that is exposed to real estate. You know, real estate is very obviously exposed to extreme weather events. That has always had a regulatory component as banks are required to report on their climate risks and their portfolios. So from day one, there was a regulatory use case. However, ClimateX has been able to go way beyond that because now it's actually about creating an edge in real estate investing.

32:17If you're able to quantify the climate risk of a specific property better than other investors are doing, well, obviously you have an edge. You have an edge in pricing. You're having an edge in having a successful deal there. So they've gone beyond that initial regulatory use case and now really helped their clients win business. Therefore, they're doing really well and they have expanded to the U.S. And actually, their CEO, Lucky, actually moved to New York because the opportunities with U.S. clients is so enormous that they just felt that they had to make that move. regulatory has sometimes been called both fintech secret weapon but also the the big blocker i'd love to ask you if there's anything on the horizon in europe that is making you either anxious or excited yeah i mean regulation is is both a blessing and a curse right in in the early days when when when you try uh to get into the market obviously it is a hurdle for For many companies, it creates a higher funding need than you would otherwise have had.

33:30You need to create all that overhead to make sure you are compliant with regulation. So in the early days, it makes it harder to get off the ground. However, once you are actually successfully regulated, it is also a barrier to entry, right? Also, being a regulated company is something that helps create trust with customers and consumers. So actually a lot of FinTech carry that as a badge of honor, that they are regulated by FCA or by BaFin or whoever their regulator is. And then it gets a positive. You just need to make sure that you know what you're up to, that you have the right kind of talent that also understands the regulatory environment and how to play that environment in a sense.