An exclusive interview with William McQuillan, Founding Partner of Frontline Ventures. The interview first aired as the 6th episode of The European VC podcast. This is the second part of our talk, check round one, if you haven’t yet.
A little bit about William McQuillan
William McQuillan is a co-founding partner at Frontline Ventures. Before starting Frontline, William was a founding employee at Ondra, an award-winning startup investment boutique that went from a 4-person team to 70+ employees across London, New York and Paris in just 18 months.
William experienced firsthand the difficulty that European founders have when fundraising. This inspired him to set up Frontline and try to make VC better for entrepreneurs. Since then, he has led investments in over 20 B2B technology companies across Europe and the US.
We chatted about:
- How William perceives the funding environment in Europe, compared to the US;
- How Frontline collaborates with its LPs in adding value to their portfolio companies;
- The importance of firm-building for VCs and how he believes it’s paramount to Frontline’s success;
- Why VCs should be more rigorous in their use of data when sourcing deals.
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Raising a fund is different in Europe and the US
William was transparent with us regarding the difficulties he faced when raising his first fund. Options in Europe are limited when compared to the US. There are very few university endowments, one of the biggest sources of LP capital in the US. What is more, European pension funds often require ticket sizes too big to become LPs in early-stage VCs – the threshold is often >10 M€ and they don’t want to be a dominating LP in the fund. That makes it difficult to have them in a 30 – 50 M€ fund. Looking at the most important source of capital for emerging managers; family offices, you’ll find that most European families are 7 to 10 degrees detached from the entrepreneurial experience that led to the family’s wealth – a number which is 2 to 3 in the US. That means that most European families are more focused on wealth preservation rather than wealth creation.
As a result, the European Investment Fund (EIF) takes an important role, saving a lot of the European VC ecosystem. The Economist stated that around 40% of VC funding in Europe came from Governments, and EIF was responsible about for half of that. But government funding usually comes with strings attached, such as geographic investment restrictions. Even so, one must acknowledge that those public forces have enabled the European ecosystem to scale over the last 10 years for which they deserve great respect.
William is optimistic about the future of the funding environment in Europe. Data shows returns across multiple funds, with Cambridge Associates reporting 2020 fund returns in Europe being higher than in the U.S.
And better results will help change the large institutional investors’ focus, leading them into this asset class. All things considered, it’s very positive that government capital has allowed a lot of these funds to start proving that Europe can show returns and there are already signs of a stronger presence of institutional capital in the European ecosystem.
William expects that this, coupled with the low-interest economy we are experiencing, will lead institutional investors to move capital towards European venture.
Other positive shifts can be expected. European family offices will start to look at the VC ecosystem’s performance, and the rise of Funds of Funds means there’s now a great option for the more risk-averse.
Concurringly, William highlighted that there’s a lot of international capital making its way into the European VC ecosystem. Frontline helped blaze the trail for a stronger European ecosystem. Now, these factors are combining to make a much stronger space for emerging managers, investors and entrepreneurs.
LPs are looking for different types of return
Just as VCs have different value adds for entrepreneurs, so do the best LPs.
A key learning from our talk with William was the importance of thinking strategically about a fund’s LP-base. Some will be able to provide value to the portfolio companies. These are typically corporates, entrepreneurs with great exits under their belt or family offices that are still close to their businesses. These will often have secondary motivations to invest in your VC fund – e.g. encouraging a specific ecosystem or vertical, looking for insights into a sector or co-investing with the fund.
On the other end of the spectrum, you have professional institutional investors. These are a stable and reliable LP that you can count on for your next fund – provided you generate the expected returns. This is important as it will give you peace of mind as a manager. It also signals value to other potential LPs. But this is not all, they will also be very clear about their reporting requirements and when you need to start fundraising for the next fund. While this might sound like a formality, it is integral to remember that formalities matter a lot when dealing with LPs.
How VCs have changed in recent years
When he entered the business, William found that a lot of people used to go into VC to retire. At the same time, he found himself at the opposite of that, being the youngest partner of a VC fund in Europe.
As discussed in our episode with William, VCs get to meet people who are lifting them up mentally and trying to excite them every day, and which is of course incredibly stimulating.
Since VC sits right at the top of Maslow’s hierarchy of needs, it’s the perfect wind-down path for someone with an accomplished career behind them. A 9 to 5 workday is possible, while still having a routine full of people wanting to meet them and boost their ego. But this is in stark contrast to how William thinks of this job as a VC.
In recent years William has noticed a shift in people breaking into VC, with ambitious managers starting to become more common than those who come into VC to retire.
Data is like a lens to help you see the ecosystem
Though the gut feeling is still quoted as crucial to investment decisions, William shared his belief that data has an edge to it. In most other investment categories where data has become more open and transparent, algorithmic trading was highlighted as the right investment strategy. William believes that VC should follow suit, using data to help deliver stronger results.
Later stage investors already use a lot of data. As Frontline’s investments are about 80% pre-revenue the challenge for them is determining what data to use. How people are perceived still involves a lot of gut feeling, but Frontline is constantly looking for new ways to find data to support its activity. For example, weekly alerts have been set up to find people who change their titles to co-founder or founder on LinkedIn.Data is an advantage, but most people don’t use it. If you want to set up a new fund in Europe, you should be thinking about ways you can use data to your advantage.
Cooperation as a strategy to see globally.
Initially, Frontline was seen as an Irish VC, and people took a long time to realize they could invest across Europe. So, data was, once again, used to get a better view of the European ecosystem. The question was: how to figure out what Frontline was seeing versus what was actually happening? Despite being able to see circa 95% of the deals in Ireland, in the UK only 20% were in sight. Looking upon those being missed, a lot came out of Universities. So, relationships with those universities were built. Other relationships with different entities arose from this analysis. Sharing info with selected funds, was one of them, increasing Frontline’s line of sight in the UK and Europe.
Data allowed for different gaps to be found, and different strategies to be crafted accordingly. Strategies as doing content, scout funds, or even making deals in specific ecosystems can all play a role. Great founders can be found in all geographies and that fuels William’s ambition to build a global firm to serve them. Today Frontline sees 75% of all deals in the UK and 25% to 30% of all deals in Europe.
Take a stand round
This time, for our second interview with William, we had a Take a Stand round. The questions were aimed at gauging William’s take on a given topic.
There are two schools: those who swear to personal VC and those who swear to the firm brand. Who’s wrong and who’s right?
William stands clearly with the firm brand approach. He reasons that if you want your VC firm to have longevity, then egos must be cast aside, and a strong firm brand must be nurtured. That way, the firm can outlast its founders. In contrast, personal branded VC is common among those who move into VC to retire, making it more of a short-termed strategy.
Some VCs believe that partners must be hired in, and you can’t build people up from associate or another more junior position. What’s your take on this, who’s wrong and who’s right?
William is a strong believer that people can be built up from within the firm and Frontline plans to do so. William started out as the youngest Partner in Europe at the time and he credits much of his learning process to his older and more experienced partners. They treated him as an equal from the very start, while still being his mentors.
William also referenced the fact that many successful VC firms in Europe and the US build people from junior levels up to general partner.
Some believe a partnership has to be equal in all respects, but William believes that it can work perfectly well with different levels of reward and ownership if everyone commits to the partnership’s mission. That way, things can be structured to accommodate the natural cycle of GP careers. When someone retires, room is made for people who are moving up from below.
An early-stage European VC stated that the VC’s customer is the LP. In the first part of this interview, you boldly stated the customer is the entrepreneur. So, who’s right and who’s wrong?
William believes that attracting the best entrepreneurs will in turn generate the best returns to attract the LP’s investment. Therefore, Frontline’s offering is designed with the entrepreneurs up front and centre. In the last deals they looked at, founders had several term sheets to choose from. Just being the same as the other offers of capital won’t cut it and that’s why Frontline focuses 100% on the entrepreneurs.
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