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Investment Climate Podcast
On Why Vertical SaaS Still Rules in the Era of AI - Nils Eiteneyer, Capnamic
00:22:50
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- [00:00]
A
You don't sell green but if you sell better economics, better resilience, better efficiency, et cetera, et cetera in energy systems, food systems, agricultural supply chains, whatnot, then that's something that's sustainable as a business model, as a technology and then it will also create impact at the end of the day. And because people have focused so much on that for the past two, three, four years, we see better situations, better companies, more interesting cases. My name is Nils, I'm a partner at Capnamiq. Capnemic is an early stage specialist VC firm from Germany. We've been around for almost 15 years investing from our fourth fund. We come in early, quickly as a lead or co lead investor, take quite a bit of ownership but stay very close to you at the same time. We focus on Europe, especially German speaking areas but we've been investing a little bit beyond as well opportunistically. What about myself? I'm an ex operator so understand what founders are going through. I'm also an ex advisor. So I started off at McKinsey and then realized that actually I want to become an entrepreneur one day. So I started doing that. Been working in consumer and E commerce on the on one end and then VC and tech on the other end and then slowly but steadily move towards becoming full time venture capital investor. And now I'm super happy to be part of this, this great partnership.
- [01:15]
B
Amazing. We're so happy to have you guys and excited to discuss your thesis around agri food. Just check size and what percentage ownership do you guys usually look to take?
- [01:25]
A
Yeah, okay, so typically we, we probably do 2 to 3 million initially we can do from half a million if when it's super early up to five or six initially in a rather serious a like situation we, we, we love 15% ish. Of course if it's a little later in the round then we can find ways there. The earlier it is the more we like we find that helpful because of our portfolio math. At the end of the day we need to return money to somebody to our LPs and we want to do that across fund generations but at the same time we only invest into five, four, five maybe six companies a year. So very selectively and we try to be very much on their side at the end of the day. I mean all VCs tell you the same stuff. The value proposition of almost all VCs is the same. The question is who delivers. And my partners and this firm have been around for so long that we've been actually fortunate enough to help founders Build unicorns and sell them to large, you know, very, very large enterprises. And we are about to build the next few unicorns with our portfolio founders. And that's only possible because we focus on a few and then we stay very close to them.
- [02:35]
B
Amazing. Well, congrats on that. And talk through the recent investment in agri Food and kind of where your thesis. What's driving that investment?
- [02:43]
A
Sure. Probably there's, you know, there's two recent investments that, that, that fall into this space. One is Omega from Munich. The other is Logistic Buddha which will at some stage be renamed into an internationally usable name from Dortmund, which is actually my hometown. Both are great examples with, with Omega they solve a massive real world problem in, in hatcheries through NI enabled spectral analysis. So basically they tell you day five or six, don't quote me exactly whether it's male or female, the egg that, that is being, that's being produced in the hatchery and, and that's a massive problem for ethnic, ecological, but also especially economic reasons. And we, we like this team because it's, it's super experienced. Actually two of the three founders have been part of the, the, the whole proglove story I think sold at Dokopia a few hundred million euro. It's a great team in, in terms of personalities. They work at the intersection of hardware and software. They solve a huge but rather unsexy problem. Something we like as well. So that's great and this is, you know, totally on point food tech. Then can we open this one up for a second?
- [03:53]
B
Because I think it's. I was, I'll just do a little reveal here. I was consulting for a company in the past few years ago who was a competitor to Omega. It was, I can't remember. I'll tell you, I'll make it very easy. It's an Israeli based company that if you look at competitor Omega, Israeli company, they were no longer around so Mega beat them. So congratulations. But the, the question becomes just first of all, I think it's really fascinating for our listeners to understand the problem because like, maybe you could just help explain why is knowing the sex of the egg so crucial in commercial hatcheries? Like why is that some. Why. Why don't you want a man as a. You know, some cultures prefer men. Why don't hatches prefer men?
- [04:36]
A
Yeah, I mean, let me tell you a little bit about it. I mean my partner Christian and our colleague Jason, you know, they'd be the best ones because they are doing the deal, they're leading our investment there. The best ones to talk to. But there's a problem in so far that male chicken neither produce meat nor eggs. So from an economic perspective in agriculture there's no real value to them. And in the past there has been, you know, that huge issue of actual, I'm not entirely sure how to put this in English, but in Germany we'd say Kupenschketan. So you actually just, you know, destroying the little chickens, putting them into a huge machine where they're being, you know, crushed into pieces. But that's getting less and less regulatory or ethically being appreciated or executed across European, but also northern American markets now. So both for, you know, from a consumer and consumer taste, ethnic reasons and regulatory perspective as well as economic perspective, it's, it's not desirable to actually have male chickens. So the earlier, you know, what is female, what is male, you can actually then abstain from further conducting the process of the act becoming a full blown chicken. And there's actually, there's actually put, you know, additional revenue streams and I'm not entirely sure whether I can, you know, make that transparent, so I won't because it's on the founders to tell the story themselves. But there is additional revenue streams that you can open up. If you know early enough which one is male, you can do something else with the male sort of egg and then you can also let the female egg continue the journey into a chicken and then being, you know, something from an agricultural and economic perspective, something productive. Does it, does it answer the question, Alex?
- [06:16]
B
Yeah. And so to our listeners, what, what I'm hearing is a clearly deep tech solution is a, is a large problem. Right. And I, I would almost say it's, again, it's maybe true terms, but obviously there's an ethical piece here, but also almost like an upcycling comp here of where you're taking discarded elements and then creating value from it. So by knowing early, which is a discarded element, you can create greater value for the producer and reduce cost. Right. So that's a very, it's, it's, it's really interesting technology and congratulations on that.
- [06:48]
A
Well, congrats to Katarina Till and Paul, who are the founders. And that's, you know, that's super important. Not only does there need to be sort of a huge market, a problem that needs to be solved and a solution, product, technology, whatnot, but most importantly obviously are the founders that we invest in.
- [07:06]
B
Yeah.
- [07:06]
A
And I mean, I have a second example for you and if you want to, then we can move away from that and then towards Sort of what our thesis behind that. But the second investment is called logisticude. It's a supply chain software. So It's a vertical SaaS case at the end of the day. And again, very interesting founders, all four of them, all four of them are former researchers at Fraunhofer. Fraunhofer is that, you know, large German research institution and Fraunhofer Institute for Logistics is the largest logistics think tank in the world. Seven hundred researchers and, and the team, Philip and the three of them, they are former Faunhofer people and they know the space, they know the problem. What they do is basically they digitize the whole load carrier management workflows again very unsexy. But every day millions of load carriers are being pushed from one place to the other. For example pellets. And in food and agricultural supply chains that's an important thing. So it's something that we call enabling technology. Nagel Group is, is, is Europe's largest food logistics player and they are again also one of the largest, if not the largest customer at logistic pool. And what we, what we like here is that the team, they really know their. We love teams that either come from the industry and, or research and that have a very deep domain expertise and that work on things that need to be solved. But look, you know, at first sight, look a little unsexy, a little boring even. Those are the things that we really like. And here, you know, there's a whole discussion about AI and software. And you know, we've been, we've been thinking about that discussion for many years. We've moved away from former investment thesis that our many of our colleagues have shared for many years, a few years ago already. But if you look at, you know, vertical and infrastructure questions in software, those we still find selectively still find interesting. Yeah, yeah. And if you want to, you know, take a bigger picture, why do we find things in food and agricultural tech interesting? Because sort of resource scarcity and demographic shifts are sort of two of the four or five mega sort of trends that we look at for the next 10 or 15 years where we invest in and we love things that strengthen European resilience and autonomy. And again, you know, if we find solutions that are in food and agtech, that's part of a resilience game for Europe.
- [09:37]
B
And again, to drive back another point, I actually think that logistics are extremely sexy because I sold very high end software for logistics, last mile logistics software, that's what I sold. So, so to me actually logistics is very important and three PLs are very, very important. First mile, middle mile, last mile. It's like that. We could talk days just about first mile and the importance of first mile. The question I'm curious about is when I think about SaaS, there's a lot of predictions right now that SaaS is dead. Right? That's the concerns like that. Okay. You have, you know, it's become democratized. The cost of producing it is, is the barrier to entry is much lower. Another thing is the fear that bigger players are going to just disrupt it themselves. And just, you know, a good example right now is whisper, which is this voice to text was valued at X billions of dollars. Google puts out one feature on their keyboard that does voice to text. That's a big threat. So curious, how do you guys look at SaaS, especially in. Why specifically in the agri food tech vertical or in this first mile vertical, SaaS still makes sense when you have a world of AI which is threatening. It's so hard. I speak with founders raising every day and they're all telling me the same thing. It's harder than ever to find investors who are actually deploying. And getting access to those leads takes time founders just don't have. Every month fundraising is a month burning Runway. This is why we created ftw, a community of founders and acliff fundraising, the world's most accurate agri food tech investor database. Plus connecting you directly to ideal target investors and a community of support and accountability. Guaranteed results or your money back. Apply today at www.joinftw.com hub.
- [11:34]
A
Yeah, so I think as an sort of opener, we need to sort of reiterate. We are very selective and careful with software investments. For many years we've done things at the intersection of software and hardware. Hardware buy and build models. Build models. So moving away from pure or oftentimes pure software investments. But we still believe there's, you know, there's value being created in software. And if you want to make it super simple, we believe horizontal is more difficult than vertical. And why is that? Because in horizontal software, often we talk about public data, we talk about situations where you can use some of the established models, products out there, whatever Google or OpenAI, whatever anthropic are putting out to actually work on things. But in situations where you talk about sort of niche segments, for instance parts of, of our food and agtech space, or let's say food and agricultural space, and there you find sort of situations with very specific workflows where you have to know the industry, where situations where you have to have sort of Proprietary access to the industry where you are over time collecting and enriching proprietary data. Data that is not publicly out there. And so we believe. And then again and there is a, there is a difference between sort of, you know, building a software product and actually running and operating it. Many products also benefit from being used at multiple customers and multiple users and being run by sort of professional firms behind them. So even if of course you can build dummies and prototypes and things very easily nowadays, you know, actually operating software is a whole different game and you know, maintaining it over time. So we believe that, that vertical solutions still deem our attention and even soft and even horizontal situations might. But there we are a little more careful in vertical situations like with logisticbude we find that you know, those workflow integrations, those data modes that are developing over time, those proprietary access situations to customers and users in the industry are very interesting to look at. And then the third sort of part of the whole software game is obviously infrastructure. And we're seeing a lot of stuff happening beyond LLMs now in the sort of numeric space in the whole question of physical layers that are on the edge, on edge devices. And there's quite a bit of stuff happening in Europe that will be needed out in the field, out on the farm. So you know there's still some, there's still stuff to be done and we don't believe that everything will be, will be delivered by anthropic and the likes. And you know that is also being driven by users, companies. If you want societies growing awareness that the dependency on you know, two or three giant players might be risky, you know even at least for technical reasons. Not, not discussing any other factors in there.
- [14:45]
B
Yeah, give us a. Like this home. My, my father in law is, is a lawyer and I think like Harvey, that's a big one. I think that's a really great use case for an AI. Like that's all the cases are public. Like there's no proprietary data. Like the cases are being built on public. So that's a great use case to replace. But what you're describing and these are closed systems, they're not comfortable sharing publicly the data. You just, you need a, you need a software solution that can integrate directly for your use case and not necessarily and it can be fed on public information. So again vertical, vertical closed systems is an interesting use case.
- [15:22]
A
Yeah, fully on the right what you're saying. I mean I had a, I had a call yesterday with, with you know a, an entrepreneur from a small cap company. They do sort of gardening and stuff like that in Germany would say gardener Landschaftsbau. And he says he is on purpose using only local models with sort of on prem hosting and he's not sharing any of his proprietary data sort of with US solutions. He's really, he's really careful about what data he is sharing from his enterprise systems with what applications out there. So anything where we see that sort of know propriety data, you know, deep workflow integration, distribution and trust in the industry are important potentially a connection to the physical world and even you know, sort of that system of record situation like with Luigi Buddha for the load carrier question. Those, those things we find interesting in software and we often find them rather in vertical than in horizontal situations and we might see them in infrastructure questions.
- [16:24]
B
So take a, take us to the next step which is where you look at now what's interesting. What if somebody's listening to this podcast and I just, they're thinking hey should I give a call? I'm, I'm based in Germany or say German speaking regions or maybe I'm, I'm in Europe. Like should I be reaching out? Yeah, what kind of entrepreneur should be reaching out? I mean, you know, where are the areas that you guys are looking at? Where's the thought process of where, where the gaps are?
- [16:52]
A
Yeah, yeah. So you know, at the highest level, so to say we, we, we find situations interesting with deep technology meets sort of structural pressure as discussed. Anything around, you know, problems that, that try to solve demographic shifts and resource scarcity, labor shortages, climate volatility, pressure on, on food systems and, and, and, and you know, rather increasingly fragile supply chains. Anything that strengthens European resilience. Those we find sort of multi decade themes. We like technologies that you know, part a part of the enabling stack like lucasipuru or are you know, spot on solving individual problems in the, let's say food space like with, with Omega. We find AI is a massive accelerant, but only if it's part of a sort of bigger solution that has real world application, potentially a connection to the physical world. We love that we don't invest just you know, in AI for the sake of AI. Also anything that becomes part of operational infrastructure is interesting and, and again, you know it comes down at the end of the day it comes down to the founders. Do we see obsession, do we see domain expertise and then you know, customer pool velocity sort of on the, on the, on the market side and those, those situations we love.
- [18:11]
B
Okay, amazing and just a very random question, but do you consider the UK Part of Europe.
- [18:16]
A
Yeah.
- [18:17]
B
Okay.
- [18:17]
A
We actually, we, we have a, we have a portfolio company that's called Dexterity. They do sort of in AI and robot robotic enabled warehouse inventory automation. It's, it's on the retail side and logistics side of things. Again based in London.
- [18:32]
B
Okay, perfect. So I, I think that gives us a really amazing overview of the strategy. Is there anything else that you think for the founders that you need to hear and maybe. Actually I think a lot of the founders that I speak to, they're not but cynical but they're. We've been in this winter with food for a little while. Right. I actually think this is actually the best time for us because everything is so cheap and you know, this is the best time to actually build a company in our space. But what gives you optimism around investing in solutions around agri food? Like why are you optimistic around there being an opportunity as a VC there for you today?
- [19:07]
A
Yeah, well, one is the questions are still looming. Even if you sort of concede that the whole macro and geopolitical climate for impact impact business models has been rather weak for the past two or three years, that might still, you know, continue to be the case. Climate sort of, climate change is real, resource scarcity is real. Shifting and changing demographics is real. And those problems won't go away. So we need to solve, for example for warmer climates, for the different dispersion of rain seasons over the year and you know, all those problems that we don't only have in the Middle east or you know, in Southern Europe, but that are actually moving north sort of as we speak, that's number one. So those, those structural problems won't go away and need to be solved. And by the way, if you solve them, you know, I'm not talking about the economic reality also sort of from a purpose perspective that's huge. Yeah, there's so much impact to be created. And number two is because of that, that sort of crisis situation that you have been describing and that we've seen for the past, you know, few years on anything around climate, tech, impact investing, et cetera, founders and investors have focused on actually improving economics, resilience, efficiency, moving away from the whole. We have, we need a green premium for this to work. Our thesis and, and that's healthy crisis do bear something positive at the end of the day as you said Alex, I, I fully subscribe to that. And so we believe, you know, you don't sell green, that doesn't work. But if you sell better economics, better resilience, better efficien et Cetera, et cetera, in energy systems, food systems, you know, agricultural supply chains, whatnot, then that's, that's something that's sustainable as a business model, as a technology, and then it will also create impact at the end of the day. And because people have focused so much on that for the past two, three, four years, we, we see better situations, better companies, more interesting cases.
- [21:11]
B
Amazing. And I, I, I share in that principle entirely. The top entrepreneurs that I see, um, they've learned from the mistakes and the challenges of the last five years. So you get the benefits of other people's mistakes that, that you've learned on top of. And also the valuations. You could do quite well with a half a billion dollar exit, actually. And, and if the money structure is right, people could do well. Like, you could still get great returns with smaller exits because things are cheap. Founders are more flexible than they were in 2001. 2000, yeah. So 2021. So I, I, I really appreciate your insights, Nils. This is a really great conversation. And the companies you've invested in and they seem like they're, they're true winners. I can definitely tell you, oh my God, there, I follow that company very closely and you know, I am, I'm very happy to see that they're succeeding, Growing.
- [21:58]
A
Yeah. Thank you, Alex. That's very kind. It's very kind.
- [22:01]
B
Amazing. One more thing. Don't close this episode yet. If you got value from this conversation, here's what I need from you. A five star rating, one comment, 20 seconds of your time. That's the deal. A five star rating means more founders. Find this content. And every time a founder raises, all boats are elevated. Every week I pick one random comment and send that person a complimentary copy of Investment climate, the book. 50 sales playbooks from founders who actually raise money during the fundraising winter. Real strategies, real closes, real numbers, not theory. So if you want a copy, comment below. And if you haven't followed the show yet, do that too. And if there's a guest you want us to bring on the show, just drop us a note or send us an email. We'll read each and every one. Until then, keep on raising.