On holiday over the last week or so I have been reading a lot of the chatter about seed funds/smaller VC funds in the US and I planned to sit down and digest all of it today and produce some thoughts on parallel developments in Europe. Unfortunately my day has totally run away from me and this post is reduced to a series of rambling observations….
The debates in the US are centred around two things – changes to the nature of startups and the implications for venture capital, and whether large VC funds can be good seed investors. It is the former question that interests me the most, but for the latter read Brad Feld and Mark Suster who cover the issues thoroughly (and they are the same here in Europe as in the US).
In his own inimitable style Dave McClure nails the changes in the nature of startups and the implications well. Here is what he has to say about the changes (note this is all focused on consumer internet):
Startup costs have come down dramatically in the last 5-10 years, and online distribution via Search, Social,Mobile platforms (aka Google, Facebook, Apple) have become mainstream consumer marketing channels. Meanwhile acquisitions are up, but deal sizes are down as mature companies buy startup companies ever earlier in their development cycle.
and on the implications for venture capital:
There is tremendous opportunity in building revenue-focused consumer internet startups for $1-5M that a) attain some level of commercial viability, b) acquire customers predictably using online distribution channels (Search, Social, Mobile), and c) can later be sold for $25-$250M.
And he also says that there will be less opportunity for larger investments heading for larger exits. I buy that too. As I’ve said, the internet sector is maturing.
So that points to smaller funds making smaller investments that can create good returns if sold for $25-50m.
My question is: does that work in Europe?
Roughly speaking startups cost the same to build here as in the US, so that part of the argument holds. Where it might get difficult is on the exit side. Google’s acquisition of Plink earlier this year was its first in the UK. For a large corporate small acquisitions need to be easy to make and integrate in order to justify the effort, and it seems to me that this is the most likely explanation for the relatively low number of small European acquisitions by the tech majors. Strong personal relations between company founders and execs at Google, Yahoo, etc. are also a big driver of activity and these are much more likely in startups with geographic proximity to the corporate HQ.
On the flip side we have a number of indigenous European media businesses that have made numerous small acquisitions – Bertelsman and DMGT are two that spring quickly to mind late on this Friday evening.
I think the answer to the question then, is a qualified ‘yes’ small seed funds should work in Europe. Sure the exit climate is more difficult than in the US, but that is true at the larger end as well.
To finish then I’m going to repeat something I’ve said many times before – we need more large European tech businesses – that will help drive the ecosystem at all levels. We should all get on and build them – which will be difficult given the trends outlined above.