E630 | Alexey Plesakov and Alexander Lis, Social Discovery Ventures (SDV): Betting Across Borders & Global Play on European VC

0:00Welcome back, my friends, to another episode of the EUVZ podcast. As you know, we're all about championing the European venture ecosystem. And today we're joined by Alexey Plesikov and Alexander List from Social Discovery Ventures, a somewhat quiet but very active European investment company investing across the US and Europe with a focus on both fund investments and directs. We'll dive into the origin story of STV, how they've recently spun out of Social Discovery Group, who is, of course, the firm behind the dating.com website that we all spend all our days at. And today, we focus fully on their global investing and we unpack their views on Europe, why now, where they're placing their bets and how they see the region fitting into their global strategy.

0:59This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Alexi and Alex, these are two names that everyone in this podcast will be very familiar with very soon. Alexi, maybe you start as the main master of this whole design. Alexi, tell us about yourself and the STV. Let me start, I think, with a story. So we started the business in 2001. It was a bootstrapped, purely bootstrapped company. Now it's one of the largest dating companies in the world. The name is Social Discovery Group, mostly known with a product dating.com. And it has, I don't know, I think a few hundred million users, operates with a few thousand employees, spread across the globe, but mostly concentrated, I think, in Europe.

2:03But because the company was bootstrapped, I think we have collected quite a few dollars, I would say, over those years. so in back in 2013 we have we started to deploy this capital into the market even though we we didn't we didn't have like we didn't form an investment vehicle for this I would say we were more actively investing under the same brand but yeah that that's that was the time we started to to build our portfolio. I'm with the company since 2011, so even earlier. And Alex joined back in 2021. Yeah, just four years ago. Yeah, so he can talk about himself. I'm having actually the legal background.

3:02I was an attorney and joined the company actually for a few litigations with competitors, but then ending up making the portfolio of the real estate and then making the VC portfolio and other asset classes portfolios. So now the portfolio is quite diversified within different asset classes and diversified from, I think, the good meaning. you know sometimes the diversification is like you have yeah it's divorcification divorcification yes tell me about that tell me about that why do you call it divorcification there is a narrative about diversification that the more investments you have investments you have in your portfolio the better from one one point of view it could be true but if you ask me to compare a concentrated portfolio of like I would say five high conviction investments with like portfolio with 100 investment which you don't understand nothing about I would definitely choose the first one so it's just not about increasing the number of investments just in the sake of it It's about creating a diversified portfolio with different asset classes, preferably not correlated with each other or negatively correlated.

4:41We think that it is important to also add non-market correlated absolute return assets as well. So it's not just about venture capital, which is great, but the family office portfolio consistent only of venture capital would be too volatile. Tell me how does venture then fit into this portfolio in total? How much of the total invested amount is with venture? The venture capital allocation is quite significant. It is more than 30%, which is, we did the benchmarking versus large endowment, versus family offices. And like our allocation to VC is the biggest one. There are two reasons here. The first one is because the capital came from tech space, tech company.

5:47So it was natural to invest more in technology companies and venture capital funds. The other part is that our major venture capital investments were made in the very right time. And so before it was cool, right? So that's why recently when venture capital started to really booming in 2020, 2021, and further with the Gen AI revolution, we were already invested. And that's why the return for our venture capital part is quite high. And naturally, the allocation is also high. Also, the IT roots and IT network allowed us to leverage it quite significantly because we see, I think, the change in demand and change in technology much faster than the usual consumer or even maybe usual VC investors.

7:03Because we're talking directly to entrepreneurs on a constant basis, not for the investment purposes, but for the knowledge sharing, for the technology sharing, just for the market research, competitive landscape for our own products. Yeah. And once you have network, it's easier to do investments. Maybe you guys could tell me a bit about just some of the names that you've invested in, because everyone's listening in now thinking, okay, so what have you guys done? Who have you backed and so on? And first and foremost, it's pretty cool that you actually do talk about it publicly. So kudos to you for that.

7:42But let's get the names on there just so everyone understands the types of funds that you normally invest in. So I think among the most known is New enterprise associates. Also, we've been investing into Kostla Ventures. And we've been very lucky to get into the fund, which invested into OpenAI at the very early stage. So this was a great hit. That's from the bigger side. From the smaller side, I think, where we've been supporting our friends DM Capital. It's a UK slash US based fund. Great guys. We've been investing into Target Global. Few funds for them as well. Mangrove, Lake Star. I think we've invested in about 20 different firms and 30, I don't know, 32 or 34 different funds.

8:44but usually trying to build good relationships and support firms with different funds. But it also depends on how much money in the market. It depends on what stage is more interested in this particular time for us. Does it match with the fund thesis and other stuff? Yeah, maybe I could provide a little bit more perspective on that. So our approach is, firstly, as Alexei mentioned, we like to support managers, which we have a history of relationship with. That's why, for our strategy, we start with a smaller check. And then if the performance is good, if the relationship is good, we double or triple down in the subsequent funds.

9:37What Alexey was talking about is the stage, that's another part of our approach. So we monitor the capital flows and try to maximize, try to invest more to the niches where the capital is scarce, not in abundance. to avoid the competition over quality companies. So, for example, in 2023, I guess, we identified two things. First one, that the particular stage, it was, I believe, Series B stage. There was kind of lack of capital. There were many early stage funds and pretty much capital on more advanced stages, almost like growth or pre-IPO. But in between, there was kind of death valley. And so that's how we decided to invest more in CeresB.

10:48That's kind of how our decision-making process works. Yeah, so a part of other funds, Bling Capital, who is led by Benjamin Ling, who was the partner at Cosla Ventures. We didn't get the acquaintance in Cosla Ventures. It's just we thought that it's a good thesis. And also he led a Bumble for, I think, a year or something like that. He was head of product for Bumble. So it was a good match with us. and also 500 startups, DCM, the US-Asia-based VC fund, well, even blockchain capital. And we've got some names there. How could you just, and maybe Alex, that's a question for you, the split between US and Europe, what is it and why have you chosen to have it as such?

11:47I would say that the split in total assets is skirt like significantly towards the US. It's more than 70 % if we take all the assets. But if we take VC, it would be, well, again, the US share would be higher, but it is more even than overall portfolio. that's probably because we had a significant network in Europe, as Alexi mentioned. That's why it was easier for us to get into high-quality managers in Europe back in the days. So that's why the U.S. share is maybe a little bit more than 60 % when it comes to VC versus 80 % overall, something like that. Guys, it's always interesting to hear about now we have the geographic split.

13:05How do you think about emerging managers in particular? So there is a kind of notion and narrative in the VC space among asset allocators that you should allocate more to like large, well-known names. Well, it is true to some extent what we identified based on our portfolio and based on the research on publicly available data is that bigger funds with well-known names, they tend to perform the volatility. The dispersion of their returns is slower. So you're kind of more sure about the returns that they're going to generate for you. But the average return is actually lower for them versus emerging managers, especially if you take the best ones, the most successful ones.

14:20So if you want to shoot to the moon, want to get casino returns, something like that, it's actually better to go with emerging managers. But the challenge is to distinguish the best ones from the mediocre ones. I mean, we believe in emerging managers and that's the thesis proofs. We've invested into Davido VC, we've invested into Blink VC, another... Should be mentioned here. Yeah, Black River Ventures. Yeah. So we are sharing this thesis. And also, I think we potentially with emerging managers, you can extract more value. For example, with Davido VC, he is a member of our investment committee.

15:20So actively investing together. Also, Oliver Holy from Speed Invest was the member of our investment committee. uh i'm not sure like well i think uh back then guys were like now they're institutional big fund but back then it was they were smaller much smaller so i think the potential collaboration and the readiness for potential collaboration is just uncomparable for example like i i deeply appreciate our cooperation with costler ventures but they will never be a member of our investment committee you know yeah well maybe at some point considering all of this where are you making bets in the future where do you think that there's the most exciting opportunities in european venture Right now, there is an ongoing shift.

16:22We actively monitor the situation, but probably gonna let market to decide and wait a little before the dust settles. What I'm talking about right now, the first one, the most interesting thing probably, would be a reversal of the US exceptionalism trend. That's more broadly, more general thing, and it is still not clear if it's happened or the US exceptionalism is going to continue. Another thing is related to tariffs, the possible decoupling of European tech ecosystem from the US tech ecosystem. Again, There is a huge uncertainty about tariffs and we couldn't tell what it's going to be. But in such case, in a case of decoupling of two ecosystems, that could be interesting.

17:22Because from our point of view, European startups and scale-ups, they were reliant heavily on the U.S. U.S. as an end market because it's so big. But not just like that. Also, the US financial market. So all the high quality, well, probably there are a couple of exceptions, but high quality European tech companies, they do IPO on NASDAQ, not like somewhere in Europe or in London. So I believe if this situation is going to change, there are going to be so much so many things that European tech ecosystem should build to get independence from the US and that would take capital to be developed in Europe and in this case it's going to be a huge opportunity for us but we still not 100 % sure or like even 80 % sure because of all of the insurances.

18:44Because I'm actively looking into fintech vertical, I would say, or industry. Maybe this is less broad, but very particular. But first of all, I think the European fintech ecosystem might be changed quite drastically due to a PSD3 introduction, like in one year, or maybe, I don't know how long it will take. Already took like one and a half years. We'll see. The European regulators are not so fast, but we'll see how it goes. I believe the market might change quite drastically. At the same time, I think if there would be a startup which would create the way how to interconnect Eurozone from the currency standpoint with other zones of Europe, like Nordics, who, like, they have their own local currency and the interconnection is still very poor.

19:54That would be a good, I think, a no-brainer. And also I think the AI voice-based neobank might be a very good idea just because the communication with the bank right now goes through the app. And I think that the app by itself, it might be just a verification of the information, but the initial interaction should be voice-based. Like you were talking with Alexa from Amazon, right? So just easy and smooth. You're coming at it with two different perspectives. And it's always interesting to hear because Alexei, you're the direct investor in this conversation. And Alex is the fund investor. It's interesting to see these two.

20:49At least that's how I feel the two of you engage and the reflections that you have on the market. Am I right in putting it this way or at least somewhat? Yes and no. But you are correct that I'm more of a big picture guy. So I start from super high level capital flows, central bank activity, etc. And Alexey is very attentive to details. We usually combine the top-down approach and bottom-up approach. But actually, we use it both on our funds investments and direct investments. Yeah, I think Alex is more passionate about macro and he is more trained for the macro. I'm a little bit more down to earth, but at the same time, I fully appreciate the approach going from the macro analysis into direct ideas, you know?

21:58Yeah, it is super important to combine these two approaches. Could I ask you, combining these two approaches, so to say, and also your risk willingness and so on, your analysis that you just shared, two very different perspectives, is the current uncertainty making you hesitate a bit and hold on investments? or are you deploying at the same pace as you did pre the current uncertainty, some might say pre-January this year? Others would say it would be a bit earlier. Or are you continuing exactly as you would have nonetheless, but maybe with a different focus or places to deploy to? Now, I think we are quite overexposed, as Alex said, to VCs.

22:47So I'm trying to be disciplined and to stay myself away from VC because the more time invested, the more you want to make deals. And I think we want to at least keep the allocation, not to increase it. Family offices always tend to say that they spend far more time in mantra than they should. but they can't not do it. At least that tends to be the case when they do just at least a little bit in venture. Yeah, in our case, not a little bit. But I would add here that Alexei tells about the net exposure. So like the distributions and capital calls combined. And given that like our fund portfolio is quite mature, we do get distributed even even in these times right we still get distributions uh and that's why we we could uh in uh keep investing uh with our overall vc exposure uh going slightly slightly down so yeah about our risk appetite i would say that right now like particularly right now it's not very high we were risk takers uh we were pretty aggressive and the starting from first half of 2023 uh free to i would say first quarter of 2024 after that we uh decided that it's time to like to be more conservative, but that's because of the bull markets on pretty much all the assets, including venture capital.

24:51So right now, the combination of high valuation, high asset prices, lower risk premium, and like macro geopolitical, all the kinds of uncertainties, that's not exactly the best time for us to aggressively deploy capital. But we still keep investing even in times like that, but not that aggressive as we could. Alex, your take from the micro perspective on this whole market situation we're in in Europe or globally for that case? So I think the European market, I think, is in terms of valuation is more interesting. It was historically like that. And we've seen some examples where companies are raising smaller rounds, it's easier to access to those deals.

25:53But at the same time, at the moment of a high growth stage, valuations are coming to the point where it is comparable to US. For example, Revolut, right? Or Adeon is quite a good example for this. So I think this arbitrage makes the Europe very... I'm talking about like, not the macro macro. I'm talking more about the particular VC thesis for Europe. so this kind of arbitrage still exists so that potentially might be interesting but in terms of the macro I think on the strategic level yes we agreed to be more conservative we are looking for not looking but we think that there might be quite an extensive correction and also I think the valuation right now and the stigma right now is not there yet.

27:03It's like everything is going okay, so the VCs are under, especially European VCs are underfunded but still the ones which are doing great valuations are quite high. So for us, I think it's like we're taking the more conservative pro now rather than going to the market and looking aggressively. However, we're not like stopping the networking, we're not stopping the building the pipeline because once you stop, then you are behind the whole train. Yeah. And if you plan to invest in, say, in a year, the time to build network and pipeline is actually right now. Before we close, guys, I just want to ask you one question.

27:58You built dating.com and the social discovery group Bootstrapped. What learnings would you give to everyone listening in right now around the value or the power of building Bootstrapped and kind of contrast it to what you're seeing done in normal venture? Well, my take would be that for Bootstrapped, or at least capital lean companies their greatest advantage is discipline so they do not have a luxury of a big cash pillow so that's why they're very conscious about their birth about expenses and they more likely to like to to be certain to have high conviction that their expenses have a very decent ROI.

28:54We know that many bigger well-funded companies, they are not very high disciplined and sometimes it ended badly for them and for the investors. So I actually like the question about the one thing for VCs and for investors. And I wanted, because I think the last, well, not decade, but maybe last five years were so much, it was so much hype driven. So on one conference, I think it was in Singapore, like back in 2015 or 16, the Indian based principal of one VC fund telling that while like how how he select a fund, a potential investment targets. and also i think it is very applicable also to to funds also ask five layers of why that's that's how you you you can get rid of hype and and choose and pick uh fundamentally good quality assets and this is very correlated like it relates to direct and to vc as well to two funds as well yeah like We're going to deploy AI.

30:20Why? To grow higher, faster. Why? I don't know. And so if somebody is able to answer your why five times in a row, probably they understand pretty well what they're building and why, right? I think you're absolutely right there. And it is one of many tools for someone investing in funds. God knows that VCs tend to be good salespeople, whether they are good or not as a VC, but they're not always first principle thinkers. And definitely the why test is definitely one of the tools that you can use in your toolbox as an LP, trying to figure out whether this person is someone riding the hype train or someone who's truly knowledgeable of the space they're investing in.

31:15Alexey and Alex, thank you so much for joining me on the podcast today and thank you for betting actively on European Venture. It was a pleasure. Thank you for having us. It was a pleasure.

31:40Acting, acting, acting, acting, acting, acting.