Meeting European VC Champions: Leading Early-Stage Deep Tech

The second VC champion I had the opportunity of chatting with was Stephan Morais. Stephan is the founder and Managing Partner of Indico Capital Partners, a leading early-stage deep tech VC firm.

We chatted about:

  • How Stephan tackled raising a VC fund and what to should look for in LPs
  • How European VCs can push for policy developments that allow for more capital to be deployed into the industry
  • What Europe can learn from other countries and regions
  • What learnings Stephan has drawn from running an iberian fund

If you’d like to listen to more of these meetings with European VC champions, follow the EUVC podcast.

A little bit about Stephan Morais

Stephan Morais is the founder and Managing Partner of Indico Capital Partners, a leading early-stage deep tech VC firm based in Portugal. Stephan was formerly an Executive Board Member at Caixa Capital, where he led investment rounds in many Portuguese global tech success stories. 

I was particularly excited to be talking with Stephan. He has been a major player in building up the entrepreneurial ecosystem in Portugal.

With a diversified background as an investment banker, consultant, entrepreneur and CEO, he has lived in 8 countries and 4 continents over the last 24 years. Stephan (also the Founding Curator of the Global Shapers Lisbon Hub) was appointed as a Young Global Leader by the World Economic Forum in 2010, and is a Member of their Digital Leaders of Europe Community.

Path into ecosystem building

Stephan was first exposed to the wonderful world of private equity and venture capital back in Harvard with Prof. Josh Lerner. Prof. Josh Lerner is the world-wide authority in this industry. Later on, with experience as a founder, during the dot com boom, and with an ensuing bust at HBS, he realised that VC would be his career of choice.

However, as eloquently said by Stephan, “life takes time”. Stephan ended up doing a lot of stuff in the middle, but always with an eye on becoming a VC.

Stephan realizes that having been on different sides of the table gives him great insights on to how founders feel. That’s why Indico keeps close relationships with founders. Their objective is to always try to support founders as much as they can. Stephan sees that this relationship really impacts the level of happiness of founders.

Stephan’s entry into the wonderful world of VC started at Caixa Capital. This happened during the boom of the Portuguese ecosystem. At this time things were starting to brew up and the first success stories were arising.

Small is beautiful in the world of VC.

Stephan Morais

According to Stephan, since the Portuguese market is so small, the good companies go global very quickly. This is also why he finds VC such a fun profession. However, he alerts that being a VC requires experience. Experience in what goes well but, also, and maybe more importantly, on what doesn’t go well (since that is the norm). Stephan highlights that it is really important VCs are able to enjoy these successes. VCs must them to counteract the impact of so many failures.

The rolling snowball that keeps growing

A successful tech and innovation ecosystem needs specialised and knowledgeable investors, as well as experienced entrepreneurs and angels. Corporates willing to work with founders are also important. Corporates allow for the deployment of local pilots, knowledge sharing and develop senior professionals.

In other words, an ecosystem isn’t built only with money, time is a huge factor. Things need time. An ecosystem is built by creating a few early stage success stories and giving them the time to get capital abroad. There specific locations where more capital is concentrated, for later stages and growth. Ecosystems need the angels, particularly those who are former tech entrepreneurs, among others. Big corporates in tech also need to be active in the market. Otherwise, how can these fast growing success stories source the senior talent they actually need? All in all, things need time to develop. Specially when kickstarting an ecosystem.

At Caixa Capital (a public bank), Stephan was focused on helping angels with capital. He also worked in supporting accelerators with sponsorships, capital and knowledge. Caixa Capital was trying to develop and professionalize all stakeholders. They developed them to a stage where they could cherry pick the best companies posing out of the ecosystem itself.

For Stephan, the decision of going private was, partly, based on the belief that an ecosystem can’t only have public money. Public money, and corporate money, is exposed to policy priorities and market dynamic, respectively. A new government can easily change priorities and redirect capital to other priority areas, such as healthcare and education. A corporate, particularly during an economic downturn, is likely to close their innovation practice or corporate accelerator/incubator. An ecosystem needs this private capital because it is robust and strategic in its capacity of funding the ecosystem.

Being an entrepreneur is different from being an investor

For Indico most capital, but not all, came from institutional LPs. Namely, funds of funds, high net worth individuals (not angels or former tech entrepreneurs), among others. Most capital is actually foreigner.

According to Stephan, this is the norm in risk averse countries like Portugal. VC is perceived as being more risky in less mature geographies. In these geographies people have not yet seen results and, therefore, don’t like the asset class. In Portugal, we are yet to see major exits happen (Talk Desk probably being one of the few exceptions). These big exits are required to to sustain funds.

Exited and successful entrepreneurs tend to become angels. In more sophisticated markets they become investors in funds. Stephan shared that, quite often, people think they can do it and that they know it better. However he clarifies that being an entrepreneur is different from being an investor or a VC. Nonetheless, there are clear advantages. These entrepreneurs understand tech, venture building and have done it in the past. But there are other dimensions. As Stephan highlighted for Indico itself, VC firms typically have entrepreneurs, but also other backgrounds. Stephan’s main point being that diversity is important in VC and adds a lot of value for investors. With that in mind, Stephan believes that entrepreneurs would benefit from becoming LPs and investing directly into VC funds.

Raising a fund

Raising a fund in Europe is a particularly difficult task for most VCs.

Those three things are fundamental: your track record, your ability to source deals and your ability to co-invest with other funds across the globe.

Stephan Morais

The first things investors need to understand is a fund manager’s track record. It is extremely difficult to start a fund without a track record in investing. As Stephan previously shared, there is a need for diversity and a mix of people. A need for those who were successful entrepreneurs but also those with investment experience. At the end of the day, investors want to know if the team knows how to invest in technology.

The second thing investors need to understand is how the fund managers will access deals. Not any deal, but the best deals and companies out there. It’s important that investors understand how fund managers ensure they are the chosen investors of the best founders.

The third thing investors need to understand is the international reach of the team. This is a core requirement to make follow on rounds happen. In VC, the investment os actually start of the game. As Stephan said, “VC is a game of layers of capital”. In that game very few investors do it all (or even want to). VCs are basically a supplier of deal flow to more mature ecosystems. For example, Europe provides deal flow to San Francisco. Fund managers need that reach. They need to know the people in the industry.

The European LP landscape

The European LP landscape is, arguably, a bit grim for the vast majority of VCs. Not because there is a lack of deal flow (even though some institutional investors bring this up). Europe has great scientists, engineers and entrepreneurs. So, in other words, there is enough demand for capital in Europe.

Most potential LPs in Europe refuse to invest and are very wary of the asset class. In fact, some are actually forbidden of investing in VC. Not surprisingly, VC in Europe is getting a bit left behind.

Stephan has experience as a former Advisor to the European Commissioner of Science and Innovation, a past Chairman of the European Venture Finance Network, Board Member of the European Venture Capital and Private Equity Association and Board Member of the International Venture Club. At these institutions, he tried coming up with ideas to make LPs consider VC an attractive asset class. Unfortunately, as Stephan shared, Europe is “still has a long way to go”. The US looks at innovation in a very different way. The sheer amount of capital available in the US for tech investing is larger.

Size matters in VC!

Stephan Morais

One of the objections heard from potential LPs is that they don’t invest in VC. Some even state that, even if they did, they would do so only in Silicon Valley. Interestingly enough, and as Stephan pointed out, Silicon Valley funds are not really accessible to European institutional investors.

The fact of the matter is that rounds are getting and bigger. Small funds can’t make it. Fund managers need 50 to 100 million to be able to do follow on rounds. Otherwise, they won’t be able to deliver good results for themselves and investors.

Stephan believes policy needs to change in Europe. Not only at a regional level, but also at the member state level. Policy needs to promote the deployment of capital directly into financial intermediaries; particularly, professional, specialised, tech investors.

There are many public programs that invest in funds; but they often come with a lot of strings attached and fine print. It’s all done with good intention but ends up really hindering the industry and its agility. We need to change this to be competitive. Stephan really believes that there is a lot to be learnt.

Call for a policy driven revolution in VC

Many institutional investors cannot invest in VC. Thus, Europe must bring down those barriers. As an example Stephan highlighted the fact that certain pension funds can’t invest in this asset class. Therefore, there should be an incentive scheme so that these LPs can and would invest in VC. At the moment there is no incentive, there are actually huge barriers, and that is a big issue.

If you have 1% of the pension funds in Europe investing in VC, that would be a tremendous revolution.

Stephan Morais

Some European countries have made efforts to make individual investors invest in tech. However, these schemes and program did not require this investment to be made through professional investors. Thus, there is this huge risk that these people become “tourist investors”. So, basically, this money is being wasted; because unexperienced investors end up investing in the wrong tech, teams or even investing for the wrong reasons. More importantly, the money wasted is not only their won. It is also public money. It would be smarter if these people had tax breaks to invest directly in professional investors.

Often, the easiest solution is for governments to come up with schemes investing directly themselves. This approach is simpler and faster. This is very important, as public capital has actually allowed to create the European VC industry. However, Europe needs to attract the private capital. Just a tiny bit would be game changing.

The geopolitical game is being played on the tech level, and Europe cannot fall behind.

Quickfire round

  • More LPs investing
  • Need to celebrate more the success stories. People don’t know about it.
  • Indico keeps on growing. Investing in great deals and providing return. Amazing talent throughout Europe in small countries. The joy is working with this star people. Probably gonna do this forever.

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