Simon Schmincke

This transcript was generated automatically (YouTube auto-captions) and then edited for readability: names and obvious mis-hearings corrected, filler words removed, speaker labels added where the speaker is clear. Passages that could not be understood are marked [unclear]; short omitted passages are marked [...]. Timestamps are approximate. The recording is the authoritative version.

Julius Ambrosius 00:00:00

Yeah. Hello and welcome to another episode of Campus To Capital. Today, Konstantin, myself are joined by a very special guest, Simon Schmincke, a general partner at Creandum, one of Europe's leading VC firms. Yeah. Hello, Simon.

Simon Schmincke

Good to meet you guys. Super honored to be part of your podcast.

Konstantin Girst

Yeah. Hi, Simon. Very nice to have you on. And to jump right into it, when I looked at your early career stations, I saw that you, before now being an entrepreneurship and now venture capital, that you had early internship stations at BBDO and the digital media marketing department of BMW. So I was wondering what kind of impact does that experience in advertising and branding have on VC and how you approach certain tasks in VC today?

Simon Schmincke

Hey, that's a fantastic start to the podcast. Really like the question. Look, ultimately what we do as VCs is we sell money, right? Money is a commodity. There are fantastic other funds out there and the best funds look at the best deals. Any deal that Creandum does is competitive and part of selling money is building a brand around you. And I've always been interested in brand building and marketing. I started studying marketing initially in my bachelor's degree and

00:01:30

to this day it's something that I'm super interested in. I'm responsible for the website and the look and feel of the firm because ultimately a venture capital fund is a small startup as well, right? We're only 35 people and we don't have someone for everything in the firm. So yeah, also as a general partner, you need to make your hands dirty and make sure that everything works.

Host

Yeah, good to know. And I mean to kind of expand a bit more on this career topic, I mean if there would be anything else outside of venture capital and entrepreneurship, is there something that interests you or in a different universe what you could see yourself doing?

Simon Schmincke

And the reason why I switched from being an entrepreneur, I started a company called HelloFresh in New York City as a CEO, but ultimately decided to move over on the investment side, is I like that I have the chance to dive into new topics, new areas, new markets on a regular basis. I like knowing nothing about something and then very quickly having to dive in. So any type of job or role or place where I'm basically forced to reinvent myself, forced to relearn what's true right now is something that I'm interested in. I still love building products. I worked for a ton of agencies to build digital products to finance my life as a student. And to this day I love building products here at

00:03:00

Creandum. I'm constantly tinkering around with... Yeah. Right now I'm building a new platform in the background to manage all the angels that we work with, a login system, a platform to submit deals. So I'm constantly trying to build and create stuff even while being an investor. So most likely the answer to your job would be something around building products in various industries, if that job exists. If I could find it.

Host

Very interesting. And by the way, I really like the website.

Simon Schmincke

Appreciate it. Appreciate it.

Host

Yeah. No, no. When we looked everything up, it was like a real wow effect with all the dynamic pictures and so on. Yeah, going back a bit to the early start of your career. You grew up in the late '90s and early 2000s, I reckon, where the internet was rapidly evolving, right? How did this environment influence your entrepreneurial mindset and curiosity for building things?

Simon Schmincke

Thanks for reminding me how old I am. Really appreciate it. No. I was lucky enough to grow up in a place where my mother was one of the early internet pioneers in Germany and in the late '90s already was working on the internet and that put me in touch with people who built stuff back in the time, completely different than using Lovable, one of Creandum's investments today, where you with a natural language prompt and the

00:04:30

output is a very complex web application. Back then you had to build everything from scratch. Yeah. And this is where I learned the ropes and tricks which then later on, as mentioned earlier, helped me get freelance jobs in agencies and then started building stuff myself and selling it to the fathers of my colleagues in high school. This is how I earned my first money and this shaped my love for technology, for building products, and to this day it's the part that I enjoy most, discussing with entrepreneurs how their product makes the world 10x better, how it solves the problem in a significantly better, cheaper, faster way than whatever is possible today. It's the part of the job that I enjoy the most.

And so yeah, it's fantastic I think to know how software is being built and how it's being shipped and how much work it is and how much work it is not. So if a CTO tells me it's going to take half a year to build, I'm the one in the board that can easier judge if it's really half a year or if we should be able to see something maybe in a month or two. That helps in my job and I think it helps me become a better investor and sparring partner to the entrepreneur. So I can only welcome everyone to look into building digital products themselves early on.

Host

Yeah, I mean with that being said, that was actually one of my follow-up questions. [...]

00:06:00

Yeah. [...] I didn't enjoy the task that much. [...] So I got to say I'm a huge fan of the product. I think it's absolutely mind-blowing.

Simon Schmincke

For sure. It is mind-blowing. It's funny, the call before this one here was actually with one of the team members at Lovable and we were discussing a bug that I discovered over the last two days. I'm using Lovable right now literally 8, 10, 12 hours every day on the weekend and a couple of hours every day in between calls. It's a fascinating new world out there. It's fascinating.

Host

Yeah. So beyond a great product, execution is also often what separates success from failure, right? So how do you assess whether a founding team has the ability to not only develop an idea but also to scale it into a category defining company?

Simon Schmincke

Yeah. It's funny that you mentioned this. My first job after university was working for Oliver Samwer at Rocket Internet and the mantra back then was: the idea is nothing, the execution is everything. So I am a strong believer that you can have the greatest idea, but it doesn't help you if you don't put the work in and put the grit

00:07:30

in. And ultimately, the team is going to win who wants it the most. And that often comes with just putting in a ton of work. It's very hard to evaluate founders up front, whether they can win something in the long run. Any of the big companies that Creandum has invested in, Spotify, Klarna, iZettle, Trade Republic, these are all businesses that required a horrendous amount of work and a tremendous amount of grit and it took quite some time for them to get to where they are today.

One of the most important things that I'm trying to figure out when I'm meeting a new entrepreneur is their willingness to learn. And that's only possible if they're open about the stuff that they are not good at. So I really appreciate if entrepreneurs are very open with what they don't know yet, what they maybe have a hypothesis around, or even going further, what they are not good at, what they may be either working on to become better at or where they know that they need help on their side. Maybe they've already hired someone who's more data-driven, more product centric, more marketing or sales-heavy because they're strong technically. Quite dangerous when you meet entrepreneurs who believe they need to show to us as investors that they're the perfect individual. No one is perfect. No one knows everything. No one is capable of everything. So, it starts with admitting to that and being open about

00:09:00

your vulnerabilities or your lack of certain skills. And then if I listen in and hear that they talk about how they want to make up for that, either by becoming better themselves or by learning new stuff or bringing on people who can contribute, that's a base requirement for us, which then shows that they might be able to execute in the long run. Because if you're blind about the stuff that you're not good at, it's very hard to become successful in the long run.

Host

So I mean based off of what you just said, I assume you would agree that there's no official playbook to sort of predetermine the success of a startup, but I guess that there are certainly certain aspects that you need to see in someone in order to believe in them. And maybe going back on that topic of digitalization, I mean we are in a data-driven economy today and how do you sort of balance data-driven decision making versus your own gut feeling about someone or their idea for investment decisions?

Simon Schmincke

Yeah. So early stage investing is both a science and an art. The science part becomes more sciency and more important the later in their life a company is. The more data there is, the more numbers to crack, product usage, KPIs to analyze, the more financial data to look at. And in the Series A nowadays companies often have

00:10:30

a couple of million of euros of revenue. There's often extensive data sets which you do need to look at, do need to crack, understand churn, understand all these type of things. We have fantastic individuals in the team that are even much better than me in that part. We always work in teams. And then there comes the art part of this. And you talked about gut feeling. And the reality is the numbers can be as good as they are. If your gut feeling isn't there with the team, with the founder, with the industry, most likely you shouldn't do the deal. And that takes some money and some wasted money to realize that you should listen to your gut feeling even if the numbers check out.

And now I'm in year, I don't know, 12, 13, 14 of my investment career. I have the grit and I have the balls to say no to a deal that looks good financially, metrics, growth, whatever. But if I'm not feeling it, I'm saying no. And that takes some strength to go to your team and say, "I found this deal. We spent two weeks on it. All-nighters, the data looks amazing, but I'm not feeling the deal." Yeah. You need a certain stamina to pass on something that seems to be doing well because you're not feeling it. The reality is I pass on a ton of fantastic deals which in hindsight

00:12:01

or fantastic founders which in hindsight were wrong. I have yet to find a deal that I passed on where my gut feeling was off that turned out to be a great deal. And so I pass on other reasons and these founders prove me wrong and build fantastic companies. But my gut feeling nowadays is pretty good.

Host

I mean I'm happy to hear that and I think that's a very interesting insight, that the gut feeling and the personal grit kind of take priority above numbers. But yeah, as you also just briefly touched upon, I mean on the other side of the sword, this access to data, I mean also allows you to kind of explore afterwards more precisely if maybe you should have done something that you passed on in the first place. And maybe if it hasn't been through your gut feeling, is there still maybe an opportunity or a deal that you missed out on which keeps you up at night?

Simon Schmincke

I passed on many fantastic deals. I passed on the sender [unclear] team. David is an amazing individual, friend of the firm now. He still laughs about me that I passed on him I think twice. I passed on deal [unclear]. I passed on Contentful. I passed on Monzo. I passed on Mambu early on. There's many fantastic companies which I missed and that's unfortunate. It's unfortunate for our investors, our LPs. It's unfortunate for us. I would have maybe

00:13:31

liked to work with those individuals, but you can't always be right. And I'd rather be able to make that decision and to come to conclusion myself than to miss them. It's even worse if you're not in the room, if you're not part of the mix of evaluating if a deal fits into the Creandum strategy or not. That's what we're even more upset about when we miss deals, because the founders didn't consider us as being first choice to speak to. That's more what we're trying to figure out how we can get better at.

But we will always make the wrong decision. And obviously in hindsight that's then hurtful. But we also make a ton of right decisions where we didn't invest and it was a good idea. So it comes with the nature of the industry and the job that we will eventually pass on fantastic individuals that we misjudge, that then deliver what they had promised or more, and we cherish them. We celebrate them. We're not sorry for that or upset. We love to meet great people who prove us wrong and every now and then we make a right decision and can maybe participate.

Host

You win some or you lose some. Right.

Simon Schmincke

Exactly.

Host

And I believe there are also sometimes cases where it's the other way around, right? Where you say, "Okay, this is an amazing idea, but I mean the numbers, they just don't fit." How do you tackle that?

Simon Schmincke 00:15:03

Yeah, just to clarify, in many of the deals that we do, there are no numbers. So that being said, right, Creandum, we run a half a billion euro fund, still do pre-seed deals and sometimes seed deals where there is no number. There's a product to play around with, there's a vision, there's maybe a couple of first hires and there's always, when we invest, the visionary founder that is telling a convincing story that he or she is going to change the world. And that's then more the art part of investing, less the science part. But Creandum does around 30%, 25 to 30% pre-seed deals. And I can tell you there's no data. There's a story, a vision, and always a great founder or founding team. Yeah, that's reality.

Host

I mean with this opportunity to pick your brain I have to ask here, because when there are no numbers, how do you sort of go about reading in between the lines when there is a founder who's trying to sell you a dream or a perspective?

Simon Schmincke

No. So there is no original numbers. No original data, meaning the company can't provide revenues or customer retention numbers or product usage KPIs. But we do then ourselves create a ton of data. We do expert calls. We speak with potential customers. We speak with people who could be buyers of the company eventually. So me and my team, or my team and I, we then do

00:16:33

spend a ton of time in the background to create a data set where we, right or wrong, believe that we understand the opportunity at least better, right? Where could this lead? What are people willing to pay for this? Obviously in a stage of a company where the product is often only partially defined and maybe not yet going up market or mid-market when they start at the bottom, or vice versa. But for any deal that we do, we're trying to better understand the opportunity of the problem, of the solution that the entrepreneur is pursuing. It's just that the entrepreneur often doesn't come with data right in the beginning.

Host

So there's no fixed way to do a due diligence. It kind of depends on the situation.

Simon Schmincke

No. [...] I think it's an important one. You should definitely stick with that.

Host

I mean, yeah. Okay. Talking a bit more about the sort of macro perspective of the whole VC industry. As we already mentioned, Creandum is one of the leading VCs in the European system. But traditionally the US venture ecosystem has been larger, more liquid and also more aggressive in its risk appetite than Europe, right? So what are the biggest structural differences you see between the two markets

00:18:03

and how do these impact the way startups grow?

Simon Schmincke

Well, that's a question where we can have our own podcast about what are the differences, etc. So, you're right in many ways by asking this question and in many ways not. Creandum doesn't try to be an average European venture capital fund, but trying to be one that takes a little bit more risk and is a little bit more aggressive and raises a little bit better money than the average European VC. So we're not comparing ourselves to the average European VC, but to the best VCs in the world. That's who we look up for. So this is who we learned from and this is who we benchmark ourselves with.

But that being said, there's tons of differences. First of all, it starts with venture capital dollars per capita. So there's simply more money in venture capital funds in the US. It's easier to raise money in the US, both from an availability of money, but also from a cultural risk-taking perspective. My wife happens to be American, so we do spend also quite some time in the US privately. And yeah, it's completely normal that you have a side business, a side hustle on the side next to your regular job. You're trying yourself out entrepreneurially. People are willing to take risk and if something doesn't work out, it's a completely different culture when it comes to how the world reacts to a failure, right? You often get applauded for trying it out, for trying to build something for yourself and your family. While in Europe we still, and at least here in Germany, we still have this

00:19:33

mantra: when things don't work out, people look at you like a failure. And this cultural difference is the biggest difference, which then again has an impact on the liquidity side. It's next to impossible to get European corporates to pick up an early stage product or team and say, let's implement this into Deutsche Bank. Let's have this piece of software work at Volkswagen. Let's buy these robots, this robotic company, into IKEA. It is so hard for entrepreneurs to eventually join a European corporate, when in the US, and this again to the risk-taking culture, we feel that corporates and the people that work in corporates in the US are much more willing to take on smaller early stage teams to potentially improve their own core offering. And ultimately that creates the liquidity for the ecosystem, which is good for us, but I fundamentally believe it's good for the economy if the big slow whales out there start buying hungry innovative teams and the solutions that they've built.

This to me is the most frustrating difference when it comes to the difference. It is the fact that people aren't willing to take a risk, also to onboard a new technology, a new product.

00:21:03

Some of them won't work out, but others might become significant revenue drivers for the incumbents out there. It's very rare here in Europe that we see that. And you can feel from my passion, this is really frustrating.

Host

Yeah. Is this also caused by this sort of regulatory fragmentation in Europe?

Simon Schmincke

Yes and no. If the corporates want to buy, let's change the rules if the rules are stopping them from buying. That's what I think. The rules are there to make sure the world runs happily and freely and fairly. But if corporates want to buy young teams and incorporate their products into their offering, no one should stop them from doing that, within certain limitations, within certain boundaries. But regulation is something that should make the world better, not worse. And if we have set up regulation to make the world worse, let's change the regulation. I'm not saying abandon the regulation, but no, I don't think regulation is the reason why corporates aren't buying. It's because they're afraid.

Host

Okay. So at Creandum you also have fintechs in your portfolio. And European fintechs have historically struggled with large scale IPOs compared to the US counterparts. So what does need to change in the European capital markets to create better exit opportunities? I know this

00:22:34

question, yeah, is quite interesting because I just read that Klarna's IPO is about to take place, right?

Simon Schmincke

Yeah. Yeah. Klarna is one of our portfolio companies and it is a fintech out of Europe that is IPOing. But guess what? They're not IPOing in Europe. And the reason is Sebastian is a really, really smart guy and he realized that there is just so much more interest by American buyers into equities than European buyers. And for American buyers to be really interested, the stock still needs to be listed in the US. That again is more of a cultural thing than anything else. Partially tax-wise, but it's mostly a cultural thing. So yeah, Sebastian built a US business and is now able to list Klarna in the US and it's another missed opportunity for the European capital markets to celebrate a winner of their own.

And that is because in Europe the big stock exchanges all believe they should be independent, and I am a strong believer that the European stock exchanges should join forces under one roof and build a competing capital market, and trying to have three or four irrelevant, too small ones. Yeah. And unless that doesn't change and until that's not over, the companies, the smart ones and the ones that can, you have to also be able to, will always list in the US. But let's

00:24:04

not fool ourselves. So we have to do our own homeworks before we can have the next Klarna maybe list in, I don't really care, Paris, Frankfurt, Amsterdam. I don't care, as long as in Europe.

Host

Yeah, fair enough. I mean, I saw a couple of months ago that the yearly volume at the New York Stock Exchange is like four times the size of the one in London, which is the largest one in Europe.

Simon Schmincke

Absolutely. Yeah.

Host

Which is incredible. So maybe the joining forces idea is not that bad after all. But now when we are talking about your own portfolio, and as we talked about regulations and boundaries earlier, I would like to know about the boundaries within Creandum, and my question here would be: would you guys invest into two direct competitors or is this something where you would draw the line?

Simon Schmincke

It's an interesting question. So what are limitations of venture capital funds in general? The first limitations are the hard ones coded in the LPA, the limited partner agreement, which is the contract we have with the institutions in our case, or sometimes individuals, and with other funds that invest in a fund. It's a long document where you write down what is the fund allowed to invest in. And for most funds in Europe, there are limitations around hard liquor, weapons and porn. Many have gambling as well as a fourth category, and that's similar at Creandum. We have some limitations

00:25:34

to what we're not allowed to touch. The second limitation factor is what we as the six owners of the fund don't like to invest in. Let's take cruise ships for example. It's a big business: cruise ships, booking platforms, management, hiring. You can imagine a couple of big businesses built around cruise ships. We really don't like cruise ships. They pollute the ocean. So, we would be allowed to invest in cruise ship businesses, but we don't want to do that. And there are probably a couple of other categories where we as the partners or the owners of the firm simply want to look in the eyes of our kids, we all have kids, and say, "Nah, that's something we don't want to do."

Maybe another one that's easy to understand is consumer credit for low credit score groups of society. So it's a business, loan sharks make tons of money, and there's tons of startups that make good money in that category of the financial market. We decided not to play in that market. We could, but we don't want to. So that's that limitation. And then, making sure that I answered your question properly, can you quickly repeat the last part of it again?

Host

Oh yeah. I was just interested to know if you guys would invest into two direct competitors within an industry.

Simon Schmincke

Yeah. So that's not a limitation again per LPA, because what is a competitor is very hard to say. There are few companies that do exactly the

00:27:04

same. But obviously when you invest in a company and a founder and you build a relationship, you become friends. You speak every day, maybe every second day, and if you then look someone in the eye and say, "By the way, I'm rooting for your competitor." That's something that's just emotionally very hard to swallow for anyone involved. So, no, we wouldn't.

But then what does happen is you invest in two companies and they both expand their product roadmap. They both expand their offering and they eventually become competitive. And that does happen. I run the fintech vertical here at the firm and I can tell you that does happen quite a bit. You start a bank account and a corporate credit card. Eventually the bank account offers a corporate credit card and guess what? The corporate credit card offers a bank account. And now all of a sudden you have a competing situation. And there are founders who struggle more with that. And there are others who are very bold and say, I don't care who you finance. I'm going to screw anyone around anyway. I'm the best in this market. So who cares about competition. And both positions are understandable and I don't say one is better or more right. But especially in fintech, yes, we have companies that became competitive because they decided to expand their product roadmap. And as a venture capitalist I think it's the worst if you think you should influence the product roadmap. It's the founders who should do that. That's just reality, how it is. But for sure,

00:28:35

once we are invested in a corporate credit company, we wouldn't invest in another corporate credit company from the get-go.

Host

Okay. And on that note, as you said at the start of our conversation, you guys are essentially selling money. And maybe right after that, what is the second most important thing that you would say optimizes for? Is that maybe impact on society or creating legacy for the company?

Simon Schmincke

What do you mean by optimize for?

Host

Well, there's certain objectives that you're trying to get out of improving the companies that you support and invest in.

Simon Schmincke

Okay. So we invest in the companies because we want to deliver the best returns to our LPs. That's goal number one, number two, number three, number four, and there are no other goals on that list. So, we want to become or be, and nowadays remain, the most successful fund commercially.

Now when it comes to what we offer to the companies, maybe this is how I should interpret the question, other than money: the reality is the best founders in our portfolio, they want very little from us. They want the money. They want someone on the board who is integer, well-prepared and can from time to time ask the right question which makes them pause in their very active life and maybe reconsider a decision they otherwise would

00:30:05

have rushed into. But I personally, and again I've run big companies before myself with investors, don't believe that if you're not in the trenches every day yourself, that someone from the outside can meaningfully impact your business and the success. We do tons of things nevertheless. I interview pretty much every C-level that joins my portfolio companies. We have strategic reviews. We're planning. We have workshops on which customer segments to go to. But deep down in myself, I wonder if the best entrepreneurs really need my help to build their companies.

And if you look at time spent between our very, very successful companies, I'm talking Trade Republic, Christian Hecker, I'm talking Markus Villig from Bolt, Sebastian Siemiatkowski from Klarna, Daniel from Spotify. These are not the companies where we spend the most time with. And that makes you then wonder what does it mean for the companies where you do spend the most time with. I'm not saying that they're less good, but I'm yet to meet a VC who can claim that he or she materially influenced the success of the portfolio company. I think sometimes we're right and we can help, and especially when it comes to fundraising, corporate governance, hiring, team composition, I think it's super helpful to have someone on your side that does that exclusively. But on anything operational,

00:31:36

I'm getting nervous when I hear that a board member wants to review the marketing plan of one of my portfolio companies. Please don't.

Host

I think that's a very, very interesting answer. Thank you for that transparency as well. So prior to this podcast I also listened to your podcast with Finance Forward. I think by the end of last year you did one. And there you mentioned that you're currently doing more deals than ever. What are the key drivers behind this increase in investment activity, particularly in these times of economic uncertainty?

Simon Schmincke

Yeah. And when I say more than ever, that sounds like we're 2xing or 3xing or 4xing the number of deals we do. That's not the case. Creandum has nine check writers in the team, so individuals who can lead a round, and every one of us does one to two, one to three deals a year roughly. And so this is then the spectrum when we talk about more than ever before on a two or three year gliding average. We're doing the same that we've done for 22 years, which is quite boring. Same amount of deals every year.

But yes, especially last year in Q3, Q4, and continue in Q1. Now we see just an immense amount of companies that create products that have an impact faster and bigger than ever before. We have companies in

00:33:06

the portfolio, sub 20 people, they make 30 million revenue. We have a company that's sub 25 people, they make 40 million revenue. These are ratios and numbers we have never seen before, prior to maybe a year or two from here. And so on a daily basis, we meet teams that are able to build products that get so rapidly adopted by the market or by their customers, be it in the consumer or in the B2B space, that it's simply a very exciting time for us as investors to see how rapidly the world is changing.

And yeah, I mean, I'm sure you guys are using 10 AI tools every day as well. I just think it's a fascinating time to live in and to think about: if the product is this good at the beginning of '25, where were we in '27? Imagine plus two years on this one-year product development cycle, so tripling what the team has put into at this point. The world is changing right now, I feel, at an amazing and rapid pace. And yeah, then it's going to be interesting to see how society changes and what impact that has. Because again, I don't want to be the doomy gloomy European that thinks, where's the world heading to? But the reality is every day I meet two teams that make 10% of their industry obsolete in terms of headcount if they're successful. From tax advisors to lawyers

00:34:36

to inspection engineers to security guards, you name any industry, there's an AI out there. If that product succeeds and it can actually deliver what the entrepreneur envisions, 10, 20, 30% of the workforce in that industry is no longer necessary. That is reality. So it's a crazy time to think about universal income. What does it mean? How does society change if all these entrepreneurs are successful?

But coming back to Lovable, right? Anton's vision is this is the last software company on the planet. If you think about this, because you and I can now build a copycat of Personio, a copycat of Workday, a copycat of Salesforce, obviously with limited specs. But let's put it out there: 70% of the use case of most Salesforce users you and I can build in a weekend in Lovable. So if Anton is successful with Lovable, it's a crazy, crazy thought experiment.

Host

For sure. I mean it's definitely, as you said, a hockey stick development curve and it's super interesting where this will go. And on that note, I'm not trying to be mean but just realistic. [...] And their kind of success formula for AI said something like 10% algorithm, 20% AI and 70% people. So, and we were kind of debating that that's just kind of all we got to save ourselves, because if it would be only

00:36:07

50% people, a lot of us wouldn't be able to give this lecture in a couple of years anymore because we simply just wouldn't be working at BCG no more.

Simon Schmincke

Well, the main reason is they couldn't charge the daily rates anymore, because true, they would be double or triple as productive. And reality, I know if you guys played around with OpenAI, with ChatGPT Deep Research, it's fascinating. You throw in a question, it takes two, three, 400 sources, challenges itself, and outputs a research which, yeah, my associates are now on steroids. They're now on superpower. They can now due diligence two or three industries at the same time because they get such an incredible head start into learning a new industry or diving into a new market. Not saying that hallucination and errors aren't real in AI today. They are. And the output you shouldn't take as granted. But you get such a leap forward if you use AI in the right way that, yeah, if I would be a BCG partner I would be worried about my margins as well. Because why am I paying you two, two and a half, three grand for a junior consultant if I know all he does is has a ChatGPT Plus subscription and works on two projects simultaneously. That's reality.

Host

Yeah. So coming back to this macro perspective on VC. So over the past years the startup funding landscape

00:37:37

has been affected by rising interest rates as well and tougher exit conditions. What macroeconomic factors are currently having the biggest impact on venture capital and startup funding?

Simon Schmincke

So maybe for the listeners out there, why does macro impact venture capital? Ultimately, we're just an asset class for very large institutional investors to put their money in, and we have to compete with our returns for any other asset class out there. That's reality. Our asset class is very illiquid, very long-term, and very hit driven. So it's not a very sexy asset class if you get higher interest at more liquid markets in a more predictable way. And hence when interest rates were rising, the very large capital pools, we're talking the large institutional pension funds, the endowment funds, had other asset classes they could look into, to park there, to put their money in.

And at the same time, with the public market crash at the end of '21 and the slight burst of the tech bubble, all the assets in these venture capital funds that they had parked billions and tens of billions and hundreds of billions in, all of a sudden, if you compared them to public markets, were no longer worth the money that they were in the books of these LPs, and hence they then decided to put more money into other asset classes. This is why we are impacted by

00:39:08

macro. So yes, interest rates, strangely enough, although our asset class is a 10, 12, 15 year outlook, impact it, because LPs decide where to put the money. And what then has happened post '21 is that many LPs have reduced their commitments to venture capital. They have simply dropped managers, no longer invest into them. So the next fund comes around and the LP says, I'm no longer part of your next fund. That's reality. Some funds were shrinking, they were still able to close the fund, and others are going out of business. That's also reality. We had an explosion of venture capital funds between 2018 and '21 and so there's a natural cycle that now there's going to be a couple of fewer venture capital funds in the future. That effect still holds on. That is still part of it.

The interest rates have come down, but the public multiples on tech have not increased to the level that it was at the end of '21. So there's few or less money. At the same time the macro development, political development in the US is a problem to a certain degree. Others are hoping that American corporates can now buy bigger companies again. I mean, you saw Google and Wiz, but there's the famous example of Adobe and Figma that didn't work out. I think that actually was the UK regulator. But there's hope for

00:40:38

that. There's going to be more larger acquisitions. But the main problem is instability. No one knows what's happening, right? Everyone is like, should I invest in the US? Should I not? Instability and uncertainty is always bad for business. You can have bad conditions as long as they're predictable. But if things are unpredictable, that's the worst. And that's the situation we have right now. The companies in every large venture capital fund that are currently preparing for IPO, but who knows what's happening in the fall. Maybe the market is completely gone and you can no longer IPO in the fall. So, do you IPO now? Do you rush it with bad numbers? You have to make a decision. Do I push my IPO out? What do I do? Like, uncertainty is the worst and that's what we have right now.

Host

Do you think that this uncertainty, I mean we see that especially since the inauguration of Trump, do you think that this might be also an advantage for Europe, so that Europe tightens because of that?

Simon Schmincke

I hope so. I hope so, because fundamentally I'm a European and I want us to win as well. I don't know. I don't know, it's the answer. I don't know. The US market is still super attractive for European companies

00:42:08

and I mean you saw Isar Aerospace launch a rocket, and I celebrate this as well. They built the rocket literally 10 kilometers from where I live here, south of Munich. So there's some patriotism. But yeah, I want us as mankind to win, and not now we have the Europeans play, as the Germans play against the French and now the Nordics have their own interests. I don't think the whole development is positive for the world.

Host

But yeah, no, for sure I hope that the geopolitical situation and the sentiment of investors about the market will both improve sooner than later. Hopefully very soon. But yeah, overall I think this has been great. Thank you very much. I think we were able to learn a lot and I think our listeners will be learning a lot from this as well. But one last thing before we let you enjoy the rest of your late Wednesday afternoon. In our recent episode, we talked to a fintech entrepreneur who's backed by Y Combinator and he talked about a study that showed that there is a very high correlation between fast email replies and successful startup founders. And I wanted to ask you as well, is there maybe a specific personality trait that you have discovered in founders?

Simon Schmincke

That I have discovered in founders that makes them very successful? Yes. But I alluded to it in the beginning of our discussion today and that is the

00:43:38

capability to openly talk about things that founders are not good at and not blush or not feel bad about it. It's the ability to show vulnerability about fears they have or things they don't know yet, where they're struggling with right now. Because in life no one can solve the biggest problems of our world alone. But if you don't know, first of all, if you don't know yourself what you're struggling with or what you're not good at, but if you then can't reach out for help, and that starts usually with articulating what your problem is, that's a big problem. So then again, this is I think something that I've learned over the years, to really focus on how do founders talk about the things that they're not good at and how do they try to solve that. This is my number one thing I think that I had to learn over the last years. It's not the founders that pump their chest and say I'm the best at everything. It's those actually who are really good at certain things and are very clear about what they're not good at. That's something that I find tremendously important.

Host

Yeah, I like that. I think that does not only apply to the venture capitalist market, but I think everywhere, people that are self-aware will always be nicer to work with, better to work with than people with big egos, right?

Simon Schmincke

Yeah. Comes with some self-reflection that's required,

00:45:08

right? Because if you yourself don't know what you're struggling with, you can't possibly ask for help or look for help. But yeah, it's important.

Host

Great. Yeah, I think this is a very interesting and valuable closing note for our listeners and ourselves. So again, Simon, thank you so much.

Yeah, thank you, Simon. And to our listeners, make sure to tune in again on the Wednesday, two weeks from now. Check out our socials and give us a rating on the streaming platform that you're listening on.

Simon Schmincke

Fantastic, guys. This was big fun. Really appreciate taking the time to speak with me today.