VC Profile: HTGF optimistic on seed stage opportunities as exit environment toughens

The VC firm wants to make about 30 more new investments this year via its fourth fund HTGF IV, which closed on EUR 493.8m in February 2023, to add to the roughly 15 tickets it has deployed so far, said von Frankenberg. The firm has reserved capital from its fully deployed HTGF III for follow-on investments, he added.

The new fund started investing in the fourth quarter of last year, he said, after holding a first close of EUR 400m in June, Unquote reported. Investments include satellite manufacturer Reflex Aerospace, biotech company Phialogics, and AI-based payment software developer VisioLab.

The seed investor, which invests in start-ups founded in the last three years that are either headquartered in Germany or have business premises in the country, can commit up to EUR 1m in a seed round, with an average ticket size of around EUR 800,000.

It may also consider smaller tickets, starting from around EUR 400,000, for companies with smaller funding needs, he said, noting that HTGF will be able to invest up to EUR 4m across a startup’s total financing rounds for selected cases. In total, it is seeking to make 200 investments across the fund’s five-year investment period, which translates to about 40 per year, he added.

Bucking the trend
HTGF was among the eight funds that completed fundraises in 1Q 2023, as reported with its fundraise alone accounting for almost 25% of the quarter’s committed capital.

Amid a broader VC funding slowdown and macroeconomic headwinds, von Frankenberg attributes its fundraise success to various factors, namely the firm’s track record of exits over the course of its two-year fundraising period, the consistent stability of the German government, and its LPs’ long term investing approach.

“They [LPs] are aware of the short-term crisis and do expect caution with cash spending, but know that the crisis will be over at some point, and they are still looking for relevant investments in a macro scope,” he said.

Although the structure and composition of the LP base of its fourth fund remains largely the same to previous vehicles, HTGF has also seen a considerable increase in the number of private investors versus HTGF III. Alongside the Federal Ministry for Economic Affairs and Climate Action (BMWK) and KfW Capital, a subsidiary of the German state-owned investment bank, 45 private companies have invested in the fund, according to a press release. The majority of the private investors are either established medium-sized companies or “hidden champions”, a term the firm is using to refer to small and medium-sized family-owned companies, he said.

Its fourth fund has secured commitments for the first time from a number of family offices with “an entrepreneurial background”, said von Frankenberg. Its LP's base also includes its first non-German investor, Schneider Electric, an energy management specialist based in France, he added.

Prepping the portfolio
Amid the current tough environment for exits, HTGF has also been experiencing a slowdown, starting in the middle of last year. The firm expects the situation to remain largely the same this year, said Frankenberg. Its latest exit of lino Biotech, a biosensor company, was realised in February this year, with the business sold to Miltenyi Biotec, a Germany-based biotech company.

However, startups can leverage the slowdown as a “healthy performance incentive” while sponsors can focus on getting their portfolio ready for the next exit window, he said. HTGF is deploying its reserved capital in follow-on rounds, while prioritising cost-cutting and operational efficiencies, even generating profitability, seeking to fill up its exit pipeline going forward.

The majority of its portfolio is currently going to trade buyers coming largely from the US in larger transactions of above EUR 20m in enterprise value, he said. A “good chunk” of smaller companies end up with European acquirers and a small percentage goes to Asian corporates.

In some cases, its portfolio companies are bought back by founders or go to a PE house, as the IPO route in Germany remains “extremely difficult,” he said. But, as all major US stock indexes, including NASDAQ, have been higher lately, von Frankenberg is optimistic that the IPO market will reopen sometime next year for “good companies.”

HTGF is still looking to exit some of its investments in Fund I and II. It is preparing one of the unrealised investments from its first fund for an IPO in 2024, said von Frankenberg, without disclosing the name of the company. He believes that the company, which operates in the industrial tech and software space, has a good shot as it has been planning to go public for many years.

The IPO market is still limited to an extent by sponsors’ and founders’ preference for trade sales that generally offer quicker returns on their investment, he admitted.

Deployment opportunities
In spite of the slowdown, von Frankenberg is seeing innovative opportunities across its core investment themes. The firm, which invests in technology start-ups in the fields of digital tech, industrial tech, life sciences and chemistry, is currently seeing interesting opportunities across robotics, energy management and the emerging market of quantum technologies, he said. It remains committed to its support to the biotech space, chemicals and new materials, retaining its interest in AI, blockchain and IT security, he added.

It is also focused on securing follow-on funding for its portfolio companies, especially those that “raised lots of money but generated a high burn rate construction,” he said.

While lower valuations in early-stage rounds were expected by some to attract later-stage investors as well, as reported, this will likely be hindered by the collapse of major startup lender Silicon Valley Bank.

In the seed space, however, von Frankenberg has not observed increased competition as “it is not an easy financing stage for new investors to navigate given the uncertainty when it comes to supporting pre-revenue startups,” he said. Regardless, HTGF is keen to forge partnerships and sees sponsors operating in the space as partners as opposed to competition, he added.

Discussing the venture capital funding slowdown overall, the managing director noted that HTGF is exercising extensive due diligence ahead of investment decisions while maintaining a quick investment pace. “It’s important for us to be fast in our judgments in order to get a very early-stage business started,” he said.

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