E186: Where’s the Alpha Opportunity in VC in 2025? w/Abe Finkelstein

0:00So is European venture dead? You're the first person that ever asked me that. Look, I don't think so. As a firm, we don't think so. You know, I think you saw it recently. We actually added a partner in London, our first partner outside of Israel. So we're actually a long European venture. We've been investing in Europe for about 15 years now. I've done extremely well. I don't want to just look backwards. I am looking forward. But I definitely think the best years for Europe are ahead of itself in terms of venture capital. We can touch on that. But it might be a little bit of a contrary intake, but we're big believers in the opportunity there in venture capital.

0:47And one of the reasons I wanted to ask you is because you're not stuck on a specific strategy. You're in Europe, you're in Israel, you're in US. So you don't have to be investing in Europe. Why take the time to open up an office in London today? And why lean into Europe? It's a great question. I actually see some parallels with what we saw in Israel over the past decade and a half, even 20 years. So some of that is around a simple, you know, going to the basics of the basics, like the demographics and, you know, saying, what's the future going to look like for people, you know, in Israel, you know, kind of being an entrepreneur, I always told people it's almost like a job, like any, you know, the way I would have thought of being a doctor or a lawyer or an investor back in the day.

1:31So I think when I look at Europe, and that's because there weren't, you know, there's not a ton of different alternatives to begin with, kind of going back. When I kind of feel that way with Europe as well, I think if you're, you know, a younger person in Europe, you may decide to pick up stakes and leave. But I think one of the ways to get wealthy there is probably more likely to go the path of being an entrepreneur. Um, so I think that's a, that's a good thing that we're going to see more and more entrepreneurs coming to market. Um, again, just looking at a younger population and the opportunities that are afforded them.

2:04And then the second thing is I, I look back at Israel. If I go getting back 20 years, 15 years, um, you know, the foreign investors started coming over to Israel the way they started going over to Europe, probably about five or six years ago. some even before that. And it ultimately just raises the bar for the entrepreneurs. You know, the foreign funds don't, you know, they're not satisfied with 100 million, 500 million, even a billion dollar exit these days. So when they're putting money into your company, you better be aiming much, much higher. So I think that's a fantastic thing that happened in Israel.

2:40And that's something that we see going on more and more in Europe. And then finally, I think kind of, you know, success, we got success in the sense that we've seen, you know, Spotify. And then, you know, we have Revolut, which now they're talking about being valued at, I don't know whether it's 40, 50, 60 billion dollars. I mean, these are very, very large numbers. And then Klarna and a whole bunch of other ones that can be expected to be public offering. So I think that entrepreneurs are seeing out of Europe that it's possible to build very, very large companies. and that next generation of whether it's lovable or N8N or what have you, like, again, these are the next ones that we think can become bigger and bigger.

3:21So I always say when an entrepreneur or your neighbor sees how well you're doing, they say, wait a second, you know, that idiot can do it? Then I can do it even more so. So I think that kind of flywheel and ecosystem is developing in Europe. It's not without its challenges. It isn't going to be a walk in the park. But I do think we're feeling that. And the last thing I would say is that we're seeing these larger companies, and we saw that in Israel as well, spin off the next generation of entrepreneurs. They were part of a company that got built to a very, very large scale. And again, they say, wait a second, I see this as possible.

3:55When you see something happen, you realize it's possible. I'm going to go out and start my own company now. So that's why we're excited about it. The reason I asked you whether European VC was dead was not necessarily to be controversial. it's the fact that most people, at least the consensus view, is that the future VC, at least the next decade, will be driven by AI. And in Europe, you seem to have this weird dichotomy where you have this regulatory landscape that's making it very difficult for AI companies to succeed. But also you have Paris, which is the hotbed of AI. How do you weigh these two factors and how are they both affecting the European ecosystem?

4:34That's a great question. And by the I think most people are skeptical about Europe and venture capital. I'm not saying that I'm not also concerned. I have my concerns, and we'll see how it plays out. But I tend to think in general, and again, there's no doubt that regulatory and government, and again, we saw that in Israel. We see that in the U.S. can be a big boon for investment in general, investment technology, investment in venture capital. and maybe Europe's not there around that. And I think they do need to do a bunch of things, whether it's around like tax incentives, whether it's bringing over, you know, more of the large corporates to open up R &D centers and things like that.

5:16You know, by the way, like tax incentives make all the difference in the world in a lot of cases, whether it's for startups or for corporates. And so that can be a huge thing. I know Europe is having challenges with that and particularly the UK as well. And it seems like in the UK, given some of what they're doing, on the tax side is actually driving people out as opposed to having people come in. But I'll put that on the side. I think venture and entrepreneurship, it tends to live in a bit of a bubble. We thought regulation was going to kill Uber and Airbnb. And these are some of the largest companies in the world.

5:50And I think that the talent will just ultimately get beyond that. So Paris, for example, majoring engineering schools, whether it's companies like Mistral or even Hugging Face has Nexus there and, you know, Eleven Labs. Like we're seeing those companies come out regardless of regulation. Now, some of them may start there and then move their operations to the U.S. And we see that with the Israeli companies as well. But ultimately, I think the opportunity is that those companies start in Europe and you can get many of the European VCs or the U.S. VCs that are over there get there first and give them the seed capital.

6:26So I just see that kind of stuff just operating. It's its own organism. It's kind of like here in Israel that we've had a conflict going on. We've had a conflict going on for, you know, 75 years or maybe, you know, 3000 years. But we we've had a conflict at least since October 7th. And, you know, you could everything, you know, venture capital investment is living in this bubble that's just doing amazingly well. And I think in Europe, that's going to be the same thing with entrepreneurs want to get something done. They want to build something. they're just not gonna you know listen to the regulation and what's going on now clearly that can dampen the opportunities um so i do think that needs to be uh addressed but i just think we're going to continue to see amazing uh successes because there's just going to be more experienced entrepreneurs who've seen big companies getting built and will want to build one even bigger the next time around i mean even go i look at you know you know there's spotify i mentioned, but look at Stripe, who founded Stripe?

7:22It was two Irish guys that had access to the capital to do that. They weren't from San Francisco. They weren't from New York. They weren't from Tel Aviv. So I think it's possible anywhere. Taking a step back, tell me about Vintage's strategy and how does Vintage invest in both funds as well as startups? So we actually have three separate strategies. We have fund-to-funds, where we invest in venture capital funds. You don't want to come back to raise their new funds. And within the fund-to-funds, we have a number of different strategies I can touch on. We have secondary funds, which is actually where we started back in 2003.

8:04This was kind of the contrarian nature of Vintage and Allen Feld, who started the firm, who saw everybody exiting technology and venture after the dot-com bubble burst and exiting Israel as well. And he said, no, I'm the opposite. I'm long technology. And I think that's one of the reasons why he hired me as employee number one, because he saw I was also long technology. So we have secondary funds that buy out investors from their investments, both in venture capital funds and direct holdings in companies. And then we have a growth fund. The growth fund is actually the most recent strategy that we added.

8:41That was back in 2011. And the idea of the growth fund was to look back into the portfolios of the fund funds and the secondary funds and cherry pick what we thought were the best emerging companies, at that growth stage and go in on a direct basis. So if I think about everything we're doing, it's kind of covering the venture landscape from the earliest early stages via our fund of funds, typically going into early stage funds. And then the secondary funds maybe going in a click later to much later, buying at LP interests, doing direct secondaries. That growth fund is kind of somewhere, kind of the B rounds up until the last round.

9:20And it's across venture. So everything is venture capital. And in our fund of funds, we have multiple strategies. So we have a fund of funds specifically focused on Israeli funds. We have a fund of funds for smaller funds in the U.S. and Europe, emerging funds in some cases, and then a fund of funds for larger funds in the U.S. and Europe and a health fund of funds. And they're all super synergistic. You know, we can get to, you know, a deal from multiple different ways and leverage each of the funds. At the center of it, I would say, is our relationship, though, with the GPs of the funds. You mentioned you have a fund based on small fund funds or emerging managers.

10:01How flexible is that mandate? Are you looking for the funds that have a 50 % chance to be a 10x plus? Or are you looking for something to be diversified within itself and predictably deliver a 3x? That's a great question. So that fund specifically, the mandate of it is to invest in funds in the U.S. and Europe. $200 million in sizes and below. And typically the funds that are 200 and below are doing pre-seed and seed. I would love a 50 % chance of getting a, I don't know if it's a 10X or 5X, but that's great. But they're definitely, it's a mix of two types of funds. It's usually funds that may be on their fourth, fifth, or sixth fund that just, they want to be small, right?

10:47So it could be like a Ludlow out of Detroit or a version one. These are funds that they intentionally want to remain small and may remain small forever or a floodgate, for example. So very, very experienced investors over multiple cycles as well. And then what we also try to do is find the next great versions of those funds. So it could be that it's somebody we only invest in investors that have some sort of track record. So it could be a first time fund. It could be a single GP. It could be a first time team, but we want to see a track record. And the hope is that they can perform really, really well.

11:23Some of these funds will grow up in size over time. Like we were in the $100 million fund of primary ventures of New York. And we were in the$120 million fund of 0.9 out of Germany. And they've scaled up over time and kind of moved out of that smaller fund of funds, or our fund of funds targeting smaller funds. But we're always looking for those new managers. And And yes, what we see is that the diversification, we don't want to be over-diversified, lowers the risk. And therefore, we can take big bets on these smaller funds. And we've had these$200 million and below funds. We have a bunch that are 10Xs and above.

12:01We have a bunch that are 5Xs and above. We even have a couple that are 20Xs and above. And then we have a few that haven't performed quite as well. What we don't have a lot of interest in enough is those that have actually lost money. So obviously we're not doing we're not making an investment in a venture capital fund to do a 1x or 1.2x. But it's very interesting to see, you know, if you get an experienced manager, you know, who's made money in the past, has a track record. It's it's rare that they'll actually lose money for you. It happens, but it's it's it's pretty rare. But for sure, that's the vehicle that's a bit more high betas the way I would put it.

12:43And every LP will say they do first-time funds. Most will not. And most like to track the fund over time. Give me the thesis for why fund ones are good investments. Why should somebody invest in a fund one? We actually had a discussion about it today in one of our investment meetings that sometimes, and we've seen this a lot, where the fund one isn't good. It could be timing. It could be portfolio management. And then you have to make an assessment. Do I go into fund two? And fund two turns out to be amazing. And we've had that. There's a bunch of well-known groups where their first fund was terrible and then they went on to do amazingly well.

13:20But you're saying, you know, if I say why invest in that first fund is because, you know, first of all, like an access issue. Like we see something that's amazing and we really believe in that. Like we want to be there from day one. It'll give us the ability to have ball control, so to speak, to be able to increase our allocation over time. And it also might be if we're not there from day one and they do extremely well, we may not be able to get into that fund, too. Now, it's kind of rare that you know how strong a fund is within kind of those first couple of years before they come back and raise that next fund.

13:53But that's always a risk. But the main idea is to get there, get an early, get a toehold in the fund. And then, again, if they do well, you can scale up over time. And that's the main reason to do it. And, again, sometimes being in the fund can teach you a lot. So it could be that I say, okay, I'm going to skip fund one, but then I'm going to come to fund two. And then fund one looks sideways or maybe looks great for some reason. And that can make me invest or not invest. But it might having been in the fund one and known and see how it behaves and how the partners behave and the types of investing they're doing.

14:31That could actually change my opinion versus fund two. So being on the inside is also worth something as well. I mean, we don't do a lot of fun ones. We do do them. But that's why we keep the bar like super high on those. There's really got to be like one sentence that you can describe the fund in is why you think it's like super amazing and differentiated for you to go do it. It's that edge. Yeah, we might start with a million-dollar check, by the way, and that million-dollar check can become a$30 million check over time, right? Said another way, if you can't simply explain the edge, then there is no edge.

15:06Or, you know, it's not being conveyed to me properly, or I can't interpret that. So, again, we've made mistakes, and we've missed things because I couldn't discern the edge. But I would say even the ones that I didn't do and I made mistakes on, I saw the edge. I just didn't have the, you know, maybe the guts to go do it for whatever reason. But I saw the edge. And, you know, so that kind of tells me, like, if you can see the edge, then there's usually a good case that it's going to turn out well. Obviously, Fund One is extremely risky, even from an entity level, whether the team stays together.

15:42What are some ways that you could de-risk investing into Fund Ones? So, first of all, the model that we do, it is a way to de-risk it. Again, we're probably investing in that vehicle in about 20 funds, about 10 to 12 of them I would call core checks. And then another, you know, six to eight are sort of these toe in the water ones. So by having that diversification, it tends to de-risk it. So that's the that's the main thing. I think also, and again, I don't want to toot our own horn, but we've seen what works, what doesn't work, managers, and staying close to these early stage managers, giving them guidance, not telling them what to do, obviously.

16:20But I do think we have contributed over the years to making some of these groups, maybe giving them a better chance to be successful. So that's another way, de-risking, just because we've seen so much. But at the end of the day, you're taking a big risk, right? But I would say the main de-risk going in is I always like to, I mentioned it before, is to say that we're not doing first-time investors. We're doing people that have made investments. Maybe they haven't done it in kind of a classic fund sense, but they've made investments. There's feedback from entrepreneurs about them. You can kind of read something into the tea leaves from what they've done before.

16:59So it doesn't mean that somebody couldn't come out of some large organization and start just making investments and do amazingly well. I'm sure it's happened in the past, but I think we de-risk it by avoiding those and focusing much more on the ones that have had some investment experience and at least a decently robust track record.

17:23you've repeated this multiple times the benefit of having the toehold in the fund but also the information advantage of being an existing investor versus observing it from the outside what do you see on the inside that you can't see from the outside you see um you see how people make decisions you see whether they're careful with them you see whether you know how deeply they go on things they see. You can see, again, how they interact with you, what information they're willing to share with you or not, you know, how transparent they are. Again, these things are real partnerships. Again, we're not running these funds, but you're involved with these people for, you know, I say 10 years, it's probably more like 20 years in many cases.

18:07And ultimately, like you want to be involved with people that you can trust, that you have fun working with and interacting with. And again, being on the inside, you can feel that. And also being on the inside, you know, it's more the, you know, it's the job of the GP at the end of the day, the fund manager, but you can also see some interesting things like bubbling up in the companies, right? You can see a little bit more detail than opposed to saying, okay, three years from now, start telling me about, you know, what happened. You can kind of see that time series of how things are progressing.

18:36I also say, and again, we, I think we have okay judgment on entrepreneurs as well, but we get to interact with the entrepreneurs that they've invested over the years, listen to them, hear what they're saying. And that type of stuff, as opposed to, again, just at one point in time, when you're due diligence, you know, fun to have to make a decision, I mean, or out based on everybody being prepped to say wonderful things about, uh, the funds of being on the inside can just, uh, make a tremendous, uh, tremendous difference. It's also what you're not seeing, which is you're not just seeing a backwards applied narrative to why you did X, Y, and Z, you're seeing in real time before the decision is made.

19:13And that's just a whole different way to view a fund versus through a narrative that the GPS weaved. A hundred percent. A hundred percent. And again, like I said, this isn't, you know, at the end of the, it's working with people in a insanely dynamic market. And like, so that's the thing, you really, you want to be in the trenches with them. And that's really critical. Again, we've invested in fund twos as well, but in many cases, it's been people that we've been tracking for that first fund and even before. There was one fund in our portfolio where we didn't do the first fund because we didn't like the strategy related to the timing of the market, but we loved the person.

20:01And also there was some team dynamics as well. two partners when they came back for the second fund the strategy had shifted a little bit the market had shifted a little bit and they came back as a solo gp and we're like great you know i'll back that person and it all it all worked out um and we'd kind of been following it relatively closely along the way also because the fund manager you know very graciously was in touch with us giving us updates uh as well which is also that's great you know like i appreciate that also So even though, again, we had passed on the first fund. And you mentioned that oftentimes the fund one is okay and the fund two is great.

20:41What would make a fund two suddenly pick up and be a good fund where it wasn't as a fund one? Great example. It literally was one of the first fund-to-fund commitments we did back in our first fund-to-fund. So the situation was the first fund. To be fair, the first fund was raised in 1999-2000, which was like, or maybe 2000, right? That was one of the worst vintage years ever. So ultimately, I think the fund did a 1x. So I don't know if that was top quartile. So they didn't lose money, which I'll give them credit for. But what was really interesting when we were analyzing the first fund, we saw that out of the whatever, you know, 100 great exits over whatever period of time, you know, they had picked four out of the 20 portfolio companies that they invested in.

21:26And I was like, wow, you know, these guys seem to know what they're doing about picking. But we analyzed the portfolio. We saw they entered with very low percentages relative to their fund size. And a lot of their following capital was used to help, let's say, the more challenged companies survive versus putting more capital into their great companies. Now, when we talked to them about fund two, we sat down with them and we were going to pitch them that that's what we saw in the first fund. Like, okay, so why we wouldn't do the second fund. And they literally came to us and said, look, you know, we see where we made our mistakes.

22:01We want to change it. We think we picked good companies. Where we went wrong was around portfolio management and construction. And that's what we plan to do differently this next time around. Now, it could have been they would have screwed it up. But it turned out that the second fund ended up being, I think it was something like a 4X net fund. So, again, I think it was that it was picking up on some of the, you know, what they were doing well and where they weren't being able to exploit that and take advantage of that. So, again, it doesn't always work that way. But I do think and also, by the way, I think it also says a lot about managers when they see, you know, what they did wrong and they want to correct that.

22:40And, you know, a little something that isn't necessarily public information, but and I blame myself as being here in the beginning. But, you know, Vintage's first fund was our worst fund so far. And I think a lot of it is OK. You know, you think you know what you're doing. And but there's a lot, a lot of learnings. And we, you know, we do three off sites every year where we beat the crap out of ourselves to figure out what we do wrong and what we need to do better. And that's something that we started way back in the day in 2003. And again, fund one of ours should have been much, much better for a few clear reasons.

23:14And we changed that. And so far, the future funds have been, subsequent funds have all been better than that first one. First one was okay, but the next ones have been better. I think the top LPs, like the top VCs, look at the manager's rate of change. You mentioned that fund. not only did they react to feedback quickly, they actually internally generated what was wrong with the strategy and improved before they even met with you. That's even better than being reactive to feedback. So you also have to look at the trajectory, not just the point in time. Growing up, I thought managing money meant paying bills and balancing a checkbook.

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24:54And again, that first fund did a 1x in a period of time where, again, 1x was not bad. But a lot of it had also to do with the sector they were investing in. And they said, okay, this next fund, we're going to have a thesis around these three sectors. And that's where, because we believe that's where the puck is going, where the world is going. So that's also something like to think about. we're seeing that I'm, I'm, I'm, I'm seeing that more and more with funds. And I respect that more and more. I would say if I had to go back 20 years, he asked me, I said, Oh, if, you know, funds are changing the areas and the sectors that they're focused on, I'd be like, I'd be a little wary about that.