On the podcast: Seed's silver linings November 10, 2022

Maëlle Gavet, CEO of Techstars, joins the podcast from Web Summit 2022 in this bonus episode of the “In Visible Capital” podcast. Gavet unpacks Techstars’ approach to pre-seed investing and talks investing in the Middle East and Africa, opportunities in the farm-to-fork supply chain, and why she expects VCs to start disappearing as LPs concentrate their capital. Check out the episode to hear why Gavet is optimistic about the early stage, despite a daunting geopolitical landscape.

Listen to all of Season 6, presented by Sapphire Ventures, and subscribe to get future episodes of “In Visible Capital” on Apple Podcasts, Spotify, Google Podcasts or wherever you listen. For inquiries, please contact us at podcast@pitchbook.com.

Transcript

Nizar Tarhuni: I think a lot of people are familiar with Techstars, but I think it’d be good for us to maybe take a step back, and I’d love to hear your perspective on how you view Techstars, especially since you’ve taken over as CEO over the last couple of years, and maybe help the audience better understand what Techstars is today and how it operates.

Maëlle Gavet: Absolutely, Good morning. Very happy to be here. Techstars has been around for 15 years. We’re basically, by now, the largest pre-seed investor in the world, and the way we do pre-seed investment is by running accelerators, but accelerators are really a means to an end. As an investor, we have now made over 3,300 pre-seed investments in companies all around the globe. We’ve invested in 60-plus countries and pretty much any vertical that you can think of related to technology.

We’ve been increasingly a major deal flow for the venture capital world. A lot of what we’re doing regarding access to entrepreneurship for underserved founders, regarding focus on sustainability, regarding development of countries that are not necessarily right now in the radar of venture capital, all of that has an effect later on, on the venture capital world in general. This is a very, very exciting time to be a pre-seed investor right now.

Nizar: Let’s talk about the last few years. There’s been a tremendous clip of fundraising across the global venture market. There’s $540 billion-plus of dry powder sitting out there with a lot of corporate money that’s been supplementing general funding trends and deployment of capital into the innovation ecosystem. I think close to 80% of that, though, has been sitting in billion-dollar-plus vehicles, especially in 2022. What does that fundraising market look like for a firm operating as early as Techstars? How do you guys think about sourcing capital? What has fundraising been like just, in general, for you over the last couple of years?

Maëlle: You’re absolutely right. The vast majority of increase in venture capital deployed has been on later stage. If you look at amount deployed versus number of deals, the amount deployed has increased on the later stage because valuations have been going up and up and up, but the actual number of deal hasn’t. And so a lot of the gross in venture capital just comes from inflated valuations at a later stage. If you look at early stage, here, the number of deals has actually increased the valuation a little bit, but not so much.

For a pre-seed investor like Techstars, our deals have been the same for many years in terms of how much we invest in companies and the valuation that we command. What we’ve seen mostly is an increase in the number of people who want to be entrepreneurs and who see the value proposition that Techstars offer them, which is not just the check we give them, but also the programs we put them through, the accelerators that we were talking about, but also, everything that happens after the accelerator, because we have a huge service platform to help them [with] fundraising, finding talent for their company, and also, the communities/mentor network.

All of that has made it decently easy for us to continue to invest. This year, 2022, we’re going to do between 550 and 600 pre-seed investments. Next year we’re planning to do about 800. We do not see any reason to slow that down because, despite the economic downturn, there’s a continuous, an increasing stream of entrepreneurs who are coming into the space.

Nizar: How do you think about– I’ll take one quick step back. Sources of capital, the LP base, what does the LP base look like today, or relative to maybe what it was when Techstars was founded? What are those conversations like with LPs today, given everything they’re seeing across all the assets that they’re invested in?

Maëlle: A lot of very interesting conversation with LPs right now. I know that you know, but exposure to venture capital for a major LP, whether it’s pension fund or university endowments in the US, have steadily increased. Their exposure to VC is much higher now than it was a few years ago. At the same time, right now, they’re looking at a market where the valuations are crashing, that creates a lot of anxiety. At the same time, there is still a very different conversation happening depending on whether your GP at a later stage or your GP at an earlier stage like Techstars.

For us, when we talk to LPs, existing and perspective—because, by the way, there’s still a ton of money to be deployed—it’s not like these LPs are dry. They are continuously looking to find GPs that are going to be there to deploy their capital efficiently. The conversations that we have with them are a lot about [how] what Techstars offers to them is a highly, highly diversified portfolio. When you invest it into one of our fund, you invest in hundreds of companies all around the world across multiple industries. What they come to talk to us about is, “Oh, you guys are offering the upside of venture capital with the downside protection of an almost index-like product.” That’s very exciting.

That’s very different than the traditional venture capital product, which is very low diversification, very small portfolio. Usually, only one or two bets are going to pay off and you just hope that these one or two bets are going to cover the losses on everything else. In that area, I know a lot of LPs are very worried, very concerned, and looking to decrease their exposure, looking also to invest in less GPs. I expect a high concentration of institutional LP money in the years to come, which will likely lead to, who knows, up to 30%, 50% of venture capital firms usually disappearing.

Nizar: Investing that early at a firm like Techstars, as people want to shrink the volume of managers they invest in, I don’t think it’s a large leap to think maybe they want to write bigger checks to more proven managers that have the ability and the capacity to take the bigger money and the bigger checks from the LPs. Do you feel like Techstars offers those LPs the ability to write checks that big or do you think for them, the preference is still to keep a Techstars on the roster because they’re going to get less concentration risk, they’re going to be diversified by industry, by geography?

While maybe they’re not going to be able to write the same check, they might be able to write to a larger, multibillion-dollar fund. The asymmetric upside that maybe Techstars can provide is valuable for them? Just trying to understand the shrinking amount of GPs you work with, is the capacity still there to invest in a firm and invest as early as Techstars?

Maëlle: Absolutely. Again, obviously, I’m biased. That’s the beauty of the Techstars model is, if you’re an institutional LP and you want to deploy hundreds of millions of dollars, billions of dollars, into early stage, what are you going to do? You’re going to go and talk individually to 1,000 angel investors? Obviously, you can’t do that. What you can do, though, is come and talk to us because, as I say, this year 550 to 600 investment, next year 800. We have the capabilities to go much larger than that. We’ve been talking about the plan to do several thousands of pre-seed investments a year.

When we talk to potential LPs or existing LPs, the check size that these people can deploy with Techstars is, to a large extent, similar to what they can do with later-stage investment. Apart from the fact that in later-stage investment, their GP are going to invest in a few deal, let’s say a dozen deals, whereas with Techstars, it’s going to be hundreds of deals. That’s back to hyper-diversification and lower volatility that we were talking about earlier.

Nizar: I want to piggyback on a few different pieces here. I do think it’s important in light of the current situation. You are diversified geographically across multiple continents, major cities across the US and Europe. You said earlier that there is an uptick in the volume of entrepreneurs or individuals who want to be entrepreneurs. I’d have to imagine that the ability to evaluate the quality of those entrepreneurs with more volume gets more difficult, as you think about evaluating the quality of those entrepreneurs across different cities in different countries that have their own different political and economic climates to navigate.

I want to talk a little bit about what’s the risk evaluation process as you’re deploying capital into many of these new entrepreneurs? Then I also want to unpack a little bit, what is the deal evaluation process look like or the accelerator evaluation process look like across different cities and geographies? Is that a standard process or thesis-driven environment across Techstars? Is that different by office? Maybe just how you think about risk in this environment across those different locations.

Maëlle: Let me start with your middle question, which is the term. The term sets our standards, wherever you apply. This year, we’re going to run 55 accelerators, I think, around the world in 15 different countries and the terms are exactly the same for everyone. It’s $20,000 upfront and then $100,000 convertible notes. The compulsory participation into the program so the accelerator or the boot camp and then all the services that comes in the access to the mentor network.

Whether you apply to our Lagos accelerator or New York accelerator or Silicon Valley accelerator, you’re going to get the same terms. The financial terms, again, are just one piece of the equation. When it comes to risk evaluation, the Techstars model is a hybrid model in terms of we have a central overview of all the trends that are happening.

That’s why I can talk to you about pretty much any vertical that you’re interested in because we see what’s happening in foodtech, in sustainability, in edtech, in fintech. We have an understanding of what are the key markets from an industry and geography perspective, thanks to all the data that we collect. It can get very granular because we see applications coming up way before a typical VC would get deals coming to them. We identify clusters of innovation and are like, “Oh, there is something happening in there.” That’s at the central level, but we also, and that’s where I talk about a hybrid investment model, we also have local teams.

If you apply to our Paris accelerator, there is a managing director there alongside of other managing directors in Europe who is going to meet with you in person and evaluate the team, evaluate the solution that you’re trying to bring to a specific problem, evaluate the size of the market. These are managing directors who know very well the local ecosystem, very well the local market, so it’s not Americans deciding whether or not the French market is the right market. It’s people embedded into the French market [that] were like, “Yes, from a European perspective that makes a lot of sense.”

Nizar: Let’s talk a little bit shifting gears to the current state of venture. Late-stage valuations are declining rapidly. I looked at a statistic with PitchBook that if you looked at the top 10% of valuations a year ago, top 10% of companies that had the largest valuations, I think the median check size that was being written around that time or the median valuation was about $1.25 billion, or something like that. That same valuation has now declined 63%. Companies that were the top 10% valuations this month are 63% lower than what they were last year.

What I thought was interesting is if you went to the lowest 10% evaluations on a year-over-year basis, they’re actually higher today than what they were last year. I’d love to get your take on what you’re seeing in the overall venture market in Silicon Valley and globally. How you think that’s impacting things at the earlier stage and just how you see things playing out over the next call it 18 months or so?

Maëlle: Your data reflects a lot of what we’re seeing which is the later-stage valuations over the last couple of years have gone completely out of hand. If you look at the multiple, whether you take them on a revenue basis or an EBITDA basis, when the companies actually have some positive EBITDA, they were becoming completely unsustainable and the market is basically correcting for that, which I think is painful, but healthy.

Interestingly enough, it does not mean as I heard sometime that there is no money and there is no deals. … Absolutely, there are deals being done. They’re just done at what I would consider to be a much healthier valuation.

If you go earlier stage or if you go into some specific verticals which are, for good or bad reason, very exciting for venture capital right now, like sustainability, for example, what we actually see is for the good companies, valuations continue to increase. They don’t increase as fast as they used to be. Again, I don’t think that was that healthy, but early-stage valuations haven’t actually really moved.

In the case of the good companies, they’ve actually increased because people are starting to realize that even with the 60-plus percentage discount that you were talking about before on later-stage valuations, these are still expensive deals. There’s more attractive deals to be done [at the] earlier stage, more opportunities to get upside afterward. Again, that’s why they come to Techstars because, then suddenly, they can invest in hundreds of deals at once and that makes it a lot easier.

Nizar: What worries you about the current environment and where we might be heading, economically or politically, and the impact that has on the overall business? Obviously, as a CEO of Techstars, you’re managing groups of people who are deploying capital day in, day out, but you’ve also got to manage the overall entity and the P&L and make sure that you’ve got your own shareholders that you’ve got to be accountable for. What worries you as you think about the next 18 months?

Maëlle: Techstars is 300-plus employees all around the globe, so yes, we have the capital we need to deploy, but we also have an operating company that needs to be managed. … We continue to support the portfolio companies we have, and we provide services to them. I am generally pretty pessimistic about the global economic outlook. I think what’s happening right now with the Fed increasing rates, with inflation continuing to increase, with the war in Ukraine that continues to disrupt supply chains all around the world is not making me very hopeful about 2023, in general.

Now, for early stage, again, there are still a ton of entrepreneurs. I do expect that older people that have just been laid off from the Google, Facebook, soon-to-be Twitter of this world, a lot of them are going to become entrepreneurs. That’s going to be a good alternative for them. For early stage, I’m actually pretty optimistic, because I think more entrepreneurs, crisis usually makes people more innovative so I expect a lot of really interesting startups. And on top of that, potentially more financially healthy startups, because there won’t be anymore the expectation that you can raise every 12 months.

We are already seeing more and more entrepreneurs who come to us with very smart, very thoughtful plans to reach profitability and be significantly less dependent on yearly fundraising. Pessimistic overall, but very optimistic for early stage.

Nizar: I’ve got a couple more questions, and one of the ones I want to touch on is industries and sectors. I think across the innovation life cycle, there are going to be peaks and troughs across different verticals, different sectors. You’ve got things like AI and machine learning that continue to build on top of each other and they’re buzzwords and you hear them all the time.

I feel like you’ve got other sectors like virtual reality and items like that that go up and down with their popularity. There’s foodtech, there’s agtech, there’s all sorts of different things out there. It’s very difficult to get a sense of what a TAM might look like, what a market size might look like, what the opportunity set for a company to actually have a sustainable profitable business in different sectors.

Maybe your take on the sectors that get you the most excited and maybe you can speak personally, but also for Techstars as well, what are some of the industries that you’re watching and why?

Maëlle: I’m very excited personally and as the CEO of Techstars around foodtech and agtech, and the reason is that suddenly because of COVID creating a lot of supply chain issue, including with food, the war in Ukraine making that even worse, plus a lot of concerns around sustainability, climate change, which are, to a large extent, related to the way we exploit the soil—AKA, how do we feed the world? These three things together have created a lot of uncertainty into food, uncertainty that frankly, the western world hadn’t experienced since World War II.

Suddenly, a lot of people who had never thought about whether or not we were going to be able to feed our populations are like, “Oh, wait a minute, actually, food security is not a given.” So increased awareness of the fact that we need to continue working on foodtech and agtech, basically, on the farm-to-fork supply chain in general.

On top of that, a lot of really interesting pure technology innovations around nanotechnology, for example, around better tracking in the supply chain. I won’t bore you with the details, but that area I think is incredibly exciting right now because there is demand and there is innovation.

I’m also very bullish on everything that is happening in the MENA region: Middle East, Africa. Lots of entrepreneurs coming to market, huge market, mostly untapped, lots of opportunity to take what has been developed in North America and Europe and adapt it to the local market, and capital that is finally waking up. We’ve been operating in Africa since 2011, but we are now finally starting to see venture capital paying attention.

When we send them a deal flow, it used to be that Africa was not even on their radar and now it is, and so that to me is also a very exciting pocket of investment.

Nizar: Do you feel, and this is maybe—not to be controversial—but I feel I’m going to ask the elephant in the room related to investing in so many different regions. Do you feel in a climate today, where things get a lot more uncertain, LPs then have to figure out the headwinds and the tailwinds across the various asset classes they’re invested in, the different geographies are exposed to and where they have risk. Do you feel like there’s appetite to stomach even more uncertainty in certain markets where you might not have the same political structure and economic structures, like in the US or in Europe, in developed countries, moving in the middle of Africa and certain places MENA?

I think those can be nerve-racking for some individuals, and then you also don’t know what types of legal boundaries you have around investments and how companies operate. How do you overcome those challenges? What do you think the overall market is going to think in the coming years while trying to face some of those challenges?

Maëlle: I love that question because you’re putting your finger precisely on the challenge that a lot of VCs have. They’re like, “I need to continue to find interesting deals, but I’m not sure I want to get exposure to the most risky regions.” That’s where, again, Techstars comes in because what we say to them is, “It’s a global fund, it’s highly diversified. You’re going to get exposure to the US. Over 50% of our portfolio is still US based. You’re going to get exposure to Europe and, by the way, you are also going to get exposure to what we believe are the top of African, Middle East, Asian, LatAm companies.”

That’s if you are an LP in Techstars, but then when you’re plugging into our deal flow, what you get is basically companies that have been not just vetted but actually mentored and coached so that they are properly structured from a legal perspective, from a compliance perspective. We have done an analysis around the market and we believe that these are large TAM. We usually work with a lot of local partners, like we just opened in Nigeria, we have a great financial institution as a partner.

We do a lot of the pre-work so that when we bring you as a more traditional VC, the deal flow, you’re like, “I wouldn’t go on my own investing in in the Middle East or in Africa but like this has been vetted by Techstars and so sure, why not do one or two deals?

Nizar: We can end on this, but I think a lot of conversations happening right now around and I think across, honestly, multiple different asset classes, both private equity and venture. You’ve seen funds that are maybe earlier stage and then want to raise funds later on to be a life cycle capital partner or you’ve got the flip side of that, as people say, you should find your knitting and stick to that and only invest across those verticals where you’ll have better risk-adjusted returns and maybe have a skill set that’s better suited for that.

What is your take on that philosophy? How does Techstars operate up the stack as companies grow in either Series A and Series B? Do you remain invested? Are you active secondary sellers? Do you reinvest across different areas there? Do you find it better for you to maybe stick at that seed-investment stage?

Maëlle: The way we think about our model is really a funnel investment. We start at the pre-seed level. We put them through the accelerator. We talked with you about the terms. We end up with between 6% and 10% of the capital in these companies. Then we do full-on investment for the most successful among them. We do have all the broader rights associated to our initial investments. We either do it ourselves—we have separate funds to do follow-on investments—or increasingly, we’re doing co-investments with some of our LPs. That’s part of the advantage or the bonus of being an LP into Techstars.

Nizar: Very cool. Thank you so much for joining us here today. It’s so fun to do this live and we look forward to having you on again.

Maëlle: Thank you so much.

In this episode

Maëlle Gavet
CEO, Techstars

Maëlle Gavet is CEO of Techstars, the global investment business that provides access to capital, one-on-one mentorship, and customized programming for early-stage entrepreneurs.

Gavet was drawn to Techstars as an entrepreneur at heart, having founded her first business at 16 and going on to start two other companies. She has been a senior executive at numerous large tech companies around the world, including Ozon, the Priceline Group (OpenTable, Kayak, Booking.com) and Compass. She was also a principal at the Boston Consulting Group for six years.

She has been named one of Fortune’s 40 under 40, a Young Global Leader by the World Economic Forum, one of the Most Creative People in Business by Fast Company and was on Time Magazine’s list of the 25 Top “Female Techpreuners.”

Author of the widely acclaimed book “Trampled by Unicorns: Big Tech’s Empathy Problem and How to Fix It” (Wiley, 2020), she is currently based in New York City.