Many early-stage venture funds have succumbed to the temptation to raise larger funds and expand the number of start-ups they invest in. Bek Ventures rejects that path in favor of maintaining discipline and staying focused on a smaller group of companies.
There was enough LP interest in the Luxembourg-based firm’s third fund to justify a fund as large as $750 million, but Bek’s managing partners held a final close on $250 million in November.
The fund was still bigger than its initial target of $150 million, with Bek increasing the hard-cap from $200 million to $250 million due to investor interest, managing partner Cem Sertoglu tells Venture Capital Journal.
“We extended the hard cap to accommodate some of our longstanding LPs that have been with us throughout our journey, with whom we have very strong relationships,” he says.
As a specialist in seed and Series A stage companies, Bek prefers to restrict its fund size because “we look at the volume of opportunities in our geography and our capacity to pay the required amount of attention and care to each of our portfolio companies,” Sertoglu explains.
Bek’s ideal fund can back 20 companies over four to five years. “To scale that up is detrimental to our performance and ultimately our returns,” says Sertoglu.
He believes the firm’s discipline, in addition to its track record of strong returns, were the drivers of so much interest from LPs in Fund III. The firm’s first two funds have generated $2.4 billion in returns to investors.
“If you’re able to access the top quartile or maybe top decile of performers, it provides a big boost in investment alpha, and I think that’s what attracts investors,” he notes. “Our consistency has also been an important factor. We have a structural competitive advantage in the area we focus in – the most ambitious, capable teams rooted in what we call ‘dynamic Europe,’ which is the fast-growing, younger part of Europe.”
Launched in 2013 as Earlybird Digital East, Bek recently rebranded when Earlybird spun off the part of its business that focuses on Eastern and Central Europe.
Private LPs
There is a broader base of LPs in Fund III than in either of Bek’s first two funds, which were backed mostly by public institutions such as the European Bank for Reconstruction and Development, the European Investment Fund and the International Finance Corporation. Earlybird Digital East Fund I closed on $150 million in June 2015 and Fund II raised €200 million in February 2021.
“We haven’t left the public sources behind. It’s just that their representation in the mix of our LP base is much smaller than it used to be,” Sertoglu notes. No single LP owns more than 20 percent of the new fund.
LPs in Fund III include global financial institutions, insurance companies, funds of funds, corporate investors, family offices and entrepreneurs – 60 percent of which are based in Europe, with 20 percent each in the US and Asia.
Investments out of Fund III so far include the mobile gaming company Grand Games and AI research and product company Zeta Labs.
The first checks that Bek writes range from $1 million to $3 million for seed-stage companies and $3 million to $10 million for Series A rounds. More than 90 percent of its portfolio companies end up getting second checks, according to a November blog post by Sertoglu and Mehmet Atici, his fellow managing partner.
Although Bek looks at as many opportunities each year as other early-stage firms, it ends up investing in just four or five per year. That enables Bek to give much more time and attention to each company it backs.
“Our aim is to become the closest board member to the founder, where we hear about developments, both positive and negative, in the companies first,” says Sertoglu.
In cases “where the company’s not headed in the right direction, we work with the founder to find alternatives such as early exits or maybe a tuck-in acquisition or a merger to a large company, which then takes away the need for the next round of funding in the company,” he explains. “On the more positive side, we are able to identify situations where a company is headed in the right direction with very strong signals, perhaps before it becomes visible to the larger world.”
With large reserves set aside, Bek is “able to offer pre-emptive rounds of financing to our portfolio companies where we’ll lead an internal round or show support in their next fundraising with a strong follow-on check.”
More focus
Sertoglu thinks the venture capital industry has been harmed by early-stage VC firms’ drift from limited-size portfolios, an increased focus on marketing on VCs’ portfolio pages, high turnover in teams and diluted attention to founders due to the larger size of portfolios.
He also laments the higher public profile the VC industry has achieved in recent years. The celebrity status of investors like Marc Andreessen and Peter Thiel “creates a lot of noise in the venture capital sphere, and we find it to be both confusing and detrimental to the founders in terms of what they should prioritize when they’re choosing their early-stage investors,” he says.
A surfeit of lip service being paid to adding value to start-ups beyond the capital that VCs provide makes for a proliferation of commentary, either in public channels or more often on the boards that VCs serve on, which Sertoglu characterizes as “throwaway, or not super-valuable.”
Targeting global markets
Many of the local markets of founders backed by Bek, including Bulgaria, Romania and Hungary, are not large enough “to excite a world-class founder to build a team just for the local, more regional needs,” Sertoglu notes. “So, they have to think global from the outset.”
He likens the dynamics of these start-ups to those in Israel, where ambitious founding teams also understand they can’t afford to build products meant only for the Israeli market.
Despite the software talent in Central and Eastern Europe being “second to none,” Sertoglu says “the region has been generally overlooked by early-stage VCs” and “seemed to us like a big opportunity when we launched the fund over 10 years ago.”
He likes that founders from the region tend to be less exuberant, while the companies are typically more efficient and less wasteful of cash than their peers in other geographies where the cost of capital may be lower.
“We think that is conducive to the creation of healthy companies that are not overly dependent on massive spending on customer acquisition like we’ve seen in other parts of the world,” he says. “Companies from our part of the world tend to be more balanced in [not prioritizing] growth over all other factors.”
These founders also tend to be less polished than their peers in other regions, but that doesn’t bother Bek’s team. “If the leadership characteristics are there, the polish and the veneer over that can be added relatively easily compared to other hard skills that are not as easily added to a founder team that is very high on the narrative abilities,” he says.
He also believes companies being created in Central and Eastern Europe have become more ambitious in recent years, in part due to top-tier tech companies recruiting talent from much more dispersed geographic regions during the pandemic.
For years, when great tech giants were only to be found in Silicon Valley or a few other major hubs, the billion-dollar outcomes that they realized seemed “almost unachievable from a distance,” notes Sertoglu.
“Now they’re not so distant,” he says. “I think ambitious founder teams are able to conceive of outcomes for themselves that approximate some of these global companies. That is the more exciting thing for us.”
He cites the example of UiPath (NYSE: PATH), a decacorn that Bek invested in from its debut fund, whose founding team came from Romania and whose founder and CEO, Daniel Dines, was formerly an engineer at Microsoft. “We’re seeing this more and more,” he says.
Many early-stage venture funds have succumbed to the temptation to raise larger funds and expand the number of start-ups they invest in. Bek Ventures rejects that path in favor of maintaining discipline and staying focused on a smaller group of companies.
There was enough LP interest in the Luxembourg-based firm’s third fund to justify a fund as large as $750 million, but Bek’s managing partners held a final close on $250 million in November.
The fund was still bigger than its initial target of $150 million, with Bek increasing the hard-cap from $200 million to $250 million due to investor interest, managing partner Cem Sertoglu tells Venture Capital Journal.
“We extended the hard cap to accommodate some of our longstanding LPs that have been with us throughout our journey, with whom we have very strong relationships,” he says.
As a specialist in seed and Series A stage companies, Bek prefers to restrict its fund size because “we look at the volume of opportunities in our geography and our capacity to pay the required amount of attention and care to each of our portfolio companies,” Sertoglu explains.
Bek’s ideal fund can back 20 companies over four to five years. “To scale that up is detrimental to our performance and ultimately our returns,” says Sertoglu.
He believes the firm’s discipline, in addition to its track record of strong returns, were the drivers of so much interest from LPs in Fund III. The firm’s first two funds have generated $2.4 billion in returns to investors.
“If you’re able to access the top quartile or maybe top decile of performers, it provides a big boost in investment alpha, and I think that’s what attracts investors,” he notes. “Our consistency has also been an important factor. We have a structural competitive advantage in the area we focus in – the most ambitious, capable teams rooted in what we call ‘dynamic Europe,’ which is the fast-growing, younger part of Europe.”
Launched in 2013 as Earlybird Digital East, Bek recently rebranded when Earlybird spun off the part of its business that focuses on Eastern and Central Europe.
Private LPs
There is a broader base of LPs in Fund III than in either of Bek’s first two funds, which were backed mostly by public institutions such as the European Bank for Reconstruction and Development, the European Investment Fund and the International Finance Corporation. Earlybird Digital East Fund I closed on $150 million in June 2015 and Fund II raised €200 million in February 2021.
“We haven’t left the public sources behind. It’s just that their representation in the mix of our LP base is much smaller than it used to be,” Sertoglu notes. No single LP owns more than 20 percent of the new fund.
LPs in Fund III include global financial institutions, insurance companies, funds of funds, corporate investors, family offices and entrepreneurs – 60 percent of which are based in Europe, with 20 percent each in the US and Asia.
Investments out of Fund III so far include the mobile gaming company Grand Games and AI research and product company Zeta Labs.
The first checks that Bek writes range from $1 million to $3 million for seed-stage companies and $3 million to $10 million for Series A rounds. More than 90 percent of its portfolio companies end up getting second checks, according to a November blog post by Sertoglu and Mehmet Atici, his fellow managing partner.
Although Bek looks at as many opportunities each year as other early-stage firms, it ends up investing in just four or five per year. That enables Bek to give much more time and attention to each company it backs.
“Our aim is to become the closest board member to the founder, where we hear about developments, both positive and negative, in the companies first,” says Sertoglu.
In cases “where the company’s not headed in the right direction, we work with the founder to find alternatives such as early exits or maybe a tuck-in acquisition or a merger to a large company, which then takes away the need for the next round of funding in the company,” he explains. “On the more positive side, we are able to identify situations where a company is headed in the right direction with very strong signals, perhaps before it becomes visible to the larger world.”
With large reserves set aside, Bek is “able to offer pre-emptive rounds of financing to our portfolio companies where we’ll lead an internal round or show support in their next fundraising with a strong follow-on check.”
More focus
Sertoglu thinks the venture capital industry has been harmed by early-stage VC firms’ drift from limited-size portfolios, an increased focus on marketing on VCs’ portfolio pages, high turnover in teams and diluted attention to founders due to the larger size of portfolios.
He also laments the higher public profile the VC industry has achieved in recent years. The celebrity status of investors like Marc Andreessen and Peter Thiel “creates a lot of noise in the venture capital sphere, and we find it to be both confusing and detrimental to the founders in terms of what they should prioritize when they’re choosing their early-stage investors,” he says.
A surfeit of lip service being paid to adding value to start-ups beyond the capital that VCs provide makes for a proliferation of commentary, either in public channels or more often on the boards that VCs serve on, which Sertoglu characterizes as “throwaway, or not super-valuable.”
Targeting global markets
Many of the local markets of founders backed by Bek, including Bulgaria, Romania and Hungary, are not large enough “to excite a world-class founder to build a team just for the local, more regional needs,” Sertoglu notes. “So, they have to think global from the outset.”
He likens the dynamics of these start-ups to those in Israel, where ambitious founding teams also understand they can’t afford to build products meant only for the Israeli market.
Despite the software talent in Central and Eastern Europe being “second to none,” Sertoglu says “the region has been generally overlooked by early-stage VCs” and “seemed to us like a big opportunity when we launched the fund over 10 years ago.”
He likes that founders from the region tend to be less exuberant, while the companies are typically more efficient and less wasteful of cash than their peers in other geographies where the cost of capital may be lower.
“We think that is conducive to the creation of healthy companies that are not overly dependent on massive spending on customer acquisition like we’ve seen in other parts of the world,” he says. “Companies from our part of the world tend to be more balanced in [not prioritizing] growth over all other factors.”
These founders also tend to be less polished than their peers in other regions, but that doesn’t bother Bek’s team. “If the leadership characteristics are there, the polish and the veneer over that can be added relatively easily compared to other hard skills that are not as easily added to a founder team that is very high on the narrative abilities,” he says.
He also believes companies being created in Central and Eastern Europe have become more ambitious in recent years, in part due to top-tier tech companies recruiting talent from much more dispersed geographic regions during the pandemic.
For years, when great tech giants were only to be found in Silicon Valley or a few other major hubs, the billion-dollar outcomes that they realized seemed “almost unachievable from a distance,” notes Sertoglu.
“Now they’re not so distant,” he says. “I think ambitious founder teams are able to conceive of outcomes for themselves that approximate some of these global companies. That is the more exciting thing for us.”
He cites the example of UiPath (NYSE: PATH), a decacorn that Bek invested in from its debut fund, whose founding team came from Romania and whose founder and CEO, Daniel Dines, was formerly an engineer at Microsoft. “We’re seeing this more and more,” he says.
