E694 | Pedro Ribeiro Santos, Armilar: 25 Years of Iberian Tech & The Next Chapter with Fund IV

0:00Welcome back everyone to another episode of the UBC Podcast. Today we're talking to Pedro Ribero Santos. I am always struggling with Portuguese names. Considering my partner, my co-founder being Portuguese, that is not good.

0:30From 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. So, Pedro, we're here to talk all about Armilar, your fourth fund that's coming up now. Congratulations on all the success and very important role you've had in the Portuguese ecosystem, and welcome to the podcast. thank you very much it's a pleasure to be back it's been a little while so it's good to be back we spoke about it just before I think three years or so since you were there I think that must have been yeah we've probably we're coming out of our last fundraising probably so yeah it's been a while it's been a little while well but Pedro this is one of our pitch episodes which means that it's an episode that's designed of course for the LPs in the European venture community to get to know all about Armilar So I'll let you take it from here.

1:34Okay. Well, thank you very much, Andreas. So this may be starting very, very high level, but it's actually useful for those who don't know us because it says a lot about who we are, talking about the brand. Because lots of people ask us, what is Armilar? And Armilar is the name for an armillary sphere, which is the stuff that you see in the middle, an ancient instrument of cosmology and science. Very multicultural in its origins. It dates back to the third and fourth century in China and Persian and whatnot, and then eventually got introduced into Europe in the 10th century. And it was perfected over the years to become an important navigational instrument rather than just an instrument of science.

2:17But it's been very well represented in heraldry and as a symbol of knowledge and wisdom. And it has very important representation. And particularly, it is represented in the center of the Portuguese flag. So that yellow thing that you see in the middle is an armillary sphere. So that's our brand. And you'll understand what I mean when I say it speaks a ton about who we are. So we've been around for quite a long time, 25 years. That's a long time for European VC. That's an eternity for Portuguese VC. There was nothing here when we first started. Originally, we were founded as the venture arm of a bank here in Portugal.

2:58never as a corporate VC in the sense that we never served any strategic purpose of the bank it was always financially driven but we were formerly owned by a bank for a few years and that's how we we started and but raising funds in the market like everyone else the bank happened to be an anchor investor in each funds but raising funds like everyone else and eventually over time we we we spun off it's been almost 10 years since we become became fully independent but it's exactly the same team that's been off from that. We're now a team of 18. We raise several hundred millions in several funds, you know, have been internationally from day one.

3:37And that's an important thing. I mean, when you were a VC 25 years ago in Portugal, it would not make sense to be overly specialized. So by design, we were a generalist investor and also by design an international investor because again, there was not a lot of deals for here. for the first decade. So we started investing internationally immediately from day one. Being part of the bank was actually pretty relevant and instrumental at the time because it allowed us, the bank had dealings in the US in particular, so that allowed us to start investing in the US alongside some very experienced investors.

4:10We knew nothing of VC, so it was very instrumental for us to learn from them because there was also nobody here in Europe to teach us. And then eventually with time, we sort of, as ecosystems in Europe, started to develop, we started bringing that experience to invest closer to home. And nowadays we're essentially focused in Europe. We can still opportunities to do investments in the US, but we don't do any proactive deal flows sourcing there. And we were, you know, I think we're proud to have had a role locally in the evolution of the Portuguese ecosystem. We had the privilege of backing companies that became very relevant and by their own merit.

4:52Some of the unicorns here that we backed from very early stage, I think I'll have a chance to speak about them in a minute. And proud to have a dragon in each of the mature funds up until now. To those that don't know, obviously a unicorn is something that's valued at more than a billion, but a dragon is one that has returned the full fund. And that, of course, is a very important metric to any LP. For the VCs and for the LPs in each VC fund, that's what matters, right because sometimes unicorns are for show you can have a unicorn that does not return the whole funds and you can have a non-unicorn that returns the whole fund and that's that's really what matters so we say that unicorns are for show but dragons are what matters that we incarnate dragons are for real we've been operating this sort of dual track strategy in terms of stage so we've always been and continue to be focused on early stage that can mean different things depending on the fund so We've had this family at the top of our flagship funds doing mostly series A types of investments that where we started actually.

5:57But then with time and especially as the ecosystem in Portugal started to develop, it became relevant to do also, to be also active at the earlier stages and seed and even pre-seed. So we've had this family of seed funds and some thematic funds investing locally. And the most important of which is the one in the middle, the tech transfer fund. So that's also a pan-European fund that did very, very early stage investments. And it was geared to do technology transfer investments throughout Europe, but with an important allocation to Portugal. And now our focus, of course, is Fund 4, which we're here to talk about.

6:35Again, going back to what I was saying before of being a generalist, we remain a generalist. We invest in all sorts of industries, verticals and technologies. Having said that, our DNA is pretty technical. I mean, almost all of us in the investment team have a background in either engineering or science, and that has always led us to gravitate towards technology-intensive companies in a broad range of spaces. In the past, it went to the limit of doing either both software and materials and chemicals and bio. And then over time, we matured into the types of deals that we know best. And so nowadays that we've had better track record on.

7:19And nowadays that's data digitization, connectivity, so the digital world in general. But again, with a very, very generalist approach. We do multiple types of industries, multiple types of technologies. Being a technologist ourselves helps us in that space. That's what we continue to do. So Fund 4 is about doing more of what we've done well, and I'll talk about how well and track record in a few minutes. So it is geared to doing Series A top investments. So the first closing of the fund has already been made with a little over€120 million raised. So we're now starting to deploy. We have like three companies about to become invested until year-end, hopefully.

8:04And the target is to sort of double that in the next year or so. Keeping in mind that this is a very, very challenging target. We know how hard it's been to raise$120 million in the current market context. So we're not, you know, unrealistic in our ambitions. We know that doubling the size in the current context is really hard. But that's what we're working for. Geography is pan-European. There's an allocation to Iberia that I'll talk about in detail. Well, again, of all over the digital world and again, that overlap with the hard science that we're, that's where we move well. Data, digital connectivity, of course, AI is in there.

8:48We've been doing AI for a long time. We do cybersecurity for a long time. We do all sorts of hard technologies. In terms of geography, we always, we've always done investing international, as I've told you and that's still the case for this fund so it's a pan-european fund having said that we do have a strong focus in sort of in our home turf and the home turf today is defined as portugal and spain which is actually something newer than most people think it wasn't the case that iberia was a region it was very two separate countries that has evolved a lot and and so for this funds like we've done in the past, will have probably an allocation of 40, 50 % in Portugal and Spain.

9:38This fund has the backing of the IF on one hand, which has been with us also from the prior fund, but also from the Spanish fund of funds set, which makes it that we have an obligation to deploy in Spain, which is something that we will do anyway. And then, of course, from north of the Pyrenees, we're also very proactive and trying to be in local markets. But of course, as we all know, sourcing deals from outside of your home geographies or geographies where at least you have a team relies a lot on the network of co-investors and people that have known us and trusted us for years. And that's a very, very rich source of deals that we continue to cultivate.

10:25So actually the three deals that we have about two, two, two, so the three first investments for this fund, one of them will be in Iberia and two of them will be, you know, north of the Pyrenees somewhere. A word on track record, which obviously important. So this shows you on the left-hand side, the blue is the divested assets. So all the companies that we've exited from and gross proceeds that, that has had in total 2.4. I don't need to tell you this, but just to make sure that for all the viewers, this includes everything. So the good ones and the bad ones, they're all in those 178 million invested.

11:04And the 433 is what we've returned. And then of the current portfolio, those companies, they're still active. We have this multiple 3.3 on the investments made in them and the actual, the current value in them. historically, every time that we produce a successful exit, it's higher than it is in our books. So this number hopefully can become higher, but that's the books today. And then we have the capacity on the yellow part of the chart. The 152 is what includes already the first closing of our fund four, and with the rest that we're still trying to raise. So TVPI, yes, go ahead. I was just about to comment your slide here because it is absolutely beautifully made.

11:51And I think for a lot of people that are building pitch decks on the VC side, I definitely recommend taking a look at this slide because it is one of the more beautiful showcases of DPI and TVPI that I've seen. Thank you very much for that. And on TVPI, we put it here at the bottom. So for the mature funds, of course, in these portfolios, you have companies in more recent funds that are still maturing. So they don't necessarily have a high multiple yet, but they have that potential. So taking the mature funds, the TVPI is around three times. And again, because there's still stuff in there that can potentially materialize better than this, we still hope for this to be a little bit better.

12:32So that's something to be proud of, not only the slide design, but also the content, hopefully. we're very proud to show this just a few examples here exited companies at the top chip idea was probably one of the yearlier successes in portugal very quick turnaround from investments to to exit txvia it was in payment space and in one of our u.s portfolio companies that we sold to google very successfully safety pays one of those cases it would it's a dragon and it was not a unicorn so that returned a whole fund fund three in that in that case even if it didn't actually reach a billion dollar valuation, we had a meaningful stake in it.

13:12So it was very, very productive investment. Probably two of the most recognizable names in Portugal, our systems and FISAI that we got into very, very, FISAI in particular was literally the three founders incubated in the university when we first got in. And now they're both of them very large companies. And I'll add one point to this that I think I have detailed more ahead, but I'll use this for I to present it, which is in both of these cases and more cases, but take our systems in feed side. So we were early stage investors. And of course, now they've raised large amounts from the likes of KKR and Goldman Sachs and whatnot.

13:52In both cases, we're still on the board, even though we're not investing later on. And that happens because the founders sort of want us there. because we've been through the highs and the lows. And so rather than have, you know, each round of financing, restructuring the board, which they do, they always make the case for army loss staying there. That's really the approach that we take with companies. You know, we don't write off companies just because they're performing poorly if we see that there's potential and we continue to work alongside them. And that pays off. It pays off not just in terms of returns, but that pays off in terms of credibility and trust from the founders and which in turn you know leads to access to deal flow and whatnot so we we you know we play that card very very consciously and and that is very very important for activity and and and like to continue to do so and then at the bottom you have several examples of companies that we more recent investments that are you know showing great promise but of course have everything to prove so we just put a few So we see there are a few examples, but in almost all of these cases, almost not all, these are companies that were doing very little revenue when we got in that are now doing, you know, somewhere between, let's say, seven to 15 times the amount of revenue that they were doing when we first got in.

15:18So it's companies that are showing notable growth. About the team, right now we're four partners. We've been working together for a long, long time. So Joaquin at the top is our founding partner. He's the one that created this inside of the bank. He's the CEO of Armilar. I joined in 2009, so it's been a good 16 years. And Duarte joined right after me, and we knew each other from our formal life as consultants. So we've been through, and then Nuno has been with the team forever. And he was hired as a junior and went through the ranks to become one of our partners. So, you know, we've been working together for a long time.

15:57We've been through a lot. The spinoff process from the bank is a whole episode, if you wanted to. Well, we have done a whole episode. Oh, yeah, actually, yeah, we actually have. We talked about it. And it's very, very protracted and a long process that I think made us stronger. So this is the partners. But, of course, it's not just us. And the message that I think is important for investors is this is a generational building type of approach. So there's the two 60-year-old guys. Joaquin is a very young 60-year-old. Jose, who is also one of our partners, he's now retired. He's still in the investment committee.

16:37Then there's two 50-something-year-olds, myself and Duarte, and Nuno also is a CFO. João is something that's been promoted to partner and Rodolfo is a principal with 40-year-olds. There's 30-year-olds. So this is something that we're proactively building as a multi-generational, as a GP that will want to survive the business and continue performing this type of performance and track record in the long term. I think what you just said there is a very important point because it is, of course, when you have new LPs coming in now, They will care a lot about how are you thinking about succession because it is not a natural given thing that a venture firm will perform all through the next 15 years, the next decade.

17:25And it's not a simple process. The succession process and the succession logic is hard to construct. It takes a lot of time. We know that no one can claim to be fully routed experience in VC unless they've done a whole cycle of a fund. And that's 15 years from fundraising to closing the fund. So it's a long apprenticeship. So it takes a long time to build and work on that succession plan for sure. And there's a lot we could dive into there about how you think about ownership of the partnership, how you think about how you accumulate carry and so on. It's a very interesting discussion and something that almost every VC firm is struggling with, if I'm being honest.

18:10There's not a lot that have succeeded in going from entirely shifting out the founding generation with a new team. So being thoughtful about that, especially at a firm that's as progressed in its life as you are, that's obviously something like that's the flip side of you having been here for 25 years, having proven that you can deliver DPI, considerable DPI over their first funds and now have everything that you want as an LP, the question is then, do I think that this can continue? Right, exactly. So it makes a ton of sense that you talk a lot about it or a bit about it in this presentation and it's of course something that every LP will dive into and they deal with this with you.

18:54Okay, so this is Armilar and Fund4 in a very brief nutshell. I hope that this was somewhat clear, but happy to continue the discussion. And you hit the 20-minute mark exactly. So a big, big commitment to you on that as well. It shows that timing is not only something you're good at in venture. Let me ask you one final question, just for those that tuned in here and would love to hear what is going on in Iberia today. Can you talk a bit about just five minutes state of the market in Portugal and Spain? What's moving? Is it an ecosystem that is still on its way up? Is it one that has already arrived?

19:37How should people think about the region? Talking of this with the privilege of having seen it go from almost zero to what it is today, It's astounding the progress that we've made in starting with Portugal in particular, which of course we're closer to. We've gone through the huge hype cycle that all of a sudden we've always had good engineering and good science, but there was no entrepreneurial spirit until all of a sudden in 2008 or nine, the jobs for life that people were used to were just not there anymore. And that coincided with a lot of information about the startup culture and what it meant to fund and create a startup.

20:19We coincided also with some incentives from the state. So all of a sudden you had this huge wave of young, talented people choosing entrepreneurship as a valid career, which was not the case before. And of course, many of them failed. Many of them tried a second time, a third time. And now it's become pretty much a well-rounded type of ecosystem. ecosystem i wouldn't call it yet fully matured yet i think the one piece that we're missing is like one very large exit like an ipo so just to use examples from our portfolio you know if one day our systems or fees i ipo and and all of a sudden stock option holders actually produce tangible value from their stock options.

21:08And all of a sudden you have people that have found themselves with liquidity, ability to reinvest or to restart a new venture, to create that kind of a virtuous circle of a mafia. We haven't really had one event like this happening here. And I think that will make a ton of difference when it happens. I probably would not too far, but I'm not talking specifically about our two portfolio companies. There are several others out there. I don't think we're too far. Maybe even if the IPO window hadn't been shut for two or three years, maybe that would have happened already. And I think that that'll make a ton of difference.

21:46It is a well-rounded, complete ecosystem that came from a reality of a small geography, a small country in which there is no local markets. At best, Portugal is a pilot. And it's a good pilot because infrastructure is good. Everybody speaks good English. The digital literacy is good. but it's nothing more than a pilot. And that means that if you're entrepreneur from Portugal, you need to think global or international from day one. And that has, in most of the cases, led to engineering-driven product creation and its origins. Now, of course, it's more diverse, but if you look at the origins in the first few success cases, they all came from there.

22:30And Spain kind of came from the other opposite extreme in the sense that it was, you know, first of all, it's very well capitalized. And I'll talk about capitalization in a second. So there's plenty of capital available from local VCs. Naturally, at the earliest stages, they would look for early stage investors in their markets. And, you know, if they grew, they would go north and not go to Portugal to find investors. And it came from the other extreme in the sense that very often businesses in Spain and with other, and I'm targeting Spain in particular, other large countries in Europe were born to serve the local market and start serving Spanish customers in the case of Spain or French customers in the case of France because it's a large enough market to sustain large businesses.

23:17And that evolved also a lot over time. And nowadays there are tremendously good companies coming out of Spain from pure engineering products that could be applicable globally anywhere from day one. and the frontiers between Spain and Portugal have really, really dissolved in the sense that every Spanish VC is looking to Portugal, every Portuguese VC is looking into Spain. They're all sharing deals. The founders know all the Iberian investors, regardless of whether they're in Portugal or Spain. The types of companies also have come to meet in the middle from these two extremes where they were born.

23:57In capitalization, there's still a big difference. In the sense that there are very few large international experience we see out of Portugal. And there's quite a few in Spain. That has a lot to do with the LP culture in general. There's no experience culture investing in venture capital as an asset class in Portugal. And we haven't had, up until now, and that's actually in the plans for 2026 by the government. We haven't had a proper fund-to-funds type of initiative like EcoOrset in Spain, like BPFrance, like KFW, etc., etc., which in each case in each of the countries has really not only capitalized the local GPs, but actually because of course they demand that there's a private component to every fund that they invest in, has fostered and actually educated the market about a means to invest in that asset class.

24:56That hasn't happened in Portugal. Hopefully it will. That has happened for a long time in Spain. So Spain is much more capitalized. Given, Pedro, that these episodes are a service to the LPE community, let me ask you one extra question, which is just on the Golden Visa program of Portugal, because it's obviously one thing that some have said is very lucrative or very interesting to look into Portugal specifically for. So yeah, there's been quite an inflow of people of immigration, high income immigration moving to Portugal. And many of them applied to the Golden Visa program through investment in funds.

25:37You had either the option of buying property or investing in funds. property became harder because it sort of generated a bit of a housing prices issue in Portugal. And so at certain points, housing in the big cities was not eligible anymore to produce the Golden Giza. And so people started opting to invest in funds. So that's been a good inflow. There's sizable funds that have relied on that very specifically. It's not our case, even though we welcome investors that we think have a good fit with us, but we don't have an initiative driven by it. The darker untold story of that is that it's for the other process that needs to happen in the background.

26:27The administrative and paperwork process has been very, very long and protracted. So, you know, people have been frustrated that they've come into the country, they live here or they put money into a fund. They're happy about the investments. That's not the point. But the original objective of the Golden Visa is taking longer than it should have had. Hopefully that will get solved. But there's lots of discussions around that. Awesome. So I think that was a bit of extra free service for the LP community on the Golden Visa program in Portugal. Thank you so much, Pedro, for joining us today. It was really awesome to hear about the next fund.

27:08Thank you, Andrea. It's always a pleasure to talk with you. 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.

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