HHL SpinLab Investors Day: Highspeed in Leipzig
28. November 2018
On November 16th, 2018, the semi-annual HHL SpinLab Investors Day organized cooperatively by the SpinLab and the HHL took place in the backdrop of the Porsche plant in Leipzig. At the event, the SpinLab startups and a handful of other startups from central Germany met with a variety of private and public investors. In addition to pitches and personal exchanges about investment potential, thematic discussions on current developments and ongoing challenges in venture capital formed another exciting pillar of the program.
Each startup from the current SpinLab class, as well as selected startups of the Central German entrepreneurship initiatives, (exist, SAXEED, SMILE, Thüringer Hochschulnetzwerk and univations) were given the opportunity to introduce themselves to the investors. As the day progressed, the venue became the backdrop for discussions and exchanges between founders and representatives of more than fifty different investment companies. Additionally, the startups had chance to win a prize for the Best Pitch, on which both a professional jury and the audience voted. Keleya, the digital midwife for expecting moms, secured the Best SpinLab Pitch provided by Leipzig municipality. The prize awarded by the Karl-Kolle-Stiftung for the Best Pitch of Central German startups went to Morpheus Space GmbH, which develops and produces propulsion systems for nano-satellites.
Is AI the future of VC?
In the first panel discussion, representatives of various Venture Capital (VC) companies discussed the potentials and risks of using Artificial Intelligence (AI) to automate the identification of promising startups. “While there are already some AI-backed VC companies in the US, in Europe only a few have taken full advantage of the technological possibilities” Karolina Kukielka (InReach Ventures) opens. She adds a brief presentation of their company, which aims to use AI to discover and promote the hidden startups outside the overrun hubs. The optimism and the progressive outlook of her presentation resemble the pitches of the techn startups. On the other side of the debate, Thorben Rothe (Iris Capital) argues that “data necessary for AI is limited – both in quantity and in quality”. This holds particularly true in the early stages of investment, where however also most of the deals tend to take place here. Furthermore, the “team” factor, often crucial for a startup’s success, is addressed. How should human factors such as passion, work ethic or trust be quantified and processed automatically in data analysis? Jochen Klüppel (Grazia Equity) brings the growing controversy to the point, when he says “it pains me to argue pain against AI – it’s such a disruptive technology, but maybe it just lacks a pinch of common sense.” Despite all the doubts, all participants repeatedly confirm that meaningful evaluations would probably be possible given the right data. Ms. Kukielka (InReach Ventures) confirms “the challenge for us is working with the data. Once we have the algorithm, we’ll have taken a big lead”. Likewise, Daniel Höpfner (B10.vc) points out that with the increasing density of startups, an alternative to manual scrolling is inevitable. B10 for example seeks to source startups through an AI-backed ecosystem approach.
“While there are already some AI-backed VC companies in the US, in Europe only a few have taken full advantage of the technological possibilities.”
In the first keynote of the day, Ashley Lundström (EQT Ventures) shares a best practice how to work with AI in a VC firm. She presents EQT’s “Motherbrain”, an AI platform designed to funnel millions of startups and break them down to a handful of particular promising cases. Motherbrain has become an integral part of Ashley Lundström’s everyday life. She can increasingly rely on the futuristic-sounding artificial intelligence. However, teaching Motherbrain remains an ongoing process because the key to developing an effective AI is keeping up the feedback loop and continuously refining the system in real time. In that way “we can spread the knowledge from our head into the system”. When challanged by the audience, Ashley Lundström like her colleagues before confirms that the employed data has to be correct in order for the AI to work well. It will always hold true “Shit in, shit out”.
It is hard to predict if and how much venture capital will change in the next years. Traditional VCs will have to face AI-backed startups in the race to find the most promising startups as early as possible, so much is for sure. But scarce data and difficult to analyze soft factors remain major challenges for the rapidly advancing use of AI.
VC vs. Public Funding?
A second focal point of the program addressed funding needs in startups and the possibilities of subsidized funds on the one hand and private venture capital on the other hand. Jörg Rheinboldt (APX) soothed into the topic with his keynote highlighting the pros and cons of both sources of finance. He points out that the question of “VC or funding?” – as with so many entrepreneurial considerations – is ultimately a highly individual choice and at discretion of every startup depending on its specific needs. Some factors to be considered in this strategic decision include the time spent on the application, the administrative structures of the funds and the formalities required, as well as the networks and contacts they can make accessible. In the following keynote, Kevin Reeder (bm-t) shared his experiences as CEO of the Thuringian agency for entrepreneurship promotion, funded by the Thuringian government. “We have more patience,” he says “and this patience has paid off immensely.” While VCs have a higher inherent pressure driving quick and high exits, public funds can be more lenient in their economic selection and eligibility criteria and rather focus on technology development and the kind. The second panel of the day further explored the differentiation of VCs and public funds. Andreas Winiarski (Earlybird) states, “it is good, right and important that public funding supports companies that are less interesting to VCs.”
However, both Kevin Reeder (bm-t) and Andreas Winiarski (Earlybird) caution that a protective bubble startups relying on grants will cause inefficiencies and failure. Kevin Reeder (bm-t) points out that “distraction and change in mentality” can be major problems when cocooning startups. The “market’s negative feedback” is an extremely important lesson for every startup. Andreas Winiarski (Earlybird) enhances “entrepreneurs are the better entrepreneurs – not the state.” Isabelle Canu (Coparion), who works in the allocation of subsidized funds, explains that the tension between market proximity and social responsibility is the central and foremost challenge of public funding. She highlights the importance of not distorting the market. Rather, grants should only be allocated where the market fails. Reinhard Flaskamp (Saxonian Ministry of Economic Affairs), who states clearly that “funding and VC is not a contradiction”, also took a similar view. Especially in the still structurally weaker East German states there is still much potential to expand this symbiosis. While all participants agree that viable technologies and innovative startups are also flourishing in the Eastern German states, the private financial infrastructure in the form of VC remains comparably weak. However, as Andreas Winiarski (Earlybird) points out, “The money follows the idea” and entrepreneurship hotspots will undergo major changes in the years to come. Likewise, Jan Alberti (bmp) emphasizes the possible impact of new work formats particularly the geographic spread of team members within a single startup. Increasingly, teams are digitally connected, spatially flexible and thus not limited to single hubs. Therefore, public and private financiers respectively are facing an increasingly complex ecosystem difficult to monitor and navigate.
The successful nourishment of research-based and innovative startups requires a versatile financial infrastructure. Donors must master balancing patience in the development of new technologies, on the one hand, and promotion of a market-oriented entrepreneurial mindset, on the other hand. Startups must constantly reexamine their financial strategy and choose according to their specific needs and circumstances. Within the range of the funding criteria lies the potential for public and private donors to work hand in hand but also the risk of passing each other or worse working against each other.
We are looking forward to the next exciting HHL SpinLab Investors Day on 06.06.2019, save the date!