Lea Strumberger (KfW Capital): Inside Germany's $1B Fund of Fund

Meet Lea Strumberger: Investor at KfW Capital It was in the beginning of last year when I really felt that LP's I was talking to also big insurance companies, pension funds, etcetera, that they walked away or that they were more hesitant of deploying in climate tech because they were nervous and they were intrigued by the global narrative. I'm Leah. I am with KFW Capital for five years now. We have this huge funding gap in Europe from Series B onwards. I think if you really work with the fund, talk to the funds, you realise it's just a vertical or a sector you're investing in and it has nothing to do with philanthropy or so. It's just part of the investment strategy that everyone should have. Speaker 2 Leah, welcome to the podcast. Very glad to have you in Paris while you're, you know, just for a short stay, but was able to catch you during that time. Today's conversation will be about how LP's make decision. You know, I hope we can get behind closed doors and see a little bit what's happening at KFW. Want to understand what separate funds that gets funding and just that dance, how to improve your fundraising process. Hopefully that serves as a tool for fund managers. And, you know, something that I hear a lot of people talking about right now is like Fund 2 specifically in climate. So how to approach fundraising for Fund 2, which I think is quite different. But before all of that, yeah. Can you please introduce yourself? Speaker 1 Sure. Happy to. Yeah. Thanks for having me today. It's a beautiful day in Paris. So happy to be. Speaker 2 Here in Paris. Speaker 1 Yeah, I'm Leah. I am with KFW Capital for five years now. Before that, I was on the direct investment side with Yeah, Prop Tech VC in Cologne. And then I switched sides to the LP side of life. KFW Capital was found in 2018, so not that long ago and I joined in 2021 and within my team I focus on climatic impact and deep tech investments. Lea's Journey: From Direct Investor to LP Have you found a transition from being a direct investor to an LP investor? Speaker 1 Actually for me it was quite natural and it really helped me understand how GPS work. So for me it was relatively easy to switch sides. And I also thought in the beginning it would only be like for a certain time period to be on the LP side and then switch sides again. But actually I really enjoy being an LP and working with so many funds. And yeah, I really like like the work. Speaker 2 Do you think LP's would make good GPS actually? Speaker 1 I think this is harder than the other way around because LP's are more like on a higher level and GPS really have to be quite deeply into the to the topics. And I think I never met so many person changing sides from LP to GP. And I think the other way around is more natural. But of course there's also LP starting Co investments and then we have both, but still Co investments is a bit different than GPS that really you. Speaker 2 You don't do any Co investments with? Speaker 1 We do, We do. We started last year. We have a dedicated team for that, OK. And we started to invest alongside our our funds. Yeah, we're just starting the problem program. It's a 1 billion program. So we have lots of money to to deploy. But yeah. Speaker 2 How much of that should go to climate and impact? Speaker 1 We don't have a fixed allocation, but I assume that because we only invest if the rounds are big enough. And I think deep tech and climate tech rounds are the ones that require lots of funding. So I think there there might be lots of, lots of climatic investments in there. Speaker 2 And what's the what's the idea that is that do you want to Co invest with your fund managers? Is that the plan? OK, so basically they come and they say, hey, we have this sales BC whatever company they're raising 100 million. Do you want to come in with? Speaker 1 Us exactly, Yeah. Speaker 2 Interesting. Does that kind of diversify your portfolio because I will concentrate your portfolio I'm not sure how to think about. Speaker 1 It, Yeah. And I think it concentrates it. But of course it also because we have this huge funding gap in Europe from serious B onwards and this mandate is more yet to close the this funding gap. But of course it concentrates the portfolio in some cases, yeah. But our portfolio, I don't know how many direct investments we have or indirect portfolio companies. I think it's 2000 or so at the moment. So yeah. Speaker 2 Yeah, OK. So you're already quite exposed to the ecosystem anyway. Unpacking Europe's Climate Tech Series B Funding Gap What I'd be curious to hear about the performance of KFW. But look, let's first talk about the state of European climate tech. You mentioned something already which is quite interesting, which is the Series B gap and onwards. Is that still the case today? Speaker 1 Yeah, I think it's it's still the case. But and we see more and more like growth stage investors or platforms coming out also early stage investors that are now raising next generations that are more multi stage focused or funds that try to raise bigger funds to be able to have more reserves to follow. Yeah, follow the investments also in the later stages. But still, I have the impression that there's a big funding gap. Speaker 2 How long does it take to fix it? Because I've, it feels like I started this podcast a year and a half ago and it feels like the first LP conversation I've had was, well, we need more funding for growth stage companies in Europe. It's been a year and a half. Feels like it's not changing fast. Like how long do you think it takes for fixing that problem? Speaker 1 Yeah, that's very hard to answer, but I think it it takes definitely longer than you might think it takes. And also because market, the market has changed, appetite for climate or impact investments also decreased. So on the one hand you still have this funding gap, but on the other hand you have LP's and investors that kind of stepped out of the market or they yeah are more fear driven. And this also does not help the the issue issue. So I think it it still will take some time, but we should all work work on it. Speaker 2 Yeah, of course. I think the success of the European climate tech ecosystem depends a little bit on it, although I feel like US investors are very generous when they see great companies out of Europe. Speaker 1 Right. Speaker 2 They don't shy away from investing in our companies. You mentioned the kind of, you know, the how can I say a sentiment around climate tech and Europe is going down and and impact as well. I don't talk to so many LP's. I bet that talk to more LP's than I do. Is that really something that you see across the table across all the LP's that you talk to? Do they kind of shy away from impacting climates right now? Speaker 1 Yeah. So I think it was in the beginning of last year when I really felt that LP's I was talking to also big insurance companies and pension funds etcetera that they walked away or that they were more a hesitant of deploying in climate tech because they were nervous and they were like intrigued by the global narrative etcetera. But I think now it's, yeah, it's progressing and the market is maturing. And so do the LP's. They kind of see that there's still solid climatic funds. And also, I mean, the storytelling has completely changed. And if you really look at the funds and they go through the portfolios and then you see that it's really investable and that it's not about impact anymore or investing in good people that do good things for the world. It's really an investment thesis. Speaker 2 What do you think makes them come back to climate tech? Like do you see, and maybe that's where we have to talk a little bit about performance, but I'm assuming that LP's are just like rational finance people that look at numbers, right? So the the fact that they're coming back, does that mean that we have great performance climate? Speaker 1 I think it just needed some time. That's that the big panic wave around climate and impact went away and it cooled down a bit. And people that pressed on pause before just started to to look at the funds again and to continue conversations with them. And I think if you really work with the fund, talk to the funds, you realize it's just, yeah, it's just a vertical or a sector you're investing in, and it has nothing to do with philanthropy yourself. It's just part of the investment strategy that everyone should. Speaker 2 Have I love to hear you say, because that's one of the key thing I'm trying to push on this media, which is like climate is not philanthropy. Like for me, it is one of the largest opportunities that we have. And especially now at the time of AI, well, like if you don't invest in some of the big AI companies, arrest like software and everything is not quite defensible. And now you have this big climate stuff that has big, massive hardware that has lots of CapEx, but is very much required for the world to function properly. And by the way, it's very defensible because it's not like you can't snap your finger and prompt your way into like a fusion reactor that doesn't quite work out. So I mean, from my perspective, I think it's one of the largest opportunities that we have. Speaker 1 Yeah, true. Definitely. And I think this is also what, what is really important to educate the LP market or the investors market. So therefore podcasts like yours are really important and also that big institutions like we are our big public investors act as multiplier for the, for the private market and to to show that because we're also return oriented, we're not an impact investor at all. So our main goal is to generate returns and we don't differentiate between being like climate funds and other funds we invest in because we have a large portfolio and we being we invest in pretty much everything. So and climate is not like our impact or our philanthropic impact on the society. It's just an investment or it is an investment sector and vertical. Speaker 2 And do you have like a target at KFW level for returns or is it like per vertical? Speaker 1 No, not per vertical. We have like an internal. We have like an internal scoring where we score the funds that we're looking at and they always have to be above a certain threshold with regards to DPI and then we can invest. If they are below, we never invest. Speaker 2 What's the threshold I? Speaker 1 Think I'm not allowed to tell that, OK. But this is what we what we look at throughout all the sectors. Speaker 2 OK, interesting. I love that you have the exact same threshold for everyone. Yeah, You know, that sets the stage for what climate really is. Energy vs. Food Tech: What Works in Climate You talked about some of the sectors being more investable than others and what have you learned the last, you know, 3-4 years in climate? Like what are the things that are working super well where you think companies are making a great job and parts where we'll probably have mistakenly invested in sectors that we're not, you know, profitable that I would say. Speaker 1 Yeah. So I think this is actually really, really interesting, especially for me because I started in 21 at KFW Capital and this is where most of the first wave of climatic funds raised their first funds. And now, five years after it, the world kind of completely changed. So we backed a lot of the first generations of climate funds in Europe. There were also lots of German funds. We looked at all of them. And for us it was also quite new. Also KFW, which just started in 2018. Then we started in 2020 or 21 to invest in climates funds. And it was a completely, yeah, new field for us. And the narrative changed a lot, but also the investment strategies and 21 lots of climate funds also invested in alternative protein, for example. And the entire food tag and agritech market did not really develop well. And this is something I think lots of funds adapted their strategy throughout their investment period. But there are also lots of fund there that are still exposed to that sector. And I think this is there is no fund now coming out to the market raising for food tech or alternative proteins anymore. I think there is maybe some, but it depends because it's not like that. I remember five years ago when you talk to to the funds that were really invested in pushing for alternative proteins, for example, you kind of believe that five years from then nobody would eat meat again. But this actually did not happen. So it's a it's still a tough market, but there is some companies working well. But this is something I would say was not a fair, but it was like a vertical that did not work that well or not as expected. Speaker 2 Do you think that's because of my perspective on it? Is that because this is the only part of the sectors where we basically have asked consumers to say, hey, you have to make a choice, do you want to be climate friendly or not? Whereas I don't know, if we talk about energy, the goal is basically to get energy as cheap as possible. And by the way, the green energy is becoming cheaper than oil and gas. And so that's where we're moving. So we're not really asking for choice. It's the same product in the end, it's energy, it's electricity and the price and how you build it and how you produce it is different. Whereas for alternative proteins, for example, I think it maybe would have worked better if like you go through the B to B way and then consumers are not quite aware. I have an example of that. A company that one of the guests I had on the podcast had invested in was alternative chocolate. They put it in cookies. People didn't really realise that the cookies were not made with popular chocolate and then it worked out super well for them. Whereas when you ask for alternative protein, usually you think through, you know, based meats and then you ask people to make the choice. And I don't think people care. That's the problem. Speaker 1 True. Yeah, I think so too. I think the companies that were more on the B2B side such as this chocolate alternative, that could work out very well or did work out in some cases. But if you're on the like the B2C side, it's it's quite hard also because you have lots of alternatives. If you go to the supermarket you see lots of alternatives, but as long As for example in Germany you can buy like 1 kilogram of chicken for a 699 or so and we have like huge inflation at the moment, people would always choose this. I think it's a different maybe in France, but in in Germany they choose the meat instead of the 100 grams alternative. Meat alternative for 499 or so. So it's simple maths and also for the, it's really hard for the for the startups to get into the supermarkets as well. So skillet scalability is also very difficult. And I think this is also the case. And in terms of crises, people don't care about what they eat maybe so they just eat what what they can get and what what is cheap. Speaker 2 Yeah, I agree with you. And also, I think the the climate narrative is probably not in our favour. Yeah, as I said, I mean, although I'm quite an optimist, I don't think a lot of people care enough at least about the climate. And on the other side, what have we done? Well, what other sectors were you saying? OK, we should have to build on this from the beginning, because this was quite profitable in the end. Speaker 1 So, I mean, profitable is still it, it's, it's still a big word because most of the companies are not profitable now. But everything around the energy sector, of course, it's really, really important. This is also what you're seeing, the climatic funds, they're really focusing on energy right now because the energy demand will rise massively from year to year, also with AI. So I think this is where most of the funds are now. Yeah, going to. Speaker 2 And what were some of your criteria when looking at funds in 2021 that you think were the wrong criterias to look at? Speaker 1 This is also very hard to tell because of course when you invest in first time managers, you take a lot of risk. But I also think that institutions like KFW, like public institutions should also be there to take this risk and to support first time managers, to support innovation and to also signal through the DDS that we are doing, which are very, very decent and detailed, that you can also invest in first time managers. And me personally, I really like the spirit of a first time managers. But of course you have this high risk because it's often people coming together with different backgrounds. And most of them did not have that many experience in the climatic space because it was kind of a new space. And therefore you really had to trust or you had to just give them some credits before, before they even delivered, which is no different because five years afterwards they can, they could prove maybe their strategy or they're also that they invested within their strategy. Performance is still very early to tell, but now it's a very different, different way. DPI, TVPI, and Raising Your Second Climate Fund How do you think about then second time managers? I think we're getting into this space now where basically this batch from 2021, like if you know, when you go to conferences, everybody's raising money right now because you know, obviously just like VC cycle, right, they've raised 4-5 years ago, they've now deployed most of the money and they're raising again, as you said, most of it doesn't have any performance. And I'd love for you first of all to explain what performance means to you and then also how to raise at second vintage. Speaker 1 Yeah. So this is what we actually experience at the moment because all the funds we invested in 21/20/22 are now coming back to us to raise the next generations. First of all, of course, there for most of the funds, the narrative completely changed. You also see completely different pitch decks for that from impact for the world to resilience for for Europe. It's it's a very different narrative. But still the underlying investments are kind of the same. They just evolved a bit. As I said, like food tag is not that hard anymore and we're shifting towards energy tech, industrial tech, etcetera. Yeah. But now it's, it's really important that the L, the GPS show because there's almost no DPI for all the funds we are looking at. Speaker 2 Have you had funds where you had DPI already across your portfolio? Speaker 1 I don't think so. And if it was very, very little, so it did not move the needle also because most of the funds were invested in our early stage. And of course, it's very hard for early stage funds to pay back lots of money after like 3 or 4 years. Yeah. So most of them don't have any DPI. But what you can see is when you go through the portfolio, you really have to dive into every single company and to see the like the traction they have. And therefore it's really important to engage with the with the fund also throughout the investment period before they raise. It's always easy if they are really transparent about the about the portfolio. And what is interesting is sometimes you're surprised is because there is companies marked at 1X in the portfolio and they the last funding round was three years ago and you're saying oh wait, they are not raising it's 1X, is it? It's a good company. And then they tell you they're on their way to profitability this year. They don't need to raise any money. But we could not mark at the company because there was no funding round. And this is something that LP's want to hear. We need to understand the unit economics that are underlying in the portfolio and to go see if it's a healthy portfolio and what value really is in the in the companies line by line. Speaker 2 What's the best practice there? Do you, do you want your portfolio managers to fund managers to send you quarterly reporting with every single details? Do you want them to call you from time to time? What's kind of the best practice to entertain that relationship all the way through? OK. We're now raising again. You've got all of what you need basically, right to make it a quick decision, basically. Speaker 1 Yeah. So we get the quarterly reports, but it's rather high level. Then some of the funds do also quarterly update calls with the investors, which is really interesting. But I think the most important is for me when it comes to fundraising that they have their data room prepared and they have like documents prepared that show line by line the traction of the companies. And then you do like like a call with the funds and go through the portfolio. And this definitely already helps. So they don't have to work on it like for two years or so. Just at the point that they're raising, they have to show what's in the portfolio and how they look at it and being really transparent about it. Speaker 2 To every single piece that you know, look at the details to that level like because you know, sometimes have the impression that people are seeing that ALP's are basically, you know, writing checks based on people and and looking at the overall performance, but not really looking like line by line every single company and understanding the performance. Do you think everybody does? Does it the way you do it? Speaker 1 No, I don't think so. But This is why we're often also seen as a reference for for some of the especially the private investors, because most of the LP's don't have the capacities. They have small teams. They sometimes also invest across all asset classes. We only do venture. And so this is our core business and we have like a big team to do our due diligence. So therefore I think it's really rare that other investors would do a due diligence like we do it. But therefore we do lots of reference calls, especially this is what I find interesting because in the last months I did so many reference calls like never before. But what is good? Because if people rely on our work, it's a good sign and this is actually what we are here for, to. Speaker 2 So I mean people calling you to invest in your funds basically. Speaker 1 You know, people other LP's calling us because they want to invest in funds we invested as and they just want to hear our opinion about it or check, double check if their due diligence is it's correct. It's correct, yeah. Speaker 2 And So what you're saying is that basically when you're raising the second fund, it's not like I need to have a certain level of DPI because you said most of it, most of them don't have DPI anyway. Is that, is that also true by the way, of non climate tech fund? Yeah. Speaker 1 It's the same. Speaker 2 It's the same across the portfolio. Speaker 1 It's, it's the same, yeah. Speaker 2 OK, that's good to hear that we're not the end of the bad, not bad students, right? Speaker 1 No. Also, when you look at our portfolio, you see that, but the same vintages across all sectors have almost the same performance. It's not, it's not that climate tech underperforms the other vintages. We could not say is it? Of course there's some climate tech funds underperform others, but like in general, the average is, is pretty much the same. I would say yeah, I. Speaker 2 Would probably assume that it's the same across all sectors. You would have, I don't know, education tech funds that are also underperforming as others. OK. So it's not about DPI And do you care about TVPI at that stage like? Speaker 1 Yes, yeah, yeah, because this is something you can see on paper to move on. Then if you don't have a DPI, you have to look at the TVPI. Can you remind? Speaker 2 Me of the meaning of it. Speaker 1 Total value to pay it in, it's like the value of the invested capital right now it's it includes the bronze for example. And this is what we're looking at because if the fund is for example to give you a broad range when it's a vintage of 21/20/22, it should definitely be above 1X TVPI. So it should be out of the J curve. So this is already a good sign. But still it's all on paper. So you cannot rely on the TVPI, but you have to take something into account. You have to see something to to move on. And then you dive deeper and you see, OK, the TVPI, if it's above 1X, what drives this TVPI? Is it only one company that had a big up round and the rest is still at cost or so? This is the portfolio work that I just mentioned that you have to do then. Speaker 2 You said above 1X, but what's your X reasonable expectation for fun from 2021? Speaker 1 That's it's hard to tell because it's always a case by case decision. And for us it's more important what is in the portfolio, what companies do we really believe in the companies do we think they did a great job and they delivered on their strategy. This is more important than when I say it's 1. The threshold is 1.2 X or so, yeah. Speaker 2 OK, Yeah. And also I think there's a bit of narrative around it. For example, if you have a big exit events coming up, I don't know, one of your company is getting acquired in a couple of months or something like that. I think that's part of the story as well. Speaker 1 This is also really important information. And sometimes I'm also a bit surprised when I talk to to the funds we already invested in and they come to me and say, yeah, we want to raise the second generation. What is important for you to know? And some of them seem surprised that this is important information and that I have to to pull it out of them. But this definitely helps if they can tell me, yeah, we have some companies that will be acquired later to later this year. It's already a good sign. Execution, Team, and Founder References for Fund II So, so for fun too, you still can run away a little bit with a narrative and storytelling. You have a little bit of number and don't get me wrong, but like the narrative still plays a very important role. Is that narrative based on the future Also? Like, do you also look back on like execution? Because for example, you said they could invest in their cases. Have you seen cases where it's not the case? Speaker 1 No, not really. So actually most of the funds were invested in the first generation kind of delivered what they promised in terms of strategy. And this is actually also one like ticking point because this is really important that you invest what you promised once. The other important point is also team, because as I said earlier, investing in a first Time Team is also a big risk because there is people coming together that maybe did not work together before. Some of them did, but some of them did not. And for us, it's important to assess their dynamics and how the team evolved and are they still working together. And this is also an important point. And there it helps because you build the relationships, you are talking regularly to the team. You get lots of references also from the, from the, from the crowd, from the ecosystem. And this is something really important to also take into the account. Speaker 2 Do you talk to funders as well? Do you ask them like is that a good investors? Speaker 1 Yeah, that's what we do. This is actually a big part. And it's it's a really interesting part because sometimes, of course, founders would not really talk bad about their investors, but sometimes you really hear and feel there's some differences. But this is really interesting and also important. And especially, yeah, when assessing a new generation, it's important that the the founders really believe in the investors and think I would take their money again and again. And I also recommend it to my founders friends because they add great value and they it's it's good to work with them. Speaker 2 Yeah, that's probably also one of the key leading indicator to performance for the next fund as well because founders have founders friend and then they will recommend those friends and then at some point you get the perfect amazing company that returns your fund basically through that network. OK. So we have little bit of paperwork looking at your numbers, we have reference calls with founders, we have team dynamic relationship. What else is included in that kind of due diligence process for funds? Speaker 1 So actually the follow on investment follows the same due diligence process as before. We do always the the same long process that we're doing. How? Speaker 2 Long is the process. Speaker 1 It depends. I would say from three to six months, but when we first engage with funds that can take even years from first contact. You have to be patient with us. Yeah. But I think for a following investment always depending also on the legal stuff etcetera, if there is lots of changes, but three to six months I think is that's a good number. Speaker 2 OK. Three to six months, you do your due diligence. What happens during that period of time going back to what we were saying before? Speaker 1 Yeah. So first of all, I think the first step we're doing is the performance part because also for us internally, we have to do prioritization of the funds we invested and we only have, we have a fixed budget. We have a huge fund portfolio with RE UPS, but we also want to do new, new relationships, new funds that we invest in. And therefore we start with the performance. We go through the companies as I said. And if that is, if we find OK, it's investable, it's, it's a good fund, then we start looking in. Is there any changes in strategy in the team? How did they develop what, what is the strategy also in terms of a fund size? Do they want to increase the fund size? Why? Why so Etcetera and. Speaker 2 Do you always increase the fund size? I feel like. Speaker 1 I don't think so and it it depends if your strategy also kind of changes. If you if you think that you see more late stage opportunities for example where you need bigger fund sizes and bigger checks, sometimes it makes sense. But if it worked out for you with the fund size you had, you should should not. So as an LP you don't expect to have the font sizes increasing every generation. But it's always a case, case by case. Speaker 2 Also because your pockets are not getting larger and larger. So if you have to total down on every single font, then that doesn't work out really. OK. So font size and portfolio construction track record, I think we've mentioned about everything you look you're looking at or am I forgetting something? Speaker 1 Governance and team development, not sure if if you mentioned it, but of course we also want to see depending on the maturity of the fund, but how is transition managed? How is the development of the junior people? Do they have an outlook to become partner in the firm? This is also really important because we see us as a long term partner and we always see it like more than one generation that we want to back and therefore we really also try. Speaker 2 To is that always a strategy you you invest in a first time manager or like in the first fund of that specific fund manager and then you want to back them throughout the journey, you expect to back them throughout the journey? Speaker 1 Yeah, I would say what is rather we really like to be long term, long term investors, but we don't say that if we back funds one time, we will back them again and again because it always depends of course on their development and performance, so. Transparency and Authenticity in LP Fundraising Relationships OK, How do we improve that fundraising process? In other words, as I said, you know, you're seeing a lot of funds right now from that first climate tech vintage. As part of that, I'm sure you see some people that have the fundraising process fully figured out and it's perfect and somewhere, somewhere they need a bit more help. What are your pro tips and tricks to improve your fundraising process as a fund manager? Speaker 1 So you mentioned earlier that other LP's are more like seeing their investments as people business and investing in people. And we do really a big like large due diligence, but it's still a people's business and therefore relationship is key, I would say. So even if you're not raising, try to invest time in the relationship also with the big institutions because people have to have you in mind also when it comes to internal strategy sessions etcetera. If you know that there is funds 123 that they that want to raise later this year, you have to have them in mind because processes are very long in KFW capital but also in other big institutions. So invest in relationships, have regular catch UPS, be really transparent and be authentic. Speaker 2 Transparent, meaning you share the. Speaker 1 Highs and lows. Speaker 2 Yeah. Speaker 1 Also be be also transparent about the lows in the portfolio, about your lessons learned because in the end it's still also people's driven and you people have to convince people and you can do it with authenticity, I think. Speaker 2 Yeah, how, how much do you appreciate when someone comes here and say, hey, like I've, I've messed up 1 of pumps, you're sorry I've learned this and this like what's how much does that play in your investment decision for the next fund? Speaker 1 So if they already proved that in the beginning they messed up, but then they changed their strategy and then they showed that they really improved, it's a very good sign because they can really learn and make the best out of it. But if they say I totally messed up the strategy and my inter portfolio is like looking really, really bad, then you cannot invest in the in the next generation of course. Speaker 2 It's interesting how much similarities there is between LPSG PS: relationship and GPS to start a relationship as well. And you probably have seen that yourself actually. Would you say it's quite similar? Speaker 1 Yeah, similar in terms of the people's business, I would say. Speaker 2 Which is quite interesting for finance, you know, part of finance or an asset class, right? Because I don't think it's quite the same for, for all the parts of finance. Navigating Public and Private Capital in Europe There's something I want to talk with you about, which is when I was chatting to a few funds recently, a few of them have mentioned that they have basically locked in quite a great part of public money. So KFWEAFBPI, whoever else, Tessie. But then there's this rule, and I don't know if it applies to you, which is like matching it at least with one to one with like private money. Is that the same for you? Yes. And some of them are actually actually struggling and they're thinking of like downsizing the fund because they have, let's say, I don't know, 60 million from public funding, but they know they can't get 60 from private capital. How? What's how do you get there basically as a fund manager to convince private capital as well? Speaker 1 Yeah, lots of funds are facing these struggles, especially because there is the EIF, PPI, a TC, a KFW that have really large pockets to deploy in the market. But on the other hand, we have these insurance companies, pension funds that are really under allocated in VC in Europe compared to the US, for example. And when I'm talking to them, you really feel that there's still not that huge appetite and they're still kind of under educated. The asset asset class is really new to them and there is like a big lack of private capital in the market. Also family offices that they have like sometimes a tiny allocation for VC funds, but most of the the rest of the money is going across all asset classes. So this is still we think a problem we need to need to fix in Europe. And I think also that funds should really focus on private capital and should not take all the public money only because it's easier to to get. Speaker 2 Is it easier to get? Speaker 1 It's sometimes not, but sometimes I'm surprised that there is so many public institutions already in it. And for example, we we only invest in funds when they already showed that they have private traction because in the end they cannot match our our ticket and then we have an issue. So we first want to see public, private money to be in the fund and then we can match the ratio, not the other way around. So if we would invest in the first closing, for example, there is the risk that there is not enough private capital coming in. Speaker 2 What what happens if that's the case? Speaker 1 Then we cannot sign the whole ticket. So even if we committed 10 million before and they did not match the public private ratio, they can only like draw the the amount. Yeah, OK. Speaker 2 Interesting, how do we encourage this? Pension funds, family offices, you know everyone else to invest more in VC. Speaker 1 Yeah. So this is actually what we're aiming for is to signal to, to bring the signals. And we also doing this because we some years ago we raised a fund of fund at KFW Capital, which was a 1 billion fund of fund where we also wanted to like engage with the private invest investors and this is actually private money that we invest from mostly German institutions and. Speaker 2 That's a separate pocket. Speaker 1 It's a separate pocket, it's a private pocket that we also invest and this is kind of our attempt to to bring more private capital to to venture capital. Speaker 2 Interesting, are you the only government backed LP that has this double kind of, you know, private pocket and public pocket? Speaker 1 I don't think so. OK. But I'm not aware of the of the other programs, but we're currently raising the second fund of fund also with of course institutional money and private money and I hope it will turn out well. Speaker 2 So you also have the same problem. You also follow it. Speaker 1 Yes, we also fluctuates. Speaker 2 Okay, fantastic look. The Future of Fund Sizes: Mega Funds vs. Solo GPs One section for today, which I really want to talk with you about is kind of the overall it's take apart climate tech, but the overall trend in French capsule in the US we see Zeus massive phones. I can listen over over it. I think difference like 10 billion something off 15 billion something quite crazy for AVC firm. And then we see the small firms that are solar GPS 1015 million, sometimes up to 50, but like that are smaller and more specialized. You know, I wonder like are we going into are we splitting in two directions there or do we also need the hundred 200 million found that are more generalist? Like how do you see that working out? Speaker 1 I think in the US it's kind of a different game. In Europe, the mega fans are more like 500 million to 1 billion fans compared to that. But we also have more and more solo GPS and I think some of them do really great work. And from a return perspective, it also definitely makes sense because this is very network driven and they kind of get into deals because of their character and their individual and because of their network. And it can really make sense from a returns perspective. But of course they don't have these large reserves or to back these capital intensive companies and it's rather early stage. So I think for early stage innovation it definitely makes sense, but. Speaker 2 Have you ever invested in a solo GP? Speaker 1 No, we cannot. Speaker 2 Oh, you cannot? OK. Speaker 1 Because we see this as a key person risk and therefore we always need at least 2 two GPS managing the firm. Speaker 2 Yeah. OK. So the So what you're saying is that solo GPS do a really great job very, very, very early. So pre seed, seed kind of stage and what else then do we need in order for that stack to walk basically right? Speaker 1 Yeah. It also depends on the business models and sectors I would say because actually in Europe we have so many of these 100 million or 200 million funds. This is where most of the funds sizes are at. But it definitely gets gets harder and especially also in climate. What I see now is that they are trying to increase their fund size because they see they need more reserves in order to play a bigger role for follow ONS. The business models are capital intensive, lots of deep tech, lots of hardware and therefore you kind of also need the bigger funds like 500 plus because otherwise you can you cannot play the game. Yeah. Speaker 2 So what do you do? You think that we're going to go towards larger climate tech funds? Speaker 1 I think it will. It will be both, but or more. There will be the solar GPS and smaller fans more and more I think. But also the existing climatic funds or other funds will more evolve towards platforms and larger funds sizes I think. Speaker 2 Yeah. Because so far I think we have most of the funds have only one fund. Basically they don't have like have a precede and then a seed and then a growth stage font type of thing. I think that's something I think that's as, as I said, for example, Anderson know of it's always have really like, you know, 10 different funds they're investing from at the same time and that allows them to navigate the environment. Whereas feels like for us in climate, at least in Europe, we have one fund and anything that's from that and you try and imagine the way you can and well, is there one less thing we haven't talked about that you want to mention on this podcast? How to Successfully Engage with KfW Capital as a Fund Something people should you know understand. Something people should know from you, from KFW. Speaker 1 I think what people should understand if they're trying to approach us or trying to build relationships, because it's not as easy to to get public funding as it seems, because it's also hard to get private funding. But we have such long processes and we have a huge pipeline. And sometimes I think GPS should really be prepared before they approach us. And when I have the impression that they, we don't even know what we're doing and that we're German, like from the German government backs and they don't have any German exposure, sometimes I'm really wondering why they're contacting us. So I think it's good if they, if they're doing their homework and if they're around the most important events and industry events to reach out personally. It's always easier because otherwise it's just you're one out of thousands reaching out every day. Speaker 2 How many funds do you see per year on average do you think? Speaker 1 On average, I would say 2000s or so, but there's also many that don't fit our mandates and are just like Indian EC funds. So we could never invest in. But it's a lot, yeah. Speaker 2 OK, so you basically have the same job as as UPS, same same process. Cool. Well, without going to an event, where can we find you online? The first way to try and reach out to you is that LinkedIn is. Speaker 1 LinkedIn, yeah. Speaker 2 LinkedIn, yeah, OK E-mail is not public yet. Speaker 1 It's not public, but most of them find out it's it's also not. Speaker 2 OK. People can also reach out if they want. And then another question for you is who's next in your seat for an interview to talk about LP investment in climate? Speaker 1 I think it would be interesting to hear the fundraising part from AGP side that just deployed the first fund generation and is currently raising the next fund, like Planet A for example. And there it could be Lena Teeter, who's also his GP but also head of impact. And I would be very curious about how conversations change now compared to five years ago when they raised the first fund. Speaker 2 Sounds good. I'll reach out to planet A then they they were already a guest twice in the podcast, I believe, But well, fantastic. Thank you so much for today. Had a so much pleasure talking to you and none a lot actually, So that's great. Any last word for the audience? Speaker 1 Yeah, thank you so much for having me and I hope that Climate Tech will be a huge success and I encourage every LP to to invest in this sector. Speaker 2 Sounds good.