Andre Retterath, General Partner at Earlybird Venture Capital: Earlybird’s €360m fund and the future of European deep tech

0:00Hello and welcome back to the Scating Europe show presented by DL Ansel Johnson. Today I've got the one and only data-driven VC, Andre Partner at Early Bird. Thank you for joining me. How are you doing today?

0:09Andre Retterath:Thanks a lot, Zeb. Thanks a lot for having me. Doing very well. How about yourself? I'm very good, Dan. Now look, big news today. What's happened? We have just announced the new and largest Early Bird early stage fund ever, 360 million euro fund aid. So we are hitting the market with that, doing many more investments in the areas we've been investing in for long, deep tech, AI, software infrastructure. So the stuff we are very excited about. Early Bird is an amazing firm. I think I read that you've raised a new fund every three or four years. Yes. 30 years now. And as you said... Next year. Next year is the 30 year anniversary.

0:48Andre Retterath:It's a big thing. It's crazy. I mean, yeah. And as you said, this is your largest early stage fund yet. Tell me about the size. What was the rationale between raising this much money for an early stage fund? So look, I think if we look at the last generations of fund, the 2018 vintage was actually 175 million euro. And then for the 2021-2022 vintage, we increased that to 350. Obviously, crazy market back then. We, in the past, played a bit around with portfolio construction. So historically, we come from mostly exclusively investing in Series A. But then over the last couple of years, we started also investing earlier.

1:27Andre Retterath:So if we look at the portfolio composition today, we do about 35 portfolio companies in this early stage fund. We invest from pre-seed, so the earliest stage possible, stealth founders. This is where we are very excited about looking into the areas we really know well and then seed and series A. So on this portfolio composition, we just look at what does it take to be a lead or co-lead investor as this is our strategy. then we just look at what is the average check size we typically need to pay for this ownership target. And then we try to reserve 50 % for follow-on and 50 % for initial investment.

2:02Andre Retterath:And that leads us to a comfortable size of around 300 million euro. And now for the past fund, we went to 350. That was also the hard cap that we aimed for with this new fund. And very thankfully, we had a very successful and also fast race. And towards the end of the race, we had a new blue ship LP that wanted to come in. So we needed to stretch and extend the hard cap to 360. And that's the number that you see as the headline right now. And talk me through the fundraising process. How was that? How did you look at the market given, you know, in tech, everyone's aware that AI is crazy. The startup market is crazy.

2:38People don't have that same visibility of the sort of VC-LP relationship. Can you touch a bit on what that market looks like right now and how you found raising this fund?

2:47Andre Retterath:Yeah, I think if you look back and the first race that I've seen end-to-end was the 2021 and that was like incredibly fast it was literally like a month or something you went back to the market existing LPs but also new as we almost doubled the fund size for the last one so that was like a very fast race and obviously we've seen our peers and friends GPs at other firms who've been in the market for the past 24-36 months racing and we all know it's a very difficult and tough market there's very little liquidity in the market. IPO window has been closed for a long time. So we are excited for the summer and see what's coming up with SpaceX, Anthropik, OpenAI.

3:26Andre Retterath:But there was very little liquidity coming back to the LPs. And we looked to start these conversations early with existing LPs. Thankfully, a majority of them had secured liquidity to also come back into our new fund. But we also added a few more institutional LPs to Roaster here. So we are very happy with the setup and the fundraise led to the outcome that we eventually wanted to see to stay very competitive in this market. Amazing. You talk about some of those big US IPOs that are coming up. Do you think that that could unlock the European market if those, you know, SpaceX, OpenAI, if we see those IPOs do well in the US?

4:05Andre Retterath:I do think so. If we look at the market right now, so we've always had the big question mark from international investors. Can European companies become as big? And I think we've seen it. So from our early bird Eastern European fund, we have seen the story firsthand. We've invested 2015 into a company called UiPath out of Romania. Back then, the entry valuation was very attractive to us. And then six years later, we did an IPO at 33 billion in the US. And you could suddenly see this arbitrage between investing at the earlier stages at the lower valuation in Europe, but then companies becoming international champions and really exit at a large scale.

4:47Andre Retterath:And I think we have lots of companies that have different role models in US. For example, our portfolio company, ISA Aerospace, it's a lower orbit rocket launcher, looking into European space sovereignty. And obviously, everyone is looking at SpaceX right now. And you can see at like the multiples of valuations, these companies are higher. So obviously, we are looking at these role models. Plus, obviously, there are also lots of international LPs that tend to invest into Europe. So we've seen in the last couple of years due to the geopolitical situation in the US that also international LPs have shifted investments towards Europe.

5:25Andre Retterath:So I think freeing up some liquidity, there is the second path where it's a very important and critical milestone for European markets as well. And talk to me about deep tech more generally. You know, like I think every European firm is sort of going through a gradual or actually quite sudden pivot to trying to be a deep tech firm. I think Early Bird has had an impressive portfolio of deep tech companies for a while now. Can you touch on the firms, I guess, thesis to deep tech and maybe some of the more impressive portfolio companies that you've had? Yeah, no, I think it's actually quite an interesting background.

6:02Andre Retterath:And quickly talking through an anecdote, I'm an engineer by training. So I had a computer science background. that did a PhD in the machine learning space. And for me, quite frankly speaking, I didn't know the venture capital ecosystem that well. So I literally just Googled up what's the best VC firm in Europe. A few names popped up. And I think the one that had the most tech exposure was Early Bird back then. So both on the existing portfolio side, I would say we have probably had 80 % or something in the B2B space and about 20%. Yes, we do also have some consumer like N26, smava interhub in the past so we've invested in some of them but the core focus has always been tech that was the reason why i joined early bird in the first place and i think when i joined early bird with more than eight years ago i was really looking into building out ai as an investment practice so we've invested into ai since 2017 and built out the portfolio with early investments in that space so we've invested in deep code static code analysis that we later merged into snick and became shareholder and snick which at the peak traded at 10 billion valuation we've invested in companies like ivan which the last valuation was 3 billion it's a managed database software infrastructure we've invested in companies like aleph alpha for example very early on we've invested in companies like black forest lab spatial and the list goes on so this is our home turf this is where we've built a very strong portfolio in the past and not just when share gpt happened And the same is true if you look now into deep tech, hard tech.

7:34Andre Retterath:We've invested in companies like mentioned before, like Issa Aerospace, Marvel Fusion. We've invested in a decarbonization space. Arago is an investment from the new fund that is in chip infrastructure, building an alternative to NVIDIA. So we've built like a very strong deep tech software infrastructure portfolio. And you can see this compounding because over time it gets easier to also get into these more competitive deals if you've built a track record already in this space. versus many funds just shifting to whatever is hot right now. So we've been in this space for very long already, not just when it became hot, not just when ShareGPT happened.

8:10That's super interesting. And you actually, founders or companies are more likely to let you on the board, like, you know, on their cap table. If you've got a good track record in this space, they want to see investors with deep tech experience.

8:23Andre Retterath:100%. I think at the earliest stages where you cannot look into commercial traction, specifically for deep tech companies, it takes longer to get to commercial traction. You need to have a deep understanding of the technology and how these companies might actually differentiate and also really to assess talent. If you look at most of the founding teams of the companies I've just mentioned, many of them are researchers. Many of them are very deep into the subject matter. And it's important to at least speak somewhat of on eye level to be considered also a good sparrings partner for these companies.

8:57Andre Retterath:And this is what we try to build out. So early bird, different to many other funds, hasn't been a generalist fund investing in everything from quick commerce and gorillas and fling. And tomorrow we invest in something that's hot like crypto and NFTs. We've built out these areas where we had the expertise also oftentimes from operations or researching ourselves and then really build out the portfolio that compounds. And I think it's not only the subject matter expertise that the founders want to see, but we can also connect them to companies at different maturity levels in our portfolio. So if you look into building a foundation model, for example, our portfolio company Spatial, it's founded by, among others, Matthias Niesner, who is also co-founder of Synthesia, who was professor at Stanford, who is a professor at TU Munich.

9:43Andre Retterath:And we can also give them expert connections to scale and commercialize these models. So I can connect Matthias with Robin from Black Forest Labs if they want to look into how to balance like API business versus licensed business, for example. Amazing. Yeah, it makes total sense. I want to touch on Aleph Alpha, right? Because we've just had this news sort of acquisition merger with Coher. You've been very involved in that company, right? You've played quite an act. I imagine a very active, very busy few weeks for you. is there anything that you can share to give a bit of either flavor to the story or maybe a bit why you're either further excited about this next stage of the journey just to give a bit more color that goes a bit deeper than just the headlines that we've seen yeah look i think on rf alpha we've invested in 2021 so very early pre-commercialization and had a strong belief in foundation models already but lots of lessons learned over time so initially when we invested foundation model and majority of the funding round that we provided actually went into hardware infrastructure which was a huge topic back then like why would you take funding round and invest that into chips it turned out actually that this full stack approach is quite critical and we also later on learned you cannot just throw a foundation model at a problem and have a solution so actually what you need is you need deep integrations you need a platform you need forward deploy the engineers and all of these models that evolved in the last couple of years and that was a lot like a long learning journey with ups and downs.

11:12Andre Retterath:So as publicly seen, we also added some strong leadership and management to the company last year. And the company went on a very strong trajectory, also building small specialized language models. So it's very important they are serving the enterprises and governance, which have very specific requirements on sovereignty, but also in terms of the dictionaries they've been using. And it's more important to have these specialized models, then a large model that might be also inefficient to use and might be great to compose the next poem for your grandma. So on this vision, they actually had lots of strategic interest in conversations.

11:50Andre Retterath:And one that has seemed to be very fruitful is the one with Cohere. So in the last couple of weeks and months, the team spent quite some time also getting to know each other and looking at a mutual vision. And then very thankfully, we also have Schwartz as an investor with deep pockets and a large vision. And on this building a European sovereign alternative to Anthropic OpenAI and Google, I think that's a perfect fit. And we are just figuring out, obviously, the last details and steps of this merger. And then we are just getting started and excited to capture more of the value that's coming. Amazing.

12:25And what's yours and the firm's view on this idea of sovereignty? and you know that a lot of a lot of being a lot is being spoken about the need for sovereignty within europe especially in the deep tech space there's some areas i think we're always going to struggle to be sovereign and so there's always this interesting balance between sovereignty and like strategic independence and i'm always i always love asking my guests like where they sit on that scale like does europe need to have data centers chips llms you know all the energy the full stack or are there some areas where we think actually a level of strategic strategic strategic independence is probably better and where do you fall on that scale like do you think actually it's okay to have maybe most of the LLMs in the US maybe we only need some for defense or whatever I'm just curious to hear your take I think there are two different approaches one is

13:14Andre Retterath:and that's the history where we come from is really backing European founders who build companies for the world UI path Black Forest Labs also falls into that so they do not focus on specific geographies but they build the best solution in a category for the world and then you have the other bucket which is really the sovereignty bucket and sovereignty really is critical across all of the infrastructure buckets so we spoke about access to space before with ice aerospace it's very clear that we cannot depend europe on us or russia china and other kind of geographies for launch capacity. The same is proof for energy.

13:58Andre Retterath:We can see the impact right now. So Iran war, I can tell you sitting here in Munich and Germany, Germany has made some interesting decisions on energy in the last couple of years. And you can see the implications right away in situations like that. So I think in some situations, it's very important to have independence on critical infrastructure. That's access to space. That's energy. That's compute. that is really on different kind of data sovereignty as well. So you can see also, if you remember, JD Vance who showed up at Munich Security Conference last year and it was essentially, look, we sit on two sides of the table.

14:36Andre Retterath:Either you provide the data to us or we will find other solutions. And I think that's something completely underestimated in Europe. We have these hidden champions. We have the data that sits really on the subject matter expertise across these value chains. And I think we need to be very thoughtful and cautious on how we trade this data. So if we talk about sovereignty, of course, you need to play on the same level of performance or at least state of the art. Like nobody will use a sovereign alternative if the performance has a wide gap to a US competitor, for example. but I think if we manage to get to state of the art, the sovereign alternative when it comes to the AI stack is very, very critical for a majority of our businesses as they need to own their IP.

15:23Yeah, interesting, interesting. Yeah, and it's such a great opportunity for Europe and European deep tech companies who are trying to play in this space because there's such a demand for the sovereign alternatives. I want to talk, you know, I apologize if I haven't got much time left. I want to talk about something that was that you that's been part of this fund announcement has been early birds perpetual ownership. So as part of this announcement, you've spoken about how the ownership structure of the firm is changing to essentially guarantee the longevity of the firm. And this is something that is always such a hot topic with VCs.

15:58And I speak to a lot of VCs who are probably a similar stage to you or age to you, where there are like older members of the firm who are not leaving or holding on to the firm. or like there's these really strange sort of like handover or lack of handover plans. And there's been some examples where it's gone notoriously badly. And so like, yeah, talk to me about the news, what the rationale is and what it means for Early Bird. Look, I think it's one of the most critical topics for our industry.

16:27Andre Retterath:Some US funds that have been in existence for 40, 50 years, they figured it out. But here in Europe, I can tell you from my own experience talking to different peers, I think most do not have a plan. And once they do have the situation of building out a plan, they will fail to do so because there are lots of components to put together. I think Early Bird is in a very fortunate situation that we are already in the market for 30 years. Two of our founders are still 100 % active in the early stage fund and also looking into new initiatives and have been reinventing Early Bird over time, which is very critical.

17:03Andre Retterath:and we have sat together in the last couple of years to really figure out what is the future of early bird and i think if you want to simplify it there are two different models one is either you can sell the management company and like lots of examples in the market for different reasons you can look at life science partners to eqt you can look at la familia general catalyst and like the list goes on there are several more examples where you can sell it and in the consulting world The example is Roland Berger, a very famous German consultancy that got sold back then. The second model is really build a legacy.

17:37Andre Retterath:And I think staying in the consulting world, McKinsey, for example, McKinsey is always owned by the operational partners. And our two founders who are operational still at Early Bird, they've been educated and trained back then at McKinsey. And I think that's really the kind of vision they had for Early Bird, really building a legacy. So that's one. you need to be clear of like do i want to monetize it and make some money out of selling a management company or do i want to build a legacy decision here was very clear building a legacy second component is really who owns the management company because eventually if you stack multiple funds at some point it becomes attractive in terms of the management fee and profit flows and i think that's what many companies will face a huge critical discussion where the more senior partners obviously want to see these profit streams coming in and not leave the firm.

18:27Andre Retterath:So we sat together and also discussed and in all honesty, if you cannot build a model that works for the next generation, the next generation will eventually leave and start their own new VC fund, as we've seen multiple times over and over again. And I think it's important to have more and more flourishing managers, but also for the existing ones that actually decided to plan for this legacy. it's very important to sit together and find the economics that work out. And what we have done is essentially to create this perpetual ownership model. So once you retire out of early bird and you're not operational anymore, you will not have any shares in a management company anymore.

19:06Andre Retterath:So the management company is at any given point in time exclusively owned by the operational partners. And we've built in mechanisms so that whenever, let's say, the founders leave the company and the next generation wants to sell the company, there are mechanisms that they have an incentive to always hand it over to the next generation and really not sell it. So this took long time. And one is the agreement on, do we want to sell the company or do we want to build a legacy? Second one is figuring out the commercial incentives on both sides of the table. But then the third one is also the technical implementation.

19:41Andre Retterath:There are lots of caveats on like tax implementation, implementation dry income all of these things and we are very excited that about one and a half years ago we figured that out at early bird it's all implemented we have a fully regulated under buffin in germany management company and this is now set up for the next generations to come so it did not only work once from the founders to us but is also set up for the next generations to come and we are very excited to also promote from the existing team the next generations and continue to evolve this partnership. Amazing. And look, if you were somebody young, hungry, wanting to get into VC today, it's a very different market than it was five years ago, 10 years ago, the tools are different.

20:24Everything is different. Even the structures are changing quite a lot. What advice would you give to somebody who today wants to break into VC?

20:32Andre Retterath:Man, it has changed so much. I mean, I've only seen this industry now for a bit less than a decade. And within this decade, everything has changed. When I joined, you could literally take weeks and months of time of observing a company and like really building a thesis and making a decision if you invest in a hot space like i remember we invested in a company called Sintra AI out of Lithuania last year the company bootstrapped within eight months got to like 10 million ARR he had one week of fundraising he had seven term sheets on the table and you need to decide so fast but it's not only decision to invest but really the conviction and convincing the founders that you're the right partner around the table.

21:09Andre Retterath:So I think VC has professionalized a lot and you need to understand what's your unfair advantage. That can be previous operational experience, that can be academic deep expertise. It can be also just charisma of like you can convince people to actually work with you. So my bottom line is I think VC on all ends is a bit like a sales job. It starts with the fundraising. You need to convince LPs to give you money. You You need to find the right founders. You need to network to access the founders. And then you also need to convince them. You need to sell to your team that you're the right GP to actually work with.

21:45Andre Retterath:So I think it's all around the sales job. And proper sales training is very, very critical. So I think putting it down, figure out an area where you are incredibly passionate about. Become AI native. I think every investor with the next 24 months needs to be AI native. if you need to leverage a different kind of tools, no matter if this is a cloth or whatever. And I think the last one is be very comfortable in selling in all directions and really win people for your mission of backing the most disruptive founders here. God, that's great advice. I mean, sales has become cool. Like 10 years ago, 15 years ago, sales was not seen as that much of a cool job.

22:27But now everybody's like, you've got to sell. No matter what job you're in, from founders to investors, operators, if you can't sell, you're not going to get there.

22:34Andre Retterath:but the market is so noisy the market is so noisy and needed really cut through the noise and i think distribution has become a critical part you can see that all across different kind of positions that are hired for so now as ii is transforming more of the product and tech side of things i think distribution and and sales is very critical and you need to have people who have passion for that absolutely well look thank you so much for joining me andre congratulations on the raise it's super exciting thank you so much sepp

23:08Thank you.