By: Yonatan Nacht, GMBA Student
At the risk of sounding a bit “cheesy”, I wish to start my paper by thanking all those who organized, coordinated, managed and in anyway helped to execute our Berlin Study Tour. Although I have never participated in an organized study tour before, I feel that I can safely rely on my instincts and say that our study tour was extremely successful and brought amends value to us, not only as business students but as mid-career business woman and men, entrepreneurs (current or in the future) and even simply as participants of our age’s “hyper-speed”, ever-growing economy and global market.
When I think about our experience during the few days in which our group had the pleasure to be hosted by so many interesting people, from so many different parts of the entrepreneurial industry, I begin to understand why the analogy chosen to describe this industry had been (so rightfully) taken from the world of biology. the “Ecological-System” of these complementing services, businesses and institutions we met, indeed very much correspond and operate like symbiotic parts of one large “breathing” mechanism. Neither of which could have survived alone (or at the very least it would be much more difficult for it to do so), nor would the absence of any of them make the entire system any more efficient (i.e. there are very little, to no “free-riders” in the system).
Learning about Berlin’s eco-system and how in operates via visits to the different parts of it and by experiencing immersive learning, such as visits to the public and private corporations like Berlin-Partner, which facilitate so many services for companies and help grow the industry, the Incubators and Accelerators which nourish the ventures and help them achieve their first meaningful steps, the different institutes (universities and colleges) which train the talents, employees, managers and entrepreneurs and the different investment funds which inject capital into the industry and with it bring experience, direction and opportunity to both the entrepreneurs and investors (and of course to the customers), allowed us as students to achieve an eagle-eye viewpoint while observing the industry and as a result to better understand how it operates, what is the nature of the relationship between the different parts and how they cooperate, rely on each other and need one another. I believe that achieving this awareness and understanding a little more about the nature of the connections described herein, is simply impossible from within the walls of a classroom, no matter how successful the course is and how talented the professor may be.
Personally, our real-world learning experience allowed me to shed some uncertainty regarding both culture and key principals that exist in a new (for me) eco-system, I previously had very little knowledge of. In my current profession, I can definitely leverage this knowledge which was gained during the tour, as well as some of the personal connections that were made and so it created great additional value to me personally and to my firm.
One of the most meaningful meetings I personally enjoyed very much, was our meeting with Mr. Eran Davidson (Founder of Davidson Technology Growth Debt Fund) at Target Global. During the meeting, we had the opportunity not only to learn more about Mr. Davidson’s personal and professional history as a VC investor and a manager of 6 investment funds, who realized over € 1B in exits and sale of portfolio companies, but also, we had the chance to learn a little about new and progressive tools he has chosen to use in his current debt fund, in order to reduce investors’ risk and create value for companies in need of capital during unique situations.
The Debt fund Mr. Davidson currently manages uses a rather simple but brilliant structure which combines debt and equity in order to lock a minimum return (per investment) for the fund’s LPs (average between 10%-12%), while hedging their risk with a first (and superior) lean over cashable assets such as account receivables, real-estate, etc. and at the same time the fund secures in its loan agreements a “call-option”, insuring its right to buy equity (shares) along with future up-round investors with some discount. This way the fund can choose to participate only in success cases in which the value of the shares of the companies the fund lent to, appreciated, minimizing uncertainty and volatility and focusing on increasing the number of deals the fund can engage during its life span.
This example of the Davidson Technology Growth Debt Fund is a good place to start when describing the differences between the two eco-systems (Berlin and Tel-Aviv).
The simplest issue we can begin with is the going rate in which companies such as Davidson’s portfolio companies agree to borrow in. For the Berlin eco system, young companies which have no banks as creditors, but already have a steadily rising sales stream, may (evidently) agree to funds in 10,11 and even 12 percent interest. This in turn, may imply that they are perhaps less bankable and riskier. However, in Israel a company which already has sales and its revenue stream is trending upwards with clear visibility (even if currently is cash-flow negative), is extremely unlikely to have no bank loans, and if it doesn’t – it will be considered a very successful company (as its created its value with little to no leverage) and will probably raise equity with a high valuation, rather than take a first lien loan with a double digit 10-12% interest. In this sense, Davidson’s Fund allows for a small peek into some of the difficulties that exist in the Berlin eco system.
Perhaps these difficulties described in the previous paragraph, compiled with the great growth engine and all of the other advantages that a strong startup sector can offer the state of Berlin (such as creation of new work places, positive and educated immigration etc.), a post traumatic city, still very much licking its war and segregation wounds, can explain why does the public sector and institutional entities take such an active role while assisting young firms build themselves and try to insure they succeed, achieve meaningful sales, show growth and eventually reach a stable state.
In Berlin, the majority of the VCs, incubators, accelerators and public entities we have met (such as Berlin Partner previously mentioned) seem to be much more involved in the micro decisions and day-to-day management of their startups. We have met hubs that assist their startups with a wide variety of issues from HR visa issues, picking an office, designing their products and much much more. This is quite different from Tel-Aviv’s eco-system, where most of the VCs will prefer to remain a financial investor, hold one or more board seats and assist in business development. These funds will invest mostly based upon their trust in the venture and the ability of its management team to implement its core business and monetize from it by themselves.
Finally, I am happy to say that during the trip I discovered that my line of business has a very strong need in Berlin, there are many opportunities for investment bankers to create deals and many cross-border investors and transactions are feasible and appealing. I have already created some introductions such as Mr. Holger Weiss and a smart mobility fund manager I work with that may consider investing in German AutoLabs in the future and I’ve initiated and led a very fruitful conference call with my firm’s founder – the CEO of our investment bank and Eran Davidson. I think the most valuable need I recognized and already taken steps to fulfil is a need for a strong Tel-Aviv-Berlin link that can assist both to young growing startups as well as to funds and other investment entities find each other, build trust and facilitate investment deals to create a more sophisticated market for the benefit of both sides.
I had a wonderful experience and wanted to once again thank you all, especially Oren, Michal and Asaf – without you, this tour would not be possible.