Big and Small Pieces of the Pie: An Interview with Investment Consultant Falk Müller-Veerse

We catch up with Falk Müller-Veerse in his Munich office in the Lehel district, a perfect location with a view of the Isar River. Since the merger of his company with Bryan, Garnier & Co., the founder of Cartagena Capital has been the Managing Partner of the international investment bank. His friendly conversational tone does not hide the fact that a great deal of money is being handled here — and obviously with good success. What we want to know: what does the financial pro recommend to startups looking for investors?

Glass trophies, known as “financial tombstones,” proudly speak to the company’s past successes in placing capital with growth companies. Among others, the Munich-based enterprise has already helped tado° and baimos find fresh capital. According to the company’s own information, Bryan, Garnier & Co. has one of the largest technology teams of any investment bank in Europe, with 60 employees  — 15 of them in Germany. Overall, the company has about 150 employees. Its focus: European growth companies.

Falk Müller-Veerse has been in the business for a long time. He founded Cartagena Capital in 2001, and merged with Bryan, Garnier & Co. in February 2016. He was a member of the Steering Committee for the German Accelerator, and Table Captain at the last Bits & Pretzels fair. An industry man.

What do you do for startups?

Growth companies hire us to raise capital at levels of about 10 million euros and up. That includes venture capital, family offices, private equity and high-net-worth individuals as well as financing on the stock exchange. In the last two years, we were the most active European investment bank when it came to listing European companies on the NASDAQ. Some companies that hire us are still very young and do not have high sales volumes yet.

So our work can be summarized in three areas: we raise money for startups, we sell them, and we help them go public.

You helped tado°, a Munich-based IoT company, raise a total of about 45 million euros of capital in three financing rounds. What kind of work do you do for startups, specifically looking at the example of tado°?

For one thing, we arrange contacts with investors, although tado° didn’t have any trouble in that area — after all, they are one of the top startups in Germany, maybe even in Europe. Our job was to filter out the right investors. We also handle negotiations about conditions and optimize other terms & conditions for the management and the current shareholders — from liquidation preferences to tag-along and drag-along clauses.

“That makes the company unsellable” — preemption rights and other serious mistakes

What clauses and conditions do startups need to be careful about?

Strategic investors often expect preemption rights, or rights of first refusal, when they invest in young startups. In other words, if the company is sold, the strategist can purchase the company for the same price that another company has offered.

However, that is an absolute disaster for the startup. If an interested company learns through the due diligence that a competitor can always take over the company at the same price, it no longer makes sense for the bidder to spend the time, effort and money to acquire it  — after all, the competitor will always win the bid. That makes the company unsellable. That’s a serious mistake that many naïve startups make.

Are startups too uninformed about financial transactions?

In these kinds of financing rounds, absolutely. They would do well to find someone with a lot of experience who can help them. Someone who knows what is standard for the market and what they can ask for. Someone who can also manage the competition and optimize the conditions and the valuation.

Here is a typical example: three or four university classmates come up with a business idea during their studies and want to start a business. What will they need when they go to the investor?

First off, if four classmates are studying the same thing, then they have a very homogeneous management base. Most of the time, that’s not an ideal setup — three or four economists, mechanical engineers, or computer scientists are not a dream team. Ideally, they should complement each other.

Beyond that, they will need three things: first, an investor teaser — a short executive summary with all the information about the company, the product, the market, the technology, the management, the USPs, and why someone should even take the time to look at the company.

Second, an investor deck: a 15-25-page investor presentation, which needs to communicate within half an hour why an investor should make an investment. The investor deck presents content from the investor teaser, the company finances, and the business plan in more detail.

Third, startups need to be able to present a solid financing model that the investor can ideally also play with and use to experiment with some sensitivities (ed. note: shifting parameters under slightly modified conditions).

“In Germany, startups often go to the investor too late”

Can you say which phase a startup should be in when it starts looking for an investment? At what point does it make sense to approach investors?

It is always better to finance your company yourself for as long as possible, and to start looking for investors when you have something to show them, like a functioning prototype. Of course, some people can also be convinced with a couple of PowerPoint slides. But the level of uncertainty is naturally higher the less you show them. So it is often better to wait until you can demonstrate something for your potential investors.

In Germany, however, startups often go to the investor too late. By the time you build a company and try to make it profitable by yourself, it has often already been overtaken by the market. Those who want to survive on the world market need capital.

That particularly applies to the competition with companies in the US, where companies receive a great deal of capital very early on. They don’t necessarily use the money very efficiently, but people stick less to their share of equity in the United States than in Germany. Companies should ask themselves: do I really want a giant piece of a tiny pie, or is a smaller piece of a really big pie enough? Isn’t that possibly worth much more at the end of the day?

Why is it that Germany takes a more conservative approach to financing and wants companies to grow first  — is it a cultural issue? Or is it because there is not enough growth capital available?

There is money available in the early phases: business angels, the High-Tech Gründerfonds, Bayern Kapital. But I think it’s a culture that has evolved to be like this: medium-sized German companies did things the same way. Instead of putting in equity capital, they preferred to take in a large amount of outside capital. So the  equity ratio is very low in German companies. People let companies grow from the cash flow and then reinvest their profits.

Today, more entrepreneurs are raising equity capital. It may also be a cultural thing, since the new founders, who are in their 20s or early 30s, have a different way of thinking.

“Where there’s no competition, there’s no market”

Can you concisely summarize the three beginners’ mistakes that startups make when looking for investors?

1.    Saying, “We don’t have any competition.” That’s completely implausible. Where there’s no competition, there’s no market.
2.    Saying that you will have more than a billion euros in sales within three years. Excel sheets are very patient. It’s a common mistake, and not even Google, Facebook or Apple managed it.
3.    Not contacting investors early enough. Many startups simply miss the opportunity and are too focused on their own business. Startup CEOs should constantly be building relationships with investors and providing them with information and updates about their partners, customers and products.

To build trust?

Exactly, to build trust. And to show that the business is developing as expected. After all, you need to show potential investors that it is worthwhile to watch the company for a longer period of time. Investors don’t make a decision in four weeks. They take a long time at first, sometimes even years. They watch companies and ask themselves: are they delivering on their promises?

…in order to minimize the risk…

Of course! Venture capital is risk capital, but investors still entrust people they don’t know with a great deal of money.

How do you reduce the risk for investors?

Investors know that we have taken a careful look at the companies. We conduct extensive due diligence. Investors need to be convinced that something has a solid basis, and isn’t just hot air. After all, they connect our name with these companies. And since we live off the success fees, naturally we are interested in finding companies that keep their promises.

Have you ever had a total failure?

Of course — there was one case, a company in Berlin. During the crisis year of 2009, we raised five million euros for them. We introduced the investors and the management. They went to the notary together and signed the documents. The existing investors and new investors all put in money  — only the CEO, who had wanted to be a co-investor, didn’t pay in. Three or four months later, the company went bankrupt.

Unfortunately, you can never completely rule out things like that. We do our reference checks and much more. But when people have never done anything wrong before, even that doesn’t help. A normal CEO wouldn’t do something like that — oh well.

What do you think distinguishes Munich’s startup scene?

I think you really do have less hot air in Munich. Even if I say, “I’m in Berlin, I’m a startup, so that makes me cool and hip,” the basics are still what count in the end. The startups in Munich are more down to earth. On average, they are more on the hardcore technology side, so they can often offer something more substantial.

There is a strong “old economy” in Munich  — many medium-sized businesses, many corporations. What does that mean for the startup scene here?

Of course it is good for Munich startups that they are closer to old-economy companies here. For instance, Siemens invested in tado°, and I’m sure the physical proximity played a role there, too. It has allowed very different relationships to be built and developed over the years.

Is IoT hardware just a Trojan horse?

Which startups are especially exciting investment objects right now? Where would you advise investors to jump in?

One huge trend are data-driven approaches, which involve more than just hardware. Many people think the IoT is only about hardware. From my perspective, though, it is just a Trojan horse, for instance in order to get into the Smart Home area. Ultimately, however, it is about data and data analytics. On the analytics side in particular, there is still a lot of room. That’s a very exciting field.

The new, clear business models in the lead-gen area (ed. note: lead generation) are also interesting, and allow completely new CPOs (ed. note: costs per order) to be created. In addition, there is the whole area of cloud computing — a field where Germany is still dragging its feet and is now only slowly catching up.

What is Munich missing as a hub for business?

In Berlin, the startup world is more vibrant and more international. Bits & Pretzels, as a “lighthouse” event, is definitely a good way to bring people here. Maybe it would be helpful to build a stronger network between the existing offerings — Munich has plenty of business and company builders, accelerators like Wayra and TechFounders at UnternehmerTUM. It’s important to connect all that even more strongly with the venture capital world, which still has a strong base here in Munich.

Do you think we need more hype in Munich, more hot air?

No. Startups that are good and that perform strong exits are worth more than a thousand words and hot air.

Thank you very much for the interview!

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