Q: Is Silicon Valley’s Series A crunch causing a chill in Europe? A: Yes and no.
A lot has been written about the Series A crunch/palpable chill in Silicon Valley that’s making founders pull their cardigans a little closer. Most recently a report by a venture capital analysis firm CB Insights suggests there hasn’t actually been a reduction in the amount of money available, but rather too much seed funding causing too much demand for the same amount of cash at the Series A level. Whichever way you cut it, a lot of U.S. seed-funded startups looking to upgrade their backing to Series A level are going to be going away with an empty begging bowl in the future.
But what about beyond the Valley? Does the funding situation in the U.S. have an impact on startup funding in Europe? As the old adage goes, if the U.S. sneezes, the rest of the world catches a cold. So if Silicon Valley has a Series A chill, does that make the funding situation a little less forgiving for Europe’s seed-funded startups too? I asked several European VCs and investors for their views on whether the Series A situation in the U.S. is making life more difficult for startups in Europe. I’m not making any claims that this is a scientific poll — it’s a very small sample — but, nonetheless, it’s an interesting snapshot of opinion in the European investor community as 2012 draws to a close.
My takeaway from the poll is that while this group of European investors hold slightly differing views on how much influence the Valley has on the funding situation in Europe, they tend to fall into two camps on the Series A crunch: those that say there’s no change in Europe because it’s always been tough raising a Series A round here; and those that say Europe is having its own mini seed-funding boom — which means that getting a Series A is probably going to be even tougher in the future thanks to increased competition. Sucks to be a European startup then — but if you do manage to get Series A, rest assured you worked your ass off to get it (and probably deserve it).
Angel investor Jeremie Berrebi, who co-founded KimaVentures, says the U.S. Series A situation makes no difference to startup life in Europe. “The answer is simple: It was always difficult to raise Series A money in Europe…and it’s still difficult ;-) No change!” he says in an email. Berrebi’s view is that the key to raising a round in Europe is still a sound business model. “What I can say is that almost all of our startups proving that they have a real business model and a good team are raising easily and successfully a round in Europe.”
Berrebi’s view echoes a sentiment expressed recently by Jackson Hull, previously VP of Plum District and now relocated from the West Coast to London as CTO of UK startup onefinestay. Discussing the relative merits of London’s startup scene vs. the Valley last month, he told me: “Businesses here in London, startup businesses, often have a firmer footing in terms of their business models… There’s actually a little bit of craziness in Silicon Valley in relation to startup ideas and the amount of capital being thrown behind these startups, so [US tech folk relocating to London] could be… a reflection of the fact there are great opportunities in London with high growth potential and a lot less noise. There’s more of a focus on a sustainable business model for startups in London.”
Angel investor Julian Ranger‘s take on Europe and the Series A situation is akin to Berrebi’s — he says: “Europe will remain as tough as ever as SV effects are limited on early funding here.” He also flagged up the importance of nailing down the business model — and points out that if a European startup is going to the U.S. for Series A then the key ingredients are a “good business model, a good team and reasonable valuation.” “If these hit the mark then you’ll have a good chance [of raising Series A in the U.S.]; if they don’t you won’t,” he says. “Same as anywhere really.”
Ranger also notes that since equivalent U.S. startups — at “same stage, same team capability, same prospects” — can be valued two to three times higher than European counterparts, this can lead European startups to assume they will get an “immediate uplift” in valuation if they take a trip over the pond. But that’s just “wrong thinking,” he argues. “Maybe the crunch (which is being over-hyped) will help startups realise that,” he adds. “You go the U.S. for funds because you want to access their market, their contacts and their scale — valuation will be a by-product and should not be the rationale.”
For Robin Klein, partner at Index Ventures and The Accelerator Group, Europe’s Series A situation looks like a microcosm of goings on in the U.S. — because he says the region has also had its own, albeit not quite so frothy, seed-stage investment boom, as governments have jumped on the startup bandwagon. “There has been a marked increase in seed-stage startup investing here, too. More angels, more mini funds, partly EIS [Enterprise Investment Scheme] fuelled,” he tells TechCrunch. He believes Europe is therefore set for its own version of the too-many-seed-funded-startups Series A crunch — with investor sentiment also being influenced by chillier climes over in the Valley. “The change in sentiment in the U.S. will affect sentiment here, too. It will become harder for companies to get Series A funding and smart seed investors should ensure that ‘runways’ are long enough to achieve the milestones necessary. Boards of startup companies should try to focus very clearly on defining these milestones and ensure that they are achieved.”
Ondřej Bartoš, partner at Credo Ventures, goes one further: there is already a Series A crunch in Europe that’s making it harder for seed-funded startups to get to the next funding level, he says: “Series A crunch is now a reality — and not just in the U.S., but we see clear signs (maybe not yet backed by statistics) of it in Europe as well. Today’s reality is that the chances of a startup with seed or angel funding to get venture financing are decreasing.” As to the cause, Bartoš also points to rapid growth in angel and seed deals — going so far as to describe it as “accelerator and angel investing hysteria.”
“As far as I am looking at the market, I think the reason is not that the amount of available venture funds is decreasing (well in Europe it never was too high), but that the number of angel and seed deals is rapidly growing. With all the accelerator and angel investing hysteria which we’re seeing, it is not too surprising that often the quality of the startups with seed funding is low. If that’s really the case, we should be happy for the Series A crunch as it shows the VCs are keeping their quality standards high – and raising VC is staying as tough as ever which should be the case — only the best ones should succeed.”
So it’s not that Credo Ventures has reduced the amount of Series A funding it is offering — it “still has more than half of the fund available”, says Bartoš — but as with the CB Insights report, the problem here is too many seed-funded startups chasing the same pot of funding (and too many “low quality” ones at that). “We like investing into startups with previous seed or angel funding and/or accelerator experience. On the other hand, none of it is a guarantee to get funding, and yet we’re seeing lots of low-quality startups with previous seed funding,” he adds.
Runa Capital partner Andre Bliznyuk also believes the level of funding on offer at Series A won’t change. “We expect that Runa itself will continue to invest in Series A rounds at the same pace as before,” he says. So the key to unlocking that crucial Series A round is still both as simple and as hard as ever: basically, be an awesome startup. “We continue to believe that the strongest teams with the best products will continue to be able to raise financing, be it in Russia, Europe or the U.S.,” he adds. On a side note, Bliznyuk suggests that being an enterprise/B2B startup may increase the odds in your startup’s favour as that portion of the market has historically been less crowded than the consumer space. “We have also historically been more focused on enterprise/B2B software companies vs. consumer Internet startups, so our portfolio has largely been unaffected by the overall market exuberance,” he adds.