2008: VCs and startups get real across Europe

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Over the last few weeks I have been going around talking to venture capitalists, mainly in London, with a view to trying to get some kind of forward visibility about the technology and startup market next year, especially the role of the VC in all this. A few themes emerged during these conversations, as well as some learning about the VC mindset. (Please note, this is mainly about VC issues, not seed or angel investing, which has different issues I’ll address later).

It seems that the VCs that will be successful going forward in the next year will have to be pretty nimble-footed. A few VC firms are starting to realise they have boards packed with people who don’t contribute anything to the bottom line of the firm and aren’t actually able to keep up with the fast pace of developments in the market today. If you are a startup looking for VC backing, look into who is on the board. If the board has people on it who reflect the right kind of knowledge about the broad issues of entrepreneurship and the tech market then this is a good sign. If it is stuffed with a lot of old suits who did well in the 80s but barely understood Fax machines when they launched, think again. Perhaps that sounds harsh but these are the people your personal VC contact may have to convince about your startup.

In addition VCs without some kind of connection to Silicon Valley – either a business development person or some kind of footprint – are not going to be as appealing as those without. This is not a statement saying that European VCs are bad – It is quite simply a statement of Realpolitik. If you want to know why Silicon Valley remains important to tech startups ask a French entrepreneur who just threw a massive European startup conference, Loic Le Meur. His new startup? Silicon valley-based Seesmic. (Disclosure: TechCrunch’s founder Mike Arrington is an investor).

It is also an acknowledgment that Europe still requires a few more years of great tech VCs (and entrepreneurs for that matter) to come through the system before it quite has the “compost” to create a truly amazing startup culture. [Yes, I know all about Skype being European but let’s leave that to one side for a second]. But this point applies less to London-based VCs than it does to continental Europe. Chatting to some frustrated startups in Barcelona and Berlin recently, one still got the impression that VC firms, even in some major European hubs, tend to think not in global, US or broad European terms, but in local terms. Will this startup be big in Catalonia, they might ask? Will we get traction in Greece? The VCs who seem to me to be less constrained by parochialism are in London and Scandinavia (Sweden and Finland specifically – what can I say, they just think that way). That is clearly a totally subjective viewpoint and quite possibly wrong on several counts, and I’m happy to be corrected – but it’s my impression all the same.

Please note at this point that I am on the side of people like Saul Klein and Ryan Carson who are passionate advocates of staying in Europe to do your startup. I agree with them. Quite obviously I think you can startup in the UK and Europe. But it is also smart thinking to put down feelers in Silicon Valley, that’s all I’m saying. I doubt anyone would disagree with that point.

If you are a startup, you will also want to ask questions of a VC firm about the structure of the firm. If you really want to put the wind up them, ask them what their “succession” policy is. Put simply, in the past some VC firms have become top heavy with older management who have yet to leave. The young bucks who know the market are champing at the bit to make smart investments and see their startups through to exit, but without a career path (or succession ) up the ladder they will gravitate toward other firms that offer them this trajectory. If you as a startup encounter a VC that you feel you can work with, just think about whether they will still be there in a year or so to plead your case for more funding.

Another way to make the sweat break out on a VC’s brow is to ask them if they think they are “Tier One” or not. This will either produce a clipped answer (“Yes, of course we are”) or a long winded one (“Well it depends on what you mean by Tier One…”) Either way it’s a useful exercise to get the cut of their jib.

Now, some of the issues VCs are going to be focusing on in the new year relevant to “2.0” startups are…

Advertising, despite many nay-sayers, is going to be a deeply interesting business model for some time to come. The simply fact is that there remains billions of dollars which have not been spent online, but which economic issues like the credit crunch will start to push online. Why? Because online is measurable, off-line it is not. Exactly the same thing happened in the last nuclear winter after 2001/2, it just wasn’t noticed as much. Two key aspects of online advertising relevant to startups will be video ads. The second will be targeted advertising, particularly niche advertising based on location, but which can be served across a large reach of eyeballs, often via social networks. Yes, I know this sounds like DotCom Bubble talk, but believe me when I say, I have looked into the whites of the eye of these VCs and many are utterly convinced that there remains a deep vein of advertising revenues waiting to be mined by smart startups. And if you don’t believe me just go read Paul Fisher’s blog (he of Advent Venture Partners), which has recently become obsessed with advertising.

A further theme amongst VCs next year will be Eastern Europe. There remains a deep core of technology talent in the former Eastern Bloc nations. Plenty of UK startups have made use of the great developers to be had there, and there are at least three outsourcing Web development companies in Kiev, Ukraine, for starters. And then there is Sofia (Bulgaria), Warsaw (Poland), Prague (Czech Republic), Tallinn (Estonia) etc etc. All of these nations have great people, even if the entrepreneurial culture remains at an early stage. [Note that I have not included Russia in this list. The VCs I talked to consider Russia, with 142 million people, to be its own, inward-looking market. Startups there do not need to build and scale beyond Russia, so the opportunities are different].

But the smart ‘western’ startups are finding ways of working in a pan-European manner. I have lost count of the startups I have met in continental Europe who say things like “Our head offiice is in Copenhagen, but our developers are in Warsaw, our VCs are in London and we have a biz-dev office in San Francisco”. Outside of the US, all of these people are an hour or so away on a plane (remember to carbon offset your flight though!). It is precisely this “Think Europe” attitude which I personally would like to see more UK startups take on board (I will not bother lecturing my Irish friends about this – by and large they already do it). My resolution for next year is to punch the next startup CEO who comes up to me at some event and whines about how he “can’t find any coders in Farringdon”. Get out of London for starters, and find some talent in the rest of the UK, and in Ireland (Dublin and Cork are great). And after that go East my friend, go East. (Yes, I may get punched in turn by UK Geeks who want job security, but I am afraid this is the reality of globalisation. We need to “get with the programme”). In fact, there is probably a startup waiting to be done which actually helps other tech startups who want to go pan-European…

However, if you are based in the UK, then fear not. All European companies and – predictably – all US firms come through London eventually (I will leave the arguments about the London-centric nature of VC-land for another fight) so there remains plenty of opportunity in the UK. In addition to which labour remains most flexible in the UK. Hire someone in some European countries as a full time employee and you might find yourself still paying their wages for a year when they turn out to be crap. Watch out for that.

But, the really cool thing about Europe in the broadest sense is just how much opportunity there is. It remains a deeply complex market for US companies to enter. They tend to get to the UK and then balk at going further. That means European firms have a lot of scope to be smart about building here and following whatever strategy that makes sense. Plenty of European startups have rolled out across Europe only to be acquired by a wealthy US web giant, simply because our American friends – coming from one big market – are unfamiliar with the complexity involved. And let’s not ignore the particular advantage in language UK startups have for facing in the other direction and growing fast in the US first. Always an option.

As far as the talent pool is concerned, there is also room for optimism. We are starting to see second and third time entrepreneurs coming through the eco-system now and the experience is deepening.

But let’s be in no doubt that the era of turning up to an OpenCoffee event in a loud shirt, talking loudly about “Web2” and your social networking startup for owners of three-legged dogs is pretty much over. The same goes for the guys who have a great idea marketing to Gap year students who want to blog their trip…

Luckily, the real hard-nosed people in this space don’t fall away when times gets tough, and they are about to get tougher.

As Fred Destin, VC with Atlas Ventures, says “brace yourselves for a tough 2008“. His view is that investors have done a lot of deals in the last two years and now what faces them is a period of uncertainty. That means entrepreneurs need to get tough and “make their cash work even harder.” We are not talking about a huge crash or an ‘end to the bubble’ (there never was a financial one, other than of hype), just a harder-edged reality. It’s likely that many startups which won funding at the start of this year will either get real traction in their market or start to run out of funds. Plenty of mergers and acquisitions are predicted in this case.

Destin says startups will need to pay particular attention to their milestones and align themselves with VCs who can hold their nerve when times get tricky. And there will be a lot of emphasis on revenues (as in, do you have any?). If your startup underperforms expect to get your funding starved in favour of better performing startups in the VC’s portfolio. Gulp! But there is a way out: “do fewer things better and buy yourself runway”, Destin says.

I would also tend to agree with Destin about not slamming your VCs if it all goes wrong. Yes, there are some terrible investors out there, but the best VCs know when to call time on a startup and the startup needs to recognise that as well.

But let’s not be too down beat. The great thing about the wider European economy taking a hit next year is that a lot of the chaff will fall away. In the last bubble we called these guys “B2B” entrepreneurs. In other words they go “Back to Banking” because they previously left their safe banking job to join a startup. Their departure creates space for smart people to move in and do something exciting. A little recession is no bad thing for the internet entrepreneur. Less able to fritter their time and money away in the real world, more people arrive online to swell the ranks of the potential audience. Plus office rental gets cheaper. And Europe’s base of angels and investors is likely to grow exponentially, as pointed out by Nic Brisborne of DFJ Esprit.

So to conclude: Tougher conditions, but more “real”. Still loads of opportunity, even still in the right kind of social networking applications (web and mobile) and advertising. Great things to be achieved in a pan-European sense.

So get out more, and start building those connections across Europe…

  • Johnti

    Nice article Mike, as usual well thought out and informative..

  • http://www.peopleperhour.com Simos

    Very interesting reading Mike – I agree on the point of staying in Europe to do your startup (and with Ryan and Saul’s point of view) and being involved in a startup myself I can see the advantages of being based in the UK for example (if you are trying to penetrate the UK market of course); unfortunately I can also see that the startup culture in the UK is not there yet and live the flipside of not being based in the Valley on a daily basis..

    I personally believe that while it’s possible to create a successful web startup in the UK (and rest of Europe) while not having connections to the other side of the atlantic, it can save you a LOT of effort and make things easier if the right connections are there.

  • http://www.peopleperhour.com xenios

    A few god points in the article, to which i would add the following

    1) I think aside of the VC’s apetite, there is another equally, if not more important, driver that will come into play in 2008. Entrepreneurs in the UK are traditionally (and lets face it – the Brits loooove tradition) accustomed to funding their startup predominantly by re-mortaging their home. Little chances of that happening in 2008 !!

    2) Agree on “thinking Europe” , opening up to a more integrated space, and i think there are increasingly more avenues one can pursue to make that reality (including our own startup peopleperhour.com ). However, i still think Europe is a bit of a way away from being one market even for the cyber space. Unlike the US, there are still many cultural, language and legislative barriers between the different parts of Europe that make the scale-up process tougher. And alas here lies the opportunity – for those who can pull it off.

  • http://www.friendent.com Sean

    I think this is an interesting post, partiularly because I’m an American entrepreneur moving to London for my new startup (seems backwards right?)… We’re backed by First Round Capital, and I wouldn’t be coming to London if I didn’t think there was great opportunity there. I was at the second chance tuesday event ~2 weeks ago and got the sense there is a vibrant community. Anyways, would love to chat with you about it from the perspective of an American entrepreneur coming to the UK so shoot me an email.


  • http://www.critir.com/ Paul J

    Quality article Mike, certainly food for thought.

    The European market is a hugely rich untapped vein of both customers and talent that’s waiting to be exploited fully. It’s true we’re currently behind our US brethren in terms of the maturity of the market but I believe this represents opportunity in spades for us.

  • http://tioti.com paulpod

    Great post. It’s really buzzing at the moment, I think you can feel it especially round parts of London. Thankfully, a few of the really weak ideas have been weeded out and there are some really strong ideas getting turned into solid sites during these ‘dark months’. Should be an exciting 2008!

  • http://randgaenge.net/2007/12/18/europes-internet-business-challenge/ Europe’s Internet Business Challenge | .:|randgaenge|:.

    […] Challenge December 18th, 2007 Please read the rest of that rant. It’s worth it! 2008: VCs and startups get real across Europe: […]”Chatting to some frustrated startups in Barcelona and Berlin recently, one still […]

  • http://www.kwiqq.com Raj Anand

    Excellent article Mike. Really looking forward to 2008. I think its the year of UK Startups !

  • http://benmetcalfe.com/blog/ Ben Metcalfe

    As one of those Brits who has lept across the pond I have to agree London is still not the same fertile start-up ground that San Franciscio is. I’m honoured to be involved in Seesmic myself, and it’s just a great text-book example.

    “But it is also smart thinking to put down feelers in Silicon Valley, that’s all I’m saying. I doubt anyone would disagree with that point.”

    I couldn’t agree more. And on that note, I’m really interested in reaching out to British start-ups that would like a ‘feeler’ in San Francisco/Silicon Valley. At this point I’m really keen to see if I can help the Brits get a leg up over here rather than thinking about business angles at the moment. So if you’re interested please contact me via the contact page on my blog.

  • http://uk.techcrunch.com/2007/12/19/our-man-in-silicon-valley/ TechCrunch UK » Blog Archive » Our man in Silicon Valley?

    […] TC40 « Previous episode […]

  • http://www.lovest.at Jack

    Great article Mike, really thought provoking.

  • http://www.kwiqq.com/blog/?p=172 Kwiqq Blog » Go Europe! Go Europe!

    […] I’ll quickly cover this. Mike at Techcrunch UK has an excellent post about European Startups and VCs. If you are planning to read it make sure you get a cup of tea […]

  • http://webappropriate.com/?p=13 WebAppropriate | Keeping up with the VC’s (and angels) in 2008

    […] Butcher, of TechCrunch UK (it’s great to have it back!), has a great post covering not only the European/London VC scene for 2008, but the tricky topic (and one that has […]

  • http://www.theequitykicker.com Nic Brisbourne

    Hey Mike – good post. It’s definitely getting easier and easier to build startups here so there is less and less excuse for people to go to the Valley!

    I think there will be more VC investment next year though, not less. VCs have raised funds and they will want to invest them.

  • http://crueltobekind.org Nicole Simon

    I disagree with that the UK may be the most flexible to work with employers – of course you can have shorter contracts in other countries, you just need to do your homework.

    And I disagree with “everybody goes through London eventually”. The US side, yes, because they consider the UK to be the entry point to Europe, when in fact it is the entry point to the UK, but that’s about it. If an entrepreneur from continental goes international, they go to the valley directly. There is no need to make the pit stop at London except for going through LHR.

    The reason many continental companies don’t think big but in local terms are simple: The local market is more than enough in most cases. But if you stay local you have to deal with local. [The clever way of course would be to take advantage of global and play local.]

    But in fact there is an increase of interest for the continental / pan european market which always is good. :))

  • http://www.twidox.com Nicholas

    If you are talking about globalisation, then I think we are the pinnacle of the idea. Our start-up (www.twidox.com) is registered in the UK (because it is easy to setup), our offices are in Hamburg (media city of Germany) our developers are in Buenos Aires (great coders) and members of our ‘Advisory Board’ are in, inter alias, Singapore and Zurich. So, the only think we are missing is a connection to the Valley.

  • Paul Smith

    It seems every 12 months someone in the UK writes this article. The ra-ra post telling UK entrepreneurs that it should be ok starting in Europe next year, even though everything tells them that it is easier to raise [larger] sums of money, for less equity in the valley. Why wait for the next generation of Angels?

    Fred is right 2008 will be very hard and I predict it will be a year of M&A. Many startups will run out of cash and the VC’s won’t support the same business. VC’s will try and merge similar startups, if they are to further fund them.

    Nestoria, Zoomf, Popperazi, Dothome
    Qype, TrustedPlaces
    Reevoo, Crowdstorm

    I think the time the UK/Europe will come into its own is late 2008 when Google android hits the streets and the mobile web becomes a reality.

  • http://www.broadstuff.com alan p

    Good post, Mike – look forward to the one on Angels. I’ve made quite a few some comments over on broadstuff (bit long to post here):


    I do think though that in 2008, any startup with a silly name, esp double-vowels in their name and no “e” before the obligatory “r” at the end should be shot on sight ;)

  • http://www.ylventures.com Yoni Leitersdorf

    Excellent post Mike! You’ve done a great job summarizing the past years and presenting future trends. I’m an analyst with YL Ventures and have been taking an active role in the fund’s deal-flow management and company-review process in Europe.

    After looking into hundreds of companies, meeting people in over a dozen conferences all over Europe (France, UK, Spain, Croatia, Italy, Ireland, and more) and thoroughly investigating the current and future trends in Europe – we’ve come to the conclusion Europe is on the path to success.

    Like you said, the entrepreneurs’ scene in many of the European countries is still young (which results, amongst other things, in partially-digested ideas for startups), but we honestly believe that there are many people actively taking part in aiding Europe become a leading power in terms of high-tech startups. This especially makes sense when one reviews Europe’s achievement in other intellectually-intensive fields.

    Individuals, Government Agencies (such as Ireland’s “Enterprise Ireland”) and even EU-wide organizations are all doing their best to foster the growth of startups in the various parts of Europe (western, central, eastern), by fertilizing the ground with funds, shorter bureaucracies, training and more. There’s still much to be done, but I’m very optimistic here.

    Another issue within Europe is a segmented market. Different cultures, regulations and other hurdles make it more difficult to treat Europe as a whole and require giving attention to different countries separately. I also believe this will slowly become easier to do, as the different countries within the EU are working on bringing the different segments of the market closer.

    We, at YL Ventures, are tieing our future with that of Europe by focusing a large amount of our attention here – expecting great things. We are one of the first true tech VCs on the ground, and plan on staying here for a long time to come.

    I am positive 2008 will see more mature entrepreneurship in Europe and as a result, more companies with the real potential to be added to the list of European success stories (such as Skype).

    Have a great year! See you around Europe!

  • http://www.freddestin.com/blog/2007/12/2007-random-rev.html Fred Destin

    2007: random review of a random year…

  • http://www.sun.com/startup Michael

    Being in the states, I can’t comment on what VC groups are like in Europe, but here, we’ve always heard their praises for being in the Sun Microsystems’ Startup Essentials Program — I guess they like the fact that we’re scalable right off the bat! Dig it: http://www.sun.com/startup

  • http://www.mydealmaker.co.uk Glen Hopkinson

    A key difference between Europe and the USA is that here (Europe) the VCs don’t generally have a strong technology background and are more comfortable with the numbers and contracts. As Warren Buffet emphasises, if you can’t understand something, you shouldn’t be investing in it. Organisations like Connect (see http://www.connectorkshire.org) seek to act as a conduit linking the two and trying to help each understand the others language. Breaking down the barriers, misunderstandings and polarised views that can be deal breakers is all part of a days work.

  • http://uk.techcrunch.com/2007/12/21/our-contact-in-eastern-europe/ TechCrunch UK » Blog Archive » Our contact in Eastern Europe?

    […] realise now that it was remiss of me, mentioning that European startups might want to put out feelers in Silicon Valley, not to also re-emphasise the other point I made in that long post about connecting with the […]

  • http://uk.techcrunch.com/2008/02/06/european-vc-down-but-getting-more-focused/ TechCrunch UK » Blog Archive » European VC down, but getting more focused

    […] European venture capital firms are backing the fewest companies on record, according to VentureBeat. They invested in just 897 companies last year, the lowest number since 1999. However, more money is going into fewer startups, reaching €4.56 billion, a two percent rise from 2006, and the fourth year of consecutive increase. Obviously this is all VC (so Cleantech etc etc), not just Web or mobile companies. The reason is put down to the lackluster market for mergers and IPOs in Europe and the difficulty of bringing a company to a stage where it returns profits and can then attract VC or be sold. The number of European venture-backed companies going public dropped to 38 from 89, while M&A deals fell 38 percent to 136, the lowest figure this decade. In addition hedge funds rarely invest in start-ups in Europe like they do in the US. However, US VCs and European VCs are piling into Eastern Europe where there are a lot of hard core tech firms being created. See my analysis of what’s going on there. […]

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    I think the time the UK/Europe will come into its own is late 2008 when Google android hits the streets and the mobile web becomes a reality.

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