“Time flies,” as Virgil once famously remarked. It has been a complete 11 years since I first noticed the emergence of Connect Ventures, one of the early pioneers among the budding group of European tech venture capitalists in that era.
At that time, Connect Ventures stood out as one of the few VC firms in Europe with a strong focus on product development, drawing inspiration from the product-centric approach that had blossomed in Silicon Valley.
Fast forward to 2023, and it’s evident that this approach has proven beneficial for Connect Ventures. Over the years, they have supported several successful startups, including Typeform, which secured a substantial $135 million Series C funding round last year, valuing the company at over $900 million. Other notable investments include TrueLayer, Lifebit, Oyster, and Kheiron. However, we won’t dwell on Citymapper’s acquisition by Via, which TechCrunch sources described as a disappointment. As the saying goes, “You win some, you lose some!”
Bringing us up to the present day, Connect Ventures, headquartered in London, has reached a significant milestone by raising $80 million for its fourth fund, with the final closing expected later this year. This development closely mirrors their previous fund’s progress in 2020.
This time, existing investors have enthusiastically reaffirmed their support, including British Patient Capital, De Agostini, Big Society Capital, Top Tier, and Molten Ventures. New investors, such as Aldea, Jason Green, Sella Venture Partners FoF, and Francesco Simoneschi, founder and CEO of TrueLayer, one of Connect’s earlier successes, have also joined in.
Top Tier Capital Partners, LLC, a global fund of funds manager, stands as one of Connect’s lead investors. In a statement, Eric Fitzgerald, Managing Director at Top Tier, emphasized the value that the Connect brand brings to its portfolio companies, enabling them to attract top-tier downstream VCs in both Europe and the United States.
Connect Ventures specializes in seed and pre-seed stage investments, typically ranging from $150,000 to $2.5 million. Their product-centric approach leads them to invest across various sectors, including B2B SaaS, fintech, consumer products, healthcare, and web3. Their portfolio for the new fund already includes companies in B2B health, generative AI, B2B payment infrastructure, B2B SaaS, and developer tools.
What’s noteworthy is their lean and efficient “partner-only” investment team, resulting in a relatively low annual investment rate. In this context, they’ve welcomed Katy Turner, formerly a co-founder at Multiple, as an operating partner. For those interested in her extensive startup experience, an interview with Turner from 2019 is recommended.
Sitar Teli, one of Connect’s co-founders and managing partners, shared her insights on the current direction of tech investment in Europe in a recent conversation:
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 a 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.”
Mike Butcher: 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?
Sitar Teli: “During the last few years of ‘ZIRP’ or the ‘zero interest rate period,’ a lot of the startups that were funded weren’t particularly capital-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.”
Mike Butcher: What do you think the end of the bear market means for tech products and product-oriented VCs?
Sitar Teli: “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.”
Mike Butcher: So it’s the end of the “big rounds” era?
Sitar Teli: “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?”
Mike Butcher: Investing in Europe is down 50%. That’s quite a massive correction, isn’t it?
Sitar Teli: “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.”
Mike Butcher: Generative AI… what’s your feeling about that in Europe at the seed stage?
Sitar Teli: “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.”
Mike Butcher: And what’s the atmosphere out there amongst LPs that you’ve spoken to about where we are right now?
Sitar Teli: “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.”
