20 VC 018 Seed Stage Investing with Stefan Glaenzer of Passion Capital

In episode 18 of the 20 Minutes VC, host Harry Stebbings interviews Stefan Glenzer, founding partner of Passion Capital and former chairman of Last.fm. Glenzer shares his journey from a German economics student to a tech entrepreneur, detailing his pivotal role in founding the online auction site Ricardo and its subsequent IPO. Transitioning into venture capital, he discusses Passion Capital's seed-stage investment focus, revealing a preference for startups with working prototypes and the firm's typical equity stake of 15-25% for an initial £200,000 investment. Glenzer emphasizes the importance of qualified referrals for pitches and the balance between board meetings and operational freedom for startups. He expresses his enthusiasm for the fintech sector and the potential for disruption in traditional financial services. Finally, Glenzer advises entrepreneurs to pitch with passion and engage in dialogue, while also sharing insights on his latest investment in a fraud prevention startup.

• Harry expresses gratitude for the iTunes reviews and encourages more reviews with a competition.
• Listeners can enter the competition by emailing Harry with the review name to win books and a chance to pitch to VCs.
• Stefan Glaenzer is introduced as a guest on the podcast, with a brief overview of his career in VC and tech.

"Now, I first want to say a special thank you to all of you who have left a review on iTunes." Harry is thanking the audience for their reviews on iTunes, which are important for the podcast's visibility and growth.

"To enter into the competition, simply email Harry at the 20 minutes VC with the name that you left the review under and you'll be submitted into the competition to win all the books mentioned in the five episodes of the 20 minutes VC and a chance to pitch to the vcs mentioned in the show." Harry is explaining how listeners can participate in a contest that offers rewards for leaving reviews, incentivizing audience engagement.

• Stefan Glaenzer introduces himself and his German origins.
• His academic background is in economics, with a focus on option pricing, preparing him for investment banking.
• Glaenzer decided to start a media company instead of pursuing banking.
• Early years of entrepreneurship involved mixed results before founding Ricardo, an online auction site.

"Clearly, as you can hear by my accent, I'm a native german speaker." Stefan Glaenzer is identifying his German heritage, which is noticeable from his accent, providing personal context.

"I decided, no, banking is not the future, but started a media company with two of my friends way back in 91." Stefan Glaenzer explains his decision to forgo a career in banking for entrepreneurship, signaling a pivot to a more innovative path.

• Ricardo, an online auction site, was a significant turning point in Glaenzer's entrepreneurial career.
• The company went public on the Frankfurt Noya mark with a substantial market cap.
• Glaenzer describes the period as the "Wild west days" of tech and the internet, which fueled his passion for the industry.

"Ricardo was an online auction site. So the equivalent of on sale or Ubit or eBay in Germany and Switzerland and other European markets which we founded on the 21st July 98." Stefan Glaenzer is explaining what Ricardo was and its significance as an online auction platform in the European market.

"I mean, those were the heydays. It has been the Wild west days." Glaenzer reflects on the excitement and rapid development of the tech industry at the time of Ricardo's success, which was a formative experience for him.

• Glaenzer discusses the appeal of a portfolio approach in venture capital.
• As a founder and CEO, one is heavily invested in a single venture, whereas VC allows for diversification.
• He expresses a growing interest in learning about various businesses rather than focusing solely on one.

"At some point, it's probably more interesting going after a portfolio approach." Stefan Glaenzer is highlighting the strategic shift from single venture focus to a diversified portfolio in venture capital.

"The older I got, I was more interested in learning more about different businesses instead of going twenty four seven in one venture again." Stefan Glaenzer shares his personal evolution towards valuing the breadth of experience and knowledge across different startups, which venture capital offers.

• Glaenzer reflects on the feeling of success with Ricardo's IPO.
• He clarifies that Ricardo was not his second startup; he had multiple attempts with varying levels of success.
• The digital revolution lowered barriers to entry, contrasting with his pre-digital entrepreneurial efforts.

"That was crazy. So Ricardo was actually not my second startup." Stefan Glaenzer describes the intense experience of Ricardo's success and clarifies the misconception about it being his second startup.

"The barriers of entry to start and innovate have been way higher." Glaenzer contrasts the challenges of starting a business in the pre-digital era with the more accessible digital landscape that followed, highlighting the evolution of entrepreneurial opportunities.

• Passion Capital experienced a phase of rapid growth, expanding their team significantly.
• They hired almost everyone who came into their office due to the urgent need for staff.
• The team grew from zero to 200 people in approximately 18 months, marking a period of high intensity and expansion.

"We grew the team from zero to 200 people in 18 months or so. It was just a very special, very crazy time."

This quote highlights the rapid scaling of the Passion Capital team during a unique and hectic period, illustrating the challenges and excitement of fast growth in the venture capital industry.

• Passion Capital has a dedicated focus on seed-stage investments.
• They prefer to invest when some technology is working, not just at the concept phase.
• A working prototype or a closed beta with a small user base is their ideal point of engagement.
• They are often the first institutional investors, with an average investment of 200,000 pounds in the first round.
• Sometimes they are the first external money, following friends and family investments.

"We only invest in seed stage, so the preferred time of our engagement is we love to see some technology working... That's when we love to get engaged."

The quote underscores Passion Capital's investment strategy, focusing on seed-stage companies with some level of product development, typically as the first institutional investor.

• Passion Capital generally seeks 15-25% equity for a 200,000-pound investment.
• Their typical investment ranges between 100,000 and 300,000 pounds.

"Generally speaking, we look for equity somewhere between 15 and 25%."

This quote clarifies the equity stake Passion Capital aims for when making a standard investment, setting clear expectations for entrepreneurs.

• Passion Capital runs a co-working space called White Bay Yard where they closely interact with invested startups.
• Startups working in White Bay Yard require fewer formal meetings due to the open-plan office and proximity to Passion Capital.
• For companies not in White Bay Yard, meetings are held every one to three months, with frequency depending on the company's phase and founders' experience.
• Passion Capital emphasizes not wasting entrepreneurs' time with excessive board meetings, especially in early stages.

"With these companies, you do need less formal board meetings because pretty much White Bay Yard is a 10,000 square foot open plan office... It's different with companies who are not joining White Bay Yard as their starting office."

This quote explains how Passion Capital interacts with startups based on their location, with an emphasis on efficiency and the unique setup of their co-working space to facilitate informal interactions.

• The best way for entrepreneurs to connect with Passion Capital is through mutual contacts or qualified referrals.
• Passion Capital receives around 2000 pitches annually and meets with 600-700 of these, primarily those introduced through referrals.
• Each of the three partners at Passion Capital meets with about one new company per day.

"By far the best is making a contract through mutual contacts through some form of qualified referrals."

The quote suggests the most effective method for entrepreneurs to gain the opportunity to pitch to Passion Capital is through a referral, highlighting the importance of networking and connections in the venture capital industry.

• Passion Capital invests in 10 to 15 companies out of roughly 750 reviewed annually.
• They are data-focused and make investment decisions based on a rigorous analysis of potential opportunities.

We are quite data focused, so we tend to invest in any given year in ten to 15 companies. This quote emphasizes the selective and data-driven approach Passion Capital employs when choosing investments.

• Stefan Glaenzer views missing out on investment opportunities as an inherent part of being an entrepreneur and investor.
• He compares it to a football player missing a goal or tackle, suggesting that it's a natural aspect of dealing with constant new opportunities.
• Accepting that not all judgments will be correct is necessary when working with innovation.

That's part of being an entrepreneur. That's already been part of my entrepreneurial career. And now this accelerates as being an investor. But that is just part. This quote reflects Stefan's acceptance of missed opportunities as a normal part of the entrepreneurial and investment process.

• Passion has several investments in the peer-to-peer lending sector, such as Lendable and Smava.
• The sector is appealing due to its large market size and the sluggishness of existing players, which creates an opportunity for disruption.
• Consumers have been poorly treated by current companies, making them ready for new, disruptive solutions.

Financial. I mean, first of all, it's the market size. Second of all, the existing players are, for whatever reason, relatively lame and slow to react. This quote highlights the potential Stefan sees in the peer-to-peer lending market due to its size and the ineffectiveness of current market players.

• Stefan believes that the fintech sector, including crowdfunding, has a bright future as an alternative investment and financing method.
• The digital transformation of traditionally analog sectors, like finance, is creating new opportunities for innovation.
• Companies like AngelList and Funding Circle are shaping a new understanding of financial instruments for consumers and businesses.

Crowdfunding is going to have its place. And all the beautiful things that angelist is doing and is creating is fantastic funding circles. This quote conveys Stefan's optimism about crowdfunding's role in the future of finance and the positive impact of platforms like AngelList.

• While Passion Capital has a narrow focus on backing great, ambitious entrepreneurs regardless of sector, cybersecurity is a specific area of interest.
• They avoid gaming investments due to a lack of understanding and belief that it's too hit-driven, despite recognizing the potential for creating fantastic companies in that space.
• Passion Capital is open to all verticals and segments outside of gaming.

Right now? We do actually have a strategy here at passion that we focus on one sector only, and this is a very, very narrow focus sector. And that is great, ambitious entrepreneurs. This quote outlines Passion Capital's strategy of focusing on the qualities of entrepreneurs rather than being bound to specific sectors, with an exception for cybersecurity.

• Stefan suggests that genuine enthusiasm from entrepreneurs can be felt during pitches, regardless of the pitcher's age or experience.
• He acknowledges that pitches are nerve-wracking but believes that true passion for a project will come through.

You do get a feel, whether a team or an entrepreneur, or young person or an elder person. This quote indicates that Stefan relies on his intuition to gauge the enthusiasm and potential of entrepreneurs during their pitches.

• First-time entrepreneurs often face the challenge of solving problems using technology.
• The fundraising process is described as nerve-wracking and terrible.
• Over time, entrepreneurs learn to transform their pitches into dialogues that get to the heart of the problem they're trying to solve.

"But still, first time entrepreneur has a problem he is intrinsically interested and tries to solve by using technology. And usually, yes, of course, it's nerve wracking and it's actually terrible. This whole fundraising process is a terrible experience."

This quote highlights the intrinsic motivation of entrepreneurs and the difficulties they face during fundraising, emphasizing the stressful nature of the experience.

• There is no one-size-fits-all formula for a successful pitch.
• Some businesses may benefit from a data-driven approach, while others may require a softer, relationship-building approach.
• The strategy for pitching changes from early-stage to later-stage investing, with later stages becoming more data-driven.

"Some businesses need a clear data driven approach. The other one is a more softer one. Then you have some cases where it's just about the ability of building a relationship with the investor."

Stefan Glaenzer suggests that the approach to pitching can vary depending on the business and the stage of investment, indicating that flexibility and understanding the investor's perspective are crucial.

• Overly optimistic competitive diagrams that place the company in the top right corner are a common red flag.
• Another red flag is when a company claims to have no competitors at all.

"These competitive diagrams where you see all the competitive companies and by some miracle, your own company always ends up in the top right corner."

Stefan Glaenzer points out a frequent issue with pitches where companies unrealistically position themselves as market leaders, which can be a sign of naivety or dishonesty.

• Stefan Glaenzer's hardest career decision was to stop being an entrepreneur.
• He advises startup founders to do everything with passion.
• His transition from an entrepreneur to an executive chairman was significant as it involved less direct control over decision-making.

"Stopping being an entrepreneur."

This quote reflects Stefan Glaenzer's personal challenge in transitioning from an entrepreneurial role to one with different responsibilities, emphasizing the emotional weight of such a decision.

• Stefan Glaenzer recently invested in a fraud prevention product due to the fantastic and experienced team.
• The startup team had a proven track record, global ambitions, and was entering a promising market.
• He acknowledges a "honeymoon period" post-investment before facing the reality of the startup's performance.

"Just signed the term sheet about a fraud prevention product. Fantastic team, very experienced in a very fast growing startup."

This quote explains Stefan Glaenzer's rationale for his most recent investment, highlighting the importance of team experience and market potential in his decision-making process.

• Resources mentioned in the show can be found on the Twenty Minute VC website.
• Listeners are encouraged to subscribe to the podcast on iTunes.

"Now, for all the resources mentioned in today's show, head on over to www.thetwentyminutevc.com where you can find them all under items mentioned in today's show."

The host provides listeners with directions to access additional resources related to the podcast episode, indicating a focus on extending the value of the content beyond the immediate conversation.