We meet Falk Müller-Veerse in his Munich office: Lehel, a prime location overlooking the Isar River. The founder of Cartagena Capital has been working since the merger of his company with Bryan, Garnier & Co. Managing Partner at the international investment bank. His friendly demeanor doesn't disguise the fact that he's working with a lot of money – and apparently with great success. We're interested in the question: What does this financial professional recommend to startups looking for investors?
Glass trophies, called “Financial Tombstones,” proudly display the company’s success in arranging capital for growth companies: Among other things, the Munich-based company has already tado° and baimos to raise fresh capital. According to the company, Bryan, Garnier & Co. has one of the largest technology teams of any investment bank in Europe, with 60 employees, 15 of whom are in Germany. The firm employs a total of around 150 people. Its focus is on European growth companies.
Falk Müller-Veerse has been in the business for a long time: In 2001, he founded Cartagena Capital and merged his firm with Bryan, Garnier & Co. in February 2016. He was a member of the German Accelerator Steering Committee and table captain at the last Bits & Pretzels. A man of his own trade.
What do you do for startups?
Growth companies commission us to raise capital, from around 10 million euros upwards: From venture capital, family offices, private equity, to high-net-worth individuals (Editor's note: wealthy private individuals), all the way to public offerings. Over the past two years, we have been the most active of all European investment banks in bringing European companies public on the NASDAQ. Some of the companies that engage us are also very young and have little revenue.
Our work can be summarized in three areas: We raise money for startups, we sell them, and we take them public.
You have supported the Munich-based IoT company tado° in three financing rounds We have helped them raise a total of around 45 million euros in capital. What does your work for startups look like, specifically using tado° as an example?
Firstly, we establish contacts with investors, which tado° certainly had no shortage of – after all, they are one of the top startups in Germany, perhaps even in Europe. The goal here was to filter out suitable investors. We also lead negotiations on the terms and conditions and optimize the other terms and conditions for management and existing shareholders – from liquidation preferences to tag-along and drag-along clauses.
“The company will therefore be unsellable” — Pre-emption rights and other major mistakes
Which clauses and conditions do startups need to be careful about?
Strategic investors often expect pre-emption rights, a Right of first refusalwhen they invest in young startups. This means that if the company is sold, the strategist can acquire it for the price offered by another company.
However, this is an absolute disaster for the startup: If an interested company discovers during due diligence that a competitor can always acquire the company for the same price, there's no added value for the bidder in making the effort and investing a lot of time, effort, and money – because the competitor always wins. The company thus becomes unsellable. This is a fatal mistake that many inexperienced startups make.
Do startups know too little about financial transactions?
With financing rounds like these, definitely. You're well advised to get someone with extensive experience to support you. They also know what's standard on the market and what you can achieve. They can also manage the competition and thus optimize terms and valuation.
A typical example: Three or four fellow students have a business idea during their studies and want to start a business. What do they need when approaching an investor?
First of all: When four fellow students study the same thing, the management base is very homogenous. This is certainly not an ideal combination: three or four business economists, mechanical engineers, or computer scientists are hardly a dream team. Ideally, they should complement each other.
You then need three things: First, an investor teaser, which is a short executive summary that tells you everything about a 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: the 15-25 page investor presentation, in which you have to convey in half an hour why an investor should invest. The investor deck presents the content from the investor teaser, the financials, and the business plan in even more detail.
Thirdly, startups must be able to present a truly sound financial model, which the investor can ideally play with and sensitivities (Editor's note: Shift in key figures under slightly changed conditions) can try out.
“In Germany, startups often approach investors too late”
Can you say at what stage of growth a startup should seek investment? At what point does it make sense to approach investors?
It's always better to self-finance your business as much as possible and only approach investors once you've already got something to demonstrate, like a working prototype. Of course, some people can be convinced with just a few PowerPoint slides. But the less you can show, the greater the uncertainty. Therefore, it's often better to wait until you can demonstrate something to potential investors.
In Germany, however, startups often approach investors too late. If you build a company and try to make it profitable on your own, the market has often already overtaken it. Anyone who wants to survive in the global market needs capital.
This is especially true when competing with US companies: There, companies are provided with a lot of capital very early on. While the money isn't necessarily used very efficiently, people in the US are less attached to equity than in Germany. Companies should ask themselves: Do I really want a huge piece of the tiny pie, or will a smaller piece of the really big pie suffice? Isn't that perhaps worth much more at the end of the day?
Why is it that companies in Germany tend to take a more conservative approach to financing and want to grow first? Is this due to cultural factors? Or is it because there is too little growth capital available?
Money is available even in the early stages: Business Angels, High-Tech Founders Fund, Bayern Kapital. But I believe it's a culture that has evolved this way: German medium-sized companies have done things this way before. Instead of giving up equity, they preferred to take on a lot of debt. That's why the equity ratio is very low in German companies. Until now, companies have grown from cash flow and reinvested profits.
More entrepreneurs are now raising equity. Perhaps this is also a cultural issue, and the new founders, who are now in their 20s or early 30s, have a different mindset.
“Where there is no competition, there is no market”
Can you succinctly summarize the three beginner mistakes startups make when looking for investors?
- To say: "We have no competition" is completely unbelievable. Where there is no competition, there is no market.
- Saying you'll exceed the billion-dollar revenue mark within three years? Excel is very patient. This is a well-known mistake, and neither Google nor Facebook nor Apple have managed it.
- Not engaging with investors early enough. Many startups simply miss the opportunity and focus too much on their own business. Startup CEOs must continuously build investor relationships and provide them with information and updates on partners, customers, and products.
To build trust?
Exactly, to build trust. And to demonstrate that business is developing as expected. Ultimately, you have to show potential investors that it was worth following the company for a longer period of time. Investors don't make decisions in four weeks. They take their time, often years. They observe companies and ask themselves: Are they delivering what they promise?
…to minimize the risk…
Of course! Venture capital is risk capital, but investors still entrust large sums of money to people they don't know.
How do you reduce risk for investors?
Investors know that we have carefully examined the companies. We conduct intensive due diligence. Investors must be convinced that this is sound and not just Hot AirAfter all, they associate our name with it. And since we earn our living from success fees, we're naturally interested in finding companies that deliver on their promises.
Have you ever had total outages?
Of course, we had a case – a Berlin company. In the crisis year of 2009, we raised five million euros for them. We brought investors and management together. They went to the notary together and signed the documents. The existing and new investors all contributed money, only the CEO, who wanted to co-invest, didn't. Three or four months later, the company was bankrupt.
Unfortunately, you can never rule out a case like this 100 percent. We do our reference checks and much more. But if the people have never done anything wrong, that doesn't help either. After all, a normal CEO wouldn't do something like that—but okay.
What do you think characterizes the Munich startup scene?
I think in Munich you actually have less Hot AirEven if I say, 'I'm in Berlin, I'm a startup, that's why I'm cool and hip,' the basics still count. The startups in Munich are even more down to earth. On average, they are more on the hardcore technology side and can often offer more substantial features.
Munich is home to a strong old economy – many medium-sized businesses and many corporations. What significance does this have for the local startup scene?
Clearly, it's an advantage for Munich startups to be closer to old-economy companies. For example, tado° has also attracted Siemens as an investor—the proximity certainly played a role. This has allowed completely different relationships to develop and develop over the years.
Is IoT hardware just a Trojan horse?
Which startups are currently particularly exciting to invest in? Where would you recommend investors invest?
A huge trend is data-driven approaches that aren't just about hardware. Many people believe IoT is just about hardware. In my opinion, however, it's just a Trojan horse for getting into smart homes, for example. Ultimately, though, it's about data and data analytics. There's still a lot of room for improvement, especially on the analytics side. It's a very exciting field.
New, clear business models in the lead-gen area are also interesting (Note d. Editor: Lead generation, customer acquisition), the brand new CPOs (Editor's note: Cost per order). Added to this is the entire area of cloud computing – a topic in which Germany is still lagging behind and is only slowly catching up.
What is missing in Munich as a business location?
In Berlin, the startup world more vibrant and international. Bits & Pretzels is Lighthouse-Event is certainly a good way to bring people here. Perhaps it would be interesting to strengthen the existing offerings: In Munich, there are many business and company builders, accelerators like Wayra and TechFounders at UnternehmerTUM. It would be important to connect this even more closely with the venture capital world, many of which are still based here in Munich.
Do we perhaps need more hype, more hot air in Munich?
No. Startups that are good and have strong exits tell a story more than a thousand words and hot air.
Thank you very much for the interview!
