Investor talk #1

Over the coming months, we will invite seasoned start-up investors to share their perspective on matters of start-up funding and the venture capital industry. Up first is Fabian von Trotha, Managing Partner of DvH Ventures. Join us and have a read on how Fabian thinks about start-up valuation and common pitfalls for founders in this context.

Fabian von Trotha is Managing Partner of DvH Ventures. He has been successfully investing in young technology companies for years and has a deep understanding of the venture capital industry. Previously, he was responsible for M&A at the Handelsblatt Media Group and gained extensive transaction experience in Germany and abroad.

Akira: As a tech founder, how do I approach the topic of company valuation when I plan my first funding round? How do I achieve a valuation, if my company is not yet generating any revenues? For which founders are you the right contact person?

Fabian: Dieter von Holtzbrinck Ventures is one of the most active early-stage investors in Germany. We have been building successful investment clusters for years, for example in the areas of Digital Health, FinTech, or EducationTech. But also ideas from the fields of artificial intelligence, Big Data or Internet of Things arouse our curiosity. The same applies to topics such as mobility, energy, or enterprise software. As an early-stage investor, we usually invest a six- to low seven-figure sum in a so-called seed round. For existing investments, we often keep the option open to reinvesting in later, so-called growth funding rounds. Regardless of which funding round is involved, we receive company shares in return for our capital. The valuation of the company can be easily derived from our investment and the amount of shares issued, based on the rule of three. The earlier the company phase is, the less reliable data on a business model is available. Accordingly, the proportion of qualitative characteristics of the company value is also higher. In later phases, quantitative characteristics like business plan figures, conversion rates or the return on marketing investments are increasingly decisive.

Akira: What do founders often do wrong in this context?

Fabian: I can only strongly recommend that founders take a realistic approach to company valuation. As investors, we are betting on the future. This also means that the company value we agree on is not a real value, but an expected value. Founders who set the company value too high at an early stage expose themselves to enormous pressure to also show corresponding growth and sales. This is already the case until the next funding round, because both existing and potential new investors want to see that the bet on the future works. Not only investors have something to lose here, but also the founders. Namely their good reputation. Those who cannot live up to their own (too high) expectations will find it extremely difficult to be heard with their forecasts or arguments in all future funding rounds. Founders who take a realistic approach to the value of the company retain greater entrepreneurial freedom and room for maneuver and remain credible.

Akira: Are there special features in the area of company valuation that a tech start-up should take into account compared to non-tech start-ups? Do you see any particular differences between software and hardware start-ups?

Fabian: There are valuation criteria that apply to all start-ups. And then, of course, there are specifics for hardware start-ups. The same criteria for software and hardware start-ups are, for example, the attractiveness of the market, the skills of the founders, the degree of innovation of the product, and the company's previous turnover.

The special feature of hardware start-ups is often that the production of prototypes is expensive and takes a long time. This increases the need for capital. Besides, the production time and often the dependence on suppliers must be taken into account. Software start-ups are often less dependent on third parties. This makes the models less complex and usually more agile, which makes it easier for us as investors.

Akira: The COVID-19 pandemic has also hit the startup scene. Companies like Airbnb and Uber had to lay off many employees. Is now actually the right time to seek a funding round? Isn't there a risk that the company's valuation may suffer as a result?

Fabian: In many areas, start-ups are a company like any other. As such, a start-up is not protected from global economic developments. As a VC, we stood by our investments, especially in the first phase of the pandemic, and helped them regain stability and, above all, secure funding. From an investor's point of view, there are sectors in which it is worthwhile to enter the market right now. The COVID-19 pandemic, for example, has clearly shown that the German healthcare system is still far from digital. However, digital health solutions could certainly close gaps in the provision of care. It does not matter whether these are caused by a pandemic or already exist anyway, such as for specialists or medical care in rural areas. The urgent need for digital innovation has become obvious with the pandemic. From an investor's perspective, there is no better time to invest than now. But here, too, it is important to make a realistic assessment. Anyone who waits until the global economy recovers before starting a business may already be too late with their idea. Instead of ducking away, start-ups should now step on the gas. There is no wrong time for good ideas.

Are you a founder with open questions on matters such as start-up funding or the venture capital industry? E-mail us and we will have your questions answered by experienced VC investors in one of our future investor talks.