Warner Philips (Rubio Impact Ventures): Don’t just do it because you think there is a market opportunity, do it because you believe it solves a problem that is close to your heart.
05 Nov, 2021
Marc Penkala joined MP in 2013. He is responsible for the international deal flow as well as the execution and the global roll-out management. Prior to his time with MP, Marc gained more than five years of entrepreneurial experience by founding two companies. Previously, Marc worked as the assistant to the executive board of Bilfinger Berger AG and assistant to the CEO of Rollbo Transport GmbH. Marc studied business administration at Freie Universität Berlin, University of New South Wales Sydney, LSE PKU Beijing and CBL Business School Dubai with a focus on international taxation, strategic management and entrepreneurship.
I’m coming from an entrepreneurial background. I founded two companies before I actually started doing venture capital. The first company was completely offline, which I actually managed to sell in the first year of university. I was very lucky and fortunate that this worked out. It’s not been because I’ve been so smart, it’s just been a lot of coincidences I would say and back then I had a very good reason to study business.
I did study business and built my second company at end of university. That’s where I actually got the first time in touch from an entrepreneurial side and from the startup side with venture capital. I did this company for three and a half years and we failed to raise a second round. We ended up in bankruptcy and it’s been a very important and necessary experience for me to see how to build a company and sell it on the one hand side. But on the other side, how to build a company, fuel it with venture capital and then fail.
Back then I thought: «No problem. I’ve seen both cycles. I’m going to do it again». I was lucky enough that one of my former investors called me and asked to work for them. I decided that it is actually very interesting because I asked a very important question to myself: «What makes a good founder?». And it was pretty clear that a good founder does not only know how to build a company and how to run a business, but he as well has to understand how VCs work. Why do they give you money? What kind of KPIs do they assess? And what kind of assets do they bring to the table aside from money? I was naive enough to think, that I’m going to join a VC for a year or so and then I’m going to have a very good understanding of venture capital.
It was eight years ago, so either I’m a very slow learner, or there is more to learn than I thought. I hope it’s the second one. As I said, eight years ago I came to venture capital and I started very classically with global venture development. I took companies from A to B and I developed our portfolio on a cross-border level.
We are very Europe-centric. Mountain Partners back then had a portfolio exposure not only in Europe but as well in Southeast Asia, the Middle East and India. We happen to have a blank spot in Latin America. After doing global venture development I went into the very classic investment management for the group. I was lucky enough to identify and spot the opportunity in Latin America. Roughly five years ago my objective was to identify whether we are going to build or buy new activities in Latin America. I traveled around Latin America, met a lot of people and we ended up figuring out that it’s convenient for us to buy an existing infrastructure instead of building something up by ourselves. I was in charge of buying three funds, two company builders and a whole infrastructure, which was back then based in Mexico, Chile and Colombia.
For the past four years I’ve been doing more or less two things. I’ve been developing the infrastructure, being responsible for Mountain Partner site in Mexico, Chile and Columbia. Currently, we have not only the first three funds but five funds and players. We have a portfolio of roughly 50 companies in total.
As I said earlier, I am located in Berlin and I’m a little responsible for our activities in Berlin and Germany. I have a multi-sided work. I travel a lot between Berlin and South America. Or I used to due to the current COVID-19 situation. My traveling activities are fairly limited now, but in the past five years I’ve been back and forth. I don’t even know how many times, but like twice a month I traveled to Latin America to meet our fund partners, investors, our portfolio companies and try to streamline and optimize the workflow between Europe and Latin America. And as you can imagine, if you work in different time zones with different cultures and different startup ecosystems, there are two different views on how to operate and how to do things, which is not necessarily negative. But we use the time to learn from our local infrastructure. Of course, we transferred everything we know to our teams and partners in those countries to just be better together.
On a group level, we are surely an early-stage investor. Due to the fact that we come from the company building side, we started to build company builders around the world and we’ve been very successful with that. We like very early companies, even a pre-business plan, that are just very great people and don’t have an idea or laser shop idea yet. We prefer to enter the seed stage, maybe pre-series A and then follow a very strong follow-on approach. We follow a certain power law. If you have a hundred companies and 10 of them work well, we have the majority of our capital location in those 10 companies after we entered them.
When it comes to industries, we feel super comfortable in fintech, proptech, insurtech and educational tech. These are where we can add value aside from money, where we have very deep expertise and, of course, a very broad portfolio. I believe that portfolio companies learn from each other. So, if you manage to use a network and connect those companies, then the likelihood that they will be successful is simply higher.
When I met this with what I do, I think my investment approach is similar. I have one differentiation. I actually don’t care about the entry valuation and I don’t care too much about the stage. I try to see startups where I invest in from a different side, which is rather an exit perspective. If I enter into a company that has the potential to become a unicorn and the valuation is 30 million, I wouldn’t care too much about 30 million. If I see a company, the market itself and the potential of the company is, I don’t know, a maximum of 50 million exit value, then I would obviously care about 30 million valuation because the value step up is simply not high enough. This is one of the main differentiations.
When it comes to industries, I like as well fintech, proptech and insurtech. This is where I have the majority of my private investments. I am geographically completely agnostic. I’m not only investing in my comfort zone, which would most likely be Germany. The majority of my investments are in Mexico and in the US. I have some in Singapore. I just like to look for the strongest teams on the market, which is growing and is not saturated, where companies or startups have a very unfair advantage or very strong competitive edge so they can fence what they do.
Probably one, which I like, where I see a lot of momentum and we’ll have surely a future relevance is anything around drugs, or let’s be more precise around cannabis and around anything which could be healthy for you but still, it has a kind of shady image. I think it’s a growing comb industry. It is super attractive and has very high margins, but it’s not regulated in most of the countries yet. It’s regulated in some countries such as the US (in certain states) and the Netherlands, but not everywhere. I think the potential here is huge. It is massive. But again, I would refer back to the uncertainties, as there are high regulatory uncertainties. I would probably not touch it, because a company could do super well and it could die from one day to another due to regulatory changes. This is something I probably wouldn’t touch, even though I think it’s super interesting and the growth rates are highly attractive for investors.
Medtech and anything around e-health are super attractive, but I always say, especially when it comes to the regulatory part, that you have to go, for example, in the US, through an FDA process. It’s always the binary investment. When you look at startups, per se, of course, it’s binary. Either you win a lot of money, or you lose your money. But there is a huge gray zone. Companies can be successful without selling the company for several hundred millions. They can be profitable, still alive, pay dividends and so on. When you go into medtech it’s highly binary. If you have a great product and a great idea, you can go through the FDA process and pass it. You will most likely fail due to the regulatory environment and the requirements which are needed to become successful. I liked those models as well, but I think life science and medtech is probably one of the riskiest industries you could potentially go into, especially if those companies need regulatory approval in order to operate. That’s probably another example where I wouldn’t put my money, but this is also due to the fact that I just don’t have in-depth expertise in order to assess a company. Let’s say, if they do a biomarker with a different approach than everybody else, I could say it’s a brilliant idea. But for me, it’s too far away and I wouldn’t have the expertise to say it’s so good that it will out-compete the market.
East European countries are rising, but they are very early when it comes to venture capital and startup ecosystem, which is actually not due to the talent. There is very strong tech talent and there is a high potential, but East European countries specifically have two major problems right now.
The accessibility to venture capital. There might be accessibility at a very early stage. There are angels, angel syndicates and accelerators in place. But once you actually get beyond that point, you need venture and growth capital. And it is not yet there. This is a structural problem when countries themselves didn’t manage to establish an infrastructure, whether it’s governmental grants, governmental leverage and governmental money, enabling limited partners or investors to actually put the money into venture capital. And when you think a little broader, of course, there need to be tax initiatives and an easy way to invest into those companies, specifically startups to make it attractive and appealing for high net individuals and companies who actually corporate venture capital to invest in those startups. That is why the exposure from our partners’ side and as well from a private side is very limited.
A second factor is for sure the political uncertainty. The more stable or the higher is the certainty, the easier it is to deploy capital in those countries. But if you have a high fluctuation in the currency and political instability that is another risk factor to venture capital. Venture capital per se by definition is already probably the riskiest asset class you could put your money into. You always tend to mitigate the risks, which surround venture capital and most likely it’s the political infrastructure, the currency part and as well how the country or the region per se is doing in terms of macroeconomic numbers.
I did have one unusual investment in terms of what they do. Several years ago, I met a company or a founder who is a serial entrepreneur in spacetech. This is something I wouldn’t understand due to my background. I’m not a physician. I have no idea about this kind of technology. Within my first call with him, I was so impressed by his knowledge and his very big vision that I already decided that I want to invest in his startup without actually seeing all the details. I asked him if I could invest and he actually took my money. He accepted my proposal, which was fortunate for me because looking down the road they are currently in the execution of an IPO early next year in the US. This was something where I was highly guided by my gut and the moment. It was something where I wouldn’t invest because the spacetech is not my focus topics.
What they do is they have water propulsion, which they developed and they do into orbit space transportation for satellites. If you think about how satellites get into space, you have basically two options. You have a dedicated rocket going to space and it will drop you exactly in the orbit you need to go. And what they do, they put a small rocket on a rocket, which is driven by water propulsion. And they take the satellites and attached them to where the rocket is going into the right orbit. To simplify, you can think about it as an Uber for satellites on orbit. You don’t always depend on in which orbit the rocket is going. You can put it in the right orbit throughout water propulsion. Their technology is non-explosive. This is one thing which is very important. If you would put something explosive on a rocket, it will increase the risk dramatically. And water propulsion, because you can light it up on fire and it is not explosive, is a very safe way to do it.
Very simple – it is a team. I believe in investing in serial entrepreneurs. Founders who have done it before, not necessarily that they sold the company before or build something huge, but they should have made all the classic mistakes you would do as a first-time entrepreneur.
The second one is obviously the market. I really like to understand what the total addressable market is and how they would enter the market. The market size should be at least 1 billion. Anything below that is probably very tricky because you will not be able to create a venture case.
The third one is the competitive edge or an unfair advantage. What do they make differently? You don’t necessarily need to be the first mover. You don’t need to invent something nobody has thought about before, but you have to show me why you do it differently. Why you do it better than everyone else?
The team can be one good answer to this, but you can have a very strong competitive edge as well, with AI or machine learning. You could have a very unique and attractive sales approach, especially in fintech where you have high customer acquisition costs. If you find the right angle to enter a market and do it 10 times cheaper than everyone else, this could be a strong edge, but it has to be visible. It has to be clear and it has to be something which we could prove with numbers that you can actually do what you are trying to say. I think these are the three core elements for the company. And of course, the potential that you can operate this company not only in a single market but you can expand this company in multiple industries or regions.
To be fair, as we invested a lot of times before, there is a real product attached, either hardware or software. Of course, sometimes we invest based on a PowerPoint presentation. We don’t even know the outcome of what they are going to build. We do it by preference. We prefer software over hardware because the hardware is always very difficult. It is very capital intensive and of course, if you create the hardware, it’s not easy to change compared to the software code. The hardware product is a little trickier, especially when you have to order and manufacture something.
When it comes to the actual business model, we are very classic here. We prefer SaaS solutions. Recurring revenue is something you can rely on. This is something transparent and fast, but anything which is transaction based would work as well. We do have lots of e-commerce players and e-commerce enablings, but here we are very numbers-driven.
We love companies that are profitable by design, companies which are profitable on the first sale. SaaS is something like this. If you sell software with a customer acquisition cost $1,000 and the average contract value is $5,000, you are profitable by design. The moment you make a sale, you already made your money for the customer acquisition cost and you can operate profitably. Same works with some hardware products. A good example is Casper mattresses. To produce a mattress will cost you $250 and the marketing cost is another $150. If you sell the mattress for $600, you already made your money for the customer acquisition costs, the cost of production and you already have the profit. There is no need to sell a second item to that client or to the customer.
If you take the counter side, for example, e-commerce, you have a very high cost to acquire a customer. In the worst case the customer has to order between three and five times over a certain period, let’s say up to a year, just to recoup the customer acquisition cost. And this is where we say that is not profitable by design.
I don’t believe in a one-man show. If a startup team consists only of one person it’s not a perfect setup. The perfect team should consist out of 2-3 people with in-depth experience in a certain industry. I love founders, that come from an industry where they work and where they identified certain problems, inefficiency, or something, which they can democratize and work on that problem to solve it because they have in-depth knowledge about certain items, processes and problems in that industry. As I said before, the team should preferably not be the first founding team. They should have done it before, unattached to the fact if they have been successful or not.
What is important for me as VC and angel investor, that you don’t have somebody who is very stubborn. People who like to listen to others, to a different opinion and learn from other people who have done it before. When you have founders, who already know it all and who don’t listen to the advice from VC, advisors and partners, they will fail most of the time. I prefer to have people who listen and are still eager to learn something from people who’ve done it before.
It’s a good question. We see it from time to time. I think it could be super positive, because, especially on family terms, if they are related, both parties know exactly the expertise of the other. It can be very helpful and very positive. But working with your family can be very critical as well because there is the emotional part to it and this makes it sometimes tricky. I think bad constellation is definitely a couple. It can work, but when you take a look at reality, you spend your private time together, then you spend so much time at work together in your own startup. Over time you have too many friction points. And the worst-case scenario for every investor is if you have a founding team, which has to separate due to internal conflicts. At the end of the day, most VCs invest in a team and if there is a latent danger that the team will spread apart because they are a couple, you add new risks to your investments.
I have not had this case personally when I invested in a couple. I wouldn’t say I would not do it, but I would be very critical on a family level. I would be a little more relaxed, still, it’s a little critical but probably possible. I wouldn’t say you can be less or more successful because you are related to each other. If you take a look at the normal setup, which means you have two or three founders, who may know each other from university or from work, the likelihood that something like this happens is very low.
From the company side, as we are an early-stage investor, our sweet spot is probably ranging for an entry ticket between $250,000 and $500,000. It highly depends on the geography where we invest. We have invested in two companies with a seven-digit entry ticket as well. And we have invested with only a hundred thousand as well. Our sweet spot, as I said, would be ranging around $500,000 as an entry ticket.
For me personally, as an investor, I do checks between $25,000 and $50,000. And this again depends on how comfortable I am, how developed the company is, in which markets they are operating and of course, who is also investing along in those companies.
It highly depends on the stage of the company. The later you go, the less percentage with the equivalent money you could expect. But a fair amount, as an investor, especially when you are co-lead or lead and in the seed or pre-seed round should be ranging anywhere between 5-20%, depending of course, on pre-money valuation and actual check size. 20% would be already a very high top end of what to expect. Sweets would be anything ranging around 10%.
In order to answer this, you probably have to understand that we invest throughout multiple vehicles. We don’t have one fund where we invest in. We have a holding structure in Switzerland where we do balance sheet investments. We as well operate funds as such in Latin America or Southeast Asia, that have their own balance sheet.
If you want to see it from this point of view, we of course have joined investment vehicles and SPVs. Therefore, it would be very difficult to answer, because we would be mixing up different vintages, different regions and different investment focus. In order to be successful in general, you have to target a gross return of at least 3X over the lifetime of the fund. That is the minimum in terms of IRR, or you should be targeting anything beyond 15% IRR in order to be successful and operate in the top quartile of investors. But again, a small disclaimer, depending on the industry and the region where you are active.
I would say there is no rule of thumb on how long it takes to exit. I don’t believe in the idea that you can sell and the company gets bought just because you think it’s the right moment to sell. It’s very hard to sell a company. Usually, it’s the other way around. You don’t want to sell and somebody approaches you asking to sell your company.
One thing which we’ve learned in the past years, the best companies we sold, were sold too early. The moment you sell them, you think you did a good deal. Then you wait two or three more years and the company quadruple on devaluation. You think if you would have waited, you would have made multiple more returns. If there’s a ballpark where you can expect to sell a company, it always depends on the stage where you enter.
The later you enter, the shorter the cycle where you sell. If you enter on a B round, you could probably expect a horizon of 2-5 years. If you enter into a company in a pre-seed round, your exit horizon is probably rather between 5 and 10 years. The earlier you go, the longer you have to wait. The later you go, the shorter you have to wait. You can do the math. On the other side, the later you invest, the lower your ROI is, but your IRR can be tremendous. And if you invest super early, your IRR would probably be fairly lower, but your ROI will go up as you invested in a very cheap valuation. But you have to be very patient when it comes to venture capital. When you look into a fund, especially in the early stage, it’s definitely somewhere around eight years.
The answer will be upsetting, but it depends. The due diligence procedure is a very simple one. It starts with the first call meeting. After the first call meeting, if you like the idea and you have a generally positive meeting, you will request everything which is relevant for your internal due diligence.
It starts from the pitch deck, goes towards the financials, historic and forward-looking. Of course, all hygiene factors, such as the legal formation of the company, all legal contracts which matter the cap table and so on. And based on the investment analysis, which we do on the information that we receive and of course, further calls and communication with the team, potential partners and other investors we drive the process internally to our investment committee. The investment committee takes a decision upon all the information which we get up to that point and based on how the whole investment round comes together. The process itself can take between four weeks and probably four months depending on how fast the route is coming together, if we are lead, co-lead, or just one of the investors, if it’s a new round or we do a new investment.
If we do a follow-on round, it’s easier for us because we already know the company. We don’t have to do deep due diligence and we most likely co-invest with others, who actually do the lead. One factor which is important as well, if we are in the lead we can drive the pace. We decide how fast we go. But if we are co-leader or one of the investors, it’s others who decide. If you have a very aggressive and very fast lead investor, you have to go at the same pace as he does. And you are limited in deciding yourself how much time do you want to take to assess or evaluate if you want to invest.
On a deal flow level, we have pretty much two sources. One is inbound and the other is outbound. Of course, we have people who approach us more or less cold. We don’t know them. They send us the pitch decks and most of the time these are not too well from quality. It is a very broad approach. The other one is a little more precise. We have people, whom we have worked with, entrepreneurs, which we invested in and we get referrals from our network. And referrals probably have a higher likelihood that we take a look at it and they have a way higher likelihood that we end up investing in them. If I had a case from a successful entrepreneur, whom I personally know and he refers me to somebody else I will most likely look at it. If somebody just sends me an email, whom I never heard of, maybe I take a look at it, but the likelihood is very low.
To put it in numbers I would say we receive way beyond a thousand proposals a year. From those thousands, we probably take a short look at 500. From that 500 we end up taking a closer look at 100. And from those hundreds, we drive the process to actually end up investing into 10. If you run the numbers by yourself, the likelihood from somebody sends us a deck to actual investment is ranging between 1-2%.
This sounds super low and actually, it is, but you always have to consider that most of the time we receive decks for regions, stages, or industries where we are not active. We have so many red flags or criteria where we would exclude an investment, even though it could be potentially good, but it just doesn’t fit our investment thesis.
At least 50% are exactly not being considered due to those reasons. Along the way when we qualified a startup, there are still so many things that make us feel uncomfortable, such as a very unstructured or complicated cap table, a distressed company, investors we don’t feel comfortable investing alone, or the company can raise a sufficient amount of capital aside of our money. We believe in never go alone. We like to invest or co-invest with others.
The deeper you go along the way, the more certain obstacles and red flags you identify. For example, the market is not as big as they thought it would be, the competition is way advanced or stronger than we thought from the beginning, or the product is not as sophisticated as it should be. There are a lot of things which could lead to a fact that we say we can’t invest. Of course, a very simple one is valuation and terms. If we are exposed to terms we don’t feel comfortable with, we prefer not to do a bad deal instead of just doing a deal.
What is the best way to pick us up? Two things first. As a founder, I would always start with validating if the investor would consider investing in a company like mine from the stage, the industry, the round size and the valuation. If all these boxes are checked, the best way to get access to a VC or investors is always through the warm referral.
For me it’s a good sign if you manage to find somebody who I would think is trustworthy, that would say: «Hey Mark, you should take a look at this tech from this guy. He’s a brilliant guy. He is building something smart, which could be of interest for you». This has a very high value for me compared to a cold email. Never approach an investor throughout these cold emails, LinkedIn, or whatsoever. It doesn’t work in 99.99% of all cases. If you find somebody who knows you and me, shows me that you already invested some time and resources to identify the person to receive a warm introduction. This is like a quality stamp for you as a person and an entrepreneur, as well as potentially for the case.
We also make what I would call arbitrage investing. Most of the time we see in developed markets certain companies and cases. Let’s take the US, Israel, Europe in general, or the UK. These cases are maybe not available or not yet in other markets. And when we identify companies that could be super successful in markets where they do not exist, we try to search for teams and companies who start working on that. We have a very active approach to create our own deal flow by looking for companies that we think could be potentially successful in different markets.
I think it’s a very interesting way to do it. I always explain it internally, it’s like having a time machine when you see a certain company in Europe and the company or the model itself works very well. The only thing you have to do is identify other markets, most likely emerging markets, with the potential and a certain need. And you could launch this product in this market when you find the right time slot to do. Using the time machine approach will help you to identify companies early enough in the market to enter early because you already know the role model and know it could be successful. I really like that idea and we do look for companies specifically, or for certain attributes.
This approach works vice versa. We do see a lot of technologies, or companies, which are not yet in the developed markets, but of course, will work in those markets. I think this approach is not limited to having something in a developed market and looking for it in an emerging market, but as well it works from emerging markets going into developed markets.
Actually, no, I don’t. Of course, I try to improve my network, meet a lot of new exciting people and entrepreneurs because that is what we live off. It’s important for us that we have people we trust and who are successful because that’s how we receive the best referrals. I don’t like conferences, especially if they are very big and huge where you have 10,000 people because they are very impersonal and superficial. Therefore, I don’t do it.
Nonetheless, I do understand why startups and other VCs do it because of course, they have to do marketing, be exposed and visible to other VCs and other startups. But in our case, it’s not necessarily. We are very long on a market and we have a known brand, we are very active and we have a very vivid network.
We have one event ourselves, called Entrepreneurs Stay. Once a year we invite 300 most important people from our network. It’s not an open event but invite-only. I would say it’s a family event where startups, investors and people who we work with are meeting together in order to improve our network and the way we work together.
Most of them were already mentioned before. Hygiene factors such as the cap table, former legals and investors who are in the deal already could be some red flags. The second one is an unqualified team, which is stubborn and doesn’t want to learn or develop. And the third one is surely, when we identify, that somebody has been dishonest or lying about the product, revenue or certain things which we communicated.
What we are in is a trust game. If I have a feeling that you are not trustworthy and disclosing or telling me something, which is not true, then I would have a problem to actually be a go forward in that process, because our relationship will always be built on trust. I give you a lot of money for nothing in return. At that moment it is equity, but equity has no value until it materializes. You need to have the ability to be honest and trustworthy, so I actually transfer the money.
The lack of expertise when it comes to financing: how to structure financing round, how to model an equity story and how to look forward into the future. If you are a seed or pre-seed company, you obviously don’t know what is going to happen in 10 years, but you surely need to have a glimpse about how this could develop in terms of fundraising, what your capital needs are and how to actually structure the fundraising in order to become successful. This is surely one.
The second one is too much love for the product. I believe in the 80/20 rule. It’s not necessary to have a fully-fledged perfect product to go to the market, rather go with an 80% ready and then develop the residual 20%, because you will minimize the time to market and you will learn from the market to adopt the product. You will be faster and more agile. Some or lots of founders actually are very much in love with what they create. They want to have a perfect shiny product without any flaws and stucks. Most of the time it doesn’t make sense because you will need 80% of the money for the last 20%. Use the first 20% of the money for the first 80%, go to the market, validate the market, adapt, iterate and then optimize the product. Therefore, you have to be a little more flexible on that side. I think these are the main flaws.
Of course. Bessemer Ventures, a US-based VC firm that is the oldest and one of the most recognized VC has a sub-site on their homepage. It is called the Hall of Fame of deals they didn’t do. If you take a look at that, you will find Tesla, Facebook and all the great companies you could potentially imagine. They rejected them on a couple of hundred million valuation and lost billions of dollars. And I really like that they do this because it shows you will see so many deals where you’ll say this is ridiculous, it will never work and it is stupid. There are so many mistakes and looking back 10 years, you will say: «Oh, I am such an idiot that I didn’t do those deals». And that’s not the problem. It’s okay to miss deals, but it’s very important to identify one of those winners from time to time.
The VC game is and will remain a home run game. Your portfolio based on the theory always depends on this one single home run, the one company which will give you a 100X. If you don’t identify this in your portfolio, or if you don’t have this portfolio, most likely you will not have sufficient performance to be an attractive fund. It’s okay to miss 10 deals, as long as you hit that one deal, a home run and be successful on that. And here we go.
Yes, of course, we miss lots of companies, where we say: «Oh, that was stupid!». But something we can change, and what I’ve seen over time is we’ve been so often wrong, we’ve been right every now and then, but, sometimes you see your portfolio and think, this company will not work, this will not work and this will work well. And two years later it’s exactly the other way around the company, which you thought will work fantastically well, is a no-brainer and will return a billion dollars, this company will go bankrupt.
One key learning is a company from the start to being successful changes its business model on average 4-5 times. If I invest in a company today, at the moment I will sell it, or the company goes bankrupt, it will be a completely different company. That’s why it is so important to invest in a team instead of a business model. Sometimes you are very thrilled about shiny founders and a business model in a hype market. And you say: «Hey, it totally makes sense. It will work fantastic». And then one or two years later down the road, you are very disappointed because you’ve been wrong in evaluating the competence of an entrepreneur and sometimes it’s only the character, they spend money for stuff they shouldn’t buy, they don’t manage to build a great team around them or they don’t listen to you. Of course, it’s a part of the game to be wrong and I wouldn’t say we have regret. We made those mistakes; we try to learn from them and not to do them again in the future. It’s okay to be wrong as long as you don’t repeat your failures and the mistakes you have done in the past.
Yes and no. We’ve been very lucky that our portfolio happened to be very robust. Even though we have more than 130 companies around the world it is very diversified in industries, stages and geography. And we don’t have very strong exposure in the industries, which are highly impacted by COVID-19, such as hospitality, travel industry, micro-mobility, restaurant, bars and so on. We don’t have investments in those sectors. To be fair, we didn’t have a single default in our portfolio due to the pandemic. We’ve been lucky in that.
When COVID-19 started, we opened our war room. We went through the portfolio, took a look at the liquidity of the portfolio companies, their business model and try to evaluate how much each company is affected and how we can support those companies. The first thing we did is we stopped doing new investments for so far a short period, which you can see in aggregated numbers for mostly seed markets and there is a dip in investments. New investments stopped for one-two months because everyone was like to find out where the whole COVID-19 situation is going.
And from stopping investing in new companies, we focused on strengthening the current portfolio which we had. We reinvested into companies where we believe they are corona winners. This is the main differentiation between this crisis and other crises, which we have in the past, in 2000, 2008 and 2013, because then everyone lost. COVID-19 is slightly different. You have lots of losers, that’s out of the question, but you have lots of corona winners. The most evident one would be Delivery Hero. Everyone sits home and people order more. They are a winner. Most e-health companies and medtech companies are winners. We have companies which work on efficiency and improved the way you work from your house such as Zoom. Of course, the number increased dramatically because everybody is using Zoom right now. And we try to identify them in our portfolio and strengthen such companies, which we call winners, with more money.
The common situation is stressing the market and it changes a lot of things, but we are almost back to normal when it comes to our investment thesis. We invest in companies and our existing portfolio. We are a little more cautious when we see models that are highly impacted by COVID-19 as we can’t estimate how long the whole situation will last, how it will change the way we work and how it will change the way people behave. And I think this is the most dramatic change.
It’s a good question and my answer would be very political. It depends on who you ask. As I said, there are surely winners in the whole corona situation. And some funds will have tremendous performance because they invested in companies that turned out to be corona winners and they went through the roof.
Looking at the funds, which are highly exposed in hospitality, micro-transportation, or anything, which is highly affected by COVID-19, they will be losers. No question. They will lose a lot of LPs’ money and private investors’ money. But in general, I would say the VC industry will not change. That will be a different allocation of capital. As I said, there is a dip in new investments and total investments in markets. But what we’ve seen as well is after the dip there was a huge catch-up on the companies that didn’t receive funding in the two or three months where people stopped investing.
There’s just a shift in the time when people invested, but the money’s not gone. The beauty of funds is that they work with committed capital. People with money commit capital to a fund and the capital gets withdrawn by the fund at the moment they invest. Just because they didn’t withdraw the money doesn’t mean that the money is gone. It will be allocated to the different kinds of deals. The only effect will be if you have funds, especially micro funds, which consists of LP structure, family offices and many high net individuals, which are highly struck by the corona situation. And if they are not liquid enough to pay the capital costs, they can’t pay into the fund. Then the money is really gone.
But at the end of the day, I think the VC and the startup industry is a very robust one. And the COVID-19 is one of the biggest enabler for VCs and startups because everyone is seeking to digitalize the process. And who is doing this? Startups! There can be a clear winner, but not in every industry or the whole COVID-19 situation. And if there are winning startups, there will be winning VCs. It will be different than the future, but we will be there. We will stick around for a couple of more years.
The most obvious and the most apparent one is Google. I think it is the enabler for everything that we do today as they built the infrastructure where most of the startups actually touched down on. They are pioneers of the internet, not only from Google search but anything which is surrounded by Google, in terms of services, offerings and products, that are used by not only you and me but startups as well.
The second one is surely Amazon. It is one of the players who changed the way we live. They change the way we order and consume. This company enabled e-commerce, as we know it today, not only from the fulfillment side but as well on our general behavior, how we order, evaluate, compare and so on. And both Google and Amazon invest in startups very aggressively around the world. They are a very important part in almost every region around the world, enabling companies with money and not only what they do.
And the third one, I assume is not clear yet to me, but I think it will be SpaceX. To do something like SpaceX, if you take a look at it from a bird’s eye perspective, is so incredible. Everyone, if you tell them what they do, will say it’s not going to work. But Elon Musk is doing it. He’s taking a rocket to space. It is not too fancy itself, but creating throughout Starlink satellite infrastructure, which will enable people to go online around the world for basically small money is something really big. The best number to underpin why this is relevant, let’s look at the global population of 7.5-8 billion people, half of our population have never been to the internet. Just imagine all our Earth, 5G and the impact of this when you will bring to the internet the other 50% of the people who have not been to the internet or don’t use it frequently, all of a sudden you will double the market.
Therefore, I think, especially with Starlink, they are doing something outrageously interesting, which will change the world. On the second level, aside from going to Mars and space transportation, going from Berlin to London, to Hong Kong and I don’t know, will take 45 minutes. Those things are so far ahead in the future that we can’t imagine that we will do it someday, but we will do it someday. It’s just a matter of time. These are some of the most promising companies, where we will see so many changes in our daily life.
I am lucky enough that I really love what I do. Nonetheless, I would surely say that I’m very driven by opportunities and I think at some point I would be keen to build a new venture or to start and operate my own fund. Not necessarily here in Germany, but somewhere in the world where I will see an opportunity angle and which I could bring to the table.
I’m very much enough with blogs. Of course, there are brilliant books out there that are highly recommendable for every startup. And they should definitely be a must-read. It could be Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies by Reid Hoffman, Tools of Titans: The Tactics, Routines, and Habits of Billionaires, Icons, and World-Class Performers by Timothy Ferriss, The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup by Noam Wasserman and Originals: How Non-Conformists Move the World by Adam Grant. There are a lot of books, which are definitely worth reading for every founder and which should be hand tools for them.
I like blogs a lot because there are certain topics which are covered in a 15-20 minute reading, where you can gain lots of expertise from somebody who spent a lot of time reading or investigating about a certain subject. And that’s one of the main reasons why I write my own blog. I see so many things over time and I write every now and then about a topic that is so interesting I would like to summarize my learnings, challenges, or what’s important about the topic which could be relevant for the VCs or entrepreneurs. And this is most likely based on learning, then identifying something, researching and ends up in a 5-10 minute reading, which you just read and digest. But for me, it’s probably a process of a couple of days or weeks to think about it, get the sources and then put all those things together. I think it’s a very neat way to transfer or transmit information from A to B. Of course, podcasts, interviews with people who have built or done something great or experienced something outstanding are at least as important as spokes, Medium blogs, or WhatsApp.
The first one is never go alone. Surround yourself with people which are better than you. A people hire A Plus people, B people hire C people.
The second one is when you build a case where you are in necessity to have venture capital or VC on board, find the right VCs. Don’t accept money because you get money. There is enough money in the market. Find VCs, which can help your aside of money with a network, a platform, their intellectual edge, or with companies in their portfolio, that are complementary to yours.
And the third one, the thing which I like a lot, is that the main difference between people who build companies and don’t build companies is exactly that there are so many people with great ideas, but not too many people having the balls to leave everything behind and build the company. And from my perspective, it’s probably the greatest personal journey you will go on, building a company, creating a culture and being in a constant challenge on a daily basis for years, to build something and change a small part of the economy and your ecosystem. And I think, on a personal level it is the best and most important way to learn. Building companies is something everyone should pursue.
That is the toughest question at the end. It would surely not be a fancy or posh place. I can tell you that much I would definitely live at the beach, close to the city and somewhere, very unusual to what I’m used to and if I should and have to name something it would probably be a lido at Palawan, Philippines, which has been recognized as one of the most beautiful islands in the past years. It’s fairly untapped, yet will be more crowded during the next years. I think that will be the place I wouldn’t even need that much money. It’s just a place I’ve traveled to and I really loved.
It definitely would not be Germany. Absolutely not. No necessity to live here. It’s cold here, we don’t have nice seasides. People are the way they are. For me, it would not be my first pick.