SeedBlink Blog

We recently hosted a webinar on “Winning strategies for startup investors - portfolio building & investment instruments.”

Our expert panel featured Stefan Köppl, Managing Director at Samira Advisors, an M&A boutique and experienced VC fund professional. Stefan has 10+ years of experience as a founder in venture capital investing, strategy consulting, and international M&A.

He was joined by Andrei Hancu, General Counsel at SeedBlink and a tech lawyer specializing in venture capital, and Ronald Rapberger, DACH Regional Manager at SeedBlink, who moderated the session.

During the session, they covered:

• Strategic portfolio building, focusing on risk management and diversification across verticals, stages, and geographies.
• Understanding different investment instruments like equity, CLAs, and SAFEs and how they impact investor portfolios.
• Real-life examples from the speakers' experiences showcasing both successful and challenging cases of portfolio building and term sheet negotiations.

Startup investments - lessons from Stefan Koppl

The session begins by addressing common misconceptions about startup investing, particularly the idea that nine out of ten startups fail.

Statistically, it's more accurate to say that out of ten investments, one or two may succeed and yield significant financial returns, while the others may either fail or fail to generate meaningful returns, often referred to as "walking zombies." It reflects the "power law" in venture capital, where many successful investments account for most returns.

How do you diversify your portfolio?

Identifying deals that succeed early on is often easier, but the real challenge lies in managing the rest of the portfolio. Successful portfolio construction is at the balance between taking risks in new opportunities and diversifying across different verticals and stages of investment.

For example, a later-stage investment like a Series A is less risky. Still, it offers lower potential returns than a pre-seed investment, where the risk of failure is significantly higher. Diversifying across different stages helps mitigate the overall risk.

The conversation also points out the dangers of following market trends out of fear of missing out. During the COVID-19 pandemic, many investors rushed into e-commerce and marketing tech companies based on temporary success.

When interest rates shifted, these sectors faced significant downturns. A similar pattern is emerging with the current wave of AI investments.

“I see the next FOMO bubble blowing up, and I’m wondering if people are now intelligent enough to see that if they focus a huge part of their portfolio on AI, they will risk way more than the rewards they’ll get by the end.”

Mentions Stefan Köppl, Managing Director at Samira Advisors.

How do you manage risks and expectations

During a bull market, with periods of high investor interest, equity rounds are more common, where investors buy shares at a set valuation. However, when investor enthusiasm goes down and companies find it challenging to attract capital, they often turn to alternative fundraising methods, such as bridge rounds.

“In 2020 and 2021, low interest rates and the effects of COVID-19 led to a period of high activity in venture capital and public markets, which some referred to as a phase of "irrational exuberance."

However, starting in 2023, the market began to normalize, with a healthy correction continuing into 2024.”

Mentions Ronald Rapberger, DACH Regional Manager at SeedBlink.

Bridge rounds have become more common during this period. They often involve existing investors and smaller amounts of new capital and are frequently executed using convertible instruments such as convertible loan agreements (CLAs) or SAFEs.

They provide a flexible way for companies to secure funding without setting a fixed valuation immediately, which can be difficult during uncertain market conditions. The goal is to "bridge" companies through to 2025, with hopes that macroeconomic conditions, particularly interest rates, will improve, making capital more affordable.

Convertible instruments allow investors to invest in a company with the understanding that their money will convert into equity at a future date—typically during the next major financing round. This delay in setting a valuation is especially useful for startups that may not have a clear market value or those in transitional phases.

However, investing in convertibles introduces additional risk since the investor does not know whether the next round will be a "down round" (where the valuation decreases) or a more favorable one.

To address this risk, startups often offer protective terms like valuation caps or discounts. A valuation cap sets an upper limit on the price at which the investment will convert to equity. It helps to ensure that even if the company’s valuation skyrockets in the next round, the investor can still convert at a more favorable rate.

"Retail investors often see VC funds as a kind of validation. If a VC invests in a startup, it signals that someone has done thorough due diligence, so it feels like a green light. It indicates the startup is, at the very least, doing okay.

However, investing before an equity round is riskier since the valuation hasn’t been set yet."

Adds Andrei Hancu, General Counsel at SeedBlink.

Understand market cycles

As long as the market is on an upward trend, valuations and opportunities for profitable exits increase. However, when the market declines, it becomes challenging to sell investments, especially in sectors experiencing downturns.

Not all sub-markets decline simultaneously, so a well-diversified portfolio may allow some investments to maintain value or recover when others struggle.

In periods of market correction, growth-stage companies may raise equity rounds with substantial liquidation preferences to maintain valuations without eroding investors' returns. It makes it difficult for early-stage investors to exit during downturns, as they may face unfavorable deal terms.

"As long as you diversify across different industries or verticals, there’s a good chance that one of them will perform well, allowing you to exit at a fair valuation.

For the others, you can wait for the market to recover. If you panic and sell during a downturn, the outcome may not be in your favor."

Mentions Stefan Köppl, Managing Director at Samira Advisors.

The ideal number of startup investments in your portfolio

For an angel investor, the general rule of thumb is to have at least ten investments to spread risk effectively. Investing in fewer than ten startups within a short time frame increases the probability of relying on luck, which raises the risk.

Spreading investments across different verticals and stages can help mitigate the potential downsides of individual startup failures. The stages of the startups in the portfolio also play a significant role in risk management.

"It takes you a while to build it up because you won’t invest in ten startups simultaneously, but I’d tell myself to choose a ticket size where I can afford at least ten investments to spread the risk equally."

Mentions Stefan Köppl, Managing Director at Samira Advisors.

Early-stage investments, like pre-seed, carry higher risks but offer greater opportunities for returns, whereas later stages, such as Series A or B, tend to be less risky but have smaller potential returns.

While late-stage companies may seem safer, they can still fail to deliver returns if their valuations are inflated before going public. Therefore, having a mix of investments at different stages can optimize the chance of a positive outcome.

Even though venture capital is typically considered an illiquid asset class, selling your shares at reasonable multiples when opportunities arise can lead to stable returns.

Investors who hesitated to sell stakes in 2021 and 2022 missed opportunities for real cash profit despite high valuations on paper.

"I remember we had a company on our platform that has been quite successful. We had a SAFE investment with a cap, and they later raised an equity round at five times that cap, meaning investors made a 5x return.

I saw two very different strategies emerge on the secondary market. Some investors took the 'double down' approach, reinvesting in the equity round and secondary market to maximize their gains.

Others chose a more cautious route, returning their initial investment and letting the rest ride, prepared for further gains or potential losses. It shows the balance between not getting greedy and not getting scared.

The company raised a great valuation in a tough market, showing they are doing something right. But the best strategy depends on the rest of your portfolio—if you have multiple successes or some struggling companies, that context matters."

Going from “growth at all costs” to “focus on profitability.”

In venture capital, success is measured by multiples, with the goal to at least triple the investors' money over a VC fund's typical 10-year lifespan.

When calculated on an Internal Rate of Return (IRR) basis, this typically results in annual returns of around 15-25%, which, while solid, may not seem exceptional considering the high risks involved in venture investing. Some investors also focus on liquidity and the time to exit, recognizing that quickly flipping investments, such as through secondary markets, can lead to significantly higher IRRs.

In recent years, tougher market conditions have led us to a change in investor focus from hyper-growth to profitability. Startups are increasingly being pushed to become profitable sooner to ensure they can survive if fundraising opportunities dry up.

"In the last 5-7 years, everyone focused on growth. Revenue growth was everything, and costs didn’t matter. You could grow your revenue five times, but nobody cared if your costs were ten times higher.

It worked for some companies, like Amazon, but ultimately, a business's purpose is to make money for its founders, investors, and stakeholders. Growth without profitability is useless."

Mentions Ronald Rapberger, DACH Regional Manager at SeedBlink.

Investors now recognize the need for startups to manage their cash flow more carefully and avoid insolvency during difficult fundraising periods. The change has brought venture capital thinking closer to private equity (PE), where profitability and EBITDA multiples have always been fundamental value measures.

In the past, startups were often valued based on revenue growth and market capture, but now they are evaluated based on their profitability, leading to lower valuations than the previous emphasis on revenue multiples.

"Investors are starting to realize that some companies are growing but don’t know how to be profitable.

For founders, shifting from growth to profitability requires a different skill set. It’s not just about growing anymore; it’s about managing expenses, making money, and delivering returns to stakeholders."

Mentions Ronald Rapberger, DACH Regional Manager at SeedBlink.

Stay connected!

For more insights, watch the whole SeedBlink webinar on Winning strategies for startup investors - portfolio building & investment instruments below.

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