It is impossible to time a fund

Interview with Peter Lasinger (3VC) <> Dominik Perlaki (Brutkasten)

In a landscape clearly dominated by venture capital funds for the pre-seed and seed phases, 3VC is one of the few exceptions. Started in 2017 the Vienna based VC invests predominantly from Series A rounds onwards. The first fund had a volume of 50 million USD. In 2022, the second fund launched under quite adverse conditions for the VC world, reaching a volume of 150 million USD. We spoke with founder and partner Peter Lasinger about the difficult past years, follow-on financing in Austria, and necessary political measures at national and European levels. Interview has been translated from German to English.

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Brutkasten: The past few years were notoriously difficult for the entire venture capital sector. How did you fare?

Peter Lasinger: I would say it went surprisingly well. However, a fund is only as good as the underlying portfolio, and naturally, there are all sorts of ups and downs there. It was by no means easy; there were truly several difficulties. It all started with Covid, and since then it has been a rollercoaster ride.

The main praise goes to the entrepreneurs we finance; there was a lot of work within the portfolio. What helped us was our selective approach with a very focused portfolio—as of today, we support 20 companies. Fires were burning everywhere somewhere, and we tried to find solutions. However, I must say: There was not a single fallout in the portfolio. That was possible because some teams really gritted their teeth.

The environment is still ambivalent; we are not out of the woods yet. On one hand, there is a positive future outlook regarding everything AI-related. On the other hand, there is a large area where it is still extremely difficult to find financing as well as to gather liquidity as a fund. All other funds report this as well, though it might be a bit easier in the USA.

Brutkasten: You said there wasn’t a single default. With the first fund, you had a unicorn rate of one-third. I assume it has been more difficult recently to achieve such valuations in the portfolio with the second fund, or am I wrong?

Peter Lasinger: The second fund is only in its third year, so it is still too early. We do have initial value developments, and the unicorns of the first fund have remained, but did those value increases continue? No, because valuations were extremely high during the time of the first fund. Half of the companies only needed two years to grow into those valuations.

With the second fund, we began investing in a phase where valuations and expectations had shrunk again. The whole thing is turning again now. Extremely high expectations are once again connected to AI-native companies, accompanied by extremely high valuations. This leads to having so-called “paper values” very quickly. Whether these will be realized or if there will be a rude awakening will likely become apparent in the next two to four years.

Brutkasten: Unfortunately...

Peter Lasinger: That is nothing new—it is our business. It is cyclical, and it is impossible to time a fund.

In a cycle of ten to 14 years per fund, you will always have ups and downs. You are either lucky to sell things during a high, or unlucky that it is exactly the opposite. Large foreign funds, especially in the USA, with extremely large amounts of capital are at an advantage here. It is almost impossible to time this on the stock market, and even more so for us. Therefore, we really focus on promoting solid company developments and minimizing risks. We try to ensure these companies become self-sustained and not dependent on what the capital market is currently doing. That is an up and down, and just because something is highly valued and then less so again, doesn’t say much. That is not necessarily a reason for panic.

Brutkasten: The lament that there is a lack of follow-on financing in Austria is omnipresent, yet hardly anyone dares to tackle it. But you do—that also requires corresponding capital. What originally motivated you to go into the late-stage area and not stay in the early-stage area like almost everyone else in Austria?

Peter Lasinger: There were two aspects: The first was our perception that there is relatively abundant financing in the seed phases in Austria and the surrounding countries. There are great offers, and one can finance oneself very well through various pots, both public money and private money.

The second perception we had ourselves as entrepreneurs was that not only capital but also the know-how for the scaling phase is missing.

What do I do after Series A or even later, when I have product-market fit and really want to expand? There is really very little available there. We experienced all of this ourselves and can support companies here. Even in this phase, hands-on support is still needed; it is not as if everything runs by itself, and one can still do many things wrong. This build-up phase, where you scale the team from 50 to 200 or 300 people and the business model from five to 50 or 60 million in revenue, is still a very critical phase. It is still very dependent on individuals and specifically on the founding teams. So we said: Yes, more capital, but focused, because we want to work entrepreneurially. We also do not want to make investments en masse.

Brutkasten: And why not even later then?

Peter Lasinger: In the Series B and C phases, there is a very strong international offer. Once you have reached 30 or 40 million euros in revenue, you break through a sound barrier and become visible to very many international investors who can then finance you very well. Then it is actually about cost of capital: Who can lucratively raise and invest such amounts of capital more cheaply? We in Europe are still at a disadvantage there. It is much harder for us to raise funds on that scale. It is harder to invest and then harder to realize value because we simply do not have the stock markets that can absorb and play back correspondingly large sums.

Brutkasten: Do you see a perspective, based on what you said, that a fund can emerge in Austria or Europe that has this extreme volume to be able to do Series D financing et cetera, as US funds or a Japanese Softbank do, for example?

Peter Lasinger: I believe it is about where the funds come from. There are certainly examples, for instance in the Nordic region, like EQT. They invest only in the later-stage area and can finance themselves well via pension funds et cetera. They have billions under management and a correspondingly strong deployment.

Normally, however, the later-stage rounds of European scaleups are still very US-dominated.

If one wants to turn the trend, one must succeed in closing the full cycle.

The capital must originate from the region and then be managed or invested by a regional manager. And when there are returns, they must also land back here in the region, including tax revenue and everything that goes with it. Otherwise, there is no real long-term benefit from it. Capital assets do exist in Europe. But they, in turn, are often invested in US funds.

Is this full circle impossible? No, surely it is possible. But I believe it is actually hard to accomplish, and I do not really see this original pool of capital. I also do not believe that the state can do this alone. There is the European Investment Fund (EIF), which is the largest capital provider in continental Europe. Without it, the entire VC and private equity scene in Europe wouldn’t exist. But somewhere, private capital must also be mobilized in larger dimensions.

Brutkasten: With the planned “Dachfonds” (fund of funds), the federal government is pursuing exactly this goal of mobilizing private capital for follow-on financing. Do you believe that this goal can be met with the targeted total volume of a maximum of 500 million euros?

Peter Lasinger: It is very hard to say because it depends on the exact design. It depends, for example, on who manages the fund of funds, with what goals, and with what restrictions. Germany implemented this quite successfully with the Growth Fund, which had over a billion euros and then mobilized correspondingly more capital. Basically, something like this is always to be welcomed if investments are made according to market standards. That means the fund of funds must really act like another fund of funds that is return-driven and correspondingly open. If there are too strong restrictions on where the money is to be invested, then that is naturally also a deterrent for some investors. Because ultimately, we and other funds are measured by financial returns and not by where we invest regionally. There are conflicts of objectives that should be avoided as much as possible in the setup. Ideally, there should be a solid anchor that really provides stability. That then mobilizes further capital from rather risk-averse companies, pension funds, insurance companies, and banks.

Brutkasten: In the government’s plan, the state is supposed to act as an anchor investor itself. Is that sensible? The idea is indeed also criticized in the startup scene.

Peter Lasinger: I believe there would be little in the venture capital sector in Austria if it hadn’t been for the aws Gründerfonds or if funds like Speedinvest hadn’t also received public money. That presumably applies to Europe as a whole. Is it good to bring money into the market at all? Yes. But one must also think further here so that it is sustainable. How does one ultimately realize value from these holdings? Where do returns come from? If the answer here is: “Through an IPO in the USA!”, then it is clear where the value creation happens again. Even with large strategic acquisitions, one hears relatively little from Europe. Most exits go somewhere in the USA. If we finance the companies, is that then what we want? But basically, I have no problem with the state appearing as an anchor investor.

Brutkasten: I have now indirectly heard the big topic of the common European capital market. How important is that from your view—and what would need to happen there?

Peter Lasinger: The market is large enough if one looks at the volumes or the GDP. So something should really be possible. But fragmentation and national interests are certainly an impediment. What adds to this: The really big capital providers in the stock exchange sector who can move things are very strongly US-dominated.

A harmonization of the capital market would therefore be a big step that could bring liquidity. Because only when the market is large enough is it interesting and can it move corresponding volumes. Then it is also about what status growth-oriented technology stocks or technology companies have in the total portfolio of institutional investors. As long as the basic attitude is: “There is real estate, then perhaps bonds, and then nothing for a long time,” nothing will really change. A change in willingness is needed, but also in regulations, for example for pension funds, to invest accordingly. To break through this, it takes a lot of time and good examples of success that work. Ultimately, pension funds are also a key driver of the whole thing in the USA. However, I naturally understand why there is historically a higher risk aversion with us. It must also not happen that pensions are destroyed in a stock market crash.

Brutkasten: Do you see other possible political measures, be it at the EU level or national level, that could be a concrete lever, both for the capital market and for startup financing and follow-on financing?

Peter Lasinger: Everything that is simplified and harmonized at the EU level is desirable. How can entry barriers be lowered? How can founders and teams be enabled to grow as simply as possible in a market that is similarly harmonized as the large US market? Everything that helps with this is extremely welcome, such as the proposed “EU Inc,” i.e., the so-called 28th Regime.

A difficulty I still see with all the concepts, however, is the tax complexity, which simply remains: Since every country has its own tax sovereignty and that will certainly not be changed in the near future, there will be few possibilities there. It would therefore be ideal if, alongside the “28th Regime” for companies, an EU tax regime were also created. That would bring a huge advantage in expansion because one could, for example, incentivize employees in all countries equally.

Currently, there are many cases where employees themselves do not want employee participation at all because of possible tax traps. That is naturally poison for the ecosystem.

Also, any political measure that helps create transparency, clarity, and predictability is sensible; furthermore, everything that creates an incentive to invest in asset classes with higher risk. Great Britain did this well for a long time with tax breaks, but recently took that back. One quickly gets into the situation of making tax breaks only for the rich and ultra-rich. One would have to design it so that it is also attractive for the normal citizen to invest in risk assets, and not just big capital profiting from it.

Brutkasten: Towards the end of our interview, I would like to come to another big question: current US politics. Is this more of an opportunity for Europe, or do the problems outweigh the benefits?

Peter Lasinger: I see it as problematic because uncertainty has increased massively. Added to all other effects like Covid, the financial crisis, and over-indebtedness is now political and economic uncertainty. That is basically poison when no one knows if there will be a tariff tomorrow or if capital movement will be restricted. The situation also demonstrates the EU’s enormous dependencies on the USA, for instance in IT infrastructure or cloud services.

However, for Europe, it is an opportunity in so far as brain drain is being halted. If researchers are afraid of being able to continue their research and then settle in Europe, that is naturally—although it is negative overall—perhaps an advantage on a small scale if one can keep certain people one otherwise couldn’t. But it must be clear: We only get them because they cannot go there; not because we are so attractive ourselves.

I believe it is also a chance for the EU to now say: We can appear more self-confident. But one must design it accordingly. There are many mechanisms in the EU that do not necessarily support this. With so many individual interests, we are not a strong unit. The unanimity principle is a problem here, for example. The world has certainly not become simpler. Nevertheless, I am an optimist and say: You make the best of it.

It would be completely wrong now to bury one’s head in the sand. Actually, now is the time to say: Let’s get to work! And fortunately, many are doing that.

Brutkasten: That would be a nice closing word, but I have one final question regarding the future of 3VC. What is the outlook here?

Peter Lasinger: The plan is that we continue doing this. We have expanded the team and will continue to expand it—also at the partner level. We will continue to do focused work as we have done so far: Less is more and quality over quantity. We want to really focus on supporting teams in Europe to build large companies. We are on a good path there but at the same time still at the beginning. We want to support many more companies. However, we do not intend to become a billion-euro fund.

We know that challenges will come our way again and again. That is our environment; we expect that and we must be able to accompany that accordingly.

Link to the article in German: https://brutkasten.com/artikel/es-ist-unmoeglich-einen-fonds-zu-timen