I'm on vacation and wasn't going to blog while away but one thing has been puzzling me and I thought a post was worth it. Once again, and this is a trend as you'll by now have seen on my blog over the years, we're discussing Euro VC verses the Valley. This time, triggered by an entrepreneur "throwing the Euro VC landscape under a bus." There have been responses to this from both VC's and entrepreneurs. Here are some examples if you care to read them: here, here and here. Finally, Fred Destin of Atlas who left London for Boston, threw in his thoughts on Euro VC, which I totally concur with.
Yet, this post is not about Euro VC verses the Valley. It's more of a warning of what I see coming up in the near future for European venture. This will effect both VC's and start-ups seeking their money. Whether you like it or not it will happen and it's not necessarily beneficial to the entrepreneur.
I clearly see in Europe that we are following the same path as in the US. Tier 1 VC's have established themselves and then you have the rest. Forget calling them Tier 2 or Tier 3. You're either Tier 1 in the VC world or you're "the rest". Being the rest sucks....be it in sourcing dealflow or raising capital. It's not just in venture capital so but it's clearly the case in this industry.
What does it mean to be a Tier 1 VC? Well, without going into detail there are two major benefits: 1.) you see all the dealflow first and you get your crack at the best business cases before the rest and 2.) LP's, the investors in funds, come to you asking to invest in your fund instead of you going to them begging for their money. There are many other details but these are the two crucial differences. What does this allow for? Well, you get a ton of power in the market. Every start-up wants to first go to the Tier 1 VC's. They have their pick of the litter and in reality, they define the terms. Further, they have tons of money or access to it. This means they can "own" the whole value chain....from seed to exit.
What does this mean for the entrepreneur? Well unless you have the next best thing and are highly innovative, you will play by the rules of the Tier 1 VC's. They will define what is "best practice" and you'll suck it up to get their money. Again, there will be the outliers whom even the Tier 1 VC's chase down to invest in their business but this is not the norm.
What does it mean for the VC's in Europe? Well, this is the tough one. We will see a lot of funds go away. As is the case with venture capital fund structures, you have a slow death of funds. They can run on fumes for quite some time so you don't have any sudden deaths. But it's clear that a lot of players are right now already dying as they are not able to raise further funds. When you speak with LP's, they are consolidating their positions in the segment, investing in fewer funds and only the best. This means that in five years time, you'll have a couple new entrants to the market but a lot of older funds will be gone. As an entrepreneur you may be talking to a "living dead" fund yourself, hoping for an investment which can never come. Due to the lack of diversity in the fund space, you'll also have far less options for funding.
In Europe, we also have another problem which is currently being resolved in the Valley. There are not enough angels, super-angels or incubators. This is changing but they are in no way a counterbalance yet to the Tier 1 players in Europe. I'd say at this point that there are approximately five to seven Tier 1 players in Europe, give or take one or two. This is far too little when you compare Europe to the US. Even though the market in total is similar I'd say you have close to 20 Tier 1 VC's in the US, both on the West Coast and East Coast and covering stages. You have the Tier 1's specialized in Seed and Early Stage, in growth and in later stages. You also have players spanning the whole spectrum from seed to exit. This allows for some healthy competition. In Europe, not so healthy.
Are we getting better in Europe. For sure better but the painful hump is not yet overcome. As Fred wrote, a revolution is still necessary. After a revolution, it takes time to build things up. Who will suffer most in this interim? In my opinion, the entrepreneur because he is still dependant on the VC for financing. A lot of VC's will also be out looking for work. Many will head back to consulting or banking but I foresee a lot of soul-searching in the futures of a lot of friends in the industry. But all is not lost and please don't take this as criticism of the Euro VC scene. It's simply a statement of things I see coming up. As I tweeted in response to Fred's post, revolutions hurt. Things change and change can be hard. I would argue that you have to embrace it. Change is good and I'm glad to see we are going to be seeing a lot of change in Euro VC whether we like it or not.