Having Coutts ruminate about the pros and cons of venture capital feels a bit like listening to Prince Charles’s views on rap music. Once I’d gotten past this, and read its report The Price for Growth in full, it felt like the overwhelming focus was to look at the negative points in order to make it more interesting, as well as presenting the option of raising money from banks in a more favorable light.
From the title onwards, there is an underlying tone that VCs are a necessary evil and that entrepreneurs would do well to understand who they are dealing with.
The actual survey results are, in fact, quite interesting, and entrepreneurs would do well to follow much of the advice from the panel. But the underlying tone is one of “vulture capital” and “think carefully before you let those people get their hands on your business”.
This is despite most of the research suggesting a positive perception of VCs overall, with an astonishing 80 per cent of entrepreneurs saying they would recommend them to others. The negative numbers are almost all from “those with no experience of VCs” with, for example, 56 per cent saying that the process of raising venture capital is “not enjoyable but necessary”.
Could someone please explain to me how an entrepreneur with no experience of working with VCs is able to talk with such conviction about that non-existent experience? My only explanation is that this category is actually for those unable to raise money from VCs, rather than those with no experience. Of course, if your business had been unable to raise money, then it would be only natural to have some resentment towards those you had approached.
This all points towards this prevailing attitude in the UK which fears risk, fears ambition and, most of all, fears failure.
Setting up your own business is risky. Investing in early-stage businesses is similarly risky. In return for taking this risk, VCs look for good deals and good companies that will give them a chance of making many times their money if the business fulfills its promise. Many companies will not make it; that is the nature of the business and why it is so important that the ones that do are capable of delivering great returns.
But this is all treated with suspicion in the UK. It’s as if it’s better to desperately cling onto 100 per cent ownership, avoid taking too many risks and never ever risk the awful embarrassment of failure.
In the US – the eco-system that we all aspire to – 99 per cent of successful tech exits are by VC-backed companies. Dating right back to the 1980s, with the backing of Intel, Apple and Microsoft, VCs have played an instrumental role in the creation of countless world-beating technology companies and, at the same time, created billions of dollars and millions of jobs.
There is much more of an appreciation for the role of the VC in the US eco-system. There is also an attitude across the whole of the industry that you should think big, you should take risks and you should raise the necessary money to follow your dreams and fulfill the full potential of your business.
That, ultimately, will lead to you having a smaller slice of a bigger pie. If it doesn’t work out, then at least tried to make your little “dent in the Universe”, as Steve Jobs coined it. There is nothing like what you can learn from failure – it will be better equip you to succeed the next time around.
Venture capital invests in businesses long before a bank will consider lending them any money. It’s in our interests to do everything we can to help the business and be aligned with the other shareholders, as without a successful outcome, we don’t make any money. This is in stark contrast with a bank that will make its share of interest along the way and have collateral identified should anything go wrong.
Don’t get me wrong, VCs are by no means perfect. This is especially true in Europe where the asset class has underperformed for too long. Too much money flowed into Europe during the dot com bubble, when the eco-system wasn’t ready. This led to too much indiscriminate investing by too many inexperienced managers with little or no knowledge of the markets they were investing in.
But things are different now. The European VC market has “right-sized”, with only the strongest funds surviving the fall-out from the dotcom crash. There are also an increasing number of entrepreneur-backed funds emerging, such as Notion Capital, Passion Capital, PROfounders Capital and Atomico, run by managers who have been there and done it themselves. This proven experience as entrepreneurs makes us better investors and makes us more capable to add value to our portfolio companies.
Notion is very focused on adding value beyond the money that we bring. Indeed, we do an annual questionnaire with all our CEOs to understand where we are adding value and where we can do better. The main areas where we think we can help are in introductions, recruitment, strategy development and acting as a general mentor and sounding board.
Venture capital can help you to fulfill the potential of your business; it’s as simple as that. Don’t let Coutts, or anyone else for that matter, tell you otherwise.