STARTUP VENTURE CAPITAL
Close Encounters of the B2B Kind: The Dynamic Relationships Between Startups & VCs
You know what they say: it’s always good to have friends who are lawyers. Recently, ours from Luther Lawfirm invited us to their 6th annual Startup Conference with the theme “Venture Capital and its recent developments in Germany.”
The event had the overall mission to bring select startups, investors, and corporates closer together in an intimate, business-casual-but-Berlin-cool setting at the iconic Musikbrauerei location. Prior to the canapés and wine-fueled networking portion of the evening, two expertly curated panels with top German investors gave the audience plenty of insights to fuel the conversation later on.
Knowledge is power. Or at the very least, a neat party trick. So, when we at dynamics have the privilege of being in situations (like this one) where very smart and qualified people have very smart and interesting discussions, we like to share our takeaways with you.
Venture Capital vs. Client Revenue
Instead of putting all of your startup’s energy into raising venture capital, why not put that energy into building up a sales pipeline?
Luther Lawfirm’s Andreas Tüxen kicked off the session with a challenge to the panel of mostly investors. Dr. Gunjan Bhardwaj, Founder and CEO of Innoplexus, whose company famously raised its startup capital through prepayments from future clients, argued that the crowdfunding approach should be the way for all growing companies. Startups get customer insights directly from the client and thus are better equipped to build the best solution to their problems.
It’s simply smart. Kill two birds with one stone, and without giving up any equity. If big companies are willing to pay you €200–300k to solve their problems, then you can be sure that it is a real problem. And it’s hitting them hard.
That’s how Innoplexus got started. The original solutions they built for their first customers are now the base of their overall service, and they hold over 120 AI patents because of it.
But is going for a full sales pipeline instead of relying on a supportive VC really the way to go for all startups?
If it were so simple, everyone would be doing it. Michael Rager from Deutsche Telekom AG Capital Partners (DTCP) highlighted the fact that it depends whether the startup and the investor in question are B2C or B2B. There are some VCs whose investment portfolio and professional network are exclusively consumer-facing founders. Others have an in-depth understanding of what it takes to grow a successful B2B company and half of the German manufacturing industry in their contacts list.
Different investors can help in different ways. It’s up to startups to learn about and leverage the unique strengths of their VCs. Founders should talk to as many people as possible and evaluate the best funding option for their company, their solution, their industry. In the end, you have to do what’s right for you.
Get you a VC who ‘gets’ you
Juliane Schiefer, Managing Partner of Signature Ventures, started her fund just for that reason. Sometimes, early-stage investors just don’t do the trick — especially when it comes to frontier tech. She made the decision to support blockchain & other ‘deep’ technology startups, as the early financial offerings in this sector were very limited. Not all investors in this space actually understand it. And if you don’t really understand what you’re investing in, you probably won’t be able to justify why it’s a good investment to your LPs. Furthermore, you might not be able to offer much help to your portfolio companies, which doesn’t make you a very good VC.
A good rule of thumb: If you don’t ‘get’ it, don’t buy it.
Mark Harré working for SIGNA Innovations underpins this point. He argued that great investors have a deep understanding of what they’re investing in — either vertically or horizontally. You should have somebody backing you who supports your vision and understands the value you’re adding. If you’re talking to an investor and they don’t have the slightest clue of what you’re talking about, its’ the wrong VC for you. Doro Gotthardt, IA at Capnamic Ventures, emphasized that as an early-stage VC you can really support and share your knowledge.
Sometimes investors focus too much on valuations and numbers. Lars Härle, Partner at Redstone, explained that all investors need to do their due diligence, but they also need to understand the respective industry and changing demands. Therefore, it is vital to build a strong network of relevant industry contacts early on, as Gunjan mentioned.
Scooping up seconds
Providing knowledge and having a strong network is undoubtedly beneficial. However, as the years pass and a company evolves, needs will inevitably change. A lot. Just like I outgrew most of the friends from my teenage goth phase, the same can happen to the earlier investors on a growing startup’s cap table.
Sometimes, the people whose support was critical to your early successes can’t add any more value to your venture later on. That’s where secondary purchases come in. Philipp Meindl, investment partner from TempoCap, is one such secondary investor. If the strategy fits on all sides, they buy out old investors, have an active role in the startup, and they provide benefits from their own ecosystem as well. TempoCap is active in US, UK, Germany, and France.
In startup VC, Eastern Europe is as important as Western Europe. In fact, it has vast and untapped technical potential. Max Moldenhauer, Founding Partners at Sunfish Partners, actively chose the CEE region in order to connect and leverage the high-quality technical capabilities. They set out to foster decentralized teams with business operations running in any other country and development nearshore in Poland.
Managing a fund that invests in the CEE region out of Berlin categorically involves near-constant traveling. For investors in general, it comes with the territory. Another important topic that can no longer be ignored in the VC world is global warming.
What responsibility do individual companies and their investors have?
Not so fun fact: did you know that the carbon footprint of a VC is 26x higher than that of the average person?
Finance for future
There’s no better topic to end the discussion on than the one that’s going to end the world: Climate Change. It’s something we all have in common; we’ll all be screwed unless we start doing something about it now.
Fabian Mimberg from Luther Lawfirm asked if you would, legally, commit your portfolio to measure the carbon footprint and to support green initiatives. Dorothea Gotthard ventured that Capnamic wants to lead here as an example by evaluating how to put clauses into their contracts that emphasize sustainability.
Overall, VCs have a responsibility when they look at startups to see if they are aligned with the investor’s values. On this statement from Philipp Meindl, Andreas Tüxen had a very controversial question:
Would investors be willing to sacrifice profits for a greater good?
Philipp replied that this is a tough choice but made slightly easier when they are aligned with what you stand for.
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The state of VC in Germany is in constant evolution. From the very early stages up onto secondary investments, the fight for founders and business models is tough & ongoing. Investors have to provide more than just money; they have to add long term value. The ecosystem, network, and scaling effects are sometimes more valuable than any check they could write.
All of the topics discussed led to the same conclusion: the vision we have for the future is collaborative.
Organizations and individuals have to commit to working together in order to achieve a greater purpose. And that’s our core belief at dynamics. Our mission is to bring together startups, corporates, and investors to solve the biggest challenges in our industries.
