One of the dirty little secrets of venture in Europe is that most VC’s are really just employees, and aren’t risking their own capital
remain resolutely against venture capital as an asset class. Very successful US funds like Kleiner Perkins, Sequoia Capital and Bessemer Ventures have felt that they could stay out of Europe, and just do one off deals from a Partner flying in.
What’s wrong with this picture?
First let’s take a tour through the (incorrectly held) home truths that are commonly accepted, and some of the bad advice that the venture community operates on in Europe today.
I. Raise at least €200 million in your venture fund and/or as much as possible.
New fund managers are told by institutional investors that they have to have €200 million to be credible. Fund of funds want to deploy no less then €15 to 25 million, so it’s not worth it to invest smaller amounts. Also, a key driver for the larger funds (north of €50 million) is to have large management fees so that the venture funds’ partners can pay themselves larger salaries. (They should be focused on making capital gains). Typically investment teams don’t like to crowd into small cramped offices; black marble feels so much better.
Once you have hundreds of millions under management, the temptation to overinvest in tech firms is enormous. You want to put lots of capital to use – not because the start-up has hit a big milestone necessarily, and figured out what their operating model is – but because you have a big fund, and doing small deals won’t deploy the capital fast enough. The reality is that you don’t need a lot of capital to grow a tech firm today. The cost of technology has plummeted due to the standardisation and componentisation of technology. Beatthatquote, a client of Ariadne and a financial services price comparison firm, had no more than £500,000 of investment in total, and was sold to Google for £37.7 million five years later. Many, many VC-backed tech start-ups in Europe pre-2006 raised too much capital and will never get a return through a tradesale because the multiples just aren’t there. I could name names here, but I won’t.
II. Don’t use your own capital; whether a venture capitalist invests his/her own capital is not the point.
Fund managers are like most people – if you can have the luxury of spending someone else’s money, why not?; one
30 entrepreneurcountry
of the most important considerations for a fund of funds manager to look for in selecting a venture capital fund to back is how much the General Partner has invested of their own capital. One of the dirty little secrets of venture in Europe is that most VC’s are really just employees, and aren’t risking their own capital. Nothing wrong with being an employee, but if you are there to select the winners, and haven’t built and sold your own business before, it’s hard to see what you bring to the table. You can’t do venture capital – at least in the early stage, high-growth end of the market, by analysing the market as a McKinsey or Bain consultant would. Go to market strategies are inherently adapted on the ground fast; a good entrepreneur can interpret market signals that he/she has the right product but the wrong business model, for example, and pivots fast. If you are coaching that entrepreneur, and you’ve never been in their shoes, and never experienced the near death experiences that they will be facing from time to time, you will as a venture capitalist either panic or be annoying to the management team who are probably working 100 hours a week to drive the business forward.
III. Control the founder. He probably can’t make it as the CEO. Alignment of interests is for wimps.
This has been one of the most crippling “beliefs” in European venture capital – that the entrepreneur doesn’t have what it takes to become a Bill Gates, Larry Ellison or a Steve Jobs. Nothing trumps founder passion, and everyone is a first time CEO once. Actually, what you want with an entrepreneur is the strongest guy possible – NOT someone who you can easily keep under your thumb as a VC.
This has been one of the most crippling “beliefs” in European venture capital – that the entrepreneur doesn’t have what it takes to become a Bill Gates, Larry Ellison or a Steve Jobs
Furthermore, there are so many things that go wrong with a high-growth tech start-up that alignment of interests must be the basis of the investment or you have a truly dysfunctional experience which emerges. Many VC’s put in liquidation preferences, which give the VC a preferential return, which stack the deck against the management teams, creating animosity between investors and management.
On one of my first investments while I was an Assistant Director at New Media Investors in 1998, I was taking a
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