The decreasing importance of local VC?

We’ve had this discussion before. You could easily say that Berlin doesn’t have much going for it as a tech hub. Very limited local venture capital, no world-class computer sciences school, no real local economy, no real structural / regulatory support, no – err – proper airport,… the list goes on.

Yet, despite it still being a very young ecosystem with a ton of homework left to do (as the silly “next Silicon Valley” discussion is still going on in the media I should really update the “Will The Real Berlin Please Stand Up?” post), it clearly has become one of the most active entrepreneurial hubs in the world. Why? One reason is of course that we live in a wold where you can build and scale great companies from anywhere. Anywhere you can attract and retain the best talent that is. And if you believe that talent likes living in urban, inspiring and english-speaking environments – well Berlin is very good at that. It’s also probably the only large-scale urban inspiring environment where entrepreneurship has the center stage, not just another / smaller part of the economy that dominates the city. We like to say that startups should be doing one thing 10x better – this is what Berlin does 10x better; while still doing many other things 10x worse that we need to fix over time. So we could conclude by saying that Berlin’s entrepreneurial surge is driven by its ability to attract an increasingly hyper mobile group of talented people from around the world.

But then this raised a few eyebrows (including mine) recently “According to Dow Jones VentureSource in the second quarter last year Germany received $375.8m in new VC for 67 deals, mainly in Berlin, while the UK won $290m for 77 deals”. More VC invested in Berlin, where there is very limited local capital, than in London where there is several orders of magnitude more VC available? (please note – this is not London vs Berlin debate - I view Europe as an ecosystem of connected dots) The data is old and there doesn’t seem to be anything newer available. But if you look at some of the rounds that have happened in since then in Berlin (e.g. Souncloud / IVP, 6Wunderkinder / Sequoia, Onefootball / Union Square, DeliveryHero / Insight, Zlando / TH Lee etc) the picture is still going to look very healthy.

But yet we constantly hear that the lack of local VC is somehow keeping Berlin (and other tech hubs) back.

I am thinking we are going to have to start questioning that. We live in a world where not only talent has become hyper mobile, but also capital.

The implications are profound and will keep European VCs on their toes. The best entrepreneurs will not want to work with a ‘local’ VC if that is also where their mindset and network ends. Entrepreneurs can now raise from anywhere. We are seeing many European venture firms adapt to this: most formerly locally focused funds are now also investing across Europe, are beefing up their US ties, etc. This is good for entrepreneurs.

We may need to rethink what ‘local’ really is and how much it even matters. What do you think?

localvc


When syndicating is outsourcing an investment decision

There are a few good reasons to syndicate an investment:

  • More & deeper pockets around the table
  • Complementary set of experiences
  • Complementary set of networks
  • Complementary set of personalities to help the company
  • Entrepreneur may not want to rely on just one institutional fund / good to have a balance

I am sure there are more – basically they are all about assembling the best “capital team” for a company.

There are also a few bad reasons to syndicate:

  • To make you feel better about your own investment decision
  • To increase chances your partners will support the investment
  • Because it’s what you do
  • Etc.

When you are syndicating to make you and your firm feel better, you are practically outsourcing your investment decision. It may be important to remember then that we earn fees and carry to make investment decisions.


The “Oh Jesus!” slide

There are more than enough blog posts on how to cook up a great fundraising deck. I think the consensus is that at early stages you ideally don’t have one at all (instead an alpha / beta version of your product) and for later rounds the shorter the better.

The only thing I would want to add is that no matter if your pitch deck is 5 slides or 30 slides, you definitely should try and have a slide my partner Jason calls the “Oh Jesus!” slide. What Jason is describing is the reaction of the audience to that slide. This slide basically sums up in a single claim / picture why you are building something of incredible value. Here are some obvious ones:

  • A slide showing an exponential growth curve and where various continued trajectories will lead to in 1,2,3 years
  • A slide showing how you have built incredible engagement / passion per user / customer
  • A slide showing why your positioning / what you are building allows you to own a very large market or create it

These are some over simplified examples but you get the picture. The slide should be uncluttered and speak for itself. Talk to it; create  discussion around it; spend time on it. Don’t get lost in the other less relevant parts. You may want to start with it, you may want it to end with it – it may be the highlight in the middle that triggers the right thinking for the rest of the discussion. But no matter where you put it, make sure to have an “Oh Jesus!” slide.


In a world I want to live in

Yesterday news broke that scientists have found overwhelming evidence for gravitational waves that basically prove the theory of cosmic inflation.

In a world I want to live in, headmasters of schools around the world would interrupt classes to share the news and teachers would be discussing the significance of it with their students. A sense of excitement would be spreading across university campuses around the world. Office and factory workers alike would be abuzz with the news over their coffee breaks. Parents couldn’t wait to get home to tell their kids about how humanity has again just inched every so slightly forward in its understanding of the cosmos.

However, even in the most educated societies we are awash with the living dead. Where superstition and fairy tales can trump the magic and beauty of science. Where curiosity and the pursuit of the truth is less important than the comfort  of ignorance.

In a world I want to live in we would all be working very hard to fix this.

First glimpse of big bang ripples from universe’s birth – physics-math – 17 March 2014 – New Scientist.

Cosmic Inflation


Investing in a startup ‘case’ vs a startup’s DNA

When I hear folks discussing a potential startup investment I’ll often hear something like “it’s a really attractive case” or after the team has made certain changes to the pitch, “the case has improved a lot.”

Although in most cases it is meant well, I don’t like that way of thinking because it feels like we are at business school and are making decisions based on how slides and spreadsheets are changing.

What it completely ignores is what I call the company’s or team’s “DNA” – i.e. its intrinsic capabilities that are completely detached from any kind of plan.  Let me explain using an example:

A team approaches investor X and the investor thinks that the product roadmap is too slow and revenue ramp is too late. The team works on the pitch and comes back with a faster product roll-out and a more aggressive revenue plan. The investor says “the case has improved a lot” and is now more likely to invest.

However, nothing has changed at the company – same team, same product, same market, etc. In fact, nothing has improved at all, except a few slides and numbers on a spread sheet. That is why I really dislike decisions that are based on how ‘cases’ are moving around.

DNA investing works differently and it is my preferred method: Say if I have questions around a company’s product roadmap or monetization strategy I would much rather focus on observing its ‘DNA’ in those areas, e.g.:

  • While we were engaging with the team have they iterated quickly on their product?
  • What is the observable product quality to me; to their customers?
  • How have they reflected user  / customer feedback in to the product in the past?
  • How is the product team assembled, what are the backgrounds of the product folks at the company?
  • Does the team have a clear idea on how / where to monetize and how / where not to? Is there a philosophy behind it?
  • Have they been agile in testing pricing structures in the past? Are they structured in their thinking vs benchmarks, competitors, etc?
  • Does the team have a relevant background in monetizing this kind of product? If not, do they know who they want to hire?

If I have a good feeling on the above, quite frankly, I don’t really care about the plan so much at all. That will be easy to figure out together. However it will be very hard if you don’t have the DNA to do it, no matter what it says in your pitch or spreadsheet.

This is oversimplified but you get the picture. A company’s DNA is way more important than it’s business ‘case’. Unless of course you are actually at business school.


Making hard investments: VCs pitching to entrepreneurs, not the other way around.

Imagine that you are approached by literally thousands of folks every year. Nearly everyone you will meet would love to take your money, is particularly nice and says you’re a great guy and the right partner for their company.

If you are not careful, you will start believing it. You will get used to entrepreneurs reaching out to you – not you to them; they will come to your office – you wont bother taking the first meeting at their place; they play to your timeline, to your terms. And from all those people you meet you will invest in the ones you think are the best. And because in venture capital it can take many years before you realise you may not be very good at your job, you will go on like this for years and years. “We have such good proprietary deal-flow”, “we see nearly every deal on the market – they come to us” is what you will think and say.

What is actually happening is that you are engaging and getting feedback from the wrong side of the market. You have become an adverse selection investor. It’s a common VC movie that does not end well.

A clear observation of mine is that – as a rule of thumb with exceptions – the best investments are usually the hardest. You have to fight to get in; fight hard to convince the entrepreneur you are the best partner. You’ll get a few knocks, it’s humbling.

But it’s good for you, keeps you on your toes. Don’t need funding right now? – how about we take out those seed investors in an attractive secondary and put in a little fresh money on top at a much higher valuation to make this work? Being creative, finding ways of having the best companies and entrepreneurs accept your money – not finding the easiest (laziest) way of investing money in whoever walks in your door.

The best deals are when VCs are pitching founders.

For some folks this is an observation from the church of the bleeding obvious. And they are right. But I still see it every day. That is why I am very happy to observe increased competition in the European VC market. It is good for everyone.


A camel is a horse designed by a committee

Our best product driven companies have a pretty inclusive decision-making style. This means that every team member can contribute to key product decisions and their opinions and thoughts are taken seriously.

Sometimes this can go a little too far though and all of a sudden the product roadmap becomes more or less subject to a democratic process. Mostly inform of an unofficial committee of the most vocal team members – sometimes correlated with their seniority / experience, often not.

Then it’s important to remember that startups aren’t democracies and that a camel is horse designed by a committee.


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