Conviction and scrutiny
- an interview with Julian Mattes from Digital+ Partners
Acting fast and with convictions are the pillars of Julian Mattes’ work as a growth investor. As a Partner at Digital+, he focuses on companies that already made it through the first stages of development (e.g., Seven Senders, quantilope). German growth investors were absent from many growth rounds lately, such as the USD 1bn round for process mining company Celonis in June 2021 or the USD 66m funding for no-code company BRYTER in April 2021.
US investor participation in German VC and growth rounds has soared in the past few years. In 2020, a record 150 deals worth EUR 4bn included US-based firms compared with just 76 deals five years ago totaling EUR 784.3m, according to PitchBook data. With Digital+, Julian is endeavoring to cover this gap by providing funding for later-stage companies.
Paweł Michalski (PM): At Digital+ Partners you focus on later-stage investments. Do you think that this is where the biggest opportunity is?
Julian Mattes (JM): The advantage we have as later-stage investors is that we only look at companies that made it this far. The market is the primary correcting mechanism and the most demanding jury and it is quite an achievement for founders and teams to get to our stage. While early-stage investors are primarily focused on investing in the right teams and technology, at later stages, we invest in great teams but also have the advantage to see some track record, customers, and product-market fit being in place. The main topics where we want to help on is execution and scaling. And there is definitely an opportunity for us to bring value to the ecosystem and help great founders and companies to scale based on our previous experience from investing and management consulting.
PM: And what is the most challenging part for you to succeed?
JM: In broad terms, it’s about balancing deep conviction and being critical, while defining where we can help the most.
PM: In what context?
JM: When you start looking at an opportunity, you start developing a hypothesis on your own and you naturally get excited. Eventually, as you progress through due diligence, and look deeper into the market, you start seeing more details, like competitive dynamics, which may discard some parts of your hypothesis. For this to succeed, you need to find the balance — keep the love for the next big thing based on an early hypothesis but also carefully review the market, competition, the business model, and how you can help.
PM: How did you find your middle ground?
JM: I came to this job with a lot of passion and personal drive. In the first few months of my investing career, everything seemed great and I was focused on finding new deals. Based on the challenging input of my colleagues and the feedback from our investment committee, I quickly learned to leave no stones unturned. I found myself initially focusing too much on the company only and built my initial hypothesis too little on competition and the general market. Since then, I focus much more on understanding the broader market, incumbents, and other attackers. I learned that for somebody who had developed a conviction about the topic at hand before and believes the company’s mission coincides with his values, it is good to challenge one’s views by talking to other people. I refer to my colleagues, founders within our portfolio, and advisors who know technology, industry, or product better than I do.
The important lesson for me was to act fast in determining what are the issues and then making a decision. For example, if competition is more intense than thought in the beginning and an incumbent could disrupt the space easily, the solution is never just to wait and see what happens next. There is no better timing to discuss the things you dislike than doing so upfront and be honest. The later you get into the deal process, the harder it is to discuss issues.
PM: Would you call combining conviction and scrutiny the single best practice in investing for you?
JM: I would say it is about being fast in developing a conviction for a hypothesis about various topics while remaining detail-oriented and conscientious. Those, who can do both, have a higher exposure to relevant opportunities. The more you know about a market and the deeper your understanding is, the more helpful you can be to scaleups.
If you are not fast enough, you create inefficiencies for the entire ecosystem. You owe it to your investors, founders, and other shareholders in their companies. While a swift “Yes” is great, a fast “No” is much more helpful to all parties involved than a slow one. For me, it is natural to also provide honest feedback, especially when it is a “No”.
PM: Have you made any regrettable mistakes?
JM: Absolutely. Most of those mistakes are related to falling in love with companies early on and taking too long to see that my hypothesis did not hold. Once again, I’m coming back to what I said before — in some cases, I did not know the space well enough from the beginning. To develop conviction early on, I started to get as deep as possible into the respective space by talking to many experts and companies before making a decision.
PM: What do you like about your job?
JM: First of all, it is the best job I can imagine. I have been a management consultant, I held management positions but the freedom and opportunities that my current role offers are incomparable.
I am working with brilliant people who are taking huge risks to build the leading companies of the future. By supporting these founders and management teams, I get much more than a return on our investments. Working with and alongside these people is particularly motivating for me.
PM: Talking about the important stuff, what is the most important aspect of your job?
JM: It is the ability to build meaningful relationships based on trust. Even though we are working with more mature companies as growth investors, it is still very much about the people behind the businesses. And I am not only referring to founders but also to employees, Limited Partners, corporates and other stakeholders we regularly interact with.
PM: Are there any things you do not like in the ecosystem?
JM: I probably have not been in the ecosystem long enough, therefore I still mostly see the positive sides of the ecosystem. When I started to work as an investor, I was amazed at how helpful people are to each other. It is a small scene, and after a while, you know a lot of people in the scene. It makes sense to be helpful, not only to people in whom you invest. This promotes collaboration over competition — to a certain point, of course. So far, I have rarely seen people abusing this.
PM: Let me rephrase — what is missing in the ecosystem?
JM: The availability of funds in Europe. I know I have said before that funding is widely available, and this is true, but funds are just not available for everybody. The funding environment has changed at the early stage, where the threshold is pretty low. As soon as companies start to grow, it becomes complicated.
You see many funding rounds for the top companies in every region — the UIPaths and Celonis of this world. However, there is not much for the rest. We should help elevate entire ecosystems because it is impossible if only three companies out of every country get funded adequately.
One of the reasons why we are doing what we are doing is because we believe there is a difference in providing funding at later stages.
PM: Do you think that Europe’s tech scene is becoming less competitive than the United States’ one because there is not enough growth-stage funding?
JM: Theoretically speaking, money has the same color and it doesn’t matter where it comes from. In reality, however, the aforementioned high levels of liquidity in the global markets mean that the differentiation increasingly comes from what one offers beyond the capital.
I believe that on our stage proximity still matters. It is much easier to establish and develop meaningful relationships with founders and help them to develop and grow if you can meet them in person. I know that the threshold to meet founders from anywhere in the world has decreased dramatically in the pandemic.
However, some US investors require European companies to move to the United States or have a particular focus on the States, and I do not believe that this works for everybody at every stage. The question is: do we have an environment that offers European companies a level playing field so that they do not have to look for partners elsewhere?
PM: Do we? What do you think are the ingredients that we need to ensure that the European ecosystem thrives?
JM: I would argue that the main ingredients we need are great risk-taking founders, corporate customers that are willing to take a chance on a small scale-up, a deep pool of technical and commercial talent, funding at all stages, exit markets, and a stable regulatory environment. Yet, there is no one-size-fits-all solution for every company. For some, the US market is much easier to handle. For others, making it in Europe means they can make it anywhere. And the European market by itself is huge.
The tech investment scene is still relatively young, even in the US. The European tech landscape is different from the one in the States. If we act fast, we could still develop an edge.
We have large enterprises in all kinds of sectors, like automotive or insurance companies, which are the leading players in their respective industries. I keep asking myself if we will be able to support the next generation of leading enterprises. If not, they will emerge elsewhere.
PM: You already mentioned you worked in banking and consulting before. What did you do in your twenties? What lessons did you learn?
JM: I think there was one thing that stood out — sports. I always believed in doing something that I could master by working harder than everybody else. Thus, I chose an area where I could profit from hard work, this is why I chose decathlon in my teens and triathlon while studying. Hence, I trained really hard and at some point even competed in national championships.
I drew two lessons from that period of my life. First, hard work and dedication pay off. Second, following your convictions can get you places you would never believe you might go. Both of these lessons are related to what I’m doing now. As a young investment fund, we cannot differentiate ourselves by our history yet, so we need to show our conviction, dedication and value add to help great founders and companies on their journey.
PM: What other lessons prepared you for becoming an investor?
JM: Growing up with four siblings (laugh). I mean, certainly, my career in corporate finance and consulting helped me understand business models. Still, I would argue that having arguments with four siblings shaped me as a person to a greater extent and made me ready to understand different perspectives better.
PM: You are a family man.
JM: Yes, I have two little kids that help me get back to the bottom of things, no matter what happens. They keep me on the right track.
PM: Is there something you wish you knew before becoming an investor?
JM: I sometimes feel that if I had been able to study something closer to technology, for example, data science or engineering, it would have helped me in my current role. It is becoming increasingly important to quickly develop an understanding of a topic. I think a technological background might have been beneficial for this purpose.
