E581 | Olav Ostin, TempoCap: Europe’s Secondaries Boom

0:00When Europe's venture market froze, one asset class suddenly became irresistible. I find it quite nice to have the word sexy with secondaries, bearing in mind that a few years ago, nobody wanted to really talk about this. But behind the hype lies a brutal market reality. Everybody's selling at the moment. Everybody needs some liquidity. And liquidity always comes at a cost. First of all, I would say you should assume there is a discount. There is a liquidity discount. So how do you unlock cash without destroying future value? The answer lies in surgical precision. Our preference would be to cherry pick.

0:32But the real innovation, a deal structure that gives sellers what they need most. Cash today, upside tomorrow. So we find a solution where we will buy 10%, they retain 10 % of the assets, so they get some liquidity, but they also have some kind of upside going forward. It's a formula that's reshaping European venture. And one firm has bigger ambitions. Become the biggest secondary direct player in Europe. How did cherry picks and strip deals become the new path to liquidity? Join us as we decode the mechanics behind Europe's secondary revolution with Olav Austin, founder of TempoCap.

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3:44This show is not investment advice, and the hosts of this episode may be invested in the funds and companies featured. Today, we're diving into the searching secondaries market with Olav Austin, founder and managing partner at Templecap. As the secondary market hits record highs, Olaf offers insights into the dynamics reshaping European venture and what it means for the future of liquidity and exits in our ecosystem. We, at the time this episode goes out, we'll just have launched Joe Short's talk from the UBC Summit where we also talked about secondaries. So I'm looking forward to contrast what he said compared to what you're saying.

4:19I imagine it's somewhat similar because these days, Olaf, everyone's saying secondaries is the place to be when it comes to venture in Europe. Yeah, well, thank you very much for having me on the show. Delighted to talk about secondaries. Tell me, Olaf, first and foremost, a bit about your background so everyone knows you. Tempo Cap, when did you hit the market? What have you done since? So on. Yes, so we set up Tempo Cap in 2016. So it's been nine years now. We've been doing secondary transactions for the last nine years. We are a team of 12 people with an office in London and Berlin, and hopefully next year in Paris.

4:59And we do two types of secondary transactions. We either buy entire portfolios of investment for people who look for some liquidity, which is most people these days, or invest in single asset secondaries, later stage companies. I'll explain a bit later in more details. Well, maybe actually, maybe that is where we should start because the mechanics of secondaries, not everyone are super well versed there. So let's describe those two in detail and then maybe talk about why you're focusing there instead of, as an example, LP secondaries, which is a big iceberg. Yeah. So what we do is called Secondary Direct.

5:36Why Secondary Direct? Because we go directly into the companies. As you say, you have LP position, you have GP leads. We're also active managers, so we're exactly like VCs after the transaction. We sit on the board of the companies, manage them for a period of three to five years until exit. I would say recently the market has exploded with a few players coming to what we call single asset, secondary direct. So where you have some VCs who are just doing primary investment and are finding it now quite sexy to do secondaries. I find it quite nice to have the word sexy with secondaries, bearing in mind a few years ago, nobody wanted to really talk about this.

6:19And then you have very, very few players buying entire portfolios of investments like we do, because it's technically quite complicated to buy five or 10 companies in one transaction. Yeah. And maybe just talk about deal size here. What size deal stage would you look for in companies? So we look for companies that are later stage, we call them. So we look for companies that have more than 10 million of ARR. So normally when we invest is kind of 10 to 30 million of ARR. I speak of ARR because 90 % of what we do is enterprise software. And we look for companies that are fully funded. Doesn't mean that they have to be profitable, but what we want to see is with the cash they have in the bank, they'll get to profitability over the coming years.

7:06And the main reason for that is it's obviously quite disruptive to look for some new capital. And also our business model is really trying to invest in technology with limited risk. So if a company is mature or reasonably mature and is fully funded, we've established that there is lesser risk of failure. And at Tempcap, we haven't closed the company for the last five years. So this has worked reasonably well for us. In terms of sectors, perhaps also we do quite a lot in cybersecurity and defense. As one sector, we do quite a lot in fintech. And we do, in general, quite a lot in enterprise software, horizontal or vertical.

7:54So that's probably 90 % of what we do. And then from time to time, we will do some other sectors like digital health. We were investors in Depop, which was not an enterprise software, but a great deal for us. So in terms of stage and sector, that's where we focus on mainly European companies. But when we buy a portfolio, we're happy to also have kind of a U.S. company in the portfolio. And transaction size? So in terms of single assets, it's probably 5 to 20. We'll probably start with five to ten, I would say. And then what we like to do is extend through more secondaries. So a great transaction for us would be to start at seven, eight, nine, and then double down over a period of time with more secondaries in the company and potentially supporting the company also afterwards with some primary capital so they can expand.

8:55It's not because we're doing secondary that we're not prepared to boot primary investments in the companies also. And then in portfolios, more complicated transactions, taking more time. Minimum for us is really 20 million euros. And there's no kind of top. At the moment, we're looking at deals of over 100 million. We'll see if they take place. There's been a big shift recently in terms of size, but the minimum being 20 there. how does a deal come to you as a secondaries investor? Like, do you prefer to hunt them yourself? And kind of you have your targets that you have top of mind. How much do you source by collaborating with VCs in the ecosystem?

9:42When is it that a company comes to your map, so to say? And what do you want to say to the GPs that are listening in, in terms of engaging with you? Yes. So two types of transactions, single asset and portfolios. I would say on single assets, there's quite a few primary investors who will also do secondaries. And then you have a few new players who have VCs before and have raised a secondary fund. Also, what you're starting to see is LP investors who will raise a secondary fund based on the recommendation they get from their GPs where to invest. So I would say on single asset secondaries, there's probably kind of a broader number of players.

10:30And there we get most of our deal flow by sitting on the board of companies, knowing VCs in Europe and looking at quite a lot of primary rounds. Also, we are not against participating in primary rounds. So look at primary rounds with secondaries. secondaries. And then we have this strong sector expertise, so probably in the sectors we know well. In portfolios, it's completely different. Just a follow-up question there. Do you do a primary round without a secondary component to it, or is there always a secondary? No, no, we'd be happy to do this. On single assets, what we're looking for is investing in the best companies we can find.

11:09The beauty of secondaries is you can invest anytime in a company, in theory. So we're looking at the company that just raised quite a significant amount of money in the UK. I was talking to the founders recently, and they're saying there might be more secondaries to be done on the back of this primary round. And also sometimes there's a primary round, there's no secondaries, and six months later someone calls us and says, well, we really like the interaction we had with TempoCap. Would you still be interested to do a secondary? So this can happen pretty much any time. In terms of portfolios, it's very, very different.

11:43So there's almost no one in Europe doing this. And so TimeBookUp is known as being capable of buying five, seven, eight companies in one transaction, which is technically very difficult, bearing in mind preemption, co-sell, and the difficulties of closing one deal with eight companies, underlying companies in one transaction. So I would say in this market, we get a lot of inbound calls at the moment from corporates. We're having lots of discussion with CVCs, corporate VCs, and with VCs in general who are looking for some DPI. Everybody seems to be kind of needing some DPI at the moment. Let's drill further into this dynamic.

12:31Let me first ask, when you do a multi-asset purchase or investment? Typically, is it in the shape of buying a full LP portfolio or sorry, VC's portfolio? Or do you cherry pick within a VC's portfolio and you leave the ones that you don't want, but you do, it's still a multi-asset purchase because it is more than one, but you typically don't like to buy the whole suite of the remaining portfolio. How do you normally do? So our preference would be to cherry pick some assets from the portfolio and then find a reasonable kind of pricing around these assets with the seller. It's not always possible to do that.

13:15And I would say, depending on situation, the dynamics can be very, very different. If you have a CVC, for example, corporate VC, they will often come to the table saying we are discontinuing the operations. We have 15 companies. We understand you're only interested in five, but what are we going to do with the rest? So then we have a discussion on, well, you understand that for us, the other assets perhaps have very little value. It might be better to sell them to management. But there'll be a dialogue. The idea is really to try to build a liquidity solution with the seller. We're not going to impose our terms.

13:55People are not imposing their terms. These are really tailored solutions. where you try to understand kind of the needs of the seller and then you try to adapt and find a deal that is a win-win situation for everybody. In VC portfolio it's very very different. You know you might be talking to a VC that is in fund seven, I make it up, and in fund four or in fund five they still have some assets and this is mainly driven by the need to do another fundraise and the LPs putting some pressure into the VC, sorry, to generate some DPI. And so they come to us and they say, well, ideally, we wouldn't want to sell anything.

14:42But, you know, the reality is the exit market has been tough over the last few years. And so we need to generate some liquidity. So again, here is very much of a tailored kind of proposal. and normally this is kind of tailored around a few assets unless there is a clear need to shut down one fund but it's very very rare normally it's really dpi driven and you can have also what we call strip deals so where you share the shareholding so let's say vcs 20 in one company we consider it's very attractive they are telling us listen if we sell the entire state this is a big upside for our fund. So this is a bit of a problem.

15:23So we find a solution where we will buy 10%. They retain 10 % of the assets. So they get some liquidity, but they also have some kind of upside going forward. And I guess it also tends to be a better option when it comes to the founders, because hopefully the founders are already happy about the existing investor. And as much as they They would love to welcome TempoCap, I'm sure, to the cap table. They are happy about the existing investor that's already been on a good journey with them. And for that reason, maintaining them. Well, it's not always the case because if you have a fund that is out of cash.

16:01Yeah. And the company is doing well. And they want to do an expansion round. They'd much rather have us with fresh capital. There's a new round of funding. we can participate in the round of funding than a VC fund that is after, I don't know, year 12. The company is doing well, but it took a long time to take off. And this fund is kind of not in a position to join the new rounds. It might create some tension because, you know, so it's not always kind of black and white like this. Of course, there's always a question of, you know, who are these guys? I mean, I've been working with this investor for three years, five years, seven years, 10 years, and suddenly you're replacing someone in the relationship.

16:49So the fact that we do a lot of single assets, the fact that we sit on lots of boards, the fact that we have some sector expertise really helps also kind of bridge kind of this kind of gap and make everybody comfortable. And the idea for us is that to make the transition very, very smooth always. and also we're quite value-added. We have three partners here who are 100 % operational to try to help these companies grow. So this is also a surprise quite often from companies that expect secondaries to be 100 % kind of financially driven. But we are really like kind of an active VC is trying to help to grow the companies over time.

17:30I'd love to ask you a bit about, let's call it not best practice, but rather bad practice or misunderstanding, misconceptions around secondaries. One thing as a beautiful example, I think is when I talk to VCs that are not super familiar with secondaries, they often think that secondaries as an anonymous to a discount. And they often, when you hear them talking, it's very quickly, how much should I expect enough for discount on this and blah, blah, blah. And then the funny thing is whenever I talk to secondaries investors, the first thing they say is, discounts is never where we start. Discounts is contingent on whatever we find out about the company and what we believe about the company and where it stands today.

18:19So it's never, well, because this company is this old and it's in this market, blah, blah, blah, expect 20 % discount. There are no rules like that. So I'd love to, if we start with that one, and then we continue into the things where you are seeing that when you engage with VCs or founders around a secondary round, that this is where we often need to explain the dynamics or how we come to it. First of all, I would say you should assume there is a discount. There is a liquidity discount. If you invest in an asset class that is illiquid and you want to get out before the company is sold or IPO, there is going to be a liquidity discount.

19:02If you're on the stock market, it's exactly the same thing. You know, if you own some shares in a kind of a listed company and you want to sell a block of shares, the broker is going to tell you, yes, I can do it off the market, but there is X percent discount. So this is kind of not very, very unusual, I would say. So I would say in general, there's always a discount. We've done some deals where there's no discount because, let's say, there's been around a year ago and the company has grown by 50 % in the last year. For us to ask for a discount didn't seem to be fair or even reasonable because the company has grown quite a lot since there was a loss pricing.

19:43It's fair to say it also very, very much depends on how the valuation is computed at the sellers. A lot of CVCs, corporate VCs, will keep the last round of funding. So you can just imagine, you know, in 2021, the average transaction was done at 15 times revenues. While over a 10-year average, we can see that the revenue multiple is five to six times. So it's not me saying it, it's the numbers. You know, there was some overvaluation in 2021. one and if you have a corporate VC is trying to sell a good company but that that hasn't grown exponentially even though you can imagine it's doubled you pay kind of 15 times so you know you are paying now seven and a half times it's still more than what you're getting on exit which is five to six times so you're going to have to see a discount so here if you're starting with the last round it depends very very much what the company has done since then and what was the pricing at entry.

20:46A lot of VCs are marking to market, so on a quarterly basis or every six months, and there you have different types of disciplines. Some VCs are conservative, and we find a portfolio of investment where we don't really see the need of a big discount, and other situation is completely unrealistic. And actually, if you ask LPs, they can say that between GPs they have a valuation that goes from simple to double. I would say on our side what we try to do is try to see what is the exit pricing you're going to achieve for an asset. And then what we are kind of factoring is the multiples we'd like to achieve on this company, which is normally our target is to achieve a return of 3x.

21:39And so this gives us an entry price that we want to be paying for a company. Of course, if the company is going to be sold in the next 12 months, you can't expect to do three times the money. But I would say we work much more on this basis of what is the exit pricing we can get in three, four, five years. And therefore, what's the price we should pay today? And we've just offered to buy quite a large portfolio between 50 and 100 million. where the seller didn't give us its nav or book value. And they said, well, quite rightly, you guys, you say you're expert, you can value, well, I'll give you all the data you want and you tell me the price you want.

22:21And it's quite interesting. So we put a pricing and then we discussed and then we discovered the book value. And we ended up with a bit of a discount, but it wasn't outrageous. But then the seller felt much more comfortable that we had done a proper analysis of the portfolio pricing. And so we are now engaging on discussion, see what will happen. Is that a rare dynamic or is it something you see once in a while? How did you like it? Do you think it was actually beneficial for the process or not? No, I would say most of the time people will share their reporting and they will say corporates are normally reasonably straightforward because why is there a portfolio transaction with a corporate?

23:08You need one of these three factors. The first one is the corporate is not doing well. So if it's not doing well, it doesn't want to have a corporate VC fund of 100, 200 million. It wants to cash out. Second factor, there is a new management team. New CEO, new CFO, new CEO. And they simply don't want to have a CVC. For them, it's kind of non-core. They don't want to spend the time between the assets. So they're strategically, in these two scenarios, they're basically saying, by Christmas, I want this portfolio out. And then they give all the information they have and they say, find a solution.

23:49I just want to have a fair process. And then the third reason, which also happens sometimes, is the portfolio is not delivering what the corporate was expecting. Either they wanted to have some kind of deep understanding in some technology that they're not getting through the CBC or the financial performance is not in line with what they were expecting. So you need one of these kind of three scenarios to have a transaction that takes place. And normally, I would say corporates give you a lot of information. In terms of VCs, it depends. So you have some VCs who say, well, you've cherry picked five companies in my portfolio of 20.

24:26You seem to say you know what you're doing, so I'll give you the information. You give me a price. Since you've cherry-picked, it doesn't seem fair that I'm giving you the nav of all the companies. And fair enough, you know, that at the end of the day, we'll need to get the nav to close the deal, but we just don't need it at the start. And some of the VCs just send their entire reporting and say, you know, we just need some liquidity. Can you do the cherry-picking? Tell us what you think. And then we'll engage on these bases. So, again, there's not really a rule. Most of the transactions we have are bilateral discussions.

25:03You don't have a process. You just have a counterparty saying, you know, we'd like to discuss a liquidity solution. Is it a usual process, so to say, that a VC will reach out to you and say, we have a need to generate liquidity? Are you interested, like, basically go to our website, see the logos that are there? Does that look like something that's interesting for you to dive deeper into? Is that a similar origination of the conversation? No, I would say most of the time if they call us, we will sign. So the processes, perhaps to explain to everybody the steps. We normally have three main steps.

25:45So the first step is what we call a desktop analysis. So we'll sign an NDA. We'll get quite a lot of information on the portfolio. most of the time we know the underlying companies because we are active in primary and secondary single assets. So there's a portfolio of 10 companies. We'll probably have met already five companies in the last three years. And so we will spend quite a lot of time going through the portfolio, establishing what is the perimeter of the portfolio that should make sense for everybody. the price, and then we have a kind of a feedback with the seller, a discussion. And this is a very important step because it's completely confidential.

26:27So someone can come to us, share this information. If we don't agree, the market will never know we have spoken. And that's super important. I think before there is an understanding on the deal terms, it's very important that these discussions are extremely confidential. If we agree on the deal structure and on the price after this first step, then what we have is kind of a due diligence or confirmatory due diligence. So we meet the top assets to confirm that what we've been told is correct. So at that point, the transaction is not kind of public, but there's less confidentiality because TempoCap will meet a few of the companies to confirm that commercially what we understood with our desktop analysis is correct.

27:18And then at the end of this process we will confirm pricing and we will confirm that we want to close a deal. Also normally in the second phase we agree how we're going to transfer the assets. Transferring the assets is very complex and you need to find a way where it's very, very smooth for the underlying companies. And then we execute the deal. Phase two is kind of confirmatory diligence and finalizing the structure and the pricing. And phase three, you just execute the deal with an SPA and then you transfer the assets, which interestingly can take quite a lot of time sometimes. Phase three could take one month, but it could take three months because transferring the assets can be complex in the type of deals we do.

28:03Any other important misconceptions that we should get to before we move on? Yeah, I think there's one important point to mention is our preference is to work with the incumbent GP. So most of the deals we do on the portfolio basis, our very strong preference is that the GP remains in place and then we work together. So we are GPs also. So it's not like it's us and not them. So our favorite structure is that after the event, we have some kind of partnership. We have one investment committee and together we manage the portfolio, which is, as you say, as you said earlier, it's a smooth transition for the underlying company.

28:45For us, it's also make sure that there are no skeletons in the cupboard. It helps us also to manage better the portfolio going forward. So I think very often people think that if we get involved, we're going to want to do everything. this is not our preferred transaction. Everyone's talking about this pending destruction or collapse of many funds in US venture as well as European venture. We've all seen the stats of all the funds that don't manage to raise the next one. I'd love to ask you, and you've described it here already, I've heard the same thing with regards to corporates, that there's a lot of fire sales of corporate portfolios happening.