The European Venture Capital Industry is Making Money for America
I'm from Palo Alto originally, so I should be biased towards 'home'. However, I've lived in Europe since September 1988 when I took off for Paris two weeks out of university, wanting to faire fortune in Paris. So as an American in Europe, I believe I understand both landscapes.
As a venture capitalist for the past 15 years, I've grown tired of hearing that European venture capital as an asset class doesn't work. My analysis of why, however, might surprise you.
It's working, but for America.
People make the comparison between Europe and the US for entrepreneurship and the financing of entrepreneurship, but few are looking at the real differences and assets of Europe in a way where Europe & the UK can win, rather than just imitating or worshipping Palo Alto. Europe is a first born child, and inherently has a stake in the outcome of things. It doesn't want to hack the system, but to extend and enable it. Innovation can be profound here, but it's about capital efficiency and unit economics, and engaging with corporates who need to become platforms and highways.
Palo Alto is a later born child, loves disruption, wants to rebuild the world, turnover the apple cart, start fresh, is keen to back marketing oriented entrepreneurs who can sell a big vision with hundreds of millions – not focused on capital efficiency, believing that money is what makes markets happen. By trying to imitate the US and Palo Alto, European Venture Capital and Entrepreneurship will always be second rate. It must focus on doing what it does and can do well.
If you listen to Mark Andreesen of Andreesen Horowitz, bitcoin heralds in a whole new financial order. AH have invested $50 million into bitcoin, and there's no question that it's becoming a force in the market. But it will be additive not replace the pound sterling or dollar anytime soon. We didn't stop listening to radio when the TV arrived.
The US tech platform companies – Facebook, Apple, Amazon and Google – organize the economics of their ecosystems. They do that by having had a tremendous insight into consumer behavior that they leveraged into a global empire – each one – worth hundreds of billions of dollars. Their grip on their consumers gives them the business model power. Their younger brothers – the LinkedIn's, Uber's, AirBnB's, Tesla – also want to take over every industry: recruitment, transportation, hotels etc. Together they are disrupting the so-called traditional world of non-tech firms.
But 95% of the universe is not Facebook, Apple, Amazon, Google, AirBnB, Tesla and Uber.
What happens to that 95%? What's their fight back strategy facing the digital disruption?
If they win, they win by imitating the digital winners. They become platforms, engaging with the ap economy by organizing the economics of the aps on their platforms. We call that 'Ecosystem Economics' at Ariadne Capital.
Back to the European venture capital industry ....
Europe has not created digital tech platforms over the past 15 years. Skype, who we advised in its early days, and 4 of my team were seconded into the very early team there, might have become one, but it was sold to a .... US tech platform company: Ebay. Autonomy similarly.
What most of the tech VC's in Europe do is search for an outstanding European entrepreneur, back him or her, and then sell it to a US tech platform player. That's their number 1 play in their play book, and they don't think too much about it.
But is it good for Europe? It's building a deep bench of talent for those who build and exit companies, but without platforms, we can't have real ecosystems which drive long-term growth, sustainability and network effects in Europe.
And that's where it gets interesting. Every car company, retailer, bank, insurance firm - non-tech traditional business with customers – could be a highway for the digital cars which are being backed by the European venture capital community.
Think of a start-up as nothing more than a revenue-generating algorithm. Every entrepreneur has a secret – an insight into consumer behavior, which implies a way to make money around it. These start-ups have a customer acquisition problem. Most will do a deal with an Ap Store in a US tech platform company to get distribution.
But every non-tech traditional business could be their highway ... if ... they were open for business in the digital age.
Back to Palo Alto
Americans learn on day 2 of their lives to market themselves. We are told that the world wants to know what we think, and so we talk loudly about our visions. Palo Alto does consistently and systematically create great companies, but it also tells the world that it is more or less the only place that does. Whereas the macro trend that all can see is that great entrepreneurs are coming from all corners of the planet. But the infrastructure of entrepreneurship is unevenly distributed. EntrepreneurCountry is building that Infrastructure of Entrepreneurship.
So many European entrepreneurs want to rush out to Palo Alto for their funding. They frequently are shocked at how fast faced it is. But even if they didn't do that, they almost certainly will then have done a distribution deal with an Ap Store based in Palo Alto. But even if they didn't do that, they almost certainly will be acquired by a US firm based in Palo Alto or thereabouts.
And that loud whoosh is the value which is going to Palo Alto.
Why should we care you say? You wouldn't unless you were playing a long-term game, were obsessed with building a system-level solution to a system-level problem, and unless you saw business as the center of society. If you believe that society works best when it's organized around the entrepreneur, and that all of society benefits from the work that entrepreneurs do, then you take a different view of things.
But what is the opportunity then for the European venture capitalist?
It's not B2C, disruptive tech, but enabling tech where the capital efficiency is stronger. This maps nicely to the fact that less capital is available, and Europeans don't tend to do large consumer tech plays as well as Americans. And when we compare the unit economics of the disrupters or the enablers, it's not clear who makes more money for their investors over the long-term because Palo Alto is always ahead. If you could organize an A/B experiment to start fresh in a sector and create a new platform – let's say Uber in taxis – or enable the existing taxi infrastructure – GetTaxi, Liftago etc, and you could run them at exactly the same time, it would be interesting to see the net benefits to investors and society of that A/B test. The problem is that the European part B of the test is always delayed by a couple of years. Being a 'Digital Enabler' instead of 'Digital Disrupter' is less sexy, but more sustainable. My gut tells me it's a more consistent way to make money as an investor too.
This Palo Alto girl will back the Digital Enablers of Europe (and make a lot of money), and we'll network them into the non-tech firms enabling them to become platforms (and make a lot of money). Not CSR this. This is pure business analysis, but with a long term horizon.
Other Commentary on the European Venture Industry by Julie Meyer on Bloomberg Technology AM Markets Shows
Bloomberg – 12 November 2014
Bloomberg - 24 February 2014
Bloomberg - 21 February 2014