HenQ, an Amsterdam-based VC that invests in European B2B software startups typically at seed and Series A, recently disclosed the first close of its fourth fund at €70 million. The final close is expected to top out at between €75-€85 million later this year, and the firm has already begun backing companies out of the new fund.
However, what sets henQ apart from many VC firms isn’t just its pure focus on B2B software but that its team is fully remote. Primarily investing in the Nordics and Benelux, henQ doesn’t have any official offices, with the team working from different temporary locations. Even before the coronavirus pandemic, henQ closed deals remotely.
Successes from its previous funds include Mendix (acquired by Siemens) and SEOshop (acquired by Lightspeed).
I spoke to partners Jan Andriessen, Mick Mackaay and Jelmer de Jong to learn more about henQ, what it’s like to be a fully remote VC and how the firm envisions the post-pandemic era.
TechCrunch: Can you be more specific regarding the size of check you write and the types of companies, geographies, technologies and business models you are focusing on?
Jan Andriessen: Our main focus is seed rounds, in which we often are the lead investor. We also invest in Series A rounds, often as a co-investor. Initial check sizes vary from €500,000 to €3.5 million.
A typical seed investment has a product and perhaps a few pilot customers. The key here is not revenue (which is OK to be zero), but there is proof of the actual need for the product.
Most of our recent deals were in the Nordics and Benelux, the areas where we spent the majority of our time. But we have also invested in the Baltics, Czech Republic and the UK. For henQ 4, we expect this to be the same: the bulk of our investments will be in the Nordics and Benelux, with an occasional deal in broader Europe.
In terms of technology and business trends, one of the things we firmly believe in is the consumerization of enterprise software: successful startups are centered around their customers and focus on the job to be done. More generally, we have always been focused on startups with staying power: companies that have a right to exist over time, not just now, as they deliver a product that touches the core processes of their customers and operate at the heart of their customer’s business.
For example, looking at our portfolio, Zivver delivers secure communication solutions for hospitals and governments. Stravito works deep in the research departments of FMCGs, delivering a knowledge management platform. Mews runs the full operations of hotels with their property management system, and Orderchamp enables retailers to digitize their buying process.
We see the business model of a company as a means, not an end. Most of the startups we invest in charge a SaaS plus implementation fee, and have a more enterprise-sales driven business model. We are not afraid to invest in startups that have a more complex and longer sales cycle, and are not per se looking for SaaS ‘by-the-book.'
Who are the LPs in this fund?
Jelmer de Jong: HenQ is a fund for B2B software founders, by B2B software founders. Roughly half of our €70 million first close comes from LPs that are successful B2B software entrepreneurs themselves. They are motivated to take on an active role in mentoring the startups we invest in, sharing their knowledge and expertise, if desired by founders.
What I very much like is that among our LPs you will also find some of the most experienced founders we’ve invested in ourselves in previous funds. For us, this demonstrates they had a positive experience with henQ. Moreover, we are delighted to see they are eager to contribute to the current generation of founders.
Additionally, we are backed by a number of family offices and larger institutional investors.
Give us a sense of the henQ team. How many investment partners are there and do you each have specific geographies or focus?
Jan Andriessen: As we are a very specialized firm already, we have not further broken down our team in terms of particular focus markets. We explicitly believe entrepreneurs should be the vertical or industry experts, not VCs. We are very wary of the biases that are generated by too much focus on market prediction and a VC’s view of what a product should do, rather than understanding the drive and the view of the entrepreneur.
Moreover, as sourcing becomes increasingly automated and communication increasingly digital, and Europe being many countries but a rather small place in terms of travel time, we are deliberately not focusing on physical presence. Therefore, our partners do deals across all geographic focus areas. A particular investment is led by the partner that has the best fit with the market, product, founders and the specific challenges of the startup.
Where focus comes in, is in how we support portfolio companies. As typical for many VCs, each of us takes board seats as a generalist, nurturing a strong relationship with the founding team. In addition to that, each of our partners has a subdomain in which they continue to build knowledge, to further specialize and excel. For example, Jan might step in to support the hiring of winning people or sales process optimization. Mick runs our ‘in-house corporate finance boutique’ to help our portfolio companies raise successful follow-on rounds. Jelmer brings in a wealth of knowledge and experience when it comes to marketing and scaling product development. [Co-founder Coen van Duiven’s] strength is in complex deal-making and strategy.
This is the 4th henQ fund, we’ve been around for 15 years and want to be the leading enterprise software VC for at least another 15. We believe that one of the secrets to sustaining success in venture capital is to manage team succession very well.
With henQ 4 we believe we have built a truly future-proof venture firm. Jan, Mick, and Jelmer – as the new generation of partners – work alongside Coen. Coen led investments in the fund returners of henQ’s first two funds (Mendix and SEOshop) and is currently on the board of Mews Systems (which recently raised $33M from Battery Ventures).
I joined henQ in 2014, after having founded Scord (a one-stop-shop for early-stage startups to manage their fundraise, tax and legal work), and quickly became a partner, leading investments in a.o. ZIVVER, Sendcloud and Stravito.
Mick made a similar journey, joining henQ in 2016, after having led an edtech-enabled organization to several hundred thousands of euros in revenue. He has since led investments in Orderchamp and Aula, and future-proofs henQ as its CFO.
New hire Jelmer adds well to this mix, having made the switch to the VC world after being on the management team of high-growth enterprise software company Backbase for nine years. Running both marketing and product at Backbase, while making the journey from EUR1-100M ARR, Jelmer has a wealth of experience from which every single portfolio company can learn at least a thing or two.
In addition to the four partners, the investment team consists of associate Rob Rousseau, analyst Orphee De Bouard Sarrabezolles, and our venture scouts. In the back office we have strong support from Sylvie Oomens and our in-house legal counsel Hein van den Hout.
HenQ is a fully remote VC (no offices, with the team working from different locations) and you say you’re also closing deals remotely. How is that working out? I.e., what are the upsides and downsides of being a fully remote VC?
Mick Mackaay: Yes, we do close deals remotely, most recently for example with Aula. And not just because of COVID-19. The biggest advantage of working remotely is that it enables us to move faster compared to other funds. We don’t have to wait for a Monday morning partner meeting if we like a deal, but immediately jump on a call to move forward. We also never have to waste time by managing travel schedules if a company “needs to come to our office to pitch.”
Working remotely also enables us to be wherever we need to be. Remote doesn’t have to be from home, but means that we can work from anywhere. Since we are active across Europe, not being tied to a location (before COVID-19 that was) means that we often work a week from Stockholm, followed by a week in London, for example, and work there with our portfolio companies or have longer, in-depth meetings with new startups.
Next to speed, we also noticed that being remote makes you invest more effectively and objectively by focusing on data and actions over beer-shared anecdotes creating personal biases. It creates a more level playing field. There is a new generation of founders and VCs that don’t need “steak meal” deal dances but create trust based on facts.
Being remote could make building personal relationships more difficult. We believe those personal relationships and interactions are key. And we actually see that by doing most work remotely, that this creates the option to spend more quality time together when you do meet in person. No need to go over the basic operational stuff, but immediately dive deeper into a key topic.
Let’s talk sourcing. I gather your pitch to LPs was a combination of automated sourcing via technology you have built in-house and the “human touch”. How does this work in practice and what are the data points you automatically track in the hope of discovering the next promising B2B European startup early?
Jelmer de Jong: Our aim is to not just be early, but to be the first to discover a startup within our very specific domain of seed in B2B enterprise software.
And we believe the first steps of deal flow, the finding and tracking of startups, is something we can do digitally. This is something later stage investors have been doing for quite some time. In seed, this wasn’t possible a decade or even five years ago. There were no clear data points to track. That’s why European seed firms have traditionally been organized around physical presence and with a clear (oftentimes even narrow) geographic scope (we call them the Local Champions).
What changed: the proliferation of online data. From mainstream platforms like LinkedIn, Twitter and Instagram, to product review websites (Capterra) and code repositories (Github). There are dozens of tiny “breadcrumbs” of information about even the tiniest of startups all over the internet, waiting to be used.
This data is accessible to everyone, but you need domain expertise to translate this information into actionable signals. That’s why we believe the next decade will fortify the rise of what we call International Specialist VCs: firms that operate internationally, based on the proliferation of online data and their core expertise and strong value add in one specific (sub)domain.
Our secret sauce: we have determined the mix of signals that indicates which startups are worth reaching out to (proven by our continuous seed round coverage checks) among the thousands of European B2B software companies. This enables us to be among the first to reach out, without randomly reaching out to thousands and thousands of companies. What is that mix of signals? That’s our secret, but we can say that 80% of our deals are now sourced through the henQ Hunter, showing it really gives us an early-mover advantage.
The henQ Hunter is really all about discovering and tracking the right companies: the “real work”
(i.e., from reaching out to doing a deal to making a company a success – the other ten thousand hours … ) is still very much personal. In that context, the henQ Hunter might be a piece of software, but it allows us to focus more rather than less on the human touch; to really spend time and deliver quality in every call we do, to make sure we bring value to the founding team from the first contact and to show the benefit and expertise we can bring as a VC. And all of that in a much wider international context than was previously possible in European seed-stage VC.
If you are a B2B startup founder, how should you be thinking about the coronavirus crisis and current economic downturn, in terms of mitigating short-term problems, such as cash-flow and different sales cycles, but also where the puck might be skating to as we consider the “new normal”?
Mick Mackaay: In terms of short-term problems, before diving into the longer-term opportunities, cash will probably come in a bit slower than before, for the large number of companies that are not fortunate enough to supply software enabling eCommerce, esports, facilitating WFH, etc. Unfortunately, bad things tend to cluster. Both customers, as well as the overall VC market, are likely to spend their money a bit more carefully. In practice, this means new sales might be slower, churn is likely to be somewhat higher, and funding rounds might take longer as more proof points could be needed.
Part of mitigating this can only be done at the moment you found a business and is hard to change after that. In our view, it is key to be in the “primary process” of a customer, building something that is really needed to keep the lights on and very hard to shut down or replace. Our portfolio is catered around that requirement and therefore faring relatively well in the current environment.
Beyond that requirement, the way you pitch to customers should probably become a bit more tailored toward cost reduction rather than investment/value increase. As for the VC community, rightfully or not, it will probably be a bit more focused on capital efficiency and unit economics than, let’s say, a year ago. Therefore, cash spend in the same phase should probably be a bit lower to be on the safe side in terms of runway.
It is hard to say whether there is truly a new way of working and how bad the recession will be that lies ahead of us. Therefore, we stick to our investment thesis: Investing in B2B software companies with staying power, that are building technology that supports the primary process of customers and will still be relevant >10 years from now, whether the economy is up or down and people are working from home or the office.
While the above may sound mostly scary, as if doomsday is here, we see many opportunities for the right founders with the right product. Already now, we notice that founders are better able to hire for the key roles that were difficult to fill before, as more talent becomes available. Moreover, with a reasonably healthy cash balance, your company is probably well-positioned to grab the market that competitors are leaving or not servicing because they are still working on fixing their internal operations. In a later phase, we see a tremendous opportunity for acquisitions.
Lastly, let’s talk diversity, specifically gender. With an all-male investment team, it looks like henQ is failing pretty badly here. Is this something you worry about, as arguably it could create a lot of blind spots in sourcing and culture, and more broadly, how does henQ think about diversity and the role it should play in tech startups?
Jelmer de Jong: We’ve definitely failed in presenting a diverse investment team. Although we actively measure and monitor to avoid blindspots and biases (e.g., 36% of the companies we’ve invested in in the last two years have a female co-founder and 55% have at least one woman in their management team), we don’t believe this is enough. Increasing the diversity in our investment team is one of our top priorities for 2020.
Moreover, we believe that our role as a VC is to invest in the best founders and work with them to create the best companies. And what we see is that successful companies are being led by a diverse executive team. We actively work with our portfolio companies to create a diverse pipeline of talent, which enables them to also do diverse hires. To ensure they hire the team that sets them up for success, since we know and have the proof that this is one of the key elements for great future outcomes.