Love / Hate investments

You all know the spiel about what VCs look for when investing – great teams, product, large markets, defensibility, yada yada. All makes sense. But I think that over time it is quite important that as a VC you develop an extra sense for the type of company that gets your blood flowing; much more ‘personal’ reasons for why you might be passionate about working with a team. We all only have so much time and energy – so passion and conviction is really important.

I had a great conversation with Danny Reimer last week about just that and somehow we ended up talking mostly about the companies we have gotten a lot of slack for. Fred Wilson nailed it with his return and ridicule blog post (it may just be my favourite investing blog post of all time). But ideally you don’t just want to get slack, you also want some people to love the company to death. This makes sense – if you disrupt a space you are going to make some people angry; if you are trying something unusual or hard a lot of people won’t (want to) get it and won’t like it. But on the other side you are probably hitting a nerve with a small community of folks that will give you a lot of love, because you are making life easier for them or you are giving them something they have always wanted.

So we agreed that what we really liked were companies where there is quite a lot of hate and love. Love / Hate investments.

Graphic by Hugh MacLeod @

Graphic by Hugh MacLeod @

Technology angst: it will not be logical for a super artificial intelligence to support humans (at best).

There is an increasing debate around AI and if or how much we should be afraid of it. I am going to take tweets from two relatively smart and popular folks to highlight two aspects of that debate – there is of course much more sophisticated and detailed material out there we should all be reading.


Here’s Elon Musk’s warning:


Neil de Grasse Tyson thinks we should chill a little more (assuming he is talking about AI robots):


Well, I’m in Elon’s camp. And I’ll tell you why.


Especially if you factor out emotions, it does not appear rational or logical for an artificial super intelligence to in any way support humans. Let’s think this through from that super AI’s perspective – and we are talking about an AI that is not somehow restricted to a ‘protect humans’ derivative (so a real, out of our control, AI):

  • humans are ruining the environment – i.e. threatining  the energy supply of the super AI
  • humans are decimating other species – i.e. de-stabilising the ecosystem that produces energy for the AI
  • humans are constantly at war – i.e. we are putting infrastructure at risk the AI may need
  • humans are even at war over things such as who believes in what invisible person in the sky – i.e. we are totally out of control / highly irrational / dangerous
  • humans will try to control and destroy the AI if it becomes to powerful – or even if they are just afraid of it


So what is the logical conclusion a super AI will come to when looking at humans? Maybe this video has the answer:



So, besides bio terrorism (or imagine a super AI capable of bioterrorism), that is a big technology Angst of mine. How we embrace and use AI – and if we manage to get our act together as a species – may just decide whether we go down in history as that biological boot loader or not.

Let’s stop free photo opportunities for politicians at startups.


One thing that has been bugging me more and more recently is politicians getting great photographs / PR stories while touring startup offices. It has become quite the fashion and I can see why. For the politicians.

Here’s what the Berlin startup scene has gotten in return from these politicians so far:_____________ . Let me know if I missed anything.

So I am wondering if we all need to start doing something like this:

  • Every politician is more than welcome to visit our offices and invite press to come along.
  • They can take as many pictures as they like – however they will be handed a kind of ten-point ‘manifesto’ what we – the Berlin startup scene – need them to deliver and this will be clearly communicated to the press.
  • 6-12 months later the press gets an update as to progress on those points / if the politician has helped with anything.

If a politician is not willing to accept that then there is no free photo PR opportunity.  That’s the deal, taking photos at startups is no free lunch anymore.

Oh; and we also need to talk about that ten-point manifesto for Berlin politicians. I’ll write about that next time.

Our syndicate partners mapped out (literally) & the underlying trend

I used a service called CartoDB to map out the geographical distribution and density of the other VC funds we have syndicated with over the last 18-24 months or so. It’s a density map: so darker means we have syndicated with a lot of folks from that place, lighter means just a few or one. The picture that emerges is pretty clear (you can click on the map to go to a better version):

Screen Shot 2014-07-11 at 17.29.22

We have invested with more funds from the US (both East and West Coast) than from any other country. UK (London) is second, then Germany.

So basically this confirms what we are seeing more and more: European entrepreneurs can raise from anywhere, US funds are filling the capital void in Europe and local capital is becoming less relevant.

We are going to do more work on this but I thought this was neat enough to share.

In case you are wondering here is a full list of the folks on that map:


  • 500 Startups
  • Betaworks
  • CAA / Texas Pacific Group
  • DFJ
  • Lerer Ventures
  • Sequoia
  • SV Angel
  • Thrive Capital
  • Union Square Ventures


  • DN Capital
  • DFJ Esprit
  • Index
  • Passion
  • Piton


  • Holtzbrinck
  • Paua Ventures

Other Europe

  • Bright Capital (Russia)
  • Kite Ventures (Russia)
  • Open Ocean (Finland)
  • Red Alpine (Switzerland)

Liquidation preferences, short-term vs long-term greedy


Last week I wrote about that for early stage venture investors downside protection is more a or less a nonsensical concept. An entrepreneur I know was sharp  enough to comment “Great. No more liquidation preferences at Earlybird.” I promised a follow-up blog post on liquidation preferences but while doing research I stumbled upon two blog posts that cover the subject better than I could:

The point is basically that liquidation preferences are less about downside protection and more about preventing lob-sided outcomes, aligning interests to some extent,  allowing for faster investment decisions under information asymmetry (avoiding lengthy due diligence), etc. This is why good VCs don’t care about downside protection but do care about liquidation preferences.

However there is still a ‘wrong’ way to use liquidation preferences (and other protective / minority investor rights) in my book and it has a lot to do with downside-protection or the desire to not lose any money as a VC. Here’s an example:

  • Say a company you led an A round in does not do well. Basically the outcome is a tiny exit that barely covers your liquidation preference i.e. the money you put in as an investor. Or you can secure a new financing but only at detrimental terms to the entrepreneurs due to anti-dilution mechanisms etc.
  • Option 1 is that you step back, think about what would be a reasonable outcome for everyone and try to split the cake in a way that everyone can walk away with their head held high (or at least: “a good compromise leaves everyone unhappy”)
  • Option 2 is that as a lead investor you get so obsessed (I have seen it become quite a sport) with protecting your investment that you squeeze every dime out of everyone else, using your liquidation preferences and minority rights / protective provisions.

Now there will be cases where things get ugly and this is not a carte blanche against using liquidation preferences in scenarios with low outcomes. I am talking about cases where it is being abused.

So in such a case – if you pull option 2, what you will have done as an investor is gotten your money back. What you will also have done is ruined your relationship with the entrepreneur, the angels and potentially other investors.

And what did you get in return? An amount of money that is irrelevant to the fund performance and some serious bad karma in the market with all negative consequences for your ability to work with these folks (and their extended network) going forward. It is short-term greedy and bordering on stupid.

Option 1 is also a greedy. But it’s long-term greedy as it means you are deferring getting money now for the chance to earn a lot more money down the road by being a good & reasonable VC to work with. I intend on being long-term greedy.

Downside protection doesn’t matter

When you are investing large amounts at high valuations there is a case to be made for ‘downside protection’ – i.e. that there is a reasonable scenario an investor will at least not lose any money or even make a small return in the case that the company they are backing is not very successful.

This is not the case for early stage investing. Downside protection really doesn’t matter and when I hear that argument it is a real turn-off. Let me explain:

  • Our current fund is $200m.
  • If we want to stay in business we need to return that 3-4x to our investors. So we need to generate say a total of $800m in proceeds from our investments.
  • If we own 20% on average, it means we need $4bn of total exits across all companies ($800m / 20%).
  • We will probably have 25-30 companies in our portfolio and 20-30% will generate those $4bn; so that means say 6 companies need to generate $4bn of exits – i.e. be worth $667m on average when they exit.
  • That means we will earn on average $133m (20% x $667m) for our investors in a successful exit. An industry rule of thumb is 0.5x-1x the fund back for a successful ‘venture case’ investment – so that fits right in there .

Now our average early stage investment is $2.5m. In this case downside protection means I may not lose $2.5m or maybe I can even get $4m back.

Will our investors care if we return that amount of money when we need to return $800m in total? Absolutely not. And this is why I don’t care either.


The best thing happening to European VC: increased competition.

For way too many years European VCs were not really used to competing.  For those that were around – and had money – it was pretty cozy times. As we all know, that is a very bad thing. You become stale, you become a bad product for entrepreneurs.

This is changing. Since some time last year we got beaten out of a few rounds pretty badly, we’ve beaten folks out of a few rounds recently. In some cases it was the terms that went for / against us – in some cases the entrepreneurs just preferred us / the other fund to work with.

In each case when we lose out it is an important opportunity to ask ourselves why we didn’t get in and what we should be doing better. Is our product good enough?

I have also seen a few VC folks get a bit whingy about this; as if there was some kind of entitlement to get in to any company you want to.

Those days are gone; good riddance.

So what is going to happen is that increased competition is going to make the good funds better and the bad ones disappear. I guess both things are good things for entrepreneurs.


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