The Operational VC - an interview with Florian Heinemann

Florian Heinemann’s life could easily be made into a book and yet he is far from slowing down. A pioneer of operational VC, he told me of the distinction between basing your fund on expertise, instinct, or reputation, as well as the need for focusing on the founders.

Florian is a serial entrepreneur, manager, business angel, co-founder and General Partner at Project A Ventures and Limited Partner in several VC funds (including 42 Cap, Cherry Ventures and Point Nine) — it’s fair to say that he knows the European startup scene inside and out.

Before co-founding Project A Ventures, Florian spent several years at Rocket Internet — the European startup factory — where he held the Managing Director position. While at Rocket, he was involved in the development of Zalando, Global Fashion Group, and eDarling/Affinitas.

He wrote and co-authored several books on entrepreneurship, sits on boards of several companies (including Henkel and Oetker), and is a father of four. I was seriously questioning my time management abilities while preparing for this interview, and yet Florian managed to find time for not one, but two calls with me.

Paweł Michalski (PM)
: Your fund, Project A Ventures, is probably one of the most unique players on the European market. It was named the best VC in Germany by Business Insider this year. Tell me, how did it start?

Florian Heinemann (FH)
: It was born based on the idea that the power balance between founders and investors will shift towards founders. We thought: if that is about to happen, we needed a credible competitive edge. We didn’t want to be “just another VC.”

Some VCs can offer a “reputational transfer.” For example, if Sequoia invests in your company, it makes you stand out in the crowd — irrespective of the specific help a partner at Sequoia gives you. Obviously, if you are just starting, you don’t have that, unless you are Andreesen Horrowitz, star entrepreneurs who played that card when they started their fund.

The downside is that the reputational approach works only as long as you are winning. In any case, we couldn’t base our strategy on reputation alone. We needed something that utilized our skills and expertise. We knew how to do operations well, and that’s what we decided to leverage.

: So, the operational VC became your defining characteristic. What does being an operational investor mean in practice?

: We have about one hundred people working at Project A. Only fifteen of them are investment professionals. The rest are operational experts. On top of our investment, we give you access to those people, but only if you need it. It’s more like a menu — if you want to work with us, you can.

I have always been very keen on our offering, and I wanted it to be tangible. We review the scope of our services regularly to find out if they are still relevant. For instance, human resources and data architecture were easy wins for us from the beginning. Four years ago, we added some expertise in enterprise sales.

: Do you see other VCs follow the same model?

: Rocket Internet does similar things, but it focuses on incubation, not VC investments. EQT Ventures probably has the most similar model, but it is more focused on mentoring than operating. For example, they would send a marketing mentor to you, whereas we would send an entire marketing team.

There are others, including the a16z mentioned above or GV (formerly known as Google Ventures) in the US, but altogether not that many.

There’s one thing that I would add, though. In the end, it’s all about the thesis. As a VC, it’s good to have a thesis and an institutional approach around that thesis — otherwise, you’re a family office.

: Alright, so what are the traits that you believe make the best VCs?

: First off, I can only speak about early-stage VCs, because that is what I know. With that said, I believe that the best VCs are those who understand what kind of bucket they play in.

: What kind of buckets are there?

: Let’s start with VCs focused on a particular area, possibly within a larger trend. They build deep area expertise and a vast network. This approach is the closest to systematic investing.

Then, you have people who don’t go as deep into what’s really happening, but they have a great gut feeling, especially about people. They can quickly assess the potential of people.

This approach is not as respected in the VC community, and you might call it superficial, but if you think about it — 80 percent of the decisions you make as an investor is based on people. It can be an excellent way to invest, especially for talented networkers who win people over and who do the right kind of hustle to close the deal.

Finally, you have the “reputational” VCs, who were able to build their brand awareness. This approach is about positioning yourself in the market in a particular way or having something unique to offer — that’s where we see ourselves now as the operational VC. Building your reputation takes time, though.

Now, you have these three buckets. There are more, but I think these are the essential ones. You need to make sure you’re playing in your bucket. VCs often don’t know which bucket they play or want to play in. It makes a lot of things easier if you do.

For us, it’s clear. We are the operational VC. As long as we make sure that people believe we are one of the most helpful investors, we’re good. But it is a constant work in progress.

: Could you give me an example when this doesn’t work?

: If you’re the only one investing in your country then there’s no problem. It might become one the moment you want to grow out of this country. Being the largest VC in town is also not a proper positioning. This is the usual problem of corporate VC funds (CVC).

As part of the corporate structure, they have a clear liability, and entrepreneurs are often skeptical about working with a single corporate. But as soon as you distance yourself from the corporate parent, you lose the benefit of the corporate platform on which you are based.

: You mentioned that you focus on early-stage investing. What is the most challenging part of your job?

: The main challenge of early-stage investing is understanding the forces in the market that make the timing for a particular idea right. In other words: what is the constellation of people, money, partners, etc., that would translate an idea into a successful business.

People are mostly wrong about these constellations — that’s why VC portfolios are so large. You need a fair chance to find two or three winners to make the VC model work.

Even with the best operational support, there’s a lot of things you can’t influence. The luck element is still significant. It’s not a bad thing, but you need to acknowledge it and align your actions accordingly.

As a side note, it’s very different in later stages. Take private equity investments — they are systematic. Private equity fund managers draw their conclusions based on 80–90% facts.

In early-stage investing, we have less than 50% facts. Both are called investing, but it’s an entirely different animal. The former is about discipline and paying the right price. The latter is about making the right bet, irrespective of the cost, that could change an entire industry.

: Let us travel back in time — how did this entrepreneurial journey start for you?

: I finished my studies when I was 23, and I immediately founded my first company. It was 1999, and I had a reputation of being internet savvy. To use the Internet in the 90s, you had to go to a computer lab. In contrast, I already had a laptop and could just use a dial-in.

While working at my first startup, I started doing online marketing. It was by accident, but it became my true passion. Having some domain expertise has always made me feel comfortable — especially as an investor. I’m not only a guy with some money to spend — I can provide operational support if needed.

: What are the biggest lessons that you learned from this early experience?

: Starting a company with four other people was probably too much, and I don’t think I would ever do it again (laugh).

I found out that I’m a decent entrepreneur, but I’m probably an even better mentor. I figured that I have a passion and perhaps some talent for enabling others on their path — rather than doing it myself.

I believe in path dependence — the configuration you have as a company determines your development path. It matters where and how you start. I found it to be as accurate for companies as it is for people. To put it in other words: your actions carry on long into the future and determine your trajectory.

: So, how did you transition from being a startup operator to a venture capitalist?

: My first company was acquired, and I earned a decent amount of money. I started writing small checks. One of my early investments was Trivago — and it was a success. I thought: wow, that’s cool! It seemed much better than being operationally involved. I continued making deals, mainly because I had a decent dealflow.

Meanwhile, I joined Rocket Internet full-time. The reigning philosophy at Rocket was to reduce founders — we thought we didn’t need any. Instead, we focused on execution. We brought along our staff, we built the infrastructure, plugged-in some very talented people, and added capital from Oliver Samwer — who’s probably the best fundraiser that has ever lived on the German soil.

Eventually, I realized the limits of the execution-heavy models. I thought that we are living in an increasingly product-driven world, where ideas are more substantial. Such a world would need more “real” founders who are mission-driven and have an emotional attachment to the product they are working on. Those founders would still need operational help.

What Rocket Internet helped me realize was that these are typical problems: HR, data architecture, marketing strategy, etc. I thought I saw where the market was heading and where my scope of opportunities would be moving, and I sensed an opportunity.

To finish our conversation, what do you think is the single most important “best practice” in venture capital?

: It is to understand that VC’s primary goal is to support entrepreneurs in whatever they do, not to satisfy VC’s own need for control. Many investors think they have to exercise a high degree of control. I don’t think it’s that important.

If you genuinely believe you’re investing in a groundbreaking company, you have to understand that you should spend at least 90 percent of your time working for the benefit of the entrepreneur, not the other way around. It sounds easy enough, but it isn’t.

If you ask yourself what you would do if you were in the founder’s shoes, your answer might be true for you but not necessarily for the founder. Being able to get this distinction right is a trait of great VCs.