Reference Capital - Funding from the bottom up

Hélène van Berchem, Associate • José Galeano, Co-Founder & CEO • Olivier Mettraux, Partner • Luke Carroll, Chief Investment Officer

Since beginning in mid-2019, Reference Capital has invested in 72 funds. Relatively private, this is a rare and fortunate insight into how the company operates and serves its international base of clients. Touching on their research process, how they select funds, what they expect over the coming years and advice to budding investors.

What are your investment verticals?

Since mid-2019 we’ve made 72 investments into funds and 14 select direct investments. We have three main programs:

Our first is bespoke mandates for large family offices where we deploy into a program for VC funds. We try to allocate depending on the families, but invest between $20 and 50 million per year into VCs. Our standard is between eight to 12 funds per family per year. This is the primary core of our business.

Secondly, we have two fund-of-fund programs at the moment: a seed fund-of-funds program and a blockchain fund-of-funds program, where we invest into funds..

The third is our co-investments, which is where Vauban comes into the picture. We mainly co-invest alongside the GPs in our network. For example Wayve (a UK based Autonomous vehicle startup), was a co-invest in which a few of fund managers we knew were investing. We got direct access to the company through this network and were very impressed with the technology and team, especially their CEO Alex. In addition to our GP network, we also find promising companies through our own research and deep-dive efforts - Brightseed for instance, was very much a research-driven investment.

Can you elaborate on what you mean by your own research?

We develop a full map of each ecosystem, analyse thousands of companies in that space, tagging them to different sub-sectors, and build our own taxonomy. Then we work to identify the leading or up and coming companies in each category and look at who is actively investing in those companies to help identify the landscape of funds in that space. Given the lack of track record versus the number of funds emerging for instance in blockchain or food and agtech, it’s important from our perspective to take a bottoms-up approach to understanding which funds are leading rounds in which sub-verticals, who is co-investing with whom and also to understand from the founders and GP perspective who are the leading funds in the space. Given the capital intensive environment we are in it’s more important than ever to understand if the fund we invest in can attract top founders and if these funds are able to deploy the quantum of capital raised in these top companies. 

Brightseed, for example, that we've done through Vauban, was one that we followed for almost two years after a deep dive in the microbiome space to start with and then in food and agtech. It was clear that the team had expertise that not many in the industry have for building their AI/ML system, the Forager, whose data set is now four times bigger than any other bioactives data set that exists in the world. For us, that's what is very interesting and what we try to look for: real venture investments with a lot of potential to change an industry.

Our research is very focused on emerging themes, we choose a select few pillars per year and deep-dive into them. The rationale there is that we educate ourselves in these sectors that are growing in terms of capital allocation, but we also share the latest insights with the families that we work with. The pillars we choose are quite broad: lifesciences, technology (where the bulk of our investment strategy is focused), and sustainability. We are conducting several deep-dives this year into sub-sectors within sustainability. We really believe that the triple bottom line exists in sustainability. It's not just investing for good - which we strongly believe in - but also a driver of value given the amount of governmental intervention in the space.

Reference Capital
Reference Capital

Given the capital intensive environment we are in it’s more important than ever to understand if the fund we invest in can attract the founders and are able to deploy the quantum of capital they have raised in the best companies.

Luke Carroll

In a recent study by Stanford, only 5 of the top largest VCs mentioned ESG or sustainability, and from an analysis of 3000 VCs only a few dozen mentioned sustainability in their thesis. Why do you think there is this omission of sustainability from VCs’ investment theses?

Sustainability is a big focus area for Reference Capital.  We are gathering a lot of insights to avoid greenwashing as it is a major fear for investors.  As such, as mentioned before, we are undertaking four deep-dives into sub-sectors within this space. We spend a lot of time trying to find out which funds are legitimately focused on the impact and for making strong returns. In most cases, what we've seen is that the funds that don't comment on impact are the ones that have very impactful investments. There's a whole issue right now around measuring the impact of these companies, something that a lot of companies are now trying to implement. It's often tough, given the company is still in a relatively early stage of development. While it's nice to predict the impact these companies have, it's another thing to then go and show that impact. Some companies have potential for massive impact but unfortunately are so nascent and new that you're not going to be able to quantify that and tell people how impactful it will be. As a result, funds prefer not to comment.

We have seen that in some companies where it's very evident sustainability is at their core, they omit commenting on impact because of the taboo term and oftentimes needn't comment on the impact because they believe it's evident already.

From the startups’ perspective, want to shift away from being associated with philanthropy and compete in the same realm as the more ‘technological’ startups.

From the startups’ perspective, oftentimes even the ones with sustainability at their core, they want to shift away from being associated with philanthropy and compete in the same realm as the more ‘technological’ startups.

Hélène van Berchem

How do you stay ahead with your thematic investing? How do you choose your next deep dives?

We have significant access to information thanks to our funds and 30+ experts that support Reference Capital. Conversations with our underlying managers, as generalists and specialists in their spaces, help us know what they’re thinking and shape where our focus is. Another factor is what our clients would like to look at and want to understand better.

Each sector has a very different approach. With sustainability, for example, we determined four pillars that were going to impact all the UN SDGs: starting with AgriFood, then moving to energy and resources, equal opportunities, then health. Approaching blockchain was a very different story.

We’d love to know more about what’s interesting you most in healthcare.

Healthcare is a space we are very active in and will continue to be. With the inherent risks with regards to single molecules and regulations such as FDA approvals, we really prefer to keep our focus on technology and how technology can enable the acceleration of medicine. The risk is more manageable. Although that's not to say we will say no to all deals in life sciences, we do plan on doing another deep dive in Life Science.

Enabling technologies include AI in bioengineering and technology that enables food as preventative medicine. Health and food are almost completely inseparable at this point: we don’t want to take drugs to stop whatever ailment we have, we want to stop the ailment before it even starts. It’s clear we need precision nutrition. Companies like Zoe or DayTwo that are trying to assess your microbiome and tell you what you should and shouldn't eat to keep you healthy. Though there's a long way to go to enable those companies to be as accurate as they need to be.

One recent investment we did was Kingdom Supercultures, which is very much at the limit of AgriFood and pharma. Longevity is a theme that we’re interested in, but we have enough on our plate for now.

What opportunities are you getting particularly excited about?

Outside of our assessment of emerging geographies. Within sectors we previously focused on AgriFood, blockchain, the microbiome and so on. Now we're honing in on circular economy and waste. The four topics we’ve seen emerging are food waste, circular fashion, carbon markets, and the blue economy related to ocean management. 

It's hard not to deny the proliferation of Web3 within companies. A manager that we're close with described it very well, that Web3 is more of a horizontal layer than a vertice sector, something every founder should think about adopting but one that every founder should not adopt. More and more companies, especially consumer and community-based companies, are exploring whether Web3 makes more sense to incentivize more interaction amongst their communities. So far it's done very well, although there's obviously volatility that still exists there. The backlash due to lack of regulatory oversight will hopefully diminish over time as we come closer to a regulated environment. Web3 is simply an area you can’t ignore. If you look at some of the top generalists, such as Union Square Ventures, you'll see a big chunk of their portfolio in blockchain and sustainability now. We think that's for a very obvious reason.

On the co-investment side, we’ve also seen a lot of activity around this theme. In part, it’s because it's very much linked to the main businesses of the families we work with but also because we identify them in the portfolio and discuss in more detail these investments with the GPs. In that sense, the families are also a great way to do technical diligence on an investment. For instance if it's circular fashion, some of our families are in that space and we can test whether the investment makes sense or not for them at a very large scale. If these families did decide to move forward, it would then provide a lot of revenues for the underlying company.

Do your decisions to co-invest overlap with your investments in funds?

No, for us having conviction in the fund is quite important regardless of any co-investment. We've been very fortunate to access a lot of oversubscribed funds as a result of our network and connections to corporations. The fund decision is completely separate to the direct investment decision. More and more in the micro VC investing landscape you see people using funds as means to get potentially greater access to co-invest but may not have the same conviction in the fund manager. For us, a conviction in the manager is key.

For managers of largely oversubscribed funds, they likely take a handful of new LP per vintage. Why we enter into the picture is because they can have Reference Capital as one LP, but with one LP they can have significant exposure into industrial European families with multibillion global businesses. For them, with one LP ticket they can have exposure to large corporations in new geographies, especially for US funds, that can add a lot of value to the underlying portfolio companies.

Your network is unbelievable. For someone who might be a brilliant investor but is just starting out and doesn't have a network yet, how would you recommend they go about building a network as strong as yours?

It's difficult and takes years. The best way to build a network is to do good and add value for people without asking for anything in return, to alleviate problems and build Goodwill. Likewise, the networks themselves like to connect: the families we work with have operational businesses in many sectors and oftentimes there are opportunities for collaboration or interesting discussions between them. We spend a great deal of time facilitating those conversations and creating a space for them to connect.

Another brilliant way to create your own network is to bring a differentiated/value-add approach in terms of research and knowledge. Let's say you spent months, time and capital researching on a specific topic that you share with a fund that’s investing in that space, that fund can turn around and say to others “Ah, I know this small fund that has amazing research connecting with many corporates within this field” - they consider as more of a strategic investor on the dealflow side too. But honestly, in most cases, if you are trying to access the best deal without bringing in any additional value, it's going to be very difficult, especially in a competitive market like now.

To add to that, certain sectors are more collaborative. For example, historically sustainability is more collaborative than competitive, making it much easier to make links and bring people all together. Likewise we’ve seen this in Web3. That said, as capital flows into these sectors and the requirements for ownership from these managers increase, we are seeing more competition emerge on the best deals. 

As with GPs, on the LP side you need to differentiate yourself with the quality and the specificity of your research. That makes a big difference.

To an investor who is starting their own fund, what advice would you give to them?

Selecting your LPs as a first fund is incredibly important, as you might not see a track record for two, three vintages. You want people who are there for the long-run, who understand the vision you've created and are willing to back that. Investing in a first time fund is like investing in a first time founder, there's a lot more risk than there would be a third time founder. It’s important to find the right partners with a good network who are value add and will back your vision into the future.

First time fund managers should probably be very careful with the size of their fund as well. It is always better to close quickly a smaller fund rather than hoping for a bigger fund that will last longer to close. Additionally, if you don’t have the brand and you set ownership targets too high, you risk missing target and being over diversified versus plan, failing to live up to what you told your LPs when they first invented. If you want to start with a bigger team and more support there are mechanics that work to enable you to do that and keep your fund size small. Happy to talk through that with any interested first time GPs. 

Go very gradually, prove your track record. It's a long-term game. 

Geographically, you’re pretty well spread out. Do you have a sense check of which regions are feeling more bullish and opportunistic?

If you take YC as a good proxy for where people were investing more recently, emerging economies were becoming a more significant focus for them. We also seeing larger funds establishing presence in regions like India and LATAM. These developing economies have a lot of potential with massive TAMs, we don’t see these funds pulling back from the regions but increase caution potentially in high inflation times. It will be interesting to see how this continues if inflation continues to rise. Europe has done very well in terms of amount invested to paper returns with some of the very large exits. We’re also seeing a lot of well-established US VCs setting up base in the UK, which is a promising sign. So Europe is an attractive area. Israel is a powerhouse for R&D and deep-tech. The amount of unicorns per capita is phenomenal. You can’t not be in Israel. 

Only once we do our research and dig further do we see what tracks we want to explore. So while we haven’t invested yet in India, for example, we’ve identified some very promising local funds that dominate deal sourcing at the early stages and have brilliant performance helped by capital coming from the US. India will likely be one of the next big investment areas for us. 

Our founder and managing partner have always had very strong ties to China where we think there is still risk from government intervention and acceptance of international investment but if we select the right managers it’s still another geography that fundamentally you need exposure to. We’re also starting to see some especially interesting developments in South East Asia and Africa. With the west becoming more and more competitive for managers, the off-growth into new geographies is something that we are exploring as well.


While Reference Capital is young, numerous members of your team have had 30 plus years as GPs and investors. Through that you’ve seen the dot com crash, recessions, the pandemics. Has that shaped any preparations for future market downturns?

Recession eras tend to bring the highest performing vintages, statistically that's the case. The entry value and the exit value are the two fundamental principles of how you make returns. We invest at early stages, so there should always be potential for very nice outcomes regardless of if you pay $3m or $9m post money but, if you buy at the right price, then there is in this example 3x upside in the difference compounding at a fund level. What's going to be interesting to observe this time around is that there is a massive quantum of dry powder in venture capital - $280 billion in US alone (to put in perspective, in Q1 2021, US VC firms raised the same amount of capital as all of 2019) - which didn't exist in the prior recessions - VC wasn't as well developed, you could argue, and there wasn't as much capital. We have noted a slowdown in transactions more recently and it’s clear there has also been adjustments in valuations, which is very much driven by public metrics and potential for higher interest rates. For Reference, we are excited about the timing. We have focused on more early stage investors looking to exit in 6-10 years time, in which the companies will be emerging into a different public market environment. 

It will be interesting this time as there is a significant amount of dry powder that needs to get deployed in the next four or five years’ time, which is why many are speculating that the VC environment will see a softer landing and activity will continue at a pretty consistent pace while the valuations will adjust. On the valuation side, it creates an interesting dynamic, because the amount of dry powder is high (with slower deployment) but the number of companies may remain the same. If funds don’t want to compete on price again with high supply of capital, then they compete on brand and on delivering value for founders as a differentiator. This brings about the idea of productizing VC. This makes for an interesting field to compete in, it’s something we're monitoring closely. 

Is there a vision for where Reference Capital will be in 2050?

Our objective is not to be the biggest in the world, but to be a reference in VC investing. Our mandate program is intentionally not very scalable because for the moment we invest at an early stage and don't want to be in a position where we have too many clients and not be able to serve them properly. Our value is really more bespoke helping our clients identify and access what we believe are the best managers, so we will continue to source the highest quality funds and look to onboard another three to five families with value-add backgrounds. 

Over this time we want Reference Capital to reflect a strong value add for all the partners, all the companies and funds that we’ve invested in. Becoming a referenced brand (forgive the pun) by word of mouth among LPs and the VC community would be our ultimate goal.