Welcome to an insightful conversation with Federico Wengi, a Partner at SquareOne, a Berlin-based venture capital firm, dedicated to nurturing and propelling early-stage startups in Europe. With a focus on fostering B2B technology teams that tackle intricate challenges, Federico plays a pivotal role in SquareOne’s mission to catalyze innovation across the continent’s diverse startup landscape.
As a seasoned expert in identifying promising entrepreneurial talent, Federico offers unique insights into SquareOne’s investment strategy, emphasizing the crucial role of robust founding teams, and technical innovation. Join us as we delve into Federico’s perspective on the dynamic European startup ecosystem and his vision for the future of early-stage investments.
Could you provide an overview of SquareOne’s focus on startups across Europe and its investment strategy?
SquareOne invests in B2B technology teams that solve complex problems in huge markets in Europe. As an early-stage investor, we focus on pre-seed and seed rounds with a ticket size between €350K and €3.5 million; usually, we aim to be the first institutional investor on the cap table. We’re looking for exceptional entrepreneurs with strong engineers in the founding teams, and we also really like to have technical IP in the companies we invest in. Companies that scale purely through sales or marketing are usually not the right fit for us. Open-source software, AI, robotics, developer tools, and payment tech are good examples.
While we’re open to investing anywhere across Europe, we pay special attention to the so-called Tier 2 and Tier 3 hubs that other investors often may overlook. To give you a few examples: We’ve made investments in smaller, non-tech-hub cities in Germany like Dresden (Wandelbots), Bochum (Edgeless Systems), or Giessen (Hygraph), and also invested in teams in Poland (VueStorefront), the Czech Republic (Codasip), or Italy (Glassfy).
What specific criteria do you use when selecting startups for investment? Are there any particular qualities or factors that you prioritize?
You use the word “startup”, I would rather speak about “teams” because we primarily invest in two or three co-founders and their idea, not much else. We might inject capital into a company in the same notary session in which it is founded.
Coming back to your question, we look for teams who have proven excellence in their careers, either as founders or operators. Ideally, the team has already worked together and has a deep knowledge of the industry. Market size, product, and business model play a role in our decision-making, but a smaller one compared to the team. After all, at the beginning of a company, one can adjust the product many times, but it’s much harder to make changes in the founding team.
On the other hand, what are some negative or particular qualities that would make you not invest in a startup?
I would mirror what I have told you before, teams that have yet to prove that they can execute, industry outsiders, or co-founders that have never worked together before or have just met.
How do you assess the potential of a startup in terms of its scalability and market demand? Are there any specific indicators or metrics you look for?
This is a much-debated topic with no right or wrong answer. Typically, we invest in cases where the market size is relatively evident if the product delivers as expected. It’s usually not the best sign if we need to dive deep into reports and build assumptions sheets to understand if the market is big enough. In terms of product demand, often, founders have conducted customer discovery calls which we use as insights. And we always do the same exercise by reaching out to market experts in our network. In terms of scalability, a much broader discussion is needed. It varies whether hardware components are involved or the product has a product-led sales motion versus enterprise sales, etc.
What unique opportunities do you see in the Italian startup ecosystem that make it an attractive investment destination?
Italy right now offers a few exciting opportunities. With only around 60 Million inhabitants, it is the third-largest EU economy but also one of the smallest tech ecosystems in Europe. So there is a lot of untapped potential. Italy has top IT talent at low prices, and top commercial talent is also returning to Italy after gaining extensive experience in other hubs abroad, attracted by favourable tax breaks. We see a lot of movement in terms of VC right now; many new funds were established in the last 24 months, bringing more money, expertise, and competition to the ecosystem. Finally, it is very attractive to be active in Italy: the entry valuations leave room for easier up rounds compared to other ecosystems in the EU.
How do you navigate the balance between investing in promising startups and managing the associated risks, particularly in the early stages of their development?
There is a high intrinsic risk at single investments per se, and you typically cannot meaningfully reduce it. Our job is all about taking good risks, investing in strong teams, and attacking big markets. The risks get mitigated at the portfolio level by taking many single bets in different markets, sectors, and at different times.
How do you or SquareOne support the startups invested in beyond providing capital? Are there any additional resources or mentorship programs offered?
We do everything we can to help our companies reach the next level. We see ourselves as hands-on supporters from day one, trying to create tangible value and fighting shoulder-to-shoulder with our founders. We make customer introductions, connect our teams to other investors, and provide guidance on topics like corporate governance.
How do you approach diversification within your investment portfolio? Do you have a specific allocation strategy for different industries or regions?
Portfolio diversification for us consists of three different layers: countries, verticals, and years of investment. We invest all over Europe, with a particular focus on the DACH region. At the same time, we closely examine underserved ecosystems, such as Eastern Europe, Southern Europe, or non-tech hubs. We have recently invested in Glassfy from Turin, Italy. However, historically, we have paid less to the UK market as we want to play in ecosystems where we have a competitive advantage.
At the team level, we have individual conviction spaces, which each investment manager focuses on. For example, I primarily look into investments in open-source topics and Italy, while others focus more on DeepTech, AI, robotics, or GreenTech. All these components and the sheer number of investments provide appropriate diversification for our portfolio.
In your experience, what are the key challenges faced by startups in Italy, and how do you address or mitigate those challenges through your investments?
There are still a few challenges that prevent the Italian ecosystem from truly shining. In simple terms, it’s the typical chicken-and-egg problem: On the one side, there isn’t enough VC money, and on the other, there aren’t enough AAA teams. To break this vicious circle, public funding can step in. In that regard, the Italian Development Bank (CDP) is doing a great job as an anchor investor in newly minted VCs. Additionally, as already mentioned, the tax breaks for top Italian talents who have worked abroad and want to return are a step in the right direction.
You are Italian, born and raised in Milan, now living in Berlin for over ten years. How do these two ecosystems behave toward each other?
I started my VC career in Berlin in 2013; back then, the ecosystem here was totally different from what it is now: small, with few active VCs and very few entrepreneurs with a proven track record, but with exciting growth signals. Which is exactly where Italy is right now. I see many parallels between the two ecosystems, albeit at a smaller scale and smaller possible outcomes.
Looking ahead, what are your future plans and ambitions in terms of your fund’s activities and investments in the startup ecosystem? Are there any specific countries, sectors or trends you are particularly excited about?
We are very excited about Italy, for all the reasons mentioned above. I am on the ground in Italy often and organize events where I bring together the most important stakeholders of the ecosystem. I can feel the buzz and see how the ecosystem is growing every day. On top of that, we are bullish on Tier 2 and Tier 3 hubs in Germany as we have a history of successfully investing there. In terms of sectors, I am focusing on everything open-source and its applications in AI, payments, fintech, and business applications. There is enormous potential there!