E360 | David Meiborg, First Momentum Ventures: The European Deep Tech Hardware Napkin

0:28Welcome back to the European VC podcast. joins me to talk about their Deep Tech Hardware Napkin, which I'm super excited to be bringing to you. First, before we go into it, let me just tell you a bit about the methodology. So they've brought 30 Deep Tech VCs together from eight countries to really create a data set of more than 100 data points, which is validated by more than 1 ,000 data points from Dealroom. And they did this to really create a deep tech napkin that will show the most important parameters of a deep tech hardware startup at each of the different stages that we have in mentors.

1:04So pre-seed, seed, series A and series B. This is a conversation I've been looking very much forward to. The guys are really pioneering a lot of exciting things at FMV. So I hope that you will enjoy this episode as much as I did. Here's a few words from our beloved sponsor. Enter the world's largest and most dynamic space for startups, investors and corporate innovators at Expand Northstar. There you'll find 70 ,000 plus international visitors, 1 ,800 plus startups, 1 ,200 plus investors, 450 plus global speakers and infinite opportunities to connect, collaborate and co-create the future. Mark your calendar.

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2:10Tear down this wall. It's more than just an alliance. This is a union of values. 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. 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. David, welcome to the European Easy Podcast. Hi, thanks for having me. So I just told you, I want to start with just the update on everything FMV, First Momentum Benches. We're LP, so as I said to you, you guys are just crushing it.

3:01So I'm just looking forward to give you this stand to tell everyone exactly about how crazy you are, but what great things you've done since we invested and since you got launched with Funtun. cool yeah thanks for thanks for having me again and yeah for everybody who doesn't know us or wants to have a recap so we have first mental ventures we are pre-seed fund from germany investing all over europe with a very technical investing dna we have launched our second fund really actively investing so i think since our last update we've probably done 10 deals or so So very busy, also busy summer. So very hyped for the next topics.

3:42And also a couple of teams from our portfolio that are gearing up for the next fundraise. So everything is looking great. And yeah, happy to talk to you today for another time. And you've also grown the team a little bit. You've brought on some new people inside FMV, which is exciting always. You've done your first conference, Deep Tech Conference, which is also great from our side. Could you share a bit about the learnings, the people you had there, that type of thing, why you did it? Yeah, sure. So we hosted the spin-off summit this summer, and this grew from an initiative and community that we've built over the past year.

4:23The effort here was led by Anna, our head of research, and Lena, our head of platform. and Anna built a Clueless No More community, which is basically a deep tech community for academic founders who want to start a deep tech venture and to get educated a bit about the do's and don'ts and to sync with people who are in the same position. And the spin-off summit was basically the physical offline event to facilitate this communication, this exchange. We had a bunch of workshops, a bunch of content and it was really cool to get everybody in the same room and have this life. Yeah, and it's funny how there's something special about being together in person.

5:10We're finding that as well. We're doing much more of it. Really, we've just brought on the UBC team and an incredible resource lady called Sophia. She's nailing it. I love her. And thus, we're also expanding on our event side so that we can spend a lot more energy on bringing people together rather than just the podcasting world. People probably also have seen that we've launched our community, which is another side to that, which means everything is small form or small group session form instead of these larger one-to-many types of communication. So that's all very exciting. But you are here because you've launched the Deep Tech Napkin, and it's something that I've been looking forward to really talk about.

5:55I love, first of all, how our good friend Christoph Jansz, though I called him a good friend, but he feels like that I've never interacted with the guy other than one quick email. But and I don't think in that one he did decline coming on the podcast, but it was not something that led to something, obviously. So here's a big open invitation for Christoph to join us on the podcast someday. But I love the fact that his napkin has kind of inspired everyone else to do a napkin. Nucleus has, of course, done theirs. And now we have yours, the Deep Tech Napkin. You've done this, though, together. And I want to give you big credits for that.

6:29Not alone, but by sourcing a ton of information from a bunch of reviewed firms. If we bring their logos up here on the screen, we have them. You've got V Squared. You've got Unruly, Verve Ventures, Onsite, Possible Ventures, IQ Capital, Intel Ignite, all firms that we know very well, many more. But all firms that I'm a very big fan of and know very well, so incredibly cool that you have not just built this in a small world or small vacuum of FMV, but have built it in collaboration with so many by sourcing the data. Maybe you could talk a bit about that first, the sourcing of data, the decision of how to structure this, why you thought that this wasn't just a cerebral exercise inside FMV, but something that should build on the shoulders of others.

7:17Yeah, 100%. So the idea for the Deep Tech napkin came basically from our observation from all the Deep Tech founders we talked to over the years. And we've experienced that many of the founders come from academic research environment and are usually not that educated about the whole startup investment world and everything around it. You know, it's rather untypical compared to the Zars world where you have a bunch of, you know, shared flats in Berlin. And basically everybody you know is either a founder or VC or you can talk about a whole lot of this stuff and educate yourself. That's not very common for the academic world.

8:00And this is what we experienced basically. And instead of telling the founders every time we interact with them about all of this, just from our perspective, we thought, hey, let's bring this to a transparent data-driven level and just publish a report, source a bunch of data, not just from our investment process, but also from our friends and colleagues from different funds, and then create an overview of the findings that we found. we found and uh obviously this was heavily inspired by the deep tech uh the zaz napkin from christoph jans in point nine so it's kind of like the uh yeah the single source of truth for like zaz uh commercialization stages and the company stages across funding grounds and we wanted to use the same format as people know it people love it and uh yeah we we got attached to that and then we just basically reached out to all of our friends and colleagues from from different funds and said hey we want your data please contribute and we will we will share the results with everybody and do shout outs and everything and also there's a upcoming private dinner for everybody who contributed so that's also part of the incentivization scheme there yes you need it You need incentives.

9:21I think there's someone in the rally that says that show me the incentive and I'll show you the outcome. Shout out to Jason Calacanis that we all listen to constantly. Sometimes it feels like that. Now let's go to the deep tech hardware napkins. So first of all, obviously, you're putting in hardware there, which I think is an interesting point to make. Because in many, am I right now? That's a contentious way to put it. But in many, many, many people would say the deep tech, the deep tech napkin. And then and then you not have only hardware, which I think is an important point here that you're very committed to hardware investing.

10:04And that's, of course, different from pure deep tech where, you know, somewhere around 50 percent of the deals that are being done. They're not the innovation that's being done there, but the deals that are being done are pure software. So let's look at this deep tech hardware napkin. And if I just describe it to begin with, so what you have is you can imagine in front of you a matrix where you have in the columns, you have pre-seed, seed, series A, series B. So you have the rounds there. And then in the rows, you have post-money valuation, the size of that, the size of the round, the source of the amount of public funding that's already in the company.

10:43You've got the yearly revenue that's in the company. And then you've got more contextual data on the team and the technology and the product and the commercialization stage that they're at. So let's talk through each and maybe let's start at your home base, which is Preseed. And you tell us a bit, what are the findings that you have here when it comes to Preseed in the deep tech hardware space? Yeah, so I think for us, that was kind of like a no-brainer. like the data that we found on this is that most of the deals that are being made at pre-seed are very team and very tech driven and so to give a primer as well like every company that we have in the deep tech napkin and every funding round attached to the data points that we have all of those companies they have raised funding we don't know the company names and details so it's everything is anonymized but we have to say that all of those companies are working on like very very large markets with disruptive technology so it's not those are like big opportunities that that are being chased and this is always the context in in everything that we the outline and at pre-seed stage we mainly assess the the team basically and look at the technology that they have come up with either in research context or in a corporate context sometimes and think about how can this technology transform a market that we think might be interesting and how do the founders think about both the tech roadmap and the risk associated here, but also the commercialization path and everything that is connected to the go-to-market strategy.

12:30And yeah, this is the centerpiece, basically. And then you have the post-money valuation being$8 million to$14 million. And you have the round size being$5 to$3.5 million. And you say that there's typically less than$500K in public funding in these companies. Could you talk a bit about the spread here where you're seeing, you know, why you're seeing some companies coming in the one end versus the other, things that are maybe different in the deep tech hardware space versus other spaces? Yeah. Yeah. So when we are looking at hardware companies at pre-seed stage to deliver the next milestones to reach the next value inflection point, raise a seed round or directly raise a series A after the pre-seed round, sometimes you need quite a bit of money to build the first prototype, set up a lab or something associated to CapEx investments.

13:31And that's why some companies need to raise substantially larger first round than their SaaS alternatives or like comparables. And this is what we also see in the D-Tech napkins that we have a broad range here. Sometimes you have companies that work a little less capital intense in the first stage. So this is why the range is that broad. Obviously, there's also a definition problem with pre-seed versus seed that we sometimes have. We try to clean up the data in the way that we define pre-seed as the first institutional round that goes into companies. And that's the data that we found. And if we then go to seed, which is obviously the next stage, you're looking at a post-money valuation of 9 to 25.

14:26And you're looking at round sizes between 2 to 6. Public funding is typically somewhere between 500K and a million. And this is where you can sometimes have some revenue, but you're saying it's rarely more than 500K. Let's just talk about the specifics of the round here. What are you seeing that's special to the deep tech hardware space versus others? Why is it important to delineate it like you do here? So to say, what's the core finding here? Because obviously, as you said in the beginning, founders in this space are not necessarily knee deep in venture and the tech ecosystem because they're working in facilities in hubs that are oftentimes outside of the capital cities.

15:15So maybe you can talk a bit about why is it so important in this space to specify this? Yeah, so I think the major transition for most companies from pre-seed to seed in the deep tech hardware domain is not really commercial as it would be in the SaaS world, where you then close the first customers, you make the first revenue. And this is kind of like your fundraising story. It's a bit more complicated for at least most seed stage companies that we looked at, where the major risk that was basically reduced from pre-seed to seed is on the technical side. And usually that's a transition from a white paper stage to a first technology demonstrator, where you can actually show tangible results of the hypotheses that you outlined in the first race.

16:04And usually it's a communication challenge for the founders to illustrate this milestone, basically. For some lucky founders and companies, you can complement this with also a commercialization story. Sometimes you have the first PUC that you close or first partnerships that you close that can validate your market hypotheses as well. But what we see frequently is that the pre-seed to seed stage raise is mostly based on tech and product milestones. Yeah. And then let's go to the series A and look at it there. So if we just say post-money valuation, that's 40 million to 100 million, typically. Round size, 9 million to 25.

16:51Public funding, a million to 5 million. And yearly revenue between 100K to 2 million. Now, let me understand a bit better the team and the tech and the product and the commercialization stages. When you're at Series A, what are you looking for to have established at that point? Yeah, so Series A is really, when you look at the round sizes, the valuations, this is really the key value inflection point for investors and founders, where there's this perfect blend of, okay, we are reaching a technology maturity where you can actually call your tech a product in many cases. And it's not just kind of like in a lab setting with very constrained parameters where the stuff that you are working on is actually working.

17:38You reach the stage of being able to showcase a real packaged product to customers. And this is also then where as you increasingly look at the commercialization and the go-to-market validation of your product. Obviously, that's not for every Series 8 stage deep tech hardware company. So we are looking at the Fusion company. They're probably still two or three rounds away from a commercialization path. But we are always looking at the averages here in the stages. And when we're looking at the team that is building this product and going to market, You can usually see at Series A stage that you shift a little bit the hiring focus from only technical people that you hire to individual contributors that help you with go-to-market, that help you with ops, with procurement, with financing, all of this stuff.

18:35And this is where the company also has this inflection point in the complementary setup of the whole team that you are building kind of like a holistic organization. Maybe you can add a few words to the shares that a founder should hold at Series A. So we didn't talk about this before, but you're saying before pre-seed, they should hold more than 90%. Obviously, these companies are oftentimes coming out of universities. So that's why you more often see them starting not at 100 % necessarily. And then before seed, you're saying more than 65 % is where you want to see the founders owning. and then you have before series A more than 50%.

19:17I'd love to ask you, first of all, is there anything in here that surprised you? Juxtapose it a bit to what would be common VC wisdom. Not really. So I think this slide is what is in the report is very dear to every investor's heart. So this is basically what we preach every day when we see a lot of deep tech founders coming from universities with completely ruined cap tables. And then we usually tell them, hey guys, why did you give your professor like 15 % of the company or the university another 10 %? And the company is basically set on a path that is not investable from the get-go, which is obviously quite annoying and frustrating, not only for the investors, but also for the founders to then realize, oh we kind of messed up at the at our zero basically and this is why we we especially took that data published it so we once can show that those companies that raised money we have over 100 data points now in the report from 100 companies that raised money across stages this is how their cap tables look like at each stage.

20:34So 90 % plus before the pre-seed, 65 % plus before the seed, and then over 50 % at Series A. So for us, investors, not really surprising. For many founders, probably surprising. But now we finally have the data to back our claims when we talk to them. I think if I should say anything, at least the numbers that I normally operate with, This is low percentages for the Foundry team. Oftentimes before seed, you'd be looking at having, if you've done a pre-seed round, you would maybe look at having given 20 % away. So that would put you at 80. And then before Series A, you'd maybe be down to around 70 or so, but not 50.

21:20So here, you're definitely looking at more diluted cab tables than I would normally expect. Yeah, yeah, that's a true point. So you always have to account for the dilution that you often have because of the universities, because of professors, because of the IP that you have to spin out of some sort of research context. So that leaves you with less shares to start with. So that's kind of like the baseline that is just a bit lower. And then, as I mentioned earlier, you just have way larger early stage funding rounds because of the capital intensity that is required for many businesses there. And that kind of trickles down across the rounds.

22:09Let me just ask you the question. how do you normally go about trying to solve a cap table problem at the pre-seed stage because it's you know you're you're born with a problem so to say what's the what's the usual way that you as as a now well-experienced pre-seed investor in a space where you oftentimes have universities that have been vultures um what do you do there yeah so there are multiple elements to this so first of all the if you are looking at a company pre-investment it's always depend dependent on how much you actually like the company and how much time and suffering you are willing to invest into making this cap table investable.

22:59And there is a spectrum from just giving advice to actually being part of the negotiation process. So in the past, we have both talked to universities directly, indirectly, talked to professors. Sometimes what we saw where you have professors with like 10, 15 % or so that you want to dilute a bit and they are hesitant to accept the reality of venture capital sometimes help to connect those professors to other professors from our network that know and understand the venture ecosystem a bit better because from professor to professor, the communication can sometimes be a bit smoother than the evil venture capitalist talking to the professor and telling him or her that they should dilute.

23:50And this is a hack that sometimes works. but usually I think that's a great I think that's a great great piece of advice to anyone like pair them up with another professor gods like to speak to other gods let's go to series B so and we will go to some of the learnings again of course but I just want to round us off when we're looking at the side by side comparison of the rounds and series B you're looking at rounds anything between 50 to 400 million, big, big rounds, obviously, 15 to 60 million in total, talking round size, and then public funding will typically be a billion to 5 billion. And the yearly revenue here will be more than 2 million.

24:37So anyone doing multiples on yearly revenue here will very quickly see that revenue is not the core metric that you're basing your decisions on. But I'll let you take us through this commercialization technology and product and team, just as you've done on the other stages. Let's hear where you're seeing companies at the Series B being at. Yeah. So first, I think a short disclaimer that the data that we have on Series B companies is compared to the other stages a bit more lightweight. So take the data with a grain of salt. So what we usually see is this, and you pointed that out correctly, is this weird mix of still quite low revenue levels, but like major valuations that companies raise at and also with large round sizes, obviously.

25:34So obviously that as a Series A stage company that wants to raise a Series B, you have to work in a really big problem in a large market and you have to reach this commercialization validation that while still having low revenue, like actual revenues, you have to show that you have the potential to close a lot of revenue in the coming months, years, etc. So it has to be this key point of investability in the commercialization organization where you're saying, hey, we have a couple of customers lined up. They have huge demand. Our technology is mature. The product is stable. We can operate at attractive unit economics and we can now scale go to market.

26:21And I think if this point is reached, then people will allocate money if the market and the opportunity is big enough. But looking at the companies that we have data on, obviously, those are like the most successful European deep tech companies that raised from the best investors. So, yeah, not every company will make this transition from A to B. Okay, so now let's dive into each of the attributes that you're looking at when it comes to defining the characteristics of these deep tech hardware companies. between rounds. And I want to start with the founders. And I love the question that you ask, what do founding teams look like?

27:05And there you're saying, well, you definitely see that in any VC space that you're very team driven. But what you're also saying is that investors are particularly betting on founders who can continuously create new IP. I love that. And at the same time, to anyone watching this, we're pulling up the slide from your presentation on this where you're showing exactly what share of the startups have founders in these specific different domains, but maybe I'll just let you talk over it. Yeah, so I think one of the key requirements for us and analysis factors is always how advanced and how differentiated is the technology that the company is building.

27:54and that is closely tied obviously to the founders building it and they are usually usually have a phd founders who come from an extensive research background um so in most cases this is the the background of of the core team and um there you basically bet on this company not having built uh ip and just bringing that to market it's never that easy but instead complementing what they already have and innovating steadily on the IP roadmap and bringing the kind of like the technology, like the immature technology that they probably have built in research up to a stable productized technology that they can commercialize eventually that usually requires a whole lot of research and development and taking technology, engineering risk, research risk, and solving really, really hard problems along the way.

28:54And this is what you have to be confident about when you are investing in a deep tech team. This is why you usually look at for signs of research greatness, you might call it. At the very early stages, the precede stages, you're finding that there's very often a commercial co-founder. And that number is actually dropping when you're going into seed and and and serious a so you're going from 54 of the startups having a commercial co-founder in the pre-seed stages then 44 in the seed and then all the way down to 29 so only a third of the companies at serious a have had a commercial co-founder that's an interesting finding any reflections on that yeah this was also quite surprising for us so So when we're looking at this weird drop in the data where you actually have less commercial co-founders at companies that raised seed Series A rounds, we connected that to what we call commercial savviness in technical founders.

30:02So that's a factor that we even look at pre-seed startups when what you want to have is at least one technical person in the founding team that knows the technology inside out and that has developed the technology as well. But that also brings commercial savviness, that understands the market, that likes to talk to customers, that a person that understands the unit economics and can build an Excel file to calculate kind of like the cost structure for the business. And our hypothesis on why those type of founders are better equipped to raise really large rounds at Series A and Series B stage later is that when you are actually building a product that is very technical, we believe that those type of founders that kind of like bring the best of both worlds are the best CEOs for companies that really want to hit big.

31:00And sometimes we also have a problem with kind of like this drafted business person that they met at university and is coming into the company only to meet the commercial characteristics for investors? I think logically, I don't know if that's logic, but I really like that explanation, if I'm very honest. I've seen at least some pre-seed deep tech hardware companies where it feels like such a mental trap to think that you can, that either as a founder or as a VC, think that you can compliment a very technical person with a very commercial one, and then that will work. Then you have the whole rounded team working beautifully because there's so much knowledge, there's so much intuition that must lie with the technical person that does not translate even to a very good friend and trusted colleague who then is the commercial guy.

32:08I really think that there's a lot of truth in what you're saying there. Like personally, I've always, and I was offered when I was figuring out what do I want to do with the rest of my life, I was offered a very commercial CEO role in a deep tech startup. And I was just like, I will never understand the tech well enough here to go down this route. I will not be a good CEO in this company. And I think a very intuitive example here is usually the question like, who is going to do sales? You need a commercial founder to do sales. But honestly, when I'm looking into our portfolio in most startups, the sales and the go-to-market approach is so technical.

32:53It's not like you are talking to a procurement department and you are talking about numbers and kind of like a shallow product discussion. discussion but from the first call up to the final decision making you are talking with technical stakeholders at least in many cases that's why you need to answer technical questions that you can only do if you understand the tech so it's it's I think it's all very connected if we if we look if we reflect on the on the maybe less so VC problems but the business angel problems because because VC you're kind of you're only in the game if you're good enough to get LPs to put money behind you, which puts some bar there.

33:33But you have many business angels that are hearing and can see that deep tech is the next big thing. So I want to do that. But it's so tempting to come in with that mindset of a commercial business angel thinking, obviously, this team needs a commercial person, but I can help them find that. And then that's how you solve it. It's just not, I think you're completely right. It's not solvable in that way. It needs to sit with the CEO in most situations which needs to be the person with technical capability. 100%. But I also have to say we have also companies in our portfolio where you actually have a more business-oriented or business background person in those teams.