3 Comments

Summary:

With Europe’s currency on the brink of collapse, is there anything startups and investors can do to avoid risking their businesses? We asked some of the continent’s top venture capitalists what they are doing to try and sidestep the crisis.

Jenga used under CC license courtesy of Flickr user foolstopzanet

Jenga used under CC license courtesy of Flickr user foolstopzanetEurope is on the brink of a monetary crisis, and with debt-laden nations like Greece, Spain and Italy struggling to avoid financial calamity, the euro itself is swaying perilously.

The reasons for the crisis are complex and many: economic, political, social and cultural. Some of them go back to the inception of the single European currency and even earlier. But faced with problems that have been laid bare in the wake of the 2008 financial crisis, the continent is now embroiled in a storm that George Soros has called “intractable.”

The potential collapse of the euro is a big deal for the technology industry — because it’s a big deal for everybody, full stop. And the threat of a currency collapse certainly puts things in perspective: Sometimes there are bigger things to worry about than which new features Facebook is launching.

But amid all the worry, is there anything that startups and technology companies can do? I spoke to a number of investors to find out what the crisis means for them, and for the businesses they work with. What — if anything — can they do to save themselves and their investments from being pulled down the drain? What will the impact be?

Mike Chalfen, Advent Ventures

Mike Chalfen, AdventDespite the difficulties of the European economy, it has been a strong year for Advent, which made four exits in the past year, including one, Fizzback, just this week. Interestingly, however, two of those were to businesses outside Europe. One was to a private equity buyer and only one was to a European corporation, Orange.

London-based Chalfen says that he thinks many startups were well-positioned to weather the storm — but that ultimately, there is only so much that they can do to protect themselves.

“We’re too small really to have any effect on a large scale: Technology’s not a GDP play,” he says. “Our companies have been growing throughout the credit crunch, but to be honest fundamental market fluctuations are less important to us than market share.”

“There are two ways to mitigate the risk here: Make sure you’re in a business where your costs and revenues are in the same currency, or invest in businesses that are highly global. In the age of frictionless distribution of digital products, it’s easier to find companies that grow that way. The really interesting point is that Europe is a good place for global businesses because they tend to be multinational from the start.”

Fred Destin, Atlas Ventures

Fred Destin cc licensed from PluggdChalfen is optimistic, but Destin — a French VC, now based in Boston — sees things more bleakly.

“Let’s forget startups for a second and look at the bigger picture,” he says. “If the euro breaks, it’s going to be disastrous for a lot of people — we’re probably looking at a prolonged recession that may be worse than Argentina’s for countries like Greece: Life savings wiped out.

“Anyone who does not have concerns is disastrously self-centered in my opinion.”

Simon Levene, Index Ventures

Levene was equally gloomy about the broader climate — he expects “at least one or two sovereign defaults, and a huge number of banks will be exposed to that debt as a result” — but suggests that things would be much tougher for entrepreneurs in countries such as Greece and Spain than elsewhere. In particular, it will be harder for those who are mainly selling into their own markets rather than across borders.

“It is going to restrict investment in the countries most affected, on domestic-focused businesses. But for those trying to address global markets? I think they’ll still be able to attract capital.”

But he says that good companies will be able to hustle through until things turn around. In fact, with other businesses failing, governments desperate for growth and more jobs badly needed, startups may be an important part of trying to turn things around.

“Right now venture capital is shrinking, but it’s shrinking to quality — not to zero,” he says. “We’re investing in long-term businesses — liquidity events in three to seven years. Hopefully the world will be the right way up by then.”

Jenga image used under Creative Commons license courtesy of Flickr user foolstopzanet

You’re subscribed! If you like, you can update your settings

  1. Chris McAtominey Friday, September 23, 2011

    What bout how it will affect VCs? If they have Euro denominated funds and the currency falls apart, what will that do? Even if the Euro survives but the exchange rate plummets there will be huge bargains to be had by foreign (£ or $) investors over their continental counterparts. What can startups do to protect themselves from that?

    1. A good point. Looks like the market is going to tighten up on fundraising — either because the VCs have less capital in their funds (particularly in the Eurozone) or because they can bargain harder for better deals. Neither of those is particularly good news for startups looking for funding, I’m afraid.

  2. Political smugness backfires .. no more shelter from world’s economic problems … http://canuckreport.ca

Comments have been disabled for this post