European venture’s soldiers and generals

By Simona Strimaityte on May 21st, 2012

“The UK is an interesting place to start a business, but it isn’t the best place to be,” says Jean-Michel Deligny, founder and managing director of corporate finance advisory firm Go4Venture, who has never been to TechCity before.

Due to the global nature of internet businesses, location isn’t that important any more, he says, speaking at a Bootlaw meet-up on fundraising in Europe. Yet European venture capitalists still focus on the biggest consumer markets, such as Germany and Russia, he says. “Anything else is more complicated and more selective.”

Deligny believes start-up vibrancy is strongest in tech ecosystems such as London and Berlin, where easier access to investors helps start-ups sustain their growth.

But Deligny is critical about it: “It reminds me of the killing fields in the world wars, where the generals would send in the troops telling them that ‘we’re behind you’, and all these young people would die tragically in the fields.”

In other words, investors encourage entrepreneurs by financing them, betting that at least some will survive and result in strong returns.

VCs in Europe are in a losing battle already. Venture Economics calculates that from the 1980s to 2007, the average European VC fund had an annual return of minus four per cent. In the US, the average annual return was a positive 16 per cent.

The causes for this loss are complex, but Deligny points to three main flaws in European venture. First, investors need to value and respect entrepreneurs, which “is not a common currency in Europe”.

Secondly, to be successful – particularly in Europe – entrepreneurs must learn how to move from one investor to another. Founders need to learn how to deal with investors giving up companies. The time of having one investor from seed to exist is over.

Finally, Deligny says, there is a fundamental problem with vision: “In Europe, we don’t know how to build substantial companies with predictability. And for people in the venture industry, this is the challenge for the next ten years.”

Deligny says that the internet is a great opportunity for Europe to show off. “Now we’re dealing with companies with a short cycle, we receive some fantastic returns on some great companies in Europe. Right at the point where some investors are about to give up on European venture, we’re going to see some great results.”

He adds that as much as Facebook is currently dominating headlines, tech companies are not going to dominate the investment world, but they are an opportunity for European VCs. But to capture the potential of each tech companies, location matters.

According to Go4Venture research, around 95 per cent of all businesses never go for venture capital. It’s likely therefore, that the nature of lean tech companies makes them a part of this 95 per cent, unless the company goes global. This is where the VCs step in, as recognised by London-based Atomico.

Successful tech companies tend to be global and become the winners of the entire sector – Facebook or Google are good examples of this.

“In our view, capital is becoming less important,” says Atomico partner Mattias Ljungman. “You need capital to run businesses, but there are other things that an entrepreneur needs to grow and to become successful. It’s increasingly less about capital, it’s about what we can do as technology investors. That’s why we have offices in Sao Paulo, Beijing, Tokyo and Istanbul. We’re there to help companies to grow internationally.”

But there are still some positive vibes in European venture. Dow Jones VentureSource figures show that European venture fundraising rose eight per cent in the first quarter, and financing deals haven’t dropped as significantly as investment.

Therefore, there are soldiers in the batter field that are worth venture capital investment. It’s now up to the generals to join the battle before they lose the war. This means bringing more cash, but also more value.