Christian Hecker & Johan Brenner: The Biggest Fundraising Lessons Having Raised $1.3BN | E1116

Intro (0s)

• Christian Hecker and Johan Brenner discuss selling 75% of their business to an angel investor for €600,000.
• They acknowledge that founders often don't have much choice when it comes to their cap table.

Background (58s)

• Christian Hecker is the co-founder of Trade Republic, a company he started nine years ago.
• Johan Brenner is a venture capitalist and partner at Creandum, an early-stage investor primarily in Europe.
• Brenner initially had preconceived notions about the online trading industry but changed his mind after meeting Hecker and his team.

Challenges in Fundraising (3m8s)

• Christian Hecker and Johan Brenner tried to raise funds between 2015 and 2019 but faced numerous challenges.
• They met with over 200 venture capitalists (VCs) but rarely got to meet partners.
• VCs were skeptical about their idea of starting a bank in Germany due to heavy regulations and perceived lack of potential.
• They were unable to secure a term sheet during this period.
• Christian Hecker's co-founder, Thomas, participated in hackathons and won several programming competitions.
• They won a competition organized by Commerzbank, a German bank, and were invited to join their internal accelerator program in Hamburg.
• Commerzbank provided them with funding and support for one year.
• After leaving the accelerator program in early 2017, Christian Hecker and Johan Brenner bootstrapped their company.
• They obtained a banking license and acquired 10,000 paying customers.
• Once they achieved these milestones, VCs became interested and eager to invest.

Lessons from Early Days (5m28s)

• The idea of mobile banking was novel and unproven in 2015 when N26 and Revolut started.
• Germany has a low investment rate, with only 10% of Germans investing.
• Commission-free investing in a heavily regulated market presented a high entry barrier due to licensing requirements.
• Despite these challenges, the founders were motivated by the belief that the statutory pension system in Continental Europe was broken and that millions of people would start investing in the future.
• They focused on building a small, profitable brokerage business with 80,000-100,000 clients rather than aiming to become a multi-million client behemoth.
• They started small by organizing a trading competition for students using iPads, which attracted 15,000 users overnight.

Pitching the Vision (8m0s)

• Founders should have a vision for their company, but it should be realistic rather than overly exuberant.
• Christian Hecker prefers realistic Founders to overly enthusiastic ones.
• The challenge for German Founders is to create a sustainable business model that doesn't rely too heavily on equity instruments.
• After Commerce Bank pulled their funding, Christian Hecker and Johan Brenner bootstrapped their business and looked for alternative funding sources.
• They met with a high-frequency brokerage company called Ceno, who were eager to invest but wanted a significant stake in the company.
• Hecker and Brenner agreed to sell 75% of the company to Ceno in exchange for €600,000.
• They believed it was better to have a small shareholding in a successful company than a large shareholding in a failing one.

Selling Majority Stake (10m50s)

• Christian Hecker and Thomas Pischke refined their pitch after a call with Johan Brenner and made it world-class.
• They had built a full stack and thought about every banking detail to scale the business with low transaction costs.
• After meeting them in Berlin, Johan and his team were impressed by the product, customer engagement, and the team.
• The cap table was a concern due to the founders' low ownership percentage.
• Johan and his team tried to negotiate a more founder-friendly cap table with the seed investor but were unsuccessful.
• This became a deal-breaker for Johan and his team as they wanted the founders to have sufficient ownership to stay with the company long-term.
• The founders were initially unhappy with the tough conversation about the cap table but eventually understood and are now happy with the outcome.

Lessons on Fundraising (13m42s)

• Most founders don't have a choice in who they work with, so take what you can.
• Founders should focus on building a defensible product with a true value proposition rather than being motivated by money.
• Once a product has defensible modes, product-market fit becomes obvious to investors.
• Johan Brenner, an investor, discusses the risks he considered when analyzing the deal.
• Key questions included:
  • Is the market really there?
  • Can the company acquire customers without stealing them from competitors?
  • Can the company build an international product that works in other countries?
  • Will payment for order flow be sustainable in Europe over the long term?
  • How can the company satisfy regulators and build a sufficient structure and team to operate under regulations?

Customer Acquisition & Retention (17m8s)

• Trade Republic initially thought customer acquisition would become more expensive as they penetrated each audience.
• However, due to word-of-mouth growth, 65% of customers are acquired for free through organic growth.
• Customers in the European banking market are incredibly loyal once acquired, leading to a higher LTV than initially expected.

Defining a Successful User (18m23s)

• Trade Republic defines a successful user based on monthly recurring deposits rather than trades per customer per month.
• They believe that helping people accumulate wealth through monthly recurring deposits is a better predictor of sustainable activity.
• The company focuses on getting as many young people as possible to put money into the product monthly.

Addressing the Pension Gap (19m23s)

• Trade Republic focuses on acquiring and retaining young customers (below 35 years old) who make recurring deposits, believing they will accumulate significant wealth and become valuable long-term clients.
• Unlike the UK, Continental Europe lacks government-incentivized capital markets pension savings, leading many young people to rely on generational pension systems and seek alternative platforms like Trade Republic to save for retirement.
• Trade Republic has amassed 35 billion EUR in assets due to consistent monthly deposits from its young customers, with an average account size of €25,000, making it a significant player in private wealth management.
• The company's viral product, a So-Cal savings plan, encourages users to set up a monthly savings plan and deposit money regularly, contributing to its zero churn rate due to its guilt-free and easy cancellation feature.

Raising Funds in Challenging Times (25m8s)

• Christian Hecker and Johan Brenner discuss fundraising lessons from raising $1.3 billion.
• They highlight the two sides of venture capitalism:
  • The first four or five years where there is rejection and difficulty in securing funding.
  • The second half where they had the luxury of choosing investors to work with.
• They built relationships with investors over a year or two before they entered the cap table.
• They spent a lot of time trying to promise and deliver on their commitments.

Meeting with Doug Leone (26m27s)

• Christian Hecker and Johan Brenner met during the COVID-19 pandemic and had a wide-ranging conversation about their professional and personal lives.
• Their pitch decks evolved with each funding round, focusing on finding the next big milestone, such as product-market fit, scaling in Germany, and expanding into Europe.
• They were strategic with valuation in all rounds, prioritizing long-term success over immediate gains.
• Their success in overachieving plans and maintaining momentum helped in subsequent fundraising rounds.
• Johan Brenner believes that the best seed rounds are PR-sensitive, and that pricing should be completely elastic.
• The best investments are either expensive or too cheap, and Trade Republic was an example of a cheap investment that felt expensive at the time due to the number of customers and the funding round.
• It is unclear whether the best entrepreneurs are also the best fundraisers.

What Makes a Great Founder (31m30s)

• Great founders are skilled at fundraising.
• Fundraising involves explaining their vision, storytelling, being concise, and listening.
• As an investor, it can be frustrating when founders are great at fundraising, but it's important to remember that the next time, you'll be on the same side.
• Reserves-heavy models can create a lack of purity in the founder-investor relationship.
• A one-to-one partnership model ensures a pure relationship where the investor is committed to getting the founder the best round possible.
• Founders and investors should be honest with each other about their expectations for future rounds.

Competition & Market Positioning (33m12s)

• Robinhood's poor performance and market conditions presented an opportunity for Trade Republic to raise funds.
• Trade Republic's business model benefits from rising interest rates and market valuations, which made it an attractive investment during uncertain times.
• They approached selected investors with data showing Robinhood's struggles while highlighting Trade Republic's growth and stability.
• Ontario Teachers' Pension Plan recognized Trade Republic's potential and became a cornerstone investor.
• Trade Republic viewed Robinhood as a non-overlapping competitor due to pricing and target market differences.
• The company acknowledged the challenges of entering the European market, including regulations and product-market fit.
• Founders should focus primarily on their own business (75%) while keeping an eye on competitors to learn and adapt.

Managing the Board (37m24s)

• Built personal relationships with board members before investing.
• Everyone knew what to expect and what not to expect.
• Stick to the plan and everyone appreciates transparency.
• Have a vivid relationship with almost all board members and talk on a monthly basis.
• No surprises, everyone sees changes coming.
• Send out the deck beforehand and encourage comments.
• Follow the same predictable structure for board meetings.
• Monthly update is lengthy, followed up with Q&A.
• Share things that don't work well first to build trust and reliance.
• Board is very loyal, everyone is present and prepared for physical meetings.
• Decide on 2-3 key points for the meeting and prepare comprehensive information.
• Ensure ample preparation for those subjects.
• Prioritize time to discuss and avoid falling into the trap of excessive reporting.
• Focus on the subjects that need discussion and decision-making.
• Share the meeting deck one week in advance.
• Start with a Founder-only section to openly discuss what's good and bad.
• Invite the team to present their respective areas (finance, product, operations, legal).
• Prepare the board on what to expect from the team, including areas for discussion.
• Wrap up the meeting in a small group without the team to discuss next steps.
• Anticipate questions and points that people usually bring up.
• Frame the discussion to address potential anecdotal discussions.
• Encourage a structured debate and try to be lean and efficient in discussions.
• Moderate the discussion as needed to ensure everyone is heard.

Ensuring Equal Weight of Voice (41m59s)

• Founders should ensure that their boards are diverse and include independent board members.
• Boards should be evaluated annually to assess the competence and contributions of each member.
• Boards should prioritize the long-term benefit of the company rather than the interests of individual investors.

Building an Effective Board (43m44s)

• Founders should establish a formal board when they raise around $10-15 million to ensure proper governance.
• Boards should be composed of individuals with the right decision-making qualities.
• Founders should avoid micromanaging and instead focus on delegating tasks and making high-value decisions.

Delegating & Micromanagement (44m52s)

• Grooming the executive team is important to ensure they can actively disagree and call out behaviors.
• Establishing a company culture that promotes independent decision-making and quick decision-making can be beneficial.
• The CEO should have the final decision-making authority.

Misalignment Between Founders & VCs (46m47s)

• Misalignments can occur when founders have healthy paper gains from a BC round but haven't taken much off the table.
• Investors should be proactive in ensuring founders have an opportunity for exit and liquidity to support their long-term commitment.