The big fat UK investment “equity-gap-elephant-in-the-living-room” that nobody wants to mention

elephant_in_living_room.jpgIn reply to a post that someone replied to on Robert Scobles blog, saying that there was no issue with VC tech funding in Europe and that there was plenty money for startups and suggesting that it was just as easy to fund a company to build a multi-billion dollar business in Europe as the U.S. (the persons comments in italics), I recently wrote this response…

“There’s really no shortage of venture capital in Europe.”

Not true. There is no shortage of growth capital. There is no shortage of seed capital. There is a major shortage of Venture Capital for Series A with early stage companies. I dont know if you have raised capital for an early stage company in Europe, but if you have tried you’ll know there are literally only a handful of VCs who understand the tech ecosystem fully AND are prepared to invest early stage.

“If you want to build a billion dollar software tech company in Europe by using European VC money, it’s perfectly possible to do it”

I’d challenge you to give me 5 companies in this category who have grown to a billion dollar company, purely on European VC money (let alone UK), other than rolling out the usual suspects such as Skype et al. In contrast, I can probably name you 20 U.S. in the consumer internet sector, without breaking a sweat.

There is problem in Europe – its the equity gap. And its big. There are of course always exceptions to the rule, but in general U.S. seed investment is larger, and VC investment is earlier. In contrast, seed investment in the UK/Europe is smaller and VCs invest much later. That leaves a gaping hole between around £250,000 and £2m ($500k and $4m U.S.)

Everyone knows this, everyone will discuss it private, but nobody wants to spoil the party at European conferences by saying it. Which is a pity, as it needs to be said; because there is so much good stuff going on in Europe in the startup scene, thats its a disgrace that more support and more risk capital is not made available early enough.

Europeans (of which I am one) sometimes ask why there is no Yahoo, Google, Flickr, YouTube, MySpace etc etc of Europe; I believe the reason is what I have just described. Sadly, the same fate awaits us again in 4 years time when the consumer mobile internet services mature, and the same conversation will be had again.

The U.S. is now heavily investing in mobile startups and I believe has every chance to over take Europe in mobile services and take up, within 18 to 24 months. You read it here first.

The European tech sector needs to wake up to this reality and do something about it; until it does the U.S. will continue to dominate North American and European markets with web and mobile consumer brands, because they invest earlier and more aggressively, in more companies.

That was the gospel according to St. Andrew.

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3 thoughts on “The big fat UK investment “equity-gap-elephant-in-the-living-room” that nobody wants to mention

  1. This is a copy to my reply to the one on Scoble’s blog.

    Andrew, I’m not claiming that Europe is as good a place for a start-up as Silicon Valley. It’s not. I am saying, however, that now European tech companies are *starting* to see billion-dollar exits. That’s a big step forward from where we used to be. It used to be impossible to do this. Today, it’s possible. The exits achieved by the “usual suspects” is starting to raise the level of ambition among VCs for what European start-ups can achieve… and more VCs are getting interested in actually doing what it takes to make this happen. And, you’re now seeing the best European VC groups in syndicates with the best US VC groups. So, things have really been improving in recent years.

    Also, what I would say is that, very often, I’ve seen entrepreneurs complain – vocally – that they can’t get funded… and the real reason is because what they have isn’t good enough and they’re not credible as individuals. Not that the money isn’t there for the right opportunities. In other words, the quality of start-ups in Europe is often lower than the quality of start-ups in the US.

    You’re right, though, there are aren’t many really good VC groups that get this stuff, and that are preared to lead early stage investments (including seed investments simply for “ideas”).

    In Europe, for entrepreneurs that are credible, and who have something interesting to offer, the challenge isn’t to get an early stage company funded by VCs. The challenge is to hang on to enough equity to make it *worth* taking VC money. The problem I have with European VCs is that the deals they offer to entrepreneurs are often incredibly poor compared to the deals offered in the US. Which means that Europe has a shortage of serial entrepreneurs… after they been screwed once by their investors, entrepreneurs aren’t so keen to let it happen again.

  2. Hi Simon – Thanks for your comments. I think they clarify more clearly your previous comments on Rob’s blog.

    However, I still take issue with:

    “In Europe, for entrepreneurs that are credible, and who have something interesting to offer, the challenge isn’t to get an early stage company funded by VCs.”

    This isnt true for early stage companies. I was speaking with John Owen (CEO of Library House) only yesterday who concurred entirely that if you want to get tech early stage funding (pre-revenue, pre-traction) then you’re better off going to the U.S.

    I’m not Euro-bashing; I am positive about the UK and Europe; but the fact remains that there is not the support for startups here post seed funding, as there is in the U.S. Look at the numbers.

    You are right that there is also an issue with valuations – I agree; but thats not much use if so few VCs will actually invest early stage – especially if you are not a seasoned proven entrepreneur. U.S. companies get funded pre-product launch, let alone pre-traction.

    There are some examples of early stage funding, but they are incredibly rare. In the valley its normal. That is why they can build out companies so fast and to be so big, online. The same will happen on the mobile internet, if the approach to risk and failure in Europe does not change.

  3. I do take your point that building companies out to critical mass is a more challenging problem in Europe than it is in the US. And yes, raising money pre-product or pre-launch can be challenging too, especially in terms of getting high-quality investors on board (i.e. early stage iinvestors who want to build big businesses). However, I do think things are changing…

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