Interview with Roland Manger, Co-Founder & Partner at Earlybird

18th March 2019  

You are Co-Founder & Partner at Earlybird. How did you decide to found it and what is your background?

When studying Computer Science in the 80ies, I was particularly interested in networking technologies and those areas that evolved to become the technical foundation of the Internet. In the middle of the 90ies, after some years as a Strategy consultant for Telcos and Media companies, I finally realized that the Internet was going to have a great impact on business, and hence, that there might not come a better time to become an entrepreneur. Some friends invited me to join their start-up to run Marketing and invest a little bit of money. We were lucky and eventually became the first German Internet IPO. At that time, other friends with Private Equity experience were discussing if “Silicon Valley-style” Venture Capital could work in Europe and invited me to explore the opportunity further. We founded Earlybird because of that.

What type of fund is Earlybird and what is its mission?

Earlybird has come a long way during the last 20 years. Starting with a 1999 vintage Pre-Seed fund was looking more and more like a recipe for disaster as the Internet bubble burst in 2001. Start-up and Venture Capital became dirty words. Therefore, it took us until 2005 with three successful IPOs and a large trade sale to prove our original investment hypothesis. Today, Earlybird is a group of several VC partnerships covering three lines of funds: Digital West (Early Stage, Western Europe), Digital East (Early Stage and Early Growth, Emerging Europe) and Health (Pan European, medical technologies and digital health).

What are the types of companies you are most interested in, and why?

Together with Cem Sertoglu, Dan Lupu and Evren Ucok, I initiated the Digital East Fund line. I am interested in exceptional founders from Emerging Europe that combine strong entrepreneurial talent with a superior ability to create great products or services with technology. I get even more excited if these products lend themselves to conquering the global market. To give you an example: we found a small company in Bucharest in 2014 that was providing world class know-how around rules-based systems and user interface controls as a service to other tech companies or large corporates around the world. The founder was looking for ways to turn it into a real product company and saw that Robotic Process Automation was appearing on the horizon, possibly as a new Software category. It took us a year to convince him to take money but then his company UiPath really took off. Per June 2018, it already had Annual Recurring Revenues of $100M. Now, companies growing that fast are rare, but UiPath serves as a good benchmark to keep in mind for us.

How would you describe your investment strategy, and what are the main factors it relies on? Could you give us some examples of the way you have implemented it and name some of your most successful investments?

Venture Capital is all about access to the best entrepreneurs that have founded or are about to create new start-ups. Given the fantastic returns that the top performing VC funds have created, a lot of money is going into VC funds these days or is already sitting there waiting to be deployed. The basic idea behind our Digital East Fund line is simple: If you know how to find great entrepreneurs, it makes sense to look for them where nobody else does. I am convinced: raw talent is split evenly around the world, but capital is not. The Internet, Google, the Cloud, and the concept of Inbound Marketing have made the world truly flat for those entrepreneurs. It is our job to find the best of them in Emerging Europe and help them win in their respective markets around the world. I just mentioned how we did this with UiPath in our current Digital East Fund I. There are other companies in the same fund, like Hazelcast, originally from Istanbul, now headquartered in Palo Alto, that are the global market leader in open core fast data infrastructure software with hundreds of global Fortune 1000 customers. At halftime, after five years, the fund is at a Net IRR of 54%, with most of the NAV rather liquid.

Earlybird's motto is "tomorrow belongs to the daring". It would be interesting to know how you apply this motto. When did your fund dare to do something that was not (or not yet) considered as the right thing to do by conventional wisdom?

I guess some of my friends doubted my judgment and probably saw it as a sign of an impending midlife crisis that I started to look for deep tech investments in Turkey, Romania or other places that usually don´t come into mind when one thinks about world-class VC investments. However, my partners in other fund lines are also not easily boxed into conventional wisdom. Given the great (and justified) hypes around AI, IoT and other areas that most VCs can agree on, they are doing something that many would consider as boring and out of favor as medical devices but with an excellent understanding of the market and professional capital from investors that either have been investing in the health care space for a long time or are key players in health tech themselves, such as medical device manufacturers and health insurance companies.

During our Academy, you should have joined as a guest speaker our panel "Debunking VC Funds Performances" where we talked about how VC funds can have very different KPIs to keep track of their performances. May you want to share with us your thoughts about and tell us what KPIs you use to evaluate your fund's performances?

Venture Capital funds are notoriously hard to judge in terms of substance and potential. For the first four or five years, financial KPIs have almost no value at all and even after that, market value oriented methods can yield a wide spectrum of results for the very same asset at the same time but applied by different investors utilizing different assumptions or data sources. In the end, Cash-on-Cash returns count and NAV is only indicative of the value of a fund if the underlying assets are liquid, so you could sell them at the indicated NAV today if you wanted to. If you are willing to take the time and the pain to watch your VC managers closely, there are some aspects or behaviors that will, at least, tell you something about their chances of producing good returns eventually. However, one fund generation might not be enough to do that. Having said that, watch for managers that are more interested in entrepreneurs that care about their products and their people rather than about press coverage or winning entrepreneurship competitions. Do those fund managers understand the difference between risk and uncertainty? In Venture Capital, we deal with uncertainty. Hence, it is all about optionality. Unlike in the probabilistic world of risk-adjusted returns, volatility is good as it provides the occasions for quantum leaps in value. Every decision or course of action should be tested whether it might add to the ultimate value of the option or not.  As Nassim Nicholas Taleb professes in "Black Swan", under uncertainty, an investor should not take a random walk down Wall Street but rather behave as a Flaneur, being perceptive but always ready to change course.  Being able to invest step by step rather than committing large amounts up front is positive. Having a broad bench of likeminded co-investors helps reduce the negative optionality of financing inevitable course corrections, and leaving money on the table for founders and employees of the start-ups is good as it aligns interests in going after the big outcome. Everything that creates "perverse" incentives such as high liquidation preferences, KPI based milestones or other complicated financing terms reduces the value of the options.

If you had to advise a family office in which fund to invest, which measures would you recommend looking at?

Look at Cash-on-Cash returns and in the absence of that, the relative value of liquid assets still held by the fund. More important would be the intangibles that I mentioned before.

What are the main differences between Western Europe and the Eastern Europe ecosystems?

After five years of investing in talent from Emerging Europe, our investment hypothesis seems validated. However, it might take several years, maybe even a decade or more until the supply of capital adjusts to the opportunity. While Venture Capital was very scarce all over Europe 20 years ago, at least in some parts of Western Europe the availability of capital for start-ups is now catching up with the US. Also, Eastern Founders can move to the US, to London, or Berlin, but it becomes harder and harder to find the engineers, support staff or other basic talents to grow their companies, so we are even seeing some founders leaving the West again for their home countries.

What do you think are the most promising and disruptive business sectors at this moment?

It does not matter what I think. We are more interested in what the smartest founders in our region believe. They will show us the way.