E677 | Michael Brehm, Redstone: One Investment, 200 Ventures — The New Blueprint for European VC Access

0:00Welcome back everyone to another EOVC episode. As you know, this is one of our special pitch episodes where we spotlight the fund managers who are truly moving European venture forward. Today, we're going inside a firm that's been doing data-driven VC long before it became a meme. Rattstone is a European specialist investor built as a dual company from day one. A family of focused funds on one side and a software and data platform on the other. That's so exciting. Dev quietly compounded a model that avoids hype cycles, sticks to fundamentals and delivers consistent performance across every fund.

0:32all with zero public money and a reputation earned through work, not noise.

0:52From first time to seasoned investors, the EUVC syndicate is not just about capital. Get involved. Co-lead deals, share insights, bring in great people, and help shape the pipeline with us. Visit eu.vc forward slash syndicate to learn more. This show is not investment advice, and the hosts of this episode may be invested in the funds and companies featured. Welcome to the podcast, Michael. Thank you very much, Andreas. So did I do some justice to you with that intro? I think that was a very nice intro. Thank you very much for that. Amazing brother. Okay, Michael, let's pull up your deck. Let's talk through Redstone.

1:30If you remember one line today, make it this one. One investment, over 200 ventures, that's European VC simplified. And that's what we've built with Redstone, with the Redstone global venture, Eltyf. It's a first of its kind way to access venture capital in Europe. I'm Michael, AGP and co-founder at Redstone. We're a VC platform with already now over 600 million euros in assets under management, a team of over 35 people across Berlin, Munich, Zurich and Helsinki. And we run a family of specialized funds from 10, 20 million up to 100, 200 million each fund, each with its own investment committee and dedicated sector focus and dedicated industry LPs.

2:21Let me just ask you, you've got a very significant number on the screen here, which is 3.2x DPI on average. Let's unpack that number because first and foremost, I commend you for putting it here and letting everyone in the world know. I think that we would all be better off if we were a bit more open about our performance numbers. And then this is, of course, a significant number, so I get why you are. So let's talk about that. The first funds have been performing very well. We were able to return a significant amount of money to our LPs, which they are very happy. And I think also why this is possible, because as we run smaller funds, not one very large fund, it's something that's easier achievable.

3:02For example, in one of our first funds, there was a company called Athenian Partners, which was a kind of intelligence and knowledge brokerage and expert network company that we sold at over 10x. And so that was quite good. And we've been doing this now for over like 12 years, basically starting from day one with a vision, with a kind of what you also said, dual company. We'll come to that later. And are doing this now across Europe. every day, week after week, month after month. And that has given us truly also this kind of, I think, top quarter outcomes by really doing this one thing very well, having specialized teams with evidence-based driven investing.

3:49Also, what's I think important in this is that Redstone is really built on three pillars that we think set us apart. First one, it's right-sized and specialized funds that change the outcomes. For example, we have a fintech fund with 20 banks SLPs. We have a health fund with the largest operators and owners of hospitals and nursing homes SLPs. So we build these specialized funds. The second one, we're very data-driven by design. And what's interesting about Redstone is basically, first we build a tech company and then the investment firm on top of it. And it's not just that we use data, like everybody's doing this now, but we have a complete operating model where basically we map down hundreds of process steps, drilled them down and unpacked them and thought with software, how can you either automize them or make them more efficient?

4:46And it's not that we want the software to do the investments, but really rather kind of helping the people to be more efficient and better with their decisions. So spending time on things that really matter and that make a difference, being able to spend time with the founders, being able to, when you have all the information there, then think and discuss about, does this sector make sense? Does this company make sense? And then ultimately, we're a strong believer in Europe and we think that Europe really drives returns for many reasons. We have top technical talent. we're very capital efficient.

5:26I mean, everybody says exits in the US, for example, are bigger or higher value. That's true. But if you invest at a 20 billion valuation and exit at a 200 billion valuation and maybe some dilution in between, you'll have a 6x. So if you invest at a 10 million valuation and exit at a 100 million valuation, some dilution in between, you'll have the same kind of multiple in between, but that's more likely in Europe. So we're a big fan of that. And also I think data backs that. So that's the core of Redstone. And if you then also look not only on a kind of TVPI, DPI number, but also on a IRR number, all the funds are doing really great.

6:12No fund has lost money so far that we have managed something we're very, very happy with. And most of them, or nearly all of them, trail in the top quarter in their respective area. So I think that's like a good path to be in. Obviously, they still are continuing. If you look at Fintech 2, maybe the only one that's still in the single digit, you will wonder. But there are companies like XAI in their finance guru, who's an amazing insurtech company. So very also positive on that one. Now, coming to Sophia, which is really one of the core parts of what we do, of the dual company we have built, we use it really across everything we do from like fund and strategy design to sourcing support.

7:04We do a lot of data-driven sourcing, but then obviously also we get deal flow from like university spinouts. Maybe one or the other knows we were publishing Europe's largest university startup report. we have our sector teams and now obviously also we get a lot of references into the firm. And then the question is, how do you organize all that? How do you benchmark that? We're tracking millions of companies, founders, also other investors. And the thing is, it's not just that the data is there, but really every company gets like a school grade. So it's easy to compare companies within individual sectors and areas, one to another.

7:46And then we rank them, we have the taxonomy, we obviously use it heavily for due diligence, and we track startups over time. And that truly gives you early access to relevant founders as an LP. It's no random deals. We are very conviction driven. We always, I think that's really special about Redstone and have never worked in such a place before where people try to form such a strong own opinion. Really beyond the hype, we clearly prioritize where to invest. It's very measurable and kind of very structured. Our aim was not to build like basically a one hit wonder, but something that's repeatable in a way how we operate and very systematic.

8:35Michael, just tell me a bit about, I'm sorry for calling you out to be the boogeyman here, but you've been doing the data-driven VC model, so to say, for a long time, whereas it's something that's kind of grown over the last three years and now everyone is claiming it. Could you talk a bit about where you're seeing VCs maybe overselling this side and be super clear on how are you different from others when it comes to this? I would say there are two main differences. One is obviously now a lot more data is available than in the past. The question, and that's also why we built Sophia, is how do you put this into relation?

9:16So having within a sector information about 100 different firms is one thing, but then having like a hundred different KPIs or data points and then creating one kind of school grade out of it for each company and then make it comparable and say, okay, automatically the team quality, like we have, for example, a scorecard for every founder, like how do these scorecards compare? That's still quite difficult and you need to put quite some work into it. That's one thing. The other thing is then really building an operating model out of it. I mean, we have a complete software stack. We have a complete operating model where everybody knows in which stage who does or what needs to happen to evaluate a company.

10:04And that's also something that we see that even if companies have a lot of the data, maybe they're not yet used so much to a very structured operating model that would give them an even larger advantage. And I think we have really ingrained that over the past 12 years. And just one example, because like every also investment, every due diligence is broken down in dozens of different steps. If there is, let's say, a super competitive deal and we say, okay, we just have, let's say, a week or maybe just a few days, we can say, okay, we now pull everybody together for three days. Everybody in the firm, 30 people work on this one deal.

10:48So suddenly you get like 90 working days of due diligence within three days. And that's possible because we have all these different process steps and all the different kind of pieces. And then we say like we allocate basically within minutes, like every task to different people. And that way can operate very, very efficiently. And I haven't seen that at another firm so far. Maybe let me take this chance to double click a bit because one of the things I always say when I look as an LP at fund managers is always it's one thing that they say they have an edge in something specific. But when you then drill further in, you realize that there's a little bit of a lack of an ecosystem here or a lack of processes and system design that truly plugs into each other so that their motion, so to say, is compounding.

11:44Every single day they go to work and the team goes to work, that they get better at what they do and the engine becomes stronger and the flywheel around the firm becomes stronger. And this is why I wanted to double click with you, because it's one of the things that you've been really working on for 12 years. And I think this is where it stands out from the average VC that is now starting to do much more data driven investing than they have in the past, because it's such a big difference, whether it's a bolt on or it's something that you're designing specifically for right from the beginning. And I'd love to also make another point, which is also that you and Sam Ali, your co-founder in Redstone, are company builders.

12:22You're not just investors. You're also building a company here, which I think is, I honestly think that unless you're a boutique specialist investor that never wants to scale, is how you need to go about venture. Because otherwise, you just basically are no better than the talent you're able to bring on board. And by natural evolution, the best people tend to spin out and do their own thing at some point. And for that reason, unless you can really supply an infrastructure that's incredible and allow people to do something that they cannot do from outside of the system. And this is one of the things that I really think makes a standout blue chip fund that can scale, stand out from all the others.

13:08So I'm really happy that we dived a bit into this. Maybe you can talk a bit about the firm aspiration, the company building aspiration of you and Samuli. Yeah, so absolutely. I mean, Samuli and myself, we both are like founders. We've both founded and built very data-heavy companies. The largest one, for example, that I built originally with Rebate Networks, which was more an e-commerce type company, but scaled to 30 countries, close to 10 ,000 employees. So I think we really bring this entrepreneurial spirit. and obviously we wanted to build, the approach we have taken, building these sector-specific funds is super hard because you have to raise for different funds with specialized LP basis again and again.

13:54But it's like building a very, let's say, long-term oriented company where we said, once you kind of hit product market fit, you have really a scalable company. And we took that approach and we say, we know it's much harder, It will take longer than if we just build one larger fund after the other. But it ultimately will give us a scalable kind of platform that we can then operate. And it's a little bit like if you compare it, for example, let's say a production company, depending on what tech stack you have, the software alone, just because you have like a kind of factory with SAP operating software in it, It doesn't make you a great, great kind of factory.

14:39But the question is, what's your operating model? How are you using it? And then kind of good from great will differentiate. And we try to build a scalable great company and knew that that was tough and would take a long time. But now we have these kind of very clear focuses of the funds. We have an LP basis in each fund that, at least to a large extent, that supports it, supports the ecosystem. And then we have this broad platform that kind of feeds and supports all the different strategies and that supports. And also, I mean, with that strategy also can give a lot more responsibility. And I would say a lot more exciting work to individual kind of team members.

15:25Because within their strategy, they get a lot more responsibility. they would normally get, which is also great to hire and retain amazing talent, which is obviously core. I know someone is a big fan of A16SAT and what they've been able to build. And I kind of liken it to that in the sense that A16SAT is a model built around sector specific funds and standout fund managers of each of those. And I think it's definitely one of the right ways to be building a firm. Absolutely. I mean, it's a great, great firm and a lot to learn from. As we were about investment, maybe one example, how we think, how we operate as a firm now, think like summer 21, the absolute hype of the hype of consumer companies.

16:11And we looked at the data and everything and said, okay, how can we avoid this hype? And how can we invest with conviction where it really matters? And then we found, for example, and said, okay, if the AI was starting to rise. and one of the themes was cyber security around the new AI world. So how do you protect the AI chips from being hacked and attacked? And then we invested in Exane as one of the first institutional investors when nobody else was looking and avoided a lot of the consumer companies, which is one of the reasons why, for example, some of the funds from 21 are like some of the best performing funds in our portfolio, which is very contrary to some other in the industry where obviously it was a bad idea to invest in 21.

17:02And that's what I mean with we always try to have a strong own conviction. No matter if we lead, if we co-lead, if we follow, we always go into something if we're really convinced. Going to the individual strategies and talking about then, So how does that translate into the LTIF? As many times mentioned, we built specialized funds, something like DeepTech or FinTech and EnterpriseTech, HealthTech, Education, and many more. Now we're actually starting also a blue fund, which is OceanTech with some of world's largest shipbuilders, SLPs. and now all of these funds, it would be a lot of work, very kind of, you would need a lot of people if you would want to allocate to all of them, to a lot of tracking and the ELTIF allocates to all of them across all of the funds that we're launching.

18:04So your starting exposure basically includes a lot of our flagship strategies with live deal flow, diversified by sector stage vintage, geography, vintage, and that's all with one allocation. So one transfer, one investment will give you that. And below that, you have many different expert teams, each with its own pipeline and post-investment playbook. We also do a lot of that. We always have a hundred-day plan after we invested, what should be achieved, what are the next milestones, etc. So we're thinking long term but not yet 100 year long term. So maybe to kind of also summarize that what is the Redstone Global Venture LTIF really?

18:54It's if you want to summarize it professional venture made practical. It's an evergreen distributing semi-liquid structure that rolls capital forward and delivers a really broad diversification. For example, statistics show that for a really great risk return profile in venture, you need exposure to at least 200 ventures or 10 venture funds. And we provide this with one transaction. I think one of the biggest misunderstandings of people investing in venture is that they underestimate the size of portfolio you need. And that's very different to many other asset classes. In venture, you need a disproportional larger portfolio than in many other asset classes.

19:44So when you enter there, you should really think about how do I get a broad diversification? And we offer very simple access here. You can subscribe it with one transaction. So no capital calls, no complex paperwork, no extra KYC also, super simple. And the best thing is you can think of it like a fund of fund without the costs of a fund of fund. So for example, there's no carry in the relative, so no double dip. And just depending on the amount, a small kind of infrastructure cost and a small management cost, but which we really pass through. So we're not earning that. because we're earning money with the underlying funds.

20:32And also because the money is controlled, we can manage the kind of capital a lot more efficient. One of the topics that a lot of LPs also tell us with the individual fund, they say, it's great, the IRRs you're showing, but I cannot have the money in another fund producing the same IRR. So I have to keep actually a significant part in maybe a money account, which is much, much lower. So the true IRR for all the venture funds is lower. And because we pack that here into one ELTIF and we know and operate the underlying funds, we can manage that capital a lot more efficient and also can be that way can create better returns.

21:13It also now you will ask probably like, okay, how do we get the money back? Obviously, everybody's interested in that. It's designed to continuously return and distribute. So it's an evergreen, but a distributing evergreen. That means the profits are distributed. Our target is that because also part is invested in a venture debt, that broadly diversified venture debt strategies to at least return from the second year onwards, independent of exits or not, the kind of inflation rate between two and three percent. And then after eight years, it's possible to redeem the money. So the principal investment plus accrued value.

21:51and then on a yearly basis. So that after eight years, you basically have a truly semi-liquid, yearly liquid product where if you want to invest somewhere else, if you want to do some rebalancing in your portfolio, that gives you a lot of flexibility. And so it's essentially venture from a professional VC with a proven track record made very practical to invest. When masters come into the Altiff, Will the ELTIF then allocate into each of the other funds or will the ELTIF be co-investing with the other funds? Just out of curiosity and for people to understand exactly what the dynamics are. Absolutely.

22:31Good question. So the ELTIF will allocate as an LP and will become an LP in all the different funds. So it is like indirectly, you're basically an LP in all the different funds. Awesome. Beautiful. Michael, thank you so much for coming on the podcast today to talk a bit about Redstone. You have been around forever. So in that way, you can say, well, why are you guys bringing Redstone on to do a pitch episode, to tell the world about yourselves? But honestly, not enough people know about you because you're not the loudest guys in the room. And I thank you so much for just having been focused on building and investing in the ecosystem because you've done an incredible job.

23:10And I hope that everyone who didn't know you already now do so because we did this episode together. Andreas, thank you very much for these kind words and for having me on the show and having Redstone on the show. From first time to seasoned investors, the EUVC Syndicate is not just about capital. Get involved, co-lead deals, share insights, bring in great people and help shape the pipeline with us. Visit eu.vc forward slash syndicate to learn more.

23:41Tear down this wall. It's more than just an ally. This is a union of values. Let's start acting.