London-based Resurge Growth Partners is launching a €120m investment vehicle to scoop up and turn around VC orphans, a term for portfolio companies whose growth has stagnated and they’re no longer attractive to VCs.
Resurge is branding what it’s doing as “venture equity” — somewhere between private equity and traditional VC. It’s “packaging” to some extent, says cofounder Oren Peleg, who’s also a former managing director at asset manager Oaktree Capital Management. Ultimately it aims to fund or buy out companies VCs have told aren’t growing fast enough, and aren’t profitable or large enough for PE firms to snap up yet. “They get caught in the middle, and that is the mandate of Resurge,” Peleg tells Sifted.
The firm has raised almost half of its €120m target from one family office and GP commitments from Peleg and his cofounder Eyal Malinger, a former partner at Beringea. The rest of the money will be raised on an ad-hoc basis from investors for individual deals.
Resurge will invest cheques of between €10m-25m into European and Israeli companies in the Series A to B stages over the next three or so years. It aims to gain “operational” control of companies: Peleg says, in some cases, it will take 51% control of a company’s shares, but in other cases Resurge might partner with existing investors who still want in on the business to obtain control together; that’s the case with one deal he’s working on.
The base-case goal for Resurge’s companies is to help them grow until they’re attractive enough for a PE exit. But Peleg says the deals he really likes are those where a company is building something valuable enough to attract a strategic buyer — which could mean better returns for the startup’s investors.
What Resurge is looking for
Companies need to be making at least €7m-8m in revenues to be attractive to Peleg but they don’t need to be profitable. “I would say [for] the majority of our pipeline, at the moment, the businesses are loss making,” he says; Resurge just needs to believe it can work with the team to make a company profitable with the capital they’re investing — ideally without needing to raise any further rounds. He says it’s looking for companies to grow between 30%-50% a year after investing, instead of the triple-digit growth VCs often covet.
Resurge is sector agnostic but Peleg says, owing to the team’s experience, it won’t be going after deeptech deals. He adds its strategy isn’t to chase those sectors that are currently en vogue, like AI or cyber; instead, he’s eyeing areas that were popular years ago but where VCs aren’t looking to add more exposure, like fintech, proptech or consumer tech.
One common theme among the deals it’s currently evaluating: venture debt. “Some founders probably took on venture debt without really understanding what they’re committing to or believing that they can keep growing and refinancing, and some of these venture debt terms are really draconian,” Peleg says. He adds that two of the deals Resurge is currently working on involve venture debt; in one case it’s aiming to wipe out the company’s venture debt, and in another, to work with the venture debt provider to get better terms and help the startup grow.
How many ‘orphans’?
If you think about the maths of VC funds, it’s a game of a couple of big winners returning the whole fund. Peleg estimates that between 15%-20% of a VC’s portfolio are those winners, at most; 60% will fail; and Resurge is after the 20%-25% in between.
Currently, Peleg says his firm’s biggest competitors are VCs doing so-called bridge rounds — essentially tiding their companies over. But he expects competition to heat up in the future. As the lines between traditional VC and PE or growth-style investing have blurred in recent years, “The winners will be those that have the flexibility of mandate to look for where the opportunities arise,” says Peleg. And while not many European investors are out there doing what Resurge calls “venture equity” right now (or, at least, calling it that), “I don’t believe that will stay the case over the next two years”.
Read the orginal article: https://sifted.eu/articles/resurge-growth-partners-invest-vc-news/
