EUVC #285 Steffen Pauls from Moonfare & 7GC on democratizing venture and private equity

32:24And people now can go to the Moonfair platform, they sign up, and then they get a suite of pre-selected funds in venture and growth, but in particular in buyout infrastructure. We are looking at 400 funds in a given year. And our team of industry insiders from the private equity industry selects some 20 that make it to the platform. Super rigorous investment selection process. And then you can invest. But 100K, as you rightly say, Andreas, is still a ton of money. In particular, if we want to build a diversified portfolio. This is why we have A, portfolio products, one-stop shopping products, I call it.

33:06one-stop shopping solutions, which are baskets of funds where you can invest into certain strategies, growth, buyout, venture, infrastructure, whatever. And then, of course, we have also a path to liquidity. You can liquidate your fund positions through our secondary. Before we go to the secondary market, do you have call structure in place that you call the capital or is it 100K upfront or the minimum upfront? Totally right. For the product so far, and now the big innovation, and this is very timely, by the way, our interview, because we announced it on Tuesday. I want to talk about, so far, it was 100K, and then think about capital calls over four years on average, 25K a year, but still a lot of money.

33:52What we announced, Andreas, and this was for me really a day where my mind and heart was out of the normal space, because we announced our ELTEF, our own ELTEF, which is a new regime, a new regulatory regime. at the end, without going into the details, it now allows people, normal people, I call them, eligible private investors to invest into a Moonfair private equity product, which is comprised of some of the most well-known private equity funds in the world, starting at 10 ,000 euros. So now we are really taking one step further with the democratization of private equity. Now we call it our dreams become true, because 100K is great.

34:39It's a step into the right direction, but it's still for very wealthy people. 10K becomes relevant to many, many more people. This is something I'm really so... Yeah, I've been waiting for this moment for years. And it is annoying, frustrating that you've had to wait up for regulators, right? Yes, but let's not get into that. Before going to secondaries, Mark, you said you're looking at 400 investment opportunities per year. You're picking 20. Could you share a bit more about what's there? Because, of course, this is a podcast where we primarily have VCs listening. And obviously, being on the Moonfair platform is an interesting avenue for most.

35:19Yeah, look, we started and at the end, in our thinking, you know, the investor, the LP comes first. So we thought about how can we, you know, become people who are not close to the asset class? How can we get them closer? And we started, Andreas, deliberately with the big bank, big brand names. So you find the KKRs and the Pamiras and the EQTs and all these great, incredible names on the platform who typically have, you know, 20, 30, partially 40 years track record, have, you know, never lost money with any vintage fund, have managed to navigate through the financial crisis, huge teams, huge global platforms.

36:02platforms. Why did we do so? Because we believe from a risk-return perspective, they are close to unbeatable products. However, for the VC community, we all know this, and there's tons of academic literature out there that in particular emerging managers are often outperforming established managers for many, many reasons, which are obvious, incentivization, etc. And this is why we have launched at Moonfair an emerging manager program where we really support, so to say, the distribution of these upcoming champions. But we don't offer these products to each and everybody. We are taking a pre-selection of our investor base and say, who is, so to say, sophisticated and professional can access this program.

36:55the ordinary investor on the Moonfair platform is more guided towards the less risky investments that I just stated. Guided towards or blocked from? The latter. Do you have funder funds from the platform? No, we have our own funder fund basket products. Those are Moonfair products where we select in a given year the top managers of a certain strategy, buyout, growth, US tech, infra. This is what we have, but we don't have other external fund-of-fund players.

37:36Frankly, we believe our concept is that people predominantly can pick and choose their own portfolio. They can pick what they want. And the fund-of-fund over four years investment period, we don't really like. We like no blind pool risk. We want people to understand what they invest into. This is why our basket products are totally transparent. You know which funds are in there. They are, so to say, vintage products. We are launching them each year. And that makes it much easier. For a fund of fund, that would be a kill button, right? That's part of what they trade in proprietary manner. Makes a ton of sense.

38:18Now let's go to the secondaries market that you were about to. And I'll almost just let you queue it up from there. Yeah, look, what we identified as one obstacle very early on for private individuals when it comes to investing into private equity is liquidity. And this is for obvious reasons. We are all human beings. No one knows what's happening in terms of health, in terms of job, in terms of being in a divorce. So people have a natural desire for liquidity. Having said this, Andreas, and that is important, private equity, as you know, and I must repeat this, is not a liquid product. What we do is we provide a path to liquidity.

39:00You have good chances to get out of your position because it's in the meantime a large marketplace, but there is no guarantee. Having said that, we have Lexington Partners, which is one of the largest secondary institutional, secondary players in the world with us and as a backstop on that marketplace. But again, they are not obliged. We cannot force them to buy. If you ask me, is the volume high? Last quarter or so, we have in the tens of millions offerings for secondaries on the platform. So there is a lot of volume. There is a lot of efficiency, but no guarantee. We run this process twice a year.

39:42So it's not daily. You cannot go and sell. It's twice a year. We might increase it to four times a year. In the beginning, the market was really, two years ago, it was dead. No one was selling. Now the world is a little bit different. So there is a need for liquidity. But that's another innovation, Andreas. This is really Moonfair. And it's something that we are proud of. My team is proud of. It's really an innovation out of Europe into the world. We were the first ones doing this. We are now the largest ones by far globally. And we have more than 150 other companies copying us. And the secondary market is another innovation.

40:23No one else has developed a similar solution globally. You talked a bit about the size of the transaction volume in total in the secondary marketplace. oftentimes it's very very difficult to trade a small secondary stake um can you kind of talk a bit about the bucketing there because you have some investors that will with them put up a larger uh secondaries opportunity those might be trading a bit better i imagine than those putting up a 50k in fundex no it's it's interestingly not because it's predominantly trading private between the private investors okay yeah and the bite size for them is on average 200k this is what they feel on average some do a million some even more some less but but because it's the matching between private individuals it's easier so to say to match the 50 or 100k check with as opposed to a 10 million check now i want to ask you a question which i'm not asking you to talk talk about how amazing Moonfarers and how bad the other platforms is.

41:35But I think that there are interesting differences between the different providers. Meaning you have Moonfarer as we've described, but then we have in the US Allocate by Zemir Khadji and team. I'd love to hear if you'd say, okay, because myself as an example, I say, well, we offer is completely different from Moonfarer. We cater to the community within tech and venture in Europe. It's those people that they invest with us, maybe because they want access to the same asset as you have, but they invest with us because they also want access to the partners. And they only get access to the partners because they have a value add.

42:15So we're bringing together a syndicate of people that want to do co-invest, that want to share the deal flow, that want to be stewards of the funds that they invest in, so on and so forth. So it's a completely different offering that we have to the investors, and it's a different profile of investor. But with you, you have a different play that's more democratizing access, and it's less about bringing people from within the community together with other people within the community. It's more transactional, so to say. It's a financial investment. And then I'd love to ask you if you then look at someone like Allocate, and I'm asking you to put some light on this, of course, because we have an audience that are quite well-versed in what are the different players, but maybe a bit less well-versed in thinking about the nuances between them.

43:06You're totally right in spot on. All the various players out there have different value propositions. First of all, let me say, and this is very, very important, the industry expects, the private equity venture industry expects that 50 % of the new assets that they are collecting, five, zero, half, will come from private individuals. So the market out there is enormous. Currently, the institutional market, take Europe alone, is$1.5 trillion,$1 ,500. US dollars. The same amount, this is Oliver Weiman and other studies forecasting, will flow over the next, whether it's five or 10 years or whatever the time horizon is, will flow from private individuals into the market.

43:55What does it mean? You know, there is a shortage of supply and players like you, us, Allocate, and others doing what we are doing to open up the access in a very responsible and pre-selected and curated way. So what I want to say with that little story is we embrace every adjacent or competitor or additional player in the market because our problem is not the market size and we don't have to fight against each other. You know, like if you would sell apples or potatoes, the market is so huge that the bottleneck currently is the education and a nice offering and the smooth process and liquidity mechanisms.

44:40So we embrace every player globally, all the 150 copycats. So to your question, what makes them differentiated? Look, some of them go more into niche strategies. Some of them go more into mid-cap stuff. Some, as you do, go more into venture. But in all these categories, look, we probably are the most dominant or are the most dominant one in traditional buyout and private equity, KKR, etc. where I'm coming from what is really important in my view is if you play with these players that you can rely on their curation what you provide is the value provision due to your community that's very important and that you have players that are not out there for the short term and try to make smart money very fast and then sell what happens after me I don't care this is a new game for many many people it's a new asset class and the worst can happen that people have negative experiences one thing for clarification very different for Andreas to what you guys are doing but Moonfair is also a community what we do is we bring our in the meantime 50-60 ,000 people on the platform we bring them together on a global scale we are running 50 events, 5-0, every week one, in all major cities in London, in New York, in Singapore, in Paris, in Frankfurt, wherever.

46:12And one, you know, large dinners, cocktails in partnerships with galleries. This one, next week, we have a huge event in St. Moritz, in Switzerland. Last week we had Frankfurt, Brussels. So we are playing this community very, very, very actively so that people also physically can come together. Not only, by the way, with the purpose to talk about investments, it might be a very, very different discussion point. But Moonfair is much more than a transaction platform in the internet. Do your GPs join into those as well? Or is it, yeah, so it's just as much a place for the target? Exactly. It's a place for the GPs.

46:54Also, you know, typically, I would say 80 % of all events, we have one with a large press conference this week when we announced our Altef retail strategy. We did this together with EQT. They had a fireside chat with one of their senior partners. So we are working very closely and also getting access to quite exclusive information. Andreas, as you might have seen, I'm running this formal deal talk where I have Henry Kravis from KKR, the founder, and David Rubinstein very recently from Carlyle as my guests. So we are living a very active information-sharing community, I would call it. Yeah, and that's, of course, a big reason why anyone would invest in these assets.

47:36Okay, now let's get into our shout out before we go further into your three biggest learnings from your journey building warfare.

47:50But I'd like to just send some love out into the ecosystem. Share with us who you love and why. You mind who I love in the ecosystem or in my private world? Well, I think it's better we keep it to the ecosystem for today. Okay, in the private world, it would be family first and foremost. Look, in the ecosystem, it is a very, very active environment we are in, Andreas. And why is this democratization theme that you, in a way, stand for, we stand for? Why did it become such a phenomenon? And the reason why is, of course, starting with the LP, the private investor, it makes total sense, as you know, to invest into venture, into private equity, into private markets.

48:37It's accretive for your performance and it reduces your risk. Yeah, this is empirically proven what I'm saying. So the end client is clearly benefiting. But what is interesting is that the entire ecosystem, the GPs, the private equity firms, the venture firms, the banks at the end, the UASs, HSBCs, the asset managers, Blackhawks, Fidelity, Schroders, us as platforms, the entire ecosystem is rowing into the same direction to foster and support this democratization of private equity, including technology players. as we talked about blockchain, etc. So when you ask me, whom do you love? I really love that the entire ecosystem, financial ecosystem is running into the same direction.

49:29And this is why, you know, people at KKR a couple of years ago already said this democratization theme of private equity is probably one of the largest disruptions in financial history. And this is what I believe is happening because all these forces, all these stakeholders are going into the same direction. So in easy words, Trump would say, I love them all. Okay, I'll let you get away with that one for today.

50:03Now, Stefan, let me ask you about your three biggest learnings from building Moonfair. I spent the first two days of this week together with Sebastian von Ribbentrop from Joint Capital. And I almost wish that we had done a podcast there because I realized that I would wish that I had asked him about his three biggest learnings. And he, of course, told me to give you his regards because he's a big friend of yours. So now I'll ask you instead of Sebastian, what are your three biggest learnings from building MoonFair? Yeah, Andreas, it is funny. If I tell the story around Moonfield, people ask me about it and they say, whoa, what a success and so on.

50:47You know, we had an incredibly bumpy road. When I started the company in 2016, 15, I left KKR. You know, I talked to friends about it and my friends told me, Stefan, you're crazy, you're nuts. You want to build a digital platform where people invest up to 200 ,000 euros into private equity products they might have never heard about. This is like buying a flat over the internet into an asset class people are not familiar with. Go back to KKR, please. We have four children. My friend, Hanif von Lichtenstein, said, Stefan, please, I have to take care for you. You're not yet financially done. This is too much of a risk.

51:30Who has done it ever before you? Why is no one else out there? He said, why is no one else out there? I said, look, we are innovating. Yeah, but do you think you are smarter and better in innovation than anyone else out there? So there was a lot of skepticism. Bankers, friends from banking could have taught me the regulatory framework. You have no clue what you're doing. This is not going to work. But I believed in it. And there were many, you know, my first partner and employee, he left after a year and said, I give up. This doesn't make sense. this will never work. We did market surveys, etc.

52:05They said no one will buy private equity through this platform. So my big, big, big, big learning is and I can really, I teach this to my children and to everyone else out there. If you believe in something and you're really convinced there is something, even if there's headwind, even if people tell you don't do it, believe it and do it. Stick with it and run with it. Unless you really don't believe in it. If I would have followed these people, Moonfair would not exist. Yeah, that's my first learning. The second one, Andreas, when I founded Moonfair, you know, I had a long career in private equity behind me.

52:43I was 46 or so. I really wanted to incubate it. They are very similar to what the Zamba brothers did with their rocket internet stuff. I wanted to find someone, you know, smart, younger than me, who would run the company on my behalf. And I would be a super active chairman. I would finance the starting phase, and I would bring in my knowledge and context. And I tried to do so and had a couple of people who came in to run the company. But what I figured out is you cannot hire an entrepreneur. You can hire a manager, and that's probably better at a stage like where we are now, not in the beginning.

53:26but hiring an entrepreneur is impossible. And my personal conclusion was an entrepreneur who is really an entrepreneur will not work for me. He or she will do something on her own or his own. And then a manager might work for me, but not someone who is basically realizing my idea and my baby. So you cannot hire an entrepreneur. And this is why I stepped back into the firm and has been running Moonfair since then. Look, and then at the end, it's not about me. It's not about the idea. What it is all about is team and culture. And when I was in my late 30s and Henry Kravis from KKR, he always spoke about culture is so important.

54:18I really, Andreas, I never got it. I thought it's a buzzword or something, you know, for HBS management courses. I've understood by now that culture is everything. Culture is the set of values, the set of beliefs we all agree on. Culture is the glue in terms of how we behave with each other, how we, you know, interact, how we communicate, how we collaborate together. Culture is all human respect in one word. And this is what makes it or breaks it. When you ask our people at Moonfair, they will not tell you, I'm working here for the pay. I'm working for the stock options. They will tell you, I'm working for our mission, but first and foremost also for the culture and the team because it is a culture of no assholes, a culture of integrity and respect.

55:13This is what makes great companies. And I can only tell everybody, whether you are running a fund, a venture fund or a large company, one thing you must get right is the culture and the team will follow. I have one question, and it's probably to the culture point. That's at least where I thought about it. I've oftentimes found myself in conversations with very senior GPs thinking about hiring IR people. and they tend to say this is incredibly difficult because they don't understand venture or it's very hard to find someone who understands venture who can be in a very volatile world where LPs are so different and so on and so forth.

56:01I can't help but think that someone like you who have built a platform that is meant to take out the IR person almost, at least from a fundraising perspective, must have some thoughts, even though it's not IR specifically that you're doing there. But again, I think that you must have some thoughts around how to correctly present an investment opportunity to a potential LP in a platform slash marketing way where it's actually doable by people that haven't spent 10 years in venture. First of all, Andreas, I think you need both parts, so to say. You need the specialist or the person in IR and us to make it work.

56:52What we do is basically we take the documentation, the private placement memorandum, the investment memorandum, we take our due diligence material, of course, we take the LPAs and the legal stuff and legal documentation and put it on the platform and then open it, you know, up in a very digestible, easy-to-read format. You can find everything at one place and so on. What we then do is tons of material in terms of education. What is venture? We are following your example. What would be a secondary? How does venture work? What are historical returns? And so on. And then we would typically have the manager, the GP, who is on the platform, also be, whether it's in a webinar or in Q &A session and explaining what she or he is doing.

57:42Having said that, many, many of the interactions with my team are at the end happening between us and the IR person. So when it comes to specific questions, when it comes to specific documentation, when it comes to questions in due diligence. So without an IR person, we could not run our module. So it's complementary for me. You put all this data on the platform. I cannot help but imagine that you have a ton of interesting insights on LP behavior on the platform. Is there some that you can share? Yeah, we do. We do, and we share this, by the way, publicly. If you go to the Moonfair page, and really, not everything is so important, But this is worth a read because it's proprietary data about the investor behavior.

58:37And you read it, you can see what people favor and what they don't favor. And Andreas is very interesting. What happened is, you know, people started with buyout. Then we had an incredible, incredible demand in 2020, 2021, 2022 for growth and for venture. You know, growth and venture made 45 % of all our assets under management. that we raised in these days. And then after, call it the shock from the interest rates and increases, people really went back into protection mode and are now very much looking for infrastructure, still buyout and credit. Credit because as an alternative source of financing for the private equity industry, very, very much on work right now.

59:27And people are investing there for good reasons. Having said that, very recently, starting Q3, Q4 already, we see, and also when we ask our investors, we see an increasing interest coming back in tech and venture. And that was interesting because after the grand financial crisis, it took years before this interest was about to come back. Now it came back much, much quicker. We are seeing this, by the way, in the stock markets as well. As you know, private markets are lagging behind when it comes to valuations, etc. Stock markets by some 12 to 18 months. So they are all signs, stock markets plus behavior on our platform, that venture and growth is coming back to play.

1:00:14We could go on and on and I would love to, but we better get into the quickfire. And now, the quickfire.

1:00:32This is the section where we ask you three quick answer questions. Are you ready for it, Stefan? Of course. What advice would you give to your own tenure younger self? Look, I made so many mistakes. And when I think about these questions, I could probably talk for hours. Look, one very important thing is don't live your dreams. And I said it earlier. If you believe in something, stick to it, make it happen. So take out of your vocabulary, I wish I had. That's not a good one. I wish I had should not be, I wish I had should be a stand for I have done and not I wish I had done. That's one. Second one is, you know, we are all human beings and we tend to be extremely dependent on external recognition.

1:01:22Wow, good job. Wow, that was a nice chat. wow, Moonfair is one of the greatest companies ever. Wow, you are so smart. Wow, you went to Harvard. Forget about this. If you stay there, if you are just dependent on recognition, you will never go out of your comfort zone because you will stay where you are where you get all this recognition. Make yourself independent from the acknowledgement of others. Very, very important. And associate to it, once you have done so, So leave the mainstream. We are all behaving in cohorts. We are all doing more or less, what is the neighbor doing? What is this guy doing?

1:02:05This person doing? Forget about it. You will never find your own edge. You will never be innovative. You will never come up with a great idea. You will never be a person that is different and really interesting if you stay in the mainstream. And then last but not least, I keep on telling this to my children all the time. I had a ton, maybe a different generation, too much, I would say, respect for adults and elder people. And I was not speaking up enough because I thought I might be much more experienced. I have no right to play, no right to say something. When I grew up, we had to be silent. When someone else more senior was talking, If you have to say something, say it and don't be shy to speak up.

1:02:56Now, what are your top tips for VCs across Europe who are fundraising? Look, the honest answer is you have to ask yourself, in my view. And I asked this question when I founded 7GC, 7 Global Capital, our U.S. fund. What is your reason for being? Is there really a need for another venture or another growth fund in Europe? What is really your investment thesis? Why are you different from the established players who might have a more pronounced brand name, larger resources, etc.? So what is really your investment thesis? It must be something else. If people ask me, shall I go into venture? I always tell them, yeah, if you have something new to invest in or a new thesis, you should.

1:03:47But just jumping into venture for the sake of it is probably not smart. You have to be the best positioned to win in this field. The other one is, you know, it is extremely difficult to raise a first-time fund, even a second-time fund. People know this. You know this, Andreas. You need people who trust you and ideally you bring an anchor with you. I would focus my fundraising in the beginning around an anchor investor who puts down some real money and then others will follow. And then very, very important, the entire industry is still making the same mistake. We didn't make the same mistake at 7Global, but I made this mistake in the past.

1:04:31Don't be cyclical. It was insane in terms of valuations, what we all saw in 2021. We saw in SARS 40 times revenue, forward-looking multiples that have been paid. Long-term average, as we all know, is 10 times. But people were still paying the money. Why? Because it was the cycle. We didn't make this mistake at 7GC. We paid on average seven times forward-looking revenue. So we were disciplined. And why? Because we have learned out of our history, you know, dot-com crisis and exaggerations in the 90s, that this is not healthy. So please don't run with everybody and be courageous enough to say no to a deal if you think pricing is insane.

1:05:19And now, finally, what is the most counterintuitive thing you've learned in management? Look, everyone is afraid of making mistakes. And everyone in particular is afraid of losing money. And I am so. I'm super conservative. I really don't want to lose money. I don't want to make mistakes. Because I've learned that making mistakes is something that has to be avoided at all costs. This is bullshit. If you are an investor, you have to lose money. You will not make money before you lose money. Or you will make money, but then you will lose money. Losing money and making money comes in hands. And this is what fosters your thinking.

1:06:03This is failure, to understand failure as a learning experience. And as I said earlier, failure, I made the mistake and invested in hype phases before 9-11, etc., and lost a ton of money. I've learned that you have to be anticyclical, that you don't run with the hurts. Learn from your failures. This is what you have to do. All successful entrepreneurs I know, all successful investors I know, they embrace failure as a necessary part of the innovation process, of any disruption process. At Moonshare, we do make failures every day. Any innovation process comes along with failures. And if you're afraid of making failures in venture investing, you probably should change your job.

1:06:58Stefan, before we wrap up today, I will close with the way we always close. And that is asking you to share with us a controversial opinion or uncommon belief that you hold that most people around you don't believe in. Look, every generation and every development of mankind, there are different beliefs that are inherited from the past, from your parents, from other people. And one belief that I don't share anymore is that going to university is necessary. I even believe that going to younger universities is in many cases destroying value. and why is it? Because we are living in a totally different world and we talked a little bit of AI and what is yet to come.

1:07:48I believe that going to university is driven by fear. You don't want to do something wrong. I get my degree, like in the old days, going to a bank for two years and then you can always go to a bank, you're in safe hands. This is, again, in my view, bullshit. I doubt really whether the costs are worth it. I doubt and would say what you learn at university is nothing more than conventional wisdom. That what is out there anyway. And this wisdom due to AI and the accessibility of data and information and not only data is becoming a commodity anyway. So what is needed is innovation. Ideas rule the world.

1:08:32It's not that you digest what has been out there and that you become the greatest learner. This is available. ChatGPT will be smarter than you in writing your thesis. What is needed is people that are thinking out of the box, that are questioning conventional wisdom, that are questioning common beliefs from the previous generation, that are independent from being recognized and acknowledged by others and only do what they want you to do. And I believe there are so many other sources where you can learn this, you know, whether it's self-directed learning, whether it's apprenticeships, whether it's entrepreneurship.

1:09:11Think about some of the greatest entrepreneurs. They stopped at a university, never went to university. You can, you know, do vocational training. You can whatever you can talk and find mentors. You can, you know, start working right away. the most important thing is for this generation is innovation creativity and connection between the dots and I doubt that this is what you necessarily learn at university I don't think I could agree more but I'm an old student president of my university so that is not a good situation Stemmerz thank you so much for joining us today to everyone listening in I really hope you enjoyed this episode as much as I did do not forget to drop us a review, fill up the pot and subscribe at EU.BC.

1:09:59This episode is brought to you in partnership with Zero 100 Conferences, which organizes networking events connecting LPs and GPs in private equity and venture capital firms across Europe. Their upcoming event is Zero 100 Conference Europe from April the 16th to the 18th at Leonardo Royal Hotel Amsterdam. This is a pan-European opportunity to network with major LPs and GPs from firms like Bain Capital, Permira, EQT, 500 Global, Alvin, Esas Holding, The Carlyle Group, Adams Street Partners, Agon Asset Management and Odo BHF. Save the dates. April the 16th to the 18th at Leonardo Royal Hotel Amsterdam.

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