Kindred Capital, the London-based VC that backs early-stage founders in Europe and Israel, recently closed its second seed fund at £81 million.
Out if its first fund raised in 2018, the firm has backed 29 companies. They include Five, which is building software for autonomous vehicles; Paddle, SaaS for software e-commerce; Pollen, a peer-to-peer marketplace for experiences and travel; and Farewill, which lets users create a will online.
However, what sets Kindred apart from most other seed VCs is its “equitable venture” model that sees the founders it backs get carry in the fund, effectively becoming co-owners of Kindred. Once the VC’s LPs have their investment returned, along with the firm’s partners, the portfolio founders share any subsequent fund profits.
To learn more about Kindred’s investment focus going forward and how its equitable venture model works in practice, I caught up with partners Leila Rastegar Zegna and Chrys Chrysanthou. We also discussed closing deals remotely and how the VC approaches diversity and inclusion.
TechCrunch: Kindred Capital backs seed-stage startups across Europe and in Israel. Can you elaborate a bit more on the fund’s remit, such as sector or specific technologies, and what you look for in founders and startups at such an early stage?
Rastegar Zegna: As a fund, we are very focused on the founder(s), so everything starts there. We try to drill down and get to know them as people and leaders, first and foremost. Do they have what it takes to get the company off the ground, the resilience to get through the inevitable ups and downs of startup life and through the scaling years to make this a massive outcome for the team and the investors?
The second element we spend time thinking about is the market itself and how big the company can grow within the constraints of that market. We also think deeply about the timing of the business, especially if they are trying to create a new market, such as in quantum computing, for example.
Kindred Capital closes £81M second fund to back early-stage European startups
Chrysanthou: It’s also worth mentioning that many investors talk about product-market fit, but we are also great believers in founder-market fit. In other words, a founder who might be successful in one market, might well fail in another, as different skills are required and even different personality types might be better suited. One way we assess this is to look for deep insights they have to the problem they’re trying to solve and how they think about their market.
After that, we are fairly sector-agnostic, which is why we have such a diverse portfolio, ranging from consumer products through to deep science.
How has the coronavirus pandemic and resulting lockdowns and social distancing affected the way you source and close deals?
Rastegar Zegna: Initially, we moved everything to video calls, like pretty much everyone else in the industry. Upon reflection, however, we realized that we were just using a new tool (e.g. Zoom) but in the old way — meaning, any meeting we used to have at Kindred HQ, we just transitioned onto Zoom. The interesting transition we’re going through now is to create a new way of working around the tool. That means for some meetings, Zoom will be the most effective medium of communication. For others it may be an audio call, and for a third category of discussion, a walking meeting in the park may be what’s called for. But the opportunity is to throw out the playbook written by inertia and generally accepted industry working norms, and create a first principles approach to the way in which we do business to optimize for the best outcome.
Similarly, the pandemic appears to have increased the rate of digital adoption by both consumers and businesses. Have you had to adjust your investment thesis accordingly, such as the way you view the future of work, for example, or hardest hit sectors such as travel and events (especially as you are a backer of Pollen)?
Chrysanthou: The Future of Work was always an area of interest and focus for Kindred, so we haven’t adjusted our investing significantly during the pandemic.
We do acknowledge that it’s hard for investors to make new investments in certain sectors, especially hospitality and travel, until we have more certainty. However, businesses that cater for the millennial generation and younger (like Pollen) are proving to be remarkably resilient and recover almost immediately as lockdown restrictions ease at any time.
Being broadly sector-agnostic does mean that we can be very flexible with our approach and easily adapt to changing conditions and new opportunities as they occur.
What advice can you offer to early-stage founders looking to raise a seed round remotely, and how to mitigate the lack of face to face relationship building during the process?
Chrysanthou: Like any remote communication, it just means that both sides need to work harder to be effective. That probably means a few more interactions than we would normally expect. It also means that mutual referencing takes on an even greater importance.
Let’s talk about Kindred’s equitable investing model where all portfolio founders potentially share in future carry. Why did Kindred make the decision to give carry in the fund back to the entrepreneurs and how does it actually work in practice (e.g. vesting, share etc.)?
Rastegar Zegna: When we were running companies (all our partners are ex-operators, which is still rare in Europe), we often observed that other founders were as helpful, if not more helpful, than some of our investors. So we decided that we wanted to encourage that behavior by providing an economic incentive for founders to help each other.
We also hoped that it would help with fund deal flow, which has certainly proved to be the case.
In practice, we have allocated 20% of the carry in the fund to the Collective, which includes advisors and founders — in other words, it’s a bit like leveraging the network to create the equivalent of a fifth partner.
Each company we invest in receives an equal share of carry, irrespective of the amount we invest, or indeed, whether their company is wildly successful or unfortunately ends up failing. Founders in each company then share their carry between them. Vesting takes place over a five-year period, but as long as they’re not “bad leavers,” they get their full allocation.
Related to this, you say that under the model you’ve seen entrepreneurs source 38% of Kindred’s deal flow at the top of the funnel. But wouldn’t this have likely happened anyway without extra incentives?
Rastegar Zegna: Obviously, there is no way of knowing what would have happened, but anecdotally we believe that this is a higher ratio than other funds we speak to. However, probably the most powerful proof point is that we ran the experiment in Fund I and are continuing to share carry in Fund II. If the Kindred Partners were not absolutely convinced that it works, we would have kept the £5 million in the second fund ourselves!
However, it’s also worth pointing out that carry is only part of the story. The more they help others in the network, the more likely they and their company will benefit, as with any active community.
If it is such a good model, why do you think more VCs haven’t adopted it?
Chrysanthou: We think this is a question for other funds! However, someone has to pioneer great ideas and we hope that other funds will adopt this better way of doing business.
Ultimately, when a successful fund is concluded, there are happy LPs, happy GPs and generally a handful of happy founders whose companies drove the fund performance. In our model, it just seems fair and equitable that all the founders who contributed get a great Thank You at the end, and share in the upside of the fund overall.
Lastly, what steps — if any — is Kindred taking to ensure it backs diverse founders, whether that be race, gender, disability or socio-economic background, and how does the firm view diversity more generally?
Rastegar Zegna: We embrace diversity at Kindred, as it’s been proven time and again that diverse teams simply get better results. Diversity starts from the top and the four Kindred Partners are diverse in terms of gender, background, nationality and age. This theme is continued in the wider Kindred team, with 50% being women (VC industry average 30%) and 67% of our advisors being women.
We believe that you can’t change something unless you measure it and we have been tracking diversity in our portfolio and the wider pipeline since we started five years ago. We’re pleased to say that diversity is reflected in the teams we invest in, with 16% having women CEOs, compared to the industry average of 6% and 12% containing BAME founders.
Chrysanthou: We’re also very conscious that the traditional VC investment process favors founders who are great presenters, which might not be a fair reflection of the skills needed to run a great business. Therefore, we introduced a “working session” into our investment flow, which involves their team and ours getting together and trying to solve a few problems or issues that they are facing. This allows us to get them out of sales mode and see how they really think and work together.
Obviously, we can all do better on the diversity front, both as Kindred and as an industry. But this is very much an area we focus on and will continue to strive to be a leader in this area. For instance, we recently ran a diversity and inclusion workshop led by Meri Williams, one of our advisors and a well-known, longstanding champion of diversity.
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