A personal view on Venture Capital

I always get asked as many other investors: “what’s the next big thing to invest in…?” The standard answer to this is: AI, Voice platforms, Insurtech, Aviation to some extend, diagnostics in health, any alternative than Ads to monetize and some other fields. Standard advise is: Avoid topics like advertising, B2C business based on reach, digital verticals and tools, backward looking technologies, etc.

Sustainability eats the World

What I am interested in since beginning of last year is anything pushing sustainability. The times of “making the quick win” are over. Even though Trump’s USA is thinking different by abandoning Paris climate protocol. Norway just set a target by law to only allow electric powered cars to be sold from 2025 onwards. 50% of all new registered cars in Norway in 2017 are electric or hybrid. Norway’s wealth is coming from oil in the North Sea. So cutting on your financial lifeline is the way to go for innovation and entrepreneurship.

Interesting enough there are three other countries investing heavily in this field which don’t come to your mind: UAE, Saudi Arabia and Germany. UAE is setting up a lot of initiatives to focus on sustainability: from accelerators to government funded investment funds. Attracting companies to set up businesses in this field is one strategic move. Saudi Arabia just invested heavily in the New Vision Fund of Softbank founder Masatoshi Son, who is all about innovations in economic adjacent fields. Germany was the first G20 country abandoning nuclear energy from its future and invested heavily in wind, solar and other environmental focused energy sources. The land of Mercedes, BMW and Porsche is able during summertime to produce more energy from those sources than it consumes. Extending the number of days in a year even to spring and fall is one goal for the future. Imagine the country is able to produce enough energy to support electric and hybrid cars with those energy sources: Germany would be less depending from oil and gas, which it needs to import today. The trade deficit will sky rocket even more — a nightmare for Mr. Trump.

Start small and love your city

Not every Startup is a Tesla and will not struggle with the part of scaling as Elan Musk will do in the coming years. But a lot of young companies will push innovation and set new trends. They will be rewarded by trade sales and a good share for their founders. Because it will start small, I was looking in those trends more closely in recent months and discovered some hidden champions.

If you look on our daily consumption and the waste we produce, mostly unrecognized by its scale, first thing comes to your mind are bottles. Simple as that, even returning models and more sophisticated plastic materials are still not overcoming the basic problem of drinking from bottles. Less even talking on profits and economics of this business. It’s all about driving costs low in producing, selling and maintenance. But there is one company who rose by revenue from $10mn to $100mn in year on year by 2016 and it looks for more growth this year: Swellbottle. The ultralight metal bottles are made for reuse and will keep liquids cold for 24h and warm for 12h. The trick of this company seams to be, using brand and collections as a driver for sales along side influencer marketing. Offering only limited editions combined with environmental project support is the basis of their strategy. Having the right sense for colors, e.g. offering rosegold months before Apple introduced this color on it’s iPhone shows their talent. Looks like they found a profitable business through marketing and partner offerings, as you can see with a special edition for Starbucks last year. Those fashionistas interested in a cooling companion will be happy to know it will keep your white wine cool while heading out to the picknique with friends in the park.

It isn’t a long way from water to coffee. As a friend of this brown gold I watched the baristas growing fast in my hometown over the last years even pushing Starbucks back in any part (or Veedel) in Cologne. Healthy fresh food with coffee combined is offered everywhere and with that the problem of paper cups used for coffee-to-go. While the small town of Freiburg started the “reusable and bring back to any coffee shop” model there is still a long way to go. In Germany 320.000 coffee-to-go cups are wasted per hour which results in a year for over 3bn pieces. This is a huge market to tackle considering Germany has 82mn citizens. Europe has 750mn people — so you do the math behind that. First approach was to introduce less plastic in a cup, but this will obviously not solve the problem. Next phase is to give a price reduction if you bring your own cup. Currently most baristas offering cups to purchase and to bring with you in the future. But most of those are either made from plastic (just postponing the environmental problem) or porcelain (too heavy for everyday carry and having rubber made tops again increasing plastic usage). On top those cups are priced at $15, which is way to expensive while standing in front of the counter. The ultimate solution on this is a coffee-to-go cup made from Bamboo. Next to its sustainable material the price is as low as $5 per cup and its ultralight. Making now the other baristas accepting those cups in a return model for a fee of $1 like in Freiburg, this would cut a big chunk off the 3bn problem Germany has today. Making it into a mandatory model by law would be a solution lawmakers have to think about. Currently those models are investigated by city halls in most mayor cities in Germany like Cologne, Hamburg, Munich, Berlin.

The next thing in this line on the daily usage are bags. From Rucksack (backpack) to Weekender and smaller bags. Another big market for sustainability products to take over. From kids in Kindergarde to school and adults in university and office jobs. Avoiding back pain and looking cool through personalization. There is a company in Cologne named ‘Fond of Bags’, which is focusing on the whole field of bags: from kids to hipsters, Instagram fashionistas and office workers. They combined seven bag companies so far and are still growing. Their brand pinqpong is leading the sustainability part of the business, hopefully it will outgrow the others and have a positive influence on the other brands as well. So pinqpong is offering those kind of bags, people should be using in the future from an environmental perspective.

When Services will catch up on environment

Discovering those trends and products while taking a walk in my neighborhood the Belgium Quarter in Cologne I realized that this town has much more focus on this topics than other German cities. Found of Bags is located in Cologne as some others as well. However this is not just about products but it is also about services and shopping. While you need the products to be available, there is another big step to be achieved: Putting it into a plastic bag would actually damage all the good will, you had in the first place. So lets introduce you to the concept of “Tante Olga” and others: a plastic free supermarket. Overcoming the little plastic bags for your fruits and vegetables, having pasta and cereal bagged in foil and all other items sealed in plastic is a huge challenge. Some shops like “Tante Olga” started to sell products without that package in either more friendly natural bags or offering to bring your own glasses and containers to take in those groceries right in the shop.

Reaching the shops is part of the game

Cologne stands out in terms of mobility for a couple of reasons: There is an airport outside the city which is a hub for Eurowings, Easyjet and Ryanair bringing in and out a lot of people on business and for leisure. Jobs will make people commuting in and out of city center as well between Dusseldorf and Bonn. Hence public transport is on the edge of its capacity most of the time and people tend to use individual options for transportation. To make things worse the city was marked as one of the worse areas for bike riding — too dangerous and narrow while cars seams to be getting the advantage if city planing in the last decades. But this has changed in recent months with more infrastructure projects being started to favor bike riding and preventing cars from entering the city center. Streets are getting more narrow from two lanes to one. Parking lots are converted into outside seating for cafes, restaurants and even cocktail bars. This trend of parklets was born in San Francisco in 2012 and spread around the world since then.

Limiting parking lots is driving business in summer times, hence people want to enjoy sun as long as there is some and it serves the purpose of keeping cars away. This among other obvious reasons will lead to an increase usage of car-sharing offerings like car2go, drivenow, cambio and scooter-sharing like scoo.me. Interesting enough cambio was the first car sharing offering in Germany and it started in year 2000 in Cologne, Aachen and Bremen. The next obvious movement will be to prefer bike riding in the future within urban planing even more.

Why Cologne will be part of the Sustainability movement

Looking on the history of all those trends and products I recognized Cologne being an early adopter and early mover of various parts of this development. From small startups to larger corporations adopting the trends and finally urban planing and city hall pushing towards this direction. Building a startup around this ecosystem and supporting the overall trend looks obvious from an investors perspective. Products and service in this area will need time to prove itself and gain their trusted communities. This will be much easier to build and test in an experienced and supportive city. It doesn’t need to overcome the general hurdles of a new beginning and it will benefit from an experienced ecosystem giving feedback during the long hard times of the early days of a startup. However Cologne seams to be the perfect testbed for such ventures — much more than Hamburg, Berlin or Munich.

As promised I deliver an update to my post from last year on Fintech & Insurtech Ecosystem (post can be found here).

A year after I made my assumptions it looks like the world is turning into the predicted direction. Storage players with its platforms are winning the market from niche players big time. Microsoft with Office 365 (including OneDrive, Teams, Outlook) has taken over the productivity market only challenged by Google (with Gmail/Apps, Chromebooks and winning the education space). Sorry to say Apple and others: You are out. (Box is still around for good reasons while Dropbox is on the way to drop out). With Microsoft entering the Chromebook space and Windows S the main leaders are going head on head to dived the market while the rest is watching the show.

Despite everybody predicting the end of the old economy players in banking and insurance — those old guys are resisting and fighting back. As predicted it took time to sort out and revamp in-house development and shifting to agile structures in a legacy environment those companies are coming back. Deutsche Bank with its Digital Factory is leading the pack and gets the attention of the U.S. based VCs like A16Z to present their portfolio companies, hoping they will get an inroad to the European market and its challenges of regulations and currencies. Thanks to Brexit the continent will experience a mayor shift in personnel, geographies and market dynamics. All to the bad of London based fintecs and insuretech startups and benefit of Paris, Dublin, Frankfurt and Amsterdam. (Thanks to #Leave campaign).

Technology Innovators are outpacing the reach junkies among the startups in fintech and insuretech. Mobile banking and mobile payment is a very competitive space and we saw the first drop outs. More there to see in the near future. A concentration has already started and a decline in user signups has been seen in insuretech B2C focused companies. While copycat scenarios are known from certain startups in the past — today the incumbents are entering the markets with copies of startup models everywhere. With existing customer reach and analytics of success rates of new technologies and models, the investments and roll out of new features as part of their existing products and offerings is challenging cheap. The environment is the hardest for new beginners since a very long time. Check24 is the latest to entering the markets with pure copies of successful startup ideas. As predicted the acquisition of those startups would take longer and will cost much more than just creating and rolling out the services back on their existing platforms. We are still at the beginning of those incumbents getting into the markets by their own.

The call for rescue is to be heard in financial markets especially in fintechs focusing on lending products. While the risk profile of certain customers groups is still to high for incumbents to serve them those banks and insurance players are happy to support startups in those areas. Risks are still on the side of new players while the old financial economy revenues are reside on the banks these days.

So what’s the most promising playing field for Startups?

In a world where Voice Assistants like Echo, Google Assistant and Siri are becoming the default front end to consumers and AI is the default middleware of platforms innovative b2b technologies are the place to be those days. While user acquisition becomes more and more expensive and back-end services are still the foundation, the increased usability is key driver for platform owners. Enriching their functionality is a profitable place for new beginners.

The future of b2b is in SMB and medium sized companies. While enterprises will focus on one-stop-shopping at a platform provider. They expect Microsoft, Google, Amazon, Salesforce, facebook and others to deliver to their needs. Integrating various verticals for their needs will become more and more an obstacle in an overall cost evaluation based on SaaS and cloud optimized approaches. Keeping several clouds synced is expensive and hard to manage in an efficient way. Rather stick with the features of your cloud provider.

It’s the time of the year to make some predictions for the techworld in 2017. But first: look back on 2016 predictions just make it quick:

The end of the unicorn era > Got this right.  Companies will still grow to a unicorn valuation, but not driven by investors to increase book values and collect billions of capital. Trivago, Snap and Skyscanner grow to that valuation due to their business models over time not by investors money. Gambling on high stakes is not the focus of hedge funds, PEs and corporations anymore.

Corporate investments will change > Got this right. Looking at VW (300m in gettaxi), GM (500m in Lyft), Softbank (1bn in OneWeb) or Panasonic (256m in Tesla) show the way how corporations are investing today. No seed or A-round investments to be seen lately.

Internet giants take over the commodity > Got it right as well. Amazon takes on Video, Apple takes Music inkl. Hardware (Beats), Microsoft takes Productivity. There are still exceptions like Netflix, Spotify, Slack but 2017 will show if those will survive or been taken over when losing the battle is near.

Technology will overtake common expectations > not obviously right. Looking at Siri, Alexa/Echo, Cortana and Windows 10 shows mainstream for voice operations. Tesla showed the way for autonomous driving in practice. A lot of AI is in the background of most service from facebook to banking. Most of their users were not expecting how fast technology is taking over — even in generating fake news and twitter bots during US elections.

Law makers will need to handle the mess > right but not on time. Technology forces law makers to look deeper into technology services. From autonomous driving to banking APIs to Internet spectrums out of the sky and net neutrality — regulators are getting a lot of work to come up with solutions while the technology is pushing on high speed into consumer spaces. We haven’t seen the results but law makers did not have a long holiday season for sure.

So it looks like 5 out of 5 — done for 2016. Now let’s head over to 2017

1. Everybody gets a “Jeanie in a Box”

In 2016 we have seen the raise of Echo/Alexa in living rooms. Google home is the first to follow but not the last. Wait for Siri, Cortana and others to be put into a small box to live on your counter. Maybe Apple will use Apple TV and Microsoft Xbox One as a first way into your homes but sooner or later those smaller or larger cylinders will enter your house. Some companies will offer white labeled solutions so the likes of Sony, Samsung and LG will also enter the crowed market. Without an always on assistant in a smart home an Internet platform will have problems to compete. So Tencent, Alibaba and Baidu will enter the space as well. Amazons numbers rose by 9x year on year for holiday season in selling Alexa devices — still nothing compared to the numbers it will sell in 2017. It will be massive and as well discounted by bundles with Music, Video, Prime and other services. A huge user based attractive for all mobile first companies. So the next big thing is “assistant first” for developers. Next to the “messenger app stores” we will see around facebook, WhatsApp and WeChat.

Source: https://netzoekonom.de/2016/08/06/der-plattform-index/

2. Retails products must be bots enabled

There is no difference between a messenger bot and a Assistant skill. Its an API enebaled connection to a user service without a UX/UI in an App or Browser. Many services already joined this new world: Uber, myTaxi, Spotify, Philips Hue, Sonos and many more. Those services provided by the Internet giants are enabled for those boxes by default although mostly for their own boxes. Which will make life even harder for those services. When streaming music is not differentiate by catalog and price and curated playlists it will by not be integrated with the most dominant boxes. It could be the return for Spotify if Amazon would block Apple Music from their Echo and Alexa. Same is true for Google Music and Google Home. Apple being late to this game could harm Siri Adoption, Apple Music, iTunes Video and ultimately AppleTV and iPhones. Imagine the Apple stock sinking because Tim Cook did not act fast enough on this part of hardware development. Software eats the world? — yeah not so much.

Service integration of Alexa devices in Germany

3. TV viewing is an App

Same as we seen a phone became an app and texting and music or video this will be the next victim of digitization. People will watch TV through various apps and mega apps. With a smart TV and services like Zattoo I have a live TV out of the box as soon as my Internet connection at home is setup. Every major broadcaster has an app for their content to be watched later on in a mediathek. But we are not using live TV so much anyhow. News is on Twitter, Gaming is on consoles and apps. Movies/Soups are on Netflix, iTunes, Amazon, Hulu, Showtime and Music is on Spotify, Amazon, Apple. The only missing piece is major sports which will move to apps as well. Currently most of the apps by ESPN, Sky, Canal+, etc. are banned from SmartTVs and FireTV because cable providers would be out of business instantly. They actually live off from sport subscriptions as part of their offerings. With ending the currents contracts by national leagues this world will end. The next round of bidding will see Amazon, Apple and Google enter the rounds and will out-cash the traditional bidders. In certain countries this will have an impact on the adoption of the boxes by certain vendors but it will clearly harm the cable companies.

NHL on Apple TV

4. IPO Race in 2017

So the discussion of tech bubble or not will come to an end and with that the race to IPOs will bring closure. There will be two types of companies in 2017: the ones who make it to the IPO like Snap, Appnexus and others. A significant part of successful IPOs will be from Europe such as Karma and Spotify. The other type of well funded companies will not be able to raise money in unicorn rounds and therefore seek the future in acquisition or just sliding out of business and their assets will be picked up like the ones of Jabowne. Will be interesting to see which group Uber will be in.

5. The unknown Future

There are three mayor events which are hardly to predict but which will have an important impact: Trump, Brexit and Germany.

a) Trump: We don’t know his stand on immigration, netneutrality and regulators. With a tied immigration politic he will have an impact how Silicon Valley will develop. It could cause a mayor downturn on the talent war in California and will slow down innovation and new products being developed. His stand on netneutratlty could cause an increase power to telcos, media and dominate Internet companies. If those could offer free services within their walled gardens there is a whole new game in the US. His guidance for regulators could impact on short term a push in megadeals like T-Mobile/Sprint merger or similar deals. Creating such mega companies combined with netneutrality models could severly harm the ecosystem for new startups in the US and therefore midterm for the rest of the world.

b) Brexit: If the UK will push the plan for leaving the EU it will be the end for the London startup system as we know it. It will be a hard Brexit and it will be done in a short time frame with focus on areas of business more related to traditional businesses than on startup companies. At the end the brain dead for the UK to Ireland, France, Germany and Nordics will increase until there are no more important UK startups left with a London based HQ.

c) Germany: There will be elections in Germany in September. When the current political coalition will discontinue the overall German position in immigration, EU financial rescue and corporate tax strategy will change one way or the other. With Germany changing its course the impact on the rest of Europe will be seen in the rest of Europe. This will lead to more disintegration of the EU and changing of trade deals for the future. Startups will have more challenges to setup their services across borders and financial systems in midterm. This will drive investors to become more careful and more funds will be needed for counsels rather then tech development.

Voting polls in Germany in 2016

6. The war in Syria

Recent developments in Syria will mark a turning point for the region and Europe. The refugee crisis will change from an European wide to a more regional spread crisis. It will also encourage people who left Syria in 2015/16 to return to their homes in 2017/18. With the shifts of political power in the region it will push the ecosystem in Iran to a more prominent level. Iran could become the next India with accelerators and IT business parks growing in a significant rate over recent years. In a world with weakening UK and Europe in terms of Startup supporting environment Iran and Israel are the remaining tech hotspots around. Those will attract the most significant parts of global VC funding to be invested abroad. Again this will drive acquisitions in those areas which will fuel the ecosystems even more increasing the distance ahead of Europe. Increase the limits for immigration across Europe by new elected or existing governments in France, Hungary, Poland and others will even more harm the open minded startup spirit in those countries.

GDP compared of US and EU Zone

7. The end of Corporate Venture Capital as we know it

Beginning of the year I blogged about the Outlook on #Fintech and #Insurtech in Europe here. I predicted a shift in this space for the first generation of fintech companies:

A slim, focused B2C model needs to pivot or to be extended towards higher value products

Customer gain via feature driven USP’s will become unsustainable because traditional players will catch up quickly and keep their incumbent advantage in the pure banking and insurance play.

B2B tech players will be the winner in the first phase with highly profitable earnings. They will attract funding from VCs due to the scalability of their business models.

B2C investments will have a hard time to convince financial industry experts of their success but will blend the public opinion with good PR and customer numbers. Many VC investors will try to save their initial investments with follow on bridging to win the survival game for now.

Watch out for the Trend

The investments in the Fintech space is still ongoing and keeping pace from the many seed investments in 2015/16. But as in all VC investments currently and in the first quarter of 2017 we see the drop in follow on investments for A-rounds and B-series. We are on a good track to reach the same level as last year which is in comparison a rather weak signal for now.

Investors across all stages have learned to select the better companies. So expect well educated VC partners when talking to them in fundraising. The first phase was the hot new thing as usual and everybody went for it. Now the first fingers are burned and rational thinking is back in the partners room when making investment decisions. Focus will shift to the more challenging topics and more industry driven. A horizontal approach is nice — but not winning the game if you are not the next Albert Einstein in tech. Platforms already taking over the horizontal spaces like mobile payment (Apple, Google, Alipay) and peer-to-peer payment (facebook, WeChat). Merchants will follow the customer’s money (Alipay, WeChat building on Chinese tourists abroad) and mass markets (Android and iOS devices). A simple P2P app will never reach critical mass to become significant nor will the business behind that become profitable anytime. Merchants also follow cost optimization so there is only one way to enter those product segments: do it for free! If a merchant doesn’t need to pay for an additional payment method he will eagerly try it out. No additional costs means: no fees and no additional hardware. So if you can do it with standard NFC terminals you can win a new merchant. Some banks already started their whitelabled apps being compatible with the NFC chips of Android handsets either smartphones or wearables/watches/fitness tracker.

Focus on industry segments but Mobile wins.

Deloitte published their view earlier this year and draw a picture of potential business models. There are more like this outside.

What all of those are missing is the impact of Mobile. Mobile will eat everything — because there is no difference between online and mobile. You get the same processor power, storage, speed and networks but all of this instantly and everywhere. Still the biggest game changer in this world and for all industries is Mobile.

T-Mobile US launched SynchUp with Mojio in November. First batch of products were sold out within days because customers liked the bundle of connectivity, pricing plan and feature set. There are a lot of those products and services out there in various regions. However only a few companies have the reach and customer base to build on to drive down customer acquisition costs and marketing spending. Partnering is always a good option for those B2C models — so becoming a B2B supplier wins markets which drive to commodity very fast. Without mobility in the core of the product it is hard to win a space. Connecting traditional services like car insurance with mobility and fast networks will allow to keep your margin and attack the competitors customer base on the move.

It’s all about Changing the Workflow

When disrupting an industry it is about changing the way we use a service. MyTaxi gained the market when it changed the way how people ordered a cab/taxi and paid for the ride all on the mobile phone visualizing every single step. A whole new experience of a service we know for over a hundred years.

“If you want to win in disruption change the way a customer uses your service and make it easier as well as more transparent. Technology in the background will create the new customer experience.”

This is true for Insurtech as well as Fintech:

Digg deep into the old traditional products and rethink the way a user in a mobile world will use it. Big Data analysis of every step and data, AI for all the steps and data a user will provide and Automation to create a higher flexibility will lead the way in successful products which new market leaders will grow from.

McKinsey's view on the overall space gives some guidelines where to look for chances:

But be aware: Don’t underestimate the incumbents — They can buy technologies from B2B fintech and insurtech startups and build a piece by piece a much faster and stronger service platforms. There is no time for a shiny UI/UX if those can be build easily by others as well. As in every industry it comes down to price and value of a service from a customer’s perspective.

Just a reminder: Saying people are stupid because they voted for Brexit or Trump is achieving only one thing: electing populists in France, Italy and Austria – and giving AfD a significant amount of seats in German parliament. You want to prevent that from happen?

This is what you must do starting today:

A) Motivate people to vote! (U.S. had 49% of people not voting.).

B) Tell young people to vote is the only thing that matters for their future (UK got Brexit from votes of people age >40y)

C) Discuss solutions with those who support populist (you need to turn their votes ! People sharing you values don’t need to be convinced)

D) Understand the lost part of our society (those not in startups, driving uber, being an influencer on instagram). People who fear to lose their jobs due to digitalization, being on minimal wages, living in rural areas not being attached to „modern live“.

E) Start today – election day will come sooner than you think. Making lies obvious needs to start now. Not a day before casting votes. Avoid the post Brexit/Trump experience.

We are behind in achieving a majority.

If we don’t start today we have lost the election already. This is an up-hill battle for the so called elite. It’s not a „save thing“ and „we will win it at a close number“.

While the world is discussing the impact of Unicorns and Internet giants on this century and which of those will prevail into the next decade the most interesting trend is happing in the back rooms of corporations. Still unicorns and Internet giants have, due to the size of funding available to them, could take part in this trend and most likely are doing it.

While most of funding in mature startups are invested in customer acquisition via marketing, promotions and margin cuts from an economic perspective there is no winner in this game. As we learned in the Didi / Uber deal last months this price war will be end in a draw with no winner and a ceasefire is declared from the government arm called regulator. If it was for the CEOs this war would have went on and on and fueled by more funding rounds and even higher valuations. But having a look at Uber it is known that the company is pushing more funds in their engineering to build real USPs to fight competition in the future. Uber acquired the IP assets of a mapping company Decarta some years ago.

With those assets Uber will become technology independent from Apple and Google for mapping services which is essential for them. On the other side it leave Didi, Lyft and other similar service stuck with those players or — in the future — will turn them into clients of their own mapping services. In the meantime Uber is focusing on autonomous driving and has to certain extend a head start even with the carmakers in their own field of expertise.

On the other side of the table the traditional corporations are taking the ridesharing business serious as well. Alphabet started its own carpooling services via their matured Waze application based on a large and healthy grown community with low customer acquisition costs. Daimler as the owner of European market leader in taxi apps myTaxi made a big bed on opening the shareholder structure to bringing in outside investors to their own business with the acquisition of Hailo in London in an all share deal. As part of this deal the founder of myTaxi Nic Mewes will become managing director of Daimler Mobility Services unit and chairman of the myTaxi board. This was the beginning of a process which was announced by Daimler CEO Zetsche this week to change the company into digitalization across all units. While carmarkers are busy in transforming into a world of e-mobility and car sharing from their historical roots in other industries are even more adventurous.

Deutsche Telekom enters market for charging infrastructure of e-cars in Germany and announced their activities at IFA in Berlin last week. A carrier using its legacy infrastructure to become a service provider of a different industry and competing with players which claim energy as their core business this shows a trend again. However we should not forget that Telco’s core business connectivity is challenged by Google (Google Fiber, Loom project, GoogleFI), facebook (Facebook satellite, Aquilla) and even Airbus. The world is changing and historic borderlines are blurring in-between industries.

All those initiatives have one focal point in common: Large investments in long term and risky innovation projects. Those so called “Moon Shots” becoming more and more common in the industries. Fortune 500 corporations understood that smaller investments in minority stakes are not sustainable for their innovation strategies. While it makes sense to learn from fast and innovative startups the investments in those companies have less synergies to offer today. Google Ventures investment of $450m in uber four years ago did not give them an advantage for their initiatives at Google and uber was dropping Google services more and more over time. At the end Google ended up to be a financial investor helping Uber’s valuation to rise up to $69bn making it unable to be acquired. While this might be fun for a lot of people inside Uber it doesn’t make sense for a corporate investor. So with no surprise Google’s board member quit the board of Uber and it parts way with its posterchild. Google maps integrated the biggest competitors of Uber into Google Maps long time before it started its own carpooling service.

With all this innovation driven projects inside larger corporations the money for those initiatives will be spend in-house for the coming years. Less funds are available for startups through corporate venture capital or fund in fund investments in independent VC funds. While this is rather early in the global funding cycle the impact of those missing founding sources will have an impact in five years and later. However, the impact is more serious then, when the startups of today will mature in late stage companies in need of growth investment rounds. Therefore we will see some good companies starving for growth funding in five years and they will be picked up in mergers and acquisitions by corporations for a reasonable price related to EBIT and revenue multiples.

Some months ago I was arguing the end of the unicorn era — meaning startup companies driven to +1bn valuations by a funding strategy to benefit private investors and fund at least 10 years of unprofitable business cases. There is nothing bad in this strategy as we have seen in Amazon which turned very profitable in recent months and even Rocket Internet did this with Zalando this year. However, this strategy is coming to an end when the only exit path for this model — public markets — are drying out and only a few good companies like Twilio are reaching its planed goal. The risk for private investors following this strategy over a long period of time is becoming to risk and the ratio for reward turns into a not preferred asset class for the deep pocket capital owners recently. This makes it harder for unicorns to close additional funding round at higher valuations leading to apre-IPO Dip in their valuations before even trying to go public. What we see next is growth debt investments to bridge the time to a potential IPO with strong terms from those debt providers has been reported in Spotify or even Uber during this year.

Now with the IPO window closing for most of this unicorns and a usual time frame of a debt financing of 12–18 months the pressure to seek exits via trade sale is rising in the group of unicorns. Obviously the dip in valuations need to be done similar to the Pre-IPO Dip let most of the unicorns shy away from those exits for the moment. If a corporation is considering to acquire an asset at +1bn valuation, the board needs to be convinced of a return of investment for this project. Unlike in private market investments, the key metric is not revenue multiples and growth rate but synergy effects and EBIT costs. To put it in simple words: “Money spend on an acquisition paid in cash or stocks need to be earned back in past and future.”

Lately I encountered the historic discussion about the „dark side“ (venture capital) and the „darker side“ (corporate venture capital) with fellow VCs several times. I wish this discussion would come to an end for the benefit of founders, startup companies and innovation. But I guess this is wishful thinking for some time being.

Earlier this year I was giving my view on the development of Corporate Venture Capital markets with a focus on Europe. Since then I was receiving feedback in various discussions from fellow investment managers in Fortune500’s, public funds and private VCs. From those discussions I draw my conclusions on what we will see in the European Venture market in the coming years.

Everybody wants to invest in Startups

We are still in a positive investment market because of Quantitative Easing by FED and ECB and will be for the next 5–10 years without doubt. It’s a defensive move by all those parties allocating capital because there is no other way to earn interests on capital. Germany currently is making money out of the old debts so there is no opportunity to gain advantage from allocating capital into rather save investments. But even corporations facing the issue of losing money on patronizing their global profits back into their home countries so they rather make risky investments to avoid additional tax payments. So the markets are flooded with capital rich parties:

In April I predicted here on my blog the United Kingdom would vote for “Leave” in the EU Referendum. As to many people I was right on this analysis and the reasons were confirmed by a lot of experts. Not much here to celebrate because the outcome of the Brexit process will be an economical disaster on all levels for a lot of people involved inside and outside the UK. But everybody realized that in the meantime.

Find my update to this post from May 2017 here. http://thomasgr.tumblr.com/post/161101958885/winning-in-fintech-insurtech-ecosystem-big-win 

I know that there are so many experts out there in #Fintech and #Insurtech right now. I respect them all: founders, investors, analysts and journalist. All of them bet on new players, new models, new ways of banking and new ways on providing insurances. But I have a different view and we all can only see so far into the future.

So here is my simple view on the ecosystem and I will update the picture over time. I start today to share my view just to have a discussion moving on in this interesting space.

While a lot of experts coming from a technology and disruptive perspective I take the view of a consumer of the financial services industry. This might be new and surprising for a lot of the readers, but I still believe user's demand will drive the way forward.

Main Areas of this ecosystems

Users will start from documents in my model. It could be contracts, invoices, recipes, offers, etc. Those documents in their digital format will reside in a cloud storage which is either a pure storage provider (Dropbox, onedrive, google drive, etc.) or, for most of the users, the unlimited email inbox (gmail, outlook.com, in Germany gmx/web.de, Telekom Email, etc.). From my perspective there will be no other location where users will store their documents outside their homes. That is why vertical storage providers (Evernote, doo, organize.me, others) have or will fail in the midterm. Online Storage is already free of charge, is part of a larger offering and its included with general consumer services. Similar to premium email services, which became free of charge with gmail in 2004.

The main partners for users regarding financial transactions today are banks and insurance companies. Currently a lot of interactions are triggered by transactions (money transfers, damage claims, etc.) and comparing offers (Check24, Aboalarm, etc.). So there is a ‘love & hate’ - relationship between banks/insurances and those comparing sites. They need them to get new customers in an overall saturated market while those websites are the main reasons for churn on the other hand. This is the same in other industries like telecommunication, travel and others. For sure those comparing sites will stay in the ecosystem for good.

Since 2014 supporting players have entered the ecosystem supplying services to all players based on APIs and technology platforms (Gini, Stripes, figo, etc.). They offer their platform services to all players, making no difference if they are a traditional institution or a startup company in this ecosystem.

At the receiving end we will see the regulated institutions of banks and insurances. While a lot of new fintech and insurtech startups aiming to enter this markets most of them will not reach this area due to high costs and regulatory demands. But please try hard to do so just don’t tell afterwards nobody told you it is a huge challenge — including raising tons of money during the period of setting up such an institution.

Outlook and prediction

I don’t believe in vertical players in storage. No niche player with a focus on productivity, security or finance etc. will prevail. Users love their storage provider and will stick with them. There will be one amendment to this when insurances and banks will open up their legacy systems (e.g. Online Banking Portals) to allow users to upload and store their documents in there. Most likely this is an option for users to either get online access to existing documents from the legacy systems of those institutions or saving their documents during the transaction process.

Banks and Insurances as institutions ruled by regulators will stay for the long run. Governments want to control money flow, fight money laundering and criminal activities. Everybody needs to play by the rules however we will see a broader space when wholesale models in the financial industry will become available — think about telecommunication and retailers without a network ownership.

Comparison of contracts, offers, terms and living off from commission fees will be a valid business for longer. It works for all areas in the financial industry and it will be supported by scale. Entering the space against the established player will be a good way to find an exit to one of them later on.

I don’t believe feature-focused players in ‘banking’ or ‘insurancing’ will win either. Scaling the user base is key. In those areas it will be very hard to scale and acquire users. If one player achieved this goal it is a matter of a bigger fish to eat up the next smaller one. Unfortunately the biggest fish will have the highest demand on funding — an Uber and a Didi in both segments will lead the way however from an investors perspective it is uncertain if their investments will pay out in an IPO later.

Most of the feature-focused players will face lower exit valuations in a sale to peers, another bunch will fail. On this way to avoid running out of cash some of those will move into the “API / Supporting” - segment (down) or into the “Comparison” segment (up). Currently I would suspect players like Transferwise moving into the API segment (see the latest announcement with Number26) and Apps like Outbank into the Comparison segment.

Less Funding — more Pivots — a bunch of small exits

In case my assumptions are correct we will see:

Less funding going into the space in 2016 for new deals. Some late comers will fund Seed deals but will recognize the trend rather sooner than later.

More deals will happen to focus on pushing the existing ones but carefully selecting winners — those who are ahead of the rest and already show good traction although this traction might not be in the important areas for KPIs.

When fundraising in B rounds will be tough we will see a lot of pivots by those companies. Investors and founders have learned not to wait for this funding to happen after they got too many declines from investors. They will react in due time to adapt their models. Number of user profiles and strong technology will be a good base for a successful pivot.

It’s the time of the year to blog about predictions for the new year.

1. The end of the unicorn era

The new year will mark the end of the unicorn era investment strategy. Private Investors will stop believing in ever increasing valuations until an IPO in the far future. Private equity and late stage VCs will become more careful investing in those 130+ companies valued above $1B. While fueling the late stage high valuation rounds will come to a slow down the high fundings in early stages will too. Unsurprisingly corporations, who invested in those companies in recent years, will stop doing so. They are slow in learning but they will do eventually.

2. Corporate investments will change

Following the education of corporations as investors in late stage companies, the corporate investment activities will change. Corporations will still be active in startup companies but they will rethink how they do it. Some corporate VCs have lowered their number of deals already. The end of corporate accelerators and incubators have been discussed lengthy in other publications. Instead of equity investments corporations will do what they can do best: partner with young, agile companies. Finding beneficial cooperation models by reselling and/or bundling their own product portfolio with those of startups will get more into focus in 2016. Fintech is a good example already where startups are looking for partnering with traditional banks to increase their customer access. Transferwise, Funding Circle and Gini are just the tip of the iceberg but this strategy will lead the development for 2016. Same is true for mobility sector and insure-tech.

3. Internet giants take over the commodity

Banks in Germany listed Internet giants like Apple and Google most likely as their competition in digital payment and banking services for 2016 rather than fintech startups. The success of Apple Pay is proving this thread. However the ownership of eyeballs and distribution platforms is having an impact in several industries as we see in publishing where facebook is taking over the distribution of news content. In entertaining they also lead with the success of Amazon Video versus Netflix and Apple Music versus Spotify. Even in logistics Amazon is challenging Fedex as well as Uber. Everything what can be commoditized will be commoditized which leads to the dominance of horizontally built Internet companies over vertical focused startups. Another reason why unicorns will see the end of their era coming.

4. Technology will overtake common expectations

In 2015 we have seen a lot of engineering development which is making us doubtful about our common expectations in technology. Those are small hints but in 2016 those hints will be more obvious and disturbing at least. Intel is admitting that it might not keep up with Moore’s Law. Private companies will take more and more business and scientific research off from governments. NASA is giving its business to Project X and in health research we see private companies leading the work against cancer and Alzheimer. We see the implementation of autonomous driving by a remote software update in a car. Law makers need to keep up with those developments to think about the usage of this new technologies. Robotics and Artificial Intelligence will further more challenge the philosophical and ethical use of technology. What used to be topics of novels and science magazines in the past will become a daily discussion for the coming years. 2016 will mark the year when all this became mainstream. New ventures will need to think about a society, which needs to be prepared and govern how to use the products of this new generation.

5. Law makers will need to handle the mess

The good and evil in technology will be discussed most prominently on the topics of encryption. If governments and ruling tech companies can not agree on the use of encryption it will be interesting to see how they will discuss AI, robotics and mobility in the future. It has become obvious, that like guns, new technologies will be used by bad guys as well. Preventing the abuse of technology and control access to capacities of technologies will be a challenge for future generations. The fundamental discussions and rules will happen starting with the new year. It looks like encryption is the first example for these discussions and it has become a mess already. I am a believer of privacy and availability of encryption with no backdoors. This is not easy to achieve but a necessity in a free world. But it is just one of the ethical discussions we need to have based on the technology cycle we are in. Dependencies of investments on the results of those discussions will become part of any due diligence in the future for investors.