Startup Success and Venture Capital Insights with Philipp Flesch (#06)

Episode Summary: Cracking the Code of Swiss Startups

Philipp Flesch is an Investment Associate at Nordic Eye Venture Capital, based in Zurich, where he specializes in identifying and supporting high-potential startups. In this episode, we dive into the world of venture capital and the strategies behind selecting startups to invest in. Philipp shares his insights on what makes a startup stand out, the red flags investors watch for, and the decision-making process behind when to invest more or exit an investment.

Expect to learn about the tech startup scene in Zurich and Switzerland, the critical elements that venture capitalists look for in successful startups, how investors decide to support or withdraw from a venture, and Philipp’s advice for entrepreneurs seeking funding in today’s competitive market, plus much more…

About Philipp Flesch: A Venture Capital Expert

Philipp Flesch is an experienced investment associate at Nordic Eye Venture Capital, where he helps identify and support high-potential startups. With a deep understanding of the funding landscape in Switzerland, Philipp has worked closely with entrepreneurs to guide them through the challenges of scaling businesses. His expertise in evaluating startups and market trends makes him an invaluable resource for anyone interested in venture capital and entrepreneurship.

Transcript

Explore the full transcript of my conversation with Philipp Flesch as we delve into the world of venture capital in Switzerland. From evaluating startups to understanding funding challenges, Philipp offers a unique perspective on what it takes to succeed in this competitive landscape.

Mike: [00:00:00] Philip, thank you so much for joining me today.

I thought a good place to start would be does a person working for a venture capital firm actually do every day? To me, it seems like a bit of a bit of a mystery.

Philipp: Okay, that’s a good start. Um, so basically, as a team member of a venture fund, It depends a bit on your seniority or, or experience levels, but in, in the overall, in the bigger picture, basically it involves, um, sourcing good opportunities, meaning you need to look for good startups, wherever that is, usually funds have a geographical focus.

So you go and hunt for the right startups, uh, in your territory. Um, or, or you, you look abroad through your network, however, you get access to these deals. But, uh, quite some time is spent on basically sourcing, sourcing, uh, the right opportunities and getting also to know the right people. IE networking, [00:01:00] getting to know all the funds, getting to know the founders, knowing where the, where startups are created, et cetera.

And then after that part, a lot of time is spent on the due diligence. So that means you get to know the team, you get to know the company, you get to know the business model and all the different factors that we’re probably going to speak afterwards as well. And you assess the business, you do your due diligence, um, which, which consumes quite a lot of time.

Some funds Spend less time on it because just there is not so much to assess. So it’s the pre seed or seed venture fund would, you know, a person at a pre seed or seed venture fund would spend less time in that because there’s just not so much things you can actually assess at later stages. There’s more material and more information to digest and then also to assess.

You spend more time on that and the, the deal structures become more complex. Um, and so after the sourcing and the evaluation part, you, you negotiate usually with the founders, the terms of the, the investment, uh, of the investment round, uh, that can be the valuation of the business. That can be [00:02:00] any kind of, uh, preferential shares.

It can be any additional terms that you want to include into investment. Um, and you execute the deal. So you, you sign the, uh, the term sheet, you sign the subscription agreements, the shareholder agreements. Um, and, and after all the entire analysis and transactions is done, you also, also of course spend time on, on monitoring the business.

So that is often what, what people forget, but you spend. You know, let’s say an investment assessment takes three, four, five months. Um, that is fairly quick if you compare it to the lifetime of what you spend with the, with the, with the company overall in the, in the, in the fund. So, uh, the, the real work starts, as we usually say, the real work starts at.

Um, and once the investment is done and that includes monitoring the business. So not, not only monitoring, it depends a bit on the activeness of an investor at the, at the [00:03:00] business. Uh, for our fund, we’ve always been quite proactive. We also have, uh, usually board seats. So we are very close to the business.

Other funds are a bit more distant because just of the investment style that they have. Um, but when you’re closer to the business, you have quarterly meetings, regular touch points with, with the team, with the founders, um, Uh, to really make sure that the business is, um, it’s going the right way. And also to help, of course, the team and the founders to, to, to execute on, on this, on this, on their strategy and the investment plan that you have, that you have subscribed to

Mike: within your territory, where you go and look for potential new startups, what sort of events or what sort of environments do you actually find them and meet them?

So that can be actually anywhere. Um,

Philipp: it starts from very easy conversations where you, where you even, uh, you know, you have friends of friends saying, you know, that person starting a business, um, uh, do you want to talk to them? They’re looking for funding. So it can easily start, uh, from, uh, from these kinds [00:04:00] of conversations, but, um, more, let’s say more systematically speaking.

Um, Well, you can find startups at, um, at networking events. So there’s, you know, every year there’s in different locations, there’s events for startups and investors to meet. Um, there is in Lisbon, there’s the web summit, uh, you have in Zurich, you have several, uh, events happening startup days, uh, you have no, uh, so there’s like events is basically a good place where you can always connect to starters where.

They’re actually made exactly for that. So you have startups coming to these events to present themselves, their stands, they, they, they speak on certain topics and then, you know, investors come in and could meet them for networking, et cetera. So that is one way. Um, the other way is, um, that you, that you go, Basically you connect to your local fund network of other venture funds.

So for instance, if I take our fund as example, we are a, a series, a investor. Um, so what we often do [00:05:00] is we connect with funds that are either at the same stage where we invest or at an earliest stage, uh, they invest. And whenever a portfolio companies are at the, at the, at the next funding next funding around, let’s say series a, um, we would.

We would try to connect to them and be in touch with them because that already gives us a good insight, right? Um, if, if the other fund has looked at it and they say, these guys are doing good, they’re looking for next funding round to, to, to, um, continue to a growth, growth projections, et cetera. Uh, that is a very good indicator.

If, if you have a strong opinion about that fund as well. So these, these are different startups. Um, a lot is more local, like through networks, through these events, through contacts. In Zurich, for instance, I think also hubs around the universities, especially on the technical side. So ETH in Switzerland here has, um, has very strong founders or potential, [00:06:00] uh, people in the technology space that are going So there’s a lot of, uh, talent coming out of that, a lot of ideas coming out of, out of the universities also at EPFL in Lausanne.

Um, so there, there’s also sources like that where you can connect and there’s always events happening, you know, where, which are actually targeted towards bringing investors. Individual investors, so it can also be angel investors, but also fund investors, i. e. more institutional investors to these universities in order to meet the founders and, and, you know, connect those two sides.

Mike: How do you assess and choose a startup? You must go through so many of them, um, from coming from the events, from your uncle George to everybody suggesting that you should put money somewhere. What is your evaluation process? So I

Philipp: think the important part is to know at what stage you invest. Um, for me, it is a, I think it’s very important because a lot of people might think, you know, venture capital is just one big, you know, it’s all of the same, but [00:07:00] it’s, it is actually not.

So it, because the, the, the, the stages of the businesses are so different. So it’s, it’s different if you and I would just start a business. And we would look for the first money, you know, to get off the ground, to set the company up, to have, you know, the first it systems in place, accounting, legal stuff.

It’s very different to a business that has already, let’s say at a series a stage already has a ready product. Sorry, a product that is ready, um, customers that are paying entries into different markets already, different customer segments. So, so the way you assess what you look for in a business is very different.

And so I think, but what, but what it all comes down to, if you, you know, if you would have to, you know, see it from a, from a general perspective is the number one criterion. I think everybody knows that is the team is what makes or breaks the business. There’s always the saying, and I’ve heard it millions of times, and probably some of the listeners have [00:08:00] also heard it a million times is that, uh, a good idea will break with a bad team.

Let’s say a rather bad idea or not such a good idea. We’ll make it with a very good team. So this is, this is the team is, and if you think about it, after all, it’s like, if you and I would start a business, you know, the first thing that people will look at is like, who are these guys? What have they done?

What makes them succeed in this space? So these are exactly the questions that, you know, an investor, whoever. puts money into the business is at the end, putting money into you or into the team that is behind it. Um, so, so team is, is number one, uh, criteria, number one, important factor that, that, that, that investors look at.

And then, um, if you’re a bit on the earlier stage, people also look at, of course, what is sort of the market size, like what market are you, um, trying to, Let’s say attack or want to succeed in. Um, and that is [00:09:00] important because, you know, there are some markets that people think of, they’re very growing, they’re upcoming, there’s markets that are more established, more known, more information is available.

So people try to assess what is exactly that your product or your service is. Trying to solve which problem are you solving in that industry, in that specific industry. And, uh, and that is of course, um, very important. So, uh, I don’t know if there’s a business in the. Electric vehicle space that that is a, that is just a market that is upcoming.

Uh, but if you’re a business that is trying to do, I don’t know, IT systems, I don’t know, like legacy systems, like nobody will, you know, everybody’s like looking, why, why do you think you can now tap into a market that is very crowded? There’s a lot of players. Uh, there’s a lot of like strong players that can easily, um, You know, do what you’re doing.

So it’s, it’s a lot about the market as well. And then I think those are the two main things when you look at the earliest stage, then if you, if you move, if the company [00:10:00] grows a bit further in, in, in, in, in the stages, I think what comes to it is then of course also. You know, everything on the growth and the revenue side.

So that means how strong are your sales capabilities? Do you have the sales team in place? How strong is the product? Does the product need more additions? How mature is it? Our customers asking for it and how much can you really, you know, grow into either different customer segments or into different geographies, like, because you say, let’s say you have, you have captured a large portion of the Swiss market.

Are you able to do the same in another market? So you’re trying to assess how like, and that is, and that is a bit more where we or our, um, the fund I’m working for is, is where we’re basically looking at is the money that we invest, where will it go? And in an ideal scenario, we would like to have the money invested into either growing into another geography.

Extending the product [00:11:00] offering or service offering that you have, um, increasing the sales organization. It’s these kind of, uh, verticals. I would say that, that we would like the, the investment that the companies or the, the funds that the company is raising in, in, in the respective rounds will be used for.

Mike: How, how about time? How does that fit into it? So, I can imagine if a, a startup is very promising in terms of a product, it is growing. But say for example, they’re not ready to expand from Switzerland to other entity, other countries, they will, but in a, in a longer period of time, how much pressure would you apply?

In terms of the amount of time they have to sort of hit the metrics that you want them to hit.

Philipp: Yeah, that is a very good question because after all the fund is of course interested, usually funds have a lifetime of 10 years. There’s an investment period of let’s say 3 to 5 years depending on the funds.

And then you have a time, you know, where the money works and then you need to exit the investment. So [00:12:00] time is definitely a critical factor. And I think there’s also, I mean, it always depends a bit, but there’s, there’s some funds that even would anchor their investment or the funds that they will release until certain milestones are reached.

That is what some funds do at an early stage. So let’s say someone commits to invest, let’s say 1 million, then he would said, he would say, if you reach that milestone, you will get the first 2. 50. If you reach that milestone, you get the next two 50. So, you know, some, so some funds have actually exactly that, that, um, that timeline in, in mind also to de risk their investment, of course, but also to make team work towards certain timelines.

So they know that the capital is effectively inefficiently deployed for the right things and the company’s actually moving forward. Because of an early investor, an early stage fund, their goal is that the company will reach a [00:13:00] stage where they can go to a, let’s say, a Series A or Series B investor to get the next funding in.

Mike: So can you just quickly explain what the Series A, B, C stages are? Maybe that’s a good idea.

Philipp: Of course, a hundred percent. So usually when, when we talk about, uh, financing rounds and funding, um, funding rounds, there is different stages or different rounds, uh, that, that startups complete. Um, the earliest that you would probably find as an official round, like usually companies started, it always depends a bit, but you, you, you, let’s assume that companies start with a, Business angel friends and family investment, so that could be our families that could be friends around us that have some money that would invest 10 K, 20 K, 50 K, depending on their on their on their, um, availabilities, then the first, let’s say, and that is probably considered precede.

So that, that will be sort of the first, if you want to label it, the first official round, [00:14:00] the pre seed is then followed by a seed round and the seed round is often where you have, or where you could have first, let’s say a bit more institutional venture funds investing. It can still be, um, money could still be invested from business angels, from friends and families, but you would often see the first funds to come into the seed stage.

Um, the seed stage is then followed by a series A and from there it goes on series A, B, C, D, E, and there’s in, in practice, there’s no limit to it, but what basically happens is these funding rounds just have labels. So people know approximately. Where you are in terms of your funding and in terms of your funding stage, and maybe I can maybe I can share a quick a quick anecdote there because when I when I was working at the bank in London, so the bank usually works with startups.

Um, at the latest stage, usually in the pre IPO phase. And then of course, on the IPOs on the listing of the business at that time. And at that point in time, [00:15:00] there was actually so much, uh, funds or private, private money and private equity available. Um, so in private markets, so startups could actually stay private for longer.

So there was a huge trend in, in, in, uh, in, in, in, in private markets. Uh, that meant that in that times there was so much capital available. So. What happened is that startups didn’t actually want to go for a listing at the stock exchange to, to raise more money, but they could just extend their round. So we actually went that down to series F, G, H, you know, rather nobody has seen before.

Why would you do

Mike: that? I would imagine, I mean, most people working for a startup would want it, would want the IPA, right? They want to get paid out. They want to finally cash in all of the work. What would be an incentive to push this privatization for longer?

Philipp: You could still, I mean, you could still sell your stake, uh, in a, in a, in a private round, right?

It’s, it’s, it doesn’t have to be through a public listing. It’s, it’s so, so that, that is not the incentive. The, the, the real incentive [00:16:00] was just that, um, to keep doing private runs, uh, continuously was that just the effort and the cost and everything that is attached to a public listing is so much bigger than, you know, just keeping on with private rounds.

Because if you want to list your company at the stock exchange, It usually requires an investment bank that helps you and it requires a ton of operational work to get prepared a lot of fees for lawyers and for for the bankers etc so it’s not an attractive like of course it is all possible but it takes a lot of time because a lot of money is a lot of destruction from the core business.

So that’s why people always prefer to keep these private rounds going

Mike: what are some real. Red flags or cautionary signs when it comes to looking at different startups of potential opportunities, which ones do you go? You know what? I’m staying away from that. This is why.

Philipp: Yeah. Well, there is, so I need to, you need to [00:17:00] separate that because There’s two, there’s two options, I would say one, which is because you can imagine you don’t only get high quality view flow, right?

Like, it’s not like you get every opportunity that you get that you get introduced to or that you find or that you are sent or shared or whatever. Is like, ah, I definitely want to look close into this. There’s also a lot of companies that just from the first read, usually you get like a blurb or you like a short summary or a pitch deck or a short teaser, whatever it is.

Um, a lot of them, you know, immediately if it’s, um, in or out. So that, that’s not, um, that’s not immediately a red flag. But, um, I mentioned this because there’s a lot of, um, pitch decks that you get shared where you say, no, this is just not, it just doesn’t look professional. Like it’s very basic things. You know, the pitch deck just looks all over the place.

There’s [00:18:00] mistakes in it. Um, there’s weird numbers in it. Um, so, you know, it’s just a very obvious red flag where you just. You know, you prefer to just, you know, say thank you, but no, thank you. But I think a real red flag, once you have like a deal and you look a bit closer into it is a lot around if some things don’t add up.

So that starts for me, it starts with the numbers. So a lot of. Revenue projections or, um, customer projections that are unrealistic or that are like, that are obviously unrealistic, you know, that there’s with the time, it’s all an experience question because over time you get a sense of, you know, what is really feasible, what is not feasible, what can be achieved, what cannot be achieved.

So, so I think a big red flag is for me, if there’s, you know, completely growth numbers that are. Not, not, you know, not whatsoever. Even, you know, let’s assume I don’t know the industry at all. I don’t know the team. I [00:19:00] don’t know the customers exactly, but if the, if you just look at the numbers and someone tells you that every year they, they triple or quadruple or whatever, six folder revenues every year.

You know, then there, it just doesn’t sum up and believe me, it sounds very simple and very straightforward what I’m saying, but you, you still see these kinds of projections, um, in pitch decks. When I joined, um, this investment discipline, there was only one way these financing rounds and devaluation when that was to the right and up basically.

So there, there was no investment around that was big enough. There was no, uh, valuation that was high enough. And there in these, in these times, when I joined, you would see these kind of projections. And, and that is, of course, at the end, it’s all feasible, right? Like you would, like our founders would argue, if I have enough money, I can, you know, I can pull this growth off because I can hire more people.

I can spend more marketing. I can, I can increase my, you know, I can open an office in Germany [00:20:00] and in Austria. And I don’t know the U S even, you know, make it, you know, You know, reach the big market. Um, so it’s just a question of funding at the end. So these were always the justifications that you, that you were provided with, but after all, and that is why, you know, the last year or two was a very different market environment in the venture space.

It was actually quite the opposite and after all, even though it is hard and it’s still hard for funds to raise money to, you know, et cetera. Um, it is, it is a very important, um, um, reduction, I would say of the, uh, or let’s say a healthy, a healthy recovery of the market and for, for startups. So you won’t see these inflated and projections and numbers anymore.

So that is, uh, I went a bit around, but that is, that is. That is a big, a big red flag for me. And also the dynamics around the team has, have there been changes? And it’s fine to have changes, but you need to understand why has the change happened? Like, why is this founder, why has he left the business? [00:21:00] Why is this, I don’t know, important management person not there anymore.

So it’s a lot about these kinds of things on. On, on, on team composition, but also on, on historical funding, um, where, where I would look for red flags and, and that I would, that I would basically try to understand.

Mike: You also said that you are industry agnostic when looking for opportunities. In saying that, are there any industries that you tend to stay away from?

Philipp: Yeah. So, so there’s industry you want to stay away from because you just don’t want to invest in them just for my, let’s say an ethical. or, or cultural or whatever motivation, um, avoids you from, from investing in that space. Um, and then there’s of course, industries that you just don’t feel comfortable investing in because it is important to understand that once you invest into a business and, and given that we, we, for instance, and many other funds [00:22:00] are agnostics, i.

e. that means you, you would, You know, you would invest in any kind of sector without special expertise. Let’s say in our case, um, biotech, anything related to pharma or medtech, um, just industries. I would, I would classify industries that you would, that you don’t be comfortable with. You don’t really understand because at the end, I think, again, it depends on the VC fund, but I think if you’re close to investment, you really want to add value to the business, right?

That, that is always the difference between. Let’s say money and smart money. And what you want to be is you want to, you want to be smart money. So that means that you would like to. Help the founders open up your network. That is, you know, that is often the most, the most common, um, support that funds bring to, to the startups, but you want to help in any kind of form.

If it’s on connecting to customers, if it’s on bringing your expertise, how to build up a sales organization, if it’s about your knowledge on how to [00:23:00] price your product or your services, right. Uh, in different markets, like you want to add to, uh, to the business. So you need to be very close. That means that if you don’t understand, or if you don’t have a network or not, if you don’t have any experience in a sector, you would naturally trust, try to avoid it and not invest

Mike: when you say that you want to help, do you, does that mean you position yourself with decision making power with the startups?

So what do you mean by help?

Philipp: Yeah, that’s a good question. And that, and that always, you know, lies in the interpretation of it. But I think if you are a, Let’s say an active investor, an active venture fund could also be a private equity fund, of course, but let’s say in the venture space, um, an active venture fund, you want to help never really on an operational level, i.

e. saying to the founder, you know, do this or do that, but rather be a sparing partner to them. So you want to advise them. You want to share your experience because often, um, [00:24:00] let’s say in our fund, if, if some of the partners sat on the board of the, of the investment that we did of the company. They are usually have gone through, you know, similar experiences.

They have done, I don’t, they have built up startups that have, uh, bought companies, acquired companies, uh, restructured and turned around businesses, sold them again. So there’s just with the investment, there’s someone behind that has. Let’s say a bit of gray hair and a bit of experience, um, that, that, that you can share with the founder.

Um, and it’s at the end helping him avoid some mistakes because often in, in, you know, building a business, it’s often how, Can you avoid some mistakes that that might cost you a lot or that could cost you a lot and cost could mean money, could mean time, could mean people, whatever the cost is, but that’s what you’re trying to avoid.

So you want to help them in the sense to be a sparing partner, discuss with them, [00:25:00] spare with them ideas. Bring them on onto something connect. Of course, like if you have a network, let’s say what often in our face, what we try to do is we try to work with the businesses and then connect them with other funds in the next funding round.

So, so, you know, we could help the founder in the sense of. Helping him securing the next funding around whenever it comes to it. So, so these are kind of the, um, some, some of the tasks or some of examples of tasks that you, that you would be able to help the founder with, uh, in this journey of building up a business.

Mike: What would your success rate with two, two questions? What, how do you measure success when it comes to your investments and what would your typical success rate be?

Philipp: Okay. So here it again, um, it depends a bit on the stage. Um, if you are a early investor, let’s say a pre seed or seed investor, your risk is much higher than for instance, at the series AOB stage or at a later stage as well.

Um, [00:26:00] so, and you will get compensated for it, right? Like the more risk you take, the higher the reward would potentially be. Um, but I think at an early stage, you would say. I think this is very fairly known as well in, in, in the venture spaces that you would say of, of two startups, sorry, of 10 out of, out of a portfolio of 10 startups, um, you would, you would assess, or you would, you would say that.

Two startups or one or two startups will really generate like big returns and almost we call them home runs. Uh, if they really, you know, return the fund, um, you might have, let’s say three, three, four startups that are somewhat in the, in the medium space. So that means either they return some money. A bit less than, you know, a bit less of what the invested capital was.

And then you have probably four to five startups that are just, you know, that you need to write off because the team has make it, it has made it. They haven’t achieved the goals that they wanted to. They didn’t get the following funding round, et cetera. So, [00:27:00] so that is usually, you know, what do you, what do you, what do you, what do you see in an early stage as a success rate in a series a phase where we usually invest this success rate needs to be a bit improved.

Right? Because we also take a bit. We take less risk, slightly less risk. We get also slightly less reward in theory. Um, but in our, in our, in our part, it should be a bit, the ratio should a bit change. It should be a bit change, right? We should have probably much less writers. So maybe let’s say two or three.

We should have, you know, probably three or four companies, let’s say two or three companies that are somewhat with a reasonable return. And you know, the reminder, so another four or five businesses are somewhat in the middle, in the middle range, but that is how you would probably think about it. And what you would, and what an investor into a venture fund would expect in terms of a success or their, in terms of return expectations.

Mike: How do you do a valuation? So I hear often you go on [00:28:00] swissstartups. ch and you look at all the different companies there and each of them have a, you know, series B, a valuation of 20 million or something like that. What goes into that calculation?

Philipp: So I think in venture you would probably use like the two most used valuation methods are relative and comparable valuation methods.

So you would probably look at. Multiples of, you know, revenue multiples, EBITDA multiples, less so because, you know, most, most of the businesses are at the stage where they’re still EBITDA negative, but you would look at the revenue multiples or any kind of other multiple that you think could be comparable to that business that you’re looking at.

So, so you would say, I don’t know. You look at, let’s say for, for a B2B SaaS business, you know, a subscription business with recurring revenues, you would look at the multiple of the annual recurring revenues. So you would say, I don’t know, there’s, there’s even indices from, from, from Bessemer [00:29:00] ventures, for instance, uh, where you have, um, An index that shows you across all software businesses that includes Google, Microsoft, Facebook, Apple, et cetera.

Um, you would look at what is, what is a multiple that they’re trading on these businesses. And then you would say, okay, uh, these like, this is a B2B SaaS space and you would apply a multiple on the, on the ARR, that the, that the business is generating. So that is a very common. And then of course you, you know, you can, you can create different peer groups, um, where you say, okay, let’s say you have a.

FinTech company. So you would probably look at, um, public listed companies in the banking space. You would probably look at some, uh, that do payments. Let’s say it’s a payment, FinTech. Um, so Visa, MasterCard, you would look at some banks where they’re trading UBS. Um, I don’t know, any of the other banks, Goldman Sachs, JP Morgan, et cetera.

You would look at and given it’s a technology startup, you would also look at some tech companies that are publicly trading and then you would [00:30:00] take somewhat an average across these different peer groups and you would find the valuation that you think is fair and you could do some adjustments to it.

And I don’t want to go to the nitty gritty stuff of it, but you can do some adjustments for minority shareholdings. You can do it for some premiums, et cetera. So, um, there’s, there’s some way to adjust the public market comps that you’re using, that, that, that you’re using for your valuation. And, but that is how you usually would go about it.

And the other way is to go about it is that you say, um, you look at similar businesses or other other startups, let’s say in, let’s say they’re raising in a series a stage and you say, okay, uh, independent of the sector, not completely independent, but you could look, you could just ignore the sector that they’re in, which is not probably wise to do, but you could do it.

Um, you could just say, okay, on average, I don’t know, series a businesses. In Europe or in Germany or in some geography, because that also it’s often, [00:31:00] uh, there’s a discrepancy between us and Europe. So let’s say you look at European series, a startups, they usually raise, I don’t know, something between five and 20 million in their series around.

Um, and they get valuations of X, Y, Z, whatever. And then you just, you can also go about this, um, in order to just get a feeling of, you know, where given the stage you are in, what kind of valuation, uh, you think is, is fair for the business. And then there’s another way, of course, in, in, in startups, um, which is probably the third one that I, that I missed.

It’s not only two, but it’s three ways to look at valuation. Um, the third one is of course. Often the valuation is just defined by how much does the business need in terms of cash or in terms of funding, uh, that the, that the founders or the team, um, would like to raise, I don’t, let’s say they, they are planning.

Usually you’re planning in 18 to 24 months horizons. Uh, that’s at least in Europe, the [00:32:00] standard. So, so founders would always plan for, let’s say, uh, I don’t know, one and a half years to two years in terms of. Runway and operational costs, and that is sort of the amount that you would try to raise because on there’s a general, um, a general idea of that.

You would say every two years I’m trying to raise a funding round because it costs time. It’s timely to raise a funding round, so you don’t want to spend and usually they take six months, so you don’t want to spend, you know, you don’t want to raise too much too many rounds because they’re just expensive in terms of.

Cost of your, of your time there, they take away focus from the team, et cetera. So that’s why you usually operate in like these two years cycles. It’s, it’s, it’s a very. General, you know, rule of thumb. Um, but, but let’s say you, you plan on raising that amount and uh, and then you basically say, okay, I’m willing, or the founding team is willing to give up, I don’t know, 10%, 20%, [00:33:00] maybe 30% of the business.

And that in turn gives you then valuation, um, um, of the, of the company. So, so, and that is probably often, more often the case than any of the other, the other two valuation, um, methods. especially in the early stage. If you know, if, if the founders say, I want to raise, I don’t know, one to 5 million and they’re willing to give up, I don’t know, 20 percent of the business.

So you’re ending up at a valuation between, you know, five and 25 million. And that is often a negotiation. Um, um, let’s say funds like us, we, or, you know, or other funds could say usually we invest, I don’t know, X amount that we want Y percent in the company for that investment. Um, that is often the approach.

And then it’s a negotiation between founder and fund, um, where you, where you will end up, where you will end up after all.

Mike: Now, what about when a company which you have invested quite a lot in, uh, appears [00:34:00] to be failing, they don’t want to do well, but you are also not just an investor. You’re also helping them. How involved do you get and what sort of involvement do you have?

Philipp: Yeah. So that is a, that is a very good question. If you have a business where you have, let’s say, as you mentioned, quite an exposure or let’s say invested more than, let’s say, you have a higher concentration from a portfolio perspective, you, you need to, of course, decide whether, you know, given that it is a large investment, you want to rescue it, right?

So you want to, you want to. You want to save the day of the investment and don’t want to let the company go down. So I think what a lot of, um, people do or what a lot of funds do is they really start to dedicate a lot of time to these companies. And this is a, it’s interesting because it is a bit of a contradictory because usually what you should do as a venture fund.[00:35:00]

You should always double down on your winners, right? You should always, because it’s after all, a venture fund is a portfolio approach and you need to, you need to make your winners really win big, right? That as we discussed before with the success rates, so you really need to Help these guys that are doing well.

You need to put them on steroids. You really need to push them further. Right? But of course, as you rightly say, what happens in practice often, but that is theory, right? But what happens in practice often is that people, um, start to, and that is a natural human, uh, act. Probably you try to save where the mist or where something is going wrong, right?

You, you try to fix where the, where the problems are. And that is where, where you spend the most of your time on. And you, you know, you, you don’t spend time with the good company because in your mind it says, you know, these companies are doing well, the phone does not what to do. They’re, they’re growing revenues.

They’re getting new customers on. There’s no need for me that they know what to do, but you’d [00:36:00] rather go and you spend your time on the company where there is, they’re losing revenues. They’re losing customers. The product, the product is broken. I don’t know. The software has bugs or. Whatever it is, or even, even structural problems that the team is not right.

Some people are leaving, whatever it is. So, so you really go in and I think, um, it, it, uh, it really requires, and that’s, it’s, after all, it’s a question of how. Do you want to be, because the other, the other option is, of course, you just say, okay, you accept the fact, you say, this is a portfolio game. Um, we, there is some companies that just don’t make it.

And even though it’s a bigger investment, so, so be it. Um, however, if you’re a bit more behind your money and if you have a bit, I should also probably say if you have a bit more concentrated portfolio, so not like a portfolio of, I don’t know, 50, 60 companies where, you know, some will just not. Make it to the next round or we’ll be able to continue.

But if you have a portfolio of [00:37:00] 15, 20, maybe 25 companies, it is a bit. It’s important that, you know, you cannot just let go of some of them that easily. So we would probably go in and we do, we do that. So we have, we start to pick the ones where there are the issues and we actually go in and we, we help them, uh, even more operational.

So, so that means you dedicate more time, you speak on a more regular basis, you discuss the problems that they have at hand or that are, that they’re facing. Um, and you really start to roll your sleeves up and, and, and get into the business, not, and that’s probably goes beyond, let’s say our board seat that we would have, but you really start to get a bit more operational.

Um, because obviously something is not right and you will, you will become again, it depends a bit on the involvement in the business, but you will become sort of a team member and, uh, and you will, and you work with the business much closer on the operations and the day to day operations.

Mike: How does that work when you have multiple [00:38:00] Uh, venture capital firms invested.

So you’re one of them. Maybe there’s a few other ones as well. Do you have to, do you have to create some sort of steering committee, some board with someone from each of them all involved? Like how does, why does this, why does Nordica get involved, but the other ones don’t?

Philipp: Yeah, it’s, um, often it’s a, it’s a mentality question.

Um, often it’s, uh, you know, the other funds might just say, and I, and I’ve seen it like other funds. They might just say, okay, you know, as I just described it before, you know, some, some investments go wrong, some go right. This is one that goes wrong. I’m, you know, I’m okay. I don’t want to spend my time on that.

Um, and then there’s other funds like maybe us that say, we don’t accept that this is going wrong. Uh, we, as we also have other portfolio companies, but we will, you know, we, we, we think we can help. We think we know what needs to be done and, uh, we get, we get to work basically. So often it is more a, [00:39:00] um, mentality and a question of how proactive you want to be.

Um, and, and what I should probably add here is that usually when companies don’t go right, uh, or something is wrong, um, there will be a point where the company needs again, funding. I mean, that’s usually where problems arise, right? It’s, it’s, it’s never that, uh, I shouldn’t have said it never, but often it is, it’s, it’s really the case where the company has plenty of cash.

at the bank and, uh, and there, yes, things might go wrong, but it’s not, it’s not life or death. Right. But often it is, what is the case is that at some point the company will reach a peak and they won’t have any funds available. And then the problems arise because you say, uh, I’m, I’m soon out of liquidity.

We don’t get enough customers. We’re not generating sufficient revenues. The cost base is too high. Um, we need to, you know, we need to do something. Um, and then the question is, what is that something? [00:40:00] And so then, then, um, often it comes down to, you know, who is still willing to support this business. And that not, that does not only mean operationally as I just described it, but that also often comes down to who is willing to put more money into the business.

So often you get to the point then where you say. You know, yes, we can help, but then often the question is, can you help also with money? And then often you will see, you know, who leaves the room and who stays in the room. And the, and that is often what defines the dynamics between other funds or other investors on the cap table.

It doesn’t have to be funds necessarily. Um, who will then, you know, take a bit more ownership or a bit more stake in the game or in the, in the business.

Mike: I wanted to ask now about insight into trends. And sort of the future in startups and the direction and the patterns you’re seeing. Are there any specific areas or technologies that you are [00:41:00] seeing more and more as trends pop up?

I mean, I guess AI is an obvious one because of the last sort of year or so, but is there anything else that really starts out as something that’s booming?

Philipp: Yeah. So with trends, I’m always, I mean, there’s so many predictions and emerging trends that you can probably, you know, everybody can read on. Um, I have artificial intelligence.

Artificial intelligence is definitely one of them, as you just mentioned. But I think there’s often what is often required is that you look a bit in some of the markets or some industry a bit more specific and Yeah. What I’ve found in my experience, at least that is often in, in, in different sectors, you will find some smaller trends.

And that is often what I’m looking for. So if you dive into, or if you double click on one sector or one industry, you often see that in one, in that one industry, which is, you know, which is not that as obvious as artificial intelligence, or I don’t know, it’s coins or blockchain or electric vehicles or something.

But if you, if you, [00:42:00] Click one or two layers even below that. You often see there is some trends into some direction. I don’t know. Customers suddenly start to look for these kind of products or they look for these kind of services. So that is often what I’m what I’m trying to chase. But the larger and broader trends are definitely everything which has to do, as we said, artificial intelligence, a lot in the financial space.

So that is, you know, block chain. That is blockchain. That is cryptocurrencies. That was a hype. It is still there. It has decreased a bit. There’s a lot of, a lot of things going on in sustainability space. So everything around environmental stuff, climate tech, uh, um, um, sustainable living or consumers, um, the, the health, uh, problems and, and, and these a bit more longer term trends, uh, there there’s, there’s many of them, which I, which I, which I personally also like a lot.

But there are some that are sometimes a [00:43:00] bit too overhyped and often a bit too general, you know, even if I, you know, even if I, if someone says, I don’t know, artificial intelligence, just to stay with it is, is the top trend. Like often you need to really zoom in. What exactly do you mean? Because it applies to so many verticals and so many subsectors that it’s often.

It’s, it is a general trend, correct, but you know, what is really, where do, where is really the growth happening and where is really the transformation and innovation happening? And that is what, what, uh, what I think people should look for. But, but you know, the ones I mentioned are sort of the, the bigger ones and the, the, the more broader emerging ones

Mike: I guess.

Also, you have to be careful. You’re not just sucked into if a startup is smart, they’ll use whatever trend is popular to market or advertise. I mean, everyone can say that they have AI in their tool. If they are using chat GPT to find some answers. I mean, I guess depending on how they use, whatever the trend is [00:44:00] probably, yeah, takes a bit of research and knowledge.

Correct.

Philipp: You, you always need as an investor to really, You know, you need to go in and understand much better what it means. And as you say, with these hype topics, it’s A lot of companies have, you know, I can maybe say one example, like there was one business and that is probably what, you know, so there was one business that we looked into, into, um, into the, in the UK, it’s in the sustainable consumer space.

Um, basically in very short, what they’re. Uh, what they’re trying to do is they try to increase, um, transparency for consumers on how sustainable, sustainable a product is. So let’s say you, you shop online, uh, and let’s say in the, in the category of beauty, beauty products, you want to buy a hand cream or a sun cream, or, uh, I don’t know, uh, whatever other beauty product you want to buy.

Um, often these products they claim that they are, I don’t know, vegan and they were without child labor and you know, whatever [00:45:00] claims they make. How, uh, how valid is that claim? In fact, and, and the, the company, it’s actually one of our investments. Um, they have, they have exactly, they were basically worked around that, um, in order to, you know, just to show to the consumer or the shopper who is, who is buying the product online, that, uh, they can verify if these claims are actually facts, um, or if they’re not.

And in order to prove these or to have evidence for these claims, you know, for these beauty products, they were using or they are using blockchain technology in the back. And I remember once, you know, when we got to know them and when they pitched us, they, you know, they really talked about, you know, how important it is to have the transparency consumers are looking for it.

It, of course, they also mentioned that for the, for the shops, it increases. Basket sizes, uh, retention, uh, traffic on the websites, et cetera. But there was in the end of the [00:46:00] pitch deck, there was one slide. Where they said, ah, and by the way, the way we are providing the evidence and where we, where we are making sure that everybody can see the same evidence and it’s not something, a black box that we just hold internally into our company is that we’re using blockchain technology.

And that is exactly to the point, as you say, when we talk about this hype and, and, and, and, and trend stuff is that these are sort of the businesses that have. That, you know, I would say is worth investing in because they have understood that this is not a buzzword that will attract investment, but they are just using the technology, uh, operationally to be efficient or whatever it is to, to decrease costs, to have more transparency for whatever reason you want to use the technology, um, instead of putting it on every slide.

On the, on the, on the header saying we are a blockchain business. We are blockchain business. And you know, at that time, everybody was trying to invest into blockchain businesses. So, um, that is sort of the, uh, the companies that you need to look for as an investor, where you say, they’re just not, they’re not raising [00:47:00] money on, you know, on the hype of being an AI business, but rather they using the technology in a very smart way.

They’re solving a problem, but we’re using AI to do it. That is what I think you should look for.

Mike: Yeah. Coming from a management consulting background, I am very familiar with pitch decks with empty promises of current trends. That’s for sure. There you go. What about given NauticEye has offices in a few different countries, how is Zurich positioned compared to other cities in Switzerland or more importantly, Europe, I think, in terms of as a place to get started with a startup.

Philipp: Okay. So from a startup perspective, I think, um, as, as, as I think we talked at the beginning of when we talked about, uh, sourcing investment opportunities, I think getting started in, in, in Zurich or in Switzerland per se is. Definitely a good place. Um, you have, uh, I think the infrastructure is good. You have talent, [00:48:00] you have, you know, good educated people.

You have good university, as we mentioned with ETH, especially on the tech side. And you have, of course, access to capital. I would say it’s not that easy. It’s not that straightforward, but there is. Probably I don’t know the statistics exactly from from the other hubs in Germany, France, Spain, etcetera. But there is probably a higher probability of getting or high probability of getting funding if you have the right network and the right people here in Switzerland, just because it’s a wealthy country and it’s a wealthy city.

I think the, uh, the other part, of course, or a bit, let’s say a bit, the challenges, of course, that you have, um, that the Swiss market. If your product and, or your service is for the Swiss market only, it’s a bit of a limited and smaller market. Um, so you would have to start here. Of course, have, I don’t know, first pilot customers in Switzerland, but then, um, if possible, and if the operations allow it.

expand to other [00:49:00] regions. And the first, let’s say the easiest way to go is, of course, to Germany or to Austria, given the language, maybe Austria. But Germany has a big, big economy as well. Um, and expand to these markets because the Swiss market is definitely a market that you can start with. But there’s often the argument that you can only reach a certain, you know, you can only go into a certain level.

So you would have to, you know, you would have to, you know, Have the thought of expansion and going into another market, you know, and that is operation. It’s not easy because that means opening another office Maybe that maybe means opening a german entity. I’m just taking germany as an example, but you know operationally you need to Have the funds but also the the willingness and the power to To expand very quickly because, you know, if you are, let’s say, if you compare it to a startup in Germany, you could probably just, you know, sit wherever you sit and serve the German market and then you probably can get to a very good, very good level.

Mike: Okay, we’re out of time. So I have one [00:50:00] last question for you. What advice do you give to entrepreneurs or young startups looking to attract venture capital investments? What are some lessons learned that you can pass on so they don’t have to make some mistakes?

Philipp: That’s a very good question. I would start by saying the following.

Not every business needs venture capital or outside funding. I, you know, often And I’m saying that because probably, you know, when I speak to people, it’s always about, you know, I’m just going to get funding outside from a fund or from business angels or whatever. But there is also some businesses, and of course you need to be lucky.

You need to know your market and you need to have maybe also your own means to, to finance it, but there is also ways where you don’t need actually external funding. So I would, I would suggest to the listeners also to, if you want to start a business or you have a business idea, You can [00:51:00] also, we call it bootstrapping.

You can also bootstrap it to a very, um, to a very good level. And that comes with a lot of benefits as well. It’s not easy and it takes probably longer outside money is always easier because you can, you know, you can spend that money from day one. Which you wouldn’t have otherwise. But, um, before starting and going out fundraising and asking people for money, giving up shares in your business, et cetera.

Also think about the opportunity of bootstrapping your business with your own means that you have available with, uh, you know, with friends, instead of paying salaries, you, you start, you know, to, to, to, to partner up with your friends, with, with colleagues, whoever, you know, fits into the model, um, and, and, and start the business from there.

And then you can later on, of course, if you think, okay, now we’ve hit sort of a certain threshold or now we want to go for this way and that we really cannot afford out of our own cash situation or liquidity situation, we need someone else to fund this. I don’t know, big expansion or this big product release or whatever.

Then, of course, you can [00:52:00] always go and find the outside funding. Um, but if you, but you, but don’t forget the point that you can always start also, you know, without external funding. I think that’s the point that I’m trying to get to. Um, of course, then if you will, nevertheless, it’s, it’s, it’s of course valid, um, to, to raise external funds, to get it from, you know, friends and families, and individuals, um, and later on also from funds or professional investors.

I think the important part is that you always need to act in a way that you are aware that you’re always, you know, someone else has given you money in, in trust, trusting you in having faith in you and having, you know, probably giving you money because they see an opportunity in you and that respect or that understanding needs to be both ways.

So it’s important that, you know, someone that is raising money from, from someone else. is aware of the fact that you are in the end, you’re responsible, you have a responsibility towards the investor. Um, you have a, you know, it’s, it’s, it’s just a, [00:53:00] it’s just a partnership where of course he’s not working with you day, day, day in and day out, but he has at least some stake in the business and that, that is always important to keep in mind.

Mike: And from a networking perspective, how do they get noticed? How do they, how do they bump into you at a party?

Philipp: Yeah, so I think You know, as a, as a, as a owner, as a founder, and as a CEO of a startup, you always need to pitch. I think that’s one of the core rules that I always hear the guys. I’ve never really started the business myself, like as a startup, but you probably will always pitch your idea because people will actually ask you when you get to know someone, you know, what do you do for a living?

What, what, you know, what is your work? What is your profession? And then you will always explain them, look, I’m, I’m building this, I’m doing this startup. I’m building that service or whatever it is. So we naturally always. Start to pitch people and, and, you know, and then you will find, um, you will find people.

It’s, it’s often a, a mouth to mouth, um, connection. Uh, a lot of people are well connected. Um, so it, it’s really about that, that you always pitch your idea, you always share your [00:54:00] story. You always share your, your, your plans, and that’s how you get to, to, to the right people often, um, especially in Zurich. And that’s probably one of the, the, the facts that I missed before that.

The reason that Zurich, I’m not talking Zurich because we’re both based here, but in Switzerland in general, I think the, the bigger cities, the community or the cities are not that big. And that, that is really good for, you know, Getting to know people fairly easy through, you know, two or three maximum connections.

Um, and that can help a lot because that person knows that person and that knows that one. And then you already there at someone that you would like, would need to speak to. So that is a big, a big positive actually for, for Zurich as a, as a, as a location to start a business that the networking is, is fairly easy to do.

Um, and so, so it’s the same for, for fundraising. Um, you can, you can, you can get to know your, your next investor probably through two or three connections, I guess.

Mike: Mm. Well thanks Philip. Was there anything else that I’ve missed that’s probably worth mentioning?

Philipp: [00:55:00] No, I think, uh, we covered it all. It was very exhaustive, but, uh, I’m always available, um, uh, to reach and, uh, yeah, and, and available for, for conversations or, or, or networking as you, as we, as we left it.

Mike: Well, thank you very much for your time and I’ll, uh, speak to you later, hopefully.

Philipp: Perfect. Thank you