How do you find the start-ups that wind up in your portfolio? By what criteria do you choose them and how long does the decision process last?
Acton is a growth investor targeting companies with a proven revenue-generating business model. We often know companies and their respective founding teams for years before we actually invest. A company might have a convincing business model and a great founding team but still miss proof of concept. In this case we ask them to keep us posted. Should the company develop according to plan and match our investment criteria later on, an investment decision can often be made quickly. A typical investment process takes four to eight weeks. Our key criteria for an investment are a strong entrepreneurial team, a unique value proposition, the potential for market leadership coupled with a functioning, scalable business model, and strong entry barriers.
Venture capital is a relationship business. Potential companies are often introduced to us by our network, in many cases early stage investors that have already invested in previous financing rounds. In addition to that, we frequently meet founders at global industry events or when travelling to start-up hotspots like Berlin or Stockholm. Of course we also evaluate cold pitches, however, an introduction via personal network always makes a stronger case. We evaluate hundreds of companies per year, but ultimately only invest in a handful. The selection process is very rigorous.
What is more important – the idea or the team?
A capable team is the foundation of a successful company. There is a saying “Better invest into a good team with a bad idea than in a bad team with a good idea.” My investment decisions are based on a strong belief in both team and idea. It’s hard to compromise on one of these cornerstones. We believe in entrepreneurial founder teams who combine generalist skills and industry expertise. The ideal founder is driven to build a great company and possesses a deep understanding of clients and product as well as operational experience and strategic foresight. At the same time we look for highly scalable internet business models with a clear value proposition for the customer, thus solving a real problem with a tech-enabled approach.
You meet so many young entrepreneurs, hear about their hopes and dreams – is it difficult to hand them a rejection? Has it ever happened that you follow an initial ‘no’ with a ‘yes’?
One of the most inspiring parts of being a VC is the opportunity to meet enthusiastic entrepreneurs. I have great respect for founders thus always try to be open and transparent in the communication, even when declining an investment proposal. I always try to explain the rationale and main reasons for not moving forward, so that the entrepreneur gets honest feedback and may draw his own conclusions. There are many different factors that need to come together in order to decide positively on an investment, so declining is just part of the business. And yes, we had cases where an initial “No” turned into an investment at a later stage.
You’ve been through a lot of pitches and presentations and your portfolio contains start-ups from many countries. What cultural differences have you encountered hearing pitches?
It is always difficult to generalise, but of course there are differences across countries. German pitches tend to be longer covering all relevant aspects of the business in great detail supported by a lot of facts and numbers. US pitches tend to be much shorter focusing more on the overall story and the “big picture”. Interestingly, Scandinavian pitches are actually often a good mix of both – a clear story underpinned with the relevant numbers.
When a start-up makes it into the Acton portfolio, it receives advice, contacts, etc. in addition to financial support. What do you expect from the founders in return?
A good investor always provides more than funding. We see ourselves as an active sparring partner in all relevant business issues, spanning from strategic guidance all the way to operational questions such as “how to implement a loyalty system”. In return, we expect the founders to be transparent and open-minded for discussions. This requires the courage to be honest and upfront about difficulties. You need something or support? Ask for it and tell us about the hard things as well! In fact we expect that things don’t go right all the time. A trusted relationship is key for jointly mastering challenges ahead. We expect our founders to excel in building and scaling their company. It’s crucial that they manage to find their role within the company and grow with it.
Growth. Driven by Reason’ is your motto. Can you elaborate on that?
Acton is not a momentum investor. It is at the core of our investment philosophy to invest in companies that succeed in demonstrating a strong and sustainable business model early on. Gaining a deep understanding of customer needs, value proposition, value chain, and monetisation strategy of a company allows us to sync our expectations with the founders’ expectations. Extensive due diligence sets the stage for an active board membership and opens up opportunity to be a good sparring partner for company and CEO. Ultimately we don’t believe in growth by all means. That’s why we invest in companies that not only scale quickly, but over time also achieve sustainable profitability. We are most interested in companies that are able to grow at a good pace and have the potential to become profitable in the mid-to longterm to capture a leading market position.
Expectations and expectation management are a part of your daily work. What role do you most often take: the realist that brings the entrepreneur down to earth or the motivator who pushes a vision?
This depends very much on the founder’s personality and also the current stage a company is in. I see myself as a sparring partner and coach, this
entails functioning both as a motivator as well as a grounding force. Regular board meetings, a wellstructured KPI-reporting as well as ad-hoc phone calls and workshops ground the dialogue between start-up and investor.
You yourself have a consulting background at McKinsey & Co. In your opinion, how will the consulting market develop in the next 5 years? What business models can you imagine or would you like to see in the consulting market?
Manging expectations is crucial when it comes to navigating the choppy waters of a start-up business. It sounds cliché, but the key for a solid relationship between start-up and investor is communication. Both sides have to know how to organise and direct conversations around things getting done. Technology is in the process of disrupting all industries, even traditional industries like auto-motive or finance undergo dramatic changes. I think that the increasing pace in all businesses created by this radical technological change will require much more flexible structures. There will be an increased need for precisely defined, shorter projects staed with ad-hoc teams that develop recommendations that may be implemented quickly. Cross-border topics will become more important and providing deep functional expertise will be key for success. Increasingly, smaller companies need to touch into external expertise in order to remain competitive in a global environment. This opens up huge opportunities for smaller, specialised consultancies that may operate much more cost e£ciently as they do not need to charge back large overhead costs to their clients. And of course great for platforms like COMATCH.
Where do you see COMATCH in five years?
I have a big vision for COMATCH. Five years from now COMATCH will be a leading European consulting platform, placing independent management consultants and industry experts, providing services for consultants and enabling them to build their individual consulting career path under the COMATCH roof. The COMATCH brand will stand for quality and expertise as well as a strong value system.