Where We Put Our Mouth — And Our Money
This past year, we have seen technology evolving at a pace that made us sit down with the team and reflect on our investment thesis and our claim Peers amongst Entrepreneurs. To make it relatable beyond the key words we included comments on the why behind the what. This way we hope to deliver a handy close up and are happy to take your feedback. You can also find our thesis here on 42CAP.com.
Our Investment Focus
We Look for Agility Drivers. In today’s hyper competitive world companies are forced to optimize every step in their value chain while being agile to react to new requirements. Therefore, businesses are striving to adopt verticalized solutions to support their processes. These need to be easy to use (Consumerized), readily available as a service (XaaS), best of breed in its vertical (Point Solutions) and open to support an ecosystem of tools (Open APIs). This leads to simpler and better-connected business tools –as-a-service for enterprise productivity.
On the consumer side the beautiful, simple and open in software has set standards. We support companies that bring this simplicity to where it is desperately needed: the industry. When we look for agility drivers, we look for the speed and efficiency of application reality in enterprise technology, e.g. in the augmentation and automation of legacy processes. Our Paris-based portfolio company Zelros tackles the challenge in an industry that inspired the labyrinth in Franz Kafka’s novels: the insurance business. Zelros applies artificial intelligence to increase productivity in claims management by complexity scoring and automation, while driving insurance sales efficiency through churn, up- and cross-sale predictions
We Believe in Seductive Solutions. For a solution to be broadly adopted it has to solve a burning need or a staggering daily pain. We seek companies that are able to create a wow effect. Discovering a solution should feel like complete ease and fulfillment. It should not only feel functional but satisfying to use and spend time with it.
As much as we worship beautiful and intelligent technology, it is only when solving a real-world pain that technology is seductive. The 100th anniversary of German Bauhaus reminds us of the origins of seductive in tech, that also fueled Apple’s approach. As the rise of mass-manufacturing in the early 1900s had stripped goods from any aspiration in terms of craft and design, the Bauhaus school created appliances that were elegant and eminently functional — with the simplicity needed for the big scale. Seductive solutions come from an insight into an immediate problem. A very recent example from our portfolio is the Belgian startup Customs4Trade: It addresses the menace of Brexit and trade wars by giving companies one easy to use in-house solution to manage their vastly complex customs and trade compliance worldwide.
We Invest in Whale as well as in Deer Hunters. Some investors shy away from the challenges which come with building an enterprise-software company. We have built those ourselves and grasp at the opportunity in B2B with AI and a new simplicity. Simultaneously, we embrace the potential of the SME & Prosumer market with its enormous opportunities.
We love B2B and embrace the risk whale hunters take. For one thing, amongst other companies the 42CAP team has built eCircle (Teradata) and Hybris (SAP). Also, we watch large organizations standing at the brink of enormous change. Therefore, we value solutions like the one scoutbee, based in Würzburg, Germany, has developed. The team’s proprietary AI Artimis, digests billions of data sets identifying the best custom procurement solution for purchasing managers.
We Seek Truly Data-Driven and Technology-Enabled Business Models. For one thing, data is a source of truth for successful decisions. The rise of Artificial Intelligence empowers businesses to automate and augment their processes. Moreover, software enables frontier technologies by providing innovation leaps in fields like BioIT, (Aero)space, Distributed Ledger and Quantum Computing.
The new window of opportunity in AI and software is wide open: We are happy to see original technology as well as original visions in both fields, e.g. challenging the pressing question of data privacy and commerce: Our portfolio company Mostly AI from Vienna delivers a compelling answer to full data use by creating synthetic customer data. For the first time this enables companies to liberate their data sets for market research, product development and other fields, while maintaining full privacy protection. Another great example is what the team at e-bot7 presented to us last year. The Munich-based company is tackling a focal point of the customer journey: customer support. By means of their hybrid model, an agent + AI, they automate up to 80 percent of customer support tickets by leveraging complex NLP algorithms in combination with human agents.
Our Investment Approach
We Invest in the Seed Stage. We invest in seed-stage companies, targeting both product-market fit bets, which are post-product but pre- or early-revenue, as well as scaling bets with initial revenues.
We do not shy away from pre-revenue bets. When we see a point solution to a problem and a sound pilot, we go in as a point investor. We love to cut through a product and find excellence. This must not absorb weeks of presentations: What you can expect from us is point talks with General and Venture Partners only. Cioplenu and ORDA from our portfolio were two bets at a very early stage.
The founders of ORDA had already created a nutrition app for the UN and had been working on their next app for six months, when we met them. They had created a service to change the nature of service in restaurants: ORDA enables customers to order and buy food right at the table through their app, speeding up processes and making gastronomy leaner.
Cioplenu had started as a spin-off out of the Technical University Munich and the renowned Fraunhofer Institute, when they presented their multidimensional solution to us. It takes a shortcut to industrial documentation and allocation in a company’s production by means of a digital assistance and editing solution.
We Seek Critical Market Potential. We only invest in companies that have the potential to reach a €500m+ valuation within 7 to 8 years. To achieve it, the addressable market size should be €1b+ in recurring revenues at high gross margins.
We strongly believe that the market must allow for companies to get a chunk big enough for reaching scale and growing profitable. Only markets with this potential deliver returns worth the commitment and personal investment the team is making.
Our Focus is on Europe. We focus on companies originating out of Europe with global ambition. We strongly believe in the available talent and infrastructure in Europe to build global leaders.
We see an organic potential in Europe that is about to unfold in the realms of AI and tech. The educational infrastructure is growing many talents for industry 4.0, while the standard of living attracts international talent. Moreover, the European perspective spurs game-changing ideas for the challenges like privacy, climate change and urban development.
We Go for Product First. We believe in the significance of the product and also want to see that reflected in our founders. Only an excellent product will support building an excellent company with excellent people — for years.
One of our partners once pinned it down: „I have a hard time believing in the team if I do not believe in the product first.“. Having said this, we also believe in great people and sound teams.
We Support Holistic Teams. We love determined and complementary teams with entrepreneurial vision and global ambition.
As US-sociologist Brian Uzzi showed with his somewhat famous analysis of Broadway orchestras: teams with different creative inventory produce the most successful products. As the intelligence era is cracking up the former homogeneity of the entrepreneurial scene, we see more hybrid teams. In the future we hope to see even more of them, with more women, different ages, more nationalities, and diverse social backgrounds.
We Target Significant Ownership Stakes. We are going for a significant stake because we want a concise portfolio of 20, really strong teams, each of which we can support throughout the whole entrepreneurial journey, rather than going for a “spray and pray” approach. Moreover, the returns of these stakes allow for a long-term perspective as an investor.
What you can expect from us in exchange for significant stakes is non-annoying money. Having built companies ourselves and gone through all the stages of decision-making, we provide support whenever needed but do not give unsolicited advice. After all we understand that the founders — not the investors — are the experts in the room, when it comes to a new company.
We Support A Sustainable Round Size. We believe that an entrepreneur’s focus should lie on building a company, not on raising funds. Therefore, we invest in rounds which grant a runway of 18 months.
Founders in the seed stage need time and space for a sound product-market fit. Moreover, they need to make decisions free of pitch-cycle strategies.
We Look for Solid Entrepreneurship. Back then, we wanted to be great entrepreneurs and to build a great company instead of going after paper money. It is this spirit we are looking for in today’s founders. It is this spirit we believe creates the best returns.
Entrepreneurship means long-term spirit: When building a company, the greater part of the value is created in its later years. Value is being created when your business proves not only profitable but sustainable, and your product has become a „can’t imagine the world without“. What you can expect from us: We claim to be Peers Amongst Entrepreneurs, and we mean it: We know that when faced with brave entrepreneurs building game-changing companies we better be non-annoying investors. We respect founders as experts on their mission.
