The New Capital Sin Of Venture Capital

I recently attended the ‘Bits & Pretzels’ fair in Munich, which is the perfect space where start-ups and venture capitalists mingle, drink way too much Bavarian beer (it takes place in parallel with the world-known Oktoberfest) and, this year, had the chance to listen to Michelle Obama presenting her latest book ‘The Light We Carry’ (spoiler alert: she is fantastic). 

The ambience was sparkling – maybe alcohol does help, and the investors’ lounge was packed with young CEOs pitching their lives to wealthy European VCs. 

All in all, selling ideas, tech, and a slice of a company in exchange for money has been part of our capitalistic history for a long while. It’s all good. This year, maybe because it’s a wintery phase of our economic history, I had the impression that meetings had the tempo of speed dates, and that venture capital started to look a lot like private equity. In private markets, venture capital has a slightly more romantic flair, and it is known for the ability to take more risks, all aimed at building companies in the long run. IPOs are usually the end game, and VCs are known for being less opportunistic than the short-term black belt gurus of private equity. 

Is this still true about VC? Do venture capitalists carry a different light, made of vision and long-term shared pain, hand in hand with the entrepreneurs they support? In these tough times, does the quick buck replace the objective to create a healthy start-up and then a solid scale-up, which will save us all, thanks to exponential technologies that would not find support on the public market?        

This is why I sat down with Andreas Riegler, Founder and General Partner at APEX Ventures. From now on, I am Frank, and he is Andy, so that the exchange can feel more intimate and less intimidating.  

Frank: Who are you and what do you do for a living?

Andy: I am an entrepreneur and venture capitalist with a commitment to driving technological advancements in the deep tech sector. In this role, I am working together with founders to help transform their compelling ideas into concrete realities, guiding startups through the intricate pathways of development, scaling, and eventual global expansion. I am very passionate about turning bold, new ideas into real businesses that can change the world. I focus on exciting new developments in space technology, quantum technologies, robotics, and AI, across a multitude of industries. Before my investment career, I led a management buyout of a digital distribution company from Sony Corporation, followed by a successful exit. 

Frank: Tell me something that nobody knows about you.

Andy: I have been intrigued by the cosmos and astronomy all my life, which probably also explains why, at APEX Ventures, we have such a passion for founders who are exploring new opportunities in the nascent “New Space” market. I am a venture capitalist during the day. At night, I am an active member of the Astronomical Society in Salzburg, Austria, contributing to the realms of research and education, reflecting my broader passion for exploration and discovery. 

Frank: VC and profitability. The eternal dilemma is: should start-ups be profitable, and at which stage? What’s your POV? Do you have an example of start-ups you invested in, which built a healthy bottom line, while disrupting their industry? Can we have top e bottom line at the same time?

Andy: Certainly, the subject of profitability of startups is constantly discussed in venture capital. 

In venture capital, we are primarily identifying start-ups and ideas that have an above-market average growth potential and the ability to unlock large markets. Especially as deep tech investors, we are constantly scouting for teams that are developing unique and differentiating technology. They are typically addressing problems that are very difficult to figure out, but once solved, they can open-up multi-billion-dollar markets and solve some of humanity’s most pressing issues. The essential approach, from my perspective, is to prioritize the various stages of a startup. In the infancy phase, a start-up’s focus should predominantly be on product and technology evolution, market fit, and building a disruptive and unique presence in the industry. Profitability, while crucial at a later stage, should not overshadow these foundational elements. In deep tech, it is particularly difficult to find the right talent with the necessary technical skills to help develop your product. A secondary challenge is that most founders in deep tech typically come from research or academia and need to augment their team with team members who are very commercially minded.

Even in later stages, deep tech companies continue their pursuit to add value to the company beyond just growth in topline revenue. They expand their patent portfolio, build a team of world-class experts, refine their unique technology, and grow strong relationships with key clients. As opposed to B2C marketplaces or consumer technologies, which were pushed by VCs to follow a “growth at all costs” posture, there is a lot of intrinsic value in the technology and patent stack of the deep tech company. In general, however, I noticed that, at later stages, the pursuit of “growth at all costs”, which was very common only 1-2 years ago, is now more balanced. With growth VC funding retreating, many later-stage companies are forced to cut costs and spend capital more prudently. In conclusion, I believe it’s plausible for startups to navigate the landscape aiming for both top-line growth and a healthy bottom line. However, the trajectory towards these objectives requires strategic prioritization, impeccable execution, and a responsive approach to evolving market dynamics.

Frank: VC and ESG. Let’s be honest, ESG KPIs are no driver for an investment. What’s your POV and how do you take ESG into account, if at all, in your everyday work? If we pick diversity, or gender, are you encouraging start-ups in that direction? How can we change the gender bias of the tech industry, which is male dominated, if not with funding?

Andy: Even though ESG KPIs are not the primary driver, they increasingly influence investment considerations. While it’s true that ESG factors, encompassing environmental, social, and governance aspects, undoubtedly hold substantial weight in the venture capital landscape today, I believe that in deep tech investing, we have always found a much higher concentration of purpose and impact-driven individuals that want to develop unique technologies to address some of the most substantial humanity challenges. Examples include our portfolio company OroraTech,  launching a constellation of microsatellites that observe the Earth’s surface in a special spectrum (IR), allowing them to detect wildfires very early and help reduce a significant share of CO2 emissions (approx. 20%) that wildfires contribute each year. Other portfolio companies doing incredible things are Yuri – which uses the unique environment of space and microgravity to help find new forms of drugs against cancer; and UniSieve – which addresses the market of gas separation and is responsible for approx. 15% of the world’s energy consumption. While some of these deep tech companies might not directly meet all the metrics defined in ESG, what they have in common is that they are very focused on making an impact.

When it comes to diversity in the tech industry, we believe that change starts with us. To make the tech industry more welcoming to everyone, including women, we try to set a good example. We make sure our team is diverse, with people of different ages and genders. This helps us make better decisions because we have various viewpoints and ideas. We have noticed that companies with diverse teams, including strong women leaders, often do much better than their peers. They bring fresh ideas and different ways of solving problems, which is great for innovation and business growth. So, what’s our role in this? We encourage our portfolio companies to value diversity. In simple terms, we want to help create a tech industry where everyone feels welcome and valued. 

Frank: VC and hard KPIs. Is funding driven by hard ROI figures, especially at the early stages of a start-up life? If not, and if it is about culture, spirit, and motivation of the founders, how do we measure that and act against it?

Andy: Investing in early-stage startups is a multifaceted decision-making process that goes beyond just hard ROI figures. At the nascent stages of a startup, financial metrics might not fully reveal the venture’s potential or the ingenuity of its ideas. So, the focus often broadens to encompass other, less tangible, but equally critical elements like the founders’ vision, determination, the uniqueness of the technology and the size of the market it might unlock.

The founders play a pivotal role in a startup’s journey towards success. Their passion, culture, and ability to motivate their team are invaluable assets. We meticulously assess these qualitative aspects, trying to gauge the team’s cohesion, their clarity of vision, and resilience against challenges. In many instances, we closely work with the founder team a year before we invest, to build a solid rapport. In evaluating these softer aspects, engagement is key. It involves interacting closely with the founders understanding their mindset, aspirations, and approach towards problem-solving and innovation. This close observation helps in making a well-rounded investment decision, ensuring that the investment is not merely driven by numerical targets. In essence, VC investment, especially in the early stages, requires a balanced appreciation of both quantitative and qualitative factors and helps with building a supportive ecosystem that allows innovative start-ups to thrive and realize their full potential.

Frank: Any tip for founders starting to think about going into a deep tech venture?

Andy: Absolutely. Being a founder can be exceptionally fulfilling but also very painful at times. Here are some of the traits I see that successful founders bring to bear. (1) Ensure your concept is solid and backed by thorough research and planning. In deep tech, having a strong understanding of the technological aspects is essential and in many instances is the result of many years of academic research. (2) Equip yourself with substantial knowledge and be prepared to delve deeply into the technical intricacies of your project. Deep tech ventures often require a significant commitment of time and resources. (3) Ensure you are passionate about the idea, as this will fuel your journey, helping you overcome challenges and stay focused on your objectives. (4) Foster relationships with like-minded professionals, experts in your field, and potential mentors. Building a strong network can provide you with valuable insights, guidance, and support, enhancing your venture’s prospects. (5) Lastly, I would advise that you align your venture with broader goals, such as addressing global challenges or contributing to societal advancement. This impact focus can enhance your venture’s significance, drive, and appeal to investors. Embrace the learning, remain curious, and be prepared to iterate and evolve your ideas many times over. Good luck! 

Frank: The discussion with Andy has reinstated in me some faith in humanity. Deep tech investment has kept that original venture fire alive. It requires time, caring and faith. You need thick skin to invest in quantum technology, for example, as real-life applications, according to pundits, will come no sooner than ten years from today. At the 2023 Bits & Pretzels, the start-up competition was won by EndoGene.Bio, a start-up made of powerful women and thought for women. They are working on better, non-invasive endometriosis diagnosis tests. It was magic happening before my eyes. The start-up won’t go to market for years, but the opportunity is a must-do, from a business, ethical and simply human point of view.

I come from the so-called B2B2C-Web3-Saas angle, and my experience has been forged by the hype and bust of NFTs and the metaverse. VC and start-ups have, more often than not, given in to the shortcuts of high multiples on valuations and benefited from low interest rates and excess capital, losing sight of bottom line, culture creation and long-term vision. Basically, we lost sight of why venturing into anything, in the first place. I have personally done lots of pitches, and yet our data room was probably visited once or twice. Venture capitalists meet a lot of start-ups, across multiple industries, in search for ‘the’ gem, which will lift-up their overall portfolio. Time is scarce for everyone. The capital sin of VC used to be pride, if we have to pick one of the seven deadly sins, and it’s starting to be mere greed, which is a feature of traditional banking and private equity. My tip for VC and start-ups? Ask yourself why you are doing it. If greed is superior or just equal to pride, skip arenas like Bits & Pretzel, and go straight to the Oktoberfest. Don’t even bother entering the grinder of start-up life. You are not Sam Altman, boss of OpenAI. There is 0.000001% that you will be the multi-billion dollar hit (and, I am being generous with you). You need to be the next CEO of something like EndoGene.Bio.    

Frank Pagano has 20+ years of international experience in Sales & Marketing (corporate & start-up). Senior Partner for Jakala. Advisor for other start-ups, including Tokenance, where he is also a shareholder. Author and contributor for Il Sole 24 Ore, where he leads the video-cast series ‘CEO Confidential’.