20 VC 018: Seed Stage Investing with Stefan Glaenzer of Passion Capital

Stefan Glaenzer is Founding Partner at Passion Capital an early stage VC fund who have invested in the likes of DueDil, GoCardless and CarThrottle. He is also Co-Founder of White Bear Yard, a co-working space in London's East End. Prior to Passion, Stefan was Chairman of Last.fm, an early investor in Wahanda and remains an active member of their board and founder of Ricardo, which went public in 1999. Items Mentioned in Todays Show: Passion Capital: The First Two Years Lendable Smava What you will learn in today's episode: How Stefan got into the technology industry and later pivoted into the VC world? What is Stefan's preferred stage to enter into an investment and what is the standard amount invested in a startup? How much equity Stefan would look for in an investment? What interaction is typical for VCs following investing in a startup? How individuals should pitch their idea to Stefan? How many startups does Passion typically invest in on an annual basis? Does Stefan encounter the fear on missing out on a startup? What is it about the Peer to Peer lending sector that excites Stefan so much? Does Peer to Peer have a brighter future than Crowdfunding? What sector is Stefan most excited about and why? How can an entrepreneur show their enthusiasm and make an awesome pitch? Is there a formula for making a successful pitch? What are Stefan's red flags when a startup pitches to him? As the interview concludes we ask Stefan some quick fire questions where we hear his thoughts on the hardest decision of his life? The best piece of advice Stefan has been given and his most recent investment and why he said yes? For all the resources mentioned in today's show head on over to www.thetwentyminutevc.com Likewise, if you have a suggestion for a VC that you would like us to interview please do let me know by emailing [email protected]

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Harry Stebbings?

  Hello and welcome to episode 18 of the 20 Minute VC. Now, I first want to say a special thank you to all of you who have left a review on iTunes. It's so important, but so grateful for our 35th review. Thank you so much and please do keep reviewing. To enter into the competition, simply email Harry@The20MinuteVC with the name that you left a review under and you'll be submitted into the competition to win all the books mentioned in the five episodes of the 20 Minute VC and the chance to pitch to the VCs mentioned in the show. But moving on to today's show, I'm so excited to welcome Stefan Glaenzer. Stefan is currently founding partner of Passion Capital, an early-stage VC fund

• 0:43Harry Stebbings?

  who have invested in the likes of Judeel, Carthrottle and GoCardless. Prior to Passion, Stefan was chairman of Last FM. He's also an active member of the Wohanda Board and he was also the founder of Ricardo. A brief summary of the amazing career that Stefan has enjoyed that does not do him justice, but it's time to hear from Stefan and dive into the interview. So without further ado, here's Stefan.

• 1:13Speaker 01

  You have now arrived at your destination.

• 1:16Harry Stebbings?

  Welcome to the 20 Minute VC. It's an absolute pleasure to have you on the show. And I'd really like to start off by hearing a little about yourself and how you got into the technology industry and then made your transition into the world of venture capital. Could you tell us a little bit about that?

• 1:32Speaker 02

  Certainly, happy to do so, Harry. Clearly, as you can hear by my accent, I'm a native German speaker. So born and raised in Germany, studied economics and have actually written a PhD way, way back about option pricing. So I pretty much got trained to be an investment banker. But then after university, I decided no, banking is not the future. But started a media company with two of my friends way back in 91, so all pretty digital. To sum it up, it was all pretty mediocre the first seven, eight years. Uh, some small successes, some very mediocre results, some failures.

• 2:15Speaker 02

  And then stumbled across the idea of doing online auctions in ninety eight, so founded Ricardo, which pretty much changed my entrepreneurial life.

• 2:25Harry Stebbings?

  And for those who aren't listeners that aren't aware, what was Ricardo?

• 2:28Speaker 02

  Ricardo was an online auction site, so the equivalent of Onsale or Ubit or eBay in Germany and Switzerland and other European markets, which we founded on the twenty first of July ninety eight, went live, uh, so launched a couple of weeks later. And then on the twenty first of July ninety nine, so exactly three sixty five days later, we went public at the Frankfurt Neuer Markt with a market cap, I think, of four hundred million euro or so. I mean, those were, those were the heydays of where every, it was, it has been the wild west days, yeah? So that is where I got my bug from, for working in technology and internet related stuff.

• 3:11Harry Stebbings?

  And then how did you make the transition into venture capital?

• 3:15Speaker 02

  Ah, at some point, um, at, at, at some point, it's probably more interesting going after a portfolio approach. So as, as the founder and, and CEO, you do put all eggs in your own basket, whether as a, as a, as a venture capitalist or as an investor. Uh, you do get involved with various, uh, different approaches of starting a company. And I think maybe, or in my case, it has been, the older I got, I was more interested in learning more about different businesses instead of going twenty four seven in, in, in, in one venture again.

• 3:57Harry Stebbings?

  And how did it feel for you, uh, uh, as your second startup, Ricardo, IPO-ing? How did that feel, having such immense success?

• 4:06Speaker 02

  Oh, that was crazy. So Ricardo was actually not my second startup. So within the seven years before, I think we tried five or six different companies. And as I said, none of them with particular success. It was all pre-digital, so the barriers of entry to start and innovate have been way higher. And Ricardo, yeah, I mean, it was unbelievable. This was a company growing one percent between one and one and a half percent on a daily base. So we pretty much hired everybody who made it into our office. We grew the team from zero to two hundred people in eighteen months or so. It was just a very special, very, very crazy, very crazy time.

• 4:50Harry Stebbings?

  Now, as partner of Passion, you see a lot of pitches and a lot of companies. Leading me to ask, what's your preferred stage to enter into an investment? Is it the seed stage, series A, series B? Which one's for you?

• 5:04Speaker 02

  So with Passion, we have a very dedicated narrow focus. We only invest in seed stage. So the preferred time of our engagement is we love to see some technology workings, who we rarely invest in the concept phase. But we are perfectly fine with a working prototype, even with a closed beta of maybe fifty or five hundred people on the system. That's when we love to get engaged. Most of the time, it's the first institutional money. On average, our investment is two hundred thousand pounds in the first round.

• 5:41Speaker 02

  From time to time, we are the first external money. From time to time, there has been some friends and family money in the company before. But usually, we are the first institutional money.

• 5:53Harry Stebbings?

  And how much equity would you look for for two hundred thousand pounds, generally speaking?

• 5:58Speaker 02

  Generally speaking, we look for equity somewhere between fifteen and twenty-five percent.

• 6:04Harry Stebbings?

  Okay, okay.

• 6:05Speaker 02

  And we typically invest between hundred and three hundred thousand pounds.

• 6:11Harry Stebbings?

  And then we often hear about startups acquiring that initial investment. And then afterwards, is it monthly board meetings? How do you interact with the startups after that?

• 6:23Speaker 02

  So Peshan Kettle, I run the coworking space called White Bay Yard here in East One in London, so more on the east side than the west side of London. Where half of the companies in which we have invested choose as their starting office. So with these companies you do need less formal board meetings because pretty much White Bay Yard is a 10,000 square foot open plan office. We Peshan Kettle sits in the middle of it, there's hardly any doors other than for conference rooms. So you do get a pretty good feel of where the company is by just walking through the office and getting the coffee and walking back.

• 7:05Speaker 02

  It's different with companies who are not joining White Bay Yard as their starting office. With these companies, I'd say on average, we do a kickoff meeting after investing and then we tend to have meetings every one, two, three months. Very much depending on the phase the company is in, whether these are first time entrepreneurs or seasoned entrepreneurs. I've learned that the hard way as an entrepreneur, as an investor, you have to make sure that you're not wasting time of the entrepreneur. And too many board meetings might have the potential to waste time in very early stage companies.

• 7:50Harry Stebbings?

  And how would you like entrepreneurs to connect with you? So startup founders with their company, how should they connect with you? Should they go to events? Should they try and integrate into your network through referrals? How do they get that opportunity to pitch to you?

• 8:09Speaker 02

  So unfortunately, Harry, I don't have any unique wisdom to offer here, but by far the best is making a contract through mutual contacts through some form of qualified referrals. As a matter of fact, we see roughly 2,000 new ideas being pitched to us in any given year over the last two, three years.

• 8:33Speaker 02

  Out of these two thousand ideas, we meet with physically, we meet with six to seven hundred. Most of the people we meet tend to be the ones who who who made their way by a referral.

• 8:47Harry Stebbings?

  Wow, seven hundred. Um, sorry, that's amazed me. Um, and have you passed them?

• 8:53Speaker 02

  Seven hundred, yeah, sounds like a big number, but keep in mind we have three partners.

• 8:58Harry Stebbings?

  Okay.

• 8:59Speaker 02

  And that means it's two hundred fifty meetings for every partner, first company meetings. And that means that is roughly, looking at two hundred fifty business days. That's roughly one new company uh a day, which is, you know, manageable.

• 9:19Harry Stebbings?

  And of those seven hundred and fifty, how many would you say you invest in?

• 9:23Speaker 02

  Oh, I I we we we are we are we are quite data focused, so um we tend to invest in any given year in ten to fifteen companies.

• 9:36Harry Stebbings?

  Okay, and and Passion actually have an incredible infographic, which will be included in the show notes for any of you that'd like to see the amazing progress they've made over the last few years. Um, but with so many startups you see then, have you ever passed on a company which later you've gone on to regret? And if so, how do you get over that feeling of missing out?

• 9:59Speaker 02

  Well, that's part of being an entrepreneur, and so that that's already has been part of my entrepreneurial career. And and and now this accelerates as being an investor. But then it's just part, if you deal with innovation, you have to accept that you can't get it all right. It's I I mean, have you ever heard a football professional saying, oh, I I regret that I didn't make that goal or that I didn't make that tackle? There are so many opportunities. We are constantly dealing with new opportunities. And of course, you do make a lot of mistakes in your in your judgment and everything.

• 10:35Harry Stebbings?

  Absolutely. And you have several investments in the peer-to-peer lending sector, including Lendable and Smarva. I think it's Smarva, um, leading me to ask, what is it about this sector that makes you so excited?

• 10:52Speaker 02

  Financials, I mean, first of all, it it's the market size. Second of all, the um, the. Existing players are for whatever reason relatively lame and slow to react. So this is is is the perfect ground for disruption and innovation. And I I think. The users, the consumers have been treated seriously bad by the existing companies, so they they they are just ready for disruption.

• 11:27Harry Stebbings?

  And do you think it has a brighter future as an alternative investment, uh as an alternative financing method than crowdfunding, say?

• 11:37Speaker 02

  I I'd say this is true in general for the whole financial eh tech, fin fin tech sector. And. I mean, in the end, if if you if you look from a little bit of a bird's view on it, every sector which has been run analog is becoming digital. And now the time is ready to have a very, very close look to the financial institutions. Eh crowdfunding is going to have its place and and have all the beautiful things that Angel List is is doing and is creating. Eh is fantastic, funding circles, all these credit tech, all these companies.

• 12:18Speaker 02

  Um they will form a new understanding of of financial instruments for for the consumer and for the businesses. So we are back in it, yeah, it's a huge market.

• 12:28Harry Stebbings?

  And in taking on that bird's eye view on the tech market as a whole. If you were to choose one sector other than than the fintech sector, which you're most excited about, what would it be?

• 12:41Speaker 02

  Right now, I mean, other than we, we do actually have a strategy here at at Passion that we focus on one sector only. And this is a very, very narrow focus sector, and that is great ambitious entrepreneurs.

• 12:57Speaker 02

  That is the real sector passion is operating in and we want to back and help these great talented ambitious entrepreneurs. And a bit more specific maybe to answer your question, we are quite keen on cybersecurity since quite a while.

• 13:14Harry Stebbings?

  Okay.

• 13:15Speaker 02

  But then again, you know, we tend not to do any, any games, gaming, um, investments since, simply because we just don't understand the segment and it's a bit too hidden in, in, in our view. Even though you can create fantastic companies in, in, in the space and the Europeans did particularly well. And so questionable whether this is good judgment from us or not. But other than that, we are really open for all verticals and for all segments.

• 13:45Harry Stebbings?

  And you said about really enthusiastic entrepreneurs. When it comes to pitching to you, how do you think they can show that enthusiasm? You know, pitch is a very nerve wracking environment. Is there a way they can really put forward their enthusiasm for their project?

• 14:02Speaker 02

  You do get a feel whether the team or an entrepreneur or young person or

• 14:10Speaker 02

  an elder person but still first time entrepreneur has a problem, he is intrinsically interested and tries to solve by using technology. And usually, yes, of course, it's nerve wracking and it's, it's actually terrible. This, this whole fundraising process is, is a terrible experience. I've been on the entrepreneur side way longer than on the, on the investing side. So I do have quite a good understanding, but after a while you do get an understanding how the pitch turns into something else. The pitch turns into a dialogue, into a discussion and then you get more to the, to the heart of the, um,

• 14:55Speaker 02

  to the, to the heart of a problem the entrepreneur tries to solve.

• 14:58Harry Stebbings?

  As you said, you've been on the entrepreneur side of the pitch many times. Do you think there's a formula for success then in a pitch? Do you think it is a relaxed environment with, you know, a lot of dialogue, conversational? Or do you think it should be much more data driven focused?

• 15:17Speaker 02

  There is no, unfortunately, I'm not having any, anything clever to say here. I, I think, again, it's, it's maybe, it's like in, it's like in football. You can't play always with the same tactic, you know. Some, some, some businesses need, need a clear data-driven approach. The other one is a more softer one than, in, in, you have some cases where it's just about the, just about the ability of building a relationship with the investor. Keep in mind, everything I'm saying is just true for seed and very early-stage investing. The later the game, the more changes towards data-driven decision-making.

• 15:58Harry Stebbings?

  Absolutely. And then, thinking about what is a red flag? Do you have any particular, pertinent red flags that always intimidate you when seeing a company? Be it too huge a market, too soon a product? What's your red flags?

• 16:16Speaker 02

  You know, these, these diagrams, these competitive diagrams? And where, where, where you see all the, all the, all the competitive companies? And by some miracle, your own company always ends up in the top right corner. Even though being, being just a startup, I've just seen too many of those.

• 16:39Harry Stebbings?

  Yeah. I, I suppose it's better though than the, we, we've got no competitors at all. Do you, do you see that quite often? And that's, that's always a worrying one.

• 16:48Speaker 02

  Yeah, true.

• 16:49Harry Stebbings?

  Um, so we're moving into the final quartile of the interview now. So would it be possible to move into a quickfire round?

• 16:58Speaker 02

  Sure.

• 16:59Harry Stebbings?

  Okay. The hardest decision you've had to make in your career?

• 17:04Speaker 02

  Stopping being an entrepreneur.

• 17:08Harry Stebbings?

  When did you stop being an entrepreneur? Would you not say being a VC is being an entrepreneur of many, of many companies almost?

• 17:16Speaker 02

  It was transition period during my time at being chairman of Last Ebb, where I was very executive chairman, where I was very, very involved in the day-to-day business, but still hadn't been the founder and hadn't been the, the last decision maker.

• 17:33Harry Stebbings?

  And then the best piece of advice you'd give to a startup founder?

• 17:38Speaker 02

  Whatever you do, do it with passion.

• 17:40Harry Stebbings?

  And finally, the most recent investment you've made and why you said yes?

• 17:48Speaker 02

  Just signed a term sheet about a fraud prevention product. Fantastic team, very experienced in a, in a, in a, a very fast-growing startup. So the whole team has shown in an existing startup that they're able to deliver now. They have left the company to start their own startup. They took a great market fraud prevention. They have the right capabilities, they have global ambitions and it's quite a plain field, plain, plain, playing ground out there. So the hope is high. But then again, in the moment of investing, you're going to love them all.

• 18:30Speaker 02

  And then you see the honeymoon period between six and nine months and after that you come closer to, to the truth.

• 18:38Harry Stebbings?

  Well, Stefan, thank you so much for coming on the show. It's been an absolute pleasure having you. Now, for all the resources mentioned in today's show, head on over to www dot the twenty minute VC dot com, where you can find them all under items mentioned in today's show. And if you're loving the show, please do subscribe on iTunes and we can't wait to see you in the next episode.