25 4 / 2013

Make or break - what we have seen so far.

At the beginning of the year, I explained why the rules of the VC game are changing in 2013 and that founders need to “Adapt or leave” the ecosystem. I explained the structure of the funding pyramid in Europe upon which the financing of startups in Europe will be based.

The first quarter of 2013 has passed and it is time to have a first review on those metrics:

Series A crunch landed in Europe

We haven’t seen a remarkable deal flow in the first quarter in recent years. When returning to my desk in January, my inbox quickly filled with requests from fellow VCs introducing their seed funded companies for a series A round. In parallel, we hear the news about seed funded companies merging as a last resource with competitors, as well as about some asset deals or even insolvencies. There wasn’t a particular vertical sector which was hit hardest - it was across board. Also we hear about loans given by some institutions to startups on reasonable interest rates to give more runway – the time a startup has enough money to operate from - for those still in fundraising. We will hear more of those stories in the course of the year. This development is in particular more focused on Berlin as predicted by me in January because Berlin had the most Seed Deals which are mainly affected by this metric.

Deep pockets right from the start

recent report by CBS Insights revealed an interesting fact for the US: Seed companies which received funding from VCs with deeper pockets have higher chances to receive follow on funding - aka surviving the Crunch - than those companies reaching to follow on rounds without significant backing from current investors  - most seed investors are only planning for the next round with a new, additional investor. It is too early to tell for Germany if this is true as well. However, we see at our fund even more stable conditions and interests for investments than in recent years. Fellow VCs seem to trust our pockets to discuss syndication for the next rounds. On the other hand, we didn’t see any victims of the Crunch in the portfolio of other VC funds managing similar sizes of funds as we have in the market. In the first quarter, we invested in several early stage companies in Germany as well in the USA. Some have been announced, some will be revealed in the coming weeks.

Corporations will push the ecosystem

Since Deutsche Telekom presented their partnering deals with SpotifyFON and Evernote, consumers understand the power of bundled partnerships between large corporations and startups. But not only those deals are increasing, also investment deals of corporations into startups increased in Q1. We will see more of those kinds of deals. More startups are in need of new funds and they will be open for new models. Their VC investors will accept rather unconventional deals in favour of internal rounds or write offs. We will welcome those new players in the game of minority investments - interesting times are ahead for all involved parties. Since I did one of these deals with a DAX 30 corporation at the beginning of 2012, I can confirm that these partners are valuable and committed partners in those ventures. So be open for consortiums of this type.

The Return of the come-backers

In times when fundraising is not easy to close successfully, those who were declined in the first round may return to the desks and inboxes of VCs. Sometimes it is a matter of months but mostly it is a matter of weeks. The problem for those companies is the decreasing valuations and terms they will face. While this is understandable, this trend will also impact those companies who will make their first contact for a round. Some investors might think they will have another chance in a couple of weeks on more favourable terms, declining those deals from a perspective of negotiations rather than from their view on traction and KPIs. Be prepared to return to those who declined your deal. The most impressive comebacker was on my desk for four times - maybe he will come back again.. we will see.

Big Markets and Rockstars

When asked by founders what KPIs or specifics we are looking at in a deal during those times I will answer: “We are looking for big markets and rock stars as founders”. While this is a common answer in all times from a VC is it even more important during times of restricted cash availability. The slots of investment professionals are filling up fast - so we will focus on those rockstar founders who will challenge big markets. If I can select from almost all deals out there I want just the big ones with the least efforts on my side. Rockstar founders will ensure my efforts focus on growing the company by supporting them with my network and product development experience as well as general expertise. I don’t want to waste time on housekeeping and basic entrepreneur support. All my efforts should pay out big time - i.e. if my efforts will be the same in all available deals I will focus on those with the biggest return, depending on the market size they address with their products and business models. Sorry for being that blunt - but it is a buyers’ market and that is how those markets work.

There will be big times coming soon

After all this negative outlooks and comments - there is a bright future to look at. The light at the tunnel is shining bright for those who will reach it. Having a well-funded company in 2014 means the company is run by Rockstar founders in a big market. A lot of noise in the startup ecosystem will be gone - so those companies will have the full attention from investors and customers. There will be no over-equipped with funds competitors bidding for the same talents, advertising inventory and clients. Investors will face difficult times to get into those deals in 2014 because there will be winners who might not even need additional investors nor additional funds. These will be growth investments to support international go to market initiatives or consolidation in the market with other successful players.

As we can see: times are changing, funding models are changing – and I am quite sure we are still not at the end of these developments.


(Source: thomasgr)


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