We invited Experior Venture Fund’s Kinga Stanislawska and R3i Ventures Leesa Souldre to discuss how venture capital (VC) players are doing amid the coronavirus crisis.

Their conversation with Emmanuel Daniel revolved around these main points:

• Those that raised funds last year are still deploying and looking for deals, although there remains a lot of dry powder available 
• VCs, at least in Europe, tend to have a fund of funds or government-owned party to the table when raising large amounts, with around 70% of VC money coming in as some form of government money
• There is a greater sense of collaboration among VCs, with some banding together to manage funds and looking beyond their own borders in search of promising opportunities
• At the moment, it is not a good time to look for exits, as it is better to cut costs, extend runways and survive as long as possible

Here is the full transcript of the session:

Emmanuel Daniel (ED): Good evening everybody and welcome to yet another session of RadioFinance. This is Emmanuel Daniel. I am the founder of The Asian Banker and Wealth & Society.

I think that all of the venture capital (VC) players, both the supply side and the demand side are very curious to know how the VC funding universe is going to evolve from this crisis. This evening, I've got two amazing guests.

Leesa Soulodre, general partner of R3i Ventures based in Singapore but globally invested, very focused on deep tech, with a good perspective of a lot of the general business startups that makes up the universe in Asia.

We also have Kinga Stanislawska, who is the general partner of Experior Venture out of London and Poland and she has a fund that has invested since 2020 in Europe.

Leesa, can you start off by just giving us a sense of what you do and how you invested?

Leesa Soulodre (LS): I'm an early stage deep tech venture angel, for the most part. I've got angel investment fund R3i Ventures deploy my own capital across 12 portfolio companies around the world, all in deep tech or medtech. We're raising a new fund based out of Luxembourg, which is a smart city medtech fund, which is pre-seed through the series A. 

I spend my days mostly in the trenches with our founders. Right now, in between IoT Tribe, the Canadian tech accelerator, and 500 startups here in Asia. So, I'm seeing both decimation of many of those general market play founders as well as the consolidation for deep tech founders. Many of the families in region have gone long and are diversifying out to deep tech. So never has there been a better time to invest in a low volatility asset class. 

ED: Kinga, you’re the vice president of the Polish PE/VC Funds Association. You've got a community role there as well on top of the fund that you run. Give us a sense of what you invested in.

Kinga Stanislawska (KS): Experior, the first fund was around $20 million, just above that. It was raised from private high net worth individuals. We also had an investment from the Swiss contribution programme. With the first fund, we made 17 investments. I would group them into two categories: one is software and software-as-a-service (SaaS) businesses, the other one would be tech-enabled businesses. On the tech-enabled side, we have smart manufacturing. We have a gaming company, we have some marketplaces, so it's quite diverse. We have some e-commerce businesses as well.

What we focus on as a fund are, first of all, co-investments. They will be pre-series A, series A and series B type of investments. We'll look at companies that already have revenue and some client base. We look quite horizontally, we like data-driven players that have a lot of machine learning, AI, understands scalability that way. And then we will partner up with others for precise investments into verticals, as we are not experts on every vertical.

In terms of our portfolio, I would say we have three types of companies. We have a group of companies that is really benefiting from the current pandemic situation, which are the e-commerce players. It's like they have crossed the kind of lines that we would have never expected with budgets that were created in December. We have a company that’s done over 160% now in April of their budgets, so really, they're doing super well. 

We also are seeing a group of the SaaS businesses, which I would treat as more defensible. They have recurring revenue so nothing bad is happening there. The clients are paying, but it's quite hard for them to grow now because the IT teams are sitting at home. They need to have a partner, a client on the other side. Here, what we're expecting is that actually COVID-19 has probably digitalised enterprises much faster than anything else in the past.

ED: The first quarter results of the major IT companies that just came out and it seemed that the stock market has not been as enthusiastic as we thought it should be. You have companies which are teleconferencing and stuff which seemed to have gone up. Netflix is doing very well, and so on. But the traditional guys, the IBMs and Microsoft’s have been trading sort of sidewards. The sentiment in the market, does that get reflected back into the investment community? 

KS: That's true that there are some companies that are going to be doing better than others. Definitely, as you said, all those e-commerce kind of development, where you want to set up your own e-commerce shop whilst you were offline, the software to be able to do that. But I guess, from the standpoint of the reflection on valuations and what's going on in the venture side, what we are seeing is, for example, some marketplaces are doing very, very badly, the kinds of marketplaces that didn't have the SaaS element to feed them real revenue every month. We're talking about the kind of marketplaces that were driven by huge growth, but then again, it was all investor new money coming in every 12 to 18 months or so. So there, they were kind of moving forward very fast, going to a place where they would have huge volumes and be able to sustain themselves at some point but that point hasn’t been reached yet.

ED: Just before the pandemic struck, the VC universe globally had been trending downwards. There was a lot more dry- powder available. I would even say the private equity industry had been climbing up quite well from a very long period of conservativeness and the VC industry, it's sort of softened a lot. Was that your reading in December, in January and then the pandemic struck? What was your experience at that time in terms of raising funds, deploying them?

LS: Last year in Asia, everyone was raising a new fund. It was kind of like that time we’d hit the 10-year mark, and everyone that you spoke to was raising a new fund. And in fact, last year, many early stage ventures announced new funds – everything from $50 to $250 million, but this year, it's really a challenge. You see people out there who have $250 million fund mandates out there taking $50,000 checks, that's going to be a very long fundraise. And apparently, it's the seven-year low for raising capital this quarter. 

What I've seen building out my new fund as a first-time fund manager taking other people's money is that now is probably not the time to be a first-time fund manager, number one. If you don't have something unique on offer, and certainly everyone out there that was raising general tech funds I think is having a very difficult time. I've had five offers of co-general partner (co-GP). Everyone is looking to diversify away from general tech to deep tech, because there is a strong appetite to invest in that asset class. I think it really depends where you're looking to invest. 

The second thing, you talked about dry powder. There's absolutely a lot of dry powder out there. We did a survey across 140 VCs here in the region. Of all of those that were available, there was an 87% negative perspective on deploying capital last quarter – totally a negative sentiment. But what is interesting is when you pull that down to where those investors lie – angel through to Series B – actually, for those that raised funds last year, all those guys are still deploying. Those guys are actively looking for deals. What we do see is those players that have had to deploy significant reserves to keeping current portfolio alive, they really didn't anticipate that it will go on this long. As a result of that, what you're seeing is VCs actually banding together to syndicate, to try and keep their portfolios alive and no, that's not general VC behavior. That's a positive thing that has come out of this ecosystem. In our accelerators, we’re supporting our founders to hold on as long as possible to try and drive revenues as opposed to go out there and raise cash too early and have to take a down round or worse conditions than normal. When you look around the world, one of the things that has opened up is just seeing European VCs hunting in Asia. You see US VCs hunting in Asia for good deals, because they tend to give better valuations, you tend to get reasonable terms and of course, the market access that comes with that.

ED: Do you think that the low interest rate environment, the fact that stock markets themselves have gone down considerably so there's upside potential there, are these tugging at the strings as well? 

LS: You're seeing a lot of lower average ticket sizes because people's money is tied up in the stock markets. It can't get out yet. That being said, because family offices in particular have re-architected portfolio rapidly to go along, what we're seeing is some strong appetite to put together special purpose vehicles (SPVs) in this market for decent deals. You've got a lot of people that are raising a significant amount of capital in this market in very short periods of time.

KS: Europe is quite peculiar with the fact that probably around 70% of VC money in Europe comes as some sort of government money. Now, the largest investor in Europe is European Investment Fund, that's the largest LP and they are practically in all the larger VC funds out there. There are national investment funds as well that will tend to invest. Germany will have its own KFW, France will have Bpifrance, Britain will have British Patient Capital, British Business Bank and so on. 

The way that the VCs are structured is that raising anything larger is always based on having a fund of funds, government-owned party to the table. They are institutions that had money, will have money and they will basically pay when they get the capital call.

The other thing is that the European market for private investors, for family offices, for VCs and also money coming from the US into Europe or money coming from mutual funds, that isn't really built as a structure yet. There are very, very few investors that actually take an active role in investing in venture capital. That's something that needs changing. It's not really been in fashion to invest. 

Central Europe is the kind of place where the opportunities are here because of the skills, the opportunities are here because of the valuations, but the institutional money is not there. Raising a fund out here does mean that you are taking on large amounts of LPs. So probably you will end up having an LP base of 18, 19 private individuals that then you need to deal with for the investor relations part and that's also a challenge. 

ED: The government funding is the anchor, it provides the critical mass of which you're able to grow a fund. What about taxation and government incentives? 

KS: There are a few countries out here in Europe that have done it. The UK is a pioneer. They've built the entrepreneur investment scheme (EIS), which is brilliant. That provides a lot of tax incentives in other countries

Funds in Europe tend to be registered in tax neutral locations. Unfortunately, so far, there aren't many countries that went through a tax incentive programme especially for private investors.

ED: What are the benchmark valuations you're looking at for exits or even for going long? What's the risk profile and what valuations are going to look like as the pandemic works its way through? 

LS: Our portfolio, in terms of deep tech, is quite broad. We have everything from robotics to material science, to medtech, to digital health. The good news is that most of those industry segments are delivering a reasonable return, but we've also seen some apathy in some segments where people just have oversubscribed to particular disciplines and haven't got the return. 

I would say that autonomous vehicles are pretty capped out right now. People have multiple investments in that particular discipline and they have yet to see the returns, add COVID to that. While everybody is looking at going autonomous, whether or not that's going to happen soon is a very big question, particularly with unemployment looking like it is and governments having to step up. I think it's fair to say that, in deep tech, we see pretty decent returns, and robotics is only going to get better.

ED: Do you have a sense of where the other players – the software vendors, the general tech guys – are looking like? With credit costs going so low, do you find that families are willing to take on higher risk and get into industries that they wouldn't generally get into? 

LS: Just take traditional families based on real estate investments, all of these guys kind of relied on the next generation to take them into the new asset class of deep tech and it didn't happen. One of the reasons why deep tech early stage is so attractive is that investor relations (IR) component, that we're actually going to teach their families how to deep tech invest. That's driving a very big willingness to diversify. 

The second reason is they're not just thinking about economic returns and preservation. They're also thinking about impact and that’s quite new to Asia. I think it's fair to say that a lot of people are talking about it, few people are doing it. But you are starting to see those financial carve outs and I think that is going to drive stronger valuations. The other thing is, everyone here is talking about investing in IP instead of taking a traditional equity-based approach to investment, actually carving out royalty and licence returns in order to drive liquidity back into the portfolio early. That's a trend that I think we're seeing across the border

ED: What do you think will valuations be pegged on for general science, not necessarily deep science, but not the institutional investors, the people that you're raising funds from today? What sort of exits are they going to see, especially when you think that IPOs are not going to look very good going forward – or are they?

KS: So, you are going to be able to invest over the next two years or so and exits are going to come in the next seven or eight years. That means that probably you're going to have an amazing return, because that's exactly when the IPO markets will probably come back. Today is probably not the best time to sell a company and looking for exits and M&A. Today, it’s just better to cut costs, try and extend the runway and survive as long as possible.

ED: How do you communicate that to the investor base? Is that a marketing message, that the first four months of this year is really part of a long process anyway?

KS: Yes. I wouldn't call it marketing, it's actually kind of scientific – its data driven. If you go back to 2007 what happened then, there was also a big peak and then a fall. With the crisis there that lasted about two years, it was quite difficult to fundraise, but then the best companies were created at the time. We're talking about the Airbnbs, the TWINOs which have amazing valuations today. What's made them more resilient is also having to deal with the crisis as they were fundraising. The people and the funds that invested back then made the highest returns in a very, very long time. 

In terms of structures, we are seeing that good companies are extending their runways with convertible debt, which means equity. It's just that there are different terms for the conversion, which gives an opportunity today for those who have money on their bank accounts or who are able to raise it very quickly to get into deals that maybe 12 months ago, they couldn't. get into. Even e-commerce, which is going through the roof in some segments, still needs more working capital today, because if you're an e-commerce player, you're really software. Somebody has to produce the stuff you're selling and you don't want your production teams, your factories, your whole value chain behind you to go down the drain. So, you're one of their clients, but the other clients are not paying because of the pandemic. You need to make sure that they have enough capital fast enough to be able to continue working. Actually, also the ones that are having success today also need more working capital. That's a huge opportunity for VC to get into with convertible debt rounds.

ED: Kinga, when it comes to an institutional purchase, the valuations and tax treatment, do you find that Asia is easier or are different jurisdictions in Europe easier? 

KS: We have a company in China, it's an advertising technology business that is data driven. They're actually Polish and Shanghai-based. It's quite a kind of cross-border cross-continent play.

We are yet to exit this. This is something that we've been in for three years. So, it's very hard for me to say how that will pan out in the end. But definitely, this is the kind of company that I would like to see more of – the kind of company that stands on more than one continent quite in early stage, because it makes you defensible in case of situations like this pandemic. It means that you can still develop in one place versus another more actively. This is a huge opportunity to have these cross-continent companies and then I am sure that the acquirers will be found everywhere because it's very interesting to build a company like that.

ED: Leesa, you’re now familiar with also different jurisdictions, especially the jurisdictions that are incentivising startups – Luxemburg, Singapore, Switzerland and the startups that try to leverage different jurisdictions. Which players do you think are able to leverage that kind of multi-jurisdictional approach? Do you have any success stories that you're familiar with?

LS: I just landed 11 companies in Luxembourg last week, so this is a huge opportunity for us. We see a 50% increase on average cross-border between Singapore and Luxembourg in valuation, simply because as they get this earmarked and they scale across Europe, you're in a significantly larger market in many instances. And also, some of the regulations there around these products – for example, the digital therapeutics act that's coming into play around Luxembourg – give them a unique advantage because 50% of their global market is literally sitting on their front door. Luxembourg has done an excellent job in attracting high growth companies not only out of Asia, but also out of Canada and Australia into that region as a single-market European entry point. We can forge a non-dilutive capital pathway for these guys up to EUR 50 million ($54.2 million), based on both Luxembourg local, national incentives as well as the EU 2020 and Horizon 2020, of which I've been an evaluator for three and a half years. We've just committed EUR 100 billion ($108.5 billion) to that fund for 2021 and beyond. 

That being said, Singapore government is doing a pretty great job – dollar for dollar matching, 70% upside to the VCs and on-the-ground support in 36 countries around the world. In one of my portfolios, StratifiCare, a dengue diagnostic company, they've successfully signed now in the Mexican Ministry of Public Health as well as with Brazil for dengue prognostic going into those markets. We had the Singapore government on the street with us every day there when the deal was struck.

ED: Excellent. Thank you very much for both of you for spending this time with me. Both from Leesa and Kinga, as highly experienced VCs, what you're seeing in terms of the funds that you've created, both at the institutional level as well as the families. The whole idea of VC is longish and therefore, the period is not long enough for it to affect overall trends as it were. 

Government incentives do play a very important role. The VCs themselves, because of short term issues, Leesa mentioned that there's a little bit of banding together to manage funds – and that's a good thing. There's also crossover, VCs going across jurisdictions looking for opportunities. Everyone is going along basically, in a general sense. There's investment in IT, increasingly, which is good. I was also very interested in industries that have a subscription model, kind of a long-term income model and how those were being affected by the crisis. But, basically even the companies that are doing well during this crisis will need to take a long view in terms of just surviving the business aspect, not just the technology and the infrastructure part of the business. Thank you very much.