Carried away in Vienna

Jan 19, 2016

Speedinvest’s $100 million final close has vindicated the seed investor’s work-for-equity model, which ditches carried interest for hands-on roles at portfolio companies.

On raising a triple-digit fund, few seed investors resist the temptation to scale up to Series A rounds.

For Vienna-based Speedinvest, however, that’s not an option: Its work-for-equity model only suits seed-stage startups, regardless of whether the GP has $10 million to deploy, as it did in 2011, or $100 million, the size of its second fund.

Instead of collecting carried interest, Speedinvest partners takes near-full-time roles at portfolio companies, and in return for reaching agreed milestones they increase their equity stakes, typically by two to eight percentage points.

This allows Speedinvest to pay less for bigger shares, while founders gain access to professional resources they couldn’t otherwise afford and at little risk to their business.

By the same logic, those with Series A money behind them have less need of Speedinvest because resources or contacts are in place to plug any skills gaps.

“We work well in markets where there are a new generation of founders or in businesses where there is a solid technical foundation but less strong entrepreneurial skills,” comments Oliver Holle, Speedinvest’s founder.

Almost 120 LPs have backed the firm’s second fund, including Menlo Park-based New Enterprise Associates, which has reserved $50 million for growth investment in Speedinvest’s most promising companies.

The Austrian firm focuses on fintech, software and e-commerce, usually making initial investments between €300,000 and €500,000, and, now, up to €3 million per company.

Of particular interest to Holle this year is insurance technology, the e-sports value chain (his firm has a stake in game streaming site Hitbox) and Internet infrastructure.

“We’re looking at anonymisation technologies where you can extract value out of big data or where you combine data sets in a secure way,” he says.

There have been four profitable sales from the $10 million Fund I’s 20-company portfolio, with Speedinvest holding from 15% to 20% equity in each at exit, despite some dilution due to limited firepower.

After signing up 15 businesses in 2015, Fund II will now add another 12 to 14 per year, reserving half its capital for follow-on finance.

Of course, a bigger portfolio raises the strain on resources, so Speedinvest managers don’t work more than a year at any company.

Speedinvest has also tripled the size of its team to cope with the demands of a much larger fund, for which the investment remit has widened from German-speaking countries and Eastern Europe to the rest of Europe as well.

This has brought London and Paris within its purview, and an abundance of seed initiatives in such places means much higher valuations at earlier stages than Speedinvest previously encountered.

Holle, however, thinks that smart money will win out as the European ecosystem matures and startups become more discerning.

“I don’t expect a huge correction, but as business angels start to feel the impact of really working with companies, many will become less enthusiastic about seed, while entrepreneurs will start to differentiate between having a valuable seed investor and just having a high valuation,” he says.