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Venture Capital

Investor optics: don’t let the tail wag the dog

By | Startup general interest, Venture Capital | No Comments

Earlier this week a friend was asking me whether her fundraising chances would be improved if she started generating revenues. She’s a natural salesperson and she’s wondering if having small revenues would make it harder for her to sell a big growth story than if she has no revenues at all. When we unpicked it, the logic behind the question is that if there is a small amount of revenue, maybe with small month on month increases, then projections of much larger month on month increases going forward might look less credible than if there were no revenues at all.

In short, she was wondering if she was in danger of letting numbers get in the way of a good story.

Firstly, note that this is backwards thinking. Letting investor optics determine strategy rarely works out well. I get that fundraising is a nerve-wracking process, that investors can be unpredictable and irrational and how that makes optics important. But delaying monetisation to optimise for fundraising almost always falls into the category of letting the tail wag the dog. I say almost always because the caveat (and this applies to all fundraising advice, and isn’t said enough) is that fundraising success often comes down to just one new person falling in love with your idea, and that generalisations like the one I’m making here might apply to the majority of investors, but they will never apply to all of them.

Then the¬†second thing to say is that projections which involve a step change are always harder to believe than projections which are based on an extrapolation of existing trends. That’s not surprising when you think about it, because in the step change case you have to believe that something new will happen whereas in the extrapolation case you only have to believe that things will continue as they are. That’s why companies that have been stuck in a rut of low or no growth often find it hard to raise cash, even when it’s reasonable to argue that a low level of investment is the reason growth has been lacklustre. I’ve heard many founders in this situation say that it’s very unfair when companies that are similar to their’s, but newer, find it much easier to get investors excited, even though they’ve often got less experience. Hopefully this explains why.

Returning to the case in hand – if there are small revenues and small increases, an extrapolation of existing trends won’t look very exciting. However, the same can be said for if there are no revenues at all. So in both these scenarios, my friend will be asking investors to believe in a step change. Following the logic through it makes sense for her to start monetising as soon as possible because that gives the chance that revenues will grow fast, the step change will have happened, and the fundraising will be easy.

Happily, this brings us away from investor optics determining strategy and back to doing the right thing ūüôā

In fact, this is so obviously the right thing to do, that the only reason you wouldn’t is if you didn’t really believe in your plan.

And if you don’t believe in your plan, then you have bigger problems, and delaying monetisation in the hope of making fundraising easier is still unlikely to be the right solution.

European tech: Which way to the exits?

By | Exits, Venture Capital | No Comments

Max Niederhofer recently published¬†this chart showing European exits. As you can see there’s been impressive growth in sub $100m exits, but the story with larger M&A exits and IPOs is less compelling. As I wrote last week our ecosystem is making great progress, but clearly, if we are to keep growing then at some point we need to see an increase in large exits.

The good news is that we can reconcile the facts that we have an increasing number of great companies with the fact that the number of large exits isn’t going up: great companies are staying private for longer. Witness mega rounds by companies like Transferwise and Deliveroo that in years gone past would have had to IPO to raise that kind of cash or, as was more often the case, sell to a larger company that could finance their growth.

This ‘staying private longer’ phenomenon isn’t just a European thing. In the US companies are raising amounts of capital previously only possible through IPO with much greater frequency than they are here. Whether that’s a good or a bad thing is debatable (private companies have less scrutiny and therefore lower costs, but arguably the scrutiny makes them more disciplined) but the important point here is that it’s skewing the exit data. That said, if LPs are to keep making new commitments to fund, they need to get cash back soon, so this trend can’t continue forever.

A new dawn for European VC

By | Venture Capital | No Comments

This week I’ve been at the SuperReturn/SuperVenture conference in Berlin. It’s the biggest European gathering of venture capital fund managers, private equity fund managers and LPs, the institutions that invest in both types of funds. I’ve been going off and on for the last ten years and the good news is that the tide is definitely turning in favour of European venture.

That said, we’re coming from a place where there was very little interest amongst LPs in European funds. For many years our asset class, which is “European venture” was at the bottom of their priority lists. I remember vividly one year, I think it was 2012, when a placement agent (industry jargon for a broker that helps raise private equity and venture funds) had surveyed 83 LPs. He had given them each three votes to cast across about 15 different asset classes. Of the 249 available votes, only 5 were put against European venture. European VCs fundraising at that time were fishing in a very small pond…

As I say though, things have been getting better for a while. The logic in favour of European venture was always strong. VC investment per capita is lower than the US (it’s now 33% lower) and enterprise spend on technology here is much higher as a ratio to VC investment than it is elsewhere in the world. Efficient market theory has it that money should flow into that void.

The problem has been that many LPs lost money in European venture in the 1999-2000, were nervous about making the same mistake again, and wondered if there was a structural reason why venture capitalists seemed to be less successful here than in the US. Structural reasons mooted included an absence of serial entrepreneurs, insufficient venture capital to scale businesses properly, lack of ambition and the fear of failure.

However, whilst money didn’t flood into the void, it did trickle. Governments around Europe played their part, funding the EIF and domestically here in the UK the British Business Bank, and a few brave LPs were prepared to walk where others feared to tread.

And with that capital, a few entrepreneurs succeeded against odds that were much tougher than they would have faced in the Valley. They became serial entrepreneurs, attracting more venture capital into the market, enabling us to fund businesses more aggressively, which in turn drove returns higher. We entered a virtuous spiral and if there was ever a lack of ambition or too high a fear of failure nobody is talking about it anymore.

That virtuous spiral has been turning slowly for a while now and the result has encouraging growth in capital invested into European startups and raised by European venture funds. Different data sources vary, but I think the Dealroom data you see in the chart below is pretty close to the truth.

 

However, what most of us in the industry would like is for the virtuous spiral to turn faster. I think we could comfortably deploy more capital into more companies and grow them more aggressively and reach bigger outcomes without the market getting overheated.

As I wrote recently to an active investor in venture, the input metrics of funds raised and dollars deployed are very healthy, but we don’t yet have published written evidence that all this activity is translating into great returns for LPs. The fact that commitments to venture funds are rising implies that the returns are there, or at least that LPs believe they are coming, but we haven’t yet seen that in industry stats.

What we do have now is active venture LPs saying publicly that they are making good returns from European venture and that those returns are getting better every year. We heard that at SuperVenture this week, and that’s a first for me in 18 years in this game.

We also had LPs who have historically invested in private equity but not venture questioning whether it was time for them to make a change.

So I think the chances are good that the growth in our ecosystem will accelerate. I can’t remember feeling this optimistic about our collective prospects.

UK VCs growing faster than European counterparts

By | Venture Capital | One Comment

One fear I heard expressed a lot post Brexit is that the London will lose it’s place as the dominant startup centre in Europe. These fears were compounded by programmes from France, Germany and other governments to get UK companies to relocate.

It appears these campaigns have had little impact. As you can see from the table above UK based funds had considerably more success fundraising this year than their European counterparts.

It seems that despite Brexit London is growing stronger as a startup ecosystem. I would posit that’s because there are powerful network effects at play. More funds attract better and more ambitious entrepreneurs who generate bigger returns and whose employees found new companies, in turn attracting more funds.

Nice to end the year on a happy note. Happy holidays!

Data compiled by Yannick Roux

VCs and our quest to invest in “home runs”

By | Venture Capital | 2 Comments

This chart (taken from a recent post by First Republic’s Samir Kaji, data from leading venture investor Horseley Bridge) shows that to get the 3-5x return that most venture capitalists target 10% of their portfolio need to return 10x+. That explains why we are so focused on market size and other upside indicators when we invest. Getting a 10x result is¬†hard and if 10% of our portfolio is to reach those dizzy heights then all of our investments must have that potential.

Of course, a 10x return on an individual investment doesn’t necessarily return the whole fund and¬†many venture funds go a step further and stipulate that every deal must be a potential fund returner. That’s the way that we work at Forward Partners, so for us every¬†investment in our second fund must have the potential to return¬†¬£60m back to our investor. That means if we have a 10% stake¬†the exit¬†value¬†should be¬†¬£600m or if we have a¬†25% stake it should be¬†¬£240m. If¬†we have invested¬†¬£6m to get to that point the return will be 10x, and if we have invested¬†less, the multiple will be¬†higher. What doesn’t work for us is investing¬†¬£2m and with the potential of getting¬†¬£20m back – that’s a 10x return, but¬†it’s not a fund returner.

It would be interesting to see a version of this chart which replaced “Percentage of investments > 10x return” on the Y-axis with “Percentage of investments that returned the fund”.

Evolving our investment strategy

By | Announcement, Entrepreneurs, London, Startup general interest, Strategy, Venture Capital | No Comments

This is a long post (1,900 words). For those of you who are time poor here’s the tltr:

  • Forward Partners operates a focused investment strategy because it helps us make better investment decisions and provide better support to our companies
  • A good focus area for us is one that can generate 50+ deals and where we can build some generalised expertise that helps with our decision making and value add
  • Until now we have focused on marketplaces and next generation ecommerce
  • Recently we evaluated lots of options and did a deep dive on Applied AI before selecting it as our next area of focus

For the three and a half years that we’ve been going, Forward Partners has operated a focused investment strategy. We observed that small transactions of all types are increasingly moving online and backed the companies that were helping to accelerate that trend. That meant lots of consumer and small business focused marketplaces and next generation ecommerce companies. Lost My Name, Appear Here and Thread are three of the better known examples, but overall there are 37 companies in that portfolio.

We chose to be focused for three reasons. First, and perhaps most important, being focused enabled us to build up expertise that resulted in better investment decisions. Specifically, we feel we have strong capabilities in working out whether customers will value products highly and whether it will be possible to market them cost-effectively online. Secondly, we have seen so many similar companies now that we have a good sense of what they should be achieving by when. We are better able to see problems coming and advise on strategies to work around them. Being expert in an area makes us better board members and hence better able to win deals with the best entrepreneurs. Finally, focusing allows us to add more value operationally so our companies can execute faster and with higher quality. The companies we back often share the same challenges as each other and because we focus our team has solved those problems many times over.

However, venture capital is a dynamic business and good focus areas don’t last forever. We are still seeing lots of marketplace and next generation ecommerce opportunities, but as we move into our second fund we decided to add another focus area to make sure we will continue to have enough high quality opportunities to invest in over the next four years.

Our first step was to define the what we mean by a ‚Äúgood focus area‚ÄĚ. For us the following characteristics are important:

  • Will generate 50+ deals
  • We can build knowledge that’s broadly applicable across the focus area and gives us an advantage versus other investors
  • We can articulate a few underlying investment theses
  • We can articulate use cases
  • Suitable for early stage investment
  • The UK has some kind of advantage

Then we had a high level discussion about what areas we might focus on next. A couple of interesting things came out of that. Firstly we like to invest in sectors that are rising from the low point of the Gartner Hype Cycle. Investing at this point leverages our key capabilities of assessing whether customers will love products and whether companies will be able to market them cost-effectively. If we get the timing right then mass adoption should be achievable. Investing with this strategy means we don’t chase the very rapid value appreciation that sometimes occurs at the beginning of the Hype Cycle, but we think the benefits of focus outweigh the cost of the lost opportunity.

The other interesting point to come out is that investing in deep tech at the very earliest stages is difficult. One of the key drivers of success for us as a fund is backing companies that make rapid progress and are able to raise up rounds a year or so after we invest. To do that they must pass valuation milestones. With ecommerce and marketplace companies those milestones relate to sales and unit economics and are easily demonstrable. Progress at deep tech companies, on the other hand, is based on internal development milestones and it’s difficult to predict how next round investors will respond. Until a product is released and is in the hands of customers, which can take years, the only evidence of success is internally reported improvements in algorithms and the production of code. I‚Äôm sure there‚Äôs a way to solve this for deep tech investments, but we haven‚Äôt figured it out yet.

The next stage for us was to brainstorm potential areas of focus. Each member of the investment team went away and over a couple of weeks contributed ideas to a shared Google Doc. Then we reconvened with the objective of choosing a single area on which to focus. Via a process of discussion, voting and then amalgamation of ideas we decided to look seriously at making ‚ÄúApplied AI‚ÄĚ our next focus area. That would mean investing in companies that were using well understood artificial intelligence techniques to build new and superior products.

We felt that Applied AI is attractive because:

  • It‚Äôs a broad enough area to generate 50+ deals
  • Is one where we already have knowledge and could could go on to develop a deep expertise in the different techniques and their application
  • Is at the right point in the Hype Cycle and plays to our strengths in evaluating demand

The major concern we had is that AI more generally has been a popular investment theme with other investors for some time and we wanted to make sure that Applied AI is sufficiently differentiated to be a viable investment focus for Forward Partners.

We decided to go away and do some work to improve our understanding of the area with the aim of answering the differentiation question and convincing ourselves more generally that Applied AI has the potential to yield a flow of high quality investment opportunities over the next 3-5 years.

To that end we sought to answer the following questions:

  • What are the AI techniques that can be applied cheaply and predictably by startups?
  • What capabilities do those techniques enable? (e.g. natural language processing enables conversational interfaces)
  • What use cases can these techniques be put to? (e.g. conversational interfaces to FAQ databases can improve customer service)
  • Are there enough use cases where the addition of ‚Äėintelligence‚Äô makes the product meaningfully better?
  • How can Applied AI startups meaningfully show progress in their first year of operations?
  • How much AI talent is required at pre-seed and seed stage Applied AI startups and can we find enough companies with that talent?
  • How can we add value to Applied AI companies?
  • What are some hypothetical strategies for Applied AI startups to obtain the data they need to train their algorithms? (Addressing the ‚Äúcold start‚ÄĚ problem.)

The first three of these questions relate to the size of the opportunity set. To choose Applied AI as a focus area we had to believe there is the potential for 50+ deals that would make sense for us. To get an answer we mapped an extensive list of Applied AI techniques against the Gartner Hype Cycle, and put them into a spreadsheet linking them to the capabilities they enable, then linked those use cases to capabilities, and finally the use cases to ideas for companies. After that we scored the company concepts based on their attractiveness as Forward Partners investments and looked to see how many high scoring opportunities there were. Fortunately there were many.

Screen Shot 2017-07-26 at 20.10.30.png

Once we had comfort on the size of the opportunity we turned to the final three questions which relate to whether the opportunities will work as early stage investments. Our approach this time was to hold workshops and meetings with people who had experience of building applied AI businesses. Thank you in particular to Matt Scheybeler, Steve Crossan, and Martin Goodson for helping us with this part of the journey.

One important learning at this point was that in the early stages of Applied AI startups the artificial intelligence component isn’t that complicated. We heard multiple times that you can get 80% of the way there with statistics, that almost any AI technique will get you the next 10% and that it’s only when you get to the last 10% that you need to get clever. That was great to hear for two reasons:

Most startups with true potential don’t get to the last 10% in their first couple of years so hard to find AI talent isn’t a prerequisite to get started.

Our existing strengths in building products that resonate with customers and driving growth aren’t eclipsed by a requirement for deep tech knowledge Рi.e. we can help.

The other important point we learned is that Applied AI startups can get product to market quickly and drive predictable value appreciation in the timeframe of a pre-seed or seed investment. We talked through numerous real and hypothetical examples and got confident that when we make Applied AI investments they will be able to raise their next rounds at a good step up in valuation. That’s one of the most important questions any VC has to answer and we were pleased to find that because they can get started with simple algorithms, Applied AI startups aren’t different from other software startups in this regard.

The final piece of our investigation was to think about the ‚ÄúCold start‚ÄĚ problem. We talked about three different data strategies for Applied AI startups and what that would mean for us:

  • Founders have access to some proprietary data
  • Founders have an innovative idea for using publicly available data
  • Founders will generate data from their business and develop algorithms later

In the first two of these cases Forward Partners needs to evaluate whether there is value in the data pre-investment and to help the founder extract value from the data post investment. In the third case we need to be able to evaluate whether the business will be able to generate data, and then if they can the evaluation is the same as in the first two cases. All of this points to us enhancing our data science capability at Forward Partners.

Our conclusion therefore, is that Applied AI is an attractive focus area for Forward Partners. It looks promising that there will be the required volume of dealflow, we can see how an early stage investment strategy will work, and we can leverage our existing strengths to help businesses in this new area. The only new requirement is that we enhance our data science capability.

Hence for the last couple of months we have been targeting Applied AI deals alongside our traditional focus area of marketplaces and next gen ecommerce. Wherever possible we like to take an experimental approach so we have decided that we will run with it until the end of the year and then evaluate. In parallel we are investigating what sort of data science capability we need. That will in large part be determined by the sort of opportunities we see and end up investing in, so for now we are relying on relationships with people who help us on an ad hoc basis with a plan to bring the capability in house when the picture gets clearer.

And I‚Äôm pleased to report that we have already made our first two Applied AI investments. Neither is announced yet, but watch this space ūüôā

Enough with the unicorn bashing

By | Startup general interest, Venture Capital | One Comment

It’s fashionable in certain quarters now to slate some of the billion dollar startups that have¬†been created recently and the investors that helped them get there. Zebras Fix What Unicorns Break¬†is a good example. The piece makes three criticisms of the status quo:

  • Pursuit of extreme growth¬†results in companies¬†with unpleasant characteristics and a negative impact on society – e.g. Facebook (fake news) and Uber (where do I start…)
  • Companies with pure for-profit motives aren’t well equipped to solve many of society’s most pressing problems – e.g. homelessness in San Francisco, education, healthcare
  • Companies that aren’t chasing unicorn status find it hard to raise money

There’s some merit in these arguments, but they need to be put into context.

  • There is clearly dysfunction in chasing growth at all costs – inherently unprofitable companies grow to employ thousands of people before going bust, resulting in much personal anguish and not a little wasted capital. However, that’s a cyclical dysfunction which hit notable peaks in 2000 and 2015 and which needs to be understood as an unfortunate¬†part of a larger¬†system which overall has been an incredibly positive force for good. Five of the six¬†largest companies in the world today were venture backed startups and just about all net new job creation comes from young companies.
  • It’s also true that many of society’s¬†deepest problems aren’t likely to be solved by for-profit companies. That’s because there’s no money in solving them (otherwise the market¬†would have been solved already). What we need here is government intervention.
  • The¬†startup community has taken the ‘go big or go home’ mantra so much to heart that good mid-level outcomes – including exits in the hundreds of millions – aren’t seen as sufficiently ambitious. There are structural reasons why we’ve ended up here. As Fred Destin explained in his recent post Why VC‚Äôs are obsessed with large outcomes, investors with large funds have to chase unicorns to make their numbers work. Those large funds are often the ones everyone wants on their cap table and so almost everyone in the food chain, from smaller funds to angel investors and entrepreneurs alike, orientates themselves¬†around giving those larger investors¬†what they want, with the result that¬†companies without unicorn potential find it disproportionately harder to raise money. That’s not a good thing.

So what should we do?

  1. Recognise that the system is imperfect, but not broken. We need massively successful companies like Facebook, and even Uber to generate growth, employment and the profits needed in the venture industry to finance the next generation of companies. Some unicorns are bad, but lots are good. Some investors back unsustainable growth in pursuit of short term profit (often unknowingly) but most are sensible.
  2. Celebrate mid-level outcomes as much as massive outcomes. Or at least almost as much. For me companies that exit for $200m are as noteworthy as many of the companies that raise money with a $1bn valuation, and often the lessons they’ve learned are more widely applicable than lessons from companies in the unicorn club. Talking¬†about their stories more would help shift¬†some of the dialogue and mindset in the startup community away from the needs of larger funds, towards the middle of the bell curve where most founders exist.

 

Evaluating whether a sector is interesting as an investment target

By | Venture Capital | No Comments

We have been thinking about how to evolve our investment strategy recently. I will write about the full process when we’re done and I’ve got a better sense of which bits have worked and which haven’t, but for now I want to highlight a post by another VC which highlights¬†a lot of the methods we like to use when thinking about the attractiveness of potential focus areas.

The post was written by Bradford Cross, partner at Data Collective. Superficially it’s a listicle with Five AI Startup Predictions for 2017, but you don’t have to read very long¬†before finding some good structured analysis and original thinking.

It turns out that four or Bradford’s five predictions are about things that won’t work and one about something that will work. Each of his points has generalisable lessons that can be applied to analysis of any potential investment sector.

  1. Bots go bust – main reasons: bot interactions¬†are utilitarian and don’t meet our emotional needs, and for most use cases they are less efficient than other UI paradigms (e.g. apps and menus – note that Facebook has just¬†added menu features to Messenger).
  2. Deep learning goes commodity Рmain reason: the number of grad students with deep learning skills has mushroomed and the premium paid for deep learning acqui-hires will fall because companies now other options for bringing in talent.
  3. AI is cleantech 2.0 for VCs –¬†main reason: cleantech failed as an investment category because it’s a cross-cutting societal concern with a self important save-the-world mentality and not a market. AI has similarities, albeit the self-important element is about forming ethics committees and saving the world from the fruits of it’s own labour – super intelligences that destroy humanity and robots that take all our jobs.
  4. Machine-learning as-a-service dies a death –¬†main reason: machine learning APIs are two dumb for AI experts and too difficult for AI novices. They don’t have a market.
  5. Full stack vertical AI startups actually work –¬†main reason: low level task based AI gets commoditised quickly whereas vertical AI plays¬†solve full-stack industry problems with subject matter¬†expertise and unique data which make them defensible.

The generalisable lessons here are:

  • Use cases are paramount to good investing ¬†(ref points 1, 3 and 4). Bots are failing because they don’t solve any new use cases and are worse at their job than other options. Horizontally focused investment themes are tough because they don’t start with use cases. Machine learning APIs aren’t solving a problem for anyone. Good candidates for investment focus areas have easy to understand use cases – e.g. I buy from ecommerce companies because it’s more convenient and the range is better.
  • Valuable businesses have strong¬†barriers to entry (ref points 2, 3, 4 and 5). Deep learning, and AI more generally, got hot in part because talent was scarce. This reached the point where $m per PhD was talked about as an acquisition metric. However, talent is not a barrier to entry over the long term and neither is clever implementation of new algorithms. Proprietary data and uniquely trained models on the other hand, can provide a basis for high margins over the long term.
  • Hype is dangerous (points 1, 2, and 3). Hyped sectors draw in lots of VC dollars which drive valuations up, creating an illusion of success which brings in more VC dollars (sometimes spurred on by M&A). It is possible to make quick money from investing in startups in hyped markets¬†but it’s a lottery. Moreover, all the mania often causes¬†founders and investors to lose their focus on use cases. Unsexy is harder work, but it wins in the end.
  • Good focus areas allow¬†for shared learning (point 3). One of the reasons that cleantech was¬†a difficult place to make money is that there was little in common between different cleantech companies. Solar, wind, and biofuels, for example, all have¬†very different technologies, different customers and different company building best practices.¬†Mobile games, in contrast, has been a successful investment focus for many investors because key disciplines around game mechanics, monetisation and marketing are common across companies.

Many VCs are opportunity driven.¬†Their primary strategy is to work on building their networks and then they invest in the best of what they see. Our belief is that focusing yields better results because deep understanding of a sector leads to better decision making and a greater ability to help entrepreneurs succeed. However, focusing is hard. It takes deep thought and hard work to find interesting areas and then it takes strong discipline to stick to your strategy. Focusing is also risky. If you choose a bad area to focus on at a minimum you will look stupid and if you don’t course correct in time you will have a bad fund. Still, if venture has taught me anything it’s that fortune favours the brave ūüôā

VC: the new normal

By | Venture Capital | No Comments

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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 | One Comment

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.