Podcast Summary: The Twenty Minute VC (20VC) Episode with Taavet Hinrikus
Title: VCs are Spreadsheet Monkeys and are Commoditized | Why Fees and Carry Misalign GPs and LPs | Why Founders Will Realize Multi-Stage Funds Damage Seed Rounds | Why We Need European Sovereignty More Than Ever
Release Date: April 28, 2025
Host: Harry Stebbings
Guest: Taavet Hinrikus, Partner at Plural
Introduction
In this episode of The Twenty Minute VC (20VC), host Harry Stebbings welcomes Taavet Hinrikus, a prominent figure in the European venture capital scene. Taavet is a co-founder of Wise (formerly TransferWise) and the first employee at Skype. As a partner at Plural, a $500 million fund backing ambitious European founders, Taavet shares his insights on the evolving venture capital landscape, misalignments in traditional VC models, and the critical need for European sovereignty in tech and defense sectors.
From Angel Investing to Plural
[04:08] Taavet begins by recounting his transition from being a prolific angel investor to founding Plural. He emphasizes the volume approach of his earlier investing days, making 30-50 deals annually, which he later felt lacked mission alignment.
Taavet Hinrikus: "If we can't imagine 100x, we should not be entertaining the idea of this deal." [00:00]
He critiques the Wall Street-esque high-speed deployment in traditional VCs, contrasting it with Plural's focus on backing the most ambitious founders, often those overlooked by others.
The Commoditization of Venture Capital
[06:07] Taavet addresses the notion that venture capital has shifted from a boutique, community-driven field to a commoditized, high-volume industry.
Taavet Hinrikus: "The idea of collecting a 2.2.5% management fee does not really make sense. It does not align us with the outcomes." [00:00]
He differentiates between mid or late-stage investments, which he views as more formulaic and spreadsheet-driven, and early-stage investments requiring deep founder assessment and understanding.
Operating Experience vs. Traditional VCs
[09:11] Contrasting with many European GPs lacking operational experience, Taavet highlights how Plural's partners, all having built companies, bring valuable "scar tissue" from their entrepreneurial journeys.
Taavet Hinrikus: "Every time we had the most insightful conversations with the people who had built their own companies." [10:50]
He posits that this experience makes them better partners for founders, fostering more genuine and impactful relationships.
Misalignments in the VC Model: Fees and Carry
[14:14] A significant portion of the discussion centers on the misalignment between General Partners (GPs) and Limited Partners (LPs) due to traditional fee structures.
Taavet Hinrikus: "The idea of collecting a 2, 2.5% management fee does not really make sense. It does not align us with the outcomes." [14:48]
At Plural, they charge about half the typical management fee, allowing for more investments per fund and better alignment with both LPs and founders. Taavet challenges the necessity of high management fees, advocating for a model where GPs invest their own money alongside LPs to ensure mutual alignment.
Reserves and Follow-On Investments
[22:46] Taavet delves into portfolio construction, discussing the importance of reserves for follow-on investments. At Plural, they maintain a reserve ratio of slightly less than half, allowing flexibility to support portfolio companies as they grow.
Taavet Hinrikus: "We have reserves as well. Fund two, we think will make four more investments as a result." [23:06]
He emphasizes the need for a balanced approach, avoiding the pitfalls of uniform reserves and ensuring that capital is allocated to the most promising ventures.
Skin in the Game and GP Commitments
[19:04] Addressing the concept of "skin in the game," Taavet explains Plural’s commitment to invest their own money alongside LPs. Each lead partner writes a personal check for every deal, ensuring alignment and demonstrating their belief in the investments.
Taavet Hinrikus: "We are the biggest investor in the fund ourselves. And additionally, every deal we do, the lead partner in the deal writes a personal check." [19:30]
Liquidation Preferences and Board Seats
[32:53] Taavet critiques traditional liquidation preferences (liqprefs), suggesting they often misalign founder and investor incentives. He advocates for structures that prioritize unlimited upside for founders while maintaining minimal downside risks for investors.
Taavet Hinrikus: "I don't think liqprefs makes that much sense. We are here for unlimited upside. 1x downside." [33:10]
Regarding board seats, he expresses reservations about VCs occupying multiple board positions, which can stifle balanced decision-making.
Taavet Hinrikus: "We do not love boards. They oftentimes become way too big way too quickly." [34:35]
Founder-VC Relationships and Ownership
[35:38] The discussion shifts to dilution sensitivity among founders. Taavet advises founders to actively protect their ownership stakes, as VCs may not prioritize this inherently.
Taavet Hinrikus: "The only person to fight for your ownership is yourself. No VC will ever fight for the founder's ownership." [35:52]
He underscores the importance of selecting VCs who are committed to supporting founders through both good and challenging times, rather than those who might abandon relationships during downturns.
European Sovereignty and Strategic Investments
[39:43] A substantial portion of the conversation focuses on the necessity for Europe to achieve greater sovereignty, especially in critical sectors like defense, energy, and space. Taavet highlights geopolitical shifts, such as the Ukraine war and strained US-Europe relations, as catalysts for Europe's push towards self-reliance.
Taavet Hinrikus: "We need to build our defense sector, we need to build our space sector, we need an independent energy sector." [39:43]
He emphasizes the urgency of capital investment in deep tech to ensure Europe can compete effectively with the US and China.
Investment Decision-Making at Plural
[25:40] Taavet outlines Plural’s streamlined investment decision-making process, which emphasizes quality over quantity. Each partner is limited to a few deals per year, and every investment memo begins with a personal conviction about the company's potential to achieve 100x growth.
Taavet Hinrikus: "Every deal we do we're testing like would you be willing to be a co-founder of the company?" [26:58]
Investment committee discussions are described as honest and brutal, ensuring only the most promising ventures receive funding.
Future Outlook and Closing Thoughts
[54:44] Looking ahead, Taavet is optimistic about Europe’s potential to produce trillion-dollar companies within the next decade, driven by increased capital for deep tech and a unified entrepreneurial spirit.
Taavet Hinrikus: "Trillion dollar European companies in 10 years we will see." [54:44]
He concludes by reiterating the importance of European sovereignty and the need for collective effort to build critical industries independently.
Key Takeaways
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Misalignment in Traditional VC Models: High management fees and lack of GP commitment can misalign incentives between GPs and LPs. Lower fees and GP investment in deals foster better alignment.
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Value of Operational Experience: VCs with hands-on entrepreneurial experience can better assess and support founders, creating more meaningful partnerships.
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European Sovereignty: Geopolitical shifts necessitate Europe’s investment in critical sectors to achieve independence and compete globally.
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Investment Philosophy at Plural: Focused on backing ambitious founders, maintaining manageable portfolio sizes, and ensuring deep alignment through GP commitments.
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Reevaluating Standard Terms: Traditional liquidation preferences and board seat strategies may hinder balanced founder-VC relationships. Alternative structures could better support long-term success.
Notable Quotes
- Taavet Hinrikus: “If we can't imagine 100x, we should not be entertaining the idea of this deal.” [00:00]
- Taavet Hinrikus: “The idea of collecting a 2.2.5% management fee does not really make sense. It does not align us with the outcomes.” [00:00]
- Taavet Hinrikus: “Every deal we do we're testing like would you be willing to be a co-founder of the company?” [26:58]
- Taavet Hinrikus: “We need to build our defense sector, we need to build our space sector, we need an independent energy sector.” [39:43]
- Taavet Hinrikus: “Trillion dollar European companies in 10 years we will see.” [54:44]
Conclusion
This episode of The Twenty Minute VC (20VC) offers a deep dive into the evolving venture capital landscape, emphasizing the need for alignment, operational experience, and strategic investments to foster Europe's technological and economic sovereignty. Taavet Hinrikus provides a compelling vision for a more mission-driven, founder-aligned, and strategically focused venture ecosystem in Europe.
For more insights and detailed discussions, visit www.20vc.com to listen to the full episode and explore additional resources.