A little bit about Joe Schorge
Joe Schorge is the founding and managing partner of Isomer Capital, one of Europe’s absolute strongest FoFs. Joe started his career in technology management positions that got him up close with M&A. This led him to a whole string of accomplishments in PE & VC doing direct as well as fund investments. To top it off, Joe has also made Angel investments.
In this first part of a two-part interview, we’re talking to one of the greats as we dive deep into the origin story of Isomer Capital, Joe’s investment thesis and what it takes to be a great VC.
Some things you’ll learn:
– What makes Europe so unique that Joe, as an American, had to start his fund here.
– What profiles make up the VC dream team – the so called hackers, hipsters and hustlers of VC.
– Why innovation requires an open-mind while searching for patterns and trends.
– How Isomer Capital creates value for their portfolio of VC funds.
If you’d like to listen to more of these meetings with European VC champions, follow the EUVC Podcast.
David Cruz e Silva (David): Joe! I want to jump right into our talk with a very specific question that goes back a bit. If I’m not mistaken, you decided to launch Isomer back in 2015 and there’s this question that’s been bugging me: you’re American and the US ecosystem was booming, spitting out unicorn after unicorn, so why did you come to Europe to build Isomer?
Joe Schorge (Joe): I used to get that question a lot in the early days of Isomer. Maybe, in 2013, 14 and 15, it was less obvious how strong Europe was, you didn’t see quite as clearly that it was growing. So why do this in Europe? Well, while the US market is great you know – the US invented venture capital! And it’s a mature market. It’s sophisticated, it’s highly capitalized, but it’s also highly competitive, there are lots of excellent General Partners (GPs) and there are lots of excellent Limited Partners (LPs). But it’s also high priced and access constrained. So, to understand why we started Isomer, we most go back to what I always ask myself – and all our VC partners in fact: “why does the world need another fund”?
And the strength of the answer there is completely different for Europe than for the US. In the US there are lots of great FoF investors and basically doing what we do. And I look up to them, I learn from them and they’re brilliant. But in Europe, by contrast, here’s a market that’s growing very quickly and it’s generating strong returns but with less capital – resulting in lower entry valuations. And in addition to these favourable economics, I saw a really special moment to access Europe – to get into the most exciting companies, the most exciting new VC funds and, as the system matures, to be part of tomorrow’s household names. And that’s really what got me so excited about Europe.
So, I reached this moment in my life where the opportunity was so obvious and so exciting that, if I don’t do something now, I will regret it for the rest of my life. And I don’t want to be that old guy at home one day saying: “Look, I saw the curve early, you know!? I saw it coming!” So, that’s really what brought me to start Isomer Capital.
Andreas Munk Holm (Andreas): Joe, I want us to double down on your strategy and what you’re doing differently from everyone else because, even though there are many VCs out there looking to get LPs in, it is still a competitive game, and the best funds are difficult to get into. So, I’d love to hear how you differentiate yourself from everyone else and what’s your secret sauce?
Joe: It’s a big question and I can’t reveal all the secret sauce thatwe’re working to cook up every day! But let me start by saying an odd thing: I never woke up one morning and thought to myself “Boy, I really want to build a Fund of Funds!” That wasn’t how it happened.
In contrast, as the opportunity in Europe became more exciting and obvious to me, I thought to myself: “If you understand the landscape – how it’s highly diversified geographically and fragmented in terms of where the next big thing will come from, the challenge then is to understand how to approach it. So, I asked myself, how would I do that if I had a clean sheet of paper to start and should build the perfect strategy?”
So, I looked for where great entrepreneurs get their first professional money. You want to be early in the next Spotify, or the next Deliveroo. And if you look across Europe today, they generally don’t get their first money from household names or from the big brands you’ve heard of. They get it from what I call “the local digital champion Seed funds”. A simple way to think about it is: if you’re in Berlin and you’re working on your startup in your garage, and you stick your head out of the garage looking for your very first money, who do you see? You see the people in Berlin! The local entrepreneurs and VCs that you look up to. If you’re in Stockholm; it’s the same, and if you’re in Barcelona; it’s the same! So, for me, the question was how could I be hyper-local? How could I have access, and the brainpower, that was in all these places where thebig outcomes are growing? We just had the IPO of UiPath which is a wonderful example. I don’t know how many tech investors are travelling to Bucharest to make early-stage bets, but I can promise you the number is higher now. You might ask; Bucharest a big tech hub? Well, you wouldn’t have thought of that in the past, but the outcome that was born there was amazing. Absolutely amazing.
And that realization was what led us to the FoF strategy. We thought that if we could be a good partner with these early-stage VCs, then we could help them with their business and we could join them as a co-investor in their companies along the way. That was the origin of the strategy. And, of course, there’s a lot more nuance to it. How to be a great partner? When to co-invest? How to co-invest? Where to invest? But the idea was to capture the best of Europe in a structured and rigorous way.
David: Joe, let me ask a follow-up question. A lot of our readers are emerging managers, or even aspiring emerging managers who are getting ready to start that amazing adventure. Since you and Isomer are interested in emerging managers, can you tell us a bit more about the profiles you’re looking for and what you’re looking for in emerging managers?
Joe: Hahaha! I like that you ask me that, because sometimes we get called “The Fund of Emerging Managers” though that wasn’t ever the goal. Nonetheless, it’s broadly true, although recently we’ve backed some funds three, four and five. – And that’s very much connected to the increased appearance of such funds as a natural feature of Europe growing up. But our lens on the market focuses on being the first professional money into companies, the first capital an entrepreneur gets at the seed stage, sometimes pre-seed or seed plus. And if you look across Europe today, a very large segment of the market that’s putting professional first money into companies is made of what you’d call emerging managers. They’re putting together fund one, launching fund two or three, and we’ve invested in a lot of these.
As you know, traditional LPs like to back funds from four upwards, because they can look at the track record. If somebody had a great return in earlier funds, then they feel comfortable. The problem with that approach is, in my view, that it is less tailored to Venture Capital than in any other private market segment. By nature, Venture Capital and innovation means that tomorrow looks different from today. Therefore, if you invest in the same thing that made you successful yesterday, using the same method, you’re probably not going to catch the next big thing. Investing in innovation means you must keep an open mind and look forward. Naturally we love track record, and if you can invest in fund four on the top of three awesome funds, great! I’ll do that every day.
However, you may also find that fund one is being launched by somebody with a big idea and a new thesis, and mind you, they may have experience too! We’re not looking to back people just because they’re new. We’re looking to back people because they can do something special and more powerful than others. What I’m more interested in, is how can we generate success together, how can we win big? I’m interested in that, more than I’m interested in what Fund number you’re on.
Andreas: I see that there is this apples and oranges issue with getting into VC, oftentimes you want that track record of having invested before but, naturally, many people won’t have it. Founders are one of the profiles that can turn into VCs with relative ease. What other profiles do you see being able to take this route without having that issue with the lack of investment track record?
Joe: You mentioned to me, at some point, the notion of the start-up dream team – with the hipster, the hacker and the hustler being the nice combo.
For us, I’d say we have three profiles that we would call “the entrepreneur, the executive, and the ex-VC”. What I mean by that is that there’s a skill set required to build a great VC firm.
The first is the entrepreneur; he’d think “I was an entrepreneur: I founded a company, I built it, and I sold it. Therefore, I have a lot of experience in hyper-growth, product development, and all those things that make a company great. However, I don’t necessarily want to do that again. Now I want to use the capital I made and the experience I got, to coach the next generation.” I call that “player turned coach”, and one of the first firms I was ever involved in that was like that was Atomico which was very different for Europe at that time. It was of course founded by one of the founders of Skype . And I think that’s a great profile for all the reasons you can imagine. However, it’s not clear to me that every great player makes a great coach. That’s true in football and that’s true in VC. There’s this important thing you must understand: if you want to be a coach, are you able to step back and use influence and be a good board member? You’re not taking control of the company, it’s not your company to run. Being a coach is different from being a player, but certainly players have a great skill set to bring to the next generation.
The second profile is what I’d call “the ex-VC”. Somebody who worked at Index or Accel or another great firm, acquired lots of great knowledge and experience and built a great network. A lot of people leave those firms to start new firms. Ten years ago they were not around, but Europe is full of them now, so we’ve backed ex-Accel people, ex-Index people and lots of others. They’re fantastic because they have a network, they’ve worked within a big machine, they know how to run a thoughtful Due Diligence- process (DD) and so on. But what I love about those people is that, often, they have a thesis, they have a big idea. Their thought might go along these lines: “There’s a certain kind of founder that needs my help and they’re not getting my help within this bigger firm. So, I’m going to exit and create a firm around this thesis.” I find that super exciting because you’re unlocking this talent into a new thesis. Usually, when you peel it back, they’ve been thinking about it for years. So, that moment when you can back this big idea that’s been cooking quietly in the background, that’s quite exciting. And again, we’ve backed a number of those and they’re working extremely well.
The third profile is what I’d call “the executive”. The executive is the person who worked at a big tech company – Google, Apple, Microsoft etc. – quite often they worked in strategy, in corporate VC, or did something that brought them into working with startups. What’s interesting about that profile, and additive to the other two, is that they know how to scale products, how to take something from ten to ten thousand customers, they also have a good network within the big corporate landscape, which helps for customer development and exits later.
My theoretical great firm for Europe would have one ex-VC, one ex-founder and one ex-big tech company executive. And you see firms like that in Europe today, which is super, and we love trying to understand if we can buy into their thesis. When they have that powerful mix of skills; that’s exciting.
Andreas: Joe, I meet a lot of advisors who actively advise companies on the side of their day job and then they see this route where they have been helping founders in the very early beginnings, at the pre-seed stage, for the past five or ten years. Then, as the companies grow, they tend to fall out of the journey. How do you see this profile of advisors, wanting to crack into VC?
Joe: I can’t say I’ve seen many people with that sort of profile, although I’ve seen some. I guess my questions would be: “what have you really done for the founders and the start-ups? Is that portable, reproducible and scalable?” Many people give friendly advice to founders, but you must be a bit introspective and analytical and ask: was that really generating value and formative, and can I bring that value to lots of start-ups? If the answer is yes, fantastic! We’ve backed some people like that, who had a pretty thin investment record, but they had a great record of helping the entrepreneur in at least one segment of the company build.
For example, if you’re investing very early in a company where the product is not well developed, and you’re a product expert who’s willing to contribute, you can have a powerful impact. I would hope that someone with that profile would partner up, to get some investment experience and some other kind of experience on the team. Again, the nature of innovation is such that if you only look for the patterns of the past you probably will miss the really different, exciting, big things, so keep an open mind.
That’s a tough thing to keep in mind, right? On one side you want to go back and look for that pattern, but on the other side you’re going for the unknown. I’ve been around for long enough to know that if you talk to the early backers of big famous companies, they’ll tell you: “Oh, of course I knew it was good”. But if you drink a beer with them and get the real story they say: “We didn’t really know. To be honest we made a bet.” I never forget one guy said who to me “I didn’t think Facebook was a good idea at all. One of my partners did and he brought us in there, but I was against it!” As everyone knows, Facebook went on to be successful and they were very happy, but I’ve heard a lot of stories where seed-stage investing is really not clear. So, I think that keeping that open mind whilst using all the heuristics to do past pattern recognition is a challenge. And I struggle personally with that – to look at new concepts and suppress my scepticism.
We’ve backed enough new ideas and you must be comfortable, in this job, to be wrong and to be wrong fairly often. I don’t like being wrong, but a lot of ideas took me a year or two to come aroundto. Cases in which, the first time I hear the idea it doesn’t make any sense to me, I can’t see any value in it. And then you keep talking, you keep thinking, keep researching and six or twelve months later it hits you! Then I go: “Okay wait a minute… I get it now; I apologize it took me so long to come around to it.” We’ve backed a few things like that, and I’m absolutely thrilled we did. They turned out to be really big successes as a result.
David: I’d love to deep dive on something you briefly touched which is your value add to fund managers of the funds in which you invest. Particularly, how do you balance that fine line between adding value and meddling?
Joe: Well, there’s a fine line between supporting and meddling, as you say. The VC must walk that fine line with companies, particularly when you disagree about the direction of the company or critical decisions. And I think it’s the same with us as an LP. As I explained earlier, we set out as an LP to be a great partner to VCs, and the capital is part of that equation. But, if you want to be a great partner, you’re looking out for your friend in ways which they may, or may not even, see quite often.
Looking to the emerging nature of Europe with lots of emerging managers who are the first money into companies, I find it’s useful to talk with those emerging managers about the running of their funds. It’s a new business for them; called fund management, even if they left Accel or Index to start it. So, in addition to backing great entrepreneurs and all of that, you’ve got to run a fund with different kinds of stakeholders; and it’s a product. You spend your whole day with founders trying to improve their product and you should really think about your fund like a product: who’s buying? What are they buying? Why are they buying? I find that most LPs that are investing actually don’t have the time, the interest, or the capability to think about the business of the VC. And so, as an LP, if we can do that, if we can think about our partner VC and help them out. Tell them that we’ve invested in 35 other VCs and there’s a couple of them that do certain things really well and that they could learn from them, and we’ll connect them if they don’t already know each other. Then there’s a cross-pollination which is fairly straightforward but super valuable.
Interestingly, when VCs look at companies, they see strengths and weaknesses. And, when VCs invest, they’re conscious of those weaknesses. If you’re a value-add LP you should also think: “what can I do about those weaknesses over the coming years?” And don’t forget that, as an LP, we’re signing on for 10 years. This is not a quick flip, we’re getting married! We’re going to be with you a long time so, we try to identify the areas that we think could be stronger in that firm. You might also call it the blind spots. And then we’ll try to help them in those areas. Every firm’s different, just like every company is different andpart of that help is active ownership – being a good Limited Partner Advisor Committee (LPAC) member, being active and thinking about their business – and then there’s the other part, the reactive element; having an open door and “call us”-anytime policy. And that is, I think, the moment of truth. When something goes right in a company or a VC, everyone’s happy to talk. But when something bad happens? I always question myself if our VCs feel good and have a positive bias to call us at that moment. Sometimes we can help: maybe it’s a situation we’ve seen before, or we have capital that can help, or we have a structure that can help. There’s a lot of different scenarios and there have been some interesting moments, over the past years, where a VC have called and said: “I don’t know what to do! This is happening, please don’t tell anyone …” I think when I’m being a really great LP, the role I’m playing mixes aspects of a trusted friend, an advisor and an investor.
Andreas: In the VC world VCs help assemble the syndicate of investors around an investment they’ve decided they want to commit to design the financing journey onwards. Do you, as an LP, act in a similar role for an emerging manager if you’re one of the early ones to be contacted?
Joe: Absolutely! We’ve corner stoned quite a few firms. Sometimes, if you have this open mind about where big ideas and exciting investments can come from, you meet a team or a person who doesn’t have a fund yet, who doesn’t have a firm yet. And what we’ve always thought at Isomer is that we should be open to that. If somebody really great is launching a new firm and they need help, we should provide the help. It can be capital, being a good reference to other LPs, and all of that. But there’s also a ton of other things: how do you build a data room; where do you get good service providers; and so on. If you’re entering this business of fund management and you haven’t done it before it’s a bit of a learning curve. At Isomer, since we have the capability, but bear in mind that these are big projects, we tackle one at a time – we keep moving iteratively through the whole process of building the firm with the manager. And I love that, it’s one of the most fun things you can do. You’re debating what’s the strategy, how many seed tickets, what’s our reserve ratio, you’re cooking a soup together and agreeing on how many potatoes and carrots goes in there you know? It’s really exciting in those formative stages, but it’s a lot of work. Though we can’t do every fund in Europe that way, we’ve done quite a few and they’re doing extremely well. I’m proud of our contribution there! Having said that, there are so many firms in Europe now that it’s a struggle. There’s really ismore good stuff to back than we can.
This is the end of the first part of this interview with Joe Schorge, Founding Managing Partner of Isomer Capital, one of Europe’s leading FoF.