Interview
Cem Sertoglu: Lessons from the Greatest Venture Investment in European History | E1228
- UIPath generated $2.1 billion in proceeds from a $16.5 million investment, representing a 20x multiple on invested capital for Fund One, with approximately 85% of the proceeds attributed to this single deal.
- The firm expects to realize gains from UiPath over the next five years, aiming to distribute about 10% of the holding per year post-IPO while navigating dilution and liquidity structures.
- UIPath grew from $1 million to $100 million in ARR in 21 months, a growth trajectory likely representing the fastest ever at the time of that expansion.
- The majority of funds raised in 2021 are predicted to fail to return 1x capital due to insane pricing and a prolific AI bubble that is currently more pervasive than the 2021 frenzy.
- Six of the 15 investments in Fund One remain live, and the firm anticipates making money from 12 of the 15 investments to achieve a positive return despite the concentration risk.
- The market environment is expected to become cyclical again, with exuberance returning following the current downturn as interest rates change direction.
- The firm plans to invest in AI companies for Fund Three, stating that every investment made out of Fund Three involves AI in one way or another.
- Investment checks are expected to be written in the $1.5 million to $10 million range for seed and A rounds, with typical first checks owning between 10% and 20% of the company.
- Late-stage bets will continue to involve checks in the $10 million range, as demonstrated by the $10 million late check for UiPath at the $1 billion valuation.
- The firm expects to prioritize founder alignment over valuation in early rounds, viewing these checks as long-term contracts for partnership rather than trades.
- The firm will maintain a disciplined approach to valuation, questioning whether entry prices are fair as the cycle shifts and passing on deals where the price is no longer competitive.
- The firm will categorically pass on companies where they do not have enough time to understand the business, even during market frenzies.
- The firm intends to avoid writing checks where ownership is too small to matter, planning to stick to 10-20% typical ownership to prevent insufficient stake sizes like the 2% stake in 11 Labs.
- Regional venture funds focusing on Eastern Europe and Turkey are expected to succeed by securing global outcomes rather than being subject to local macro turbulence.
- Follow-on investments are expected to rely heavily on signals from other top-tier funds, with a strategy to invest if a great fund participates in the next round.
- The firm expects to remain quiet on the board, carefully choosing moments to provide strong opinions rather than contributing excessively.
- Founder selection is expected to prioritize the "founder" as the number one factor, followed by market size, with traction viewed as a distant third in the investment stack.
- The firm expects to face pressure from LPs regarding the highest return and highest risk nature of their allocation, which requires a high GP commitment to align interests.
- LPs are expected to continue expressing anxiety over political risk, currency risk, and regional focus, requiring the firm to demonstrate that portfolio outcomes are not impacted by local turbulence.
- The firm anticipates that the current 10-year fund life structure is too short for seed and A-stage focus, noting that almost no single early-stage VC fund was liquid by year 10.
- The firm expects to avoid participation in rounds where they lack conviction, having previously passed on companies in 2021 when the process felt rushed.
- The AI bubble is predicted to be more prolific than the 2021 frenzy, with the firm acknowledging that pricing is currently insane.
- Founders are expected to underestimate the leverage they have on their cap table, and the firm will advise them to trust their ability to manage the company later rather than negotiating for obscure scenarios.
- The firm expects to inherit the team they work with, aiming to build a firm that is around for decades rather than just a vehicle for personal wealth.
- True early-stage investing is expected to remain limited and not commoditized by volume, arguing that the industry cannot be scaled by just pouring money on it.
- The firm expects to continue analyzing signals from cap tables and investor behavior rather than relying on headline valuations.
- The firm expects to face the challenge of market cycles where prices go up during "tourist capital" rushes but will focus on exposing the fund to the strongest opportunities in every vintage.
- Multi-stage funds are expected to compete for founders with higher prices and less involvement, though top founders are still expected to prefer co-founder-like partners.
- Board dynamics are expected to be a challenge, striving to balance being quiet with providing necessary support and input at the right time.
- Liquidity markets are expected to face challenges, with concern that M&A markets may close up and IPO markets could almost shut down entirely if current trends sustain.
- Valuation inflation is expected to persist, with the firm analyzing potential downside by considering scenarios where they paid twice as much, though high multiples still result in fantastic outcomes.
- Founders are expected to view the probability of success and the impact of the round on their vision as the most important considerations.
- The firm expects to pass on deals based on market sizing, as everything must be able to return the fund and small markets will be rejected.
- Scenario planning is expected to face challenges, with the firm acknowledging past miscalculations regarding UiPath's return potential.
- The firm expects to face challenges with LP categorization, arguing that venture capital is different from private equity because outcomes are global rather than regional.
- The firm expects to continue struggling with the length of time it takes to achieve liquidity, identifying it as one of the hardest aspects of the profession.
- The firm expects to face the challenge of wealth impacting investor mindset, wondering if being rich makes investors risk averse or if it helps with the risk equation.
- LP expectations regarding single company exposure are expected to be a challenge, given that 85% of Fund One proceeds came from UiPath, yet the fund remains a 2.7 times fund without it.
- LP expectations regarding concentration are expected to be a challenge, as Fund One's 15 investments are considered extraordinarily narrow and super concentrated.
- LP expectations regarding vintage are expected to be a challenge, with the majority of funds from 2021 predicted to not do 1x, making vintage the biggest predictor of performance.
- LP expectations regarding risk are expected to be a challenge, requiring a balance between downside protection and the need to take very high-risk investments to generate the highest return.
- The firm expects to continue facing the challenge of commodity capital, arguing that early-stage VC cannot be scaled by volume and that cash is not green and all equal.
- LP expectations regarding track record are expected to be a challenge, with the firm citing the $2.1 billion return from a $16.5 million investment as a humbling experience showing the need for a disciplined game and luck.
- LP expectations regarding diversification are expected to be a challenge, with an LP base that is very diverse and not concentrated in large North American institutions.
- LP expectations regarding strategy are expected to be a challenge, as the firm must explain that their fund is tethered to an idea of value and does not operate solely on price but on fair price and cycle considerations.
- LP expectations regarding LP psychology are expected to be a challenge, noting that LPs want high returns but are nervous about the highest risk part of their portfolio.
- LP expectations regarding regional focus are expected to be a challenge, as institutional American LPs are hesitant to allocate to exotic regions like Eastern Europe.
- LP expectations regarding liquidity are expected to be a challenge, knowing that almost no single early-stage VC fund was liquid by year 10.
- LP expectations regarding diversification are expected to be a challenge, noting that their LP base is very diverse and not concentrated in large North American institutions.
- LP expectations regarding strategy are expected to be a challenge, as the firm must explain that their fund is tethered to an idea of value and does not operate solely on price but on fair price and cycle considerations.
- LP expectations regarding track record are expected to be a challenge, with the firm citing the $2.1 billion return from a $16.5 million investment as a humbling experience showing the need for a disciplined game and luck.
- LP expectations regarding single company exposure are expected to be a challenge, given that 85% of Fund One proceeds came from UiPath, yet the fund remains a 2.7 times fund without it.
- LP expectations regarding concentration are expected to be a challenge, as Fund One's 15 investments are considered extraordinarily narrow and super concentrated.
- LP expectations regarding vintage are expected to be a challenge, with the majority of funds from 2021 predicted to not do 1x, making vintage the biggest predictor of performance.
- LP expectations regarding risk are expected to be a challenge, requiring a balance between downside protection and the need to take very high-risk investments to generate the highest return.