Balderton Principal Laura Connell discusses the Liquidity I fund and the exciting opportunities it presents


UK Business Angels Association

20 November 2019

Laura ConnellThe maturing European tech ecosystem has seen remarkable growth and strong venture capital investment over the past few years. As the ambition of European entrepreneurs has increased and higher values can therefore accrete over longer periods, one of the challenges facing founders, angel investors and seed funds is that they now have to wait longer for the ultimate exit.

At the time of launching the Liquidity I fund, Balderton estimated the aggregate value of new seed capital invested in Europe since 2008 was around $23bn, of which c.$10bn had been raised over five years prior and much of which remained locked up in these emerging successful companies. Led by Principal Laura Connell and Partner Daniel Waterhouse, the Liquidity I fund addresses this pain point, helping early shareholders to recycle their gains. We spoke with Laura to find out more about the exciting opportunities it presents.

Laura joined Balderton in 2018, who has historically focused on Series A investment in Europe. Sector agnostic, Balderton invests in European-founded businesses partnering with founders they believe will be the next Unicorns. Now pursuing a multi-strategy approach, Balderton launched Liquidity I and Laura explains:

“The Liquidity I fund is a $145-million fund that focusses on direct secondary for high growth European-founded tech businesses. In essence, the scope of the fund is quite similar to the businesses we look at for the early funds, a good mix of consumer and enterprise sectors, but at the slightly later stage. Rather than it being Series A, we’re looking at startups that are usually past Series B, if not Series C.”

The fund is the first of its kind to be launched in Europe and was a reaction to the clear need for a structured route to liquidity that Balderton could see in its own portfolio companies in the broader venture ecosystem. Realising the pain point is only going to worsen as more companies in Europe reach the growth stage, Laura says:

“We could see there were often misaligned incentives with existing shareholders in the cap table. Early angels and seed investors needed to crystallise early gains, founders needed partial liquidity due to a change in financial circumstances or wanted to refresh their cap table and were also keen to offer partial liquidity to their best employees as a retention mechanism. Instead of having access to structured liquidity at a reasonable valuation, with a value-add third party coming to the cap table, shareholders, including founders, were often having to go through brokers and letting rather opaque third parties into the businesses. Inefficient and expensive transactions were resulting in capital leaking out of the venture ecosystem. This is particularly critical for angel investors. So much of the ecosystem is driven by the angel community being able to invest iteratively, so having a solution which allows them to crystallise gains or structure liquidity with us, a known high-quality investor, allows them to then reinvest in further opportunities on a timeline that fits their own liquidity needs.”

The Liquidity I fund deals with both inbound and outbound opportunities when it comes to acquiring shares. An initial deluge of inbound queries followed the fund’s launch and Laura says the outbound opportunities are very clear.

“The Liquidity I fund is a $145-million fund that focusses on direct secondary for high growth European-founded tech businesses. In essence, the scope of the fund is quite similar to the businesses we look at for the early funds, a good mix of consumer and enterprise sectors, but at the slightly later stage. Rather than it being Series A, we’re looking at startups that are usually past Series B, if not Series C.”

“As Balderton has been one of the most active early investors in Europe, we’ve seen a lot, if not most, of the top businesses that get to a growth stage that need some kind of liquidity. Part of the analysis done for the fund prior to launch was identifying the scope of the opportunity and saying, ‘which of the top 500 businesses do we think could really be fantastic growth investments for us?’. Much of our time is therefore spent trying to make sure that we have open dialogue with the top later stage teams as well as the early investors we know who are in those businesses.”

Detailing further how the Liquidity I fund works, Laura shares:

“This is designed to be as straightforward as possible. We’re quite happy buying any class of share available without re-classification. We don’t add bells and whistles to the shareholder agreement. We don’t expect board seats and we don’t have percentage minimum ownership requirements. We can be incredibly flexible with sellers.”

What are the other factors that Balderton is looking for when assessing acquisition opportunities?

“The rule of thumb is, is this business past the $20 million revenue mark and is this business still growing at a reasonable pace? We ask the same questions as a growth stage primary investor should do. The core monetisation engine should be in place with a management team who has a very clear idea of what the path to profitability is. We do a lot of work around what we think future financing needs are for the business and what we think the likely path to exit is.”

Laura is keen to stress that as they are often talking to businesses off-cycle (between rounds) they are careful not to weigh management down with discretionary analysis, which is often part of the course with a primary due diligence process. Instead, they try to keep the diligence process straightforward by asking for access to whatever the management team is producing on an ongoing basis, including latest monthly account and board decks as well as the full business plan.

One of the challenges that secondary investors can face in the best high growth startups is the right of first refusal by existing investors.

“What we find in some cases is that existing investors will want to mop up as much as much of the business as they can, including any secondary. Right of first refusal is therefore always something we have to be conscious of in the best businesses. But one of the reasons this has not been a major hurdle for us is the size of the tickets: we do up to $10 million per investment, and significantly more than this with LP co-investment. When there is $5-10m of secondary available, this is often too large for existing early shareholders to have allocated reserves for and too small for larger growth investors to really want to focus on. We’re playing between average ticket sizes.”

Discussing the trends that she’s noticing coming out of the different tech sectors, Laura highlights:

“FinTech obviously continues to be an absolutely critical space at the growth stage in Europe. One of the sub sectors we’ve seen a lot of activity in at the slighter later stage is consumer lending. Investors have got burnt historically with consumer and P2P lending generally and we are rightly conscious of where we are in the consumer credit cycle. Nonetheless we’ve seen some incredibly high-quality businesses being built with best in class teams who both understand credit and risk as well as the tech driving full automation as opposed to many of the historical businesses who automated the front end and still had fairly manual underwriting and credit processes.”

Looking ahead, what would success look like for the Liquidity Fund?

“Success is supporting some of the best European growth stage companies. Liquidity is a critical part of a maturing venture ecosystem for both early investors and startups: it is essential for recycling angel liquidity into the ecosystem, attracting and retaining the best talent and allowing founders to focus on their core mission by aligning shareholder incentives. We have been the most active series A investors in Europe over the last 20 years and are thrilled to now also be playing our part at the later stage.”

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