Tempus fugit, as Virgil once put it. It was a full 11 years ago that I first noted the appearance of Connect Ventures, one of the early "new kids on the block" amongst the nascent clutch of European tech VCs in that relatively early era.
Back then, Connect was one of the few product-focused VCs in Europe, to some extent taking its cue from the product-led approach that had been developed out of Silicon Valley.
Fast-forward to 2023 and that thesis certainly appears to have stood Connect in good stead. To date it has backed a clutch of successful startups such as Typeform, which last year raised a $135 million Series C and at the time was valued at over $900 million. Other standout investments include TrueLayer, Lifebit, Oyster and Kheiron, although let’s not talk about Citymapper, the acquisition of which by Via was described by TechCrunch sources as effectively a "washout."
You win some you lose some!
Bringing us up to date, London-HQ’ed Connect Ventures has now hit the $80 million mark for its fourth fund, with a final close to come later this year, making it almost a re-run of its 2020 news of it’s previous fund.
This time, existing investors have lined up to back the fund again, and these include British Patient Capital, De Agostini, Big Society Capital, Top Tier and Molten Ventures. These investors are joined by new LPs including Aldea, Jason Green, Sella Venture Partners FoF and Francesco Simoneschi, founder and CEO at TrueLayer, one of Connect’s earlier investments.
One of Connect’s lead investors is global fund of funds manager Top Tier Capital Partners, LLC. In a statement, Eric Fitzgerald, managing director at Top Tier, said: “We believe the Connect brand brings real value to their portfolio companies -- enabling them to attract some of the best downstream VCs in Europe and the US.”
Connect invests at the seed and pre-seed stages, with initial investments at the $150,000 to $2.5 million mark. That product focus means that Connect invests fairly widely across B2B SaaS, fintech, consumer, healthcare and web3. The new fund portfolio already counts companies in B2B health (Stitch, Faks), generative AI (Carter, Embedd, Dust), B2B payment infrastructure (Sprinque), B2B SaaS (Ourspace, IterationX) and developer tools (Plain).
Its “partner-only” investment team is also pretty lean and mean, translating to a fairly low annual investing run-rate.
On that front, they’ve also been joined by Katy Turner, previously co-founder at Multiple, who has come onboard as operating partner. You might like to catch the interview I did with Turner in 2019 to familiarize yourself with her long experience in the startup space.
Turner joins co-founders and managing partners Sitar Teli and Pietro Bezza, and Rory Stirling, general partner.
I caught up with Teli to get her thoughts on where European tech investment is going right now.
Mike Butcher: This fund is roughly the same size as the last one. Any particular reason?
Sitar Teli: “We think it’s the right size for a seed fund. We have a pretty low volume, high conviction strategy. All the modeling we've done has shown us that this is just the perfect size for seed fund. I think it produces superior returns to small size funds. It requires you to focus, you don't really bleed into other stages, you stay focused on seed. There was a brief period where I think seed rounds were getting quite big, but now we're generally back down to 1 to 2 million pound/dollar/euro size. That is the perfect size for our model.”
You are one of the very few people I know who would have a really considered opinion on where we are on the tech investing cycle. So where are we?
"During the last few years of 'ZIRP' or the 'zero interest rate period', a lot of the startups that were funded weren’t particularly capitally efficient. It didn't produce what we would consider venture scale returns. Investors were willing to fund that at seed because there was downstream capital. I think what's changed now is we are back to looking at capital efficiency.
"We are also back to asking companies to achieve a certain set of milestones that we and the founders believe will unlock the next round of capital. So you have to think about the right amount of money to fund the right milestones, and the right way to achieve those milestones. In the past few years, that featured less in the conversation.”
What do you think the end of the bear market means for tech products and product-oriented VCs?
“In the last few years I think there was a number of non-product areas that were really heavily funded, like last minute groceries. It was a logistics play, not really a product play. I think we're back to software, gross margins, capital efficiency, how much money does it take to get this to scale? So I don't think it's changed the importance of product I just think the product companies are more attractive than ever, right? Because they are capital efficient. You're very user centric, you're doing user research, you're doing user discovery, but you're fundamentally building something people want, and you're solving a problem for them."
So it’s the end of the "big rounds" era?
“Any excess capital you have leads to a corresponding decline in focus. Because now you start hiring people that you don't necessarily need. You start having a lack of focus, less capital efficiency, and then you scale THAT. I love constraints. Constraint in a company is really healthy. You have to be thinking, what is the most important thing I can be doing today? Who are the most important people I need to hire? I have really limited resources, how do I deploy them as best as I can?
Investing in Europe is down 50%. That's quite a massive correction, isn't it?
“I think the danger is that we overcorrect, yeah. I remember when we started 11 years ago, the problem of growth-stage capital was always there. But I think a lot of companies have chosen not to go out to raise right now. They may have a lot of capital in the bank, they need to get more capital efficient. I think that has been the focus for the past year, year and a half. So I’m less worried about the drop, I’m more concerned about whether we get to a healthy level of growth.”
Generative AI... what's your feeling about that in Europe at the seed stage?
“Europe has really, really strong technical universities, and has actually done a lot of the fundamental work on generative AI. Everything starts with the talent. And the talent pool is extremely high. So that's a huge positive for Europe. I do think when it comes to deploying capital into foundational models, it requires a lot of funding. Especially when you start getting into some verticals. But the team of people that built the transformer technology was, like, five people. So I think a small group of people can do something really compelling, but they do need to be funded properly.”
And what's the atmosphere out there amongst LPs that you've spoken to about where we are right now?
“We’re really lucky. We have a strong LP base. So a significant amount of funding for was just repeat capital. And we did also bring in some new LPs. We brought in a lot of our founders, which I was really happy about. But when it came to new funds and institutions, etc. it's definitely a difficult market. They are not looking to add new managers. They're very distracted by their existing portfolio. You have to appreciate a lot of our peers raised funds very quickly in the last few years, some of them raised a fund every year. And now they need to correct that. Some of them are not looking at new managers or deploying more capital. They're waiting it out. But I think it's a great time to deploy capital and I think this vintage is going to be disruptive because pricing is excellent right now and that's really what you want. I also learned very early on in my venture career like you shouldn't try to time the market.”