Tuesday, November 1, 2016

Startup Investing in Germany: The Investor Who Comes Too Late is Punished For Life

A stereotypical Silicon Valley startup raises multiple rounds of venture funding. Many of these funding rounds are well publicized, and hence there are few secrets about new startups and the problems they are intending to solve. Contrast that with Europe, and Germany in particular, where limited information about startups is available, particularly in the enterprise software space: Founders have a culture of self financing, there are few venture capitalists who invest in the space, and hence these startups are not written about nor do they seek attention.

Two recent funding news from the enterprise software space support these observations: Berlin based Signavio raised31 million from Summit Partners in December 2015, and Munich based Celonis raised $27.5 million Series A from Accel Partners and 83North in June 2016.

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Both Signavio and Celonis have demonstrated that an enterprise software startup can bootstrap its way to fast and profitable growth. Their journey also illustrates some important points for investors  

  • The founding teams developed their ideas during their university projects. They were first time founders without a track record in running a business. Public funding from the EXIST program financed both startups for the first year after founder graduation from university. Neither team took on any money from angel investors.
  • Signavio and Celonis were profitable and therefore able to self finance from the beginning. Both companies signed up hundreds of customers in just a few years. Signavio and Celonis did not raise a series A or B until the first funding event about six years after founding. According to CBInsights, startups from the 2009/10 vintage raised an aggregate of $18 million in three rounds during the same time period.
    The focus on business customers and the absence of external funding made Signavio and Celonis largely hidden from the general public.

  • This type of horizontal business process applications are fairly country and even language agnostic and travel easily. Both startups were visible within the international VC community and investors approached the startups multiple times. These funding rounds were contested and in both cases the founders chose international investors with expertise in international expansion, although better term sheets were provided by German investors. Given the inherent profitability of the business, these funding rounds may be the only opportunity for growth stage investors to participate.
Just providing capital to bootstrapped startups is not enough for investors to be invited to participate. Instead, investors need to differentiate by providing additional expertise and value. For angels, domain knowledge and expertise in getting a company started are differentiators. For growth stage investors, experience in scaling startups internationally will be a key advantage.

Investors at every stage need to become proactive and step up their game to be invited to the party. To quote Mikhail Gorbachev: Dangers await only those who do not react to life.

Picture credit: das.de

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