Announcing our investment into First Momentum Ventures Fund II 🤖

0:00Hi, everybody, and welcome to the European VC podcast. I am David, also known as the LP Syndicate Lead, and I am joined, as usual, by my dear co-founder, Andreas, the LP Hype Man. Yeah, yeah, yeah. Hi, all. And me being the Hype Man of the two of us, I think I should do the honors of hyping up this episode because it's a special one as we're here today with another set of David and Andreas'. But these guys are from First Momentum and two of the three-person GP team that we have the great honor of backing ourselves. Yeah, so full disclosure there, everyone. We obviously love the mission these guys are on, and we believe they're building something that's actually really, really cool and amazing.

0:37Yes, and as always, we have a bunch of great angels joining us in the deal, and it looks like it's going to be an amazing syndicate. But enough about us. I'll let you take it away, David. And that's David from EUVC. This is going to be a tough one to keep track of. Today, as you already know, we have David and Andreas with us. David and Andreas are GPs at First Momentum Ventures, a 35 million euro pre-seed venture fund in Germany to back deeply technical companies at the earliest stage in the DAG area and across Europe. First Momentum is investing out of fund two with a total of 40 million euros AUM.

1:10So for the attentive listener, that's 5 million euro first fund and now 35 second fund and an established portfolio of 35 companies and notable investments including Daedalus, client, software-defined automation. At First Momentum, David Andreas focus on the future of computing and industrial tech, respectively. Attention, folks. On December the 11th, we're hosting our virtual roundtable, mastering non-dilutive funding in Europe on LinkedIn. Sign up to eu.vc. Discover cutting-edge approaches and best practices in leveraging non-dilutive funding, a crucial tool for both your startup portfolio and if you have the flexibility, even your own investment strategy.

1:53Gaining valuable insights from Gilles de Malbosque from Harmony, a seasoned family office investor, on optimising these fund avenues for maximum returns. Hear from Bailey Morrow at HSBC Innovation Banking about the evolving role of banks in non-dilutive financing and how this impacts your investment decisions. Venture capitalist Hamal Fraser-Roual shares a unique perspective on balancing equity and debt for optimal growth in the European startup ecosystem. Learn from Benjamin Ryder from Levenu, a successful entrepreneur on how his platform aids businesses in securing non-dilutive funds effectively.

2:32This roundtable would deepen your understanding of non-dilutive funding options, strategic implementation and how they complement traditional investment methods. This is an essential event for VCs, angel investors, family offices and financial leaders seeking to refine their investment strategies. Secure your spot now. Transform your investment portfolio with non-dilutive funding knowledge. Visit eu.vc. Head on over to the events section and sign up to join us for an in-depth look at how to win with non-dilutive funding instruments in Europe. Finally, and before we start, if you're listening in and love our show, drop us a review, follow the pod and subscribe at eu.vc.

3:17Tear down this wall. It's more than just an ally. This is a union of values. United and determined, we can serve as a model for other regions of the world. The nature of a problem requires a European response. Europe is a story of new beginnings. Let's start acting. This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. So, guys, let's kick this thing off by asking you to tell us the founding story of First Momentum Ventures. Sure. Let's take you back to 2015, I guess, because we were all kind of aggregating in the same student entrepreneurship club in Karlsruhe at KIT, one of the best engineering schools in Germany and probably also across Europe.

4:16And we basically in this entrepreneurship club, we also took chair positions, but basically a mission to get engineers away from just mindlessly trotting into the doors of the auto OEMs and the typical German industrial companies, but actually using their minds and imagination to actually build something. and to achieve that we set up an incubator program and actually at a time where a lot of really interesting people and were active in that in that ecosystem and forming companies because looking back there's at those companies there's several that have have raised really large amounts of money around kind of probably hundreds of millions and also exits in the in the nine figure range and kind of being in that ecosystem and also taking trips abroad to China, to the US, to Israel, to basically do startup tools there and see the ecosystems there.

5:16We always came back a little bit on the one hand excited about those ecosystems and on the other hand, a little bit frustrated because we kept seeing that the whole process of actually spinning out those companies or getting companies out of universities was working so differently there. then you came back to germany and you realized okay most of the vc industry here is still really focused on b2c and maybe enterprise size basically looking for the next salando and and delivery euro the big names at at that time and in 2017 one of us came across a a medium article that's that was basically saying okay hey actually in germany it's pretty easy to set up a fund and you can do it if you're quick and and a little bit over a month and kind of being naive, we believe that.

6:03Turns out it takes a little bit longer than a month to actually set up a fund. But we managed to set up our first fund in 2018 with 5 million euros and basically grown that into our second fund and really kind of becoming a household name and basically the fund to call up if you're working on a really deeply technical or complex topic. I love that story. I think that the Medium article was probably written by Vauban or Odin or Angelist or something like that. No, sorry, enough fun about that. Guys, we should touch on something right off the bat. And that's, of course, the fact that you are young.

6:47And some would even say that that disqualifies you from being good VCs. I think many in our audience have recently heard the guys at All In, giving a good bashing to anyone thinking that they can be VCs if they haven't built a startup of their own and really almost taking that to an IPO. So I want to ask you, because I'm sure you've had this question or stupid remark thrown in your face a million times. Tell us, how do you counter that? The first lawyer that we started talking with, he was looking very funny at a bunch of 21, 22 year olds that wanted to start a VC fund. So So this was for sure a topic that we had to deal with.

7:27But I think if you also look at the side of startup founders, you have a ton of successful founders that start their companies really young. For sure, they're not maybe that young anymore once they get to an exit. But I think in the end, age is really more so an arbitrary metric. And it really depends on kind of the context that you are moving in and the learning curve that you are showing. And for us, the model was basically, if someone is not believing our story from the get-go or thinks that we might be too young, then at the end of the day, our portfolio and our work has to speak for ourselves and for our abilities.

8:08Being young also gives you the advantage of just being super hungry and wanting to leave a mark in that industry that you're working in and also kind of working towards that goal of being kind of a cornerstone in that European deep tech ecosystem. And for us, this was really kind of showing milestones and evidence towards those people that might be critical on that level. So getting an institutional LP into our first fund to show that we can deal with the quality requirements that they have, to have founders speak up for us and kind of give very positive testimonials, have other GPs that have a higher opinion of us, get great following rounds into our portfolio, You have dealer locations in competitive rounds.

8:54And I think in the end, founders also appreciate this kind of underdog existence because they're in that position as well. And they have that feeling of, OK, we're building something together. And for us, it's also by starting First Momentum so young, we really have a long arc of being able to build First Momentum up. And it's not we're two funds away from retirement and we now have to maximize getting our carry. so we are able to kind of take a lot of strategic decisions because we want to build this cornerstone and kind of taking the long view on this. Before passing the mic to David, I would just say that for anyone questioning your ability, I think that what you just said there in terms of getting good follow-on rounds, which I think to any fund that's early in their development is one of the strongest metrics that you can have.

9:46And I think that the fact that you guys have Kostla, Insight, Cherry, Early Bird, Cavalry, Tiny, Speed Invest, Pale Blue Dot, Buy Founders, Y Combinator, Project Day, and all the likes of those investing with you in the companies that you have backed, I think should make many, and I think especially there's many other VCs that are older and maybe not as much part of the same ecosystem as we might typically walk around in, who would have the view that you can't be young because you need to be 95 and super accomplished. I think that that should shut up anyone. But I'll pass the mic to David now, but I just had to take my role as hype man here and say that I don't think that you can really argue with that roster.

10:33Even though we are biased, because we're not that much older than you guys. So obviously, we love what you guys are doing. I love the hustle above all. I love the story. I love how you started super small, where you started from. I remember, Andreas, when we first met, I think Fund 2 wasn't being prepped yet, to my collection at least. And it's been just cool to kind of see you guys develop and also kind of hear what the ecosystem is saying about you guys. I think that's also a great testament. And whenever I've asked around about you guys, something that has come over and over kind of back at me as feedback is, well, they're seeing really interesting deal flow and really enjoying kind of getting to see some of the deals they're doing, right?

11:13And this from names like the ones mentioned by Andreas, but also others. So I think that is also a good testament for anyone kind of asking around and trying to get a feel for what is First Momentum about and what are they doing? What are they seeing? Let me ask you one question on that front before kind of going on with the script as we had planned, which is just about positioning, right? Andreas, you shared a bit of the story and what you were seeing and where kind of the drive to start this as well came from. But I think it's fair to say that today in 2023, the landscape is very different and there have been some really cool deep tech funds popping up.

11:50So first time funds, much more institutional than yourselves, even in the same country as you, but also more established funds kind of increasing their focus and allocations into deep tech and so on and so forth. So I'd love to ask you both, just give me a quick rundown of how you see your position in the market, not in the sense of why you're better, why you're worse. What are you different than others that now exist also doing deep tech early stage in Europe? It's a combination of multiple factors. So I think on more like the hard fact side, it's certainly coming in at pre-seed extremely early with past processes and high conviction bets.

12:27Even if there is not a lot of like technical milestones or even commercial milestones in a deep tech environment that some other funds would love to see at a certain point. I think we can really see companies quite early and get in very early. And I think that is kind of like a competitive advantage on this side. Also, looking at our team, we are all engineers and scientists. We have just recently hired a bunch of physics PhDs with practical experience from science teams, from deep tech companies. Also, us on the partner level being all engineers. we really see founders lighting up when we have a call with them because they finally have the feeling that they are talking to somebody who speaks the same language.

13:16And I think most of the competitiveness in venture capital is actually finding a personal level with some of the founders that you want to back and doubling down in the process and establishing this relationship. And I think there are a lot of also transactional values that we can bring to the table, but we can probably touch on that. a little bit later. Could I ask you, because exactly the point that you just made about being able to strike a chord or resemble the founders and talk their language and so on, are you then also seeing that your portfolio is younger in terms of your age compared to what you would normally see in a normal VC portfolio?

13:58I wouldn't necessarily say so. It would actually be an interesting data analysis that we should make at some point and benchmark this. But looking at our portfolio, we have really a diverse mix of scientists, postdocs coming into the founding role in their mid-30s. We also have met some campus founders in B2B software topics, and also really seasoned entrepreneurs that have had significant exits in the past and are rather senior, I believe. And I think coming back to the age topic that we discussed just a minute ago, all of them are still in this underdog mentality and really appreciate us bringing kind of like a fresh new wind into the VC ecosystem.

14:48And I think that resonates a lot with founders trying to make a dent against all odds, basically. And I think that's one of the core beliefs that we have. So without further ado, let's go into what is a pivotal moment or what has been a pivotal moment in your fund's development and describe how it has shaped your path forward. Yeah, I mean, obviously going from being a student to managing a 5 million VC fund like micro or even nano, I would rather say, was a crazy ride. And I mean, there are so many challenges, so many obstacles to overcome. But even more significant to us was the transition from fund one to fund two, and also mostly from the internal perspective.

15:38So we are super happy to have been able to hire a bunch of crazy smart people that actually share our vision and our core DNA in terms of startup investing and the scientific and and more engineering approach to it. And to make a couple of examples, like Max and Anna are two physics PhDs with backgrounds from MIT and some of the best research institutes in Europe. Max has an experience as a deep tech founder before. Anna was a team lead at one of the best funded nuclear fusion startups in the world. And obviously they help us sharpen our fund DNA towards even more technical topics and really cater to this technical audience, let's say.

16:23Another example is Lina, our platform lead. She has started a company that we see backing, was a journalist before and like super communicative, smart person leading our community platform and brand initiatives. And in addition to kind of like upping our firm IQ and age average in the firm, what we learned is that we have to build a firm that is worthy of the smart people that we hired right and for us that meant taking some like most of the implicit stuff that we aligned on as partners building the first fund and making that explicit and building an organization and we in fund one we were more like angel investing basically very autonomous very individually driven and now we have had to build a real team like robust processes and actually an organization around like to be able to leverage the resources that we now have and i think by right now we are like pretty effective as a team we know the journey never ends to kind of like keep pushing this but uh this was like a tremendous culturally uh change and transition that we that we had to make yeah i can imagine that sounds like a very very interesting story so i want to deep dive into the strategy i want to dive into the thesis i want to deep dive into the nitty-gritty But I think even though we have given you an intro and I did my best to honor what First Momentum is, I think it would be best to have you guys give us a quick overview.

17:53What is First Momentum? What should people know about you guys? Sure thing. Yeah, we are building First Momentum basically to be the number one address for technical founders in Europe at our zero. And maybe to deconstruct that a little bit, what we mean by that is our zero means for us, we invest at pre-seed stage as early as it gets as a first check investor in those first rounds. And for us, that means sometimes pre-revenue, sometimes even pre-product, very talent-centric, very technology-centric investing style. And by reflecting on how our team looks, obviously, we are working towards very technical founders building complex B2B products.

18:39I mean, we are all engineers, all scientists, and ended up investing in like-minded people that start companies. From the geographical point of view, the Dach region, so German-speaking countries, is clearly our home turf. And we see a lot of potential here, like you have a high concentration of like world class researchers, super strong industrial ecosystem, lots of companies, strong economy, and then also a lot of like public funding that goes into technology companies and advances there. And over the years, we have built this network of over 250 scouts, students, PhDs, postdocs, startup operators across more than 30 cities in Europe, but also in the DACH region, obviously.

19:27And by expanding this network, we are also now being able to see a lot more stuff in Europe and not just the DACH region. We actually just finished our first non-DAH deal last week and signed this. So we're super excited to also expand on this and to move more into Europe while still keeping DAH close to our heart, obviously. What is also super important for us besides the investment focus and the strategy is our approach to portfolio work. So our key plan here is to strive to actually have the highest value for money ratio in the cap tables that we work in. We are usually co-investor in most pre-seed rounds.

20:09Some rounds we lead, but mostly we are kind of like the second VC next to a lead VC in the pre-seed rounds with a 500k check roughly. And that means that we can really make a dent and actually be not like an inactive core investor, but rather the opposite. We have a couple of more transactional pillars that we are working towards to accelerate the companies. First is go to market. So over the years, we have built a network of C-level people across Europe, different verticals, different industries, both from our LP base, but also beyond. And the same thing we are striving to achieve on the talent side, on the recruiting side for our teams.

20:53So to give you a little perspective on this, on average, we do one qualified intro per day in our portfolio. And just like looking back at the last few weeks, we referred one late co-founder to a really recent new investment that we made. One head of engineering for a hardware climate tech company. one CTO at a chip company that we are looking at. So this is really talent that makes a dent in the company and that founders are obviously very happy to receive. And the third pillar is the fundraising side. So you can imagine raising a pre-seed round, you already think about the next round and the milestones that you have to hit and how you want to structure the process, who you want to get on board, et cetera.

21:38and we really worked super hard in the last years to become this qualifier fund to the best seed in series a funds in europe but also in the us and by now we have the pleasure to see like if we send out a deck like a portfolio deck to our network we can can guarantee the startup ceo to have like a full calendar in the next week and the week after and i think this is all the founder wants basically to get this momentum and get a fast fundraising process and with a have like a competitiveness to it this is our transactional approach to to the portfolio work and when it comes to everything else be it forward be it like strategic operational advice i think our our key value is really intellectual honesty right like we know what we are good at we are doing this since five years, we know in which areas we can give really good advice and point the founders in the right direction or flag something that is not working properly, maybe.

22:40But it's really about reflecting what we don't know, and then getting somebody who knows it better, right. And I think this is also quite refreshing for some of the founders out there to have an investor that doesn't just give advice to anything. And yeah, this is very dear to us as well. I actually want to ask you guys about something that I know there's mixed feelings in the industry, right? So when you say a pre-seed co-investor and that you typically have other leading VC, you know, some look at that as something really good in the sense that, you know, you are collaborative by design. You are collaborative, like your fund model is made for being collaborative, right?

23:25So some love the fact that what that allows you to do. On the other hand, it does require a level of consensus by design as well, right? So I'd love to hear you guys expand a bit on your experience so far. Of course, what led you to keep that strategy for Fund 2 because it is somewhat aligned with what you were doing with Fund 1, of course. but also what are the pros and cons and kind of open the kimono a bit of maybe some frustrations that you sometimes see that well life is made of things not going super well all the time and I'd love to uncover some cool war stories there. I think there are two types of deals right there's this type A where we actually are the driving force behind the deal and we see the founder super early talk to them build a relationship get conviction about the topic and the team and then say, hey, let's raise a round.

24:18We put in 500k and let's go VC shopping together, basically. And then we open up the network and try to structure the process a little bit. In this regard, I think we are extremely comfortable. But on the other hand, you also have deals, obviously, where the lead is already there and you are trying to kind of like chip in a competitive process and build conviction fast and get access to the deal. And I think for us, sometimes it can be frustrating in those type A deals that we cannot do the round ourselves fully because of the restrictions of our fund size. So, for example, if we take a deep tech hardware climate topic, for example, you just need two to three million in the first round to get to the next milestone to be able to raise the next round.

25:06And I think for us, just by design, looking at the fund volume and the average ticket size that we can deploy, it's not possible for us to lead the round and just push it through. So in this sense, we are kind of reliable. We have to rely on hyping up other funds and building those relationships and making the founders kicking in doors for the founders at other firms. And this sometimes can be quite frustrating. Yeah, but also a very healthy dynamic at the same time. So guys, I would love to ask you if you could share a little bit on the performance side. And I'm, of course, asking this both, you know, remembering back to the conversation we had just before.

25:52Anyone who might be thinking, huh, do these guys really know what they're talking about? And we just heard the co-investor side and we heard some of the other metrics there. But there's also the pure performance metrics. And I'd love to invite you to just share a bit on that, because I think that that's an interesting perspective as well. And use that opportunity to also tell us what did you do in fund one? And then we can talk about fund two afterwards. Yes. So fund one was, as we mentioned in the beginning, was a 5 million euro fund. And I think David also framed it as kind of an angel-like fund.

26:23So usually we did around 100K on average in those first rounds. We didn't really have, just by the size of the fund, really didn't have a ton of reserves. So it was more kind of opportunistic seeing where we'd follow on. We set up the fund in 2018 and did in the end 27 deals out of this first fund. If you look at the fund as a whole, by now you really start to see kind of the first clear outliers that are moving away from the pack. you still have a bunch of companies that are kind of in a C to series A stage or in that transition, still seeing like, okay, where do they end up? Is this the fund return that you have in the portfolio or is this kind of somewhere in the midfield?

27:14But I think in general, if we look at the portfolio, I think what is really important for us is that we have a graduation rate from pre-C to the next round of over 65%. So kind of, I mean, this is the part that we can influence both by the initial picking and then also on the support side that we give there. And then I think also looking at benchmarking with funds is always a bit tricky because data is so sparse. But I mean, the best data point there, and I think you are well aware of that through Isomer is kind of looking at the fund of funds and what their database is. And I think from conversations there that we had with them is that we'll end up in the top quartile there in terms of the fund KPIs.

28:01Currently, I mean, this is still obviously a lot in movement over time. And I think especially the deep tech and industrial stuff just takes longer to mature and to get to milestones that then gets other investors excited and just basically wanting to throw money at those companies. We already had companies in the portfolio where the investor just showed up at the front door and was like, here's a term sheet. Can you sign it? So I think the dynamic is getting there. And also from the total enterprise value that we have in the portfolio that we're kind of getting to the high nine figures. There is, I think, a good indicator.

28:40But in the end, we still have quite a few years in the fund lifetime and to see kind of where we end up there. but so far really happy and also I think from looking at the LP base that we had in fund one 85 % of the LPs joined in fund two and on average doubled their the commitment that they had in in the first one so really kind of having the feeling that we're on the right track there and now institutionalizing just step by step one thing I can add there based with the data set that we have and the data set that you know I can't really disclose but I can kind of share the highlights is in fact that that conclusion that you guys have actually holds with the data that i see and i have which is based on fund one you seem to be on track to be to be a top quartile performing fund which is exciting of course uh we all know that that you know the the multiples aren't really sticky so they dance around over the over the age of the fund so your work is not done but obviously from the data that we have it it is a good indicator and i think it's something that we should double down on and double click on because it's important to make that very clear to to the attentive listener at least and with all of this a shout out to eif uh let's get that data more out into the ecosystem that would be so great for all of us yeah um but let's uh let's turn to talk about your scout program you mentioned it just before you have a bunch of people around you that you've got involved in a more or less, let's call it structured approach.

30:13So tell us exactly how structured is it? What are the dynamics you're using there? What are the types of people involved and also the sheer volume of it? Because I think that that's a very cool element in your fund strategy. So when we started with our first fund and being engineers, we pretty quickly came to the conclusion, let's build tech and tooling around our processes. So like everyone else by now we we've built scrapers but i think this also means in the end that you see see deals at about the same time as uh as other vcs and kind of coming from this carl'sbury ecosystem we realized pretty uh pretty quickly that actually the the smart people or the smartest people that that we are looking for also know other smart people um or are known by other smart people so this is You could really see the founders basically starting to start working on experiments and different projects a year or two before they really found it or the really interesting project started emerging.

31:17And you could see them experimenting, kind of falling on their face, getting back up, reassembling the team. And then at some point, the lightning strikes. And so for us, the attempt was to, or the idea was to basically replicate this, not just in Karlsruhe, because there we knew the people, but across the Duff region, and basically find those super connectors in those ecosystems that could tell us in advance, okay, those are the people that you should talk to now already and kind of build that relationship for when they then actually can start building that interesting company. And this, I think, is also quite different to other funds that are fishing in the same university ecosystem pond, because they usually tend to go through the tech transfer offices or the professors that are leading an institute.