Meet the investor: Steve Schlenker, DN Capital
The managing partner of the global private equity firm says when it comes to funding businesses "really, anywhere you look there is a hot sector waiting"...
Firm: DN Capital
Name: Steve Schlenker, managing partner/co-founder
Where are you based?
DN Capital is headquartered in London with offices in Silicon Valley and Berlin. I'm based on Sand Hill Road (California) but try to spend about 25% of my time in Europe; split 80% in the UK and 20% in Berlin.
What kind of investor are you?
We invest in software and applied software businesses.
We believe technology has the potential to positively impact the lives of billions of people around the globe, as well as the potential to negatively impact lives, and we want to fund companies with positive impact on as many “normal” (i.e. not the global elite) people as possible.
What kind of deals do you finance?
Two out three of our investments are at the seed stage at the time of our initial investment, so early product and early customers. The other one out of three are mostly Series A or early Series B companies, although very occasionally we also invest in bootstrapped “growth stage” companies and have, occasionally, incubated business ideas ourselves.
Our companies are mostly based in Germany, the UK and the US, and to a lesser extent France and the Nordics, but we will invest anywhere in the EU or with an EU angle.
What kind of person do you invest in?
Ideal CEOs have passion and domain expertise, the ability to sell themselves, their business idea and their product to customers, employees, business partners, and equity investors.
They must have a really big vision and be trying to tackle a meaningful problem that they can identify with and that affects entire industries.
How do you source prospects?
As a fund manager investing out of our fourth fund, many interesting companies come from teams that we have previously backed because they know and trust us.
We also proactively map markets and outreach to companies doing interesting things.
Thirdly, we define themes and reach out to our network of entrepreneurs, angels, managers and techies and ask them to scout for companies focused on those themes. Finally, we see what problems our own portfolio companies, and portfolio company team members, encounter, and look for solution providers to those problems.
What is your ideal investment?
Our ideal investment has each of the following:
- A team with the right mix of experience and with a dynamic leader at the helm
- A market large enough that a billion dollar revenue company can be created without relying solely on a use case that doesn’t exist today
- Technology that is unique and hard to copy or imitate, plus a user interface/experience that makes adoption easy
- Early indications of rapidly accelerating adoption plus a really high net promoter score
- Indications of a high LTV/CAC ratio with a quick time to payback
- And finally, reasonable deal terms so we can deploy a meaningful amount of our fund and have a meaningful minority stake
What are your USPs?
We are particularly well known for our ability to help companies manage multi-city and multi-country expansions, including the trade-offs between speed to market vs core market profitability, route density vs scale of operations, expansion across Europe vs expansion in America etc.
We also hear from our management teams that we spend a significant amount of energy understanding the unit economics of their businesses so that we can better advise them on decisions around growth rates, capitalisation, hiring strategies and so on.
What are the hot sectors?
In general, the population is aging but the generation that is aging is used to using technology to solve problems that were previously manually solved, unsolvable or dependent on others to solve. Solutions like personalised medicine and the marketplaces, e-commerce software, and services around that will thrive, as will the application of artificial intelligence (AI) and machine learning to help improve the quality and longevity of life for people in the third trimester of life.
Efficiency in logistics, whether for e-commerce, warehouse management, supply chain management or compliance management will also be enhanced by AI and in some cases by sensors/Internet of Things (IoT) or augmented reality (AR).
E-commerce is currently on a small pause from an investor standpoint but we are really only in inning four or five of a nine inning match to change how customers efficiently find and acquire the right products, so a new wave inevitably will happen over the next five years, which might include new delivery mechanisms such as drone delivery.
Personal entertainment is changing dramatically, whether from mobile group video or eSports or alternative betting platforms. Really anywhere you look, if you look hard enough, there is a hot sector waiting.
Three things a company should be able to offer an investor?
- Transparency of information
- Aligned interests towards enhancing shareholder value
- Impeccable ethical standards with all internal and external constituencies
What is the cardinal sin when looking for investment?
Any indication of a potential breach of the three things above!
What continuing involvement do you like in an investment?
If we join at Series A level or materially increase our position between the seed and Series A level, we almost always sit on the board of directors.
Early on, I like to do a weekly quick update call with a CEO – particularly a first time CEO – not just to discuss the business, but to be a sounding board for the stresses of running the business.
As the company matures, these calls will become much less frequent but any time there is a need for a customer introduction, for a strategic hire or strategic partnership, or equity event, I like to help give advice and counsel.
What has been your best performing investment to date?
It's unfair to comment on unrealised companies, even though we have backed some businesses that have become the most successful in Europe. In one case, we have a business with over 100 million unique users every month, in another case a business with over $1bn in revenue, and in a third case one business with roughly $2bn in transaction value.
For the realised companies, I like to point to Endeca. We invested when the business had four customers and $500,000 of trailing revenues, and exited for $1.07bn at a time when the company had over 500 customers, approaching $150m revenue, and partnerships with some of the largest systems integrators in the world.
The company has spawned off multiple start-ups, a number of which DN has backed with others backed by leading US venture funds like Bessemer and Venrock, but equally importantly, the company changed the way we think about what is a good experience when searching for items on the web.
Every time I see an e-commerce company using faceted search, I think “Endeca was the one who showed everyone that is even possible”. That is truly the best performing investment for me