Duncan Davidson (Bullpen Capital): In Silicon Valley failure is a feature, not a bug.
04 Feb, 2022
Andreas Goeldi is Partner at btov Partners. He is an Internet technologist, entrepreneur, and investor with 23+ years of experience from St.Gallen, Switzerland. He has been involved in 6 startups in software, AI, digital media, digital services. He was a CTO at multiple SaaS and Internet companies in both Europe and the United States.
I entered the VC world relatively recently, about 2 years ago. Before that, I was an entrepreneur myself for over 20 years. I’d started and built 5 startups in both Europe and the United States. Also relatively early I’ve started doing Angel investments, in various software and internet-related businesses. That brought me to venture capital because when I left my last startup in 2018 and was considering what to do next, I’ve got approached by an old friend, a co-founder of btov Partners, who asked me if I would be interested to join the firm. That’s how I landed in VC. I brought operator perspective to the table and, as a CTO, I’m focused on our technological deals.
They are all memorable, otherwise, we wouldn’t be investing. I’d like to mention 2 companies that represent extremes of our interests. One is Neptune.AI which is a company based in Poland. They are data scientists who make very sophisticated tools for scientists that allow them to build their machine learning models, test them, and develop them further. The entrepreneur is very experienced, it is his 4th company. He has the ambition to build a globally dominating product in his space. I think it is a very promising company. On the other end of the extreme, I would mention a company called gitti conscious beauty in Berlin. They make environmentally conscious beauty products, starting with nail polish and now expanding to other types of products. It’s a direct-to-consumer company, they sell online for now and advertizing through sophisticated influencer marketing. The big part of the fun of working in venture capital is to play in very different fields, from mathematical models to beauty products and anything in between.
There are 3 major channels. We get a lot of inbound, as we are one of the most established VC firms in German-speaking Europe. Most people have heard of us and approach us actively if they have a startup to pitch. The second and probably most important channel for us is Angel investors; we have a network of 250 Angel investors we work with. They reach with the deals from their respective fields because they see startups at very early stages, they coach and support – and maybe have already invested in them. And then they bring them to us for further financing. Typically it is a very high-quality deal flow because they are already pre-selected by people we trust. The third important source is the outreach within the VC community but also in the general marketplace, in the sectors we find particularly interesting. That’s important in geographies where we might not be present yet. Overall, it is a mix of sources.
It depends on the case. We like to receive a pitch deck in advance, in written form to get started, to understand the whole sector, and to make some research on the topic, so we don’t do pitch meetings just to get a presentation – we do a lot of Q&A at the very first meeting. We believe that being a great salesperson is a great skill to have for the founder, but it’s not the only qualification we’re looking for. We’re looking for people who have a deep understanding of their market, customers, and product, who can answer questions and explain in a lot of details how they arrived at certain assumptions and hypotheses. That’s why we normally prefer a very interactive session. The numbers are a precondition: if you have a startup that is not on top of its numbers, it’s not going to go well. But we are very early-stage investors, we do mostly seed and pre-seed deals, and often there are not that many tangible numbers to talk about, more about assumptions and the nature of the business model and deep market understanding by the founders.
That depends a lot on the specific sector. there are some sectors, like Machine Learning, where we have a defined set of criteria like we’re looking there for companies that got proprietary access to very specific sets of training data; access to talent is a rare commodity in any Machine Learning sector as well. In general, the most important thing for us is what we call founder-market fit. Everybody knows about product-market fit, of course, and it’s something that you find a little bit later. But at early stage companies still have to figure out what exactly a product is going to be and how it fits the market. We look for founders who deeply understand their markets – either from experience or because they know their customers, and for us, this is the most important criteria for investment.
Firmwide we look at about 3,500. This breaks down into 2 main funds that we have. In our fund (we invest in Digital Technology software, AI, Marketplaces, Fintech, etc.) we look at 20 to 40 pitch decks a week and then decide with which of those companies to proceed.
In my fund, we are interested in B2B SaaS companies. We have investments in Digital Health, in direct-to-consumer brands, in Fintech; we are increasingly interested in Developer tools and Infrastructure management software. That gets a bit more technical, as well as Machine learning and AI. And we have a sister fund that is in industrial technology and invest in Automation Technology, in Robotics, even in things like Quantum Computing as well as Medical Technology in certain sectors.
Space exploration… Well, we have invested in our private investor angel network, which invested in SpaceX. So, in that sense, we are in space exploration but it’s definitely not a core field for us. We see a few companies that use satellite images combined with machine learning to solve various problems and we will invest in such companies if there is a good fit for us.
We usually enter at the seed stage. We also do Series A and occasionally Series B, but, typically, not later. Sometimes we do pre-seed stage, but in 6-digit ticket size: if we really like a team, segment, if it’s really very very early. The seed stage is interesting to us because we are very deeply networked in our home geography, and there and more international money from the US and China, flowing into the market at the later stages, but for VCs from outside Europe it’s hard to find those early deals, so we believe that we have differentiation there by going early and helping to develop those companies. We are also very active investors, we lead the rounds and support our companies very closely in their early development, then help them to find their next investors.
We do occasionally investments in the United States and Israel, we have done a few investments in Asia, but right now we have no plans to expand beyond that. As early-stage investors, you have to be reasonably close to your startups, to be able to meet them. We believe that by focusing mostly on the European market, we can add the most value.
It really depends on the nature of the company, how early the stage is. If it’s a very early pre-seed company, it may be a question of 2 weeks, because there’s not that much to do due diligence on. The later stage company can draw out into 1 or 2 months. We try to be very efficient because we have an appreciation for founders’ time – they have more important things to do than spend time on due diligence. We try to be precise, of course, but also try not to overthink things. Early-stage companies bring a lot of uncertainties, but it’s more valuable to focus on building the business proactively than overstudy the existing data. Of course, we make reference calls to customers and experts in the industry to get a better understanding of the nature of the business and it may take us a few weeks, but we try to be as fast as possible.
Our typical seed-stage check is somewhere between €0.5M and €1.5M. The smallest check we’ve ever written is €250k, but even in this case, we’re going to invest in bigger rounds and lead them.
Since we are an early-stage fund, we definitely aim for 10x or more, that’s the nature of the phase. We are aware that the drop-off rate in the early stages is quite substantial, but we hope for potential winners who make up for that. For that reason we invest in companies that can get very big, that’s why we don’t invest in those who can make reasonable 3x, they don’t move the needle much for us.
That also depends a bit on the circumstances and the stage. The rule of thumb applied to early-stage Investments is that in the seed stage and Series A you will, probably, dilute about 20%. We don’t believe it makes any sense to go much beyond that. I think the VCs who try to negotiate the highest possible valuation and therefore the highest possible dilution for founders are not doing themselves and a company the favor. If the founders dilute too much, it makes it harder to keep everybody motivated as well as raise follow-up rounds at reasonable conditions. We try to lead rounds and have half of the rounds, which means we shoot for 10% ownership and believe that that is a fair solution for everybody involved.
We definitely like balanced, diverse teams – in terms of skill sets, in terms of gender, of background, because we know from experience that such teams tend to have the highest level of stability and tend to be the most resilient in complicated situations. We pay a lot of attention to that. The degree of experience of the founders depends on the specific sector. If you are in a sector that is entirely new and very disruptive, young founders may have the most interesting perspective. On the other hand, if it’s a company that tries to improve a relatively well-known process in an established industry, we focus on founders who have deep expertise, who know the customer base, and have a network.
For sure, we don’t imply that we want to invest in solo entrepreneurs, because teams are very important. But teams are made by and from individuals, and we believe that having teams with strong personalities is the way to success. That’s why we want to highlight on our website the strength of these people, how unusual they often are, and how they look at the world. We also want to inspire, especially younger entrepreneurs, to make their attempt and try to create a company. While interviewing our founders we try to find and emphasize who are they as people and how they came to entrepreneurship. Potentially, anybody can be an entrepreneur – it depends on your perspective and where you want to go with your life. We don’t see teams as an anonymous thing (in our sweet spot it consists of 2-4 founders) and we want to get to know the individuals.
I can’t remember any recent case. It could occasionally happen and we’ve seen it in the past when social media was still a big wave. Celebrities are always useful and helpful in getting attention for startups. But we don’t believe that it is a repeatable pattern.
This is one of the historic examples of well-balanced teams, with Steve Jobs being one of the most gifted salespeople and Steve Wozniak being a great technical person with very ambitious and unusual ideas and really going well beyond the obvious. One thing that you can find in their biographies is that Steve Jobs as well was quite technical and had a deep knowledge about electronics, about logistics later, about supply chains. It’s a great example that we are looking at a team with complementary skills. If you have a co-founder who only knows the technical part and doesn’t care about the business and another co-founder who knows nothing about the tech part, it’s not going to work out well. When the members of a founding team have some overlap, it is when the real magic happens.
We definitely do a lot of reference checks on founders, and when we hear anything about n unethical behavior in the past, that’s a red flag. We believe that you have to be an ethical person to be successful in the long run. Ownership structure can be another red flag if it is a university or corporate spin-off and the operator or founders own only a small part of the company. We want people to invest in teams that have a majority of the company for the first few rounds because it is a chance of a very substantial financial payoff. Another red flag is when we drill into the product or the technology a company is trying to sell and find out that there is a lot of marketing fluff and not much substance in it. Unfortunately, it happens a lot in the AI and Machine learning environment. I would say, probably, 50 to 75% of pitch decks we receive in our fund have some kind of machine learning story, and after drilling into it turns out to be just an intention, not a real product, but empty phrases and buzz words. When a founding team oversells it and not honest about where they stand, it’s not a base for collaboration for us.
That happens all the time. We now systematically, every quarter, look and analyze which startups we have seen at some point that are now raising money from somebody else or even achieved an exit or some other kind of success. We analyze in quite some detail how did we came to the decision, did we really made a mistake or we still stand by this decision. When you are an early-stage investor, it’s not always easy to tell if the company you’re passed on is going to end up a big success. In our fund, we have a few remarkable passes. For example, we saw Uber very early on and we passed on it for the reason that we didn’t believe that back then there were enough black luxury cars on the European market, which was the original Uber idea. That, probably, was true but obviously Uber won with the different recipe. This is a typical example: if you judge a company only by a current business model that it has right now, it may be misleading and you may miss out on something that they can achieve later. We try to be very disciplined about understanding these cases and sharpening our criteria to avoid similar mistakes in the future. It’s all about getting better a little bit every day.
No, nothing that immediately comes to mind. Sometimes companies that we invest have some troubles along the road, like difficulties in raising follow-on rounds, but, hopefully, there’s only a temporary downfall. There is no company that we regret to invest in later.
Well, you should never say “never” in our business. I’m personally quite fascinated by Virtual Reality, but we’ve not invested in it yet, because we believe that the market is complicated and way to narrow right now. It is an industry we keep an eye on. We also have not done a lot in the Blockchain space, especially here, in Switzerland, where we have Crypto Valley. We believe it’s still an emerging sector with a lot of speculation and we have not seen a lot of things that really convinced us. That is, again, something to keep a very close eye on for us.
Yes and no. It hasn’t been such a significant impact on VC as was expected initially. Almost all of our portfolio companies have come back to normal or even benefited from the crisis, especially in Digitalization and Automation spaces. We have a few investments in the Travel and Tourism space and that’s, of course, something that suffers a lot. That’s another topic – where we would have a lot of appetites currently until we see more clarity around vaccines and how long this crisis is going to keep us. We are definitely even more open to topics that benefit from it, like Remote Work or Future of Work and Collaboration spaces. It has always been a big topic for us but became even bigger now. And also the Digital Health space has seen a lot more interest as the awareness of health-related topics keeps growing, and we’re going to focus more on it as well.
It’s both. It entirely depends on the specific sector. If you are focusing mostly on Travel and Tourism, it’s clearly a major threat: it may take years to go back to normal. But overall it is an opportunity and not just in terms of sectors that have benefited, but by the whole process. Right now we do everything remotely and have made investments in teams we’ve never met physically before signing a term sheet. That’s a bit unusual; normally we like to meet people and get a first-person impression. You have now found we can do it this way and it is more efficient in terms of geographic expansion. We are expanding into Eastern Europe and Southern Europe as well, and it’s much harder to bring these teams to Berlin or Zurich, so doing it remotely has definitely added a lot of flexibility. That applies to the whole VC industry, as we can see, because less and less VCs now insist that at least the core team should be at the same location as they are. in that sense the whole VC benefited from COVID, becoming more open both geographically and in terms of organizational structures of startups, and that is great for both parties.
We’ve had these cases, yes, where this came to mind, but we normally don’t try to push founding teams too hard. Merging two companies is always difficult, even at an early stage. These teams don’t necessarily have to like each other only because they have complementary ideas or work in the same market. What we definitely try to do on a very regular basis is enabling meetings between startups, if they have similar customers, because it may be good for them to have common marketing or exchange leads. But enforcing merge is not something we might feel comfortable doing. I’ve, personally, as an entrepreneur, been in mergers, and they are not a very happy process; it’s complicated and may have unexpected consequences.
It’s not original, but definitely Apple. They invented the modern personal computer and the modern smartphone, and I admire them. They are not necessarily invented everything themselves and took ideas from other people, who’d already experimented with them. But they are the best in commercializing things for the mainstream, and this is a type of innovation that is often misunderstood. People often think that to be innovative you need to invent something in some secret lab. That’s absolutely not the case: I really like startups that take something existing and make it happen in the marketplace. Another very obvious is Google. They are my favorite example of how not to worry too much about the competition, but about customers, because Google was by no means the first web search engine and it wasn’t particularly good in the beginning. They tried to make the search very very simple compared to their competitors, focusing on making difference in customer experience, and build all the underlying technology on it. And the third one is also not original – Amazon. What impresses me is that they’ve started out very vertically, selling books, and then expanded in all directions. They filled in a lot of segments and failed in many other segments. They are my favorite example because as a startup you have to initially have a clear focus, clear target market where you have a clear value proposition, but you also have to have early on the vision to go well beyond that. Even when you have already a very big company, you can always experiment, even if it sounds crazy. All these 3 companies are really impressive in how well they managed the changes brought by other disruptive technologies.
GetYourGuide is the latest Swiss unicorn. Currently, they are under pressure, because they work in Tourism. But it’s very interesting because it was a group of mainly technical people founding a consumer-facing business and bringing their position, their determination, and technical skills to the table to build something that is very easy for consumers to use. Historically speaking the largest Swiss startup is Logitech, which was one of the main innovators in computer periphery technology in general. Daniel Borel, one of the founders, was for a long time one of our co-investors and played a major role in developing entrepreneurship in Switzerland and still playing it. That’s where, probably, every Swiss entrepreneur wants to land.
They both have their benefits and downsides. When you are an entrepreneur the amazing thing is that you get to build something new every day, you can focus on something specific, you can make your customers happy, build a team – that’s a really fascinating creative task. The downside is that is a wild rollercoaster, it changes every day, and can be stressful, it requires a lot of focus over a long time because you’re rebuilding the one thing, one company over many years. The benefit of being an investor is that I get to work every day with different startups in various sectors, with different teams. There is a lot more variety in it. The downside is that I don’t get to be too involved in building real stuff, which I occasionally miss. But it’s never helpful to cross the line between you and a company because as an entrepreneur you will benefit greatly from the help of people who understand your business deeply, but still stay away and keep their distance, keep the big picture and help you to see this big picture. Both are fascinating jobs, and I really enjoy this switch from startup founder to investor.
You have to be able to drill deeply into the topic, much deeper than it was in the past. Traditionally, VCs, especially in Europe, had been very broad in terms of investment goals, they’ve invested in many different industries. There’s nothing wrong with that, but to be really effective you have to have an increasingly deeper understanding of specific industries. This can give you much more specific and focused help to your entrepreneurs on how to run their businesses. As a VC, you have to find the right balance between being impatient and patient. You should accept that building a company, building a startup takes time. At the same time, you should also be an external party that keeps a founding team focused, who occasionally signals a bit of impatience. What you shouldn’t be as VC is a person who constantly adds anxiety, because entrepreneurs are typically anxious and driven enough, so it doesn’t add much value. So finding the right balance and focusing on the really important topics and not getting distracted by technical stuff is what investors should do.
It’s almost like an open-ended video game because it has a lot of degrees of freedom. When you think about, for example, chess it has some clearly defined rules. It’s not like that, because VCs don’t have the rules, and you often make decisions in very uncertain situations, with limited information. In board games you see the situation very clearly. That is why it reminds me more video games, like Halo, when you never know what’s around the next corner, it’s full of surprises, hopefully – positive, and you need a lot of flexibility and mobility to react, you need to be creative in measures you’re going to take and resources you’re going to use. And often you have to break the rules.
My favorite philosophy is stoicism, it helps in VC, and Seneca is my favorite writer there. Of more modern writers, one of my favorites is Swiss philosopher Alain de Botton, who’s now based in the UK; he writes philosophy, I would describe, applied to modern circumstances, usable for a modern audience – an excellent writer. I think, the best book I’ve read in the past decade was Behave: The Biology of Humans at Our Best and Worst by Robert Sapolsky. It deals with how humans work in every aspect. This is a fascinating book to read if you want to understand human behavior, which is a key ingredient of every good VC. My final recommendation is Nassim Nicholas Taleb, who is one of the favorite writers of VCs, who wrote one of the game-changing books for me Fulled By Randomness. It explains how many things in our life, in the economy, in investing are purely random, how you can study and understand randomness to stop being random in your actions.
Solve a real problem. One of the things that we often see in pitches is that people make up a problem that fits the solution that they would like to build. Build a strong and diverse team – this is one of the absolutely key elements of success. And pick your investors wisely. Don’t try to raise a round very quickly. If you’re at the seed stage, it’s very likely that you will spend with these people the next 7 or 10 years. Most marriages don’t last that long now. You should make sure that this is somebody you really like, who likes you, who understands your business and cares about you and your business – not somebody who just responded quickly with a term sheet.