Hi, it’s Alexandre from Idinvest. Overlooked is a weekly newsletter about underrated trends in the European tech industry. Today, I’m closing my review of the first semester of the year by looking at the European Venture Capital firms which recently raised a new fund.

The 1st edition of this newsletter was about European VC funds which raised capital in 2019. I highlighted four learnings: (i) the opposition between rich and differentiated funds, (ii) VC funds becoming data driven, (iii) the rise of operational platforms to support portfolio companies and (iv) the landing of US firms investing in Europe.

I’m pursuing my investigation in this new issue by looking at H1-2020 data and sharing new learnings. In the meantime, I discovered the work from Stefano Bernardi and Yannick Roux who have been collecting data on European VCs fundraising announcements since 2016 and sharing their insights on their Tiny Letter. I’m using their data which is more granular than what I used to have before and I invite you to look at their amazing work.

In this issue, I will cover the following topics:

• The opposition between generalists and specialists which is a more refined view of my previous dichotomie between rich and differentiated funds,

• The idea that capital to fund startups is abundant and will not disappear even if the ongoing crisis would last several other quarters,

• The new funds raised by French venture capitalists and announced during H1-2020: Elaia PSL Innovation Fund I, Partech Seed Fund II, Cathay Innovation Fund II, 360 Capital Fund V, C4 Fund II, ISAI Fund III, and Axeleo Proptech Fund I,

• The rise of pre-seed programs in the past 18 months with initiatives from Atomico, Blossom, Target and Heartcore,

• The emergence of funds focused on building on European strengths - either sectors we have an edge on or thematics on which we are at the forefront.

Specialists vs. Generalists

I have already mentioned in this newsletter the growing polarization in the private equity market between specialists (e.g. PAI Partners investing only in buyouts) and multi-asset classes private equity houses (e.g. KKR, Blackstone or EQT). Every asset manager has to make a choice between those two strategies to avoid being stuck in the private equity limbo where raising money and winning competitive deals is hard

Within venture, which is a subset of the private equity market, a similar trend is happening. Either you have a top tier brand enabling you to remain generalist or you have to differentiate yourself by being specialized.

In Europe, you have a dozen tier one brands in venture including Accel, Index, Balderton, Atomico, EQT, Northzone, Creandum, etc. Those brands are highly praised by limited partners and can easily move from one funding strategy to another, launch a new funding strategy while being able to work with the best entrepreneurs.

• Index (🇬🇧) is multistage with both an early and a growth fund. EQT (🇸🇪) has started with a series A - series B fund and is now raising a growth fund.

• Balderton (🇬🇧) has successfully launched a secondary fund to cash out early investors, employees and founders in successful startups etc.

When you are not one of those brands,specialization is the only way you can convince both entrepreneurs and LPs to work with you. This specialization could be built through three different levers that can be combined or not: stage, sector and geography.

• P9 (🇩🇪), Stride (🇬🇧), Cherry (🇩🇪), Frst (🇫🇷) and LocalGlobe (🇬🇧) are all successful while staying seed focused,

• Anthemis (🇬🇧) and Blackfin (🇫🇷) specialize in finance-related topics,

• Heartcore (🇩🇰) and Felix (🇬🇧) are consumer-first investors,

• Market One Capital (🇵🇱) invests mainly into marketplaces.

Dry Powder Locked and Loaded

With Index and Atomico announcing their last generation of funds during the first half of the year, all the European tier one funds have raised a fund in the past 18 months.

• In April, Index raised both a $1.2bn growth fund (vs. $1bn for the previous one raised in July 2018, not taken into account in EuroTechVC data) and a $800m early stage fund (vs. $650m also raised in July 2018). Both funds are managed by the same team and invest in both Europe and the US. The growth fund will invest in Index’ early portfolio companies but not only. Announced in the middle of the lockdown, it was hard to find a better timing for an ode to entrepreneurship as the driving force to build the future.

• In January, Atomico raised a $820m fund to invest across Europe in series A, B and C (vs. $765m for the previous fund raised in February 2017). Atomico is putting the emphasis on its Growth Acceleration Team which is an in-house team of experts helping startups to scale in key areas such as marketing and recruitment.

€19.9bn have been raised by European funds since Jan. 2019 and will have to be deployed in the coming 48 months. Even if a deep downturn was to occur in the coming quarters, those funds will have to be invested into startups. Moreover, the covid crisis is turning our societies upside down and these times are unique, generating incredible business opportunities that entrepreneurs excel at seizing.

The global financial crisis was the potting soil on which several tech giants like Airbnb and Uber have risen. VCs are well aware of these stories and are ready to fund the next wave of crisis-born startups.

Focus on France 🇫🇷

€387m was raised by French VCs funds during the first semester through five funds. I'm also adding Cathay which announced the final closing of their €387m fund and Elaia's PSL Innovation Fund - even if the funds were not included in the EuroTech VC data because their first closing happened in 2019.

• Cathay Innovation (€490m final closing, Jun. 2020): Cathay has a global scope investing in Europe, Asia and in the US with an emphasis on building on geographical asymmetries (e.g. leading Chime's series B after noticing the rise of European neobanks). Cathay is well known for its great coverage of the Asian market and its private equity fund even invested in Chinese social commerce giant Pinduoduo.

• Partech Seed Fund (€92m final closing, Apr. 2020): Partech is a generalist fund which has several investment strategies including a seed strategy. 10 people are working in this 2nd seed fund which invests in Europe and in the US in 6 broad categories: healthcare, future of work, commerce, finance, mobility and computing. The fund is already advanced in its deployment as it has already invested in 40 companies (cf. infra graph). Partech is highlighting its operational platform with (i) 6 people working full time on supporting the portfolio, (ii) events organized every 6 weeks for portfolio companies, (iii) access to key decision makers in 100 F500 companies, (iv) a community of entrepreneurs and (v) a marketplace with startup offers and potential candidates.

• 360 Capital (€90m first closing vs. €150m target, May 2020): 360 invests in seed, series A and series B in France, Italy and Spain with tickets ranging from €2m to €10m. This is the fifth fund raised by 360 which has offices in France and in Italy and which invests primarily in consumer, deeptech and automation topics.

• ISAI (€90m first closing vs. €120m target, May 2020): ISAI invests €1-3m seed tickets in French entrepreneurs. This third generation of funds will also have a pocket to invest €150k pre-seed tickets. ISAI is also putting emphasis on bridging the US and European continents for French entrepreneurs either planning to expand in the US or starting their companies in the US and planning to expand in Europe.

• Elaia's PSL Innovation Fund (€76m final closing, Feb. 2020): it invests in deep tech startups built by students, alumni or researchers from the Paris Sciences et Lettres University which is a conglomerate of top French universities including ENS, Inria, CNRS, Mines Paris Tech, Dauphine, Collège de France etc. 10 investments were already done out of the 25-30 targeted. Elaia has built a strong reputation at supporting entrepreneurs to successfully bring research breakthroughs to the market.

• C4 Ventures (€40m first closing vs. a €80m target, Jun. 2020): C4 was founded by Pascal Cagni (ex. Apple's Europe head) and has a community of 20 operating partners which are experts in certain fields. This Fund II will invest €3-4m tickets in series A and post series A (coinvestment, for foreign companies opening the European market) in three investment themes which are smart hardware, future of commerce and digital media.

• Axeleo Proptech (€35m first closing vs. a €50m target, Jun. 2020): Axeleo Proptech is a new fund strategy for Axeleo which is already (i) an accelerator and (ii) a seed investment fund specialized in B2B topics. The idea is to replicate Axeleo's successful strategy in which Axeleo provides both funding and operational support to help companies finding product market fit and executing the right sales strategy in an underfunded and promising category. It's also a good way for Axeleo to start its internationalization as the fund will invest all over Europe when the structure has been mainly focused on France so far.

Launching a Pre-Seed Program

In November 2018, Atomico (🇬🇧) announced the first edition of a new "Angel Programme" with a cohort of twelve people working in the European tech ecosystem. All of them had been given a $100k pocket to invest during 12 months in European startups they were interested in, in their early days. One year later, Atomico announced the second cohort of this programme and the results of the first cohort in which 35 investments had been made. It's too early to have an idea of the financial performance of this program but it's noteworthy that 37% of investments were done in a team with a female founder and 43% in impact companies.

This initiative has inspired other similar moves from European VCs launched in H1-2020:

• In April, Blossom (🇬🇧) launched Cultivate which is a $5m (€4.6m) angel programme involving 30 people working in tier one European tech startups to invest into alumni leaving those startups to build their own venture. The goal was to fund 20 startups in the following 12 months at pre-seed and seed stage.

• In April, Heartcore (🇩🇰) launched a Fellowship program to invest in pre-seed consumer startups all over Europe. In exchange of €100k per cofounder, Heartcore will take a 7% equity stake into the company. It was built in reaction to the covid crisis to be have a financial product dedicated to a situation in which brillant people can lose their job and be willing to start a venture if they have the good initial funding.

• In May, Target Global (🇩🇪) announced an initial commitment of €500k to co-invest in pre-seed Spanish startups along with angels who have a good coverage of the local ecosystem. Like with the Heartcore initiative, this pre-seed program was launched in reaction to the covid crisis and as a kicker for the 4m people in Spain who are now unemployed.

I believe that there are several good reasons to launch a pre-seed program including:

• Marketing: I guess that it's a good way to build differentiation in the crowded market of European venture capital.

• Building relationships with business angels: in several European countries, business angels are prolific and well connected with their local ecosystem. Working with these people is definitely a great competitive advantage to cover a specific geography or industry.

• Growing the pipeline for future investments: the four funds mentioned don't invest in pre-seed. Having the opportunity to put a foot in the door at this stage is a good way to know companies from the inside and be well positioned to lead the next funding round.

• Doubling down on the opening a new geography: Target opened an office in Barcelona in September 2019 and they launched a pre-seed initiative to re-affirm their willingness to invest in this geography.

• Reducing your blind spots as an investment team: every investment team has biases and they can be fought by bringing third parties to invest with you or by investing in different stages than what you are used to do.

• Tapping into startup mafias before anyone else: when you know the companies born from the PayPal mafias, you see that this is a great opportunity.

• Surfing the covid momentum: with the crisis, numerous companies will make layoffs and brillant minds will be on the market. Providing them with early capital could be the right kicker to push them towards entrepreneurship.

• Growing the European angel investing ecosystem which is a key ingredient in the maturation of a tech ecosystem.

This is an emerging trend to watch out in the coming years. I would not be surprised to see other funds launching similar initiatives.

Building on European Strengths

Funding European version of Asian and US tech giants won’t allow us to compete with them. It's a nonsense to back a European Google, Amazon, Tencent or Alibaba. Europe as an ecosystem has to play with its own strengths.

I believe that there are industries in which we have an edge on compared to other continents and that there we are at the forefront of certain trends. It makes a lot of sense to have thematic funds investing in these industries and trends.

Finance is probably the easiest example. Europe and the UK were at the forefront of open-banking regulations. Neobanks have risen in Europe first. This edge grew hand in hand with fund specialized in finance like Anthemis, Blackfin or Speedinvest fintech thematic fund.

During the first semester, several thematic funds were raised to build on European strengths:

• Sustainability with Pale Blue Dot (Sweden-based, €53m fund I),

• Food with Nordic Foodtech (Finland-based, €24.5m fund I),

• Deep tech with Fly Ventures (Germany-based , €53m fund II), 468 Capital (Germany-based, €170m fund I) or Elaia PSL Innovation Fund (France based, €76m fund I),

• Education with Sparkmind (Finland based, €40m fund I) and Emerge Education (England-based, €11m fund I).

Two Other (Bonus) Trends

• Being a specialist to raise a first time fund: The European venture capital market is starting to get too crowded to launch a new fund without having a specialization. Only 4 out 26 first time funds raised during H1-2020 coined themselves as generalist (15%).

• Raising a follow-up fund to double down in successful portfolio companies. Part of Index growth fund's mandate is to make follow-on investments in Index's early stage portfolio companies. LocalGlobe is doing something similar by rising a €160m Latitude opportunity fund to reinvest in portfolio companies. How to explain this phenomena? When a VC invests in a startup, it has the right to invest its prorata at each follow up round to preserve its equity stake into the company. But funds (i) do not have unlimited dry powder (usually, you keep around €1 for follow-up investments for every €1 initially invested into the company) and (ii) are limited by the percentage of a fund they can invest in a company (usually 10% of the total fund size i.e. if I have a €100m fund I cannot invest more than €10m from this fund in a single company). Having an opportunity fund or a growth fund to reinvest in those companies is a way to preserve your equity stake in follow up rounds despite those limitations and even something seize opportunities to preempt rounds by leading an internal round to strengthen your equity stake in the cap table (e.g. going from 10-15% to 20-25%).

• 💌 TinyLetter (Yann Roux, Stefano Bernardi)

• 📊 Euro Tech VC Funds Database (Yann Roux, Stefano Bernardi)

• 🗞 Agglomerators vs. Specialists (Next Big Thing, July 2020)

Thanks to Julia for the feedback! 🙏

See you next week for another issue! 👋 Do not hesitate to share the newsletter to your friends and to subscribe if it is not already the case!