Startup Investment

German Investors Need to Take More Risks

hommels
Startup investment veteran Klaus Hommels at a TechCruch event in 2014.
  • Why it matters

    Why it matters

    German companies are too cautious and bound by their non-executive board to take the really big bets on startups that ultimately create technology giants, Mr. Hommels argues.

  • Facts

    Facts

    • Investor Klaus Hommels, 49, is one of Europe’s leading startup investors.
    • He is founder and chief executive of Lakestar with offices in Berlin, Zurich, New York and Hong Kong.
    • Mr. Hommels is also an advisory board member of the Internet foundatoin IEF, founded by fellow entrepreneur Ralph Dommermuth, which tries to influence pro-technology public policy.
  • Audio

    Audio

  • Pdf

Klaus Hommels is keynote speaker at the startup conference Noah, which begins in Berlin this Wednesday.

And while Uber boss Travis Kalanick and Oliver Samwer of Rocket Internet, DAX chief executives like Daimler’s Dieter Zetsche and Peter Terium of RWE are also expected to attend, all eyes will be on Mr Hommels, who raised €135 million for his first investment fund Lakestar I in the year 2013.

In 2015 he launched Lakestar II, a new fund attracting €350 million in capital which put him right up in the first division of European venture capitalists. According to Mr. Hommels, financiers included Alibaba founder Jack Ma, the Hong Kong billionaire Li Ka-Shing and various anonymous family offices and private individuals. Lakestar concentrates on tech companies in Europe and the United States and has had investments in numerous well-known start-ups, including Skype (Microsoft), Spotify, Facebook, Xing and Airbnb.

He spoke with Handelsblatt about Germany’s current obsession with startups and why investors need to show more courage.

 

Mr. Hommels, you invested in Skype, Xing and Spotify and invested in them at an early stage. What is the next big thing?

That’s always the hundred thousand dollar question…

…that’s why we started with it.

When I meet startup entrepreneurs, I just know. Many people think they can predetermine success on the basis of figures and business plans. That is just an attempt to rationalize an idea – it’s not decisive. In Gutenberg’s days only about 10 percent of the population could read. If he had just relied on the market as it was, then book printing would have had limited perspectives. You have to share the entrepreneur’s vision. I know within five minutes if I’m going to invest. Anything else is too complicated.

What convinced you about the music-streaming service Spotify?

The founder, Daniel Ek, spent the early years of his life in a prototype house in Sweden with fast Internet. And because he came from a musical family, he saw the connection between downloading big volumes of data and sharing music. It was one of those moments. Every good startup has such a moment when it becomes clear that an idea is more than just the desire to become rich. It never has anything to do with money – it was the same with me.

What is more important, the business model or the founder?

The founder is everything. Does he have fire in his belly and a credible story? Is he trying to solve a problem? When you become self-employed, the world looks different. And after a week at the latest, all your assumptions documented in nice Excel charts and PowerPoint presentations are redundant. Then it’s all about improvisation. Good teams adapt relatively quickly, less good teams react too slowly.

What characterizes good startup entrepreneurs?

Passion for what they want to do. And usually they have no particular sense of mission. For most of them, the motto is: Roll up your sleeves and get on with it! For me it is important to know: Does the founder delegate contractual negotiations? Or does he know what is in paragraph 10, when I call him at 2 o’clock in the morning? The good ones know.

When you met Lars Hinrichs, the founder of Xing, he had just hit a brick wall with his first startup. What made you so sure that it would work the second time round?

He had this passion. It was impressive the way he just epitomized the whole issue of “networking.” And of course you learn so much more in a phase of disillusionment. When something works out, then often you don’t really know why. Just because startups are currently flavor of the month, many believe it is a romantic undertaking. “I am a startup entrepreneur,” sounds so much better at a party, than “I work in a savings bank.” But startups have nothing to do with romanticism.

But let’s get nostalgic for a moment. What was your first ever investment?

When I was 16, my grandmother gave me 20,000 Deutsche marks and said: “Buy me some stocks. If you make a profit you can keep it. If you make a loss, I’ll cover it.” At the time I was a speedy winger in my soccer club and wore Puma sports shoes. It was just before the Puma stock exchange flotation. I took a big risk and bought only Puma – and earned DM 100,000 in three months. That was my moment – that’s when my passion for investing began.

Did you also miss trends?

Sure, I miss something every day. Uber, for example. We were offered the investment, but I thought it was too expensive. By the time we launched our early fund Lakestar I Uber was already worth $3 billion.

And now the company has an estimated value of more than $60 billion.

And justifiably so. Uber changes industries. The company creates a platform which the automobile industry itself cannot or will not create right now. That’s dangerous, because whoever can reach the end point consumer will be able to control the situation. And the moment we have self-driving cars, a business with 15 percent margins becomes one with 70 percent margins.

Has it become more difficult to find good startups?

No, but the development of startups has become more difficult due to the polarizing of systems. Let’s assume a medium-sized heating company in Wuppertal, near Düsseldorf manages its heating assembly operation with an app and wants to sell to a customer in Cologne – 40 kilometers away as the crow flies (about 25 miles). But this company first of all has to ask Apple in California if its app will be accepted in the app-store. That is absurd.

You mean the power of Apple?

Yes. Apple and Google are both oligopolies. We didn’t do what Russia and China did, i.e. close our markets until our companies were big enough. That led to a situation where the Americans were able to enter the market here relatively quickly, with more money, a bigger home market and completely different marginal costs.

Do you want politicians to do more for startups and the digitization of the economy?

Politicians are the only lever. That’s why I’m getting so involved in the Ralph Dommermuth’s Internet foundation. Up to now, our young industry has not been particularly well organized.

What is the most critical point?

Infrastructure issues interest me above all else. For example, we need €400-€800 million for broadband Internet access and the quick mobile communications standard G5.

I like bubbles - they have a cleansing effect on the market.

We’re not hearing the argument from you that Germany has too little venture capital. Is that no longer a problem?

Sooner or later you have to ask yourself the question: Does going on and on about something actually increase its credibility? There is enough capital for the early-stage financing of startups. It’s not until later on that it becomes a problem. The 20 or 30 Internet firms which are so big and important that we want them in Germany, received on average between $500 million and $800 million venture capital.

Your two funds together don’t have that much money.

Exactly, compared with that I’m a dwarf. But we need investment of that order in companies. If the money only comes from the United States, then you quickly hear things like: “Get your firm registered in Delaware…”

…  a well-known American tax haven …

…  and then the tax revenues of this company are lost irrevocably for Germany and Europe. But in the final analysis, money is necessary but money is not all that is needed.

 

256 Lakestar-01

 

What do you mean by that?

An example: When China discovered taxi services Didi and Kuaidi fighting for market leadership. One of the startups belonged to Tencent, the other to Alibaba. Both permitted their companies to go through $100 million per month. After half a year, they had spent $1.2 billion, but neither company was significantly bigger than the other. So they just merged Didi and Kuaidi and from one day to the next the company had a market share of 95 percent – and the next round of financing brought in $15 billion. It just shows: Yes, the investors initially lost a lot of money, but then certainly got 10 times more money back than they had put into the venture. That is something close to my heart: That we change the way people think.

And the way the German economy thinks?

Exactly. How can a firm like General Motors, which was bankrupt a few years ago, put $500 million into Lyft , a private American transportation network company? In Germany even big, highly profitable companies are cautious with investments involving double-digit millions. We just don’t have the courage!

Why is that?

At the end of the day it’s all down to human behavior. It is difficult to find supporters in German companies for such risky investments, unless the chief executive does it himself. At the end of the day, the supervisory board has to give its blessing – and it often takes a cautious to negative attitude when faced with liability issues.

Why is that different in the United States? Microsoft, the parent company of Google, Alphabet or Facebook are constantly buying startups.

The boss just banged his fist on the table. Mark Zuckerberg said: “Now I’m buying Instagram for $1 billion and WhatsApp for $19 billion.” End of story! And then the supervisory board has no more doubts either. But of course that would be impossible in Germany.

Why?

You only hear reasons why not: The good deals are too risky, too expensive, the wrong time. But there are a few examples of such huge deals being successful in Germany or Europe – thus creating confidence. I still pin my hopes on the automobile industry, which fortunately grabbed the maps service Nokia Here.

But there’s a lot going on. Almost on a weekly basis well-known German companies are investing in startups or setting up incubators.

Yes, the whole issue of digitization took off last year – in “Germany Inc.” and the Mittelstand (the small- and medium-sized businesses known as the backbone of the Germany economy). For a long time, the Internet attracted new companies which were no competition for the old guard. That has changed now – established companies have to join forces with their challengers. The question is always: How aggressive will they be? How much risk will they entertain?

And if the bubble bursts like it did in the first decade after the millennium?

I like bubbles – they have a cleansing effect on the market. And apart from that, private money for infrastructure only becomes available when the prevailing euphoria is great enough. And the infrastructure remains after the bubble has burst. In the 19th century the English invested disproportionately high amounts of capital in railway construction, although there was only a limited financial rationale for this. But it created a platform for the transportation of steel.

If you speak about the Internet and startups in Germany, many people immediately think of Oliver Samwer. But unlike you, Rocket Internet is not looking for passionate startup entrepreneurs, it is copying business models.

Rocket is focusing single-mindedly on what it does best. Oliver Samwer only goes for business models which need financing and implementation. The German Internet industry has a great deal to thank Rocket for – quite apart from the fact that the company is a gigantic training center.

You never founded a startup yourself. Why not?

I couldn’t be a founder, because I can never concentrate on one thing. I enjoy it occasionally when I can roll up my sleeves with a startup and help with my contacts. But then I’m glad to get back to my strategic work.

 

Kirsten Ludowig is deputy editor of Handelsblatt’s companies and markets section, specializing in the trade sector. Miriam Schröder is based in Berlin and covers the city’s startup scene. To contact the authors: ludowig@handelsblatt.com and m.schroeder@handelsblatt.com 

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!