This interview is part of Scaling Enterprise FinTech | The Handbook, which includes proprietary research on ca. 65 Enterprise FinTech scaleups in Europe, Q&As with 16 founders on their journey to scale, as well as insights from 10 leading investors and financial institutions. Whether you are a founder with an idea, an early stage startup looking for inspiration and learnings, or an investor or financial institution looking to understand the difficult but rewarding journey to building a world-class Enterprise FinTech firm – download the Handbook here http://www.fintechforum.de/sef/
Samarth: Hi Marcus, before we get started with the questions, it would be great to share a bit about yourself- both at work and at leisure.
Marcus. Sure. I’m a tech industry guy who became VC 13 years ago, so I think I have a good view on both the operational and the financing side of things. I was one of the first people to work for Amazon here in Europe, then I ran all of AOL’s ecommerce businesses in Germany, and led a large marketplace business, all of their European operations. That marketplace business we sold to Amazon.com in 2008, and that’s when I switch the side of the table to the VC side of things. Since then, I’m a technology investor. Two years ago, I joined signals VC and now run it together with my partner Christian Weniger.
Other than that, I’m a marathon runner, I’m a family man, a father of three, and I live between Munich and Berlin and invest across Europe.
Samarth: Great place to be- I guess you’re covering two of the big hubs, at least within Germany, and it’s also a good location within Europe. Tell us a bit about the story of the fund- how it got set up, what’s the thesis, what do you invest in, and how has it evolved?
Marcus: Sure. signals Venture Capital is a 100 million Euro fund, which is backed by one of Germany’s largest insurance groups- Signal Iduna. We are a corporate VC, but that said, we are a completely financial investor, driven by financial VC metrics. That is reflected in our team- we all have VC backgrounds and it’s a very experienced team. We first and foremost look at investments from the financial perspective, and then- where it makes sense- we try to find some very interesting touch points with Signal Iduna and its ecosystem.
Today, our focus is on Enterprise Tech, but we also have FinTech and InsurTech in our portfolio. We look at everything that helps corporates to adapt to the digital age by digitizing processes and adding value- from process automation to employee software to customer experience management and many more.
We invest typically in late Seed and series A rounds – that’s where we start – and our typical check size is somewhere between 1 and 5 million euros. Probably the sweet spot is around 3 million euros for an initial investment, and then we can go much farther afterwards.
Samarth: Got it. The decision to focus on FinTech and InsurTech is understandable, but your focus on enterprise software was – at least from the funds I’ve seen in the financial services space – kind of an outlier. What attracted you to this space? What do you think is the potential there?
Marcus: You see, we get our money from a large corporate in the financial industry, and there are two kinds of challenges for established players like these: either on the Product side – that’s why we invest in FinTech and InsurTech – or on the People and Process side – and that’s why we invest in enterprise technology. Product-wise, the challenge is that customers today have totally different expectations with regard to the services of their insurance or their bank. That is where startups come in. People & Process-wise, corporates often rely on legacy technologies and have trouble modernizing these business-critical infrastructures. So through our financing activities in startups, we try to cover all the dimensions of the future challenges enterprises have in this very fast-moving technology environment.
Samarth: Got it. Probably when your fund started to invest, there was a picture of FinTech or InsurTech as being more “disruptive” and more B2C than today. What’s been your experience in terms of how is the market and the startups which are trying to scale up in this space, and what’s changed in the last few years?
Marcus: We are now investing in our third year. I think we got into the market when it was already at a certain maturity, and we don’t invest in B2C models, which I think supports our investment hypothesis that technology is the main driver in this industry. I believe large enterprise must first become innovative on the technology side in order to then be able to innovate fundamentally for their customers.
When I look at our first investment, it’s a B2B2C company called Element- it’s an insurance company, and a regulated company as well- that provides insurances on a technology platform for other corporates.
Then we are invested in Finleap, which is one of Europe’s most important company builder in the FinTech space, with a huge ecosystem as well, and most of their businesses as well are not consumer oriented, per se.
That shows that the sector has gained a lot of maturity, also in Europe. We are moving away from consumer type investments, but I think financial services companies must understand that they need to put a lot of work into their technology stack because that’s where most of the value is created.
Samarth: Got it! What’s been your experience with some of the companies you’ve invested in either directly or via your investments, let’s say in Finleap? What does it take to build a successful Enterprise or B2B2C FinTech company right now out of Europe?
Marcus: I think first and foremost, it’s still team, team and team. So that’s completely regardless of the industry. Sure, you need access to technology talent, but this has gotten easier, I’d say because now with remote working, startups can attract talent from a global pool.
In the FinTech space, I think from both the investor and the team side, it takes a very deep understanding of the specifics of building a company in a heavily regulated space, like the financial services industry. You need investors to understand that, because you have to work very actively with regulators, and you have to push, and you need entrepreneurs who understand that as well.
Samarth: Very interesting. That leads to a related question, which is- what’s the typical ideal founder or founder team? Do you think most of the best Enterprise or B2B2C FinTech or InsurTech companies will be founded by ex-bankers or ex-insurers? Or do you still believe we will see the more Berlin-style disruptor type of model?
Marcus: I’m not sure if there’s a magic formula, but being really disruptive- it is very hard to do that from the inside of a large enterprise and with an enterprise mindset. To build a new startup, to disrupt an enterprise from from within- it needs a different mindset. I think the typical founder team in the FinTech space is a very good combination – I strongly believe in teams even though we have some single founders as well, which are very strong.
A founder team in Fintech needs both the technology side and the regulatory mindset. Still, as an entrepreneur you always have to try to push boundaries, also within the regulatory framework. You need to be aware of where the chances lie. In the end, there’s no formula for the entrepreneurial mindset, besides energy and enthusiasm.
Samarth: In terms of the trends- having seen some of the some of the B2C approaches which started off, let’s say around challenger banks or alternative lenders, then around wealth management and robo advisors. Each of these went through that first B2C phase, and then went to a second phase where some of them had technology which could be white labeled and offered to others.
Quite a few of the players in each of the sectors I mentioned made that move – e.g. Fidor offered Fidor TecS, Scalable Capital offers a white-label version etc. Do you expect to see that almost everything which starts off as B2C goes B2B2C (as well)? What models will survive, will any of these B2C players become players to reckon, or will customer acquisition costs become too high and mostly go B2B or B2B2C?
Marcus: I think this is how we invest- you need a sound business model, and then you have to execute it. I’m not a pure technology investor, but I invest in business models, enabled by technology. I think that’s in a way sector agnostic, but it’s very true for the financial services industry, as well.
As to who will survive- I think investors in the long run, like to see where the money comes from. You really need to get traction in the market, and these models will be financed. I’m actually very positive about the whole landscape and even the concentration of investors looking at the successful models. Look at what Finleap, our portfolio company, just did a couple of weeks ago- they announced three financing rounds, all signed in one day- Solaris Bank, Clark and Penta – really very successful. Especially in industries where you need a lot of solvency capital, investors have to apply even more scrutiny in picking the right model, because we all try to build companies for the long term. However, in the financial services industry, there is no way around that. So these models will survive.
Samarth: Got it! Being associated with a corporate yourself, I have a question: do you see European Enterprise or B2B2C companies – who usually build great products and have excellent domain knowhow – well equipped to take it to scale, and have you seen that change over the last few years?
Marcus: Yes, I’ve seen a lot of change, because founding teams are on a very different level in terms of technology, business understanding, and execution. I think in general, European companies are very well equipped to take on the European market, which is very special, because it is very fragmented, and regulation is not completely harmonised.
I think European entrepreneurs and European teams have a better understanding of this very special framework in Europe than their US counterparts trying to enter the European market. That’s an advantage, and then it’s a challenge, because the European market is so fragmented. A lot of work has to go into the harmonisation of regulation, having one body to discuss technology and even privacy issues, etc. European entrepreneurs who understand that, and address it in their businesses, have an advantage that they can use under the current fragmented conditions.
Samarth: Yes, understood. Now when you say it’s a fragmented market, once a startup has started selling and scaling up- say in Germany as a first market- would you see them rather expand within Europe or straightaway look at a large enterprise market like the US? What would be your advice?
Marcus: My recommendation is always to test certain European markets instead of going directly to the US. The US is a very, very competitive and very different market from European markets- culturally, regulation-wise, and even operations-wise. It’s much easier to take a natural progression- say from Germany to the Benelux or Scandinavia, or Austria or Southern Europe. If you do it right, you can operate in several of these markets at the same time, especially from a hub like Berlin.
Samarth: Right. You said you are investing typically at around 3 million euro ticket size- so that’s usually Series A or A+. What do you look for in a company when it comes to you looking for Series A funding? What kind of metrics or expectations would you have?
Marcus: First of all, they have to have real first traction in the market- outside of, say, pilot project-based revenue source. If you have real recurring revenues from a couple of customers—it depends very much on the model—but to have monthly recurring revenue around the €50k mark, coming from maybe 5-10 customers- that’s really something. It shows that you have a certain traction in the market and recognition from more than one or two interested parties.
Samarth: Got it. You would then be talking to the existing customers, to get a feel of why they’re buying and so on.
Marcus: Exactly. First, we try to get an in-depth feeling for the founder team, because these are the key people who are driving the company. Then we do reference calls, we do a deep technology due diligence to understand the product. These are startups, so they do not need to have a completely finished product yet, but if we see a compelling base, we try to work with the founders on creating a clear product and technology roadmap.
We see a lot of what is going on in the market and try to use these insights for the benefit of our founders to help them go from good to great.
Samarth: Right. Related to a question I asked you previously- the typical fundraise at Series A – is that going mainly to expansion within Europe or do you already see companies looking for international markets at that stage?
Marcus: Some do, but – as I said – my advice is always that it is hard enough to conquer one market and to create a blueprint. You have to get that right before expanding. I think most of the companies who don’t succeed at creating a blueprint will crash and burn- with some rare exceptions from time to time.
Samarth: Okay. Have you also seen the trend of some of the banks or insurance companies launching their own ventures? How far do you see that model of in-house ventures launching out as startups?
Marcus: In general, I’m very positive about what corporates nowadays are starting to achieve, not only in their technology transformation, but also in transforming certain business units or functions. A lot of value is being created there.
For example, our own investor Signal Iduna founded a startup, which is a middleware, connecting all of the various heavy-lifting legacy systems of insurances. it’s a company called SDA. Now a couple of other insurers like Allianz have invested as well. This is probably not disrupting a market, but it comes from a deep technology understanding, that can only be successful because it comes from within an enterprise, with the knowledge of all internal systems, dependencies and legacy technology stacks.
The great thing is that these large corporates – I can mainly speak for Signal Iduna – get more and more attractive as well for technology talent. They understand much better what it takes to create a great work environment for technology as well as business talent.
Samarth: Got it. Any last piece of advice to founders looking to build the next big thing in enterprise software or FinTech or InsurTech?
Marcus: Give me a call or send me an email. Let’s start a conversation. I’m always super happy to get in touch with great founders and I think founders have to discuss with investors and build, measure, learn and then iterate through their product.
Samarth: Any type of companies you are looking for, based on your criteria? What kind of stuff should they be building that would be attractive to you?
Marcus: Think technology with a business model. That’s it.
Samarth: I know this one hurts right now, but when things are normal- where in Berlin would they meet you typically for a coffee or beer?
Marcus: Our super-great offices, located in Mitte, very close to the main station. Always happy to have people over. If it wasn’t Covid19 times, we have a great event space as well and usually host meet-ups from time to time.
Samarth: Awesome. Okay, Marcus, pleasure talking to you. Thanks for your time.
Marcus: Super, thanks!