Investor Chat with Michael Rager of DTCP.Capital

On June 17th 2021, I hosted “Investor Chat and Founder Pitch” event with Michael Rager, Managing Director at DTCP in the Growth Equity team about how to raise growth capital.

DTCP is an autonomous investment management group investing in growth equity and digital infrastructure. The firm has raised more than $1.0bn from corporate and institutional investors. We believe that the convergence of communication networks and devices with the internet is creating more wealth, disrupting more businesses, and unleashing more innovation than any force in the history of technology. We invest behind our belief of the great benefit to society of ubiquitous connectivity and a fully digitized society.

DTCP is an autonomous investment management group, majority-owned by its management team and backed by Deutsche Telekom. The firm has raised more than $1.0 billion from corporate and institutional investors to invest in growth equity and digital infrastructure.

DTCP’s growth equity team is a global SaaS investor. They invest out of the Fund II Vintage 2018, which is their second fund of $350 million. DTCP growth equity invests up to $30 million in venture and growth capital in predominantly B2B SaaS companies in Europe, USA, Israel and South Korea. In each of these regions, they have local teams to ensure that they provide the best means to connect their entrepreneurs in the relevant ecosystem there.

They are very proud of their portfolio, both the ones that have already exited, as well as the ones that they are still working with. Typically, DTCP likes to get engaged at Series B or later and can invest all the way through the pre-IPO round. For example, LeanIX is a company from Germany in which they invested in Series B in 2017, whereas for Fastly, they led the pre-IPO round back in 2018.

Our featured investor for this event is Michael Rager who holds a diploma in business economics from the University of Regensburg. He joined DTCP from Bauer Venture Partners. He has helped build a behavior retargeting company in Germany, called Xplosion Interactive, in the mid-2000s and was the Senior Manager Product & Business Development. They scaled Xplosion Interactive to roughly 100 people and got acquired by Interactive Media, a Deutsche Telekom company. The company is still up and running.

After Xplosion Interactive, Michael had a successful run as a consultant in the Corporate Strategy & Development of the Otto Group. In 2014, his adventures in the VC world started, as an investment manager at Bauer Venture Partners, and since early 2016, Michael Rager started as an Associate and Principal at DTCP in the growth equity team, and became a Managing Director in July 2021.

In this Investor Chat, Michael shared his knowledge on how startups can get funding outside the big hubs, what an entrepreneur should consider when she does investor due diligence, when and why you should approach a VC early in the process. Michael said that:

When I started in VC, it was a built custom that companies came to your office to pitch. It's been a while. Because as you say, there is no shortage of potential funding. Good companies are aware of that.

He also talked about DTCP’s Flightpath valuation framework, what DTCP offers as a VC, and what they expect to see in a startup to invest.

As a VC, you try to build a relationship with the company you invest in and with the founder for a longer period of time. If the founder said I'm going to reach that target within 12 months, and you talk to him 12 months later, you can see how close s/he is actually. So you get a feeling for how reliable is that planning.

The discussion was hosted by Martin Backlund Business Developer in Invest in Skåne, Erik Larsson, Portfolio Manager and Tech Investments at LU Holding AB, Fredrik Josefsson, Head of Entrepreneurs and High Growth at SEB. During the event, 6 startups from Sweden pitched to DTCP.

• Vanja Samuelsson, Founder and CEO at Qoitech, creates the most effective developer tools for energy optimization of battery driven products. They've been on the market since July 2017, formed as a spin-off of Sony Mobile with happy customers from 40+ countries, from makers to Fortune 500 companies.
• Ulf Gerold, CEO of Hyker Security, a majority owned spin-out from Saab Ventures. They believe in protecting data rather than infrastructure over the whole lifecycle. True Full Lifecycle Encryption is enabled by our technology which could be built into IoT solutions, web applications and other solutions where trust and integrity is of importance in a cloud environment.
• Stefan Borg, CEO of SiB Solutions, was founded by a number of experts in logistics and technology who for more than 25 years saw the same problems repeated in all companies and logistics tasks.
• Rasmus Persson, Co-Founder & CEO of Homepal AB, a data platform that collects data from different systems, transform and makes it consumable in your chosen software.
• Johan Nilsson, CEO of Connectitude, an AI-based SaaS that makes after-sales profitable for industrial machine builders and OEMs to secure sustainable innovation, by brickwalling pirates through loyalty. A connected world requires a new attitude - #connectitude
• Anders Oskarsson, CEO of Abstraktor, it offers a radical new approach to testing complex systems and functionality with protocol-based communication.

You can re-watch the event and read the key learnings below:

DTCP’s Strategies and Offerings

Q: Your team at DTCP has two different strategies, which is Growth Equity and Digital Infrastructures. Why did your team decide to set up those two different strategies, and what are their differences?

We were initially spun out from Deutsche Telecom, and Deutsche Telecom remains an anchor investor in the growth equity funds. The question at the beginning was how can we best or in what ways can we leverage the access, talent, knowledge, and assets that we have thanks to that LP (limited partnership), and two strategies came up.

One is the growth equity team that looks at software technologies but does not have any strategic implementations. We can invest in companies that are close to DT or the TMT (technology, media, and telecom) sector, for that matter, but there is no need for that, not at all. And from a structural setup, we, to a majority, own ourselves, which guarantees flexibility and autonomy to try and pick the best companies from our perspective.

The digital infrastructure fund is more of a private equity play, so they do late-stage buyouts, and they will not make early-stage investments, typically. They can look for controlling stakes and are the typical private equity shop in that respect, where they also leverage the assets of the team to a bit of a greater extent than we would do at the growth equity team.

Q: DTCP has offices in Hamburg, Tel Aviv, Menlo Park (California), but you also set up an office in Seoul. What was the reason to have an office in South Korea?

One of our LPs, SK Telecom, in the second fund is from South Korea, so we thought that this might be a good opportunity to get exposure to that market and see how it works. The Asian market works in very different ways than the European market, and we wanted to create learnings there and get a feeling of how the ecosystem is there and what types of investment can be made there. We're still early in the journey, so anticipating the question for expert advice, maybe we have that conversation again, at a later point! But that was the reason from that perspective.

Q: With what kind of different ways can DTCP help out apart from providing capital?

So there are a few ways. As I mentioned, I come from the startup world myself, and this is true for 90% of the team that we've all been entrepreneurs ourselves. We've been where you are, we know the headaches, we don't scare easy.

Because we know it's a tough ride, and things always burn and anchor wrong, that's just how it is, how it actually should be. So we tried to be a positive way, the sounding board that you can turn to, and ask for advice and help you and be calm in tough situations. That, I think, is one part.

The other part is thanks to our network from our anchor LPs and our other LPs. We have a global network of large enterprises where we can try to open doors, speed up those processes occasionally, or do business with our LPs. Some investments lend themselves better to that than others.

But I think, overall, our portfolio made over half a billion in revenue with our LPs. So there are various proof points to the fact that this works. It doesn't work for each and every one of our investments, but for many, it does. And obviously, it helps, and we have a strong alignment of interest, as we come without any strategic hopes or warrants, for that matter. Any dollar in ARR helps because it increases the valuation.

And the other part I mentioned before, we have local teams on the ground in Europe, Israel and the US, and this local network helps, even if it's just a "Hey, what's the best place to open an office? Can you take a look at that CV? Is that a prime candidate? Do you know anybody in your network who has been working with this person or not?" And this is obviously a bit easier if you are from that area than if you would be German experts sitting in Silicon Valley.

So, these company-building, sales enablement and operational guidance or help from a localization perspective are the key pillars we're trying to work with.

Evaluation Process at DTCP

Q: The Growth Equity runs a dedicated strategy focused on enterprise SaaS. The differentiator is a very analytical and data/financials-driven, ‘no emotion’ investment process. Would you please explain to us what the “no emotion” investment process is?

I'm still trying to find that out myself because so far, we didn't have a funding process that was without emotion. And I think it would also be a bad sign if that was the case, to be quite honest, especially in the earliest stages. But having said that, it is true that we are very numbers-driven; we are very analytical.

We developed our Flightpath model, where we developed a general P&L (profit and loss) framework, through which we run all the numbers that we get from each and any company.

Now, having done this over half a decade gives us the opportunity to have a very thorough data set of companies from series A all the way to IPO and see on a comparable view what does a typical or good company look like in each and every given stage? How high should growth be? What are specific efficiencies that you see? How is net retention in general? And we automated that.

So we've been getting the numbers, and with a five to 10 minutes effort, you get a very granular view on the numbers of the startup. This immediately unearths the points where the company could put a bit more focus on.

We can see where we can help the company fine-tune a few things or see that these are certain areas that are going very well, also in a comparative sense. So from a numbers perspective, we get a very good and very quick and very thorough analysis and feeling of if this is a high potential company or not.

And this is what we refer to with the analytical approach that really is data-driven and automated, and as it should be, from our perspective. Do we, despite all that, still have an anti-portfolio? Yes, we do. But we still try to eliminate the error rate as much as possible with that approach, and I think looking at the portfolio has worked quite well so far.

Q: Can you elaborate more on the Flightpath evaluation tool? For example, if one of the startups in the discussion today approached you, how would you use the tool to evaluate them?

What we typically like to do, and that was at least so far, very well received, we do our analysis. We have eight or nine PowerPoint slides that have a summary with a benchmarking on how the company performs across growth and efficiency and compare it to the top quartile of companies at that ARR stage.

Then, we break that down into quarterly numbers, look at each of these items quarterly, and annotate that. We use that for the discussion with the company when we dive into the financials. Where we say, okay, based on the financials that you gave us, we see that there is an issue in sales; because either sales cycles are too long or the market needs education, or the sales efficiency is not where it should be. Is that due to your pricing model, the product? What are the reasons for that, and quite quickly, we get into a good and operational conversation with the company in a very transparent way.

We don't try to hide anything. Even if we don't end up investing, that conversation gives at least something back to the startup because founders get the feeling that this is how investors look at our numbers. Because if you're the startup, all you typically know are your own numbers. And what you lack is a bit of orientation and guidance. Is that good? Or is that bad? And if it's good, how good is it? And we aim at providing that transparency also to the company. And it helps us on identifying very, very quickly what to address with the company. And if this is something that we are really interested in or not.

Q: How big of a company stake does DTCP take when they invest?

I think it varies; we don't have a specific target ownership where we say we need to have 20%, or we walk. That's not the case. We're flexible in that. I think the key point is we are a minority investor, we don't seek majority provisioning, we don't seek a controlling state.

So we are a classical VC in that perspective. And we talked about check sizes; if you invest at a pre-IPO round, typically, your stake is slightly smaller than when you leave the Series B. But we're flexible in that. We'd rather be on board with great companies than miss out on any chances because of that.

VC Market in the SaaS Industry

Q: It seems that investing in fast-growing SaaS companies with more than $5 million ARR is an extremely competitive scene for a VC. There are not that many companies that fit, and the companies that do, have quite a few options. Is this correct, or would you describe the scene in another way?

That's spot on. When I started in VC, it was a built custom that companies came to your office to pitch. It's been a while. Because as you say, there is no shortage of potential funding. Good companies are aware of that.

Especially in Europe, what we've seen over the last 5 to 10 years, is that you have your second or even third generation of entrepreneurs who've been there, who've done that. And when they do angel investing, they immediately enable founders to get access to other funds that they've been working with before.

Competition, especially in that bracket, is very, very tough, and that's okay. The key value rests with the founders and what they build. So I don't see anything wrong with them having an opportunity to find the best partner for them. And if there's competition on the VC side, that just enables that you try to stretch a bit more and actually help them and have a positive impact on them. But yes, competition is very tough.

Q: How come you are not investing in hardware?

It was a conscious decision from the beginning when the fund was set up. As with startups, the same is true for VCs. Focus can be a good thing and we settled for software, as we saw a great opportunity there. And it's very interesting how comparable the metrics are across various industries in SaaS.

If you have a SaaS business model, you have a good way of knowing your way around quite quickly, whereas, with hardware, that knowledge is not as easily repeatable. Which also means that you cannot help your startup as much as quickly because you need to educate yourself to a larger degree every time again, and it was just a matter of focus. I don't think there's anything wrong with hardware. I think at least once a year, I try to get a hardware startup through in our fund. But yeah, so far, success has been limited.

How to build relationships with VCs

Q: Your team led the $65 million Series C round to invest in the cloud - based voice platform Aircall, last year. Your team has been following Aircall’s journey for years. What made your team decide to lead the round and invest now?

As a VC, you try to build a relationship with the company you invest in and with the founder for a longer period of time. Because it gives you a good feeling of the founder's reliability. If the founder said I'm going to reach that target within 12 months, and you talk to him 12 months later, you can see how close he is actually. So you get a feeling for how reliable is that planning, and what the company says, and it's not a one way street for the founder.

It's also the ability of; I've been talking to this guy for two years, had the occasional question or ask for help. Did that actually materialize, or was it just marketing that was put up there? So, it's not untypical that we have a long relationship with companies before we invest.

And in some cases, it's just that we talk to them ahead of them reaching the stage where we can invest, and it's just a matter of timing, I would say. So it just happened that at that point in time, it fit. And it was good. And we are still very, very happy with that investment.

Q: What are some of the most common mistakes you see founders make when approaching your team?

The only part where it becomes difficult is when it is clearly out of our investment thesis. When it's either B2C or D2C models, or absolutely hardware heavy business, then we simply don't have the flexibility to invest in that company. That would be the only mistake, I would say.

You can't call it a mistake in that sense, but then it becomes tough. We're still happy to have a general conversation and get to know each other. But the question, will you invest in us or not?

That answers itself rather quickly at that stage. Other than that, so far, I haven't come across founders who were indecent by reaching out, and we don't need numbers in specific form, shape or color, so it's very hard to make a mistake in that sense.

Q: The six founders that are pitching today are still in an early stage; when would be the right time to approach your team?

Always feel free to reach out to have a general conversation, simply to get to know each other and do a bit of sparring. We're always happy to engage and have that conversation to get to know each other. If you think about funding, reach out when your company is in $2-3 million in ARR. From then on, it makes sense. Because typically, I'd say 8 to 12 months from that point, you enter into that stage that enables us to invest. But for general conversation, always reach out. Always happy to get to know people and talk.

How to get funding outside the big hubs

Q: How to get funding outside of the big hubs like Berlin, London, and Paris?

I think, especially in Europe, there is no shortage of capital anymore. The amount invested is constantly growing. Capital is becoming increasingly flexible with French funds investing in Germany and vice versa.

And is also becoming more global, especially in 2020 and the first half of this year, we saw a significant increase in funding that also came from the US. And I don't want to say thanks to COVID, but certainly, one consequence of COVID was that building relationships with founders, and deal sourcing from the VC perspective, is now easier, like the conversation we're having here now, which is leading to the fact that it is irrelevant where founders are at the end of the day.

From that perspective, you really don't need to be in one of the hubs to attract good and global investors. And we could look at just a handful of examples of companies that have already proved that you can raise decent amounts of money and have runaway successes.

This is a short overview of LeanIX and Pipedrive, companies that we invested in, and startup Staffbase in Chemnitz, which recently became a unicorn. Instana that sold to IBM, last year. These are all companies outside of the hub but managed to attract very good investors and create a lot of value.

And how do you actually attract international VCs easily? The first thing is to network. I think this is what we're doing here. Meet people, engage with those that are outside of our local region, build up a relationship and have regular exchanges on that.

Conferences, as soon as we can actually go back to conferences, are obviously a very good means to do so as well, especially since all international investors are at the big conferences. It's a very good way to condense lots of meetings with all kinds of investors within two days, but it's very important to prepare and do investor due diligence.

Really think who an investor that you want is. What do you want from an investor, what do you need, who could be able to provide that, and then check if you at least, to a certain degree, match their investment criteria that are either available online, or that you've heard from other companies that are already in their portfolio.

And look at what criteria investors typically have on the left-hand side. These are the general criteria that 99% of investors are looking and the importance of each of those varies from stage to stage. But overall, it's about the people and the team that the investor would invest in. Also, how good is the product? How differentiated is it? How good is the traction? How big is the market and what do the rounds typically look like? These are the key questions that anybody has on the top of their mind.

If we narrow that down a bit to DTCP. We are looking for companies that are in a Series B. I don't know if you can call it a Series B today anymore though, but at least companies that are above $5 million in ARR, they pose very high growth and have SaaS as a recurring business model. We tend to stay away from hardware, but we'd love to see a proven and scalable go-to-market strategy with reasonable underlying efficiencies, where we can simply help take that global and scale that further. And that combined with an overall good capital efficiency with the company.

Then the main problem with startups in regions outside of tech hubs is that we might not know them. That is, in fact, the only issue. I can say for sure we have never not invested in a company, because it wasn't in Berlin, or London for that matter.

So we're happy to go to remote places as well. Because it's about the talent, the team and where it is, and not necessarily the address. So, all in all, I think the key takeaway is, if you're not located in one of the key hubs, don't think about it as an issue. Investors are looking for you and are very happy to invest in these areas as well. That is the very short overview.