Venture Capital

VC post 2015: the new normal

By | Venture Capital | No Comments



The charts above are both from the new KPMP/CB Insights Venture Pulse Report.

There’s a lot more data contained within, but my read from these is that VC investment is down significantly since the highs we saw in 2015, but is now holding steady at it’s new level, both globally and in the UK. (The last bar in top chart on global investment might suggest a different interpretation, but Q3 is often quiet for venture investment.)

Moreover, overall investment is holding roughly flat despite a big drop in mega-rounds, buoyed up by activity at the earlier stages. Only one new unicorn has been created in Europe this year (11 in the US).


Brexit: Why the EIF must remain

By | Venture Capital | No Comments

The European Investment Fund (EIF) is an EU institution that exists to stimulate the startup ecosystem by investing in venture capital funds. They have made a huge contribution to the UK scene, backing 37% of UK based venture funds between 2011 and 2015. Moreover, they are often the first investor to commit to these funds making their role even more important than the headline figure suggests. Back in July Bloomberg wrote:

It is an open secret among British venture capitalists that many of their funds would have never gotten off the ground without a hefty check from the European Investment Fund

To state the obvious, if the venture funds hadn’t gotten off the ground, the startups they back would also still be on the drawing board. So the EIF has had a huge positive impact on the UK. It’s a big deal.

And post Brexit there’s a chance we will no longer have their support. That would be very bad news, and might happen as soon as Article 50 is invoked. The EIF hasn’t invested in our fund to date, but they might in the future, so there’s an element of self interest at play here, but this is bigger than Forward Partners and I would still be writing this post if that wasn’t the case.

It’s therefore imperative that maintaining the role of the EIF in the UK is part of our Brexit negotiations. In the medium to long term we could well manage our our own programme for supporting UK venture funds, and the programmes of the British Business Bank augur well in this regard, but replacing the EIF’s programmes would take time and a short term hit to venture funds raised of around 40% would inflict damage on our ecosystem that would take years to repair.

I often get asked about whether the EIF has pulled back from investing in the UK already. There are all sorts of rumours swirling around but the best intelligence I’ve heard, including comments directly from the EIF, tell me that they are carrying on with business as usual. Additionally, I know for sure that one UK fund which closed after the June 23rd referendum has the EIF as an LP.

Earlier this week, David Kelnar of MMC Ventures wrote an interesting blog post setting out the implications of Brexit for UK startups. He included the following passage which describes in detail what we will have to do to keep the EIF investing in the UK. As he mentions, we will need the consent of 33% of EU governments, so this is not something we can take for granted.

The UK’s formal influence over the EIF is limited. The EIF is 60% owned by the European Investment Bank (EIB), 28% by the EU and 12% by 30 individual financial institutions in member countries, with votes cast proportionally. Decisions by the EIB’s Board of Directors require the agreement of one third of EU members. Post-Brexit, therefore, extending the EIF’s core activity to the UK will require at least one third or more of EU members to be supportive. Given the extent to which UK VCs invest across Europe, the attractive returns available from UK funds and the UK’s informal influence, they may well be. Alternatively, other countries may assert their interests to the detriment of the UK.

Other important points are that if the EIF is to keep investing in the UK, the UK will have to keep paying into the EIB, for which a mechanism will need to be established. The good news is that there are precedents, as David notes Israel has a deal which allows the EIF to invest in their country and Norway has something similar.

As with all things Brexit, there is much to do if we are to make the best of our situation. Our task in the startup community is to make sure our agenda doesn’t get forgotten.

FOMO – A dangerous game for VCs

By | Venture Capital | No Comments

“No VC has ever failed because of NOT having invested into a company.”

This quote is from Alexander Ruppert’s The first year in Venture Capital — Lessons (to be) learned. I wouldn’t be at all surprised to learn that a couple of Associates have been fired for passing on Uber or A.N.Other hot deal of the moment, so I’m not sure it’s 100% true, but the message here is spot on. Fear of missing out is a highly dangerous for VCs.

Ruppert’s number one lesson after his first year in venture is to avoid group thinking, and that’s the context in which he offers the quote above. I agree, succumbing to the hype and seeking to beat the herd into hot deals creates perverse dynamics for VCs.

  1. Speed wins, so there’s less time to conduct thorough analysis.
  2. The time pressures can lead to difficult questions not being asked, or glib answers to difficult questions being accepted.
  3. Over-paying is a real risk. Hot companies run quasi auction processes, and the winner’s curse is at play.

So much better to rise above the fear of missing out and have the courage to chart your own path.

But the benefits of not being dominated by the fear of missing a winner aren’t limited to the quality of decision making, they extend to the efficient management of time – both for individual VCs and for firms overall.

Investors who know what they are looking for and spend their time researching and meeting companies that fit their target profile and that builds up knowledge and connections that improve their filters and decision making. They can very quickly pass on deals that don’t meet their strategy.

Investors who are afraid of missing out spend more time chasing entrepreneurs and have to spread their expertise over more areas. Their filters and decision making are much slower to improve, and processing the long tail of deals takes much longer.

Not all VCs think this way, and at a simple level it would seem that fighting hard to get into the seed or Series A of any of the today’s unicorns would have been a smart thing to do. However, survivorship bias is at work here, and the problem investors face is that it’s not clear which of the thousands of companies raising seed or Series A will go on to have outsized success. Sometimes it is the highly hyped company, but more often it isn’t.


UK venture post Brexit – plus ça change, plus c’est la même chose

By | Venture Capital | No Comments

This post originally appeared on the Forward Partners blog.


“Plus ça change, plus c’est la même chose” is an old French saying that translates literally as “The more it changes, the more it’s the same thing”

Before the Brexit vote there was a lot of debate about the trajectory of the venture capital markets and that has intensified considerably in the last couple of weeks. Venture investment has been pretty steady for nine months now in both Europe and the US, albeit with a lot of month to month volatility, but there are fears that the 2015 slowdown could precipitate a full on crash, that public market woes might transfer to the private markets, and now that our exit from Europe will hurt our ecosystem. In my opinion there is a danger that these fears are being blown out of proportion.

Impact of Brexit on the economy

I was as shocked and disappointed as the next Londoner when we voted to leave the EU on June 23rd and I was dismayed by the uncertainty and political turbulence that followed. However, I’m pleased that we now have a new Prime Minister and are on the road back to more stable government. My next hope is that the Labour Party regains its status as a credible opposition party.

Now that Theresa May has moved into 10 Downing Street and chosen her cabinet we can start to predict what our path out of Europe might look like.

From the perspective of the startup ecosystem, the most important question is whether we continue to allow the free movement of labour from Europe. We know that many of the best founders we see hail from countries within the EU and we want them to continue to come here, and similarly we want our partner companies to continue to easily source talent from the whole continent. London’s magic has always been that it’s a open, cosmopolitan city and few people here want that to change.

May has said many times that Brexit means Brexit and she has chosen two prominent ‘Vote leave’ campaigners for the cabinet positions that will negotiate our exit. For me that means we are overwhelmingly likely to leave the European Union, and that the decision is now between ‘hard leave’ where we fully extricate ourselves, and ‘soft leave’ where we accept continued free movement of labour in return for full access to EU markets.

Of those two options I think ‘soft leave’ is the most likely. It’s what the City of London wants and what business wants more generally, and polls conducted by the BBC are indicating that the majority of the population expects that immigration won’t fall. The interests of the country and the expectations of the electorate both point to us leaving the EU, but staying in Europe. That also seems to be what key figures in our new government want, most of whom are, above all, pragmatists. May was a ‘moderate Remainer’, Phillip Hammond, our new Chancellor, has always been pro-Europe, and before the Brexit campaign Boris Johnson, now Foreign Secretary, was an advocate of staying in Europe provided we got a better deal.

The stock markets are another indicator that a ‘soft leave’ with little disruption is the expected outcome. The FTSE 100 has recovered its losses and is now at a 2016 high whilst the more UK focused FTSE 250 is trading well above the average for 2016 to date. There is no sign that public market investors are anticipating a recession.

Foreign exchange is the one market that has moved significantly, with sterling down around 8% against the dollar from its trading range before the run up in the week immediately before the Brexit vote, but devaluation boosts exports and that will most likely be positive for the UK, and especially for our startups who have their cost bases here but sell globally.

So for me the only significant negative indicator has been sentiment, but given that there is little actual change I expect people will soon realise that their fears are overdone and return to business as usual.

Impact of Brexit on London’s status as Europe’s premier startup hub

I’ve been asked by a number of LPs whether Brexit will undermine London’s strengths as a startup hub and whether we might now lose out to Berlin. It’s true that we have voted to separate from Europe, making us a less open society and that startup ecosystems thrive on open-ness and immigration, but once again I don’t expect too much to change. As I explained above I think it likely that free movement of labour between the UK and the EU will be retained, and if that’s the case London’s attractions as a startup hub will remain undiminished.

To set it out, our deeper capital markets, English language, low taxes, low regulation, and expertise in accounting and law make this city a uniquely attractive place to found a startup.

Trends in venture more generally

We now have Q2 venture capital investment data (US and Europe) and it looks increasingly unlikely that the sharp slowdown in activity last summer will turn into a crash. Investment volume and value have been flat to up for three quarters now and whilst there’s a lot of month to month volatility and it’s hard to read the data with confidence, I expect us to trend upwards from here.


As you can see from the chart above activity in Europe has been particularly strong. Per capita investment levels in Europe are at least 5x lower than in the US, but the gap has been closing and over time I expect that the growth in venture activity will continue here until we approach parity.

Moreover, the fundamentals in favour of startups remain strong. The world continues to change at a faster and faster pace, pushing innovation from large companies to small companies and increasing the number and quality of investment opportunities. We are swimming with the tide.


There are lots of plausible scenarios as to how Brexit and the startup world will evolve over the next 12-24 months, but the most likely is that the referendum won’t change much and that the venture industry gets back to growth following last year’s correction. There are risks to that prediction, but for most of the time since 2008 we have had geopolitical risks hanging over us. Grexit, Russia/Ukraine and terrorism spring to mind as recent examples. Here in the UK we now have to add ‘hard exit’ to the list, but new risks intensify and weaken, and come and go. As operators and investors in this market the best thing to do is get our heads down and focus on building our portfolio. For potential investors it’s right to compare the geopolitical risks across different markets, but as I’ve been arguing, it seems to me that the Brexit vote doesn’t significantly change the risk profile of the UK.

Seed and pre-seed – trends and definitions

By | Venture Capital | 2 Comments

The increasing capital efficiency of startups has been changing the face of venture for the last decade or so.

  1. The first thing to happen was that the bar for a Series A went up – unsurprising given that startups could now get much further with pre-Series A amounts of capital (2005-2010)
  2. That created a gap in market which sub $100m dedicated seed funds (aka micro-VCs) stepped into – there are now over 300 of them (2005-2016)
  3. Then competition in the seed market led to increased round sizes driving the Series A bar still higher and causing seed investors to in turn look for more progress before investing (2013-ongoing)
  4. Creating a gap for Pre-Seed which is beginning to emerge as a category (2015-ongoing)

NextView Ventures recently published this graphic which captures the trends nicely.


Note that they have added a ‘Second-Seed’ stage which I haven’t described above. Their point is that as the bar for Series A rises an increasing number of companies are raising second seed rounds to get them there. That’s definitely happening, but I’m not sure I would have broken it out as a separate category on this chart as the goals and investing disciplines of Seed and Second-Seed are pretty much the same – get from early traction to the scaleable economics that yield a Series A.

However, Pre-Seed is very different. The criteria and evaluation are very different and the goals are to be ready for Seed rather than Series A. As you can see from the table below, the most significant difference is that Pre-Seed investors base their decision on team, vision and desk research whereas Seed and later investors also look at companies’ products and customers’ reaction to them.

Screen Shot 2016-06-20 at 14.30.57

Note that venture is an industry of exceptions and whilst this table is accurate for the middle of the bell curve there are plenty of companies that have raised outside of these criteria. The exceptions come for a myriad of reasons, common ones include experienced founders are able to raise seed or even Series A size rounds at the pre-seed stage, companies in hot markets or sectors (e.g. current account startups in the UK last year), and situations where tech development or regulatory costs demand more capital.

Forward Partners invests at the Pre-Seed and Seed stages, with slightly over half of our deals coming at Pre-Seed. Our founding vision was to deliver amazing operational support to our portfolio companies through our startup and growth team covering product, design, development, marketing, recruitment and now PR and comms, and what we’ve learned over the last three years is that operational support makes most difference at the Pre-Seed stage (we say Idea Stage). When we invest at Idea Stage our team becomes the company’s team for a few months, and teams execute faster. The leverage comes because founders are able to spend less time on hiring and recruitment and because our experience helps them plot a better path.


Europe is underweight in Micro-VC

By | Venture Capital | One Comment

ValueWalk have reported on new data out from Prequin that shows continued growth Micro-VC fundraising. Micro-VC growth has been going on long enough now that I’m hearing LPs question whether we’ve reached saturation point and this segment of the market would benefit from some contraction. Certainly that’s the argument Samir Kaji is making.

However, Samir’s comments are largely based on US data and don’t separate out Europe and Asia. Besides the continued growth the interesting thing for me in the Prequin data was the geographic splits.

This chart shows that compared to the rest of the world Europe has a lower ratio of Micro VC funds to Non-Micro VC funds than the rest of the world, suggesting that unless the US is 2x+ overweight in Micro-VC we can expect substantial growth in the category over here. Anecdotally that feels right to me.


For completeness I’ve also included charts showing the number of funds and the amount of capital raised. The surprising thing for me here is that in most years Asia has seen more Micro VC fundraises than Europe.



Mattermark data shows US venture is slowing down – Europe may be insulated

By | Venture Capital | One Comment

Stage-by-Stage Change in US Venture Capital Deployed (Deal Value) – Mattermark










Stage-by-Stage Change in US Venture Capital Deal Volume – Mattermark










Mattermark just released data for deal volume and value in the US in May. As you can see the trend is down, particularly in Seed and Series A. Moreover, as they point out these are lag measures because they report announced deals and deals are often announced 6-12 weeks after completion.

The implication is that Seed and Series A have been in slowdown for 3-5 months now.

The Q1 data for Europe showed investment was flat on Q4, but it will be interesting to see if we see the same declines as the US in April and May. Anecdotally it feels to me that activity is slowing here, but the slowdown isn’t as marked as in the US. That wouldn’t be surprising given that the ramp up in investment activity here in 2013-2015 was less pronounced.

Whatever your view on which way the market is likely to move it makes sense to plan for a difficult fundraising climate over the next 12-24 months. That means having an option of getting to profitability (where possible), allowing extra time to raise money, making existing funds last long enough to achieve significant progress (18 months) and focusing on unit profitability. Plan for the worst, hope for the best.

Non traditional venture investors are still getting to grips with startup investing

By | Venture Capital | One Comment


Perhaps the biggest story in venture capital from 2012-2015 was the rise in late stage valuations. That was fuelled in large part by new investors coming into the private company market. Because of Sarbanes-Oxley and other factors, companies have been staying private longer and mutual fund and hedge fund investors who didn’t want to miss out on the late stage growth at companies like Uber, AirBnB, and Snapchat started investing in late stage private company rounds. Hence the growth in the number of hedge funds investing in tech startups that you can see in the chart above.

Because there aren’t that many unicorns (still) and the amount of money in hedge funds and mutual funds is 500-1000x the amount that VC funds raise every year the new entrants to venture market acted were ‘hot-money’ that distorted the market driving valuations up way past comparable public companies – as you can see in the chart below.


That’s clearly not sustainable and the catalyst for change came when auditors at Fidelity and other new entrants to the VC market started writing down the valuations of their private company holdings in late summer last year. At that point investing in unicorns suddenly became a lot less attractive. That’s what the down slope on the far right of the chart at the top of this post shows.

Mutual funds and hedge funds exiting the late stage venture market has had trickle down effects to earlier rounds driving down valuations and increasing the time it takes to get deals closed. So far that has felt like heat coming out of the market rather than a collapse, but the really interesting question is what happens next. Investment data for Q1 suggested the decline might have flattened out, but then data for April was less positive, with CBInsights suggesting that the public market woes in February might have precipitated a further contraction in the venture market.

Against this backdrop the folks at Industry Ventures, a Limited Partner that invests in VC firms, spoke with 40 mutual fund and hedge fund managers to find out what they are thinking. You can read about their findings and conclusions in detail here, but reading between the lines and factoring in what I’ve heard elsewhere my view on the situation is:

  • As long as companies are staying private longer, mutual funds and hedge funds will want to invest in private companies. Otherwise they will shrink their universe of opportunities and miss out on many of the best growth opportunities.
  • However, they are still learning how to invest in our sector. The dynamics are very different to IPOs or public market investing. Each deal is in effect an auction where mutual funds and hedge funds have less information and less time than they are used to, the risk-return profile is different, and there’s less liquidity. Meanwhile, auditors are increasingly forcing them to adjust valuations quarterly when private companies don’t manage themselves to deliver quarterly improvements the way public companies do. So lots to figure out.

However, this is a positive view. If I’m right then mutual and hedge funds will be back investing in private companies before too long and what we are experiencing now is a correction not a crash. The catalyst will be when public and private price/sales ratios come back into line.

Top 100 venture VC investments each year average $100-150m gain

By | Uncategorized, Venture Capital | One Comment

Screen Shot 2016-05-31 at 15.12.06

This chart is from a Cambridge Associates research report into where VCs make their returns. Cambridge Associates is a service provider to the Limited Partners that invest in venture capital funds that’s known for the quality of its research.

The conclusion of the report is that returns in venture capital are distributed across a larger number of companies and across a wider number of venture capital funds than is widely believed. Their advice to LPs is to catch these distributed returns by investing in emerging managers outside of traditional US venture heartlands. That’s good news for newish funds in the UK.

I reproduced this chart because it shows what a great VC investment looks like. Looking at 2011 and 2012 the top 100 investments created c$10-15bn in value. That means the average top 100 investment created $100-150m in value. One way of creating $100-150m is to invest early, take a lot of risk to get a meaningful stake and hope to get a massive multiple on a small investment. That’s the Forward Partners way. The other way of creating $100-150m is to invest more money a bit later on when the required multiple will be smaller, but the exit value will be higher. Running the maths early stage investors with healthy stakes can get into the top 100 with exits at half the level Series A investors require and maybe 10% of what very late stage investors require.

One of the things I like about the early stage investing we do is that there are many many more $300-500m exits than $1bn+ exits, so we are swimming in a pool with more targets. Another good thing is that if we’re lucky some of our $400m companies will hold out for bigger exits and will end up at $1bn or more, which will drive the returns even higher.

I’m going to finish with a caveat. The dangerous thing for early stage investors is dilution by later stage investors. That’s why smaller funds and angels have a preference for capital efficient companies. In the maths above I’ve assumed that everyone follows their money to protect their stake. That can be challenging for very small funds, although is getting easier with the rise of AngelList special purpose vehicles.

Extremely rapid early growth opens the path to venture capital

By | Venture Capital | 2 Comments

“Venture capital is only appropriate for the small percentage of businesses that want to go loss making to grow very fast.” is a sentence I say a lot. As Jeff Bussgang notes in his recent post Growth vs. Profitability and Venture Returns and Fred Wilson has noted before him successful venture funds have a small handful of big winners, and the only way for a company to become a big winner in the 7-10 year lifetime of most funds is to grow really fast – which isn’t for everyone.

Jeff puts some numbers around ‘really fast growth’ in his post, showing that if a company does $1m revenues and then grows at 100% per year for six years straight then it might sell for circa $400m and generate a 10x for investors.

His analysis is spot on, and most investors would be happy if they ended up with a $400m exit with the level of investment he assumes, but in practice they are targeting much bigger exits. Usually $1bn+. In our experience that means they are looking for revenue growth in the early years of 3-4x pa. Moreover, the best companies grow much faster than that. As we know, growth off a small base is easier than growth of a larger base, but when companies have revenues around the $1m level then 5-6x growth is where it gets really exciting for most investors. When revenues reach $10m that drops to 3x growth.

The thing we focus on more at Forward Partners is how fast companies have to grow in their first year in order to get on the venture path in the first place.

Running the maths it becomes clear very quickly that the short answer is ‘very fast’, although it’s sensitive to the size of the opening month, as you can see in the table below.

Screen Shot 2016-05-23 at 12.20.46

For the majority of the commerce and marketplace startups that we work with getting as high as $15k revenues in the first month is tough, so most are looking at average monthly growth rates of 40-50%+ to get to a £1m run rate in twelve months. The way they get there is usually a couple of months of 100%+ growth and then slowing to 20-30% monthly growth.

We pick these numbers (£1m+ run rate and 20-30% month on month growth) because they are benchmarks used by investors. That said, it’s critical to remember that many other variables go into investor decisions and it’s very possible to raise with much lower figures, or to fail to raise with higher revenues and growth if there are other mitigating factors. It will just be harder. There’s more detail in this Path Forward post about Series A benchmarks.