What is the future for tech VCs in Europe?

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At TechCrunch we’re usually at least as interested in the financial environment for funding startups as we are in the startups themselves. And we know it’s something of keen interest to any new internet or mobile company. So it is worth indulging for a moment to discuss what might be happening at the moment inside Europe’s venture scene.

I am prompted to raise this issue now because recently I attended two major Europeans events designed to bring together startups and investors: Plugg in Brussels and The Next Web in Amsterdam. Similarly, late last year there was Le Web 3 and Web 2 Expo Berlin. At each of these events it was quite clear that many of the same VCs were turning up, looking to meet with startups and ‘kick the tyres’ at the demo pitches. And of course, they also hang out with eachother to swap notes on the startups doing the rounds.

What is becoming clear is that there is a new generation of younger VCs in the business who actually “get” what is going on online. A typical age for them might be early to mid 30s, which means they have grown up with the Web. At the same time as they are hitting their career prime, the older guard in the VC houses are (if they are smart) giving these guys their head, at least to some extent. Now, I’m sure I’m about to miss people out here, but here are the kinds of people I’ve been running into in London and continental Europe, in no particular order:

Olivier Schuepbach, Wellington Partners
Sean Seton-Rogers, Balderton Capital
Paul Fisher, Advent Ventures
Nic Brisbourne, DFJ Espirit
Reshma Sohoni, Seedcamp
Saul Klein, TAG / Seedcamp
Andreas Schlenker, Partech International
Paul Jozefak, Neuhaus Partners
Fred Destin, Atlas Venture
Sonali De Rycker, newly arrived at Accel Partners
Greg Marsh, Index Ventures
Max Niederhofer, Atlas Venture

Now, at the same time as this new generation of VC is picking up the pace in Europe, the kind of startup investing environment more common in Silicon Valley is gaining traction on this side of the pond. Few have failed to notice how Index took a more ‘Silicon Valley’ approach with MySQL, Skype, and LastFm and it’s worked. Balderton, as the former offshoot of benchmark’s UK office has done similar, as are others.

This Silicon Valley approach is more aggressive and aimed at creating big companies with global scale. That means everything is becoming more competitive. As one Germany-based VC tells me, “The really good VC’s as well as the really good start-ups know what is at stake. 10 years ago (discounting the bubble years) Europe was ecstatic about exits in the 100 million range. Here a couple percentage points weren’t that big a deal. Now though where we’re seeing the opportunity for mega-exits be it Skype, MySQL, even Last.FM, a couple percentage points make a big difference. Hence everyone is becoming more adversarial. It’s inevitable and not necessarily ‘wrong’.”

Secondly, Europe’s VC scene is getting more mature, though many argue we’re still in the “adolescent” phase. Until very recently you saw VC’s disappear once they left a fund or a fund shut down. You also maybe saw an investment manager here and there laterally shift from one fund to another. However, rarely did you see partners in Europe from top-tier VC firms shift from one fund to another as Sonali De Rycker recently has.

We could well start to see more of this as partners in VC houses in Europe get to the point of having a “real” track record as opposed to simply being former entrepreneurs or investment bankers who then became VCs. In Silicon Valley partners move around all the time, as the industry is a lot older and many partners have done nothing else but be VCs. In Europe it’s rare for partners to shift like this and De Rycker’s move could be the shape of things to come.

Thirdly, some are arguing that we are seeing the rise of the “super angels“. These are often former entrepreneurs who’ve had a big exit from their startup and now consider themselves to be potential investors. Some are good at this, some are, to be blunt, crap. But the shrewder ones are guys like the Samwer brothers (European Founders Fund) or the ex-Skype crew at Atomico.

The theory is that these ‘super angels’ are going to come to the aid of startups who need seed capital just as it gets harder to kick seed out of the bigger VC houses.

But the alternative view is that super angels are a “blip”. That they are following the “spray & pray” strategy of investing in what’s hot at the moment, haven’t done it for long (3-4 years) and they are post-bubble anamolies who won’t last forever. Persoanally I’m all in favour of more, smart investors in the market, especially ex-entrepreneuers. The trouble is, the cynic in me wonders if they have staying power. If in the near-term they start experiencing some heavy losses you could see them bailing out of the market one after another.

Indeed, some of them are now said to be “running on fumes” and locking down deals with startups using restrictive terms, which some might say indicates how much fear is driving their investment strategy. You see, it’s a bit like a gambler at the blackjack table in Vegas. They’ve played a lot of bad hands, and are now trying to pump money into new hands in the hope of recovering the inevitable mid-term losses.

In other words, although it looks like Europe’s super angels are coming to rescue of startups that need seed capital, the reality may be that they are trying to back as many horses as fast as possible to offset the looming losses.

Lastly, I also see another trend. Startups who have drawn a blank with European VCs seem increasingly attracted by the idea of upping sticks and re-establishing themselves in Silicon Valley. I have now come across three UK startups considering this in the last month. It’s ironic that I write this just as I too am about to accompany 20 startups on a trade mission to the region, in an effort to bring some of that rich Silicon Valley vibe back home. Now, the question is, are the startups moving because they feel misunderstood in Europe? Or is it because they they think the money will be easier to raise over there? Maybe their startup is just are not very good, and they haven’t realised it yet? Hard to say, and there is no simple answer. It depends on the companies and individuals involved. And Silicon Valley has always had a lure anyway, that’s just to be expected.

So what are we to make of all these trends? We can assume that the whole startup investing environment is going to get tougher and more competitive as the VCs mature and the startups themselves raise the bar in quality. It’s also now an international market, with some entrepreneurs threatening to move if they don’t get the attention of Euro VCs. But whatever happens, most of these trends are not “bad” ones – they are just how things seem to be shaping up, at least from my perspective.

What do you think?

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