“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.

This post originally appeared on the Forward Partners blog.

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“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.

Conclusion

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.

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.

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.

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.