Earlybird Venture Capital
David Cowan

Earlybird Hatches The Term “European Comeback”

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This guest post is by David Cowan. Since 1992, Cowan has been a venture investor at Bessemer Venture Partners, where he funded Blue Nile, LinkedIn, Postini, VeriSign and over a dozen other startups that have since gone public. He blogs at Who Has Time For This?

I just couldn’t keep my big Tweeter shut. When I publicly dismissed the soundness of his widely hailed report on European VC, Jason Whitmire of Earlybird Venture Capital challenged me to openly discuss the facts in a dialogue exceeding 140 characters. So I guess I owe him a response.

Based on the work of their summer intern, Jason and his partner Hendrik Brandis have published a “report” (actually, a slide deck) on Earlybird’s web site exposing a scandalous cover-up: the European VC asset class is actually on fire, far outpacing VC returns in the US. And lest you think I exaggerate the conspiratorial, us-versus-them tone of their presentation, the headline on slide 28 reads:

Reprehensible

…that you are only now reading about the Comeback, but then again: Visibility on European VC Funds for investors is highly limited and prejudiced…

Now unlike Earlybird, my firm Bessemer Venture Partners has no agenda here. We’re a global, $3 billion VC that invests most of our capital outside the US – anywhere we find great opportunities for startups. Indeed, we have found it compelling to fund several European startups – Skype, Criteo, Intego, Axis Network, several others – and hope to find many more. To inform our geographic allocation of capital, we constantly seek and compile sound data; so I was naturally intrigued to read Earlybird’s report, and just as disappointed to find instead a glossy brochure.

To be clear, I’m not saying that the authors are wrong about Europe’s fertility for venture investment. I’m just saying that I can’t possibly draw a conclusion from this presentation, which has clearly been crafted to pitch a message, rather than discover one through critical analysis.

The reports presents data on slides 3 through 7 to back up the claim that European VCs outperform US VC’s. The authors latch on to a few allegedly favorable metrics, such as the multiple returned on exits over $100m, the growing number of European exits, and the ratio of distributions to new commitments in venture capital.

But like an investment bank crafting the competitive slide of its pitch deck, they limit the data to a narrow slice of history – specifically 2009 and 2010, the aftermath of the catastrophic, US-centered financial crisis. During this time, US IPO markets seized up. (I’d bet that contrarily in 2011 the data will not reflect favorably on Europe’s financial markets.) Measuring venture capital returns requires a longer period of assessment than two years – every VC cycle is characterized by long periods of investment punctuated by bursts of liquidity. The US finds itself on the cusp of such a burst, with monster IPOs coming (Facebook, Zynga, Groupon…) that will eclipse their Continental counterparts. The $15 billion of European capital gains touted in this report – as well as the $30b of US gains – will be relatively immaterial as LP’s in 2013 review their managers’ performance over periods of time consistent with the life of a VC fund.

Indeed, home run outcomes play a critical role in venture returns. And yet Earlybird reports the median exit multiples to compare performance. The median outcome of any venture portfolio is irrelevant – what matters is the capital-weighted arithmetic mean, driven invariably by a handful of winners.

The report even goes so far as to celebrate Europe’s lower home-run stats:

Germany has a unique model where, in a different twist to the hugely successful VC-funded start-up ecosystem of Silicon Valley, the industry is not as much reliant on a handful of blockbusters or even a closely networked startup environment, but rather one where a high number of regionally diversified quality opportunities correspond to increasing levels of entrepreneurial activity.

I’m not sure what the last part means, but the spin on Silicon Valley suggests that outcomes like Google and Facebook create some kind of unhealthy dependency, as though no one else can thrive. (Tell that to Redpoint.)  It reminds me of the Airborne tagline “Created by a Second Grade Schoolteacher!” that turned lemons into lemonade.

Other problems with the numbers presented in this report:

  • Incomplete data – the authors have no performance data on 85% of Europe’s VC industry.
  • The report talks only of multiples without any mention anywhere of IRR. If the US exits (which included more internet companies) grew faster, a lower multiple may have easily yielded a higher IRR.
  • Other comparisons in the report between Europe and the US are even less relevant, such as the post-IPO performance of venture-backed companies.
  • Several slides in the report (e.g. 38) imply or explicitly assert that Europe’s metrics outperform others without showing any non-European data. Slide 12 claims that “Europe today has the largest inequilibrium of venture capital availability on the planet,” without any comparative data at all. Slides 20 and 21 also lack any data on the US venture industry, as if US-based VCs haven’t also seen increased deal flow in the last two years.

The presentation also makes bold generalizations that better fit an infomercial than an analytical study:

  • “Forget the charts!”
  • “What has emerged from the post-bubble struggle for existence is nothing less than some of the strongest Venture Capital firms in the world.”
  •  “Just one example: German Venture Capital…” (except that Germany is not just one example – it’s by far Europe’s best performing country)
  • “In addition to highly misleading published historical industry data for European VC which lead to a negative bias in official statistics, there is almost no reported performance of post-bubble vintages (which effectively started only 2004/2005) – these funds are significantly better performing and, as evidenced by recent exits across top- tier funds, are now at the inflection point”

That last statement, from slide 30, actually accompanies a chart showing almost no liquidity for European funds since 2005. As far as I can tell, the report offers this as proof that based on some anecdotal exits, Europe’s funds are doing much better than what they are telling us

Well if there is a conspiracy, I’m not a part of it. I actually share Earlybird’s hopes and intuition that Europe’s entrepreneurs will generate attractive VC returns even in these turbulent times for the continent, and I look forward to seeing some compelling data. It’s too bad that Earlybird’s report wasn’t more balanced, because I’m open to the argument that European startups are under-funded.

I only hope that when Europe does make its comeback, Jason will still invite me to co-invest with Earlybird!