Passion Capital VC fund crowdfunding 2021 (mini) due diligence


💡 Skip to the bottom of this blog for the TL;DR



Foreword:


For a long time, there's been this perception that the crowd can't obtain, nor deserve the best deal flow - that this was the domain of VCs alone.


Whilst seed stage VC Seedcamp has crowdfunded before, this was a campagin exclusively for their previous/current portfolio founders. There are some obscure VCs that have crowdfunded, but I believe it's often because they could not secure a commitment from institutional investors and HNWIs. Passion Capital are unique in being a top-quartile, oversubscribed VC fund offering the opportunity to the public.


I consider this a landmark raise in truly democratising venture capital/private equity, and I must take my hat off to Eileen Burbidge and team for taking this brave step. I'm truly excited by the idea of other VCs being inspired to follow suit - Imagine if we could also one day invest in Seedcamp, Accel, Balderton or Index ventures..?



As per usual, you will only find public information here. If you wish to have a look through any confidential information, or even invest, please visit Passion Capital's campaign here. There is no gaurantee of securing a stake, as Passion Capital have a cap that they can't exceed, and it's not entirely clear if they have exceeded it.


Also, in case you hadn't caught on, i'll be doing much smaller, 'mini' posts from now on - helps in getting content out of the door quicker, and is more readable in my view.👍


Please do read the risk warnings and disclaimers at the very bottom of the post.



Anyway, Let's dive in!




Sector: Any (sector-agnostic VC firm)

Stage: Seed (pre-product, pre-revenue) - typically first cheque into business


Passion is a seed stage venture capital firm, known for having backed GoCardless and Monzo. They are one of the most pre-eminent seed stage firms in Europe.



Pros:


✔️ Team: As many of you may know by now, I look for pretty much 3 main things in a Team (skin in the game, experience and -no pun intended- Passion). Let's see how Passion Capital stacks up:

  • Skin in the game - All the general partners are committed full time, and have invested a sizeable amount into the fund. I often like to see salary amounts as too high a salary can be a red flag, as it's not aligned with investors (too many operational costs = less investments). I still have some concerns around conflicts of interest (e.g. the team continue to invest as Angels outside the fund, but what restrictions are in place?), but overall i'm content.

  • Experience - The partners have experience as Angel investors, VCs (Index Ventures, Bain) and early startup employees (Skype) but not as founders.

  • Passion - This is obviously quite a subjective measure, but in my opinion Eileen Burbidge in particular exudes a passion for innovation/tech/startups, having worked at Skype as an early employee and her experience as the UK Government's fintech envoy. As another example, Passion's recent investment in fertility startup Fertifa stemmed from Burbidge's experiences undergoing IVF.


💡 One of Passion Capital's former partners, Stefan Glaenzer, left due to a sexual assault conviction. One might consider that Passion Capital's returns could suffer in the wake of his departure - although, I don't know about you, but I'd much prefer not having a sex offender at the helm whatever their value-add might be; they could be Marc Andreessen for all I care. 🤷


💡 Whilst it might not necessarily affect performance, It is refreshing to see such a diverse Team in an esteemed VC. 👏 Lack of diversity is a widely known yet pervasive problem in the venture industry. 😔


✔️Performance: VC firm returns are rarely disclosed, as it's such a secretive and exclusive industry. All we need to know is whether Passion Capital has/can outperform the market (i.e. a typical venture fund) - and it's not too difficult to arrive to a crude answer to this; According to Dealroom.co, the best seed stage VC firms in Europe by 'unicorn-picking rate' (unicorn = billion dollar private company) are Seedcamp, LocalGlobe and Point Nine Capital, with 3 Unicorns apiece. Passion Capital boasts two Unicorns (Monzo, GoCardless), but has a much smaller portfolio than the mentioned VCs. In other words, Passion Capital has historically performed toe-to-toe with the best amongst its peers. 🚀



💡 These are the most elite VC firms, and by no means indicative of an average VC. It's survivorship bias in a way; there're dozens of firms that fail horrendously and are too embarassed/obscure to make their returns known.


💡 It is important to see past successes within a venture portfolio, as these past successes often translate into future investments/successes - it is one of the reasons performance persistence is more likely in private equity. For example, Passion Capital backed Gocardless, whose employees founded Monzo (whom they invested in) , whose employees founded Daybridge - a calendar app(whom they also invested in). This happens throughout the venture industry, e.g. Octopus ventures backed lovefilm, and in turn backed Lovefilm employees when they went on to start successes such as Zoopla and Secret Escapes). ♻️


💡 As the saying goes, past performance is no indication/gaurantee of future returns . It is probably more sensible to consider the fund's strategy: In Passion's case, they are sector agnostic and prefer to back experienced founders. It's also nice to see that Passion enforce standard VC terms (e.g. liquidation preference, vesting, decent valuations, etc) but aren't too aggressive (e.g. no dreaded 'full ratchet' - an anti-dilution clause infamous for being aggressive) - this helps the firm maintain a founder-friendly reputation. I regret that the firm seems to stick to the UK for investment, as there are many opportunities in Europe; UIPath, for example, was founded in Romania, and has proved to be one of the all-time best venture returns in Europe, earning a 2,200x return for its earliest investors. 📈


Anyway, back to the subject of past performance. We've still only made a crude assessment, so let's pick one of the most elite european seed funds in the above picture (Seedcamp) and see how Passion Capital compares:



Above: Passion Capital (left) and Seedcamp (right) past fund performance.


💡 IRR means internal rate of return - it's the compound annualised growth rate of the portfolio companies when marked-to-market, whether they've exited or not - i.e. it's an unrealised or 'paper' return. An IRR of 32.7 leads to a ~17x 'paper' return in 10 years. 🤑


Assuming all figures are gross of fees, Passion Capital's 2nd fund outperformed Seedcamp's 2nd fund (~28% IRR), but underperformed their 3rd fund (~55% IRR) - in any case, a 32.7% IRR is quite respectable; my personal 'floor' would be a 6%premium (for the added risk & fees) to long term listed equity returns, so ~15%, before inflation.


✔️Transparency All non-seedrs investors in Passion Capital invested a while ago, well before any startups investments had been made. Yet, at no extra cost, the crowd is being offered the opportunity to invest almost a year onwards, when 11 (of soon/hoped-to-be 30) startup investments have been announced. Furthermore, Passion Capital have promised quarterly updates (this is, sadly, quite rare in crowdfunding) sans commercially sensitive information. They have also hinted at annual events for limited partners (shareholders). They have been quite forthcoming with regards to their approach, term sheets, past performance, etc. 👏



Cons:


❌No EIS relief - due to the way Passion Capital is structured, they are not eligible for EIS relief, meaning capital gains tax (up to 28%) may be payable on exit for some investors/limited partners.💰


❌Fees: VC firms typically charge two fees, an annual management fee (usually 2%) and a carry fee - a % cut of any fund profits (usually 20%). Passion Capital's fees are broadly in line with this, however, Investors must pay Seedrs an upfront fee of 2.5% and then an additional carry fee of 2.5%. To put the total fees into context, if Passion Capital held funds in investor cash (i.e. made no investments), you would be down ~25% in 10 years. 📉


Undecided:


⚖️Liquidity: Whilst it's quite normal for startup investments to be illiquid, VC firms are unique in that they are contractually obligated to provide a return within a set time period, 10-12 years in Passion Capital's case. For a seed stage VC, i'd say that's a very reasonable, if not generous, exit time horizon, so a positive for some. However, if you're like me and you'd prefer to hold as long as possible (20+ years) to maximise creation of shareholder value, it's not such a positive. But that's just how VCs are. 🤷


⚖️Seed Stage: Do NOT underestimate the risk that comes with a seed stage company, It is well within the realms of possibilty for the fund to lead to a total capital loss (i.e. -100%). One of the highest risks of seed stage firms is the lack of a product-market fit; no Product-market fit is the leading cause of startup failure according to Crunchbase (42% of startup failures), followed by running out of cash (29% of startup failures). That being said, higher risk leads to an opportunity for -not a gaurantee of- higher rewards. Furthermore, the competition for seed stage deals isn't as fierce as that for, say, Series A - this leads to better dealflow, lower valuations and therefore potentially better returns.🤑



TL;DR

Passion Capital are one of the best-performing seed stage firms in Europe, having backed Smarkets, GoCardless, Monzo, etc. Their partners have vast experience as VCs, Angels and startup employees/advisors, they also have a meaningful stake in the fund - aligning their interests with that of limited partners (you). Furthermore, Passion have been incredibly transparent, revealing their past performance, cornerstone limited partners, etc. Their fees are in line with the industry average, although Seedrs will charge more on top of this - making the opportunity somewhat costly overall. There is no EIS relief. Seed stage companies are incredibly risky, so the fund may be outside of the risk tolerance of some.


Should you wish to, you can invest in Passion Capital here.


Thanks for reading!


💡I'm still in the thick of due diligence so it's worthwhile following this post for any edits, updates or comments in the comment section below.




| Not financial or legal advice | All opinions my own | Please do your own research

| Capital at risk |

Startups are: illiquid | Don't pay dividends | Suffer dilution | Usually fail |

| ..even tax relief is at risk |

Disclosure: I am a shareholder of prospective limited partner of Passion Capital, I just hope I made the cut 🤞

Whilst I can't share confidential information, for any questions please feel free to comment in the forum, or even email me (admin@crowdfeed.net).





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