Sifted - VC downsizing

Following deliberations yesterday, we'll have an update on the eagerly awaited (and much-written-about, in this newsletter) EU AI Act soon. But for now, our big story today turns to Riga, Latvia, where I (virtually) chatted with one VC who’s doing something unusual: choosing to raise a smaller fund than his firm’s previous one. We got into the reasoning behind the downsizing, GP egos and the importance of fund economics. 

Elsewhere, we dig into a big raise for a UK semiconductor startup, Eurazeo’s decision to postpone fundraising and a Berlin-based fintech that finally secured a banking licence.

— Anne Sraders, senior reporter

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Downsizing a fund can be a blow to a GP’s ego. One Baltic investor is leaning into the strategy 

The current tough fundraising environment has prompted some investors to begrudgingly lower their fund sizes. But Andris Berzins, a partner at Baltics-focused firm Change Ventures, tells me his team is deliberately downsizing to focus on writing pre-seed cheques and to keep lean. 

Berzins pitched his vision at a closed-door event hosted by RAISE Global at Slush last week, alongside 19 other GPs and a roomful of LPs including Isomer Capital and LGT. 

Change Ventures has been trying to raise its third fund since early this year. But it’s “very slow”, says Berzins, adding that some of his backers, like seed fund-of-funds, are struggling to raise themselves. Change Ventures plans to raise €20m in total by mid-2024, says Berzins — and has done a first close, although he won’t tell me how much. Its previous fund came in at €49m.  

But downsizing is not an easy thing for a VC to do. “There's obviously something around GP ego, right?” Berzins says. “Some GPs are excited by the idea of managing more AUM, bigger funds, bigger teams, writing bigger cheques,” he notes. Plus, bigger funds usually mean more management fees for GPs. 

Berzins insists the tougher environment hasn’t played a role in the lower fund target. It’s just maths, he says. 

If you’re raising a larger fund — say, €200m — to get one outlier company (like a unicorn) that would return the fund to LPs, you’d need an exit that would return at least €200m. “If I own 10% at exit, say, that means a €2bn exit price. Not very common,” he notes. With a smaller fund of €20m, a VC owning 10% needs “just” a €200m exit price — “or I can own 5% with a €400m exit price”. “A smaller fund requires smaller exits to return the fund and also has more flexibility in ownership [percentage] at the exit.” 

I’m curious to hear from other GPs: How are you thinking about what constitutes the “right size” for your fund right now? Have you had talks about lowering your target? Send me a note.

— Anne Sraders, senior reporter

🇩🇪 Berlin-based neobroker Trade Republic has been granted a full banking licence from the European Central Bank. 

• The new licence means the fintech can hold customer deposits and also create a lending business — which means it can now diversify its revenue streams. That’s a good thing, because the EU is planning on banning the trading mechanism that currently makes up a third of its revenues — payment for order flow (PFOF) — in 2026. 
• Speaking on stage at Slush last week, cofounder Christian Hecker said: “If you’d told me at the beginning that it would take four years to get a banking licence, I would never do it again,” admitting that the company has a “love-hate relationship” with the German regulator BaFin.

🇫🇷 French investment firm Eurazeo has postponed fundraising for its fourth growth fund until possibly February, its new managing partner Hala Fadel tells Sifted. It follows the departure of four senior growth investors from the firm in July.

• “It makes sense for LPs to see stability in the team,” Fadel says. “I told [the LPs], we need six months to show you who the new MDs and operating partners are and who is staying within this team.”
• The investor has recruited Raluca Ragab, previously at Goldman Sachs, Vitruvian Partners and Key1 Capital, as its new London-based managing director — she’ll start in January. It has also hired three new operating partners.

📈 Klarna’s valuation bumped up by publicly traded Swedish shareholder Creades. The Swedish investment company increased the value of its stake in the buy now, pay later giant by 18%, to $11.3m, according to local media. That implies an overall valuation of $7.85bn — and comes as the fintech reported its first profitable quarter in four years last month. Last year, Klarna’s valuation was slashed to $6.7bn, from just over $45bn.

👀 Stripe has a new board member. Luciana Lixandru, a London-based partner at Sequoia Capital, has replaced Michael Moritz — who departed the US-based VC earlier this year — on the fintech’s board, according to The Information.

🤝 The Europe Startup Nations Alliance (ESNA), a forum of governments founded in 2021 to create more startup-friendly policies in Europe, is adding Malta, Slovakia and Sweden as members. The three new additions bring the Alliance’s members up to 18.

🤖 Elon Musk's new AI startup, xAI, is angling to raise $1bn, having already secured $135m from backers.

• The startup, launched in July, has already announced a chatbot called Grok that xAI says has access to data from X, formerly Twitter —  also owned by Musk.

💸 UK-based semiconductor company Pragmatic raised £182m in Series D funding.

• M&G’s Catalyst and UK government-backed UK Infrastructure Bank co-led the round, which also included Northern Gritstone, Latitude and MVolution Partners.
• The UK has been vying to invest more in semiconductor manufacturing at home, as was detailed in the recent Autumn statement. 

🇵🇱 More than half of Poland’s startups haven’t ever raised money from private investors — they're either bootstrapped or have relied on public money such as grants.

• That's according to a new report on the state of the Polish startup ecosystem by lobby group Startup Poland, which also found that those same startups have seen revenues spike in the past 12 months — 51% of respondents surveyed for the report said they’re generating “considerably higher” revenue than a year ago. Read the full report (in Polish) here.

🌪️ Science Creates secures £8.5m to build new deeptech incubator in Bristol to support UK spinouts. It’s Science Creates’ third incubator and funding came from Research England — part of UK national funding agency UKRI — and the University of Bristol.

• The new 30k sq ft building will provide capacity to incubate approximately 275 new companies from West of England universities. Specifically, it will accommodate spinouts making the next groundbreaking discoveries in quantum and engineering biology.

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🇬🇧 This week the UK government announced new measures to try and reduce immigration to the UK, one of which was increasing the salary threshold for a “skilled worker visa” to £38,700. But founders tell Sifted this could mean that a lot of people working in the UK’s tech scene need to leave the country.

🧱 10 built environment startups to watch, according to VCs.

💰 Why these founders didn't want VC money.

Despite chatter of dealflow picking up, November was an icy month for seed deals, according to new Dealroom data.

• The month notched 292 pre-seed and seed deals, a drop from October’s 361. From those rounds, early-stage startups raised €504m, lower than October’s €599m — but, on the bright side, nearly 30% higher than last November’s haul of €389m. 
• The beleaguered fintech sector has also staged somewhat of a comeback recently and saw a slight funding bump in November, with €90m worth of deals versus October’s €88m.

Paris-based ProvenRun, an operating system providing cybersecurity for smart devices and connected vehicles, raised €15m in Series A funding. Tikehau Capital led the round and was joined by the French Ministry of Defence’s Definvest fund, managed by Bpifrance. 

Berlin-based Milano Vice, which operates a virtual restaurant chain for pizza delivery in Germany, raised $9m in Series A funding. Coefficient Capital led the round and was joined by investors including True, Geschwister Oetker and Speedinvest.

Paris-based Scienta Lab, which is using AI to model out individual immune variables for drug discovery and treatment of immune system diseases, raised €4m in seed funding from CentraleSupélec Venture and angel investors. 

Leiden, Netherlands-based QuantaMap, which has developed a microscope that enables quantum researchers and chipmakers to examine chips more easily, raised €1.4m in funding led by QDNL Participations, including a grant from Quantum Delta NL.

London-based Harriet, which has developed an AI-powered HR assistant, raised £1.2m in pre-seed funding. Concept Ventures led the round and was joined by Frontline Ventures, Portfolio Ventures and Notion Capital.

Sofia, Bulgaria-based Kikimora.io, which uses AI to automate vulnerability data analysis, raised $1m from investors including Impetus Capital, Vitosha Venture Partners and SeedBlink. 

Dublin-based Beyondbmi, a digital weight-loss clinic helping users tackle obesity, raised €1m in seed funding. Enterprise Ireland led the round.

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