16 Jun 2010   |   News

A new model for private sector seed funding

German entrepreneur Lars Hinrichs has a new, off-the-peg approach to incubating start-ups. Could this plug the yawning gap in Europe’s venture capital system?

Entrepreneur Lars Hinrichs

Early-stage investing has long been the problem child of European venture capital, with too few investors willing to finance untried technologies. Without government intervention, not much would get done in this area.

Now German serial entrepreneur Lars Hinrichs - founder of the business social networking site Xing, who sold his company to Burda Media last year for an estimated €48.3 million - is stepping into the gap with his own twist on the incubator concept. He recently launched Hamburg-based Hackfwd, a pre-seed investment company that will target European software entrepreneurs.

Although many of the ideas put forward by Hinrichs are not unlike those of a standard incubator - equity in exchange for advice and coaching to help speed the process of starting a company - Hackfwd does have a new take on finding people to back. Its tenet is to, “put geeks first”. It does this by seeking out software coders who perhaps aren’t even looking to start a company. Using the extensive network Hinrichs built up while at Xing, the company will track down entrepreneurs before they have even have a business plan or a prototype.

“The coders are the guys with the most innovative ideas, not the guys in the suits,” Hinrichs believes. “But inspiring people are often employed elsewhere. The idea is to free Europe’s best developers from their day jobs.” Hackfwd will locate talented individuals and then lure them away with an offer to match their current salary for a year, so they can work on developing their idea.

The company will focus on European entrepreneurs it can reach within a short plane ride.  “We don’t have a single hot European company among the top technology companies in the world,” Hinrichs says. “But I am convinced Europe has as many great thinkers as in Silicon Valley.”  

In Hinrichs’ view, traditional venture capital is not doing a good job of helping Europe’s technology entrepreneurs. “The venture capital system is completely broken,” he says. “Funds are larger and larger, which means VCs have to do later-stage deals. There is a gigantic financing gap. They can’t support small investments and don’t have the time to give strategic or creative input.”

Standardised and transparent

Hackfwd aims to fix this with a standardised approach to venture capital. The company handles legal and administrative issues for startups and offers them consultancy on business issues, marketing and branding.  It also holds quarterly brainstorming meetings in Mallorca, Spain, to help inspire entrepreneurs and encourage the exchange of ideas.  

In return, Hackfwd gets a 27 percent share of each company. Hackfwd invests up to €91,000 for one year in a single founder, €141,000 for two founders and €191,000 for a three-member team. All of this is detailed in a standardised offer posted on the Hackfwd website, as is a sample contract written in plain English.  It also promises to give any applicants a thumbs up or down within 72 hours.

“They are occupying a real niche,” says Florian Schweitzer, partner at b-to-v, a St. Gallen, Switzerland-based company that is dedicating some of the money in its angel fund to Hackfwd. “Whether you invest half a million (euros) or €5 million in a startup, it takes the same amount of work. They have taken that part of it, standardised it, and made it more transparent.”   

To make this stripped-down approach work, the company’s investment focus will be narrow: technology-based, business-to-consumer ideas that can be scaled up without a huge investment and launched for beta testing within three to six months. Within a year, companies are expected to either be fundraising for future growth, sold to another company, growing organically, or in the worst case, chalked up to a learning experience. There won’t be any investments in biotech or cleantech.

Hackfwd has already made four investments, in MediaCloud (device backup), Zhong When (language learning tool), The Deadline (intelligent information manager) and ProductLovers (not announced).  Hinrichs won’t tell how much money the company has to invest, but says that it is working with b-to-v and Frankfurt-based Corporate Finance Partners Group, and will add more investors later.

Thorsten Singhofen, co-founder of ProductLovers, in which Hackfwd has invested an undisclosed sum, is enthused. “Lars is super-connected. When I look back two or three months from now, I will think that never have I been introduced to that many inspirational individuals, everyone a well-known expert in their specific field. Financing, marketing, branding, UI [user interface], you name it. This is exactly the type of advice you need when starting a new company.” 

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