Key Learnings of a VC

Two Decades in the Startup Ecosystem

After being active in the German startup ecosystem for almost 20 years, I think the time is ripe to share some of the key insights, learnings and observations I have gathered over the years. I will share my thoughts — and a couple of war stories — in three different blog posts over the coming month:

Part 1 — Key learnings as a VC
Part 2 — The German startup ecosystem
Part 3 — Patterns and attributes of successful startups

Inception

In 1999, a good friend pulled me out of the boring but comfortable corporate world and into the German startup ecosystem. He asked me to join his startup as an executive board member some months before we went public at the “Neue Markt”. That is where my journey in the startup ecosystem started. Between 1999 and 2007, my co-founders, partners and I founded, grew, ran, invested in and exited several tech startups. We have raised numerous rounds of VC funding and worked with national as well as international VCs. During that time, I had many very positive and some unbelievably bad experiences with VCs, and I learned a lot about how entrepreneurs and VCs interact from an entrepreneur’s perspective.

In early 2007, some German VC firms approached me to see if I might be interested in joining as a partner. Finally, in May 2007, I decided to join the other side of the table. At first I was a little unsure if I really could work as a VC, since an investor has no operational control over the venture. I promised myself that I would never ever become a “lifestyle VC”, living off the management fee and neither contributing to tangible exits and good returns nor supporting the portfolio companies in any meaningful way (aside from signing off the money, of course). I also promised myself I would always put the experience I gained as a tech founder to work for any companies I invested in.

In my 10 years as a venture capitalist, I’ve met remarkable entrepreneurs, found some true friends, learned to deal with the consequences of my own wrong decisions, and had the honor of supporting some kick-ass teams. I’ve lost count of how many potential investors I have contacted during the fundraising processes of the 3 VC funds. What I haven’t lost count of are the 12,000-odd pitch decks I have screened and the 2,000-odd pitch meetings I have attended with my colleagues.

At this point, I would like to share some of my key learnings from these experiences.

Key Learnings (selection) as a VC

Never stop learning

Working with dumb money is torture for founders
An investor has to understand what they are investing in, and after the investment, they should really stay involved with the company. As an entrepreneur, I worked with VCs who really had no f***** clue about our technology, product or market. Discussing my company with them in board meetings or in private meetings was honestly a waste of time. Yes, it is tough and exhausting to understand all the different technologies and other ingredients of various startups. But if an investor is not capable or willing to do it, they should do something different with their life. A VC should be curious and humble by nature. The ability and willingness to learn is tightly connected to the right investment decision, as well as the overall personal reputation of the VC. You shouldn’t invest in companies you don’t understand.

Invest based on a strategy

Investors without a clear focus and strategy are lost
Some investors claim to invest opportunistically in all the “good” deals. In my experience, this just doesn’t work. A VC needs an investment strategy. Based on the defined strategy, the VC team builds its domain expertise, deal sourcing, industry and co-investors network. Opportunistic investors are like bankers — money with little value added and support.

VCs shouldn’t be afraid to build an impressive anti-portfolio. If a VC firm is investing according its defined investment strategy, they will turn down interesting startups which are off-strategy and out of their chosen focus area. So, don’t worry about all the great companies you did not invest in. Just keep a record of your anti-portfolio. An experienced LP (fund investor) once told me that the deals you have turned down are not that important. It is the deals you have invested in that are important.

Build your own opinion

Followers won’t invest early in outliers
In order to be in the driver’s seat, a VC needs to form its own opinion about startups, markets, technologies, teams and trends. I am sure with their own opinion and investment strategy, a VC will build an interesting portfolio, especially if that strategy is progressive. Only with your own independent research and evaluation can you build a robust investment strategy and make solid investment decisions. Even if there are already brand-named VCs committed to investing, a good investor forms their own opinion based on their own findings. Never do “me too investments” or become a follower. One of the most dangerous and even stupid questions is “Who else wants to invest in the company?”

Brothers-in-arms and wingmen

Founders and investors have to like each other

In my first years in the startup ecosystem, I have been asked more times that I can count whether the team or idea is most important. At first I thought it is the idea. Well, my first VC investments changed my mind. It is the team, and it is all about the founders! Marc, Dominik, Christian, Michael, Uli, Frank, Alex, Marc, Christian, Manuel, Paul, Fritz, Sebastian, Tom, Josef, René, Tom, Jörg, Ingo, Michael, Chris, Tilmann plus several other entrepreneurs — you guys changed my mind ;-) Thx 
I had the privilege and luck to invest in and to work with amazing entrepreneurs, great people and strong characters.
Some years ago, my partners and I were discussing what kind of founders I wanted to invest in. My rule of thumb is that I will only invest in a startup if I could imagine spending a few days with the founders alone on a sailing trip or on holiday in a tiny house in the Alps. That is to say — I am willing and motivated to spend private time with the founders. Why? Because founders and investors have to respect, like and trust each other. As an investor, you are the entrepreneur’s wingman. The VC should be the first person a founder wants to call if (when) the shit hits the fan. Entrepreneurs and investors are brothers-in-arms and the VC has to be the founder’s wingman.

Don’t do harm (but work your ass off)

A VC should support
A startup is not a playground for investors. The founders are in charge of managing the company. As an investor, you have to ask yourself which support makes sense and won’t distract the team. Some investors tend to micro-manage from the sidelines with a really small screwdriver.

What are the main tasks of an investor after they have invested in a startup? 
First of all — a VC has to be accessible at all times. As the investor of a company, a VC is part of that company. If a founder needs to talk to them (whether over the weekend or while they’re on holiday) the investor has to be accessible. Period. Why? Because in a startup, time goes faster and days or even hours can make the difference between success or failure. 
And please — no PA defense line. ;-) Personal assistants are for salespeople, and people who can afford to wait a few days, but NOT for founders.
The other main tasks of a VC are networking, sparring, coaching, business development and most importantly making sure that the best follow-on investors will be interested in joining the next round (if needed).

War story:
In one of my own startups, I had a VC and board member who couldn’t be reached without an appointment via his PA. Sometimes it took a week before I was able to get a slot for a call. To cut a long story short, the fund doesn’t exist anymore in Germany.

Maintain your “VC street cred”

The image of VCs is still weak
At Capnamic Ventures, we work on eye-level with the founders. What does that mean? Well, first of all, we show respect. We don’t waste the founders’ time. That means we are always straight and transparent. If a startup doesn’t fit into our investment strategy, we act according to the motto “The second best answer is a quick NO”.
We know that a VC sends out far more NOs than YESes. We see about 1,500 pitch decks per year, but only invest in about 5 new startups per year. Even though we have to turn down the vast majority of startups who approach us, we still try to give every founder some support — whether with feedback or with intros.

A little recommendation to all my peers: don’t use your notebook, iPad or phone in meetings with the founders. They only last 2 hours, after all. Pay attention all the time and show respect to every founder — especially in pitch meetings. This alone would increase the image of VCs immensely.

War story:
One of the founders we backed went to a pitch meeting for a follow-on round. It was the main meeting with all partners of a French VC fund in Paris. 
1. They let him wait. The meeting started about 20 minutes later than it was actually scheduled. 
2. The ruling senior partner showed up another 15 minutes later. 
3. The senior partner started reading and answering emails or messages on his mobile during the pitch. 
The only possible consequence for the founder was to close his notebook. He told the VC partners that the meeting just didn’t make sense, and left the room and the office. Just guess how many Berlin-based founders know this story, and how many won’t get in contact with this investor.

Outlook

In Part 2 of this series, I will share some observations and insights about the development of German startup ecosystem over the last 20 years, and my thoughts on what opportunities the future might hold for entrepreneurship in Germany.

In Part 3, I will look at the common characteristics of successful startups that I have been involved with over the years, both within the DACH region and internationally.