What startups active in the smart city industry need to know: Bloomhaus CEO and Co-FounderPascal Stürchler in interview with Kurrant

With urbanization growing rapidly and authorities struggling to keep up with issues related to climate or 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 cities industry. And 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’s advancements. But they need funding to innovate and scale, making investments crucial. That’s why we (Kurrant) 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 it is a complex stakeholder ecosystem. 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. The third one I would like to mention is also regulatory and compliance challenges. The smart city industry is heavily regulated with strict standards around data privacy, security and public safety. So this makes it, I would say, harder, in this industry. But on the positive side, also to mention, you are in, you are pretty safe for the next 5 to 10 years.

Of course, that’s the plus because contracts are longer. What type of smart city companies do you focus on when investing?

So I think on one side we have a quite strong due diligence process. The first thing we do, we are always evaluating the team. We are also looking at their value proposition. How strong is the technology. Is there, for example, IP protection and how big is the market potential? So that's one thing we are clearly looking at 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%. We empower early stage startups and entrepreneurs with a B2B business model. The first is the team. Our money goes at the end into startups and founders that want to scale and become really, really big. 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.

Some of the companies you invest in offer hardware as well as software. In the past couple of years we’ve seen many investments going towards software only companies. What’s your investment thesis regarding this?

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We see that some VCs focus exclusively on software. We at Bloomhaus believe in the power of combining software together with hardware. For example, two of the five most valuable companies in the world today are hardware companies -  underscoring the impact that integrated solutions can have.
If software alone could solve all challenges, those solutions would already exist. So software excels at scaling and creating network effects, but it's not always easy to protect. In contrast, the software-hardware combination offers a stronger barrier to entry, providing a more robust defense against competitors and creating lasting value.

And, speaking of investment trends, how important is AI when you invest in a company? Does it make the company more attractive?

So, of course, we like to look at startups that can generate value using latest AI technology. Because according to CBN's guide, 60% of enterprises believe that AI is the most promising innovating technology. So companies that effectively leverage AI are often more attractive to investors for several reasons. One example: AI can dramatically improve a company's ability to scale by automating processes, enhancing decision making, and optimizing operations. So this can lead to faster growth and better margins which are highly attractive to investors. But however, the value of AI really depends on how well it is implemented and whether it genuinely enhances the company's value proposition.

My last question, especially considering that The Smart Deal event at the Smart City Expo World Congress is in less than 2 months and you’ll be part of the jury. What’s your advice to smart solution startups looking for investment?

My advice for startups seeking investment is to focus on three key areas. Firstly, clearly articulate the problem your startup solves and why your solution is unique. Investors really need to understand not just what you do, but why it matters and how it stands out in the market. Then, secondly, build a strong team. Make sure you have a team with complementary skills, a shared vision and a proven ability to execute. Because a great idea needs a great team to bring it to life. Lastly, understand really your metrics. 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. 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.

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Full interactive interview: https://kurrant.com/originals/vc-focus-on-the-problem-your-smart-solution-solves/