VCs love to invest in software companies, but it isn't every day that they buy them.
Yet today, German fund of funds Equation is announcing its acquisition of VC fundraising software startup Betterfront Technologies. Both companies are based in Munich and declined to share details of the acquisition.
So what gives?
Equation backs up-and-coming European VC managers, while Betterfront helps digitise the VC fundraising process by letting managers share docs and track record analytics with potential LPs. Betterfront has also developed a marketplace for the sale of stakes in VC funds, known as secondaries.
Equation managing partner Mark Schmitz says his firm was interested in Betterfront's secondary market and sees Betterfront’s track record visualisation and data room as important to make fundraising more “pleasant and efficient” for GPs and LPs.
“GPs today spend an enormous amount of time not speaking to entrepreneurs, not making investments, not thinking about their thesis, but trying to convince investors to back their funds… We know the struggle from both sides,” says Schmitz, referring to his time as a VC investor at Lakestar, and Betterfront founder Michel Geolier’s time working on the LP side at Siemens-backed Next47.
“The whole process can be vastly more efficient when we use data and smart platforms to make that decision in a more educated and sophisticated manner.”
Equation will also be users of the secondary marketplace, and managers the firm backs will have the opportunity to use Betterfront’s services — managers that Equation backs can also choose not to use it. Equation doesn't get any special rights as a buyer of secondaries through the platform.
It seems consolidation has hit the German VC ecosystem. The deal also comes off the back of an announcement earlier this month that German early-stage investor La Famiglia was joining forces with US VC heavyweight General Catalyst. With the fundraising environment tight, consolidation can be a way for venture investors to find an edge on others in the ecosystem.
Demand for secondaries amid few exits
The ability to facilitate secondary transactions is especially key now when VC managers are looking for ways to return cash to their LPs amid a dearth of exits. The market for secondary stakes in VC funds has remained relatively small and opaque in Europe.
Schmitz says that in the current market environment, where VCs are having trouble returning cash to LPs, it’s harder for LPs to recommit to a VC firm. He explains that while it’s easier for a large VC fund to find a new home for a stake, there is a “long tail of secondary opportunities that currently nobody serves”, which includes smaller stakes held by angels or at smaller funds. Currently, there is no easy or centralised way to find interested buyers or set prices.
Equation has already completed two secondary transactions, one in a B2B software fund and one in a deeptech fund, but Schmitz says those transactions were helped by existing relationships.
“We want more people to have manager relationships like this, in order to discover interesting secondary opportunities and over time, grow the precision of the matchmaking.”
As part of the transaction, Betterfront’s Geolier will take the title of VP of business development at Equation in addition to heading up Betterfront.
Equation has backed a total of 19 funds to date, including Possible Ventures and Visionaries Club, and out of its most recent funds usually invests no less than €2m per fund. Betterfront customers include Cherry Ventures and Partech Partners.