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#7 Marc Penkala - Building conviction in uncertain times


Building conviction in uncertain times 

Could you please tell me about yourself and your experience in the field of venture capital?

I am a serial entrepreneur and seasoned venture capitalist with a profound stage and industry agnostic investment track record as an angel and VC. I would consider myself as a hands-on operational architect with proven transactional direct investment experience, as well as a complex understanding of venture capital fund economics and structures - I am an entrepreneur by heart and VC by choice.

I started my entrepreneurial career in 2004, ever since I founded three companies in different industries with combined 8-digit lifetime revenues. In 2013 I started my professional investment career at Mountain Partners AG and subsequently Nazca Ventures as an early-stage investor, investing across Europe, Latin America and Southeast Asia – where I worked on over 125 early-stage transactions.

I have as well invested in close to 30 start-ups and VC funds as an angel and maintained a 3-digit IRR ever since, with two portfolio unicorns and various exits and one IPO. My portfolio raised over USD 2 billion after I invested. I am sitting on various fund advisory boards, investment committees and act as a senior venture capital advisor for CVCs and corporates.

Now I am one of three General Partners at āltitude, we are closing the SME tech gap through automation and sustainability technologies, investing into early-stage B2B software start-ups jointly with my partners Videesha Böckle and Ingo Drexler.

Who should raise a fund and who shouldn't?

From 2016 to 2022 over 14.000 new venture capital funds have been formed – though, the rules have changed over time. Limited partners professionalised their due diligence and overall expectations looking at general partners, in particular emerging fund managers.

In 2021 and 2022 limited partner commitments peaked at an all-time high, money has been vastly accessible for all kinds of general partners from emerging to established funds over solo-, micro- and nano VCs.

2023 will be different, raising capital is reserved for the brave, experienced and persistent general partners out there, especially as we have seen a sharp decline of 73% in committed capital compared to 2022.

An outstanding investment track record used to be the golden ticket to successfully raise a fund, these days it’s just the admission ticket to speak to LPs per se, not more and not less.

Raising a venture capital fund – especially as an emerging fund manager is never easy. Though, to be successful these days general partners will have to bring way more to the table than a strong track record with an according attribution sheet. Its more about a sharp thesis, with a unique and defensible edge, a reliable limited partner network and moreover a credible personal brand.

What are the criteria for success and what makes a great fund in terms of returns and impact on the ecosystem?

The vintage of a VC fund is a strong performance indicator by default. Recession years have been great vintage years for VC funds and private assets. Median net IRRs have been 30% to 50% higher, compared to the three vintage years prior to a recession. So timing is an important factor, though surely just one piece of the puzzle.

To build and run a successful VC fund the general partner(s) have to tailor the right investment strategy and portfolio construction, understanding the current and future market environment, aside of the following challenges (i) building fundraising momentum (ii) mastering the art of storytelling (iii) creating an unfair sourcing edge and (iv) building measurable value adding services for portfolio companies.

What is a good fund size and why?

Looking at the current market sentiment it seems to me that highly specialised and focused solo-, micro and nano VCs with a particular superpower with sub EUR 50m funds, as well as thesis driven and or thematic funds sub EUR 100m make the most sense.

Especially as fund economics dramatically change with the size of the fund and of course with the fund generation. Looking at historic data of the past 20 years sub EUR 100m (emerging) funds have outperformed their vintage peers in terms of IRR and TVPI performance consecutively – especially looking at top quartile vintage performance.

As an asset class, where do you see VC funds versus other asset classes?

Looking at 10-year IRR yields across various asset classes, venture capital has always been an outperformer – especially in the context of the private market equivalent. Over a 10-year horizon venture capital yielded 14.9% compared to indexed public markets, which yielded 10.2% or private equity (including direct and fund of funds) with 11.0%.

Interestingly, venture capital tends to be an underweight in most investment portfolios. Family Offices are a great example, which in average have only 12.0% of the asset allocation in the best performing asset class.

To be fair, venture capital is an illiquid long-term asset class, which needs a dedicated and tailored strategy across vintages, combining fund of fund, direct fund, primary and secondary investments.

As a GP at a fund and an Advisor to many funds, what are the top five repeating questions you hear?

To be fair the challenges of most (emerging) fund managers are 90% congruent, in venture capital you can’t fast track experience, but you can surely learn from others. Most funds are struggling with the following questions:

(i) How do I create an alpha fund strategy?

I identified five core strategies for venture capital funds (1) The Sourcing Wizard Strategy | based on network & reputation (2) The Unique Niche Strategy | knowledge & expertise (3) Fear of Missing out Hype Strategy | Based on opportunities & dynamics (4) Platform Play Strategy | based on adding value & innovation (5) Invest Better Strategy | based on judgement & thesis.

(ii) How do I build a consistent fund model?

In my eyes there is no golden success formular, it always depends on multiple factors, such as fund size, investment stage, investment focus and of course the target limited partner base. Fund models should be the core of each fund.

(iii) How do I create fundraising momentum and velocity?

Adeo Ressi nailed it “Fundraising is the single most misunderstood thing in VC“ momentum and a well-planned fundraising strategy is everything. To succeed and create momentum, you will need patience, persistence, persuasiveness, and you will have to be pragmatic.

Think about first closing LP perks and a tailored fundraising strategy for different targets and closings. Relentless networking is the key to success in fundraising.

(iv) How do I illustrate my track record?

Just because a fund manager has been lucky or successful (or both) in the past, doesn’t mean that he can replicate his success into the future at scale. If you are selling your track record as a value proposition, make sure it is in line with your fund thesis and the strategy selling to LPs, aside of the most relevant part, the attribution sheet. Furthermore, there is a major difference in deploying 25k checks as an angel with your own money, over 500k checks with LP money.

(v) How and where do I structure my fund?

Well, this is a classic. The likelihood that you have built a fund before is 0%. The process, including the administrative burden is massive. There are many sub-questions alongside your journey from law firm to fund administrator, BaFin, tax and accounting, AML and KYC to jurisdiction and general partner commitments. All of them are equally relevant.

What are the common pitfalls when raising a fund?

Well, many emerging fund managers are lacking a dedicated fundraising strategy.

Emerging fund manager needed on average 10 month to raise 30% of the target fund size (first closing) in 2021 and 2022. Looking at 2023 the numbers are rather 10% to 20% in 12 to 18 months.

The whole journey starts with understanding your target audience, who are the right LPs willing to invest into your emerging fund (considering your geo-, industry- and stage-focus and of course fund size).

Drafting and executing a sophisticated fundraising strategy implies that emerging fund manager understand the investment rational of limited partners and know how to address them accordingly. Build a relationship and try to find warm intros instead of cold reach outs.

The main pitfalls are underestimation, duration of the raise, capital intensity of a raise and that fact that it is a pure numbers game these days, you have to keep the top-level funnel filled at all times with high quality warm leads.

How do you see the changes in the venture capital ecosystem, with more money, more venture, more specialized funds, and alliances?

More VC Dollars at work, lead to lower vintage TVPI performance and vice versa. I think we will see the best performing vintages of the next decade in the next two years.

This assumption is mainly driven by two factors. We are currently seeing a new breed of founders with a particular downmarket founder mindset, driven by operational discipline, a strong fundamental unit economics focus, and founders seek to be default alive. Furthermore, the new VC downmarket mindset, driven by profound due diligence, KPI driven investing and the latest valuation adjustments.

What are your predictions for the future?

I assume that we will see a super slow 2023 in terms of VC fundraising, a low deal count, decreasing valuations and lots of write downs and write-offs.

The market will see first signs of relief at the end of 2024, though the deal count will slightly increase early next year, already.  2023 and 2024 will be great for secondary and special opportunity funds, buying into strong assets with massive discounts.

Many investors overpaid in 2021, and some funds may suffer. What will happen to those funds? Will LPs understand and reallocate? To where will they reallocate?

2020 to 2022 fund vintages will see massive TVPI corrections within 2023 and 2024, most of them bought into the peak of overprices early-stage start-ups, which will have a hard time to close follow-on rounds with significant markups.

Though, bigger funds will apply aggressive pay-to-play terms with above 1x participating liquidation preferences, restacking mechanisms and hard terms within follow-on rounds in their own portfolio.

Limited partners will unlikely sell off their stakes, though they will be cautious with new fund investments for a while. Professional limited partners will further allocate across vintages, as they understand the underlaying economics of the current downmarket and the respective window of opportunity.

LP fund secondary is becoming more common. How can investors make money in this area?

The secondary market is expected to grow to up to USD 140 billion in 2023. Since 2000, the venture capital asset class has grown over 10x in size. Traditional VC firms raised over USD 1.7 trillion over the last 10 years, compared to USD 406 million over the prior 10 years. With an exponential increase in the number of VC funds being formed each year.

There are more than 4.000 LPs and another 1.500 VC funds heading towards their scheduled fund term, over 150.000 founders and early employees and more than 9.000 non-traditional VC investors such as hedge funds, universities, family offices who are actively seeking for liquidity.

I think that LP secondaries are a very particular animal. To be successful, you have to apply a blended investment strategy combining a fund of fund (40%), direct fund (30%) and direct secondary (30%) strategy mainly to diversify risk and assure a balanced risk-return profile.  

Why should emerging fund manager be part of every investment strategy from family offices, fund of funds, corporate and institutional investors?

Emerging fund  manager are all over the place, they are shaping the future of the European venture capital landscape:

// 44% of the European GPs are first time fund manager
// 42% of the European GPs are second or third time fund manager
// Emerging fund manager represent more than EUR 3.7B
// 40% of all emerging fund manager raise EUR 50M to 100M
// 87% of all emerging fund manager are sector-focussed
// 50% of all emerging fund manager invest into (pre-) seed stage
// 65% of all emerging fund manager aim for a 20% to 39% IRR

Most of them are highly specialised and have a superpower, such as dealflow access, domain expertise, brand or network.

Furthermore, they are willing to take the risk and go the extra mile to outperform their peers. Sub EUR 100m emerging funds yield top quartile IRRs, as of 2021, 17.7% of first-time funds had an IRR of more than 25% compared with 11.3% of vehicles that are fund IV or later. Aside of the broad set of tailored perks they offer to their limited partner.

Could you tell me about āltitude and what makes it special? How do you impact the ecosystem? Who are your co-founders? Where do you see āltitude in 10 years?

"We are closing the SME Tech Gap through automation and sustainability technologies."

We are a hyperlocal and seasoned general partnership located in major European VC superclusters. Videesha Böckle is headquartered in London, Ingo Drexler in Zurich and I am in Berlin. We are an experienced team of venture capital professionals, startup founders, super angels, fund advisors and founder coaches.

We have a joint venture capital investment experience of over 36 years and managed to deploy over EUR 100M into early-stage start-ups. We led, co-led or have been involved in collectively over 500 transactions.

We jointly realised over EUR 150M in exit proceeds with a blended MOIC of 5.5x, while having over EUR 250M in unrealized stake values with a current blended MOIC of 3.8x as VCs. Our joint angel portfolio of over 50 start-ups stands at 5.9x blended MOIC, with a 3-digit IRR - we invested over EUR 2.1M as hands-on angel investors.

At āltitude we believe that creating differentiation is the most difficult task for a first-time fund manager. The core elements of our role as venture capitalists come down to i) sourcing ii) picking iii) winning iv) repeating.

As an early-stage fund focusing on pre-seed and seed lead ticket entry investments (aside of our EUR 100k tickets via Open Angel and our Fellowships) we decided to build our USP around our sourcing ability and master it.

We don’t believe dealflow is proprietary, but we do believe that in a market where there are over 2000 early-stage venture capital firms, knowing when a deal is happening is more critical. We aim to create better access earlier by productising dealflow from untapped people networks. We think and operate in ecosystem layers and build an according product for each layer.

We are seeking to innovate early-stage dealflow by enriching the top-level funnel with pre-qualified high-end deals - instead of going after quantity or relying on network and brand alone.

We envision to build a long-term partnership over multiple fund generations re-thinking the status quo of venture capital and startup investing, while constantly refining and adopting our strategy. We aim to become a serious contender in B2B SME tech for sustainability and automation.

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