Photo credit: Manfred Reichl; TOSA

published 24 Apr 2015 by Michael Bernstein 9 minutes 4 seconds to read

The Professional Risk Taker

To be an investor is to be someone who does not fear failure but rather factors it into the overall return on investment. We wanted to find out more, so we talked with Manfred Reichl, one of Austria's top business angels.

Failure investor

inventures: You worked at Roland Berger for 20 years and left at a high point – of both the market and your career (aged 54) – to become an independent investor and advisor. Did you fear failing in this transition?

Manfred Reichl: For me it was quite logical. At Roland Berger, I was very successful, but once you've spent 20 years as a horse in front of a carriage you want to do something different. I knew my next phase must be started early enough, so it was a simple decision for me. I've seen so many top managers approaching retirement age whose colleagues were already thinking, “when will he finally get out?” I promised myself that I would leave the job before this happens. All those who stay put in their comfortable chairs, they aren't entrepreneurs.

Funding a startup is like an airplane take-off...
The idea is ready to embark, the business waits at the gate. First, the plane has to be pushed out, and then taxis to the runway (friends and family). Then it has to accelerate rapidly (Business angels, public funding). Most of the fuel is needed to reach take-off speed and to get airborne (other private investors). Once it has proven flight capabilities, only then venture capital companies come in. (Quote from Manfred Reichl in the VENTURES ALMANACH AUSTRIA 2015)

In our Ventures Almanach Austria 2015 you use a metaphor of an airplane taking off to describe a startups' path to success. At what point is the plane most likely to crash?

Shortly after it has taken off.

Among your own investments, were the “crashes” due to pilot error or mechanical malfunctions?

Of my investment in internet companies, I've had one that was extremely successful and multiplied my investment in this area, but there were three failures that are a kind of lesson for me. In the company where I lost the most money, I completely misjudged the management. It was a founder in his forties and I only figured out too late that he didn't have the spirit required for an internet company. For example, he was not able to move and negotiate fluently in the Anglo-Saxon countries, which is a prerequisite to being successful with an internet startup.

One of the lessons I learned here is, don't trust too young people who do not really have to be successful to maintain their standard of living.

Another one was a fashion startup from Vienna – a company I still regard as having had a great business model. The “pilots” believed that they needed to “fly” to London, the centre of the European fashion industry. They actually raised a million euros from a venture capital fund, which also brought a lot of big industry names to their advisory board. These fashion people convinced them that they should change their brand to an upscale luxury label, which was completely stupid for their business model. In the end they had spent half the money just relocating and settling in London, where they were just a drop in the sea and got lost in the seductions of the big city and industry celebrities. It became a kind of three-year postgraduate education for the founders, financed by their investors. Actually, they were very good entrepreneurs and probably would have been successful if they had stayed in Vienna, but they were just too young. One of the lessons I learned here is, don't trust too young people who do not really have to be successful to maintain their standard of living.

The third was a company where I invested only 20 or 30 thousand euros. They were not bold enough, too narrow-minded. They kept coming back to the investors for rounds that proved to be too small. An entrepreneur must ask for more money than he thinks he needs. Back to your question - I think that it is mostly the “pilots” who caused the failures.

What could you have done differently?

In the last case, I could have said no, but it wasn't a lot of money involved so I didn't put a lot of emphasis on whether it was the right business model. The first company was too slow and not ambitious enough and the founder didn't fit with the social environment for which he was developing. If I had conducted the interview with him in English, I would have seen the problem right away.
And in the second case, there was nothing I could have done. The founders were too young and independent and they made a principle failure which I too often observe: they trusted in venture capital.

You see VC as a problem?

Very much. I'm very sceptical about most VC funds which are founded by former bankers and not experienced entrepreneurs. To highlight a good VC-fund: I find the approach of SpeedInvest, the fund in Vienna, very appropriate, because the founders and managers have been entrepreneurs in the areas where they invest.

I'm very sceptical about most VC funds which are founded by former bankers and not experienced entrepreneurs.

VC funds quantify what is an acceptable failure rate and then create strategies for managing the risk through diversification and hedging. Do you, as a business angel, also do this?

Of course, you hedge by multiplying and diversifying your investments among various industries. I have had more than ten investments, three of which are very successful. I did two pharmaceuticals, three engineering, and five or six internet.

Is there a specific failure rate that you consider acceptable?

When I was elected Austrian Business Angel of the Year in 2009, I stood on the stage and said that I do not accept any single failure. Every investment is like a baby and you must do everything to prevent its failure, if you see a chance for success. This is different to VC funds, where failure is calculated with statistics from the outset. Business angels, at least the way I see them, should really care for each of their investments, not as a statistical point but rather as an entity to be supported even in difficult times.

How do investors themselves contribute to a startup's failure?

By investing in something where they are not 100% sure and by not requiring appropriate corporate controlling, even for small startups. One of my failures was not insisting enough on this.

Would you give a second chance to entrepreneurs who've previously failed?

Yes, clearly! There's one pharmaceutical company where I have invested a lot of money. Its CEO previously founded another VC-financed pharma venture in the 1990s that had failed. I invested in this new company because I knew doing it right requires experience from a previous failure.

Are you so willing to forgive someone who failed with your own money?

Yes, of course. One of the Pharma companies that I have invested in had difficulties during the trials and we saw that its failure was imminent. We are taking its CEO and giving him a chance in another company. Even though I lost money on this, I knew he is a very good person and it was not his fault.

Have your past failures changed the way you invest going forward?

I told myself and my wife that I will only invest again once I have successful exits. There is certain money in the game and I will not increase the stakes from my own private wealth. The existing money has to multiply itself. So there are no explicit consequences in terms of content, just in terms of limiting the overall sum.

People say that there is more of a stigma behind failure in Austria than, say, America - perhaps because Austria is much smaller and has restrictive bankruptcy laws?

The issue with the bankruptcy law is one of the operative outcomes of the basic Austrian character since the monarchy times. The real issue is that there's been a lot of negative, collective experience in Austrian society, which made it risk averse, starting with the stock market crisis in 1873, via the two world wars, the crisis of the 1930's, etc.
The USA social character, in contrast, still has the pioneer spirit of their ancestors, who conquered the continent in the 19th and 20th century. They have always looked for new things. In the US, there is a greater sense of individualism – anybody can make it or break it on his own. A dishwasher can become a billionaire, and there is much more aggregated capital in private entrepreneurial hands.

And in Europe?

In Europe, we have an anxious, relatively narrow-minded society, which wants the state to provide for the people from birth to death. Historically, the emperors, especially the Austrian emperor, cared for their people, the people were his Volk and this is reflected in the social and political values. And the Europeans destroyed most of their financial and social capital during World War II.
It changed a bit after World War II, when everything was to be rebuilt and people had nothing to loose. With the high demand during the post-war era, you could finance your company out of the cash flow. Austria still has dozens of highly successful world market leaders in their niches, so called hidden champions, which were founded in the fifties and sixties

We are trying to change the social mentality so at least the next generation is more open-minded, internationally oriented, and less influenced by those restrictive, traditional values of our societies.

Today, times have changed – you can no longer finance startups from cash flow, you need outside investors; today's startups require different business models; cash-flow financing would take far too long and there is tougher competition globally. Fortunately, today's youngsters below 35 have a more entrepreneurial attitude and, together with business angels like Hansi Hansmann, Oliver Holle, myself, and some others, we are trying to change the social mentality so at least the next generation is more open-minded, internationally oriented, and less influenced by those restrictive, traditional values of our societies.

Should the state develop or expand any policies to assist those who fail?

We have too much state influence, anyway. The only thing the state should do is to lift barriers. For example with these stupid regulations in the corporate laws, which punish even good people who have failed once. The state should leave the entrepreneurs alone, smooth their way, and incentivize wealthy private persons and foundations to invest in young, promising companies, e.g. via tax incentives. This would stimulate innovation much more than many subsidies. I have to say that AWS and FFG and other supporting entities are doing a good job in helping young companies. However, it is often the case that innovative start-ups get money to accelerate, but the money flow stops when they are taking off, because private money is lacking. We have written a paper in the Austrian Angel Association with a number of measures that could be enacted.