While generally new company foundations have stagnated or decreased in large parts of Europe, the number of high-quality technical startups has been increasing steadily over the past years and has seen a large jump as a consequence of the COVID-19 pandemic. Evaluating these new startups accordingly has become more critical than ever, since many products (especially in B2B settings) have become a lot more technical. Add to this the trend of ever-increasing valuations on technology companies, effectively raising the ceiling of what the assumed exit valuations could be, as well as the amount of capital that is seeking new yield sources, and you get a potent mix.
Additionally, sustainability and climate-related factors have seen a large uptick in their importance. No matter what stance one takes (primarily impact or return driven), sustainability is becoming a factor that can’t be neglected, both from a stakeholder primacy perspective as well as a critical growth factor.
There are very different ways of accessing companies at different stages. First Momentum Ventures is a dedicated pre-seed investor, focusing entirely on the very first funding events at the beginning of a company`s journey, where customers have to be identified, markets studied and the first pilots conducted – so generally a creative and chaotic environment. Thus, we are approaching this stage with a “talent-first” approach, meaning that we are trying to identify topics around which the most interesting and capable people are clustering and that the founding team is the most crucial factor in our decision. This implies trying to spend as much time as possible with the founders, their target market, and customers, while also collecting references from former co-workers and actors in the same industry or ecosystem. Spending the time with the team mainly is aimed at getting a better picture of how (not necessarily just what) the founders are thinking and how they are approaching problems. This is grounded in the assumption that market environments are dynamic and that the founders are still in the process of “discovering” their final product and thus whatever they are presenting today will likely change in the future. What remains, however, is their ability to think through different scenarios, their understanding of the industry and crucially its history (in order to understand why something worked or didn’t work at a specific point in time), and most importantly to still remain open to new inputs in order to at least figure out how new information fits into their existing model of the world.
While we are a return-driven investor, in our investment screening process, sustainability plays an important role. For us, sustainability captures both environmental as well as social factors – both factors that are driving markets heavily. Thus, for us, it isn’t a question of one or the other, but rather considering sustainability as the source of opportunities, as there are a lot of hard problems to solve for which plentiful rewards are offered.
One can differentiate between the impact of the firm’s operations and the impact generated by its product and services. Startups generally leverage technology for a greater impact, thus in most cases the impact generated through its products heavily outweighs that of its operations. In our approach, we are applying both negative (exclusion of certain areas, e.g. business models strongly relying on pollution) as well as positive screening (looking for startups in areas with a large opportunity for financial and environmental/social impact). In general, we tend to find that environmental and social impact is strongly correlated with the financial opportunity – obviously, there can be neutral cases or cases in which the impact is unclear or depends on the usage (e.g. a new database technology) – as most bad practices won’t pay well in the long run.
Given the approach described above, investments meeting those criteria can be quite different from one another. Examples from our portfolio include cirplus, a marketplace for recycled plastics that makes it economically & operationally viable to recycle manufacturing-grade plastics instead of having to produce new virgin plastics from oil, and Dive Solutions, a provider of highly advanced simulation tooling for fluid dynamics (think turbulent liquids and gases). While cirplus quite clearly fits the label “sustainable”, Dive Solutions initially presents a less obvious case. However, once you realize just how much of our world has to be re-engineered in order to be more efficient in terms of resource use and what that means for existing and new technologies, things become a lot clearer. Dive Solutions helps to improve the efficiency of e.g. gearboxes and electric motors, used in cars and wind turbines, so the total impact might very well be a lot larger than that of companies labelling themselves as “green”.
Teams have to be incredibly well versed in the technology they are applying, but also need to understand how to bring those innovations into economically viable usage, how to shape policy (cirplus is, for example, leading the charge on a new DIN norm to standardize recycled plastics) and how to ultimately bring this technology to the consumer.
While “sustainable investing” in many corners still has a 60s hippiesque flair, for us, it really means tackling the largest problems facing us today. This means we need (and are increasingly seeing) a mix of the best technical solutions with the best talent – there is not a whole lot more an investor can ask for
About First Momentum Ventures
First Momentum Ventures, headquartered in Karlsruhe, Germany, has been investing in highly technical pre-seed startups tackling B2B markets in the DACH region since 2018. Its premier fund has made 24 investments out of a 5m€ pool. A second, 50m€, fund is scheduled to make its first investments in early 2022.
