12. March 2012–
Paul Jozefak is always a good candidate for poking a finger in the wound, this time questioning the relevancy of local VCs going forward in a recent blog post. The impression is that German VCs, or for that matter, most European VCs, appear delayed compared to the speed at which the ecosystem in the US developed, resulting in more EU entrepreneurs searching elsewhere for funding.
At the heart of this is a clash between the DNA of increasingly ambitious European founders and that of some of the traditional European funds.
It is key to remember that venture capital is a product for entrepreneurs as much as it is an asset class for investors
This is a healthy debate. All VCs should frequently question their value proposition to the entrepreneurs they're backing.
The internet democratised and proliferated entrepreneurialism, creating new startup hubs around the world - Berlin surely being one of them. As a result, incredibly ambitious global models can emerge from nearly anywhere, so long as teams have enough talented engineers to implement the concepts. Entrepreneurs in Berlin have upped their ambitions, international minds have moved in, and the consequence is disruptive, global thinking.
If European VCs on the ground want to be the partner of choice for the world's best entrepreneurs that are emerging across Europe (in and out of Berlin), we all need to up our game.
A 10-point plan to staying (or becoming) relevant
1. Be more ambitious
As teams here become more ambitious and disruptive, so should the VCs: finance the crazy ones with the big ideas, truly disruptive models with global ambitions, and swing for the fences every time.
We have the chance to build global category leaders right on our doorstep; why go for marginal regional value creation or downside protection? There will of course always be great local champions in regulated markets such as finance, energy, insurance, etc – but I think most successful funds will see these as an exception. Ambitious entrepreneurs will want to work with ambitious VCs, full stop.
2. Don't over-intellectualise
At an early stage, invest in great teams working to address fundamental needs. Focus less on business plans and spend less time on intellectual musings about revenue models. Product is now. Engage heavily in all relevant and new services of the web; be even more heavily engaged with the products you’re considering investing in. Use them. A purely intellectual approach to internet products and services will always put you out of touch with the entrepreneurs your engaging with.
3. Become more technical
Don’t get me wrong: you don't have to be the best coder, and certainly some of the best US VCs have never been a founder or operational themselves. But recognise this as a weakness. Smarten up and engage yourself in technology. This is also a matter of respect vis-à-vis the founders that you engage with. Make sure you "get it". I'm still way behind on my Codecademy classes but I love it ;)
4. Build a global network to help your companies
Get on a plane and meet key people at established tech companies, other startups, and VCs around the globe. Many are doing a great job of this and make it a priority, e.g. Jason and Max just spent a week in the Valley networking; Hendrik is on a plane to Hong Kong right now and we just linked up with Jerry Colonna to work with our teams here in Europe. Even if you have your office in Berlin you have to create global networks.
5. Be a VC, not a bank
Be less of a "deal-maker" and more of an "entrepreneur supporter" – unless you invest with crazy terms there is little value generated in over-optimising deal structures, etc. It also kick-off the relationship you have with an entrepreneurs on a low-point. We’re VCs, not banks.
6. Don't be passive
The best entrepreneurs won't automatically come to you; get out on the streets and mingle, build more relationships with entrepreneurs outside of the classic pitch environment. Also build them early, get a feeling for who’s onto something, have your radar always on. This means more coffees and beers than is healthy for you but every job has it’s downsides ;)
7. Syndicate early
Syndicate early with US VCs, for example, that can add a new angle; appreciate where you can support the company and where another type of investor DNA can help. This also requires trustful relationships; just sending over a deck is a frequently used but very bad way to approach these guys. Have regular dialogues, make introductions, be helpful, become a friend.
8. Don't sell early
Be willing to support and stay in until global category leaders have been established. Most large category leaders with price tags of €1bn+ were created over a period well in excess of 5-7 years; don’t sell for €200m when you could let it run to €2bn. Unfortunately many European funds are under pressure to sell due to lack of performance in the past and will need to fight hard to get out of such a viscous cycle.
9. Invest heavily in the wider ecosystem
That means both money and time (psst: our new fund will have a seed programme and engage heavily in supporting organic angel networks, not the institutionalise startup factories, more in a separate post). Paying for breakfast or dinner won’t cut it; engage with individuals, see where you can help build something, get them connected. Do a small but reasonable amount of ecosystem investing. It will help you build a network of companies and entrepreneurs to fund later down the road.
10. Keep it fresh
Many European VCs have stale partnerships; the same group of people for the last ten, fifteen years. No change. They haven’t evolved, haven’t gotten the fresh blood on board that is required to keep in touch. Let change happen, bring on new people with new ideas.
Rounding up, put your money where our mouth is and embrace the challenges. The European VC ecosystem will prove relevant if we meet the necessary risks boldly, irregardless of developments in the US.
Image credit: flickr user Ethan Prater