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Montag

12

Mai 2014

0

COMMENTS

Will Deutschland diese Zukunft?

Written by , Posted in Kaufmann

In gewohnter deutscher Jammerstimme wird mal wieder das mangelnde Wagniskapital in Deutschland durch einen Gastkommentar im Spiegel beweint.  In den USA ist es so viel besser, da dort Internet-Milliardäre Ihre Gewinne im Silicon Valley reinvestieren und fleißig neue Firmen schaffen. In Deutschland gibt es diese Kapitalgeber nicht – das führt zu weniger Innovation bzw. keinen führenden deutschen Technologieunternehmen. Laut Artikel sind wir abgehängt und können die weitere Digitalisierung der deutschen Wirtschaft an den Nagel hängen.

I want you!So weit so gut aber hier wird getan, als ob durch mehr Investitionen ein „Gründungsautomatismus“ losgetreten wird, der zu Erfolg führt. Fast nur noch lachhaft, ist dieser Paragraph:

„Es (Buch von Netscape Gründer) ist quasi eine Anleitung, was zu tun ist, um erst fünf Millionen Dollar Anschubfinanzierung zu bekommen und damit ein Unternehmen zu basteln, das 500 Millionen wert ist.

Wer allerdings versucht, in Berlin oder Frankfurt am Main ein Start-up hochzuziehen, kann alle Ratschläge und Regeln punktgenau befolgen und hat trotzdem nur geringe Chancen mit Millionen überschüttet zu werden.“

Na dann mal los. Ich bekomme die ersten 5 Millionen und dann steht, bei der richtigen geographischen Gegebenheit, der 500 Millionen Firmenbewertung ja schon nichts mehr im Weg. Schaut man aber mal etwas genauer über den Atlantik als nur auf Facebook und Google, dann wird man schnell feststellen, dass die Venture Capital Industrie viel zu viel in viel zu wenige Unternehmen investiert.  Die Industrie hat seit ca. 10 Jahren keine positiven Rendite erzielt und ist somit ein einziges großes Subventionssystem, wo mit dem Feuerwehrschlauch kräftig Geld verteilt wird – vom Geld verdienen und einen gesunden Mittelstand zu schaffen, ist die USA weit, weit entfernt.

Deutschland = Mittelstand!

(mehr …)

Dienstag

1

Oktober 2013

0

COMMENTS

VC industry changing due to new platform – death or life?

Written by , Posted in Finanzierung

Engel in TrauerRecently, I have read a very interesting article that continuous my argument that aside from many sectors the financial sector is also changing rapidly due to digitalization. The author states that:

“In my life, I have been very fortunate to chronicle the emergence of the commercial internet (as we know it) from its early days. Over next decade or so, I came to realize the amazing deflationary powers of the internet. It was — and still is — a great deflator, squeezing out middle men, friction and of course, profits.” 

The author argues that the next wave of change will affect the way businesses raise venture capital. Intransparencies will be broken open by Angel List and other fundraising platforms that force a secretive VC industry to differentiate their offerings beyond the initial cash injection. While I agree with the broad thesis of the argument I would highlight two aspects that seem to be overlooked frequently.

As previously reported the VC industry as a whole does not generate positive returns. It is an assets class where only very few firms make money. These firms generally are not “smarter” than others but have a strong PR function and therefore get more deal flow than the other industry participants. If platforms now “socialize” deal flow and every investment is instantly shown to the entire industry then the professional selection becomes even less important. An automated investment distribution among Angel List offerings based on a set of pre-determined criteria would probably beat the returns of most VC firms and would require minimal direct investment attention. This would not alter the VC industry but give it the last punch in its current death struggle.

Secondly, the start-up market is now becoming an asset class that is open to the broad public. Crowd funding platforms and projects like kickstarter are already expanding the available investor base. In my opinion, this is not a positive development. Start-Ups as an asset class are much to volatile and hard to read – if professional VCs cannot create a substantial return – how can private investors do so? These platforms are setting 99% of private investors up to lose all their money invested in this asset class.

In addition, there are just a lot of businesses out there that do not deserve funding. The current funding market is a Darwin based system that kills of a lot of bad companies prior to raising capital. If the investor and funding base is now drastically increased we will see more and more zombie start-ups that live much longer than they should based on a “stupid-money” infusion through crowd funding platforms. If you look at the quality of start-ups coming out of places that received a large cash infusion (e.g. Berlin in Europe) you see so, so many ideas that should never have been funded but are now raising funds because way too much money chases too few good ideas.

Crowd funding and platforms like Angel List will significantly disrupt the VC industry but it remains to be seen if this is positive or negative for start-ups and investors alike.

 

 

 

 

 

Donnerstag

1

August 2013

0

COMMENTS

VCs vs. Angel

Written by , Posted in Finanzierung

Venture CapitalRecently, there have been two interesting blog posts that once again highlight the ambivalence between choosing either a VC or private/business angel investor. One very entertaining rant(!) from Paul Jozefak (Liquid Labs) that focuses on the „more than money“ promise each VC makes. He has a very clear opinion what VCs really provide and how their „advertising talk“ should be evaluated by future entrepreneurs. (LINK) „Enough with the Kool-Aid though….without your money most entrepreneurs wouldn’t really care much about you. It’s OK, you still have your triathlon, cycling or foodie friends.“!

Protonet on the other hand has chosen to ignore higher valuations and instead go with angel investors. More about their rational here: (LINK). Interestingly enough they left money on the table in order to go with business angels among other reasons due to the easier negotiations and less tight up management time. This is often an overlooked point – VCs are experts when it comes to negotiating deals (given that aside from trying to get a proprietary deal flow that is their only other expertise ;)). If you negotiate with experts you have to take into account that these negotiations will be very drawn out. Your starting point will most likely be documents drafted by a VC who has written many, many preferable treatment clauses in the documents before negotiations have even started. So time and complexity of negotiations is an important consideration beside the price tag.

Does that mean you should leave VC cash on the table and always go with angels? Probably not … this approach will only work for smaller financing rounds – angels will bottom out if you are looking for 1m+ x – or you have to take so many angels on board that it becomes annoying to keep all of them in the loop. They will also have a very limited ability to go for another round or to provide additional capital on short notice.

So chose carefully when you are planning to raise additional funds. Make sure you understand the major pros and cons between investors and try to determine what your long-term strategy looks like. Are you going to raise more funds down the road? Do you need certain individuals in order to grow your business? Will VC connections support your business right now? … … lots of thinks to ask yourself and unfortunately this is highly subjective and there is no clear right or wrong here.

Montag

15

Juli 2013

0

COMMENTS

Startup valuation…

Written by , Posted in Finanzierung

… remains a mystery. There is very little data and often very differing views on future start-up developments and valuations between entrepreneurs (IPO here we come), investors (hopeful but very cautious) and parents (you are doomed). Here comes a very good summary and an even prettier graphic from Anna Vital on Funders and Founders! 

 

 

yH5BAEAAAAALAAAAAABAAEAAAIBRAA7 - Startup valuation...

 

Donnerstag

7

März 2013

0

COMMENTS

Conclusion: Venture Capital – does it still work?

Written by , Posted in Finanzierung

…finishing of my post series in regards to VC industry changes …

Will prices for start-ups significantly change?

In my opinion most start-ups will continue to raise the necessary funds in Germany. Firstly, venture capital never played a significant role here and secondly a large range of new capital sources have been developed over the last years. Corporate investors have become much more active and crowd funding offers a new way to raise initial proof of concept financing. Universities and government agencies have also been offering additional financing sources. So I believe that in terms of start-up financing there will not be a significant impact from the declining venture capital funding. Internationally, this will probably be a different story.

But what does it mean for valuations? Again I believe that most German start-ups would not have been sold/continued financing rounds to/with VC funds in any case. Trade exits are the normal route to go for start-ups here and most corporates are not only willing to invest in start-ups but have been allocating significant amounts of capital. In terms of pricing I also believe that Germany is looking at incredibly low valuations anyhow and that equity markets are not an exit route for start-ups due to depressed listing outlooks. Hopefully corporate capital availability will actually help to increase pricing levels here.

In my experience …

Overall, I believe that corporates will play a significantly larger role in the German start-up scene than VCs ever had, have and will. The OTTO Group alone has an early phase incubator (Liquid Labs http://www.liquidlabs.de/), later stage incubator (Project A http://www.project-a.com/) and a later stage VC funding partner (eVentures http://www.eventures.vc/). Most other large German corporates are following this trend and are establishing their own teams.

In addition, I am pretty sure that we will start to see an increasing number of more specialized incubators that offer additional guidance and support as well as follow-up funding through corporate buyers. Here an interesting trend from the US are specialized healthcare incubators like Rockhealth or Medstartr.

“Rockhealth is one of the growing incubators in the healthcare industry. They help teams with venture capital, advice and their network to find proper healthcare business models & help to scale them. The startup industry is just starting to innovate around healthcare and those incubators are likely to be in the centrum of this development.” http://rockhealth.com/

These significantly more specialized funds will take over start-up financing and provide industry trade buyers for growing start-ups. Entrepreneurs who are looking to grow their business should therefore forget about impressing VCs and start building their corporate contact network.

Montag

18

Februar 2013

0

COMMENTS

What are the implications for start-ups?

Written by , Posted in Finanzierung

cont’d from last post VC funding

Does it matter whether venture capital is a failed asset class or not? Yes, some capital restrictions will apply but I would argue that there are sufficient alternative sources of capital to not significantly restrict new venture creation. Smart entrepreneurs can bootstrap, rely on angle networks or newly emerging crowd funding platforms in order to bring a venture through the proof of concept phase.

Additional follow-up capital rounds can then be financed through trade investors who are currently committing significant amounts of capital. There is a significant interest from trade, publishing and pharma companies to invest in digital start-ups. These companies have hundredth of millions available for new venture creation or “corporate innovation” outsourcing. Almost daily new funds, initiatives or deals are announced by corporates who are looking to mitigate the impact of digitalization on their core investment business. These sources of funds should be able to replace venture funding (at least in Europe). In addition, German/European entrepreneurs are also cashing out and are ready to invest in new ventures. In Hamburg there is a wide range of angle / VC money available from successful industries partners e.g. HackFwd – Lars Hinrichs. 

Therefore, I would argue that especially in Europe the decline of the venture capital industry does not create significant problems and is compensated through alternative sources of capital.

Samstag

26

Januar 2013

1

COMMENTS

What consequences does this bring for VC funds, which have fully invested their current capital?

Written by , Posted in Finanzierung

As discussed in the previous post – times are tough for VC funds – but what implications does that bring? Funds need to start lasting value creation to attract new capital! As a first step I think that VCs need to reevaluate how they select investments. So far the industry has a way too high failure quote – I even think that VCs with their general herd behavior often miss interesting opportunities. Secondly, they need to increase their target range. There are lots of successful start-ups outside of the Silicon Valley and SV like hubs that would present interesting funding targets. Thirdly, they really need to develop beyond pure capital providers. Almost all of them will tell you that they are really value add above and beyond capital – that is generally just a statement but far from reality. Increasing number of start-up accelerator programs indicates that pure venture capital financing is not successful. More skills, support and knowledge are necessary. Investing in a VC environment is incredibly hard and finding the right investment criteria and sticking with them is quite a challenge. This is nicely described in Paul Graham’s “Black Swan Farming” article. Source: http://paulgraham.com/swan.html

Small is beautiful

VC firms should also stop raising larger and larger funds. Even if they successfully invested their smaller funds it does not meet that they should now double or triple their fund size. In several articles and also in the conclusion of the Kauffman Foundation report the authors argue that only smaller VC funds are able to provide decent returns. In addition, they focus a lot on the compensation structure and clearly show that having a significant amount of “skin in the game” is necessary to get solid returns from a VC management team.

„The incentive for small funds is aligned with investors and more achievable. A $100 million fund could buy 20% of 25 startups and handily outperform the public markets by building four to five companies into $400 million exit values, or a broader set of successes across the most typical venture exit values of $50 million – $500 million. Annual fees keep the lights on in the meantime, while the potential profit share from generating 300­400% gains provides the prime incentive.“

Source: http://venturebeat.com/2012/08/18/lean-vc-why-small-is-beautiful-in-venture-capital/

Compensation for the industry should also be changed. Funds will have to proof that their management team is not only investment savvy but also resourceful and has significant skin in the game.

While we agree on Kauffman’s recommendation on looking beyond large funds, a deeper analysis suggests the need to look at the risks and returns in the fund structure — the profit share of each partner, the spread of capital committed per partner, and so on — and remove the reliance on a heroic grand slam as the only, yet unlikely, path to outsized results. Other qualitative factors include structurally leveraging all partners’ expertise across the portfolio, and garnering meaningful returns from more than just a few deals. These are among the many critical and structural advantages of the smaller venture fund.

Source: http://venturebeat.com/2012/08/18/lean-vc-why-small-is-beautiful-in-venture-capital/

If these challenges are met successfully VCs will continue to play a significant role for start-ups – if not it looks like the industry’s funding sources will dry up and soon start-ups will have to look for funding elsewhere.

Dienstag

15

Januar 2013

1

COMMENTS

Venture Capital – does it still work?

Written by , Posted in Finanzierung

Previously, venture capital as an asset class has been critically discussed by Jochen and Alex in their respective blogs excitingcommerce.de and kassenzone.de.

Source: http://www.excitingcommerce.de/2012/09/vcs-und-die-hohe-wahrscheinlichkeit-des-unwahrscheinlichen.html and http://www.kassenzone.de/2012/09/12/venture-capital-funktioniert-nicht/

In his last blog Alex already hinted that I am working on a more detailed analysis of the subject. Why do I find this interesting? Well, after having worked in the PE and VC industry I always wondered how it would feel to change sides – become an entrepreneur and learn the nuts and bolts of daily operational challenges. It has been very interesting and I am tempted to claim that “professional” VCs who have been in banking or consulting all their lives and therefore represent the favorite MBA trained elite that joins VC/PE firms on a junior level – know next to nothing except how to draw pretty slides, talk in “investor” slang at fancy conferences and run after hypes like a crazy bunch of headless chickens. This is clearly an exaggerated view but overall the question remains if  venture capital is an asset class with a future. The question is, if the more experienced senior staff has the ability to find deals and make investments that are profitable. In addition, I am wondering if only a select few sometime „get lucky“ or if this is a sustainable industry with a risk/reward ration that should be attractive to investors.

In addition, Germany has seen a significant increase in venture capital through the Berlin „hype“. Now, with the entire industry under fire it becomes extremely interesting to see how the industry is going to develop. Even more importantly I am certain that these new analysis will have an impact on the rapidly developing European start-up environment.

Based on a range of studies it has become clear that the venture capital industry in general simply sucks at being investors and even more importantly sucks as an investment vehicle for their Limited Partners (“LPs”). Returns of venture capital as an asset class are simply not sufficient to continuously attract new capital.

How bad are returns?

The Kauffman Foundation, a highly reputable Limited Partner in many venture capital firms, has published the following facts based on their significant, long-standing venture capital investment history.

Only twenty of 100 venture funds generated returns that beat a public-market equivalent by more than 3 percent annually, and half of those began investing prior to 1995. 

The majority of funds—sixty-two out of 100—failed to exceed returns available from the public markets, after fees and carry were paid.

There is not consistent evidence of a J-curve in venture investing since 1997; the typical Kauffman Foundation venture fund reported peak internal rates of return (IRRs) and investment multiples early in  a  fund’s  life (while still in the typical sixty-month investment period), followed by serial fundraising in month twenty-seven.

Only four of thirty venture capital funds with committed capital of more than $400 million delivered returns better than those available from a publicly traded small cap common stock index.

Of eighty-eight venture funds in our sample, sixty-six failed to deliver expected venture rates of return in the first twenty-seven months (prior to serial fundraises). The cumulative effect of fees, carry, and the uneven nature of venture investing ultimately left us with sixty-nine funds (78 percent) that did not achieve returns sufficient to reward us for patient, expensive, long- term investing.”

Source: http://www.kauffman.org/uploadedFiles/vc-enemy-is-us-report.pdf

There are also other articles and reports that are based on the Kauffmann analysis and the inability of venture firms to raise new funds. Limited Partners have finally woken up to the reality that blindly investing in larger and larger venture capital funds no longer makes sense. Why is that? As Fred Wilson states in a recent MIT technology review interview:

“Because the returns haven’t been very good in the venture capital industry for a long time. I think if you talk to the investors in venture capital partnerships, they’ll tell you that they’re very much on the fence on venture capital, and if venture capital continues to put up mediocre returns, they’re not going to stick with it forever.”

Source: http://www.technologyreview.com/qa/428869/fred-wilson-on-why-the-collapse-of-venture/

At the moment Berlin delivers a wonderful live case study to prove my point. The current hype, number of horrible investments and general herd behavior of investors in Europe’s new venture capital “capital”. Where are the actuals businesses that are supposed to generate lasting returns in the current “hype-cycle”? Where are the returns, exists or just simply lasting value creation? A small elite group of investors such as the Samwer Brothers are highly successful but from my impression the overall industry does not generate lasting value.

The Kauffmann report goes on to argue that actually LPs should re-evaluate their investment behavior and focus on other key value drivers within the VC industry.

  • “Invest in VC funds of less than $400 million with a history of consistently high public market equivalent (PME) performance, and in which GPs commit at least 5 percent of capital;
  • Invest directly in a small portfolio of new companies, without being saddled by high fees and carry;
    • Co-invest in later-round deals side-by-side with seasoned investors;
    • Move a portion of capital invested in VC into the public markets. There are not
enough strong VC investors with above-market returns to absorb even our limited investment capital.”

The Kauffmann report also has an interesting title:

“MET  THE  ENEMY…  AND  HE  IS  US” – Lessons  from  Twenty  Years  of  the  Kauffman  Foundation’s   Investments in Venture Capital Funds
and The Triumph of Hope over Experience“.

They consider the problem the be the LPs – they need to change their asset allocation in order to substantially alter industry behavior and subsequently the return rate for the industry as a whole.

The previously listed investment recommendations are only one side of the equation. I think that there is a general consensus that due to the lack of returns and the issues outlined by the Kauffmann Foundation the VC industry will change.

Therefore, there are a lot of questions that remain:

What are the implications for start-ups? What consequences does this bring for VC funds, which have fully invested their current capital? Will prices for start-ups significantly change?

Dienstag

4

Dezember 2012

0

COMMENTS

Web Future Awards in Hamburg!

Written by , Posted in Finanzierung

Web Future Award is now open for applications. Any new start-up in Hamburg should not miss this great PR opportunity BUT be warned… though judges, including our own TAREK MÜLLER, will evaluate your ideas: http://www.hamburg-media.net/awards-webfuture-jury/

Applications: http://www.hamburg-media.net/awards-webfuture-bewerbung/