Angel investors tend to come from varied professional backgrounds, as is the case with Jonas Dromberg. After years of working at Bloomberg and in financial services consulting, Dromberg unintentionally launched a second career in the area of early-stage investment, beginning in equity crowdfunding with the Nordic Startup Award recipient, FundedByMe. Identifying a mutually beneficial relationship between crowdfunding and venture capital, Dromberg has since joined Finnish VC firm, Inventure.
KITE Invest: From your experience how have you seen crowdfunding develop and break investment barriers?
Jonas Dromberg: Crowdfunding is not new phenomena. For example, the money offertory at religious services is a type of crowdfunding. Digital crowdfunding as we see it today began in the early 2000s but took off in earnest when the collaborative economy became mainstream in the early 2010s.
Since then, different types of crowdfunding have emerged and the industry has generally divided into reward-, equity-, and loan-based crowdfunding. All of these three possess different dynamics for the investor. According to a recent study by University of Cambridge, the total alternative finance market in Europe may total seven billion euros in 2015, expanding at a 133 per cent clip. The development has exceeded my wildest expectations.
KITE: Why do you suppose crowdfunding has been regarded as potentially damaging to venture capital?
JD: Investing and especially venture capital is driven by the quality of deal flow. All investors jockey for the best startups. The initial fear of VCs was that equity crowdfunding platforms would eat into this deal flow. Some VCs, especially in the US, were from the onset very hostile towards crowdfunding.
But when the collaborative economy gained pace, crowdfunding platforms increasingly became validation tools for products and services. If a reward-based crowdfunding round, for example, was successful, VCs felt more secure to invest equity into those startups. Take Oculus Rift, for example. Today, the most sophisticated early-stage VCs balance deal flow from proprietary and crowdfunding channels.
KITE: How does Nordic startup ecosystem differ from others?
JD: The Nordic ecosystem comes from a rich technological history stemming from Ericsson and Nokia. At one point, the two rivals battled for the No.1 slot as the world’s largest mobile phone maker. Almost twenty years ago I paid for the car wash by a text message. The Nordics were on the absolute cutting edge of mobile technology.
Traditionally, between the Nordic startups, Finland has been seen as the technology leader, Sweden as the consumer product expert and Denmark as the design champion. Norway has mainly focused on the commodity market but is quickly moving towards technology.
While the region has previously been quite heterogeneous when it comes to startups, increased cross-border activity from the region’s top VCs and startup conferences such as Slush has made the region more homogeneous. This has resulted in a unique set of skills in technology, consumer products and design.
One could argue that the quality of Nordic startups is top drawer in Europe and rivalling even that of Silicon Valley, but at a quarter of the price. Especially given the recent plunge in the euro, the value in the Nordics is tremendous.
KITE: As a venture capital investor, you have invested in startups whose concept revolved around crowdsourcing or were the product of crowdsourcing. What has been your relationship of working with both investment models and merging the two?
JD: As I mentioned earlier, crowdfunding has quickly become mainstream and both strategies complement each other. While some VCs were initially concerned over how to handle startups that have been seeded by tens or even hundreds of equity crowdfunding investors, tools such as shareholder agreements have eradicated those fears.
Personally, I only see positives in merging the two. Through crowdfunding, VCs can mitigate some of the risk as the deal flow gets validated by the crowd, which ideally leads to less hit-and-miss investments. This in turn should make VCs a less risky asset class as a whole and help more risk adverse LPs invest into that category.
KITE: As an angel investor, what are the top components and characteristics of an investment opportunity? What are your industries of interest?
JD: Originally, I had a trident strategy consisting of financial technology, education technology and medical technology. I soon skipped medtech because I lacked the needed knowledge of that vertical and have since started to add e-commerce as a third leg.
Assessing entrepreneurs at an early stage is very different from assessing going concerns. There simply isn’t any data to analyze; you have to go with your gut. You can always mitigate risk by investing into the verticals that are growing and attracting money, but those industries are typically the most crowded. So vertical is key and then of course deal flow. The better the quality of your deal flow, the more likely it is that you find a good opportunity.
But most importantly it is about the individual. That awesome person who will do whatever it takes to make his or her dream fly. And when you find one, it’s amazing to look at them go.
KITE: What do you find to be the most challenging as an angel investor? Have you encountered different challenges associated with crowdsourcing and venture capital?
JD: Deal flow is the key and the most difficult aspect. When I initiated my early-stage allocation, I had a target of injecting one million euros in ten startups within three months. That turned out to be an overly optimistic estimate. The same challenge applies to both venture capital and crowdfunding; the quality of the deal flow is paramount.
KITE: What one piece of advice would you give to an entrepreneur seeking investment?
JD: First, I would encourage entrepreneurs not to seek money unless they really need it. Bootstrapping takes entrepreneurs further than they often think. For example, I’ve seen startups that have ramped up heavily and then failed to raise as expected but still continue to push forward with the same pace. Managing that is really impressive. If an entrepreneur can show this, follow-on investing becomes easier because it shows perseverance. This is of course in stark contrast to the practices of the dot-com bubble of 2000 when startup raised more money the more they spent. The ability to show perseverance is as important as growth because every startup will struggle with difficulties.