Venture capitalists are rich

Rich. In experience.

The decline of the new economy has also hit venture financiers hard. Far too many of the promising investments turned out to be flops. The industry complains that 2002 was the worst year for a long time. More than 100 venture capitalists have already left the market, reports the Federal Association of German Capital Participation Companies (BVK), including small and large, listed and private companies.

The number of the Group's own financing companies is also shrinking. British Airways has closed its CVC (Corporate Venture Capital) unit, as have Compaq, ABB, Vodafone and Alcatel. GE Capital, the financial subsidiary of General Electric, is not planning any new investments for the time being. T-Venture, one of the largest European CVC companies, is currently closing two of its three German offices.

Those who survive are rearranged. And saves.

In 2002, new investments plummeted by 40 percent compared to the previous year to 2.65 billion euros, according to the BVK. Investments in start-ups have even halved, to around 556 million euros. What does this mean for the donors themselves, for young companies and potential founders? McK Wissen asked industry representatives.

1 German virtues

Frank Böhnke
He studied economics in Essen and Toronto and then worked for eight years as a vice president in investment banking at J.P. Morgan. Since 1997 he has been a partner in the Munich office of Wellington Partners Venture Capital GmbH.

“In Germany, the hype actually only lasted a year and a half. Almost all of the internet start-ups took place in 1999 and 2000 - and by then it was basically too late. Now the money is gone, and there are hardly more than a handful of investors nationwide for the early stage area. Everyone is afraid, of course: every investment is a shot in the dark. You just don't know how long to hold and finance a company. It can take two years or six. And in case of doubt, as a financier, you also have to be able to finance the company through. So you need a lot of money as a VC, especially if the company is doing well. Companies need money when they are successful in order to finance growth and expansion. And this is where many investors are now reaching their limits.

But the bottom line is that my balance sheet is positive. The VC industry today is certainly above the level of 1995. Before that, this industry hardly existed here in this country. And in terms of entrepreneurship, too, in my opinion, a lot has happened. The phase 1997 to 1999 was characterized by a globally identical start-up behavior: Internet, enterprise software, telecom infrastructure. It was always the same. Today we observe a specialization towards German virtues. Many start-ups are based on technologies for which Germany has actually been known for many years: microelectronics, mechanics, materials science. In the past, this was never financed by venture capital, but rather quickly disappeared in the corporations. With the opening of large companies and their willingness to cooperate with small ones, I believe that there is an opportunity to develop something like a Europe-specific VC industry on a sustainable basis. It is too early to say whether this trend will finally prevail, but the development is very promising.

For us, this also means an orientation towards technologies. Hardly anyone invests in marketing-intensive businesses these days. Rather, we are trying to get research institutes, universities and large corporations to better understand what they are doing so that we can work with them. From my point of view, that is the success factor today: partnerships.

And there is still a lot to be done. It is not enough to have research institutions, founders and venture capital. You need the intermediaries in between. Institutions that act as translators and multipliers.

After all, we can't wander down the corridors of a university to find developments and potential founders.

What has changed in ourselves? We are checking much more intensively today. The investment process, which sometimes only lasted a few weeks in the hot phase, now takes four to six months. We have become much more disciplined when it comes to strategy and implementation. In times of hype you are always tempted to act opportunistically. In the meantime we have positioned ourselves clearly and we don't deviate from that any more. That also means: We are no longer willing to compromise when it comes to structures. Companies that have different loans or have invested in 15 unknown business angels are out of the question for us. In order to be able to drive companies forward, you need very simple structures.

Incidentally, this is one of the biggest problems faced by many companies that were founded in the late 1990s. Operationally they are quite good, but their structures are so complex that they can no longer be financed or controlled. Above all, many founders tried to achieve the best rating, to finance themselves through loans and to give up as little equity as possible. They also collected a lot of investors who have run out of money today. And now try to find new investors with existing, insolvent investors. That is almost impossible. "

2 Hold still, save and wait

Oliver Borrmann
The graduate of St. Gallen University worked as a consultant at JFM Marketing-Service and HBS Consulting Partners before founding his own consulting company, bmp Management Consultants GmbH, in 1992. Since 1997 he has been CEO of the now listed successor company bmp AG.

“That was one of the largest migrations of money in human history. It was like watering a piece of desert. Most of the water has seeped away, and maybe some small plants have grown in the process. Many are not, and the venture capital industry has not been covered in glory. Let's be honest: in the boom years from 1998 to 2000, we mainly looked at the exit. The technology of the future was not in the foreground. Or the search for the best management. What drove our industry was the question: Which company can you get rid of on the capital market as quickly as possible? The New Market served as a guide. Which companies, which technologies are advertised by the banks as being suitable for an IPO? In which direction will the candidate be trimmed? And what does the shareholder like? Then everyone looked for the small start-ups, tried to shape them in the right direction and put together a nice package for the capital market. We made investments because everyone somehow thought it would make sense. The system was upset at the moment when the capital market no longer worked and you couldn't get rid of the companies. Then even the last donor noticed that there was no point in having set up the twenty-fifth call center or the thirtieth multimedia agency. So there were failures and thus fewer returns to the financiers in the VC industry. With the result that today, although everyone has actually become more sensible, there is no longer any money available for investments.

Nobody invests any more in the early stages of a company. Sure: Why should I pay a few million for a company that is just starting out with an idea when I can get a reasonable technology company on the stock market for the same money, and one that is even liquid via the capital market listing?

The young dreamers don't get any more money. They have to start like they used to, but that's also quite healthy. When I founded bmp eleven years ago, I didn't have any money either. We started very small as a consulting company and then grew with our customers over many years. The young founders will no longer be venture-backed, i.e. they will be equipped with sufficient start-up capital from the start; they will first have to prove themselves. Today, VCs tend to focus more on the experienced managers - but unfortunately they are not the ones who set up companies.

Of course, it also hit us ourselves. We have made quite a few headcounts, have become much leaner and have to make sure that we cover our operating costs. Everyone has become more humble, the industry has matured. Now it's very simple: hold still, maintain your portfolio, use your money sparingly and wait. The VCs have learned that they don't play the lottery. And that you can't always draw a six. "

3 An economic disaster

Dr. Hendrik Brandis
The aerospace engineer was a project manager at MBB, co-founder of the investment company GMM and partner of the management consultancy McKinsey & Company. In 1997 he and colleagues founded the venture capital company Earlybird.

“The VC industry in Germany has always been very thin. Most companies came into being in the wake of this incredible start-up boom, we ourselves too, and just as quickly as many funds were brought to life, they have now died again. I consider this to be an economic disaster, because venture capital plays a material role in securing future jobs in this country and ultimately also technology development. In our business, the support of growth industries, it is easy to talk about thousands of jobs. All of that is breaking away now. Entrepreneurs, even very good ones, often run out of money. This means that technological innovations are only financed to a small extent. Our own industry has long since passed the phase of shrinking health. Now it is getting tragic because we are losing essential know-how. In the USA there are many thousands - I heard the number of 8000 the other day - VC professionals, in Germany there are a few hundred, probably hardly more than 200. So the USA has 40 times as many experts as we do, including its economy only five times as big as ours. That is blatant. As times get better, we will not only lack the money but also the expertise, so we will have to go through the same learning curve all over again.

At the moment the money is already very tight. Only the very best are funded, and they can hardly haggle for shares either. Today it is already a huge success if you can get any money at all. We ourselves are now very concerned about how much money a start-up needs in total. We try to provide capital-intensive companies with the financial strength right from the start through consortia that will allow them to break even; because experience now shows that it is almost impossible to subsequently find co-investors for deals that have been breakfasted off.

We are also pursuing different growth strategies than before. Three years ago we had three segments and five countries in mind for some investments. Well, the “land-grab philosophy”. Today we do it very lovingly: First of all, it is important to make a segment and a country profitable, then comes the next small step and so on. This means that in the end you need a lot less capital. So today we have a significantly cheaper entry level as well as a significantly increased capital efficiency and thus much better framework conditions for venture capitalists. This is reflected directly in the fund's performance. Grotesquely, however, the investor's perspective is exactly the opposite. Today everyone is screaming for the old economy and for buyouts, and now is the time for venture capital investments. It's like three years ago: the lemming effect.

For us, of course, all of this means an incredible maturation process. We are still young, founded in 1997, and since then we have been going through a crash course for extreme situations in venture capital in fast motion. "

4 working harders

Max Burger Calderon
The graduate of the University of St. Gallen and Harvard MBA worked at Dresdner Bank in Singapore, switched to the Boston Consulting Group and was on the management board of the Swiss Burger Sons AG. In 1986, together with Michael Hinderer, he founded Corporate Finance Partners AG, the predecessor company of today's Apax Partners Beteiligungsberatung GmbH.

“I heard an exciting lecture a few weeks ago. An American banker talked about his beginnings as a broker at Lehman Brothers. It was like today: times were bad, everyone was depressed, and that's when he hit upon the idea of ​​selling mutual funds. Are you insane, said his boss. Mutual funds are totally undervalued, and if the stuff is undervalued, it won't sell. People only want to buy things that are completely overrated. This anecdote also applies to our industry. When all the startups were hailed and overrated, everyone wanted to get in and finance the biggest nonsense. Today, when everything is much cheaper, nobody gives any more money. What does this teach us? We are just as limited as everyone else.

Back then everyone wanted to take part. Everyone wanted to become a VC, everyone wanted to finance the VCs, there was an incredible amount of money there, and everyone had the feeling: Here you get rich very quickly. And now they have all disappeared from the scene just as quickly.

Most founders go about their business far too normally. They write a business plan, send it out and then want to negotiate with donors. That sounds great, but of course it doesn't work at all. Today you have to be much more creative. How much money can I borrow at the start? What do I need for the next round? What after? Can I also finance myself through customer loans or through suppliers? Financing is an art and only those who master it will be successful as a founder. The donors have also suffered badly. What to do? Carry on, what else. Anyone who withdraws now catapults himself out of the market. Because at some point the economy will pick up again, and then investors will work with those who did not run away.

We are of course more afraid than before and are more critical. And because everyone knows that they have to make several financing rounds with a company, they immediately take partners into the business. It's not particularly clever: if it gets really dangerous, we can hold each other's hands, then we're less afraid. And of course we are humiliated: we now know that we know just as little as anyone else. The right strategy? You can only outfit the competition by working harder. "

5 The willingness to share is great

Alexander Bruehl
The electrical engineering engineer initially worked as head of marketing and later as head of strategic planning at a software company before founding the management consultancy Solution Analysis Group. In 1998 he moved to Atlas Venture as a principal, where he heads the Munich office.

“From my point of view, a lot has changed for the better. Venture capital can be operated again as it was before the hype. And, for example, carefully review an investment before making a decision. In the high phase all of this was no longer possible, so a decision had to be made within 14 days, otherwise the competitor would have got hold of the company. What has also changed: every investor was convinced that it was all about participating in the success. Risks and failures were never known. Everyone wanted the whole piece of the cake of success, so everyone fought everyone else for the best deal. Lately the willingness to share has become very great. Specifically, this means: Investments are rarely made by one investor alone, and the preparations are no longer hidden. Instead, everyone tries to find partners quickly. That has certainly been the buzzword for our industry since 2002: Syndication.

For me, an ideal syndicate consists of two very financially strong, large investors with 'deep pockets' and the classic corporate VC, which has slightly smaller pockets, but the well-founded know-how that helps the company. And with these ingredients, an entrepreneur still has a good chance of building a great company today.

In fact, the founders are rather few and far between. At least those we think are suitable. The second starters tend not to be. Of course they learned a lot, but they had practically zero experience at the start. You now have a year of practice, from founding to bankruptcy, so you can't speak of a mature entrepreneurial culture. I don't see every mistake as an opportunity either. That's why we're currently looking for the old hands. Unfortunately, their willingness to take entrepreneurial risk has traditionally not been particularly pronounced. If possible, that has become even less since the crash.

What has changed in ourselves? We cut a fund that was originally $ 980 million down to $ 600 million in December. Almost all of the big players have done that because the buying power has changed a lot. Today you can buy a lot more shares for a lot less money.A fund that was one billion in size in 2000 is now around three billion in terms of purchasing power - it makes sense that the funds should adapt to market conditions.

Where does our money go? The communications market is certainly tight at the moment. Because the camps of the big network operators are much fuller than we all thought. All analysts said that the equipment stocks of the big ones would run out in early 2003, which would have forced them to buy new things. But that was a miscalculation, which is why nobody is actually investing in this area - from semiconductor to system manufacturers - at the moment. We invest in ideas that enable so-called asset sweating. Wherever new technologies help to squeeze out the old even better, we go along with it. That is, if you will, anything that helps the established operators to grow without having to invest in new infrastructure. In addition, only the simple models get money: companies that outsource everything as possible - non-production companies. And that's where we stay. Our length of stay is three and a half to five and a half years. In the hype phase there were exits with half a billion after a few months. But those were outliers. Something like that will never come back. "