How do venture capitalists get extremely rich

"We sell money"

Pascal Klein is actually on vacation when he says hello on the phone in the morning. Even during his business studies, the 30-year-old was enthusiastic about people who found startups and “just do it”. So he started with a fellow student to try everything out himself. First they sold resume templates. Then he “dealt intensively with a live amateur football ticker”. They have started around ten projects.

And then came the yoga mat thing. A quality yoga mat produced in Germany, that should accommodate the current yoga boom and conscious consumers, right? “That went extremely well,” says Klein. And soon they had so many hobby yogis on their website that they wondered how one can really make money with it now. Because in the meantime they were able to make a living from the sales, “but not that much got stuck”. And at some point everyone bought a mat. So you would not be able to grow indefinitely. But that's what Klein wanted.

It was then that they noticed that the interest in yoga is huge, but many are reluctant to go to a yoga group for it. But if you programmed an app that explained yoga exercises and marketed the whole thing less esoterically and more in the direction of fitness, you might very well reach completely new people. All over. And keep growing.

Thought and done. In the meantime, the two had also moved to Berlin with their startup Asana Rebel. An important reason: “the proximity to investors”. And this is where this text actually begins. Because it's about these investors. About those people who decide in Berlin which founders get the chance to try the international breakthrough with millions behind them. They decide which idea is relevant enough and who has what it takes to implement it. Who are those people? How do you decide? And where did they get all the money from?

One of them is Luis Hanemann. He is 32, was previously Chief Marketing Officer at Rocket Internet and also founded TrustAgents. He is considered a marketing expert in the industry. Now he is sitting at a long wooden table in a former apartment in an old building at Checkpoint Charlie. It is the office of e.ventures, a global venture capital fund (VC) from San Francisco with additional offices in São Paulo, Beijing and Tokyo. The Europe area is managed in Berlin. The typical development curve of a startup is carved into the solid wooden table, including the “valley of tears”. The company slogan is written on the advertising notebook: "Limits are just a state of mind", "Limits are just a matter of attitude". The current European fund is worth over 130 million euros and has 30 startups in its portfolio, seven of them from Berlin.

“98 percent of the money does not come from us,” Hanemann clarifies. The whole thing works more like a fund, typically with a ten-year term. The largest investors in their case are corporations such as Otto, Porsche or Oetker, foreign pension funds, but also “family offices”, the asset managers of wealthy families. The high-risk investments can definitely be worthwhile: “We're trying to at least triple the money,” says Hanemann. That is also expected.

For this to be possible, it is not about all startups that have been invested in being successful. On the contrary: “In the end we assume that half of them won't make it,” says Hanemann. Instead, the goal is for individual companies in the portfolio to grow so rapidly that they by far make up for all losses. Ideally, a so-called “fund maker” is sufficient - a single company from the portfolio, the sale of which alone brings in the start-up capital of the entire fund.

Florian Heinemann, co-founder of the Berlin venture financier Project A, gives another reason why corporations get into such funds. "Family offices" are primarily concerned with increasing wealth. "When companies do that, there is usually an interest in exchange and possible cooperation in addition to the profit interest," he says while standing at the airport in Frankfurt Main. Heinemann still has some time to bridge before he goes to a meeting between a startup from his portfolio and a "traditional company".

Because only with other startups as customers can you become “neither rich nor big”. But conversely, many old companies are particularly interested in learning from the young digital industry. A financial contribution opens many doors. From this perspective, VC companies like e.ventures and Project A are a lubricant between worlds.

It is this network that Hanemann and Heinemann use to advertise the startups. Because while many founders search in vain for investors, the extremely promising young companies are in great demand among the funds. "We also have to convince the companies that they should take money from us instead of someone else", says Hanemann, "we sell money." In this competition between the funds, the industry knowledge of the two is worth a lot. Not only do they have easier access to possible customers of the startups and other investors, but they also help with very practical questions from the founders.

E.ventures was also one of the financiers who ultimately invested in Pascal Klein's yoga company. A total of 6.5 million dollars came together, as the High-Tech Gründerfonds just proudly announced in a press release. What is he going to do with it? "The main thing is to be able to do bigger experiments, bigger bets that you can make," says Klein, who now employs 35 people. The free app has been downloaded over five million times to date. The startup earns money with additional lessons.

But in addition to the money, the investors also support Klein with their advice when it comes to difficult business decisions. In the case of Heinemann's Project A, the support goes even further. His fund is very "operational". This means that the startups that are invested in are provided with capital in addition to skilled workers if help is needed at certain points in the company: regardless of whether they are programmers, human resource specialists or marketing specialists.

So whether someone can convince investors like Hanemann or Heinemann of his project often decides whether his start-up has the chance for an international breakthrough. Because even if an idea is good, it usually needs large amounts of money to develop, but above all to become known. But how do the VCs decide?

Christian Nagel is co-founder and partner at Earlybird, a VC that has almost half of its 45 employees in Berlin and currently manages 800 million euros worldwide. He mentions a basic rule that is mentioned by most investors: "Ideally, they should be business models that also have European potential, in the best case world market potential." It is not enough if a model is good, it has to be "scalable", that is can always continue to grow. “We believe that a product has to be simple enough that the general public can understand it,” says Hanemann. Because only then is it likely that a lot of people will buy it at some point.

The rule of thumb for Hanemann's VC e.ventures is that they only invest in companies that they believe could one day be worth at least 100 million euros. Only then is his business model worthwhile. Because the funds usually get ten to 25 percent of the company's shares in exchange for their money. And selling them has to bring in relevant sums. Otherwise they will not get the 15 to 20 percent return that is expected of them. This results in a further decision criterion: VCs usually only invest in founders who are also interested in selling their company later or listing it on the stock exchange. "After all, we can't keep anything," says Heinemann: "Even if we think something is really great, at some point we'll be forced to exit."

Therefore, another selection factor, in addition to the potential market size for an idea, existing market competitors are also important. If there are one or more large corporations that could at some point feel threatened by the new startup, the likelihood of a sale increases.

If you talk to Hanemann, Nagel and Heinemann for a longer period of time, it quickly becomes clear that, in addition to these basic rules, especially with young startups, the business plan or the tough business figures do not come first. But the founders themselves. First of all, there are selfish reasons: The investors will spend a lot of time with these people from the time they invest. That's why all three say that the chemistry has to be right. It is an advantage if the first contact is not one of the emails that investors of 3,000 to 5,000 startups get every year. Common acquaintances help even more.

Next selection criterion: character. “We are of course looking for founders who are above average intelligent,” says Hanemann, “I mean both classic intelligence and emotional intelligence. They have to be able to sell well, they have to believe extremely in their own ideas, they have to have extremely high ambitions. You have to really want to build a billion dollar company. ”In the end, investors simply have more fun working with visionaries. “We prefer to support big ideas. And not the next cat food shop on the Internet, ”says Heinemann.

Anyone who imagines the socially incompatible but visionary Mark Zuckerberg is wrong. We are looking for functioning teams with enough enthusiasm to persevere. Because if you haven't been able to build a good team so far, it will also be difficult to build up an entire company. Heinemann describes it as follows: “It's like a partnership. The founders spend more time together than with their life partners. That's why you have to pay attention to how they treat each other.

Are there two alpha animals that will interfere with each other? Is criticism taken seriously? ”In order to find out these things, people talk, talk and talk above all else. "If we then notice that only one person is speaking at a time, that's a bad sign, for example," says Hanemann. He then quickly asks himself why he brought the others with him in the first place?

During these conversations, it is also checked whether the founding team already has the most important competencies. A mixture of different talents is ideal: at least one mastermind, enough tech competence and a talent for sales. “After all, most of the time it's all about selling. To investors, to customers, to partners, ”says Nagel. “In the end, it's often a feeling because it's about people,” says Hanemann.

Speaking of selling and feeling. Why are you now a VC instead of founding a company yourself? It is not purely interested in money, the probability of earning a lot of money would be significantly greater as a hedge fund manager or private equity manager, says Heinemann, who describes himself as “already relatively old” at 41: “It's more the kicks when you help build a young company, ”he says.

Like at Zalando back when he was still working for Rocket Internet and was instrumental in making the online retailer big. "To see how it had 10 to 15 employees, and then at some point the thing goes public." That is a good feeling. He therefore sees himself more as a kind of gardener, says Heinemann, while he is still standing at the airport in Frankfurt. Then he has to go. The next money does not like to be long in coming.