After announcing a whopping 300M$ D-round at a 2.7 Bln USD valuation N26 has clearly marked its territory as very significant player not only in the FinTech but the Financial Services industry at large. 2018 was very succesful for the newcomers and proved that the industry is undergoing severe changes. More severe than most of the traditional bankers dare to admit.
When a funding round comes to a close and is announced many tend to underestimate the magnitude of work and pressure which is involved to successfully get to this point.
Everybody who has founded a company knows that you can start small and try to bootstrap. While this is a sound approach and keeps you sharp at your financials the honest truth is that your business is not likely to grow into a multimillion dollar business in a short period of time.
Ideas themselves are not worth a dime. It’s all about execution. And what helps execution next to a capable team is to have a sufficient capital buffer to rely on. If you don´t have that, instead of concentrating of kicking out an excellent product to your customers you have to worry at all times how to pay the electricity bill, let alone the salaries of your fellow workers.
Starting and growing a company without sufficient funding is likely to end you up in a fail position before you even hit the market big time. Indubitably, great ideas have been dried up in the execution phase because companies simply ran out of cash. And this is where i think venture capital has its main advantages over public subsidies or assistance. Because venture capital focuses on taking risks rather than avoiding them. Companies with venture funding are likely to concentrate more on the execution than on sugarcoating the idea and setup in a lengthy business plan. In order to bring an idea to the market the most important thing you need is the flexibility to agilely adopt your product from the original assumptions. There are market and customer changes for no good obvious reasons and entrepreneurs must be capable to wiggle and pivot the product until it is exactly what the customers expect and not what the entrepreneur originally thought it would be.
I was privileged to witness many companies in seed stage and later with already hundreds of employees, thousands of customers and a great product market fit. With a staggering certainty after all kinds of capital rounds business assumptions had to be adjusted right after the rounds. This is a very interesting phenomenon which creates discussions with the investors.Why and what is it then? To understand it we have to dig deeper into the mechanics of a venture round. Whilst everybody in the VC business is very smart (or they think they are) and throw around cool VC sounding terms few really understand what happens to a company in the search for money. That might be to do with too little VC chaps having been on the other side of the table and therefore only see their particular situation. It always helps to if not fully understand but to at least know what the respective other side is going through.
In an investment round you undergo a number of stages. First, you realise that in some point in the future you will be needing cash to either keep the lights on or to fuel further growth. Costs always come earlier and immediately, revenues usually take their time to flow in and to cover the cost base. That first stage is one of the most important. You have to accept that you will take somebody onboard and give stakes in exchange for the needed cash. And the positions of both parties the entrepreneur and the VC are obviously in stark opposition. One wants a pile of cash for almost no percentage the other one a large share with as little cash as possible.
The timing of this first stage is key. With money you can handle many business problems. What you can´t buy is time. Everything takes longer. Always. So be prepared to start the search when you still have time and many options. Options decrease as you reach the end of your runway. And this is where all the trouble starts. Looking for funding is a C-level task. But so is to manage the company and to make sure that the products are being developed, the sales is on fire and the employees happy and devoted. Not an easy stretch I might add, as the latter is already consuming more than the available resources. The search for funding is basically coming on top of that.
What is it then that takes time and energy in an investment round? You have to find the contacts, prepare a compelling story to tell and to underly it with some level of documentation, plans and a vision. Those investor talks consume copious amounts of time, often to no apparent avail.And not to forget the psychology behind that. Going in and out of talks with a good feeling which then gets torn apart after two or three weeks can be mind and soul-wrecking. And there is the team which should not feel the pressure which inevitably is building up on the entrepreneur and C-Level. Even for the most emotional and charismatic entrepreneur it becomes impossible to keep the team fully motivated if they just pass bad news down. The grapevine amongst the team can get such a dynamic which is hard to contain. And all that is not being seen by the VC you are talking to.
If you manage to get some investors interested the next challenges appear. More on this tomorrow.
Marko Wenthin, 45, married, one daughter, lives in the outskirts of Berlin
Marko started his career with an apprenticeship in Deutsche Bank. There he spent 16 years in many diferent positions in retail, corporate and investment banking. Out of his 16 years he spent 10 abroad, in Argentina and in Poland. In Poland he became youngest Board member of a bank in Poland at the age of 30 and acted as COO overseeing IT, operations, back and middleoffices. In his mid 30s he changed the corporate career for entrepreneurship. He founded a couple of SaaS businesses and even a helicopter airline which due to the financial crisis of 2008 had to be shelved briefly before starting operations. He helped Asseco, one of the largest IT software companies in Poland to expand in Western Europe and acted as non exec Board member in a couple of the acquired companies. In 2009 he created Sofort Bank, sister company of SofortÜberweisung, which later on was sold to Klarna. Sofort Bank became Deutsche Handelsbank. In order to bring banking to the next level he co-founded solarisBank and defined Banking as a platform in the real world. He is a regular speaker at FinTech events.