Fabian Sacharowitz is the investment director at EIT InnoEnergy Germany, a company aimed at accelerating sustainable energy innovation through investment in startups and curation of a strong industry network. After originally starting out as an entrepreneur, he made the shift towards investment when he transitioned into his job at InnoEnergy. InnoEnergy’s investments are partially funded by the EU and are mostly centered around sustainable energy.
How did it all start? How did you decide to enter the venture investment business?
It was strongly dependent on the job that I took here at InnoEnergy. I was not from the very beginning in the investment arena. I was more on the other side - I started as an entrepreneur, I founded a company together with my brothers. It is still existing, but I left the company in 2013 due to organizational reasons. It was at this time a small company with three brothers, founders, CEOs. It was maybe one brother too much there. So I left there and worked for five years for a consultancy, consulting, auditing, and so on. And then I had one year of working in a project called Accelerating the Pace of Sustainable Energy Innovation. We investigated how to bring innovation faster on the street to make an impact, to reach climate goals. This was a time when I also got engaged a bit with InnoEnergy and after the project, I took the job here, leading the investment team for the Dach region at InnoEnergy. I was a side entrance in a sense. I was not working as an investor beforehand, but they offered me the job anyway and now I’m heading a small investment group here.
What surprised or impressed you the most when you started working in venture capital? What do you wish you knew before becoming a venture capitalist?
Firstly, InnoEnergy is not pure VC because we are not investing from a fund - we don’t have a fund, we are investing money that we get from the EU. It’s partly private, partly public money, but it’s not a fund in the same sense others are. There are some differences in the ways we are investing and divesting. But what was surprising to me was that founders or entrepreneurs have a completely different mindset than we had as entrepreneurs back in 2008. When it came to fundraising, we were just trying to somehow survive. Now, the mindset is a bit different - the entrepreneurs follow their set strategy and if they need more money to proceed, then they simply fundraise more money. This different mindset was really surprising to me. They had a clear vision of “we are looking for money and money is just a matter of question, time, and effort, and when we get the money, we proceed as expected.”
What are the major differences between European and the US ecosystems? Is there anything a startup from Europe should be aware of when trying to enter the US (VC) market, other than a huge competition?
There’s definitely a huge difference between the markets. In the US, the venture capital market is far more advanced, the valuations are far higher, and the entrepreneurs can come up with much more investment money and risk much more money than Europe. This is basically the most challenging problem that we have here. We have incredible research, very good innovation, but we don’t get it on the street because we’re lacking the risk money. And with valuations, you see a lot of good innovations, especially in the hardware arena, struggling because the companies need much more money than expected. And then the innovation is destroyed because they need to raise so much money and they’re just staying with a minimal part of the shares, so it’s not really interesting for the investor anymore because the entrepreneur is not incentivized anymore.
How has COVID affected the market? What long-term consequences of it do you see? What are the top trends that you see in the future? Anything particularly disruptive?
The way of working has changed, that’s for sure. We have made transactions without being in contact with entrepreneurs, which was something we couldn’t even believe in beforehand. It was not possible, unthinkable even, to invest in people that you haven’t met before, and then we learned to do that. And I think this is something that will stay a bit. There was definitely a large push for digitalization in different arenas. That was a push for ventures in the digitalization field, for example, Zoom, and other digitalization startups. We also have on our portfolio startups that were helped by COVID because they got a push and others that were not. For example, ventures in the hotellerie and travel arenas, for them it was a disaster, clearly. But the market of tiny houses was pushed forward.
What was the most unusual startup you ever supported? Or, maybe, your favorite or memorable?
As I said, we are not a pure private VC fund, which gives us the freedom to a) be a bit more patient with the ventures and b) do things that pure private companies would not do, especially hardware things. So, for example, we are invested in the most advanced venture in making ocean energy buoy. So this is a 15 tonne ocean energy buoy, converting the wave energy into electricity. And we are also invested in Oswald, which is one of the brilliant companies in Europe, with a valuation of over 8 billion Euros. Back in 2016, it was two guys coming from the US, saying “hey let’s make green energy production in Europe” and we were one of the first investors in Oswald.
Have you ever rejected a startup and later regretted it?
Yes, definitely. I don’t want to mention their name because it’s too famous, but we didn’t invest in a company that is now very successful in hydrogen energy and this was definitely a mistake.
There are many venture funds out there today. How do you differentiate yourself for limited partners? And to entrepreneurs?
As I said, we are not investing from a fund, so we have more time, so we can wait longer. Because if you have a fund, you have an investing phase and then a divesting phase. So, after five years, you try to get your investment sold or realized. We have more time for this. Our risk appetite is also a bit higher. We have this sweet spot of early age hardware, which is something that normal VC funds would not do because the risk is too high and if the innovation is good and everything works out, a lot of money is still needed to scale up. That’s why all VC funds are in the software arena. And we are not against software, but we are also looking at early stage hardware.
What is the size of your current fund? What percentage of it is reserved for follow-up rounds?
We invest around 30-40 million Euros a year, spread over Europe. We are Europe invite active. We are one of the largest investors in energy and energy related technology, sustainable energy. We have more than 200 people on the ground. What makes us very special is that we invest not only in ventures, but also in the ecosystem. So, we have more than 200 people not because we need more than 200 people to manage the investments, but to also actively build on our network and ecosystem. The aim is that this ecosystem will support our investments, which works out.
Just to make sure I’m understanding, you get money from the EU and you then use that to invest in different ventures?
We are supported by the EIT, the Europe Institute of Technology. We were founded by the EIT and we use the funds provided to support ventures against inequity stake in the ventures, which is basically an investor. We are working as an investor, we are for profit, we want to make good investments and want to make good exits afterwards, so it’s the same game. Basically, there’s a difference because we don’t have this constraint of having a fund that needs to be divested from five years on.
How do startup teams usually find you? How many startup projects do you review per year?
We review let’s say about one in thirty to one in fifty decks a year. We are not only looking for deal flow that is coming to us, but we are also actively looking for deal flow and being connected with business plan competitions, with different ties in the regional ecosystem, with universities. In Germany, for example, there is something like EXCISS, which is a public support of entrepreneurs coming from the universities. These are all things that we use to generate our deal flow.
At what stage do you prefer to enter? How much do you invest in initial checks and over the life of a company?
The range is quite wide in our case. We vary from going in at a very early stage with smaller tickets, up to €250k-300k, and then we also have larger investments that are €3-5 million. So this is a bit depending on the case and the procedure behind it is a bit different. With smaller investments, we have a much shorter process and the larger investments have a more comprehensive process.
Obviously your fund is interested in green energy, but what are the other verticals or industries that you or your fund have been looking into recently?
Our goal is to invest in energy and related things, but we interpret that quite broadly. So let’s say it’s clean tech, rather than energy. So we’re also interested in transport mobility, we also invest in smart cities, renewables, batteries are a very important issue for us. We are looking at everything that can be somewhat energy related, which can be broad. But we would not invest in FinTech or BioTech or something like that.
How do you select startups to support? What a startup should have to propose to catch your attention? What are the key metrics that you consider when a company seeks investment?
As we are very early stage, we are mainly going based on the teams and the product market fit, which we challenge a lot. We have a special assessment on the entire team, not only on the team members, but also on the entire team - how the skills are separated and how they are leveraging each other and how they’re working together. Then, correct market fit. And I personally, and what my team is looking for, is the execution. We are trying to look for how long they are working at certain things and what they have achieved so far and if we see this as a good achievement and them being good at execution. If you’re very early stage, then it’s key, especially if you don’t have yet a comprehensive website, a very sophisticated model, or hundreds of thousands in revenue. If you have a vision, have a target, and we know that team for maybe a few months and during this time they have achieved a lot, then it’s important for us. So we really try to put achievements in relation to the time and try to estimate a bit: is it an execution-driven team or are they maybe not so good at execution.
How can a startup estimate the sum of money to ask from investors?
The best idea is always to get indirectly to an investor. It’s always much better to get a deck from the network than from the investor directly. If you want to approach a certain investor, I would recommend asking yourself: “Am I able to approach someone who is in the network of this investor to try and bring the deck of other network contacts to the investor?”
How can a startup prepare for the due diligence process? How long does it usually take?
In our case, it depends. If we make one of the rather small investments, up to 300k, then it’s a fairly short process. We have three assessments that we’re making, for the market, the technology, and the team and each assessment is maybe one day of work if all the documents are in place. The founders need to have all of their documentation in place, including data room (which in our case does not need to be from a professional data room provider) and the company documents, so the registration documents, the financial model, and the investment pitch, as well as IP related documents. We don’t request a written business plan, which was the case for us in the past, but currently a presentation and comprehensive excel financial models are completely fine.
What would your process look like with a larger investment?
For a larger one, it’s a larger process. We invest in larger tickets only in consortium, where we have the entrepreneur and we request the entrepreneurs to bring in a third party. The third party does not need to get money from us, but we want to have, in certain investments, an off-taker. Then we request the companies to make a so-called feasibility study that we are paying for. So we do the assessments and then we say “okay let’s go for the feasibility study.” We pay them to make the feasibility study and based on the feasibility study, we decide finally to invest the pot of money.
What are your red flags? What can you turn from investment or make you stop the cooperation with a company, if you’d already invested?
For us, it’s really important that the relationship with entrepreneurs is good on trust and that the company and the entrepreneurs are reliable and that they are open-minded. What we don’t like so much is if we are not involved in important decisions, if they do not involve us in strategic decisions, and so on. So, openness, reliability, and trust is really important for us.
What qualities do you look for in founding teams?
Basically, there is no fixed skill set or type of entrepreneur that is the best. We’ve seen a lot of very different successful entrepreneurs. But I think what is really important or helpful is definitely that at least one of the team is a good motivator and has a convincing personality. At the end, they will need to have success pitching in front of investors, in front of clients, and so on, so it’s definitely helpful to be able to present. The success of a company in scaling strongly depends on the ability to select and to lead teams. The founders cannot do everything on their own, so they need to have the motivation to motivate others. This is really crucial. It’s also important that they have the ability to manage. A lot of people are micromanagers, which really doesn’t work, especially if you scale up. So, this counts a lot. Also with culturability - if you’re not culturable, then it’s also difficult. So, let’s say we look for culturability, ability to motivate, and, with technical things, an industry background is not bad at all. If you have experience coming from the industry to develop technical things, that is really helpful.
Investors prefer to work with teams, but have you ever supported a one-person startup? Or could you see yourself doing that in the future?
We did it in the past, but not since I have been here. It’s difficult. I would not say no way, but it’s not easy for a one-man shop, for several reasons. It’s not only a question of bandwidth, it’s also a question of, if you’re starting something alone, that might mean you’re not a good team player and you will not have success if you’re not a good team player.
What is your process of working with startups, once you invested in a company? What kind of support do you offer to your portfolio companies after investing in them?
We say we are a smart investor, so we are not only investing via money, but also via services and support. So we are very close with our ventures. We like to say we’re somewhere between lead investors and co-founders, because we really are working very closely together for the first two years with the startups. We try to leverage our network for our ventures. We ask them “what is needed to bring you from point A to point B?” and if this is, for example, a contact to five friend utilities, then we connect them to five friend utilities. And this is our sweet spot that we can do that via our network in France or Scandinavia or Spain or wherever in Europe.
What are the most common mistakes startups make? In terms of pitching, operating, or when they approach fundraising? Why do startups fail?
Having a technology and looking then, from the technology, for a market for a technology. It’s better to approach it the other way around: to see a problem in the market and then look for a technology that would solve this problem. It can fit as well if you have a technology and you might find a use for the technology that definitely fits into an existing market problem, but this is often not the case. So we have nice technology, that is very nice and good working, but unfortunately not solving a real pressing issue for the customers. There are a lot of nice-to-have technologies, in other words. And this is also something, which is related to what we’re looking for, the product market fit. So an entrepreneur should really be able to make this famous elevator pitch, to convince potential customers in 30 seconds why the customer should buy the product. This is something that many entrepreneurs struggle to explain.
How much do you expect to get for each dollar invested?
We are not completely different from any of these other VC funds. We expect a multiple for our investments and this could be as high as possible. Sky’s the limit, let’s say. But, yes, the investment would not work if you are not aiming for a multiple. We’re aiming for a multiple that’s higher than 10, but are satisfied with a multiple over 3. And if you divest and get your money back in certain situations, then that’s also good.
How do you decide that it’s time to exit, especially if the life cycle of a company is not really over?
As I said, we are a bit more patient than others, because we don’t have the fund logic behind it. Basically, it’s when we see an opportunity. You need to think in the exit from the very beginning on. This is a process. You’re testing the interest of certain potential buyers and stakes in the company and so on. It’s also opportunity driven. If you see an opportunity to sell a company, then you would do that. Clearly, if it’s a recent investment and you see a lot of potential, then you would not do that, but if you have a good multiple at a certain point in time and you have an opportunity, then it would be best.
Can you name the three most breakthrough startups in history? Let’s limit it to the last 50 years.
From our portfolio, it’s kind of obvious that Oswald is the most important one. It has a multi-billion valuation and the European answer on the electromobility trend. Outside of that, it’s hard to not mention the typical ventures that have been very successful. I mean it’s also incredible, if you see how difficult it is to fund hardware startups, then it’s really incredible what Elon Musk did with Tesla. It’s also impossible from the very beginning, saying that you would start a company that is now worth more than all the car giants altogether. It’s also a question of how sustainable the success of Tesla will be in the end, but if you see how this company also drove the development, then Tesla is really important. This was basically the kick in the ass to all the car companies in the world. And, for the third one, well, clearly, Google. Google is the prototype of a successful software company. They’re not only an incredible gamechanger, but also very successful at monetizing their innovation.
What do you think is the greatest startup failure within the last 50 years?
Well, there are many. There are a lot of examples where the success of the company was built on show only. If a lot of markets are flooded with money, then you can blend easily in with others. There are a lot of examples of highly valuated startups that, in the end, were left with nothing.
Who are the 3 entrepreneurs who most inspire you?
Well, Elon Musk, that’s for sure. Then also Peter Carlson from Oswald. And I don’t have good ones for the third one. There are a lot of good ones, but let’s just go with the two.
What is your strategic vision for the next 5 years? How do you see your role changing in the future?
I think the energy transition is one of the most important and striking megatrends that we are seeing right now globally. There will be a lot of money, public money as well as private money, in this arena within the next ten years. Otherwise, we would greatly fail our climate goals. I think we will fail anyway, but nevertheless, there will be a lot of needed regulation to come at least close to meeting the goals. I think in this field we will see a lot of investments, a lot of money, a lot of growing. And this is why I think we are in a good field, first, and second, we are an important player in making energy transition happen. Because without money, without smart investments in innovation, then we would not meet our climate goals. It’s written down in the IEA Innovation Gap Report that we still need a lot of innovation on the ground in the markets to achieve our goal. To put it in other words, we will not achieve our climate goals only with wind turbines and solar panels.
Venture capital is a long-term game. What keeps you going on? And what's the most challenging aspect of your role?
I think the most challenging thing is really picking the good ones and exiting. An exit is an important thing. It’s easy to give away money, but it’s not so easy to sell your investments in a good way.
Do you have a favorite part of the job?
I really love to meet entrepreneurs and see different solutions, innovations, and business models. That’s always very interesting and gives you a good horizon of what’s possible. All entrepreneurs are often also interesting people so it’s nice to meet with them.
What are the most important things you have learned from founders? And fellow investors?
I think what I’ve really learned is the importance of product market fit. This is something that you can always easily mention, but to really go for it and ask if there is really a product market fit, is something where you need a bit of experience. This is something that I think is one of the most important things and what I’ve most learned here in the business.
Who would you prefer to work with, Steve Jobs or Steve Wozniak?
I think Steve Jobs. I think he was really sharp and precise in his vision and there are a ton of things that you could learn from him.
What books, movies, blogs, events, conferences can you suggest to startup founders?
In Europe, in our arena, the Eco Summit is very important. But also, the Slush in Finland is important and the SET Festival from the dena in Germany. All over Europe, there are a lot of important festivals.
Is VC business chess, checkers, backgammon, card games?
I would not say it’s like card games, maybe more like chess. It’s not luck or gambling, it’s really hard work. You need to really analyze the markets precisely, you need to analyze the competition precisely. Sometimes you see an interesting company and then you look to the competitors and see that the competition is doing far better. Then we also potentially approach the competition. It’s all about looking at the market, analyzing the market, analyzing trends, and then looking for the right teams.
Who did you want to become as a child? What was your dream job?
I wanted to do something a bit different. But being part of something engaged with what we call the energy transition is something that is fine for me. It’s working well. We’re investing in the right arena, I think.
Is there anything important that wasn’t covered by the other questions that you would like to mention?
I just want to note that the most important thing for entrepreneurs is really networking, networking, networking. The network is crucial for approaching investors, approaching clients, for advice, and so on. Looking right, looking left, not being shy to ask for recommendations, and building on the personal network is key.
