Tag: Venture capital

Patrick Sheehan on Fund Shack

#21 Patrick Sheehan on sustainable prosperity and venture capital

Fund Shack
#21 Patrick Sheehan on sustainable prosperity and venture capital
/

 

Patrick Sheehan of ETF Partners talks to Fund Shack’s Ross Butler about creating sustainable prosperity with venture capital. You can watch the video version here

Patrick Sheehan is a founding partner of ETF Partners, a leading European growth capital firm investing in innovative companies that have the potential to create a more sustainable future.

 

ROSS BUTLER

Patrick, welcome to fund shack. You set up ETF partners way back in 2006, then called the Environmental Technologies Fund. It must be strange that everyone’s caught up with you.

 

PATRICK SHEEHAN

It’s wonderful that people are much more conscious about sustainability and that’s great actually. You know, I’d like to think that haven’t quite caught up to be honest about it, but I’m being picky. No, we, that I I’ve been in venture capital over 20 years in Europe, in Silicon Valley back again and, and wanted to do my own thing. And so, so actually I and my colleagues sat down and thought what what’s worthwhile, right? What gives us a sense of being useful? And, and the idea that we could show that venture capital had a role to play in solving really big problems was it was just very attractive back then. And you know, I think the only thing we got wrong was we were a decade too early, but I think that’s by starting early and suffering the pains that any entrepreneur does actually of battling along for a decade has been good for us. And, and I think that’s probably why now we, we really feel we have a, an authentic leadership position.

 

ROSS BUTLER

Yeah. You were in Silicon Valley and had a successful venture capital career out there before you did any of this stuff.

 

PATRICK SHEEHAN

I’m really of confess to everyone listening, I started in venture capital in 1985, but back then it was a very different world that was in the UK sort of pre venture capital, if you will. And then Silicon Valley, my time, that was the.com era. So, so I’ve lived in a few different eras and, and the world keeps surprising us, right. We’re in a new one now.

 

ROSS BUTLER

Your thesis, while it was called the moments technologies fund, your investment thesis, must’ve evolved fairly significantly in the last 16, 14 years. 15. Yeah.

 

PATRICK SHEEHAN

I’d love to say yes, but not really. I think it was, I mean, in essence, it’s unchanged in, in the actually, you know, I’m an optimist and optimists are the people who can make change happen. I tend to think. So. I think it’s important to be optimistic. And I, I really feel that technology can supply a lot of the answers to achieving sustainable prosperity and venture capital can be really in a range of those technologies. And so that belief is unchanged. That’s, that’s what we do. And we’re never going to change what that is. We’re still investing across Europe, but change is not subtle under the hood. Actually, I’m happy to go into it, but it’s around learning where we can apply venture capital and where we actually it’s a bit harder because I think if we go back 15 years, we, we, we, we saw the needs. And so we wanted to apply venture capital, but it’s, you know, you can’t use a scalpel on every operation, right?

 

ROSS BUTLER

Well, this is exactly what I wanted to talk to you about actually, because we’ve got this global problem and it’s going to take a lot of solving, where does venture capital fit in?

 

PATRICK SHEEHAN

So I think it’s really important, but it brings, it has constraints as well as benefits, right? So venture capital allows people to take bigger risks and bigger opportunity, but, but actually we all typically all invest from 10 year fixed life funds. We need results in that timeframe where we have a potentially large, but still strange capital. So it works on, on some sets of problems, whether it can be quite quickly, very rapid growth. It works less well on a range of others, which are also important for the writer. So you know, I don’t think it works for nuclear fusion particularly well, there, there are some venture backed startups in that area. That’s I think massively important technology for 20 or 30 years time perhaps. Right. So, so we deal in the big term, which I think is, you know, results in, in a few years to 10 years, but not more. And, and we have to find companies that can grow pretty rapidly with relatively constrained capital, even in this venture capital environment. And so that’s a subset which has focused us more and more on digital technologies. And by the way, we can invest outside that area. But the sweet spot for us becomes digital technologies that deliver sustainable benefits. And it’s still pretty broad, but, but it’s not everything right

 

ROSS BUTLER

Out with the solar panel Passover or raised out with the wind farms. And then with smart digital technologies that help help us be more efficient.

 

PATRICK SHEEHAN

From our narrow perspective. Yes. But when we started out 15 years ago, there was a boom in solar, by the way, just to give you an illustration. And I remember when we talked to our investors at the time saying to them that there were then in 2006, seven over 50 thin film photovoltaics, it’s not just all federal tax, but just this one time. And, and there’s really the market for one or two, right. And revenue growth rates of those companies was probably 70% per annum, but there was very little margin in it. So we said, well, we’re probably never going to do those. Right. And that’s, that’s a low margin. It’s, it’s like the computer memory business used to be right. It’s all going to go to China. And, and sadly it has. So we have to be very careful of the sectors we play in, right. But there’s, there’s enough real innovation and added value to sustain and create durable businesses. So that really hasn’t changed going back to what hasn’t, hasn’t changed actually, Europe when we started was a great place to be. And it’s just got better. Europe’s really coming of agents. So we, we, our focus is Europe and we find some really really fabulous companies. Now,

 

ROSS BUTLER

In what sense is it, has it got better repeats entrepreneurs and technology is being spun out, that kind of thing.

 

PATRICK SHEEHAN

Yeah. Well then venture capital’s matured over the past 15 years, it’s become much more global industry. And, and so people know the roadmap now in a way that they didn’t before and, and people are much more focused on high growth companies and how to create them and know what the game plan is. And so it’s not just, there are more repeat entrepreneurs. There are people who have worked for successful entrepreneurs and there’s a much bigger ecosystem. So overall we just see better quality opportunities because there are people who are much more, you know, a greater number of people who are highly engaged and, and well, it’s really honestly refreshing if I think back over, there’s been a rapid change in the past 18 months around sustainability. Right. but, but it’s, it’s refreshing now that entrepreneurs have been selecting us in some of the recent investments we’ve made because of our brand values and our real values. And they quizzed us not on the usual venture capital, blah, blah, blah, but on the, you know, are you sincere? Cause we want, we want to deliver a positive impact and we want to make sure that you’re right behind us. And and we are, and so they’ve selected us and that’s, that’s, that’s, that’s so refreshing. Right? So having backing people where there’s aligned values makes life so much more simple.

 

ROSS BUTLER

That’s interesting because given that you aren’t doing like large renewable projects, but you are investing in more digital companies. To some degree, I look at your portfolio and I think, well, that, that could make sense regardless of the climate change pressure. And so you could get an entrepreneur that has set up a business that you find attractive for, for a set of reasons. And instead of for another set of reasons, but increasingly it sounds like they are

 

PATRICK SHEEHAN

That’s, that’s exactly right. So we’re, we’re not backing uncommercial companies. And what I like to say is the need is the opportunity actually. And so there is great need, right? And that’s why major industries are transforming that speed. And that’s why there’s opportunity for us, right? Our investors want to make as much money as possible to be clear right now, no one cuts us any breaks this. We say to them, we want to, to do well and to do good. It’s not all so on the entrepreneurs, we back could be backed by anybody, but, but they do tend to like the fact that we have a common agenda, the common mission. And I think that creates a better level of trust. Really. So our competition is, is quite diverse and it is some environmental funds. It is some mainstream funds.

 

ROSS BUTLER

I find your, your ETF’s flavor of environmentalism, very easy to swallow because it’s, you, you caught it optimistic and it is. But it’s also, I find very different to the kind of very pessimistic and is Knight anti humanistic anti-human view of environmental in the environment. And you’re, you’re effectively saying we, we, we have an efficiency problem. We just need to do more with what we’ve got or more with less. And, you know, that’s human progress in a nutshell, really.

 

PATRICK SHEEHAN

I mean, it’s the story of civilization really. And you know, I think the challenge of climate change is critical. The challenge of well, broadly of sustainable prosperity is critical, but, but good luck trying to convince someone, we need a more sustainable planet. Therefore everyone should be poorer. I mean, I would argue that that’s just not practical, right? We’ll spend so much time arguing about it. It’ll never happen. And so the, the, the way to make progress fastest is to use the system. We have capitalism, right? There’s many faults with it, but it’s there. Let’s not spend a decade changing it. Let’s just use it and get on with it. And, and to aim for delivering prosperity because there’s durable demand for it. And it isn’t incompatible by and large w we’re living more sustainably and a progress creates efficiency. And so I’m sure there are flaws with this argument at the nausea and by the way, and you know, it’s not innovation delivers unexpected things, so we’re not always right. But, but as a general theme, I think it’s profoundly important to think that way. And an innovation is absolutely the key.

 

ROSS BUTLER

You don’t say sustainable growth, you’re saying sustainable prosperity, which is a slightly different thing.

 

PATRICK SHEEHAN

Yes. Cause prosperity, I think is a better word. When people think of growth, they think of increasing consumption. I think actually, you know, you can have prosperity with decreasing consumption. You know, there’s only so much time you’re only going to eat in a meal, but we probably enjoy eating nicer meals. Right. So it’s, it’s moving towards a better quality world rather than a higher volume world, if you will.

 

ROSS BUTLER

So I’ve said that I liked your view of environmentalism, but I guess the flip side to that is to what extent does that view and how venture capital solves climate change really affects the big, the big problem? What, what’s the scale of the solution that venture capital brings? Is that a tiny piece or is it an important piece?

 

PATRICK SHEEHAN

It’s a really good question. It doesn’t solve everything to be clear. So how it fits in as an important piece of the puzzle though, I think so venture capital is not going to help with the rollout of solar. It’s not gonna help with, with delivering renewables at mass scale. That’s, that’s, you know, maybe a big infrastructure funds will do that. There’s different types of money, but it’s still an, a lot of money, but where venture capital plays a role as improving the efficiency of all that. So this is not solving the problem in the next year or two at all, right, when next year or two is urgent, we need more renewables, I think, but it is solving the problem of the next decade or two of making sure that we’re as efficient and effective as possible over that timeframe. And you know, you look at the cost curves of things like solar and wind.

Solar has probably fallen 90% in cost in the past 10 years, when more than 50% of costs in the past 10 years, that’s innovation and that’s and, and I think you can safely extrapolate that cost curve for another decade based on innovation. So it’s really critical. The impact of that is not quite so linear either because once these, these technologies become cost competitive or even cheaper, then they change other industries, right? And as you roll them out, the rate limiting step not becomes not the cost of their deployment is the intelligence with which you can use them. So other technologies are required. And then I think in that, in that, in that wave of know how to, to make efficient use of these new renewables of the electric car industry and the consequential problems, you know, et cetera. Now, I think venture capital has an enormous role to play and a lot of prior experience to draw on.

 

ROSS BUTLER

Yeah, it’s a classic venture capital conundrum though. The world is being disrupted by a mega-trend, what are the, all the unexpected con unintended consequences around that, that we can, we can explore it when people talk about this dramatic decline in the cost of solar and the learning curve and so on. It sounds amazing. Is it as amazing as it sounds though, because I mean, there are obviously the intermittency issues and so on. I kind of, whenever I hear it, I think, wow, the world is about to change dramatically and the energy companies are stuffed, but it doesn’t seem to be the case.

 

PATRICK SHEEHAN

Well I think we live in a world that’s quite hard to forecast. I think you can forecast cost reduction curves, by the way. I think you, it’s hard to forecast the consequences of the very easily. But, but if I go back in time 10 years ago, if I tried to talk to the CEO of an energy company, I couldn’t, and then I, then I might more recently you’ve talked to the marketing department who were claiming to do things on behalf of the energy company. And, and there was that, that sort of denial and obstructive constructive confusion. But in the past year or two, I can talk to the CEOs of energy companies. And by the way, I can say to them, you’re a bit stuffed, aren’t you? And they probably say yes. And so what’s important is these are bright and smart people. They live on the same planet as us. I’m not getting it. Then they are really engaged on how to solve the problem. And so they are beginning to innovate and do things. And so I, you know, I’m not one of these people who thinks big, big companies are the problem and evil. I think actually they are now beginning to change rapidly and will really be part of parts of the revolution. And so I think we need to support them rather than just attack them.

 

ROSS BUTLER

We live in a world where everyone wants to quantify everything, but it’s very difficult to be able to quantify potential impact. And, and so, so what I wanted to ask you was what are the most promising areas where the kind of incremental change, the incremental improvement could make a difference. But it’s going to be a very subjective answer, I guess you’re going to have to give.

 

PATRICK SHEEHAN

Yeah. And the best things tend to surprise us. Of course. So happy to answer that question, but there’s an implied agreement in what you said that, you know, that, that actually the most impactful things are often the hardest to quantify, right? Because you can quantify the predictable and the predictable is often less impactful. Holy See, now how it’s impactful. One of the problems of funding innovation suddenly the government and policy level is it’s really hard to quantify the benefits of the unknowns from innovation, right? And so that tends to be a stumbling block. So we are very focused on delivering innovation and impact, and we try to quantify it by the way for each of our companies, but we don’t get too hung up about it. Right. Otherwise you fall into let’s do that because it’s measurable as opposed to let’s do that because we think it’s impactful, right.

Even before the pandemic, we had started to look very hard at the logistics sector because it’s, it’s being quite, it had to been quite resistant to technology and actually quite a, quite a polluting industry. It depends on how you measure it. And so we we’d started to make one or two investments there. We made one before the pandemic certainly struggling. We made one after that, they’ve actually unsurprisingly and I’ll be doing very well. And so, so, you know, logistics and efficient distribution I think is, is a very important area for us. Mobility, I guess obviously remains profoundly important because the whole car industry is changing rapidly. And that, that has consequential impacts outside of its own industry into many things, not most obviously energy, but many other sectors as well. We we’ve looked and keep looking very hard at the what’s called the energy transition.

And again, this is a vast industry already changing rapidly, and we’re looking very carefully at very smart data companies. I’m hesitant here because I don’t really want to say AI because it’s such a buzz word, but I’ll say it anyway because that, but using intelligence to, to make smarter, better informed decisions. And in this past year, we, we, we invested, I’ll give you an example in a company called deep sea that uses genuine artificial intelligence to, to improve the efficiency of the shipping industry. And that’s a big polluter and, and enabling ships to operate as a measurably improved performance is, is very impactful. Now it doesn’t solve the problem that the shipping industry is polluting, but it it’s actually an incredibly efficient and quick way to, to improve the situation.

 

ROSS BUTLER

Oh, that makes total sense because obviously heavy transportation is one of the hardest things to, to, to get off of oil, to replace or oil. And so any improvement there,

 

PATRICK SHEEHAN

And, and particularly for us, we’re looking at where can we use technology to, to create improvement. And we’re, we’re looking increasingly at sustainable foods these days and at the, the impact of the rise of the green consumer, you know, we’re seeing very interesting companies popping up now. Not, not so long ago, we invested in another gentleman neobank had a digital bank, like, you know, there’s Monzo or Revolut, many others out there, and they’ve become very big, very quickly. And we found these guys in Germany who really able and nice people, who’ve created a green equivalent of one of those. So tomorrow is, is the green revenue, the green Monzo. And you know, I’m very happy with it. And it’s, it’s, it appeals very strongly to in, you know, engaged people, people who are engaged in sustainability want personally to do something with their money that that’s helpful for for climate changes, as opposed to potentially harmful. And so, and so if we’re finding different themes not all of them obvious where we think there’s big impact happening or about to happen. Let me try a

 

ROSS BUTLER

You did a deal called the modern milkmen. One component to all of this is, is behavioral obviously. And some of that behavior just harks back to the past. So I did a little bit of work with P and G who were introducing reusable, adamantium shampoo bottles. And that’d be rolled out across Europe this year. And, and you know, you might say great innovation, or you might say, well, that’s kind of 1950s

 

PATRICK SHEEHAN

Sort of back to the future sort of thing. But, but now the modern Melbourne is, is, is a really interesting company, actually, because if you’re English, you mean when you think of an old fashioned milk van and whistling and walking around in the morning and that all died. And they died in the name of efficiency and supermarkets delivering milk in much cheaper plastic containers. But the founder of Bob Milton, who Simon is a very able entrepreneur, very thoughtful guy. He told me he was inspired by, by David Attenborough’s blue planet actually decided that he really ought to do something now in his third startup, that to get rid of waste. And eventually he focused on essential grocery deliveries as an area where it would be relatively easy to get rid of waste. So it is a little bit of a back to the future thing and that the milk comes in glass bottles. There’s no plastic, you know, there’s no, there’s no waste wrapping. And, but there, the front-end may look delightfully traditional. The backend is, is you know, there’s a lot of digital science, a lot of know-how, there’s a lot of efficiency through micro distribution centers. And some of the jargon flips at the back end from old fashioned to very, very modern. And that company is doing extraordinarily well, actually.

 

ROSS BUTLER

I wasn’t being cynical by bringing it up at all. It’s like, no one wants to throw stuff away. And, and, and most people will even be put out a little bit, I would say in order to just feel like they’re not being unduly waste where you don’t have to be a greening to.

 

PATRICK SHEEHAN

And honestly, when I tell people about it, they nearly all say, great. Is does that deliver in my area? Right? Yeah. That’s a fairly easy check. And then I think one of the things we are seeing is this is sort of an efficient localism, if you will. And it’s, it’s far more green to avoid transporting stuff around the planet. And, and frankly, there’s probably better quality produce if it’s more local and more fresh. Yeah.

 

ROSS BUTLER

  1. So you are hesitant, you were hesitant to mention it, but it is very, very hot to, to what degree can it kind of create efficiencies that’s decreased simply put carbon emissions, would you, it,

 

PATRICK SHEEHAN

Well, I’m hesitant, hesitant to mention it because it’s overused as many buzzwords get, and it’s sort of from, from a, some cynical perspective, it’s just a good way to bump up valuation, to start waving your hands and start talking about AI. My second reason for cynicism is that the, the underlying science has not evolved very fast, right? Well, it has evolved is the speed with which computers can crunch numbers. And so using established, and if not old algorithms plus computing power, now you can deliver more. And so I think you know, I’d like to see more real innovation in the algorithms actually, but, but nonetheless computing power has evolved in such a way that there’s a far more applicability of these sledgehammers. And they’re very effective on certain classes of problems, right? So shipping is actually a really good class a problem.

And that, it, it it’s a bounded problem, as they say, it’s not, it’s not an open-ended question. You know, if you, if you wanted to use AI to find out about America, you know, forget it, it’s too vague question. But if you want to use AI to optimize a set of parameters that you know about, and, you know, you can’t have ridiculous parameters because it’s self-evident, then, then you’ve got a problem you can solve. So there, I think it’s really good for certain categories of optimization problem or certain categories of drug selection problem, but it, it’s not good for everything yet. And, and it will take a real intellectual revolution as well as a computing revolution. I think before we get to the science fiction end of the spectrum, it’s great for some things, but, but and we’re really keen that she’s to see more AI real-world applications that can drive efficiency. So we’re definitely on the lookout for those. And, and I think we will see more by the way, because of course, compute power continues to increase the storage costs continue to go down. And so, so applicability will rise for sure, but I think it’s, it’s, it’s nibbling at the real world rather than taking it over. Yeah.

 

ROSS BUTLER

I’m glad I asked that that’s fascinating and a slightly more prosaically you invest across Europe, even though you’re based in London. What’s it, you know, Europe has a pretty good reputation as as being environmentally aware and has been for some time, but what’s it like for entrepreneurial businesses doing business in Europe, perhaps in terms of government incentives, doing business with government, doing business with cities you know from a, from a, let’s say from a green perspective, and then just from a business perspective.

 

PATRICK SHEEHAN

So Europe is, is, there’s not one country, right? It’s complex and diverse and culturally different, you know, A-list but, but doing business with, with a sustainability agenda, I think is, is just a commercial advantage because there is more support, there is more Goodwill. And you specifically asked about governments and cities. Well, one of the outcomes of the pandemic is that European governments are gearing up to deploy a lot of in effect reconstruction money into the economy with a view as to the type of economy they want, and they want a green economy in Europe. And so, so actually we are expecting a lot of investment in and around the green economy and the acceleration of, of sustainability and that that’s, I think, going to be clearer and clearer as we go through this year. And you know, the UK is hosting cop 26 in November, I think, and there will be announcements in the UK, but actually the EU is putting money forward.

Denmark is putting money into its economy on, along this agenda, et cetera. So I think governments will be a source of capital of potentially large scale of capital, but it will move slowly and probably with a certain momentum rather than you know, what’s the phrase these days, this is not a speed boat. Cities you think should be faster, but, but actually when we have companies that they invest in smart or selling to cities, looking to become smart and intelligent, and it’s not an easy market because procurement cycles are still long, right? They’re still somewhat political, et cetera. So there’s great opportunity, but, but it’s not easy. But that said, if you’re an entrepreneur thinking about, or actually on sustainability, these are not the only benefits it’s, it’s frankly, much easier to recruit people. So we find our companies can by being genuinely focused on sustainability recruit better people more easily and how great to staff loyalty and greater satisfaction, you know, and that then extends beyond staff into their ecosystem generally. So, so I think actually in essence being green is increasingly just good business.

 

ROSS BUTLER

Hmm. Well, that’s such an important point because I mean, PE people in the businesses that you back is the most important thing. So if you were getting better talent for less money, or just better talent per se, it’s not the less money, sorry,

 

PATRICK SHEEHAN

But because you have to, you know, the deal is you have to give people the best opportunity. You have to give them as learning opportunity, but, but, but newer generations are find this much more appealing. And so it is easier to get better talent.

 

ROSS BUTLER

Good to go back to, you mentioned cop 22. And one of the criticisms of, of the the state led targets, I guess, is that that they can be seen as bad value for money. If you’re going to spend so much money on something that you pretty much know is going to be pretty inefficient, surely you should channel a bit more into an area that’s very, very kind of laser targeted on also making a return. Yeah,

 

PATRICK SHEEHAN

Innovation delivers a huge bang for the buck. And, and governments could sensibly deploy more capital there. But but, but typically infrastructure projects get more capital because they’re easier to quantify. So let’s, let’s make it pertinent to the UK. You know, only one of our geographies, but, but we’re spending 50 or 70 billion. I forget how much on a new train line from London to, to Birmingham Manchester. And, you know, maybe that’s a good thing, but it’s a hell of a lot of money. And a small fraction of that would have a profound impact on not just addressing climate change, but on the economic competitiveness of the entire country. So, so, but how would you rationalize that quantify? Well, that’s a bit harder, right? So, so the, the uncertainty and the femoral nature of innovation means it’s relatively underfunded. I think

 

ROSS BUTLER

Patrick, I wonder if you could leave me feeling really optimistic about the world, because, you know, w we’re all inundated with climate change doom and gloom, you have an optimistic outlook, you know, when you’re when you’re not in work mode and, and not in necessarily ETF mode, but just Patrick sheer mode, how do you generally feel about about progress on this score and, and where we’re headed?

 

PATRICK SHEEHAN

I am somewhat schizophrenia. I overall I’m optimistic because I think, well, there’s always a crisis, right? If you go through history I used to argue with my fellow students when I was a student about, about the upcoming nuclear apocalypse, right? And, and at least half of them thought there would be one before we got to the age we are now. And I was always on the, on the optimistic end of the spectrum saying the trend of civilization is, is positive. And that there are bumps in the road. If we apply ourselves, then we can do magical things. And you see that repeated through history. It does, I think bad news sells better, right? And it, and it is easier to stoke fear than to stoke hope. But, but, but actually there’s been an astonishing progress in the quality of living around the world, in our lifetime, right there, the, the there’s a billion, fewer Chinese people in poverty life expectancy’s gone up, Health’s gone up.

Education is going up. The internet has profoundly changed the way which we can collaborate. And by the way, you see the power of collaboration and the speed we can now deliver vaccines. People said it was impossible to deliver a vaccine in 18 or less has been less. And so actually, I, I think w w there’s a lot to go out. And if we, if we worry too much, you know, we’d like to fall off the tightrope, but there is no choice. Now, if we want to sustain a good standard of living for the, what is it, seven or 8 billion people on the planet we have to go forward and we have to be creative. And we, we have to be optimistic within that. I think we have to plan rationally, right? And on the concerns long-term planning long-term funding of innovation and technology being one sub sub set of that I think is really important. And there’s probably not enough of that. And so, so I’m a little bit schizophrenia, but not the optimistic.

 

ROSS BUTLER

I asked you to leave me optimistic and you’ve done exactly that. I’m really glad I asked the question, Patrick, thanks so much for sharing your thoughts and sparing your time.

 

Patrick Sheehan

“Sustainable prosperity” with Patrick Sheehan of ETF Partners

Patrick Sheehan of ETF Partners talks to Ross Butler about creating sustainable prosperity with venture capital.

Patrick Sheehan is a founding partner of ETF Partners, a leading European growth capital firm investing in innovative companies that have the potential to create a more sustainable future.

Patrick is a true global venture capital veteran, having started at 3i in the mid-1980s, he set up 3i’s Silicon Valley office in 1999, before returning to Europe to launch what was then ‘the Environmental Technologies Fund’ in 2006, a year that he refers to as ‘decade too soon.’

Hendrik Brandis

Hendrik Brandis, Earlybird Venture Capital

 

Hendrik Brandis is co-founder and partner at Earlybird Venture Capital, a leading early-stage investor operating across Western and Eastern Europe from offices in Munich, Berlin and Istanbul.

Hendrik is an advocate of European venture capital as an asset class, and walks the walk. In this venture capital podcast, we discuss how he led the first all-European round of financing for a space rocket company, Isar Aerospace. We discuss the European venture opportunity, innovation, Earlybird’s development (2020 was ‘the best year’ in their history), fund structures and governance, and supporting immigrant entrepreneurs.

 

 

#18 Vania Schlogel, Atwater Capital

Fund Shack
#18 Vania Schlogel, Atwater Capital
/

Vania Schlogel is managing partner and founder of Atwater Capital, an LA-based international private equity firm. You can watch the video version of this conversation here.

Vania Schlogel is managing partner and founder of Los Angeles-based Atwater Capital, a private equity firm with an exclusive focus on media and entertainment. Vania cut her teeth at Goldman Sachs and KKR. She was on the board of Pets at Home, and she was CIO of Roc Nation, Jay-Z’s entertainment agency. And she currently sits on the boards of private equity back to media and entertainment businesses across the US, Asia and Europe.

ROSS BUTLER:

Vania, welcome to Fund Shack. You are quite an unusual private equity investor in as much as the creative industries don’t scare you. In fact, that’s what you focus on, specialize in. How did you get interested and involved in it?

VANIA SCHLOGEL:

I saw so much value from marrying those two worlds. So the very kind of disciplined and rigorous private equity side of things with the innovation from the creative world. And I just always had the natural interest in it. The creative side of things, obviously as, as, as an individual who consumes content and music myself, and as an investor really experienced that marrying those two worlds could actually help an investment in terms of equity, value creation, generating returns on behalf of our LPs. And then I know this not many folks were doing it, so it seemed like a natural opportunity to get in.

ROSS BUTLER:

So what, what, when was your kind of Eureka moment that actually there’s an investment opportunity in this industry?

VANIA SCHLOGEL:

When I was at KKR one of the investments that I was involved in was the buy and build strategy that built what is BMG today. One of the world’s largest independent music publishers, and it was really my first foray and ability to actually invest in the creative industry. And I think one of the things that was very successful about that investment is we, as investors were able to go in and provide a body of knowledge and expertise as to what we were good at and focus on that. And I think what we did really well is let the creative guys focus on what they’re good at. And so we were backing a great management team and company with capital and M and a and integration expertise. But then we also knew when to not overstep our bounds. I can’t recall who said it, but there’s, there’s this joke in the music industry about the CEO that wants to see himself in the music videos? I think the most successful thing we did is we made sure that we were not the CEO that wanted to be in the music videos or the shareholders or board members, however, you’ll term it. And, and that was my Eureka moment where I said, this is a great investment. It’s a lot of fun. I tangibly understand it. I get along really well with these creative executives. And from there on, it just became as you know, what happens in life, you one thing, and then suddenly more opportunities keep coming in that vein.

ROSS BUTLER:

So you, you had it with a traditional private equity house, but why do you think the traditional private equity market doesn’t see it as necessarily a big sector ?

VANIA SCHLOGEL:

Well, I,do think they see it as a big sector. I think that there is more appropriately put there’s a lot of opportunity from actually investing in the sector, but then taking the next step of being really operationally involved and plugged in with the creative sector. And I think the primary reason, honestly, why it is not a big operational focus for large private equity shops is because they’re very, very good at what they do on an operational level. So implementing an ERP rollout or optimizing a supply chain, these are scaled replicable, operational strategies and processes that they can apply to their portfolio companies, really building a deep partnerships. And the operating level with creatives is time-consuming and not always replicable to other portfolio companies. And so it’s more of, I think, a scaling issue and we’re kind of happy being the smaller fund that goes ahead and steps into that role as a partner to a lot of larger GPS.

VANIA SCHLOGEL:

Yeah. It’s a chemistry thing, presumably that, you know, people that set up creative business are probably quite different to almost any other kind of business, I guess, and you have a good kind of chemistry with them. It sounds like.

VANIA SCHLOGEL:

Yeah. And I think at the core, in any case investing is a human centric business, but when you do delve into the creative aspect and, and partner with creative executives who are very much more around, you know, emotion and being led by intuition, it is very important to jive on a personal level and to really take the time and build those relationships. And I will say that despite the fact that we have wonderful working relationships with a lot of creative executives, myself and a lot of Atwater’s executives are also personal friends with our creative partners. I think that works really well for the industry.

ROSS BUTLER:

It’s quite a rare individual to be both creative and to be able to be more financially focused as well. Do you come across many creative entrepreneurs that can and do do both?

VANIA SCHLOGEL:

It is, I would say it’s more of a rarity. I definitely have noticed that a lot of a subset of folks that do this really well seem to be founders and entrepreneurs. So we back, for example, certain portfolio companies Oscar Hoagland, who’s the co-founder and CEO of epidemic sound. He does really well in terms of liaising with both communities. And so it’s not a common skill-set. We do see it, but I would say I see it most often among CEOs and founders, and maybe it’s because I don’t know us founders, we have a, a little bit of that craziness, the risk taking the innovative, whatever you want to call it, but just enough there that we’re willing to kind of get out of maybe the modality of thinking in a, in a typical private equity or consulting or whatever.

ROSS BUTLER:

So you will come your private equity firm Atwater it makes it a virtue of being operationally involved in these creative businesses. To what extent do the businesses that you invest in kind of welcome operational input and to what extent do they need it typically? Yeah.

VANIA SCHLOGEL:

Well, let me answer the second question first, because I think that’s the easiest every business, every individual, any organization of people can improve in one way or another. That doesn’t mean that our ideas are always right. And in fact, that’s one of the first things that we strive for in our relationships with management teams is feel free to kick us in the teeth and tell us if these ideas are completely asinine. And we genuinely mean that. And but is the, is the opportunity for improvement there? Absolutely. And the best founders and management teams recognize that then going to your first question about how welcome is that we as a fund, so we’ve invested about a hundred million dollars since I founded the fund in 2017. And in all our investments today, we’ve been a minority shareholder de facto.

VANIA SCHLOGEL:

That means that even if I wanted to, from a governance perspective, I cannot come down with edX from above and say, this is what you must do. And in any case, I genuinely think that’s kind of bad, bad governance and a poor way of managing these relationships because a lot of the CEOs and founders that we work with have been in the business for years, sometimes from inception. And so it’s incumbent upon us to actually come up with ideas an operating level to, to present a Rolodex within the industry that is exciting for management because we’re very open about the fact that yes, despite the fact that we may be represented on the board and can vote shares a certain way. My personal experience has been in less management really wants to work with you. Your operational strategy is not going to be that effective. And so it is a foundational thing for us to come in as investors and really form number one, deep personal relationships. And number two, actually show up with the goods because we’ll get called out right away by these very demanding founders and CEOs. If we’re not showing up with something that’s helpful for their business,

ROSS BUTLER:

And what’s the competitive environment like for attractive assets in this sector,

VANIA SCHLOGEL:

I would say our sector is more, is more right for proprietary deal sourcing than potentially other sectors. And it goes back to what we just talked about, which is that kind of creative and founder led group of folks. There’s so much that is based upon relationships and how well networked are you in the sector? How well-liked are you do founders talk about you in a positive fashion. And it’s interesting, both what I’ve witnessed is both on a positive and negative level founders. It will, it will spread like wildfire among founders, if you are seen as either a great partner or not a very good partner to management. So I actually think within the sector being, being well-networked and well-liked lends itself to proprietary deal sourcing, which means it’s outside of a normal process being run for example, by an advisor. And in that kind of case, that’s actually the ideal scenario because it’s not a competitive process. Aside from your main competition being against yourself, are you presenting a compelling case to the founder and CEO and the existing shareholders that you’re worth it, that they should sell some of their shares to you because you’re going to, going to bring value.

ROSS BUTLER:

Yeah, I can imagine that the LA creative great vine is quite sophisticated and active, so the word would get round, but you’re not just you’re based in LA, but you have an Asian presence and you recently did a European deal as well. Talk to us a little bit about your kind of geographic coverage.

VANIA SCHLOGEL:

It’s really funny because prior to parasite winning an Oscar, which is a South Korean movie, we would always get the strangest looks when I would explain that we have offices in Los Angeles and Seoul, South Korea, because most funds are based in New York and London and San Francisco. And then when they go to Asia, they immediately typically go to Hong Kong or Singapore, you know, kind of a financial hub. And the way that we explained it is we’re operational investors. And hence we launched in Asia in a very operationally relevant geography. So South Korea has the fastest internet speeds in the world. It’s a thriving and healthy democracy. It’s intellectual property protection laws are very robust. All that put together means that the monetization methods and kind of the business ethos, also legal protections endemic to South Korea, feel very natural for Western portfolio companies to launch into a, so you have to get over.

VANIA SCHLOGEL:

Obviously some of this is natural, no matter where you expand to globally, but, but you know, you need to be comfortable with the language barriers the cultural differences and being respectful and mindful of that. But once our portfolio companies launched there it feels much more like a fish in water in terms of them looking around and saying, Oh, okay, I can still sell my intellectual property for example, and monetize it the way that I would, whether I were based in Sweden or New York or, Seoul. So that’s one of the reasons that we set up a presence there. And going back to the example, also a parasite winning an Oscar, we identified very early on that for whatever reason, Koreans are very good storytellers. And so there’s always been a large body of a great intellectual property and content trends coming out of South Korea.

VANIA SCHLOGEL:

And so as the fund focused a lot on entertainment, media, and content, it made a lot of sense to us to be present in cities that were driving these trends. And it’s one of those markets where a company can launch. And admittedly, it’s a very small country and a very small core addressable market, but given the ability to export cross border a company can look into expanding into adjacent geographies, Japan, Southeast Asia, China from the, that kind of launchpad in South Korea. I would almost liken it to Sweden in that sense, what Sweden is to Europe, pretty small addressable market, but, you know, Spotify did all right.

ROSS BUTLER:

Absolutely. And so speaking of Europe, you’ve got some activity there too

VANIA SCHLOGEL:

Well. We’ve actually invested quite a bit in Europe. So we’re invested alongside KKR in a company called Neo nine studios, which is Germany’s largest production and distribution company in the country. I chair the board there were invested alongside EQT and epidemic sound, which is based in Stockholm. I also chair the board of that company. We just closed another investment alongside EQT in Malaga Spain, and a fantastic company called free pick.

ROSS BUTLER:

So under normal circumstances, your air miles are pretty significant,

VANIA SCHLOGEL:

Wonderful from the perspective of never having to pay for a personal vacation ever again. Yeah. I was spending a lot of time in Europe, I lived in London for six years. And so from a, from a sector perspective, I actually think it’s a wonderful geography to in, I think it’s multiples cheaper than a lot of us media.

ROSS BUTLER:

You’re relatively small funds to have a kind of what appears to be a completely global footprint and also personally global responsibilities, a portfolio of companies all over the place. And I guess that’s a function of being a sector specialist. Would you say

VANIA SCHLOGEL:

That’s exactly right. And I wouldn’t say we’re truly global because we genuinely as a operational fund, we have to spend time building relationships and liaising with folks. And so we’re very much present in Europe and Asia, we don’t touch geographies yet where we don’t have executives or very strong partnerships. So that would include, for example, South America Africa, those are geographies where we’re not present, but in Europe we feel very comfortable investing in the region you know, regulatorily regulatory perspective culturally even our role relationship Rolodexes, we feel very natural about investing in the region. And also importantly, we have such wonderful partners in terms of larger GPS that we work with as well as a lot of founders company founders that we know who also keep us connected on all the grounds.

ROSS BUTLER:

Well, I was going to come on to that because it’s very interesting, the fact that you you partner with some of the biggest buyer houses in the world on some of their deals. So they like you and they bring you in, they’ve got enough money of their own. What do they want from you?

VANIA SCHLOGEL:

That’s a great question. We feel a very strong duty towards our GP partners and today we’ve done, you know, we’ve, we’ve invested alongside KKR, EQT in TPG since the fund launched in 2017. And you’re absolutely right. We recognize very much that they have enough capital. They have a large committed funds and they certainly don’t need out water to come in to fill a hole. And hence there is a very strong expectation of performance on our side that in the Venn diagram of things not to get too nerdy, but they’re going to focus on, you know, these, these sets of operations. And we’re going to be over here focusing on our operational strategy and the two don’t really overlap. And that’s great that complimentarity of what we focus on and our expertise, I think is the reason why we get repeat business and repeat partnerships with these GPS.

VANIA SCHLOGEL:

And the other aspect is just we have a very, the way that we set up the operations of our fund are centered around our operational expertise. So I gave you one example, which is we’re present in South Korea because we understand it to be a trendsetter city in terms of content and technology trends, our LPs in South Korea. In fact, for example, Kakao is not only a partner of ours, but also an LP of ours. And if you imagine a digital media and technology group for a given country that owns the WhatsApp, Spotify, PayPal, Uber, and a few other assets of a country that is cacao, and they are one of our greatest partners in LPs. And so when we partner with the larger GP, we can actually go in as one of the only if not the only fund in the world that can say that and say, Hey, when, when this company, this portfolio company is looking to launch in Asia, we’re gonna consult and give a great body of expertise around having done this before. And Oh, by the way, we’ve got a fantastic digital media company there as an LP who now has a vested interest in making a success story.

ROSS BUTLER:

Yeah, that makes sense. So what, what specifically, what sub sectors, what types of creative companies are hot right now, interest you from an investment perspective?

VANIA SCHLOGEL:

We are very much focused on content and we focused on it from, from the inception and we built out a very strong investment thesis to the point where I almost feel sheepish saying content, because it’s such a broad umbrella term, the way that we segmented it is we got very deep into it. And so we’re looking for example, at content that is buoyed by the trend of online creator communities. We’re looking at content that has an over and exposure to growing over the top, or what’s called OTT streaming platforms like Netflix or Amazon. So while we spend a lot of time in content, we actually very delve down into those sub sectors that we feel have kind of acyclical component, but also from, from kind of a meta-thematic side being buoyed by digital trends and digitization, which COVID, by the way only helped to hasten quite frankly.

ROSS BUTLER:

Yeah. It’s interesting. Like when the, in the first internet, boom, like 20 years ago, everyone was constantly saying content is King, but looking back, I sometimes wonder whether actually for that first wave, but networks were King because the ones that did really well were the companies that capitalized on people’s people’s networks and kind of get the sense as you say, particularly with lockdown. And now that everyone’s got decent broadband and streaming services. And so on that the content might finally be having actually it’s it’s time in the sun. You’re gonna, when you think about that, like orthosis,

VANIA SCHLOGEL:

I’ve had this debate so many times about content versus distribution. And I think one of the most interesting case studies is what happened with Netflix. And I re you know, prior to launching house of cards in January of 2013 it was a pure play distribution platform, and I’ll never forget the production costs that were quite heavy for house of cards that Netflix had undertaken. If you actually have the interest and go back to a lot of the equity analysts and what they were saying about Netflix, it was brutal. I mean, it was just, this is daft, this is how many subscribers they would have to get to recoup this, and it just ripped them to shreds and what happens, they launched house of cards and in quick succession orange is a new black, the Marvel kind of TV series spinoffs, et cetera, and their stock price within the next year two and a half 10 next.

VANIA SCHLOGEL:

And, and so I think it’s I tell you that anecdote because where I land is that it seems more and more these days. It has to be the marriage both. Now, that being said I don’t know. I don’t mean that to say that there is not an opportunity for induction and content creators. I absolutely think that opportunity is there, but in, in order to really sell and continue selling in a systematic way and not be hit driven, these content creators need to focus on franchise defining or tentpole content to really have viable business models and also to try and own some of their intellectual. Are you going forward rather than just being a licensed, sor and working for fees in terms of the monetizing, their content? The other thing that I think is positive or content creators and intellectual property owners, is that pro in, in a, in a prior world, these content producers were selling into the traditional set of media buyers.

VANIA SCHLOGEL:

Then they were selling into the traditional set plus Netflix, and now the world has opened where now they’re selling into to Apple as well and other new entrance. And so it’s a great time to be a good content producer and intellectual property owner because the buyer set is proliferating. There’s just more and more buyers now of good and franchise defining content. I think one of the other things, and this is why we invested, for example, in Leonine is one. Yeah, the great things that happened from Netflix. And I actually mean this at associate level is because, so Netflix was able to aggregate eyeballs at a global level. There became this re-education process in the entertainment world that we are willing to watch local language, film, and TV, whether it’s the example of parasite, which is completely in Korean or dark, which is in German.

VANIA SCHLOGEL:

And so this put the emphasis and investment again in local language content. And I think that’s really important and social level. I don’t think we want to see a world where 98% of content is created and generated out of Hollywood and has an American perspective to it. I think we really want to honor diversity of content and also local traditions and cultures. And I think that’s one of the great not to go on a tangent, but it’s one of the wonderful things that actually has come from technological distribution is a refocus, any commercial case that now puts investment back again on local language content.

ROSS BUTLER:

I understand that a lot better now, because when you started speaking, I was going to say that all sounds great, but there’s, there’s only one Netflix, but I mean, Hey, that’s not quite true, but also it sounds like Netflix allows a whole ecosystem to happen as well in the same way, as, I guess, Amazon allows a whole ecosystem of suppliers to feed into it and get greater distribution. Yeah.

VANIA SCHLOGEL:

Yeah, absolutely. And I think to be fair, there need to any time one seeks a sustainability and health of an industry, there need to be countervailing forces. So while I’m also very positive on some of the positive things that Netflix has engendered why, why did we invest in Leo nine Leo nine took five companies and consolidated them into the number one player because scale at a local market level is a net necessary countervailing presence to a global technology player like Netflix. So I think for the health of the industry, also the, for the health of consumer choices going forward and for greater investment behind local content we as investors are placing our bets and trying to have scaled local players rather than just a fragmented market.

ROSS BUTLER:

Oh, these kind of film production companies, they, they are, they’re kind of like finance houses in themselves. Aren’t they, to some extent cause they’re then financing projects,

VANIA SCHLOGEL:

They are. Yeah. And that’s, that’s also why scale matters because content behaves very similarly to venture capital as an asset class, meaning you have a few real outliers in terms of performance and a lot of losses along the way. That is the nature of content that also scares a lot of investors. And so the way that we approach the sector is with eyes wide open and saying, we understand that’s how the asset class performs, but we also understand portfolio theory enough to know that diversification diversifies a way that unique hit risk. And so if a, an asset is scaled enough, it’s producing it. Number one, it’s producing enough new shows or films. And number two, it’s typically paired with an existing library that generates stable cash flows. And so I think there’s a perception versus reality gap. A lot of times when it comes to investors that investing in the content space, they just look at that unique project risk of it’s going to be great, or it’s going to be an absolute unmitigated disaster. We don’t view it that way. We view it as, as long as we can get into scaled ventures. A lot of that unique risk can be mitigated.

ROSS BUTLER:

Hmm. The fact that you’re partnering with big buyout firms also suggests that the risk profile isn’t that venturing. Yeah.

VANIA SCHLOGEL:

Yeah. That’s absolutely right. And, and Leonine, for example, spent the better part of two decades, for example buying up content and has eight, the best library in Germany. So as, as one example of why that’s so important when COVID hit and for a period in, in Germany productions completely shut down of new content, we were sitting on the country’s largest library. And so while we’re all hunkered down, bored out of our minds, looking for titles, and we’re going back to Tomb Raider and Home Alone and all those things that we watched in the past 20 years that library was generating fantastic cash flows for the company. And I think that’s a really good example of how an asset class that can be perceived as, so hit-driven actually ended up being one of the most sheltered and a cyclical assets as evidenced by what happened after COVID hit.

ROSS BUTLER:

Yeah. That’s amazing. Isn’t it? Do you want me, what’s your view of the future of private equity meeting, creative industries? Would it always be bore the specialist to some degree, or do you think there’s a larger opportunity opening up

VANIA SCHLOGEL:

Trend of a lot of pro previous operators within the media and entertainment space? Raising capital, for example, they’re, they’re doing a lot of fundless sponsor activity. I, I, you know, there are certain situations I can’t comment on now, but very well-known media executives who have identified proprietary deals as we talked about earlier and then going, and either partnering with private equity or with family offices, the rise of, of family offices, for example, has opened up a brand new and innovative kind of funding pocket. And, and they’re going about it that way. So it’s, again, it’s one of those industries that, and I mean, media and entertainment within private equity that is not only within it itself, but also the, the industries that are tangential to it. So media itself is constantly evolving, but also the way that private equity invest into media, it’s constantly open to evolution and sometimes outright tumbled. And so I do see that going forward, there’s going to be much more of a trend and continue trend of very well-known operators who have left their operating posts and want to try their hand at investing. And they’ll find funding, whether it’s through respect partnership. Spacs also, that’s part of the reason why there’s been such a rise in space.

ROSS BUTLER:

So is it because of the sector?

VANIA SCHLOGEL:

Exactly. Because who knows the media and entertainment sector better than, than folks who have a deep operating expertise within it. And so now they have creative ways of finding capital and because it lends itself to proprietary deal sourcing, I just think this industry is very unique relative to investing in other industries,

ROSS BUTLER:

Given that you’ve always been in investments and something’s doing creative, you’ve had quite a buried career cause you KKR, you’ve got your own shop. And in between you were a CIO ROC nation with, can you tell us a little bit about what Roc Nation is?

VANIA SCHLOGEL:

So rock nation is founded and helmed by Jay Z, who many people know. And, and one of the really interesting things about Jay, if you look at the history of his career. So yes, he is a very well known rapper and artist, but he’s also had a business savvy. So very early on, for example he structured the deal so that he the retention of his master rights reverted back to him, this is before artists were doing it at a broader scale. And I would say before Taylor Swift, for example, really got on that public messaging about it. And so he, he actually is, is a great example of someone who took his relationships and industry expertise and leverage that into an operational role by setting up rock nation. And so rock nation represents, I believe they started really in music now, they branched out to representing artists in outside of just music and then also athletes professional athletes and moving into those adjacent verticals and really what that comes down to is leveraging a Rolodex of relationships. And then having that credibility that, Hey, I care about your career, your art, I will be a good, good partner for you in a way that Jane the rock nation team can do.

ROSS BUTLER:

And, and culturally going from KKR to Roc Nation, and then to your own shop. I mean, they, they must be big leaps or was Roc Nation, very KKR-like?

VANIA SCHLOGEL:

Worlds apart. They are very, very different. And, and funnily enough, I would actually having experienced on the one, the Goldman Sachs and the KKRs and my career, and then on the other kind of the Roc Nation’s of the world I endeavored to set up the culture of Atwater to be a hybrid culture. So if you ever come to our offices, you know, you’ll see some funky art up, you know, music typically playing in the background. So it’s a little bit of a hybrid.

Mark Tluszcz

Mark Tluszcz of Mangrove Capital Partners

Mark Tluszcz is co-founder and CEO of Mangrove Capital Partners. Mark is one of Europe’s leading venture capitalists. He was the first investor in Skype and is currently chairman of Nasdaq-listed Wix, which is trading on Nasdaq at $11bn, and I recommend his blogsite, dare to dream beyond.

Audio-Only Podcast here.

And iTunes.

Venture capital podcast: best quotes from Mark

“Do it in Europe, stay home and believe in yourself.”

On Skype: “The only criticism I have of myself … is that maybe we should have been more generous in parsing the options. We’ve changed that now. At Wix we have 250 dollar millionaires [or one out of eight employees]”.

On Covid-19: “Our number one message: make sure you have enough capital on your balance sheet, however you get there… enough cash until December 2021.”

“It takes 5-10 years to build companies, so what is three months in a 5 to 10 year journey. We will look back and say this was a blip in the life of a successful fund.”

On healthcare: “We think we can automate what a general practitioner does.”

“Flo is a great example. I don’t think any doctor above 40 would have thought it was a good idea.”

On dinosaurs: “The keyboard is gone in 5 to 10 years.”

“We think there is going to be, somewhere in the world, a Netflix for voice.”

On investing: “Anyone you finance now will remember you forever.”

  • 1
  • 2