VC investment thesis: Point Nine Capital

This is the Point Nine Capital investment thesis shared by Chris Janz, a partner at the fund. This is not their formal, final one, but rather a draft they have shared (As at August 2017).

I just found a blog a former member of the team wrote on Hardware startups. I’ll at it at the end for fun. I’m not sure it is a formal thesis.

Point Nine Capital is a Berlin-based venture capital firm focused exclusively on early-stage Internet investments in areas like Software-as-a-Service (SaaS), online marketplaces and mobile.

The fund and its managers, Pawel Chudzinski and Christoph Janz, have backed a number of highly successful Internet companies such as Delivery Hero, Clio, Shiftplanning, Vend, Typeform and Zendesk from their earliest stages.

In Chris’ words:

Over the last couple of weeks and months we spent some time putting our investment thesis on paper. The purpose of this exercise was to challenge and discuss our implicit assumptions and to get everyone on our team aligned on what kind of investments we seek.

One of the things that being very clear about our investment focus helps with is getting to “no” faster. If that sounds pessimistic, remember that we see thousands of potential investments every year but can only do 10-15 of them. Just like it’s crucial for sales teams to have clear qualification and disqualification criteria, it’s important for us to focus our time on “higher probability deals”. That means we’ll have to be able to quickly pass on a large number of deals that are likely not a good fit for us. Our “filter” is of course not perfect, so we’ll inevitably pass on lots of great companies, some of which will end up in our growing anti-portfolio – but there aren’t enough hours in the day to take a close look at each company that we see.

A fast decision process is also important for founders. As we’ve learned from this survey, being left in the dark is the single most important reason why fundraising often sucks for founders. We will obviously never be able to make decisions based on a simple algorithm, if only for the fact that the founding team remains the most important of all criteria. But anything that helps us streamline our decision making process is welcome.

Once the document is in a publishable form we will post it. Bear with us for a little while as we’re polishing the document a bit to make it more self-explanatory and to remove the worst typos. 😉 In the meantime, here’s a sneak preview.

Point Nine Capital investment thesis

We will continue to focus on two business models: SaaS and marketplaces:

SaaS

• We use a broad definition of SaaS. Usually, the first “S” stands for “software”, but sometimes it stands for “something”, e.g. a combination of software and hardware or software and data.
• We’re interested in horizontal and vertical SaaS. What counts is that the startup is aiming to solve a big enough problem for a large enough number of potential customers in order to build a big business. As a rule of thumb, we’re looking for markets that consist of at least 3,000 whales ($1M ACV), 30,000 elephants ($100k ACV), 300,000 deer ($10k ACV) or 3M rabbits ($1k ACV). ¹
• We’re equally interested in companies targeting SMBs (AKA rabbit and deer hunters) and companies targeting enterprises (AKA elephant and whale hunters). What’s important is the right founder/market fit. For companies targeting very small businesses (AKA mice and rabbit hunters) we want to see the potential for viral distribution.
• We’re looking for companies that we think can build a 10x better product and/or drive a paradigm shift in the industry. ²
• We want to invest in companies that can eventually build moat e.g. by becoming a system of record or a “system of intelligence”; by building a large data set that in combination with machine learning translates into a superior product; by building a platform; or by becoming a SaaS-enabled marketplace.
• With very few exceptions in areas like accounting, we’re looking for companies that have the potential to win the US market.
• We’re looking for SaaS companies that have the potential to get to $100M in ARR within 7-8 years and to $250-300M ARR within another 2-3 years.

Marketplaces

• Like in the case of SaaS, we use a broad definition for marketplaces. For us, a marketplace is a digital platform that brings two or more parties together and enables them to “transact”. The object of the transaction can be a physical product, a digital product, a service, or in some cases a piece of information or knowledge.
• We look for startups that leverage marketplace dynamics to create unique user experiences in fragmented markets, with the potential to develop a moat through network effects.
• We believe that marketplace platforms will continue to emerge in the most unexpected of places and in the most unexpected of forms. They will continue to transform entire industries.
• We are open to all of C2C, B2C, B2BC and other types of marketplaces. We are particularly excited about B2B marketplaces and “SaaS enabled marketplaces”.
• We are trying to identify platforms able to become international leaders. Thus, we will typically look for early proof of ability to operate in more than one country or globally.
• We are looking for early signs of liquidity. ³
• We look for founding teams with strong commercial sense.
• We think that blockchain technologies have the the potential to disrupt many marketplace models as we know them today; we will be exploring them in depth.
• We look for marketplaces that can become truly significant. In monetary terms, this means the potential to ultimately generate hundreds of millions of dollars in annual net revenues and billions in GMV.

We will continue to invest in new areas and technologies that we like to dub “Frontier Tech”

• While we’re focused on two business models – SaaS and marketplaces – we’ll continue to keep our eyes wide open with respect to new technologies.
• We’re extremely interested in new opportunities in areas such as AI/ML, blockchain and cryptocurrencies, IoT and hardware-as-a-service, drones, or AR/VR. We have already made investments in most of these areas and will continue to do so.
• In many of these cases there are complex tech problems that must be solved. We’re happy take a certain level of technology risk, but at the same time we’re looking for founders who find ways to bring a product to the market quickly and cheaply.
• While a superior technology will usually be key to entering the market and have some early wins, most technologies will eventually be commoditized. Therefore we’re looking for additional sources of long-term defensibility such as high switching costs and large data sets (see the section on SaaS above) or network effects (see the section on marketplaces above).

We will continue to focus on early-stage investments

• We’ll continue to focus on seed investments, investing anything from a few hundred thousand dollars up to around $2M in “seed” and “late seed” rounds, typically in companies that have strong indications of Product/Market Fit and promising early traction.
• We will continue to make what we call „founder bets“: Idea-stage investments into proven entrepreneurs from our close network. In these cases most of our „rules“ don’t apply. When people like Doreen Huber, Fabian Siegel, Iñigo Juantegui, Pan Katsukis, Sebastian Diemer or Stefan Smalla start something new, we want to be part of it. ⁴

We will continue to invest internationally

• Europe is our home market – we’ve made investments in most European countries and we’ll continue to invest all over Europe.
• Especially in SaaS we will continue to invest outside of Europe as well – e.g. in the US, Canada, Australia, New Zealand and other countries.
• In SaaS, our assumption is that you can start almost anywhere but you have to win globally (which requires winning the US). In marketplaces we want to find companies that can win several large markets.

We continue to aspire to be a “Good VC”

• We don’t pretend to be the right investor for every startup. But our aspiration is that if we do invest in a company, we’re the absolute best partner the founders can dream of and that we’ll play a significant role in helping the company get to the next stages.
• We’re optimizing for the long run in everything we do. You “always meet twice in life”, as the German saying goes.

HaaS – An Investment Thesis for Hardware Startups

Historically, innovation tends to happen in waves:

• 1970s: it was all about PCs — Intel (1968), Microsoft (1975), Apple (1976) — and enterprise software — Oracle (1977), SAP (1972)
• 1980s: hardware for communications — Cisco (1984), Qualcolmm (1984)
• 1990s: consumer internet — Google (1998), Amazon (1994), Yahoo (1994)
• 2005s: social — Facebook (2004), Twitter (2006)

As an investor, our job is to try to find which companies can define the next wave of innovation — and make sure we invest in them!

Today: SaaS is sexy again? Fintech? Mobile? Big data? … It’s not clear which one will make the next $100bn business.

Tomorrow: could it be hardware again?

If you compare hardware to software, you will get why it is “hard”:

Lean is not easy, at all!

Longer and costly development cycles: in software you can prototype quickly and iterate several times with limited capital — sometimes even a single developer can make it! Hardware requires iterating on physical products, which means upfront capital investment to develop and longer development cycles.

Harder to get customer feedback: in software, you can create a website, buy some ads and start getting visitors who generate feedback which allows you to learn and iterate. In hardware, even if you manage to build a prototype, it’s not obvious how you get this product in the hands of thousands of potential customers to collect their feedback in order to iterate.

Unique skills: the founding team is always key for the success of a startup, but while starting software can be done with 3 kinds of talent: product, marketing, sales; hardware requires an extra degree of diversity that pushes companies to be larger from day zero: product design, electrical engineering, operations, marketing, sales, etc.

Lower margins

In software the most relevant costs of delivering your product come from servers and third party services. In hardware, you need to take into account that a big chunk of the final price goes to paying the producers, the transportation companies and the distributors of the product.

Intensive in upfront capital

In hardware investments, extra patience is required: it not only takes time and money to build a product, it also takes upfront investment to get the product into distribution channels — you need to invest money to deliver the products to the retailers, who at the same time will pay you with +30 days delay.

For those reasons, among others, you might be able to understand why VCs have been avoiding hardware investments and focusing their efforts on purely software startups.

Why is hardware the new cool kid in the town?

While software is eating the world, we (still) spend most of our life interacting with the real and physical world.

Smartphones aside, the physical world is still a lot less smart and connected than the online one, which means, plenty of opportunities for innovation!

Others pointed before some of the trends that are lowering the barriers to entry into hardware, making it leaner and solving some of the financing issues:

• Prototyping platforms (arduino, raspberry, sparkcore, edison, etc.) and 3D printing allow hardware entrepreneurs to iterate faster and to cheaply find product-market fit
• Those prototyping platforms also leverage common software languages, which allow web developers to “recycle” into hardware developers very quickly
• Technology (battery efficiency, communications, etc.) is improving quickly while reducing its costs.
• Smartphones are ubiquitous, they get updated/replaced very often and are becoming the most powerful sensor platform out there.
• Pre-ordering online (kickstarter, indiegogo) allows quicker and cheaper early distribution for small batches, which brings earlier customer feedback and some financing upfront.
• Supply chain-as-a-service (PCH, …) takes care of financing and production at scale.
• Online eCommerce/Software distribution channels also work for hardware products

Entrepreneurs and capital are now jumping into hardware at an accelerated pace. It also helps that some hardware companies are IPOing — goPro, jawbone, etc. 😉

HaaS: Hardware as a Service

Note this was written by Rodrigo Martinez. I didn’t dig into the background, but I think it was him sharing a blog on investment thesis as they were looking at harware startups.

So far, the early successes in hardware have been on the consumer front. But individual consumers are very unpredictable when they buy for themselves, while business customers tend to be a lot more “rational” (predictable?) when they buy for their companies — ie. would that product improve my business?

Hardware is already complicated enough on its own to add the unpredictable behaviour of consumers. At Point Nine we have an easier time understanding B2B models and we have been investing very early in great SaaS companies. When we started looking at hardware, we tried to find opportunities where the dynamics we understand in SaaS also apply, including:

• Subscription/recurring business models
• Online direct distribution channels — content marketing, SEM, etc.
• Products that are “almost software” — where most of the “intelligence” is on the software side, not the hardware device.

Show me the money: announcing our first hardware investments

We not only believe in these opportunities, but we are putting our money where our mouth is. In the last weeks, two of the first hardware investments of Point Nine were announced — in alphabetical order:

Automile.io all cars connected

We’re very impressed by Jens and his team — together, they have built an elegantly simple and API-first solution to manage a fleet of vehicles.

The opportunity is clear: cars and trucks are an integral part of the transportation infrastructure, automile’s product is amazing and the team is unique!

KISI Forget about keys

Bernhard-ware and the team have built a solution that allows companies to control access to their buildings with a device we always carry: our smartphones! Of course, the system also provides APIs which allow you to generate virtual keys, with an expiration date, on the fly.

What do those two companies have in common?

We followed the same criteria we use to evaluate other investments:

a) Great markets: both of them tackle massive B2B markets.

b) Great products: as mentioned before, in hardware, building a product that “just works” smoothly is even more complex than in software. Automile and KISI have both cracked it! It works, it’s easy to use, it’s easy to on-board …

c) Early traction: both companies managed to build some early traction, both have enthusiastic early adopters, and even more interestingly: both managed to sell directly online to their customers.

In summary, all three aspects are the result of extremely talented teams that have managed to build a commercial product in a very lean way.

Are you an entrepreneur building a HaaS company?

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