Investing earlier, leaner, deeper and smaller

Maze started eleven years ago. If there is a constant in our journey of building a pan-European impact investment firm, it’s the ability to learn from our actions.

Since launching our first fund, in November 2019, we have invested in 47 impact ventures across Europe (including the UK), deploying around 35 million euros. Five years in, it is a timely opportunity to take stock of learnings.

These learnings guide our future thinking in applying venture capital as a tool to invest in founders tackling the most prominent social and environmental challenges of our time.

Earlier – we thrive in spotting potential early

We feel at home at the earliest stages. When ideas are being generated, teams are being created and prototypes are being built. That is where our networks thrive and where our team excels at supporting founders (while they are realising that founder is what they are going to be called from then on).

Through investments at pre-seed, seed, and series A, we realised that pre-seed is where we hit our stride. Pre-seed is the first round of capital that founders raise from professional investors. From our experience, it can range from 500k€ to 5m€, depending on the technology, market, and team.

At pre-seed our:

• Investment track record performs best.
• Team wins competitive deals and provides needle-moving support to founders using our data-driven customer (aka founder) ticketing system, with a success rate of 72% in addressing founder requests. Check out this video to see how it works:

• Network of 250 founders and Venture Partners source qualified opportunities from 28 countries, operating as our eyes and ears on the ground.
• In-house scouting tool yields the best conversion rates from seen to invested, having early spotted 20% of our portfolio since we started using it.

Having built a company ourselves for more than a decade is what gives us the lived experience to honour the opportunity of being there on day 0 with founders.

Leaner – optionality can be a blessing (luck) but most likely a curse (against process)

We’ve learned that, for a pre-seed fund, the focus should be on first investments, with little to no reserves for follow-on. Here’s a summary of our thinking:

1. Let us assume we are creating a portfolio of 40 companies, with a first investment in t=0 (months). Company #1 will likely (and hopefully) be raising a follow-on round in t=18 (months). By then, this portfolio will likely have between 10-15 companies, which means that we will still be investing in another c. 25 to 30.
2. When making a follow-on decision, we will be using not only imperfect information (known unknowns) but also incomplete information (unknown unknowns) about what is still to come. The opportunity cost of that decision revolves around the question ‘shall we retain (or strengthen) ownership of Company #1, or use that capital (let us say 500k€) to invest in a new company?’
3. If we don’t manage expectations around follow-ons properly, not exercising pro-rata can signal risk to new investors, which can, in extreme cases, create perverse incentives from fund managers.
4. If we believe that venture capital follows a power law, a follow-on decision might come at a cost of a new investment, limiting the diversification of portfolio. This assumption comes from how we answer the question ‘can venture capitalists pick winners?’
5. The power law in venture argues otherwise, meaning that the major share of returns is earned from a (very) small number of investments. This article from Ulu Ventures describes this assertively, showing that, on average, VCs pick winners 2.5% of the time; and in top performing VCs, 4.5% of their capital deployed generates 60% of their fund returns.
6. If VC returns are driven by the chance of having an outlier in a fund, then the portfolio size of that fund matters. This means that the opportunity cost of a follow-on versus a first investment comes at the expense of investing in a new company that contributes to the likelihood of having an outlier company.

In short, first investments tend to outweigh follow-ons especially if we can (i) ensure target ownership upfront, (ii) focus on pre-seed, (iii) pre-communicate a no follow-on policy to avoid risk signalling, and (iv) run a smaller fund that doesn’t require a high hit rate of follow-on investments.

If you are a fund manager and are still reading this and have a good rationale to explain how you decide on follow-on investments to maximise your hit rate (vs miss rate), we would love to invite you for a nice meal (on us) to exchange views.

Deeper – software might be eating the world but alone, will certainly not save it

We analysed 900+ portfolio companies from 30+ impact VC funds in Europe. Our analysis found that only 1 out of every 5 are science-based.

Science-based ventures are those that have an underlying scientific, engineering or computing innovation in their core product. Companies that leverage scientific discoveries and engineering innovations to address the most pressing challenges and substantial markets.

What caught our attention was this mismatch: while only 20% of portfolio companies are science-based, around 75% of impact unicorns are science-based solutions.[1]. This finding made us think deeply about the type of companies that we invest in.

Here we should pause and be grateful for all the deep tech and science-focused funds in Europe, that do not portray themselves as impact funds but that have been doing the heavy lifting of investing in ventures turned impact unicorns over the past years. Thank you.

This learning is backed by our experience as first investor in companies such as:

• Orbital Materials: foundation AI model for materials discovery, ranked the fastest and most accurate in the world, outperforming Google’s and Microsoft’s.

• Win Win Food Labs: producing cocoa-free chocolate and reducing the carbon footprint of chocolate by 80% through a proprietary natural-based fermentation process.

• Clear.bio (precision nutrition data model with proven clinical trials that help users stabilise their glucose levels through personalised recommendations based on their metabolic response to food intake).

Happy to share more (including an unannounced investment). 😊

Smaller – is beautiful in maximising financial and impact value

We are at an inflection point as a fund manager, constantly evolving how we allocate capital that our partners trust upon us, to deliver financial and impact returns.

Based on learning that our element is in a place in which we invest earlier, leaner, and deeper, we must understand what route to take: go bigger or smaller. It is tempting to go big and embrace an approach of increasing input (assets under management) to generate increased output (management fees and returns). We err on the side of going smaller. For a couple of reasons:

• Economics: a smaller fund, say €25 million, deploying earlier, leaner, and deeper will likely get to 50+ portfolio companies. Holding a 3% equity stake in one unicorn-valuation company (1/50=2%) is what it takes to return such fund.
• Organisational: we have a big poster in our office with a quote from a conversation between William S. Burroughs and Patti Smith. It says, ‘build a good name’. Trust, reputation and the ability to endure are, in our view, some of the most important currencies that a team needs to have to succeed in venture capital. That requires time and proximity, which is harder to achieve with larger teams and organisations.
• Tech-enabled scalability: being smaller and working closer with founders from day zero influences the number of companies that we can have in a portfolio. To balance that equation and achieve a relevant portfolio diversification threshold, we capitalise on our in-house platform which automates ordinary and repetitive tasks to free-up our capacity to the things that contribute to portfolio growth and performance. Pre-seed specialisation also entails that our journey of active support to ventures lasts until Series A, at the latest.

Our investment thesis is rooted in demonstrating that impact is the greatest economic opportunity of our time (which is why we link our remuneration to the impact performance of our portfolio, learn more about it here).

We will be closer to this mission by investing earlier, leaner, deeper and smaller, in our endless pursuit to be better – for our planet and society.

We love thinking together, so please reach out if you want to swap notes on these topics to antonio@maze-impact.com.

[1] Sources: impact fund database refers to maze proprietary research; database of impact unicorns available here.