Roman Scharf (capital300): Start with co-founders, continue with key hires and hires in general and get the best people you can

Roman Scharf is co-founder and partner of capital300. Roman has worked in various leadership positions in European companies until he landed his first coup in 2005 with his own VoIP startup Jajah, the first European company to be funded by Silicon Valley powerhouse Sequoia Capital. Through Jajah Roman lived and worked in Silicon Valley for 10 years, before returning to Vienna for capital300. Jajah was acquired by Telefonica (BME:TEF) for USD 270 million. Before Jajah, Roman co-founded and lead Ecotech Software in Germany until it has been acquired by Rockwool International AS (CPH:ROCK-B).

After Jajah, Roman co-founded Talenthouse Inc., the World’s leading creative collaboration platform for brands & agencies. In December 2019 Talenthouse merged with Ello and Zooppa to become TLNT Group now connecting marketeers with 50 million aspiring creators in 175 countries.

Roman has valuable contacts with the Silicon Valley ecosystem and experience in the areas of branding and creative content, and can quickly understand and classify start-ups.

How it all started? How did you decide to enter the venture investment business?

I was an entrepreneur and founder for most of my career. I started four companies and three have been sold already. One of them is going public next year. The third company that I founded was started in Austria, Europe, but it got funded by Sequoia Capital and I moved to Silicon Valley and founded a company there. We had a great accident in 2009 and since that time I was looking at venture capital with a lot of curiosity.

When I came back to Europe in 2016 I saw that there is still a deficit in venture capital, specifically at the later stages. There is somewhat a nice amount of angel and seed investors, but really focused series A and growth investors are very rare. Most European growth rounds are done by US investors and there is not enough money in series A. I decided to look at how I can be helpful. After a lot of conversations with friends in Silicon Valley and over here we decided to set up the fund to start contributing.

capital 300 is a $50 million fund. We are doing 3-4 series 80 days a year. Soon we will launch another fund. Our approach is to leverage US capital and we always co-invest with Silicon Valley VCs to bring more money into the region, but also to make sure that the region benefits. All our LPs are regional. We don’t have any overseas money in the fund. When we are successful money goes back into this ecosystem and that is very important for us because I became a VC to be helpful to other founders after I successfully have founded my own four companies. I think I can do that with money, but also with coaching.

I coach our founders in portfolio companies on different things. I believe that the future needs more VCs that can contribute on top of funding the business, but more in nurturing and coaching the business and the founders, also in the terms of networking, to help them grow faster and to make the right hiring decisions.

What industries are you interested in?

We are sector agnostic. At first, we are focused on series A and then our focus is geography, which is the DACH region and Eastern Europe. Also, it is all about software, so we don’t like food investments and stuff that is not software. When it is series A and it is in our region we have a very wide range of interests. Of course, we look a lot at artificial intelligence and SaaS, we have VR stuff that we look at, industry 4.0, and things like that.

It is important to not restrict your scope to a limited number of categories. Really cool things often don’t fit in a category because they are the beginning of a new category. We want to be very open-minded and we think that our focus on stage A and geography is already a very strong differentiator to most other funds in Europe.

Can you name industries you really like, yet will never invest into?

Everything that is not the software is too far from our focus. We just got a pitch deck from someone who makes a certain drink that has a calming psychological effect. Our fund would not invest in something like that. It has to be software and technology-driven, there can be a hardware component. Although we prefer software only, the hardware is not fully excluded.

Also, we looked at two companies in the femtech space. Basically, it is an app for female users and we know that a lot of very successful VCs look at that category. We just didn’t find something that we want to invest in, but it’s not an excluded category for us. If it’s only regional when people don’t build something that has potentially global impact when there is no software in the center of the product and when a startup doesn’t have a positive impact in the world then it is always excluded from our focus.

What geography of companies are you interested in?

As I mentioned, our core region is DACH and Eastern Europe but we are also open to opportunities from other countries. We have invested in PicsArt, which is an Armenian company and we’ve done an investment in a Kaia Health, which is from Switzerland. Both are not from the European Union. We really consider the entire Eastern European world and we don’t care if a country is a part of the EU. For example, we are looking at deals in Ukraine and we were looking at another deal in Armenia. European Union is not a category that is important for us.

As I mentioned, our core region is DACH and Eastern Europe but we are also open to opportunities from other countries. We have invested in PicsArt, which is an Armenian company and we’ve done an investment in a Kaia Health, which is from Switzerland. Both are not from the European Union. We really consider the entire Eastern European world and we don’t care if a country is a part of the EU. For example, we are looking at deals in Ukraine and we were looking at another deal in Armenia. European Union is not a category that is important for us.

Also, company registration doesn’t matter. Sometimes there might be a team in Poland with a Delaware company on top, or there is an Austrian team that has the UK registration. It is important where the teams are. We think that Eastern and Central European countries provide amazing talents.

For example, have a look at UiPath, TransferWise, or players like that, and you will see that there are amazing talents in our geography. And if founders are from here, even if they moved to the US like PicsArt, where the headquarter is now in San Francisco has, but the value creation happens in the Armenian RnD center, where 400 people are working hard. And those 400 people would cost 10 times more in San Francisco. That is a geographic advantage. We think that investing in Central and Eastern European companies gives an investor the biggest stake in the business, money lasts longer for the business, and generally speaking, businesses are able to recruit better talents because locally there are very attractive employers available. Whereas in Silicon Valley, if you are a $5 million series startup, you only get tier three and tier four developers.

The tier-one developers start their own companies. Tier two work for Google, Intel, Palantir, and those guys. And you end up hiring tier three and tier four, which are even five times more expensive than developers in our region. So, it makes perfect sense to focus on companies that can benefit from access to Central and Eastern European talents. That’s why we are very sure that our geographic focus makes sense.

What was the most unusual startup you ever supported?

This is a difficult question because it is not easy to tell what is unusual. They all are special and different. Otherwise, they wouldn’t be interesting. I don’t consider any of my startup unusual. They all are special but unusual would probably be out of scope.

At what stage of the company’s development are you investing?

capital300 is focusing on stage A. We are now in year three of our five-year investing cycle. At the moment we are thinking about a second fund that has a broader focus.

How big is a check you usually issue?

Usually, we invest between 2 and 5 million dollars.

What are the requirements for startups as an investor?

Every investor has specific requirements. We look a lot at the founding team because we want to understand in series A if there is a complete team that can handle the main tasks. Going forward we want to see a cap table that proves that the team is very motivated to go all the way. We want to see how they are planning to scale, how good that plan is, and how they will deploy money to the benefit of shareholders.

We look at company culture. We think that every business is value-driven and the values of the founders reflect in the team and the values of the team reflect in the product and in the plan that is going through. So, we look a lot at that. Of course, there are also some legal things as always, and there are all kinds of financial mathematical checks that we do on the business model, cohorts, and things like that. After that, we question the model in depth.

And last but not least, we do very deep references. We want to talk to customers, partners, cohort, and founders to get a real understanding of the people involved. And on the one hand side and with customer references get really into the core of why people love the product and how they see the product can add more value for their organization over time.

Have you made any exit?

We have had one exit, but it was a kind of emergent situation. We invested in Gamee in Prague, which is a social gaming company. It was merged into an Asian platform called Animoca. So technically we exited gamey, but we are now a shareholder of Animoca.

What percentage of ownership of a company is fair to take for investment?

Usually, for series A you want to have 15-30% of the company ownership and it depends on how many participants you have in the consortium. We like to have more than 10% of a share at stage A if possible and never get 30% because we never do standalone investments. Some VCs that do an entire round have the need for 30-35% of the shareholding, but we always invest in a consortium. We never do more than half of the round and we usually end up with smaller stakes but with very strong co-investors.

What multiplication of your investment do you expect on exit?

We have some written metrics in our fund which is five-six times modest outcome. We are expecting that there are a few portfolio companies that would have a 10X-20X multiplication because this is what the fund needs.

We are investing for five years and capital300 is a 10-year fund. We are hoping to exit in 6-10 years and I would say that our average investment time is about 5-7 years.

What do you want to see in the company’s product?

We want to have very scalable products, products that have a positive impact on the world, and people in the world. We are looking for stuff that has a clear advantage over competitors and alternatives. We are interested mostly in global solutions. You could see a lot of stuff in Europe that might work in Germany or any other countries, but the product is based on legal or employment-related specialties and we don’t like that. We want a product with a global place, that is very scalable, have clear USPs, high margins, and strong growth rates. I would say it is very typical stuff.

What qualities you are looking for in teams?

As I said, team needs to be complete. If there are only engineers and nobody knows how to run a company, that is bad. If there is not enough complimentary that is also bad. If there is a family business when a founder and CTO are relatives that is not good too. We are looking for a complete team with a stable relationship between founders, aligned vision and where all the necessary functions from running the business, scaling sales, ensuring the quality of the product, recruiting in an excellent way – all these functions are covered or there is a clear plan how to cover them.

Synergetic level of the team is very important, so that they are not only a number of founders but rather a team, where everybody has his own strengths and contributing to the whole.

What is your due diligence procedure and how long does it take you to cover the whole way from the first meeting with founders to contract and check to sign?

Usually, it lasts two months. We verify a product, a team, and a business model very deeply. Then we share legal due diligence with our co-investors because it makes sense not to hire five lawyers to look at the same documents but to do complete due diligence.

How many projects do you consider per year?

This year it’s going to be between 2,000 and 2,500 projects and at the end of the pipeline it would be three or four investments.

How startup teams usually find you? Do you wait for inflow or scout for interesting ideas and perspective teams?

New startups are coming from everywhere a little bit. We have all of the streams of course but the most interesting ones come through our network and some personal introduction from somebody we know already. And when we talk about network, the largest group are partner investors in an early stage. We work a lot with seed funds and angel investors in our region and when they have something in their portfolio that they think fits to us and is going towards series A they always make us aware. Then we meet the team and look if it’s interesting for us.

What are your red flags?

There is always some sort of red flags. If there are toxic names on the cap table that’s a red flag. If founders are diluted so massively that they don’t have a big stake in the company at series A anymore that’s a red flag. Usually we would still have 70-80% of the business in the hands of the founders at our stage. If in startup only 10% founders and 90% belong to angels and partners then it’s clearly a red flag. If we get information that afterwards turns out to be wrong, manipulative or misrepresented that’s a big red flag. A very negative reference call would also be a red flag unless you can really understand how it came about, but if someone gives fund a really bad personal reference, then there is usually something behind the curtains that is worrying. But I would say there is not too many red flags.

Have you ever rejected a startup and then regret it?

We have rejected startups that I think we will regret. We are only on the third year now and it’s not happened yet, but I’m totally certain that we have rejected startups that will have a good outcome in the future and we will have regrets. But that’s a part of the game.

What conferences do you find really useful?

I like Slash and I used to like Pioneers but they stopped it. I would very rarely recommend founders to attend conferences and only when they are well prepared. I have observation that the strongest founders don’t have time to go to events and they only do if there is a good reason to do it, like 10 VCs on the same day, have a pitch desk in front of a big audience or talk to a reporter or journalist a big piece about their business.

These are good reasons to go but I have observations that a lot of founders just go to conferences to enjoy the lifestyle, to hang around and my belief is that really successful busy founders don’t have time to do that too often. Also, I think that companies don’t prepare well enough for conferences. They are floating through the days and then they go back with a random number of business cards. More often it’s a waste of time. I know conference companies don’t like to hear that, but there are not many conferences that really help you to have success.

Has your VC approach changed after the COVID-19 started?

To be honest COVID-19 didn’t affect us. We were able to work remotely for a couple of months and just continued to do what we did. Some of our portfolio companies were affected by COVID-19 but, they have strong teams and strong plans. I think pandemic has accentuated the strengths and the weaknesses of different models, accelerating the selection process in startup land.

Some companies that are will not survive 2020 because of COVID-19 would not survive 2021 without it. We have a phase where you can better see how strong a team is on the entrepreneurial side, how much they are survivors and problem solvers. And for every business that is not doing well, you’ll find another business that is doing basically same things and they are successful.

Look outside. Restaurants are a good metaphor. I am living in Vienna and there are restaurants that are basically closing, others are mourning in the news that they potentially have to be closed because of COVID-19 and there are other that are packed and you can’t get in because everybody wants to eat there.

In my opinion Pandemic is really a stress test for the entrepreneurial DNA of a business. I’m very convinced that strong leaders and strong teams with strong products will come out stronger with less competitors. One could argue that this is a good thing because then investors can focus more time on less deals and put the money into proven winners, then in a normal year.

So, is COVID a threat or opportunity for VC?

I think it is total opportunity. We are all investing now and exiting in five to ten years. The companies that we are investing in now probably will get better valuations and by the time we exit COVID-19 is going to be a thing of the past. As I said, it accentuates and accelerates. I’m sure there are a couple of funds that have casualties in their portfolio this year and some of these companies would have made it during the next year and the year after it, eventually without pandemic.

But I’m there to say that the businesses did the diet this year will probably not have become unicorns without COVID-19 either, because strong teams with strong businesses have the resilience and corona virus is a massive stress test for entrepreneurs, not just in startup land but in every field of the economy. If you run a hotel, a restaurant, a fashion brand or a startup, there are entrepreneurial challenges this year and strong entrepreneurs are getting through the storm and weak ones are not. It’s a matter of fact that some entrepreneurs are just not strong enough and that’s a natural process. You can read this in Ben Horowitz book, which is almost a Bible to many of my friends. it’s just how life is.

What are the most common areas of weakness in startups?

If we see major weaknesses we don’t invest. And that is really true. If we think they are weak in hiring we don’t invest. If we think they are weakened financial then we don’t invest.

I think there are common challenges. One of them during series A of course, is in growing sales and the team. We face it almost every time. This is a challenging topic. And that is where a strong consortium of investors can really help and that’s what we would be a good at.

You really have to stay away from something that has a main weakness. Of course, there is always room for improvement. Most of the startups we invest in are understaffed. They don’t have enough sales people and enough marketing people. They don’t have anyone in the US, but that’s not a weakness. That is an A stage and the next stage is going to cure that. When you ask about weaknesses, I think of things that we have found during due diligence and then decided not to continue.

With whom you would prefer to work rather, with Steve Jobs, Mark Zuckerberg, or Elon Musk?

I would love to have met Steve Jobs. I’m not interested in Wozniak. I met Mark Zuckerberg and I think he is a very smart guy. Speaking about Bill Gates, I haven’t met him. I think he’s doing more for the world after Microsoft. I’ve never been a fan of Windows before, but I like the new Microsoft that is now surfacing with Satya in CEO seat. I think Elan is the greatest entrepreneur of our generation, and they will look at him like DaVinci or Leonardo in a couple of generations when they look back. He is one of a kind guy.

Can you name three most breakthrough startups in history?

One of my personal favorites is Spotify but most people would not consider it as a major thing. Nevertheless, I have a lot of friends in the music industry and it completely changed the music industry. anyway.

Are you satisfied with what you do, or do you think to apply your knowledge and skills to something else in the future?

I am very satisfied of being a venture investor and I’m not going anywhere. I’ve done with founding my own companies. As I said, I found four of them and I think I can be more helpful by supporting other founders, younger founders and more founders at the same time with the fund. I have an amazing team and I’ve never had such a strong team in any of my businesses. That is a luxury of venture capital. You can get awesome brains to work with you if you have a strong positioning and a strong purpose of your fund. And I plan to keep doing this. I’m not going anywhere.

What books/films would you recommend to a startup founder?

I would recommend Ben Horowitz, The Hard Thing About Hard Things. This is the most important book to read for entrepreneurs in my opinion. I still push them to read Crossing The Chasm by Geoffrey A. Moore’s. I think it is an all-time high, how you get from an early geeky tech product to mass adoption and the ways to do that haven’t really changed. I don’t recommend movies to founders and also to people in general. I think, you find more value in books.

Your three advice to founders

The first advice is the most important one. Work with the best people you can find on all levels in your business life. Start with co-founders, continue with key hires and hires in general and get the best people you can. Focus a lot on hiring, Understand the values of the people that you’re interviewing. I think that’s the number one advice.

Number two is don’t take democratic decisions, trust your own instincts and trust your own conviction. Founders think they know something that others don’t know, and they can turn that into business and into success. They should not dilute themselves by asking. Too many people have their own opinions and then boil them down to a one size fits all kind of strategy.

The third advice – be very selective also with investors and do not look for the easy money but the valuable money. An investor that signs a check and leaves you alone sounds like a good thing, but it’s not. You need someone who is coaching you, who is supporting and helping you. You want someone who is questioning you, someone to watch externally what’s going on and to have supervision on governance stuff and so on. Choosing a strong investor in my opinion is also a must-have ingredient for success.

What is your favorite city?

Europe, definitely not America. I have lived there for 10 years. Vienna is very good and I might choose it again. I have nothing to complain about. It’s right for me, it’s urban and modern enough. It is something that has grown over centuries. It is the geography, the wetter and the surroundings. I would choose Vienna as my favorite.