2020 Was a Great Year For SaaS Valuations And Exits. For Pre-Seed And Seed Stage Companies, Not So Much.

 2019 had seen more than half a dozen IPOs in B2B SaaS such as Medallia, Cloudflare, Dynatrace, Slack, Fastly, Zoom and Pagerduty. And while the markets ended on an historically all time high, the stock price of most of these companies had performed far worse than any index by year end. The outlook for 2020 was cloudy. 

Credit: BVP Nasdaq Emerging Cloud Index

It all turned out completely different, and 2020 ended on yet another all time high: The Dow Jones ended up 10.6% (from 28868.8 to 30606.5), the Nasdaq up 41.8% (from 9092 to 12,888), and the BP/Nasdaq Emerging Cloud Index EMCLOUD more than doubled at 105.5% (from 1231.6 to 2530.88).

The Coronavirus struck and on March 12 the financial markets had the worst drop since 1987. IPOs seemed to be off for the rest of the year. There was talk of down rounds, ratchets and other potions from the poison cabinet of venture deal terms.

Yet the markets also quickly adjusted to where things were headed: Zoom became worth more than Uber on March 19. And Zoom wasn’t the only beneficiary. Services like Peloton and Doordash saw massive increases in usage and customers.

Record new levels were reached in late July, and with it talk of IPOs came back. And it wasn’t only IPOs: The direct listings pioneered by Spotify and Slack saw wider use and a previously scarcely known financing vehicle called SPAC suddenly became the next new thing. Going public again was an option for high growth SaaS companies and by the end of September unicorn SaaS companies such as Asana, Snowflake, Unity, JFrog and Palantir were publicly traded entities. On the flipside, multiples of slower growth SaaS companies suffered. As the year came to an end it was off to the races as retail investors piled into the most attractive stocks and the  forward revenue multiples seemed like an anachronistic benchmark. 

The US unicorn population continued to increase and the total value of these unicorns hit record highs. Venture growth investments reached an all time high in 2020 and later stage deal sizes surged. Simple math showed that providing private growth funding to private unicorns was attractive at even elevated valuation levels. 

The picture was quite different at the early venture stages.Seed stage deals declined in terms of US$ and number of deals. Taking the  Band of Angels as a proxy for pre-seed and seed investing, the number of investments in 2020 decreased by a third. Seed stage deal sizes remained fairly constant at a median seed stage deal of $3 million compared to $0.8 million at the end of 2014. These large seed stage deals have led to a proliferation of seed funds and the emergence of pre-seed funds. According to Pitchbook, there were 1,162 venture funds focused on Seed in 2019 and only 126 focused on Pre-seed. 

Will the success of the 2020 exits trickle down to pre-seed investing in 2021?

The largest SaaS exits for German startups and investors in 2020

The attractiveness of an ecosystem is driven by the investors ability to achieve liquidity for their investments, and for stock owning employees to get a return on the risk of joining a startup. In the majority of the cases this is through M&A, and in some cases through going public in the form of IPOs, SPACs, or direct listings. 

Source: pxhere.com

Here are the largest 2020 SaaS exits of German companies and for German investors. 

• $1.5 billion: The valuation of Estonian based Pipedrive after Vista Equity Partners acquired a majority stake. Berlin based Paua Ventures was the Series A investor in this leading CRM provider.
  
  
• €700 million: transaction value of the Thinkproject acquisition by private equity firm EQT. Thinkproject is a Munich based provider of Construction Intelligence Software and was founded in 2000. TA Associates invested in a prior private equity round in 2017 and now sold a majority stake to EQT.
  
  
• $500 million: Instana was acquired by IBM in November for an estimated $400 million purchase price plus a $100 million earn out. Instana provides Application Performance Management with a special focus on observability. Instana was founded in Germany in 2015, and Target Partners was a Series A investor.
  
  
• $360 million: Avira was acquired by Norton Lifelock in December. Avira had just been acquired by Investcorp for $180 million in April. This provider of antivirus software is based in Tettnang, Germany.
  
  
• €200 million: Exasol, an analytics database provider based in Nuremberg, went public on the Frankfurt stock exchange in May. Mountain Partners was an early investor. More on Exasol here.
  
  
• €136.5 million: Ubimax, an AR solutions provider for wearables, was acquired by Teamviewer in July. Westcott LLC and Fielmann Ventures were the main investors.

There are several large IPO candidates in the pipeline for 2021: UiPath where Munich based Earlybird was the first investor, and Munich based Celonis where Accel and 83North were early investors.

Wann wird es in Deutschland zehn SaaS Einhornstartups geben?

In den USA gibt es heute hunderte von B2B SaaS Unternehmen mit mehr als 100 Millionen US-Dollar Umsatz. Der BVP Nasdaq Emerging Cloud Index führt mehr als 50 Unternehmen mit einem Wert von über einer Milliarde US-Dollar auf, und es sind hundert weitere private Einhörner in der Pipeline. Wie steht es um die deutschen SaaS-Unternehmen?

Quelle: Pixabay

Teamviewer war das erste SaaS Einhorn, das 2019 an die Börse ging, und wird jetzt mit einer Marktkapitalisierung von 8,9 Milliarden Euro gehandelt. Noch beeindruckender ist, dass eine EBITDA-Marge von 55% und eine Umsatzrendite von 15% im dritten Quartal 2020 zusammen einen Effizienzwert von 70% ergeben, der weit über der Bessemer Regel von 40 und dem Mittelwert von 35% aller in den USA gelisteten SaaS-Unternehmen liegt. Teamviewer beweist mit dem Kauf von Ubimax auch die Bedeutung von börsennotierten Unternehmen für das Ökosystem.

In Deutschland gibt es drei privat finanzierte SaaS-Einhörner: Celonis, Sennder und Contentful. Tricentis aus Österreich muss hinzugefügt werden, wenn der Geltungsbereich auf alle deutschsprachigen Länder ausgedehnt wird.

Weitere sieben private SaaS Unternehmen haben einen Wert zwischen 300 und 500 Millionen US-Dollar (die vollständige Liste der zehn besten SaaS-Unternehmen ist hier zu finden).

Thinkproject, ein in München ansässiger und im Jahre 2000 gegründeter Anbieter von Construction Intelligence Software im Bau- und Ingenieurwesen, verkaufte eine Mehrheitsbeteiligung an die Private-Equity-Gesellschaft EQT zu einem geschätzten Transaktionswert von 700 Millionen Euro.

Exasol, ein Unternehmen für Analytics-Datenbanken aus Nürnerg, wurde ebenfalls im Jahr 2000 gegründet. Exasol ging im Mai mit einer Marktkapitalisierung von 200 Millionen Euro an die Börse und notierte zum Jahresende bei 647 Millionen Euro. Exasol erzielte 2019 einen Umsatz von 21,6 Millionen Euro und verzeichnete im dritten Quartal 2020 ein 35% Wachstum der jährlich wiederkehrenden Umsätze (ARR) gegenüber dem Vorjahr. Dieses Wachstum liegt aber weit unter den beobachteten 75% für Einhörner dieser Umsatzgröße. Da das EBITDA leicht negativ ist, lag der geschätzte Effizienzwert wahrscheinlich bei 30% und damit deutlich unter der ‘Rule of 40’.

Alle Startups in der Einhornpipeline haben in letzter Zeit beträchtliches Wachstumskapital aufgebracht, und es ist unwahrscheinlich, dass sie mit mehr Kapital kurzfristig noch schneller wachsen könnten. Wie ein Blick auf B2C-Startups zeigt stehen im Markt jedenfalls ausreichend Mittel für weiteres Wachstum zur Verfügung: B2C Fintech N26 schloss eine Series D in Höhe von 570 Millionen US-Dollar ab, und das E-Scooter-Startup Tier Mobility eine Series C in Höhe von 250 Millionen US-Dollar. Zudem wurde im Bundestag im November ein neuer Zukunftsfonds in Höhe von 10 Milliarden Euro beschlossen, um Startups in den nächsten zehn Jahren zu unterstützen.

SaaS-Einhörner haben in der Vergangenheit durchschnittlich 8,5 Jahre gebraucht, um von 1 auf 100 Millionen US-Dollar ARR zu wachsen. Wenn man sich die jetzige Einhornpipeline unter diesem Gesichtspunkt anschaut wird es also mindestens drei Jahre dauern bis es in Deutschland 10 SaaS Einhörner gibt, und auch nur wenn man annimmt, dass jedes Startup perfekt exekutiert.

There were four SaaS Unicorns in Germany in 2020 - how long will it take to get to 10?

There are 100+ B2B SaaS companies in the US today. The BVP Nasdaq Emerging Cloud Index lists more than 50 companies with valuations in excess of $1 billion, and there are many more private unicorns in the pipeline. How do German SaaS companies compare?

Image: Pixabay

Teamviewer was the first SaaS unicorn to go public in 2019 and are now trading at a €8.9 billion market cap. Even more impressive, a 55% EBITDA margin and 15% revenue CAGR in Q3/2020 combine to a 70%  Efficiency Score, far exceeding the Bessemer rule of 40 and the median score of 35% across all US listed SaaS companies. Teamviewer also shows the importance of publicly traded companies for the ecosystem when they acquired Ubimax.

There are three privately funded SaaS unicorns in Germany: Celonis, Sennder and Contentful. Tricentis from Austria needs to be added if the scope is extended to all German speaking countries.


Another seven private SaaS companies are valued at between $300 million and $500 million (the complete list of the top ten SaaS companies can be found here).


Thinkproject, a Munich based provider of Construction intelligence software founded in 2000, sold a majority stake to private equity firm EQT at an estimated €700 million transaction value.


Exasol, an analytics database company from Nuremberg, was also founded in 2000. Exasol went public at a market cap of €200 million in May and ended up trading at €647 million (close to $800 million) at year end. Exasol generated €21.6 million in revenues in 2019 and posted a 35% year-on-year ARR growth in Q3/2020. This growth is far less than the observed 75% for unicorns at that revenue mark. Since EBITDA is slightly negative the estimated Efficiency Score was likely around 30%, significantly below the rule of 40.  

It seems unlikely that the startups in the pipeline can grow even faster. All of them raised significant growth capital recently, and there is ample funding available in the market as recent funding rounds for B2C startups demonstrate. B2C fintech N26 raised a $570 million Series D and e-scooter startup Tier Mobility a $250 million Series C. And in November a new €10 billion (around $12 billion) state fund was announced to back German startups over the next ten years, with a view to attracting an additional €20 billion in private VC investment. 


In the past decade it has taken SaaS unicorns an average of 8.5 years to grow from $1 million to $100 million in ARR. It will take at least three years for there to be 10 SaaS unicorns in Germany assuming that every single startup in the pipeline executes flawlessly.

Das sind die 10 größten privaten B2B SaaS Startups Deutschlands

In den USA gibt es über 100 private B2B Startups mit Einhornstatus. 2020 sind schnell wachsende Startups wie Snowflake, JFrog und Palantir an die Börse gegangen, und schon im Januar 2021 steht der Börsengang von Qualtrics an. Welche sind die wertvollsten B2B Startups in Deutschland? 

Quelle: Berlinstadtservice.de

Der in den USA schon lange anhaltende Triumphzug der B2B Startups dehnt sich auch nach Deutschland aus. 2020 wuchsen die Bewertungen vieler Unternehmen weiterhin, und in der Folge gesellten sich zu Celonis zwei weitere B2B Einhörner: Sennder im Speditionsbereich und Contentful im Content Management. 

Danach kommen mit Spryker, Lean IX und Personio drei weitere Startups mit einer Bewertung von ungefähr einer halben Milliarde US-Dollar. Die Liste wird abgerundet durch PriceFx, Scoutbee, Signavio und Commercetools, die jeweils zwischen 300 und 500 Millionen US-Dollar wert sind. 

Fünf der top zehn Startups sammelten 2020 Geld von Investoren ein. Die größten Finanzierungen gab es für Spryker mit 130 Millionen US-Dollar, und die restlichen Investitionen bewegten sich zwischen 65 und 80 Millionen US-Dollar. US Amerikanische und Europäische Investoren wie TCV, Sapphire, Accel, Goldman Sachs und Apax Digital stellten dieses Kapital bereit. 

Die überwiegende Mehrheit der Startups bietet Anwendungssoftware für Geschäftsnutzer an, und nur Lean IX ist vollständig auf das IT Management und die Entwickler als Zielgruppe fokussiert. Die jüngsten Startups mit Gründungsjahr 2015 sind Sennder, Personio und Scoutbee, dagegen wurde Commercetools bereits 2006 gegründet.

Das durchschnittliche Gründerteam bestand aus drei Mitgliedern. Leider sieht das Bild dunkel aus was die Vielfalt unter den Gründer betrifft. Während in Silicon Valley ungefähr die Hälfte der Startups von Einwanderern gegründet wird, liegt dieser Anteil bei der deutschen Stichprobengröße bei geschätzt weniger als zehn Prozent. Noch schlimmer ist es dann beim Frauenanteil in den Gründungsteams - unter den 29 Gründern gab es keine einzige Frau. 

In der Vergangenheit haben erfolgreiche Startups in vielfältiger Weise von Netzwerkeffekten profitiert. Diese Netzwerkeffekte werden in erster Linie durch die Konzentration von Kapital und Talent, und insbesondere oft von technischem Talent, verstärkt. Nimmt man sich wieder die USA als Beispiel, dann sind dort fast 80% des Wagniskapitals in den fünf Großraumregionen Silicon Valley/San Francisco, New York, Boston und Los Angeles konzentriert. Andere große Top Ten Städte wie Chicago, Houston, Phoenix spielen hier nur eine geringe und letztendlich zu vernachlässigende Rolle. In Deutschland existieren solche Netzwerke in nennenswertem Maße in Berlin und München, und es ist nicht überraschend, dass jeweils vier der top zehn ihren Standort in Berlin und München haben. 

Die Zahl der Einhörner ist somit sehr überschaubar, und auch die Kandidatenliste zukünftiger Einhörner. Es bleibt zu hoffen, dass möglichst viele dieser Startups an die Börse gehen werden, diese Firmen als zukünftige Käufer von Startups agieren werden und ihre Mitarbeiter als Gründer und Investoren neuer Startups auftreten werden und damit das gesamte Startup Ökosystem schneller wächst.


This blog post has also been published in English.

The 10 Largest Private B2B SaaS Startups in Germany

There are over 100 private unicorn B2B startups in the US. Fast-growing startups such as Snowflake, JFrog and Palantir went public in 2020, and Qualtrics will go public in January 2021. Which are the most valuable B2B startups in Germany?

 

Quelle: Berlinstadtservice.de

The triumphant march of B2B startups in the US is also expanding to Germany. Company valuations continued to grow rapidly in 2020  and as a result, Celonis was joined by two more B2B unicorns: Sennder in the freight forwarding sector and Contentful in content management. 

Spryker, Lean IX and Personio are three startups valued at roughly half a billion dollars. The list is rounded off by PriceFx, Scoutbee, Signavio and Commercetools which are worth between $300 and $500 million. 

Five of the top ten startups raised money from investors in 2020. Spryker received the largest investment of $130 million, and the remaining investments ranged from $65 million to $80 million. US and European investors such as TCV, Sapphire, Accel, Goldman Sachs and Apax Digital provided this growth capital. 

The vast majority of startups offer application software for business users, and only Lean IX is fully focused on IT management and developers as a target group. Sennder, Personio and Scoutbee are the youngest startups founded in 2015, whereas Commercetools was founded back in 2006.

The average founding team consisted of three members. Unfortunately, the picture looks gloomy in terms of founder diversity. Whereas about half of the Silicon Valley startups are founded by immigrants, this share is estimated to be less than ten percent for the German sample size. The situation is even worse when it comes to gender diversity - there was not a single woman among the 29 founders.

Successful startups have historically benefited from a variety of network effects. These network effects are reinforced by the concentration of capital and people, and particularly technical talent. In the US almost 80% of the venture capital is concentrated in the five metropolitan areas of Silicon Valley / San Francisco, New York, Boston and Los Angeles. Other big top ten cities such as Chicago, Houston, Phoenix play only a minor and ultimately negligible role here. In Germany such network effects exist in Berlin and Munich, and it is not surprising that four of the top ten B2B startups are located in Berlin and Munich. 

The number of B2B unicorns in Germany is very limited, as is the list of future unicorn candidates. The startup ecosystem will benefit from as many of these startups going public as possible. These companies will become future buyers of startups and their employees will act as founders and investors in new startups.

2019 Was A Breakout Year For B2B SaaS Startups in Germany

The BVP Nasdaq Emerging Cloud Index (EMCLOUD) tracks 48 SaaS companies. Some are industry stalwarts such as Adobe, others are recently IPO’d companies such as Slack and Zoom. The EMCLOUD index rose 47% in 2019 and far outperformed any other indices including the tech heavy NASDAQ. 

 

There was not a single public B2B SaaS company in Germany as of 2018 . (Wirecard is publicly traded but does not have the subscription business model typically associated with SaaS). This embarrassing situation finally changed when Teamviewer went public in September 2019 at a share price of €25.30 and ended the year at €31.88, an increase of 26%. Teamviewer was founded in 2005 and is a leader for remote access and desktop sharing are in the transition from an on premise to a SaaS model. Teamviewer’s expected 2019 revenues are approximately €400 million and the end of year market capitalization stands at €6 billion.

The next largest relevant exit in the B2B space was Data Artisans’ sale to Alibaba for $90 million.

If the list of publicly traded B2B SaaS companies is limited to one, what about the pipeline of privately held B2B SaaS companies? As of 2018 only two things would have stood out: Celonis became a SaaS unicorn, and IoT company Relayr exited for 300 million. After that - nothing. Nada. Nimic. Rien. Nichts.

 

Privately held Celonis continues to grow on a global scale and the latest round now values Celonis as a ‘duocorn’ worth more than €2 billion. The company has strengthened its executive ranks to complement the three person founder team in the quest to get IPO ready. There are no other private B2B SaaS unicorns, and there is no other SaaS company that is valued higher than €500 million at the time of writing. 

2019 saw a flood of funding pour into the most promising B2B startups, and the largest SaaS players cumulatively raised $900 million in just their last funding rounds (It is worth noting that some of these investments were spent on secondaries and the money going into the companies was less than the amounts listed below and communicated to the public). 

Five companies appear to be valued as high or higher than Relayr at their $300 million exit in 2018: 

• Personio provides an HR suite for SMBs and vaulted ahead to a  $300+ million valuation after a large €60 million round in December 2019 after a prior round just in January.

• Signavio is a global leader in business process management, also raised a large round, although much of it was a secondary sale by the existing shareholders and only a smaller amount went into funding the growth of the company. The founders still own a very significant share of the company.

• Sennder also raised two large rounds in July and April of 2019.

• Scoutbee has been on an absolute tear since its founding in 2015 and has closed a large round in December after a prior raise only six months earlier. What first looked like a Web 1.0 era supplier listing tool on steroids is quickly evolving into a strategic sourcing vendor.

• Commercetools had been flying under the radar since its acquisition by REWE 2015, but Insight Partners saw an opportunity to acquire the company from REWE. It does not appear that any money went directly into funding further growth right now.

The list of highest valued B2B SaaS companies is rounded out by Proglove, PowerCloud, Contentful, Wundermobility, and KONUX which are currently valued between $300 million and $200 million (the SaaS list excludes Auto1 who buy and sell actual cars and Adjust whose revenue model is based on transactions as opposed to subscriptions). 

2019 was a ‘golden’ year for startups in Germany to raise growth capital. The five largest B2C players (Flixbus, GetYourGuide, Frontier Car Group, N26  and SumUp) collectively raised €1952 million where each investment was larger than the $290 million raised by Celonis.

Marquee investors will provide the ammunition for Series B and beyond if they believe that these companies can become global category leaders with a clear path to exit: Accel is an investor in both Celonis and Personio. Insight Partners invested in Staffbase in addition to Commercetools and Lean IX. 

And there is an abundance of seed and series A capital available from German venture capital firms to fuel the fire.

Image credit: investing.com

Why Every Startup Should Create Its Own New Category

Category leaders capture the majority of the available profit pool, and investors seek to find future category leaders. Peter Thiel’s ‘Zero to One’ book is about how to build companies that create new things and eventually become a monopoly. Investors also look for new categories because it is virtually impossible for a startup to unseat a current category leader.

But how to create a new category?

Founders should look for a net new problem and they should devise a net new solution. The only way to find this new problem is by talking to customers.

Category creation requires developing a concept and planting a story in people's brains. Customers may not understand that they have a problem and therefore may not have a budget. A new point of view replaces the current customer point of view. And customers may be puzzled because they haven't thought about it. In fact, there may not be any easily identifiable customers and the ultimate act of category creation results in a new role in a company. Box's Aaron Levy said 'you need to find a demographic and a customer that no other software company is paying attention to in a modern way, and your job is to make them be heroes.'  

The solution has to be not only better, but different and unique. Being different comes from proprietary insight and can be based on technology differentiation, network effects, or a structural competitive advantage. Peter Thiel asks founders one key question: ‘What important truth do very few people agree with you on?’

The existence of a band aided solution at the customer is a good sign that there is a category waiting to be productized. And a sufficiently large number of these cases is evidence that now is the perfect time for the category to be created.

Talking to existing channels is unlikely to generate new insights since they serve current solutions and address known problems and customers.Advisory firms such as Gartner and others will only validate new software categories when a category has become large enough for their own customers and competitors are emerging.

Qualtrics realized that their customers started to tweak the software and use it as a customer experience and employee experience solution; the original market research use case dropped to the third rank. CMO Kylan Lundeen said 'We realized we were not in the survey business, we were in the business of helping people manage the experience they provide to their most important stakeholders.' Qualtrics was acquired for $8 billion by SAP in 2018.

The best categories have no or few competitors. There is little noise and there are no preexisting notions and once a new category has been identified the work only starts. The new category needs to be positioned and an ecosystem around it has to be created. The message needs to be authentic at scale for the users and customers to evangelize it. Leadership of this movement has to extend beyond the company and include the competition.

Peter Thiel has said ‘... the single most powerful pattern I have noticed is that successful people find value in unexpected places, and they do this by thinking about business from first principles instead of formulas’.

2018 in Review - Category Kings Rule

A new year’s beginning is the customary yet arbitrary time to review last year’s market movements and portfolio developments. The main theme for decacorns, unicorns, and my own portfolio companies was category leadership; .

The undiminished power of that leadership in SaaS was again on display when Qualtrics decided to sell itself for $8 billion to SAP. Shopify, Veeva and Twilio are examples of these category leaders that have already reached or surpassed $10+ billion valuations and continue to go strong.

Picture credit: Forbes

Public markets and private tech startups

The longest bull market in history may be coming to an end. The DJII started at 25,461.70 and finished the year 5.8% lower at 23327.46 points; the Nasdaq Composite lost 4.6%. Cloud software stocks were still doing well though and massively outperformed the overall stock market where the Bessemer Nasdaq Emerging Cloud index rose by 37% from 621 to 851.

It pays to be a thunder lizard and create a new category. The plethora of tech IPOs continued and was led by some notable SaaS leaders such as Anaplan, Elastic, Docusign, Eventbrite, Pivotal, Zuora, and Dropbox. Even Domo made it out in time, although they raised a ton of red flags when they announced that they would have to IPO or go through a major restructuring.

SurveyMonkey debuted on September 26 and is trading at a market cap of $1.4 billion at the time of writing. Their IPO was soon  overshadowed by SAP’s announced $8 billion acquisition of Qualtrics on November 11. Also worthwhile mentioning is Plangrid’s $875 million sale to Autodesk. Plangrid was first introduced to the public at the Y Combinator day in March 2012 and raised a Series A not until 2015. I saw the team at the demo day and liked them, but did not pursue an investment in this vertical SaaS startup that set out to revolutionize workflows on construction sites.

Relayr was the only notable SaaS exit in Germany. Getting to a $300 million exit in five years is great by any measure, and growing into a full fledged unicorn in the IIoT space would have required a lot more capital to expand more aggressively and internationally.

Venture capital continued to flow freely according to PwC’s Q3 Moneytree report.  Late stage unicorn funding rounds drove up dollars invested in the U.S., but deal activity declined for the first time since Q4’17. In addition, seed-stage deals continued to decline, and early stage deals only increased very slightly and for the first time since Q4’17. The U.S. median seed stage deals cost $1.5m, down from the previous quarters but still very high based on historical figures. Historically, all these are signs that the funding market is a the end of the cycle.

Total investments in startups in Germany increased by 7% to reach 4.6 billion Euros, and the number of financing rounds increased by 21% to reach 615. European startups raised a median $1.2 million in Q3 for seed stage deals, less than in the U.S., but the money lasts a lot longer when taking into account the lower salaries compared to Silicon Valley.

The year started with Initial Coin Offerings (ICO) being all the rage, but the SEC quickly cooled buyer interest in the U.S. and subpoenaed 80 cryptocurrency firms in April. Global activity seemed to come to a complete halt shortly thereafter, tet Andreessen, USV and others invested $12 million in the inventors of the Cryptokiddies in March. Steem.it announced it had to lay off 70% of its employees in late November, and one of the more interesting experiments clearly is in deep trouble.

My portfolio

2018 began with 17 active investments and the value of the portfolio rose significantly due to the follow-on rounds in Wandelbots and in Kreatize.

There were 13 transactions in total: Two exits, two warrant deals, three bridges, three follow-on equity financings, and three new deals.

• Exits: Practice Fusion sold to Allscripts for $100 million in cash and Savvy was sold to Global English
  
• Follow-on financings: Truevault raised a venture venture round in August. Wandelbots continued to receive strong customer interest and raised €6 million from Paua Ventures and EQT in December. Kreatize changed their business model to provide a turnkey service for the sourcing of custom made parts and have been on a tear since January 2018. I participated in a bridge round in May, and in December they raised €5.5 million from Earlybird VC.

New investments

Some of my 2017 resolutions were continue to look for differentiated opportunities in enterprise SW in Europe - and in Germany in particular- , bet on contrarian outliers in Silicon Valley, and dive deeper into Blockchain and tokens. I did end up investing in two Germany based companies and in one enterprise SaaS company located in San Francisco.

• The AIPark team led by Julian and Johannes provides predictive parking information just based on data and without owning sensors.  Traditional parking is evolving as cities, drivers, and other stakeholders will need to rethink the curb as ride sharing services proliferate and self driving cars appear on the horizon. I helped the team sharpen their pitch and made introductions to VCs. As in most of my investments, I was the first money in, together with Atlantic Labs, Jens Lapinski and other angel investors. 
• I first talked Jan-Philipp from Hashplay in late 2017.They are building an AI powered business intelligence platform to translate operational data into digital twins and are garnering great interest from multiple verticals in a space which Gartner terms immersive analytics. The team is based in Hamburg and in San Francisco, with development resources in East Asia. 
• I got to know Oomnitza’s CEO Arthur when he raised an initial seed round in 2014. Oomnitza builds a connected, automated, and visualized Thing Management that tracks everything that makes a business run.  I was more than happy to join the bridge round in December.

I also deeply looked into two startups that planned to use tokens as an incentive mechanism for their respective market places. But the ICO market collapsed, and the collateral damage is that most token markets will likely remain frozen for a while. My other activities were concentrated on coaching and mentoring and helping fundraise some of my existing investments, and growing the deal pipeline of B2B SaaS startups  in Germany.

Observations and pontifications

The tech sector is continuing to go through seminal changes at every level of the tech stack and in every aspect of the business model.

• The Iaas market is growing in excess of 35% CAGR. Enterprises are finally moving their production environments to the cloud and to the multiple cloud providers. AWS and Azure are in the lead, with Google Cloud investing heavily to differentiate via AI and AliCloud staking their claim in China. These hyperscalers will to continue to move up the stack via acquisitions to better serve the needs of large enterprise customers and achieve customer lock-in.  
• Kubernetes fundamentally changes how complex SW is being developed. Again Google has disrupted the market with open sourcing their SW, and as a result, startups in the ecosystem are in the crosshairs of these hyperscalers. Heptio and CoreOs have already been acquired, and Docker and Mesosphere are going through massive changes to reposition themselves in this environment. 
• AI has matured from algorithms to the life cycle management of training models. But data and models are customer specific, and scaling these solutions creates challenges far more complex than for bread-and-butter SaaS solutions. In turn, this will lead to more activities in automating data labeling, model scaling and other areas which are not addressed by Tensorflow and other AI libraries.
• Tokens hold great promise in removing friction in marketplaces, and provide incentives for buyers and sellers. The market for security tokens crashed completely in 2018 and all tokens seem to be in the phase that Gartner calls the ‘trough of disillusionment’.
• IIoT customers understand the value delivered by SaaS ‘products’, but they are still expecting a full solution. On top of that, larger buyers in that segment are not yet used to paying recurring revenues. Industrial IoT (IIoT) startups need to be super disciplined about the engagement cycle from first contact to demo/proof of concept and then to pilot and to recurring revenue. Relimetrics and Amper have templated this approach and are preparing to reach escape velocity.

2019 outlook

Dark clouds? R.I.P. Good times? It pays to be prepared, although the VC guns are still loaded and there is plenty of money to go around.

The probability of a downturn becomes more imminent the longer the bull market continues. GM’s announcement of a significant streamlining of their operations notably implied an expected economic slowdown in 2019.

The time to get back into investing in Silicon Valley startups will be when seed stage and bridge valuations become more reasonable. In the meantime, lower valuations and great technical talent can be found in continental Europe. Celonis and Signavio are already category leaders in their respective segments, and Kreatize, Relimetrics and Wandelbots in my own portfolio hold great promise.

Why Software Startups Should Sell Their Product But Not Their Company to German Mittelstand Companies

Or

There Are Buyers of Products, And There Are Buyers of Companies And They Are Different.

A recent article detailed two well-known Berlin startups which had just been acquired by Mittelstand companies.

This begs the question why there aren’t more of these types of exits. Can the German Mittelstand companies be startup acquirers at a larger scale?

The majority of startups are building Software as a Service (SaaS) companies with high gross margins. In a SaaS world where growth is directly correlated with enterprise value a founder’s is to grow as quickly as possible to build an important and material software company and to maximize the company value. The highest valued SaaS companies have annual growth rates in excess of 75 per cent.

As a reminder, Mittelstand companies are "highly focused medium sized companies, achieving unprecedented efficiencies by designing a business model with a razor-thin focus and learning to do the one thing really well. They are typically privately, family owned". Many of them are in the automotive and mechanical engineering sectors and are focused on hardware and systems integration. Medium size Mittelstand companies have revenues on the order of a hundred million Euros with relatively narrow margins. They tend to grow with the GDP of their major export markets. In the past years of low interest rates they have been significantly credit financed.

Will these companies be able to pay the expected acquisition prices? Does their balance sheet provide enough room to pay cash? Do they understand the mechanics of a software business? Does their ownership structure allow them to agree on a deal ? Are they willing to take significant risk?

The answer to these questions is obvious and seems like bad news: The majority of Mittelstand companies are unlikely to be potential acquirers.

The good news is that the Mittelstand companies can be great customers and fantastic early adopters: They have fewer hierarchy levels and can make decisions quickly. They want to co- develop the Minimum Viable Product to get results. They tend to be very international and they will want to deploy products globally right from the start. In contrast, big industrials and automotive OEMs are much slower moving, and their many hierarchies and lack of true urgency will likely kill a startup. Many of their innovation outposts and labs are clueless and powerless.

For successful exits, SaaS startups need to understand the software ecosystem. The same companies that are competitors can be potential buyers. In the manufacturing and Industrial Internet of Things (IIoT) spaces, CAD and PLM companies like Dassault, Autodesk, Siemens, PTC, SAP, Oracle, Infor, and Ansys are some of the key  players. These companies make acquisitions routinely using their cash and stock, and their investors understand the need for growth.

The German Mittelstand companies can be great customers, but they are an unlikely buyer of startups. In fact, they are not really an exit option unless a startup is willing to sell very early or has essentially failed.