Nic Halstead threw a rabid cat amongst the pigeons this week when he spoke to TechCrunch Europe about his disappointment in those European VCs who, he says, remain risk averse compared to thir US colleagues (Datasift just raised $6m from two US VCs).
Towards the end of our video interview Nick said:
“We’re still doing something quite high risk at Datasift. We’re trying to disrupt the data business. There’s no other company doing this so it’s hard to prove. The European scene is still very set on the attitude of what are you revenues, what have you proved to date. With Tweetmeme we made probably a million dollars last year, but that’s not Datasift, which is unproven. So the reality was we had to go to the US [to fund raise]. People ‘got it’ in Europe but the valuation difference with the US was not even close. It comes down to price. In the US you will get a higher valuation. It is changing here – but VCs are still risk averse at the Series A level. But it’s a self fulfilling prophecy if they [don't take risks]. My investors expect a billion dollar company, with over a 10+ exit. In Europe, VCs go for models that are proven. US VCs will pick up something hot much earlier. I’d like to see European VCs moving forward on risk.”
Nick followed this up with an interview in the Wall Street Journal, Europe, pretty much repeating this.
So I decided to canvas the views of VCs, Angle investors and entrepreneurs in Europe to ask what they thought of the situation and Nick’s comments. We’ve had a guest post on the matter from Jos White of Notion Capital, which is upbeat.
But many would only comment off record:
“He’s a prat. I tried getting in touch with him and to meet with him — I chased him endlessly and he replied once every 10 times and was super flaky and then would just go quiet for months at a time. We actually *tried* to woo him and he was totally unreliable/nonresponsive. His comments [about European VC] really ticked me off.”
(Nick says this may have been a case where he didn’t think the size of the fund was big enough, hence the non-replies.)
“We cold called to him some time back and was told he was not looking for money, then or later. We are pretty high performing VC by now ([high profile startups named here]), so if he keeps people like us of his list of firms he spent time pitching to it is a bit rich to complain after.”
KIMA Ventures, Israel/Europe:
“I pass on this investment (Datasift) because the valuation was just crazy for a company with almost no revenue, no traction, no customer, an unfinished product and a closed beta. The vision is very interesting ok…but we all know that big exits are very rare. It’s sure that European exits are a lot less impressive and important that the US ones. European investors needs to take that in account and not invest in European startups at US valuations. I’m seeing a lot of US companies also fighting to raise money with US VC’s. It’s not easy at all. What is true is that you have a lot less european VC’s than in the US for ten of thousands of startups funded each year in Europe. VC’s prefer to invest is less risky project.”
Richard Titus, UK/US Angel
“Nothing surprising here.. I agree with him.”
ANON VC :
“We cold called to him some time back and was told he was not looking for money, then or later. We are pretty high performing VC by now so if he keeps people like us of his list of firms he spent time pitching to it is a bit rich to complain after.”
No doubt here that this business is too high risk for most European VCs. And those VCs aren’t as stupid as one might think. In terms of
- have you tried asking Datasift their product pricing? It’s a mess, or a VC-value-add opportunity
- twitter dependence? hello?
- hedge funds as a key buying opportunity. Or at least Datasift think they are. But have you spoken to the hedge funds who they might target? I have – they won’t pay for this as it is structured now.
But of course:
- Nick Halstead is insanely great. We need more of him
- it’s a punt, but it may well make a good return – despite the issues above. Cf tweetdeck (“a business without a business model built on a business without a business model” – Ian Dodsworth, founder)
- the next pivot could be brilliant
I think this just shows that the cost of US capital is lower (i.e. the bar to raising US capital is lower) than European capital. Which is for a variety of reasons including the greater upside that the successes in the US deliver.
Chipper Boulas, Angle Investor, Paris
“Disagree that EU investors are not entrepreneur friendly – they are in the business of backing entrepreneurs and hoping for success – however, agree they are risk averse and see themselves more as spotting current winners and providing growth capital rather than intuitively spotting future winners and taking the risk to help them create the success. They therefore spend too much time on current and future financials, and not enough time on user engagement and market potential. There are of course exceptions, but not enough. Most EU investors do not operate on the model that if you create something useful/fun/engaging that a lot a people want, you will find a way to monetize. Most of the time, revenue models change, so they are difficult to predict with precision in advance. In addition, some of the biggest internet plays are network models with increasing returns that require a critical mass before turning profitable. Google took several years before figuring out their revenue model (and it was Overture, not Google, that showed the way). Things are getting better, but too slowly. A few of us in Europe, including myself, are working on raising funds and creating a better funding model with smart capital that incorporates risk taking and mentoring at scale. Stay tuned!”
“I like Nick and wish him the best. I know he’s frustrated but painting all vc’s with the same brush doesn’t make sense. I know our term sheets are the exact same as US vc termsheets. We have done three investments in the US. One we drove, one was led by another UK fund, and a third was led by a US fund. The terms were nearly identical. We looked briefly at Datasift, but were upfront that we could never lead a $6m round. So, we politely passed. It doesn’t make sense for anyone to publicly debate Nick. We wish him the best, but the industry is more open and transparent than it has ever been. Finally, I don’t buy the theory that European VCs don’t take risk! How can that be true? Most have lost money. They are definitely taking risk. It just might not be the kind of risk that some entrepreneurs agree with.”
Ondrej Bartos, Partner, Credo Ventures:
“I think there is certainly a valid point in what Nick is saying. Similarly, us VCs could argue that entrepreneurs in Europe don’t understand risk, cannot plan their businesses and over value their ideas. The European entrepreneurial as well as venture capital ecosystem is just still far from the U.S., not even mentioning Silicon Valley. I am a strong believer in European startups and entrepreneurs, we are just in a different environment, and no wonder majority mindset on both sides of the barricade is different from the U.S.
Julian Ranger, Angel Investor:
“Whilst Nick can be over-agressive in what he says sometimes, in this case he is correct – European VCs are more risk averse than US VCs. Now I don’t agree with all that happens in the US (too high valuations for some deals and for startups too, and too much on reputation at times), but there is no doubt we need to emulate them in some areas:
a) If you’re going to change an area with new technology then it is likely you’re going to need a series A before you have revenue or any significant revenue. Now you must have a revenue plan in my mind – build it and they will come is not an option except for very few; however, European VCs are all about traction – without you get nothing.
b) Not everything has to be trendy/of the moment – the best disruptions come from something new after all. European VCs need to look beyond the numbers to what an idea really is and try and get beyond just the headlines.
c) Before everything else a good team far outweighs a mediocre one – bet on our good teams; they will do well.
US VCs tend to operate on the 1 in 10 model that Angels use – not sure that European VCs do or even a 1 in 5 model; VCs are risk capital not bank capital – take risks, but educated ones – which means working harder to identify the real winners and taking risks.
ANON serial Entrepreneur:
“It’s not just valuations but the contempt many investors show Founders. The ‘let’s build it together’ is rhetoric before the deal and while the sun shines but any bumps in the road and the fluffy world of start-up entrepreneurship is forgotten and their true attitude is revealed. They only care about the numbers and don’t give a shit about your ‘vision’. That is some times warranted, but more often it is fatal to innovation. VC’s hold such a pivotal role in the start-up industry – which is ironic when the vast majority of European VC’s have Founded entirely nothing in their lives. Worse, many have never worked in tech previously, even worse some have never even run a team. How does that qualify them to judge the value of a founder to a business, or understand the effort which goes into creating something from nothing? The startup world is not banking. Dog eat dog within a startup team, of which the VC is a member, does not build highly accelerated, efficient, game-changing creativity or ultimately, profit. Many VC’s are both ignorant AND arrogant – an unpleasant combination and not constructive when trying to incubate the next Google.”
“There is a huge bubble in US valuations right now so while European VC’s are really too risk averse they are also not insane ”
Bill Lao, Ireland-based Angel:
“SOSventures is a US based global VC firm that now has a serious European practice and as European venture partner I do feel that there are better value investments here in Europe now.”
VD/CEO, Mindpark AB, Entrepreneur
“I think the problem is twofold. On seed/angel level there are not enough good objects to invest in. I see really slow flow of teams WORTH investing in. Seed money is not a democratic right just because you can juggle Powerpoint and draw a hockeystick in Excel. Then the problem turns the other way around once the company has matured slightly, and I agree fully with the comments from Nick. The larger European VC:s are, with to few exceptions, chickens. To make matters worse they are slow, cumbersome and not really worth the effort. I can agree on the point of view. Larger VCs are rather put the money into the back with 3% p.a. instead of into a high risk startup.
In general I would describe the available capital in Europe more then growth capital then (high risk) venture capital. Many of the VC’s fuel the, controversial discussed, copy-cat culture. In startup pitches they usually ask you for your “american roll-model” or “who has proofed the model already?”. This makes it basically almost impossible for true innovators to get started BIG.
On the other hand they want to see (immediate) profitability / revenue generation by the business model. This is, indeed, “almost like a bank loan” (as stated in the WSJ interview). This is why, especially in the early stage phase, some bigger angel investors are able to secure such big stakes in early startup companies: they’re the only once willing to invest. And on top: VC’s in Europe look very strongly into the existing shareholder structure – so if you have one or two of the known angels on board and you do a copy-cat – you get funded.
I think the “under-value” issue brings European VC’s under pressure: US investors move more and more into Europe and hence the higher valuations. If European VC’s want to play the game, they have to get into that game.
“We do what we can to walk the walk and align ourselves with the team. I hear the comments and I am sure it was true in some cases historically and some even today. But i find that it is hard to fight prejudice and ingrained opinions against Europe (I realise this especially listening to the valley based VCs and entrepreneurs – its not pretty). The best thing we can do is prove them wrong by executing – this goes for both VCs and entrepreneurs. Be more aggressive, take more risk, have higher ambition levels and build a valley work ethic / culture into the teams, even as they grow. We are in the same boat fighting the same fight and wanting the same things (the companies to do as well as they humanely can). The sooner we get on the same side of the table, the sooner we can be stronger in making an impact. Globally.”
Ben Tompkins, Eden Ventures, UK
“There was about 10x more vc money raised in the US last year than in europe. Valuations over there are at bubble proportions. We are seeing valuations of usd 8m pre money for slideware. This is crazy. Deals are better value in europe. We have some great companies and prices are not as crazy. We welcome the competition from us vcs as it will increase the opportunity. The only thing that will change this is more decent exits in europe which will drive confidence. some usd billion ipos would be helpful here in Europe.”
Haakon Overli, Dawn Capital, UK/Europe
“We would like to congratulate Datasift for getting funded; it is a great achievement for any business. There are more US than European funds which means more strategies are followed in the US. What is not clear is that all US strategies are superior to the ones followed in Europe, so the picture is perhaps more nuanced than Nick sets out. In Europe, there now are a new class of VCs – such as Dawn – investing earlier than the incumbents who are delivering great performance for their investors. In Europe, we feel we are in this together to make entrepreneurs do well and we really hope that Datasift does very well”.
ANON Serial Entrepreneur:
“Lot to investigate – specifically the mismatch of the public statements from VCs and their private actions.”
Alex Hoye, Angel
“My view is, to paraphrase William Gibson, that the future of constructive, non zero-sum game deal-driven investors is emerging in Europe, but it is not evenly distributed. In fact, it is still lightly-distributed, but it is certainly coming. On the flip side, it is up to the startups to get closer to a world-beating speed of execution and either show the real ability to sell for 10s of millions quickly or have real break-out opportunities on limited investment. This too I am seeing in some of the companies I am working with like Skimlinks and BraveNewTalent which are UK companies, but taking the game to the US and beyond, playing at an international level.”
“Interestingly, I do think there is starting to be more aggression on the early stages by institutions from what I am seeing – they take a decent chunk, but a limited number of VCs are back in the ‘we’ll back this team and concept’ game rather than ‘that’s really interesting, come back when you have a ?500K+ revenue run rate and we’ll think about it. That’s an important change.”
Hampus Jakobsson, Strategic Alliances EMEA at Research In Motion
“I agree. I feel that few have the guts and are as visionary as US VCs. I think it is due to the fact that most EU VCs are not entrepreneurs but pure “corporate finance bred boys” or “wine and dine talkers” so they don’t understand risk and how to work with entrepreneurs. European VCs should recruit seasoned entrepreneurs. There are some exceptions, but lord there’s too few.”
Robin Klein, TAG:
In general I would agree with Nick. Euro VCs tend to be far more wary of early stage companies. At the same time there is a really good trend we see emerging – that of US VCs investing in UK companies. But without being too defensive, I should point out that TAG and Index Seed have certainly done their bit. Index have made more than 20 seed investments in the last 12 months and are active backers of Seedcamp. TAG has backed – from Seed – and continues to support companies such as: MindCandy, Moo, Zoopla, Wonga, Songkick, FreeAgent, Graze, Skimlinks, MyBuilder and Fizzback.