The recent report by German venture capital firm Earlybird suggesting that European investors were punching harder than their American counterparts certainly spurred plenty of opinion. The story got picked up around the industry, and we had some great comments that came in.
Some took it as a rallying call for European entrepreneurs and investors to keep stepping up their game. “While European VCs are learning the game, the same can be said of entrepreneurs, who more often than not, have one or several start-ups under their belt now,” said Pamir Gelenbe of Dutch group Hummingbird Ventures. “These past experiences on both sides of the table are making the ecosystem more efficient and ultimately drive more value for all involved.”
Others wondered whether it wasn’t all just a little too rosy to be real. Over at Techcrunch Europe, Mike Butcher and Sarah Lacy took on the study blow-by-blow, focusing largely on whether Earlybird’s analysis was reading the figures right. Is the money coming out of the European market directly connected to the money going in? No, it’s part of a longer cycle of investment. What about the number of large American corporations which have yet to float? They aren’t included in the report (see below).
This, in turn, led to suggestions that Earlybird’s figures were wildly off base: Lacey called it “absurd” not to factor in companies like Facebook, Groupon, Twitter and Zynga, which — right now at least — look set to hand their investors huge victories in the future. And there’s certainly an argument in there, since the numbers would change significantly if you included any of these hot pre-IPO companies from the U.S. into the mix, let alone all of them. But how would you do that in reality? Earlybird’s statistics, after all, are about exits for venture money… and while these businesses might all have multi-billion dollar valuations, crucially, they are still just valuations today. Without exits, how else can you realistically compare the numbers?
Elsewhere, some commenters noted that Earlybird’s analysis was definitely weighted more to the investment community than to entrepreneurs, a siren song to to lure large investment groups to back up venture funds in Europe. That argument leaves it open to the counter that America still offers more to the groups — the LPs, or limited partnerships: the pension funds and so on — who are more interested in the absolute value of returns. LPs would rather see big exits than small ones, no matter how effective they are. Think of it as not getting the most bang for your buck, but just getting the most bang.
“It’s those outliers at the top end of the spectrum that peak their interest,” Michael Jackson, an investor who was formerly with Advent told me. “I really think the report ignores absolute numbers. For most institutional LPs, they’d rather have a 5x on $100M, than 10x on $10M. It’s a question of more money being put into play.”
But while it’s true that the investors who back funds want big deals (TechCrunch’s Lacy used the example of the LinkedIn IPO, which was a $10 billion exit for the funds who backed it), there are still big exits available. Take, for example, the recent stock flotations of Yandex which, with a market cap of $11.24 billion, is a bigger company than LinkedIn.
Still, for entrepreneurs — and the ecosystem as a whole — the problem may be that too many of those exits go overseas.
“Europe can indeed build success-stories, although quite often – but definitely not always – they end up being acquired by US companies,” said Tom Henriksson of Open Ocean Capital. Why? “The valuations tend to often be higher when “selling to America”.”
Commenter “Rich” suggested, in addition, that the report’s findings weren’t necessarily that entrepreneur-friendly. “If you’re an investor, European VC seem to be more efficient than their US counterparts,” he said. “However if you’re an entrepreneur, US VCs seem to be much more willing to take risks.”
But the biggest tip of the hat probably goes to Fred Destin of Atlas Ventures, who tried to bring an even broader perspective by pointing out that venture capital needs to look outside itself, rather than focus on which markets are more productive than others. Putting it bluntly, he said European and American venture groups were “like the one-eyed making fun of the cripple”: the bigger problem is that the investors who back funds are looking to other markets where they can get safer, bigger returns.
“This means venture is now fighting for allocation alongside, say, Brazilian forests or Chinese retail,” he says. “Given that a monkey throwing darts would have made money being long commodities on China, you can see why it’s harder to get many LPs to part with their money.”
Photo used under Creative Commons license courtesy of Pluggd Conference on Flickr