Anecdotal Experience with Public Startup Funding in Germany

Sweble is a research project that I started in 2009 with the goal of helping Wikipedia. It is now a startup that is bringing GitHub-style collaboration to office documents. To that end, we acquired 720K Euro of seed funding from Germany’s EXIST Forschungstransfer (in German) startup fund. This is free money, as it is a gift and no equity is lost. However, with that, the trouble started.

I had built the startup around a senior PhD student of mine, who was also the main architect of the software. The main student was very capable, mature, and had the entrepreneurial spark. In 2016 I added another PhD student with the option of joining the startup and so he did. Both PhD students were engineers, building the product. In 2017 I added a business student. She was smart and hard working but failed at a first business plan and so I looked around and found a seasoned entrepreneur-CEO, about my age, to join the startup. Together, these four were able to acquire the 720K seed funding.

To receive this funding, the team had to pitch in front of an expert panel. This panel makes the final decision. I was asked not to join the pitch, because the funder wanted to see the team alone, suggesting my influence would only distort the picture. I find this weird, not only because I worked so hard for this startup, but also because the funds would only be disbursed through the university, keeping me in the loop on any minor detail. In any case, the team came, pitched, and convinced. Almost.

The requested amount of 720K seed funding was granted in full. It was to last the team for 18 months, after which it would need another funding source.

There was one hitch, though. The expert panel set the team a performance milestone: One customer after eight months.

It is debatable, what that means, as it wasn’t detailed any further. However, the business plan had already been ambitious (in order to convince) and the product wasn’t anywhere near possibly reaching that milestone. I have no idea, but was also not privy to the discussions, what made the panel come up with this requirement.

The requirement had its consequences, though. The entrepreneur-CEO decided to quit, calling the milestone unrealistic and arguing that the opportunity costs for him had now become too high. After about three months, the business student declared that she would quit too. Despite hard work and all her smarts, the team, she argued, did not find a convincing formula to succeed. A month later the second PhD student also quit, arguing that he also now had lost trust that something would come out of it.

With one bad requirement, the expert panel had dismantled the startup team in less than four months.

Fortunately, the main and original PhD student stuck around, and we were able to build a new and better team, so the story continues.

Regarding the breakdown of the original team, the reasons are of course debatable. Given how much the bad requirement had dominated the discussions, I put most of the blame on it.

The main way that I see how to avoid such mistakes in the future is to make the expert panel accountable for its decisions. I believe that at present they do not have to face the consequences of any decisions they make, and if we want to improve decisions in the future, we need to make poor decisions hurt.

One way would be to require that everyone on the panel have skin in the game, for example, by having to invest some of their own money or be paid a performance bonus or malus.

This should change the structure of the expert panel and hopefully lead to better decisions. I wonder…