VC: Focus on the Problem Your Smart Solution Solves

With urbanization growing rapidly and authorities struggling to keep up with issues related to climate and mobility, smart solutions are taking center stage to help with these problems. Proof of that is the growth in the last years of the smart city industry. Since a big chunk of smart city companies are startups- in the Spanish region of Catalonia, for example, in 2022, around 26% of smart city companies were startups- these small companies are a key part of the industry advancements, but they need funding to innovate and scale, making investments crucial. That's why we spoke with Pascal Stürchler, CEO and co-founder of Bloomhaus Ventures to understand, in such an emerging industry, what makes a smart city startup stand out enough for a venture capital to take an interest in them? Pascal, you were an entrepreneur yourself before co-founding Bloomhaus Ventures. It's never easy to be a startup, regardless of the industry, but what makes the smart city industry such a hard one to grow in? First of all, I mean complex stakeholder ecosystem. So you have to work with multiple stakeholders, including government bodies, city planners, you know, politicians, utilities, and also public service providers. Another one is long sales cycles. If you want to close a deal, it involves a lengthy procurement process. You have regulatory hurdles and also extended approval timelines. And the third one I would like to mention is also regulatory and compliance challenges. So the smart city industry is heavily regulated with strict standards around data privacy, security and public safety. But on the positive side, also to mention, once you are in, you know you are pretty safe for the next 5 to 10 years. Of course, that's the plus because the contracts are longer. But what type of smart city companies do you focus on when investing? So first and foremost, it's all about the team. You know, our money goes at the end into startups, and into founders, that want to scale and become really, really big, you know, so this ambition must be tangible for us. This includes an outstanding business idea that makes a difference in its fields and makes a positive contribution in a world of limited resources. Due diligence process, you know. and at first, we for sure, we are always evaluating the team. We also looking at their value proposition. How strong is the technology, is there, for example IP protection. When it comes to metrics, we normally target companies that have the potential to reach 100 million ARR or revenue within the next ten years, or with an annual growth rate exceeding 80%. and mostly also having a higher gross margin than 50%. Some of the companies you invest in offer hardware as well as software. In the past couple of years, we have seen many investments going towards companies that offer only software. But what is your investment thesis regarding this? We at Bloomhaus believe in the power of combining software together with hardware. So, for example, two of the five most valuable companies in the world today are hardware companies. underscoring the impact that integrated solution can have. If software alone could solve all challenges, those solutions would already exist, you know? So software excels at scaling and creating network effect, but it's not always easy to protect and cross contrast, and software hardware combination offers a stronger barrier to entry, providing a more robust defense against competitors. So that was an investment trend. Let's talk about another trend. And that's AI. How important is AI when you're looking to invest in a company? Does it make it more attractive? So of course we like to look at startups that can generate value using latest AI technology. You know, because according to CB insights, 60% of entrepreneurs believe that AI is the most promising innovating technology. So companies that effectively leverage AI are often more attractive to investors for several reasons. So one example is AI can dramatically improve the company's ability to scale by automating processes, enhancing decision making, and optimizing operations. So this can lead to faster growth and better margin, which are highly attractive to investors. My last question, especially considering that The Smart Deal is right around the corner in less than two months at the Smart City Expo World Congress, and you're going to be part of the jury. So it has to be, what's your advice to smart solutions startups looking for investments? You know, firstly, clearly articulate the problem your startup solves and why your solution is unique. You know, investors really need to understand not just what you do, but why it matters and how it stands out in the market. Secondly, build a strong team. You know, make sure you have a team with complementary skills, the shared vision and a proven ability to execute. Lastly, understand really your metrics, you know, be ready to demonstrate your potential for growth with clear data driven metrics because investors want to see not only your current performance, but also see your long term, potential. And finally, be prepared for the long haul investment process. It will take quite a lot of time, you know? So start building relationships with potential investors early and keep them informed of your progress. This builds trust and makes them more likely to invest when the time is right. This advice is in line with what cities have been saying again and again. Focus on the issues your solution solves. The important thing isn't just to have good technology, but to also have a real use case. Because if you have the greatest technology, but the issue it solves doesn't interest cities, it won't go anywhere. Smart city startups have to endure situations that make it harder for them to survive than those in other industries. So it's key to understand what is important in a municipality environment to attract investments and sign contracts.