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BGV recently moderated a panel hosted by Marcus Evans on the challenges faced by LPs in constructing an alternative asset portfolio around the Venture Capital asset class.  The panel members included Matt Stepan with CFM, a financial advisory firm with $11Bn AUM, and Freeman Wood with Mercer Sentinel, a leading investment advisory consulting firm.  The full webinar can be accessed at: https://vimeo.com/marcusevans/review/233650620/3d1129d2c3.  This is the first in a two-part blog summarizing the webinar content focusing on the best practices around manager selection in the Venture Capital asset class.

 

Context & Key Trends

Since the 2008 financial downtown, there has been a steady increase in LPs committing higher allocations to alternative assets. In fact, this practice has accelerated since 2016 and is expected to continue to do so over the next 12 months.  In a recent survey by Preqin, almost 65% of the respondents said they expect to deploy more capital in the next 12 months, compared to the past 12 months (see chart below).

 

Global family offices with an estimated $4T are allocating 50% to the alternative asset class.  Within the alternative asset category, private equity (including venture, buyout and growth capital) and private debt have been the biggest benefactors of the shift in allocations.

 

Despite the recent run up in public markets, this sector is becoming structurally less attractive to LPs.  These LPs are responding by raising their allocation to private markets.  Some rotate out of hedge funds into multi-asset funds.  Even Sovereign wealth funds, and pension funds as well, which comprise 5-6% of the allocation to private equity, are expected to go to 10-11% allocation. Within the alternative asset classes, investor appetite for venture capital has significantly increased over the past 12 months, ranging from Family Offices, to Sovereign wealth funds, to Endowments and Foundations. This data is fairly consistent across all geographies.

 

 

Challenges – Manager Selection

While growth in the number of funds has increased- assets under managements and even distributions have increased- this development presents a unique set of challenges. In order to increase their allocation to alternatives, investors must find the right managers and investment strategies to put that capital to work.

 

There is a wide dispersion in the returns from the private equity asset class, heavily dependent on the fund managers.  We believe that manager selection significantly influences the net returns.



Furthermore, a stark difference exists between top quartile vs. bottom quartile managers in terms of fund performance – measured in net IRR. The chart below shows that the net IRR range over a 10-year horizon is between 16-17%. The median is about 6-8%. However, when you look at the bottom quartile performance, difference is more distinct.


Thus, the challenge for institutional investors is to find top quartile fund managers. There is no guarantee that one can generally invest in this asset class and get the type of the returns they target.

 

Q&A

In our discussion, the first topic we are going to discuss is the best practices our panelists and their clients have used to go about manager selection successfully.

 

  1. Matt, from a CFM perspective, what are the top two to three criteria that you have used successfully to select high performing managers?
  2. We tend to look at three criteria to evaluate and identify top quartile fund managers. These include: a) Top quality leadership – GP’s at the firm; b) A differentiated approach to investing in the markets they focus on; c) Early stage focus – to enable us to take advantage of the equity valuation increase that comes from investing in innovative companies at this stage.

 

  1. Freeman, what do you recommend to your clients around due diligence best practices to evaluate fund managers?
  2. We tend to advise our clients to diligence the fund’s governance and infrastructure to identify and make investments and also on how they manage the investments over time. Our emphasis is on ensuring there are sound, robust and repeatable processes to manage investments over time and not just identify investments.  We also tend to look for transparency in the processes.

 

  1. Matt, you see a high number of pitches from fund managers, how do you diligence the quality of the team?
  2. We tend to look for specific characteristics in the individual GP’s including: a) Strong operating and investment backgrounds; b) Their ability to relate well to an entrepreneur – the journey that an entrepreneur takes from startup to exit is a unique and difficult one to navigate.; b) A track record of consistent success and their ability add value beyond the capital be it as a coach, a trusted advisor and/or a productive board member. At the team level, we look for teams that have worked together successfully before – this ensures that they have worked out how they make decisions and work as a team.  

 

  1. Freeman, could you give us a few examples of robust repeatable processes that you look for when evaluating fund managers?
  2. We look for teams with demonstrated expertise in the areas of investment and operational focus. For example, we like to see a clear segregation of responsibilities and processes in areas such as making investments (i.e. investment committee etc.), finance/back office operations, management of portfolio companies and portfolio exit/dissolution.  We like to see that processes are well documented and have been implemented consistently over time.

 

In our next blog, we will summarize the best practices around sustaining returns over time once LPs have made the manager selection for investment in the VC asset class. 

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BGV General Partner Eric Buatois will serve on the panel “Crossing Border to Create World Leader” at the SuperVenture conference, part of the SuperReturn International series, on February 27, 2018 in Berlin.

Panelists will address the following questions:

  • Do startups need to make the jump to Silicon Valley early on to become a global leader?
  • At what point should companies access other growth markets such as China, India and Southeast Asia?

Eric Buatois will be joined by Dick Kramlich (New Enterprise Associates), Yinglan Tan (INSIGNIA Venture Partners), and Sudhir Sethi (IDG Ventures India), with moderator Martin Haemmig (CeTIM, GLORAD).  The panel is scheduled for the second day of the event, February 27th, from 11:10 to noon at the Hotel Palace Berlin.

Registration and more information about SuperVenture located here.
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BGV Founder Eric Benhamou will speak at the SuperReturn US West conference in San Francisco, February 12-14 2018. Panels hosted are “Raise and repeat: common challenges of raising the second and third fund” (February 12th, 2:15pm)  and “Succession planning in private equity” (February 14th, 12pm). Eric Benhamou will also discuss opportunity funds at SuperReturn West’s “Opportunity funds in the spotlight” fireside chat (February 13th, 3:45pm). Register to attend SuperReturn US West 2018 to hear Eric Benhamou and other industry leaders share their insights. Event details located here.
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True Global Ventures has held 17 highly praised Disruption in Financial Services events in New York (3 times), San Francisco, Singapore (3 times), Beijing, Hong Kong (twice), Shanghai, Mumbai, Stockholm (twice), London (twice) and Paris. We are stringing together fintech trends and what Financial Institutions in the future might look like. We showcase growth stage fintech startups, identify future Blockchain and Initial Coin Offering (ICO) trends and help bring the industry together. We do not allow this to become a PR & Marketing event, media and journalists are not allowed and Chatham rules apply. We are aggressively challenging the POC Artificial Intelligence Machine as well as the ongoing hype around ICOs. We dig into real user cases of AI and Blockchain applications to solve real problems and define what should go into production or ICOs. Look forward to an engaging discussion with top industry leaders (corporates, investors, entrepreneurs) in Fintech! We are industry-focused and understand trends and approaches to innovation throughout our 9 cities in 3 continents globally.

Upcoming Events

TGV San Francisco Event 2017

13 September 2017
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Venture capital firm Benhamou Global Ventures (BGV) recently completed the final close of their BGV III fund with $80 million of investable capital from new and existing investors. The fund invests in a wide range of emerging technologies worldwide, including Sherpa Digital Media, a video content distribution company with capabilities for augmented and virtual reality.  
  Source and Full Article: https://next.reality.news/news/market-reality-lampix-nokia-xiaomi-more-invest-ar-0178640/
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New Investments, Fresh Capital, Recent Exits, Mark Momentum for Benhamou Global Ventures PALO ALTO, CA –(Marketwired – June 28, 2017) – Benhamou Global Ventures (BGV), an early-stage venture capital firm with deep Silicon Valley roots and an exclusive focus on enterprise information technology opportunities in global markets, announced the final close of their third fund with $80 million of investable capital. Investors in the third fund include both existing LPs as well as new international and institutional LPs including several US, European, Israeli and Chinese investors. Extending the strategy of fund BGV II, BGV III will focus on enterprise IT sectors including cyber security, cloud-based infrastructure services and applications, web scale infrastructure, advanced analytics and artificial intelligence as well as industrial Internet of Things (IOT). The firm will continue its cross-border investment strategy, identifying and investing in promising companies originated in Israel, Europe and Asia and helping them build a presence in Silicon Valley. BGV has made 5 investments from the BGV III fund recently: Bayshore Networks, an emerging leader in Industrial IOT cyber security was completed in March 2017 and was syndicated with Trident Capital. The company secures and protects critical Industrial IOT assets. Secret Double Octopus (SDO) is an Israeli cyber security company whose breakthrough technology enables a password-free environment with trust channels established via a mobile phone app. That investment was completed in April 2017 and was syndicated with JVP, Iris Capital, and Liberty Media Ventures. Sherpa Digital Media, an emerging leader in Augmented Reality for the enterprise, was completed in June 2017 and was syndicated with Rally Ventures. The company securely manages, measures and automates video content and reaches customers, prospects and employees across all devices and locations. 6d bytes, an emerging leader in robotics, machine vision and AI, was completed in June 2017 and was syndicated with Partech and leading angel investors such as Plug and Play. The company is transforming the way the food and beverage industry approaches the preparation and serving of healthy foods. Drishti, a computer vision spin-off of SRI (Stanford Research Institute, Menlo Park) joined the BGV portfolio in June 2017 and was syndicated with Andreessen Horowitz (a16z). It provides a highly innovative solution to improve the efficiency of human operators in manufacturing assembly lines. “We are grateful to enjoy the support of exceptional repeat and new investors in fund III to implement our investment strategy,” said Eric Benhamou, founder and general partner of Benhamou Global Ventures. “The sales of Grid Dynamics (acquired by TeamSun) and of Zentri (acquired by Silicon Labs) in Q1 2017 are a further evidence of the success of the BGV model.” The partners of BGV III are Eric Benhamou, Anik Bose, Eric Buatois, Yashwanth Hemaraj, Marina Levinson, Amir Nayyerhabibi, Janice Roberts based in BGV’s Palo Alto office, and Barak Ben Avinoam (based in BGV’s Tel Aviv office in Israel). About Benhamou Global Ventures BGV is an early-stage venture capital firm with deep Silicon Valley roots, with an exclusive focus on enterprise technology opportunities in global markets. BGV currently has 25 active companies in its portfolio. The BGV team of 8 investment professionals has successfully built and implemented a cross-border venture-investing model with companies from Israel, Europe and Asia. Eric Benhamou, former chairman and CEO of 3Com, Palm and co-founder of Bridge Communications, founded the firm in 2004. Comprised of an experienced partnership team of global operating executives and investors, BGV is often the first and most active institutional investor in a company and has a powerful network of technical advisors, executives and functional experts who actively engage with its portfolio companies. The company has offices in Palo Alto, California and Tel Aviv, Israel. For more information, visit www.benhamouglobalventures.com.
Source: http://www.marketwired.com/press-release/bgv-closes-third-fund-makes-new-investments-2224138.htm
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BGV Founder and General Partner Eric Benhamou delivered the keynote address at the Axis Cap Digital Paris conference on June 8th, 2017.  The conference defines itself as the following: ‘The annual event Axis Cap Digital Paris is a unique forum for French and European startups to pitch their innovative technologies to high caliber active investors and industry leaders from around the world.’ (Axis website)   As the keynote speaker, Eric Benhamou addressed the following:
  • 150+ attendees
  • 22 European startups selected among 120 applications
  • 40+ international investors
  • 50%+ international attendance
  • 17 countries
  Read more about the Paris conference and Axis’ upcoming conference in New York here.
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Eric Benhamou, the venture investor who ran 3Com and Palm before they were sold to Hewlett-Packard, is eyeing opportunities in China and the end of the “unicorn bubble” as he closes his third investment fund at Palo Alto-based Benhamou Global Ventures.

This TechFlash Q&A came shortly after a Menlo Park e-commerce company he was involved in, Grid Dynamics, was sold to China-based Teamsum. It has been edited for length and clarity.

In addition to being on the board at Grid Dynamics and investing through his firm, Benhamou is on the board at Cypress Semiconductor, Silicon Valley Bank and Finjan Holdings.

You’ve been involved — both operationally and as an investor — for four decades. You’ve seen the ups and downs of the cycles that we’ve gone through for several decades. Lately, the description that I keep hearing is that in the last three to five quarters, the startup world has seen a return to normal. Would you agree?

Yes, I would. But with the caveat our firm has never really deviated from the normal. There was a short period of time in which valuations seemed to become unreasonable.

Most of that phenomenon tended to pertain to consumer-facing businesses and it was labeled appropriately as “unicorn hunting.” We never played in that environment. We focus on the different parts of the markets where we never really deviated much from normal. As an example, our average valuation today for Series A companies today is basically the same as it was three years ago.

So you have been staying the course and watching the unicorn hunters go by?

That’s right. Some of them crashed and burned and others have continued. That’s OK. It’s a different sector of the industry that we focus on. We believe that the trend that we’re riding has long legs.The digitalization of industry that we’re witnessing right now is still in the first couple of innings and it’s affecting all the sectors of the industry. So we’re not as exposed to fad or to consumer tastes, one way or the other.

Basically we’re focused on technologies which help enterprises be more productive and more customer-centric and more resilient.

You were involved with Grid Dynamics, a Menlo Park e-commerce company that was recently bought by a Chinese company. Tell us more about them.

Grid did extremely well in terms of its business trajectory. It had major U.S. customers — large enterprise customers mostly — in the retail and financial sector, particularly over the last few months. That attracted the attention of many suitors.

I was on their board and I was very actively engaged with the management team, Leonard and Victoria Livschitz, who are cofounders. I worked very closely with them, particularly in the process leading up to the sale to Teamsum.

Eventually we decided that, rather than being opportunistic, we should follow a structured process with an adviser. I helped Leonard work through this process and we eventually narrowed down the groups of qualified suitors to a very small number.

Teamsum became the most attractive one for a number of reasons. One is that they happened to be one of our investors in Fund III. We had a preexisting relationship with them and we knew that it would be an extremely good fit strategically. There was basically a foundation of trust since we knew each other. So that actually went quite well.

It looked like they hadn’t raised all that much money over the years. Is that right?

Yes. Grid Dynamics is an engineering services company as opposed to a product company. So it is less capital intensive than some other investments we make. There was only one other firm that was invested in them, called DTV.

Grid did not go through multiple rounds of financing because their base of customers provided sufficient cash flow to help the company finance itself. There was no need to go through growth investments. That was fine because we’re able to maintain our position through that.

What do you think of the concerns that are being raised about China becoming so prominent a player in U.S. technology company M&A and investments?

China has a very strong economy and they weigh in a lot more in the global scene than they did just a decade ago. So it’s inevitable that we’re going to have more and more M&A transactions that are cross-border. There may be some M&A transactions that are more sensitive than others and require a close look by regulatory authorities like the Committee on Foreign Investment in the United States CFIUA. But in the case of a company like Grid Dynamics that does not really sell a product, it sells services, the concern would not be really well-focused.

Keep in mind that Grid, while being a U.S. company, has about 600 engineers in Eastern Europe. That is a great source of its service talents — excellent engineers with great math backgrounds. So there was really not much that was worthy of a deep consideration or concerns when it comes to U.S. assets. That is actually why it went quite smoothly.

Are any of the investments that you’ve made in some of the more sensitive areas? I know you’re on the board at Cypress Semiconductor and that is one of the areas people have been looking at. Another that it seems everybody is involved these days is artificial intelligence — or at least they say they are. Where do you think the line should be drawn?

Well, it is really up to government officials to spell out the policy on what rises to the level of a significant concern and what doesn’t. I can tell you that the M&A momentum flows in both directions. So, for example, at the same time as we were negotiating the sale of Grid to Teamsum, we were also negotiating a Series C investment into one of our portfolio companies by some Chinese investors and some U.S. investors. It’s a Palo Alto company called IndentityMind Global and the expectation is that it will expand into China. It is a cybersecurity company that focuses on fraud detection on electronic transactions.

We’re dealing not only with companies like Teamsum who are expanding their operations into the U.S. but also with the exact opposite — U.S. companies going into China. We have been developing important relationships in China to help secure partnerships for our U.S. portfolio companies as they expand there.

People talk about great opportunity in China but they also talk about a lot of copycat type of businesses that show up there, sometimes before they can even get there. How do you weigh the opportunity versus the risk in deciding when is the right time to go there and what founders should be thinking about?

The opportunity is now. That’s because China has an economy that is vastly expanding. From an IT perspective, it is not saddled with earlier generations of products and infrastructures. They have an opportunity to basically skip a generation or two and really advance.

We focus on enterprise IT exclusively. There are a number of large enterprise companies there who need to buy IT products and services. And they need that today. They may not find suitable Chinese manufacturers for these products and services and therefore they will turn elsewhere. We want to make sure that we’re there for these opportunities.

Give me an update on your funds. When we last spoke, you had raised just part of the money that you intended to and you were also talking of perhaps doing a growth fund. Any news on either of those fronts?

Our Fund III is at the very tail end of its fundraising process. In fact, we’re no longer soliciting interest from any limited partners. We’re just finishing the legal negotiation with the last batch of LPs who wanted to come in. We expect to complete this in a matter of a few weeks. Fund III is basically done. We fully expect to continue to raise some capital and be active in the market for a slightly different orientation for the next fund.

Both Fund II and Fund III were early-stage oriented. We would expect our next fund to have a broader scope and be suitable for larger opportunities and for more mature opportunities. You could call this growth, but sometimes growth is a bit of misnomer because it covers too broad of a spectrum of opportunities. It may be easier to think in terms of an equity series.

Typically, Fund II and III would invest in seed and Series A and B. Beyond that, the investment opportunity would typically be considered out of scope. We want to have a fund that enable us to continue to plow capital into really strong companies as they get to the next stage. And fund IV will meet that requirement.

That’s the current thinking. We’re not actively marketing fund IV right now. This is just the current thoughts of the partners on this, but we will be in active marketing mode on it as soon as Fund III reaches final closing in the next two to four weeks.

Source: http://www.bizjournals.com/sanjose/news/2017/04/17/ex-palm-3com-ceo-on-venture-return-to-normal-china.html

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