Fred Destin

What's in a (venture capital) website ?

Late on Friday we launched the new website of Atlas Venture.  The launch prompted me to tour our VC brethren in the Boston area and was surprised at how many have been redesigned recently: NorthBridge, General Catalyst, Charles River or Longworth.   Since I am new to the Boston scene, I thought it would be fun to take a designer’s viewpoint on what VC’s are really trying to do with their online presence and how they’re faring.

 

The death of traditional copy and the vexing issue of differentiation

One of the challenges that all venture capitalists are dealing with is that we are all peddling essentially the same product.  Funding “disruptive innovation” ?  Check.  Backing “world class entrepreneurs” ? Check.  Building “World class companies” ? Check.  Bizarrely no one wants to back dimwits with no ambition.  To make the copy less obvious, some firms like Flybridge tone the style down and talk about working with “great entrepreneurs to build innovative companies”.  At Atlas we went down the same route and talk about “partnering to solve difficult problems”.  And since “disruptive” is the most overused word in the history of innovation, we got cute and talk of “non-linear innovation”.  After all, I do sport a fractal on my blog, so why not…

Another piece of trivia found on VC website that has to make you smile is the entrepreneur testimonial.  I am sure one could build a quote generator here with a very simple algorithm; “VC X has been [invaluable] [transformational] [momentously influential] [godlike in this abilities] and helped us transform our business from a dead end no hoper to a dominant world class player thanks to [an endless stream of incredibly valuable intros] [a relentless commitment to our success] [deep strategic insights delivered in an incredibly subtle and non patronizing manner].”  And so on.  Atlas’ previous site was a particularly bad offender in the mind-numbingly boring quote department and I always felt deeply for the poor company CEO’s who had to come up with these and try to make them sound vaguely different.

The bottom line is we all sound pretty much the same, so what is a venture capitalist to do ?  How do VC’s, a population steeped in mythology and often deluded about their own influence on outcomes, adapt to the brave new world of the chastised venture capitalist, the SuperAngel meme, the new transparency ?  Let’s look at how folks are trying to stand out in the world of venture 2.0 through the lens of their web presence.  To make it a bit more fun I am declaring myself judge and jury and giving out awards.  What is your view ?

 

Straight Talking Award: Kepha

If you’re a new shop and you don’t have an Apple or a Google to boast about, why not go with a low tech, plain talking approach.  Jo Tango and Eric Hjerpe at Kepha Partners have done a great job of differentiating with an honest, simple style centered around a “back-to-basics” approach.  The design sucks, but with this level of un-design that’s certainly on purpose (right guys ?).  Mission, operating principles explained in jargon-free, direct manner, with a focus on entrepreneur SLA’s.  They lost me a bit with the search for perfect haiku (“Presume Trust, Seek The Truth, Be At Cause”) but overall I give them 5 stars for pragmatism.

 

“Back to Me” Approach: Founder Collective

Founder Collective does a better job than anyone else at making you feel a personal connection with each of the members of the Collective.  I love the way you can feel them reaching across the page to grab you and tell you their story.  Eric says “It was painful at times, but I learned a ton about building lean businesses, because we were undercapitalized and sweating to make payroll".  David says “our early forays into Internet enabled media & healthcare taught me poignantly that we are always better served betting on great people than themes and momentum.”  Each of them tells a story with passion and humility.  Like it !

 

Fresh design award: Longworth

There is really nothing that special about the Longworth site, but that’s partly the point.  I liked the lean style, rounded edges, soft fonts, fresh and clean feel and in particular the very neat visualisation of Longworth by the Numbers.  Here is your FAQ for the firm in one simple image.  Economy of means is a beautiful thing.  Well done.

Big Balls of Steel Award: Spark Capital

Spark’s randomized navigation site has been out for a while, and it can be frustrating to actually get to the information you need, but I have to give it to these guys: as a differentiated experience, it works.  But what is most striking is the choice of words and sheer level of aggression and ambition that it is designed to convey: screw disruption, we’re gunning for “Blowups” and “Juggernauts”.  The navigation serves the purpose and the message is implicit: you want to build big companies, you have to deal with uncertainty (as in the random navigation), messiness (as in you cannot easily find stuff) and have huge hairy goals (red and black, in your face, naked ambition).  Overall, I like it and it can’t really be copied by anyone.

 

  

Best Overall Design Award: Matrix

You can take issue with the small fonts and the relatively classic feel of this website, but as a piece of VC web design the Matrix Partners effort does its job wonderfully well.  Lead with entrepreneurs, clear navigation bar underneath, direct access to subsections from the navigation bar, clean and clear interface etc.  It’s rich and deep and easy to navigate.  They even manage to make some of their quotes work, because they keep the endorsement implicit.   See Marc Fleury’s: “everybody told me JBoss would never succeed”.  Nice touch.

 

#fails

I am only going to pick on people who I presume have better track records than we do, but here are a couple that puzzled me.

I will start with Bain Capital Ventures.  Apparently, these guys are very good!; with my ass now covered, let me nitpick over their positioning.  They have a section of how their approach is differentiated because a/ they have more people per $100m managed and b/ they contribute 15% of capital.  I am naively reading that as a/ we employ a ton of junior folks and b/ we are very rich.  Clicking on team I am counting no fewer than 35 “senior investment professionals”.  The third leg of the differentiation pitch is on that famously elusive concept of “value-add” which lists “providing strategy counsel, recruiting additional managers, raising equity etc”.   I bet every VC would write the same list.  For my money the exercise is an own goal, or it may just highlight the difficulty in defining a messaging and positioning that works both at the early stages and in buyouts.

 

I also got slightly puzzled by General Catalyst’s new effort.  Their refreshed website is pretty cool and very, very rich in content but one of those “could have been great but tries a little too hard”.  Besides the little Sequoia induced smile of  the tagline (“Entrepreneurs Investing in Entrepreneurs”) the navigation is where this one struggles.  I am a sucker for good old analog interfaces that change when I decide they do and have big fat buttons.  This one is full of movement with swishing lists and a confusing moving wall of pictures on a home page that mixes two fixed widths sections.  Urgh.  The team page can be filtered by company or by entrepreneur, which I bet is never used except by visitors like me who are compelled to understand why the many is used as a filter for the few. 

 

The new Atlas site

We (shoutout to Dustin) got going with a 99Designs competition to get mockups of the layout done and then turned to the excellent Fresh Tilled Soil here in Boston to get the ergonomics and the code just right.  I am a big fan of the architecture of John Pawson and Peter Zummthor and we were trying to get an incredibly streamlined website that would still make you feel at home and make us feel approachable.  We like the Founder Collective or Google Ventures designs too which provided some inspiration.  As an organization that’s gone through its share of changes, recently regrouped in Cambridge in our spanking new offices, the website is meant to be the visible piece of the evolution at Atlas.  We’ll be adding some content, such as a few success stories (we’re struggling with how to fit the whole history of Atlas in there without hurting functionality and usability), but not much. 

But, wait a second, there’s zero attempt at being social, engaging, connected, you say ?  True !  And on purpose, too.  Between blogs, twitter, plancast and facebook, there’s really no need to duplicate and we decided not to bring all that back to the site, to keep it completely clutter free. 

It’s designed for you to get to the people you want to get to, fast.  We have a simple FAQ on the site, but we’ll be using Quora or our blogs for more detailed policy questions (such as my view on high velocity seed investing).  Another important consideration: we can maintain it easily through the Wordpress CMS, and it’s content light.

And now walk the walk…

The death of traditional copy (“disruptive”!), the influence of app-style design and the consumerization of everything, the famous Sequoia search box and other factors have all led to VC’s sprucing up their online image to align with the times.  Now let’s see us how many of us have also changed our ways meaningfully, and overcome the arrogance that has come to define our group in the mind of entrepreneurs.  Let’s see who really walks the walk and matches behavior to their newfound online coolness.

What your investor does with reserves when you underperform

Let's look at how investors manage a portfolio of startup investments and what that means for you as an entrepreneur.  You may not like it.

When investors commit to your company, they will invest some money upfront (say $2M) and allocate reserves for future funding (say $6M).  Why ?  Well, we know from experience that successful businesses take real capital to get to the finish line.  Yes, even in the age of Ultra Light Startups (groupon, facebook, foursquare, you name it). 

The question that matters to you is: what happens to these reserves over time ?

I was prompted to write this post by a great contribution from Lisa Edgar (Paul Capital) on PE Hub entitled "are we going to make money on this fund ?".  A good read if you don't know how funds operate, in particular:

I would suggest that picking the winners from the losers—and more importantly, effectively managing the fund’s capital—is specifically the role of the GP (and for which the limited partners pay a management fee).

What I’m looking for is the fund manager’s view of which companies look like winners and which companies aren’t quite cutting it, so that they can manage the portfolio to support only those that deserve additional capital. I understand this is an extremely difficult exercise—especially for very early-stage companies or when the outcome is truly binary, like with many health care investments.

In practice, this means that as the portfolio of investments matures, the people investing the money will start to make decisions about where they want to drive the reserves in order to maximise the outcome, both positive ones ("I want to find a way to invest more money in company X") and negative ones ("company Y looks impaired and I will strip it of its reserves).  Because driving reserves to winners is absolutely core to fund performance.  Money invested in the past is a sunk cost; what matters is really the marginal return on the money invested.

Few firms do this well.  The major difficulty is human nature.  Being selecting about reserves means letting investments you believe in (typically) become disadvantaged, or it may mean driving dollars to another investor in your group who may get all the glory whilst you'll never know what would have happened if you had more dollars to feed your own baby.  You need intellectually honest, courageous and aligned partners to do this well.

You'll notice I use investors generically here, not "horrible venture capitalists" or "stuffy fund managers".  I think the same principles apply to "exgtremely friendly superangels" who manage larger funds and decide where to put their follow-on money.  It also applies to those building options portfolios (lots of small investments) and who invest in emerging winners only.  One of the benefits of option portfolios is that you can be extremely evidence-based in determining success and deploy very limited capital to test theses.  Fail fast / fail early.  The theory, at least, is compelling, although surely accurate selection in large option portfolios is hard too.

Before you say "here comes another non-risk taking VC", remember that some of the best returns come from supporting some companies through times of hardship, complete restarts and pivots and other contrarian investments (as usual, read the other Freddy).  You need to be contrarian, but right :-)   That's why deal picking is hard.  But the reality is also that companies that under-perform early (poor execution, damaged thesis) tend to continue to do so.  In any event, choices on where to allocate resources will and do happen.  That's the game.

So if you are an entrepreneur in a maturing company, you would be well advised to know where you stand and how your investor is thinking about the use of his or her's (naturally scarce) reserves.  Anticipating these issues gives you the time and capability to react.

Super Angels, Lean VCs, Proto-Incubators, whatever. Focus on social contract.

I swore to myself I was going to stay out of this super angel versus VC debate but I find I have this compelling urge that I need to satisfy.

First of all, let's move away from Roe vs. Wade style debating.  There is no super Angel class that somehow redefines what venture is about, and venture is not a species threatened by sudden shifts in temperature.  These incredibly convenient simplifications may help the debaters explain why their camp mates best, but they remain confusing and are not useful to those outside the industry.

Let's quickly rehash:

Capital efficiency has come of age.  The new orthodoxy rightly states that some businesses can build, launch, iterate on limited cash.  Those that have product greatness and are heavily networked into the right groups can achieve velocity faster than others.  The best bard if SG Blank and his awesome "4 Steps to the Epiphany". 

Networks thrive on networks: the notion that somehow the dominance of facebook, google et al means that the market has matured is misguided.  We live in the age of markets and platforms feed off platforms.  Zynga is the posterchild and a new eldorado for those seeking to derive economic rent from facebook.

Many VC's are lazy and hooked on fees. OK so whilst it's the laziest generalisation of all, it's true that many firms are run by fundraisers and not by outbound folks who actually care about entrepreneurs, and they get paid too much regardless of returns and hence have a self-destructive bias towards larger funds regardless of their own stage preference (read: early versus late).  I took the trouble of getting feedback from a ton of entrepreneurs on this, read the "Arrogant VC".  This create a great opportunity for newcomers.

You can see market evolution, and the market has responded in kind with the creation of new financing options for entrepreneurs.

Here is a taxonomy of what we see:

1. The Super Angel (Jeff Clavier) does his own deals, the ultimate lean angel, talks little about them, gets them sold, has a high batting average, probably shows up at your board.
2. The Accelerator (YCombinator) takes you at birth (as entrepreneur) and accelerates your development, hopefully making you in no time a full citizen of the entrepreneurship word able to deal with the pitfalls of growing a small business
3. The Incubator (Betaworks) leverages these trends through a mixture of internal development and external financing
4. The SuperNetworked Angel (Ron Conway) invests in everything that fits a theme provided there is some kind of "social proof", looks for some massive upside generators, plays the optionality game. 
5. The Small Possee Fund (FounderCollective) gets a group of networked folks together, raises a decent amount of money, does deals selectively, has some full-time partners, makes sure its positioning as first-round-only-we-dont-follow is clean and well understood.
6. The Lean VC who treats every seed like it matters (Mark Suster) does seed because it's what he does, does only a few deals, treat everyone of them like a "real" deal, plays his role as a lead

So McClure says "most VCs are dinosaurs";  I agree, but those that keep getting funded typically aren't. Kedrosky says super angels are probably too abundant and more likely to be short lived; the response from Dixon and Sacca is interesting: no because the good ones invest together and keep pricing in check.  Does that remind you of someone ?

What's my point: this "species" debate is not the right debate.  VC versus not VC, who really cares.   I know for a fact that David Skok at Matrix just spent a ton of his personal time helping an entrepreneur that is not even looking for money getting his go-to-market right, opening doors to analysts and customers.  He might be a VC but as an entrepreneur I would sure want that kind of commitment on my board !

What you do need to care about are is the SOCIAL CONTRACT:

• Do we have DNA match ?  Can I survive an eight hour car drive with this guy or girl ?
• Is this a partnership ? is there mutual respect, alignment, understanding ?  Do we agree on strategy (or how we discover it) ?
• Does this partner really get my market ?  Does he work and play with other people who get it ?
• If it matters to you (I think it always does), does this person deeply understand what we do ?
• Do I want and need a lead ?  Do I want social proof or a guy who is going to sit on my board and actually have some hours in the day to help me out ?
• Is this person accountable ?  Do they care if I go under ?  Who owns my demise ?  Who is willing to support me no matter what ?
• If I need them, are there reserves lined up to support me ?  How much ?  When does this financier want to exit and does this match my own expectation ?

Here are two questions I have not heard decent answers to:

• If you are a VC fund with 5 partners and you invest in 50 seed deals, who cares when one goes bust ?
• If you invest in 200 companies at seed level, what are you really contributing ?  How is that not a passive options portfolio ?

I don't have hard and fast rules, each investor needs to find out what works for him and be open about the social contract he builds with the entrepreneur. If you're an experienced entrepreneur and you want people to let you get on with it and get access to some good network, find investors that match. If you think you might need a ton of guidance, money, support, whatever it mat be, find investors that match.

I think the common trait amongst these various species we described above is low body fat.  Steve contributes a good expression likely to stick and I will leave him with the last word: the Lean VC.  Or did I meant the lean Angel ?  Damn, here we go again ... 

Fund profile: Fidelity Growth Partners (Europe)

Today I am profiling the fund of my friend and co-investor Davor Hebel who is an investor with Fidelity Growth Partners Europe. 

Davor is a super smiley Croatian.  HBS-grad as most of the venture community it seems, but I would not hold that against him as he also holds a real degree from Carnegie-Mellon.   He's been in venture for 5 years now and is "one to watch" in the European venture community in my book.  He and Simon Clark are the "historic" investment team at FGPE and they were recently joined by Chris Barchak (who I always found excellent) from Index Ventures.

The group formerly known as Fidelity Ventures recently split into Volition Capital which is taking off on its own, with the great talents of Larry Cheng, Roger Hurwitz and  Rob Ketterson and co. taking their show on the road.  Navigating this proved to be smooth sailing for the European group who has recently announced its new dedicated £100M European vehicle.

The group always had a strong rep in entreprise software (and clearly gamed thefunded well, what a set of reviews !!) and has branched out into consumer facing opportunities, first with Seatwave and now with Innogames, the first investment out of their new Euro fund.  I thought this would be a good time to catch up with Davor and share their strategy with all ye' entrepreneurs out there.  Here we go for the Belgian-Croatian face off.: 

• Funding: All Fidelity money, same configuration for the India and China funds.
• Sectors: start with software (vertical solutions, SaaS, healthcare IT), add internet (e-commerce, marketplaces), mix with digital entertainment (gaming etc) and season with some cleantech (cautiously, tech-enabled clean such as energy efficiency, smart grid).  No surprises there.
• Geo: "Eurovision countries" including Israel and Eastern Europe.
• Investment strategy: "turn good businesses into great businesses"; as opposed to investing in concepts, they invest in businesses, so need proof of business model, fast growth (30%+) and some revenue traction ($2M+) ... combined with a great level of ambition. By exception may do seed, but 90% of fund will be acceleration.  Like to be last institutional money in ideally.  Even better is to be first and last money in.
• Sweetspot deal: Innogames, a fast growing, double digit millon revenue company with 50M users that never raised outside money and was founded by school dropouts (impressive for Germany).  Will also happpily play with others such as for Newbay, Seatwave, both venture-backed business where FGPE bring the "scaling capital"
• Obvious competitors: Index Growth, Kennet, Accel, Balderton and sometimes Summit Partners, occasionally US players (I assume Insight, Bessemer)
• Value add and creation focuses on 5 things:
• Geo expansion: going global or regional depending on the company.  Sister funds and global network comes to play.  Helped AssetControl win first deal in China.
• Business development help.  Helped Neverfail get an OEM relationship with VMWare.
• Recruitment.  Help craft organisation and hire full N-1 managers
• Strategy: worked with AssetControl ahead of investment to define long-term growth plan with incoming CEO
• Exits: proactive engagement with the buyers to help determine the optimal exit path and timing

Ultimately its "all about backing entrepreneurs with aspirations for greatness".  Davor himself "gets a kick out of [his startups] beating the big guys and making money along the way".  So No talk of doom and gloom but real fighting talk from Mr Hebel who is very bullish on the future of European entrepreneurship and the ability to build $1bn+ companies "and why not $10bn".

I always liked underdog mentality.   You can reach davor at fidelitygrowthpartners com.

My latest investment: InspirationalStores lands €10M for high-end e-commerce

I am delighted to announce the closing of my latest investment, in the form of a €10M round of funding (along with existing investor OTC Asset Management) into an exciting e-commerce business by the name of InspirationalStores.  I am very bullish about this new addition to my online portfolio (which today includes DailyMotion, PriceMinister, Seatwave, Sporever or Zoopla).

For clients such as Laduree, Delvaux or Caviar Kaspia, Inspirational Stores offers a complete turnkey offering covering every aspect of e-commerce, together with a consumer experience that completely reflects and respects the brand ethos and universe. To date the company has announced no less than 12 customers and established itself as leader in this next wave of luxury and niche e-commerce. It is about to launch its UK operation to accompany the local development of Laduree, which has recently opened a spectacular new Tea Room at Harrods designed by Roxane Rodriguez, as an homage to the French “Art de vivre”  (yes, I am borrowing from the press release but, hey, I wrote it :-)).

Why do I find this attractive:

• IS really designed itself from the outset as the long-term strategic partner to its brand partners.  The partners can focus on what they are the best at (great products, great brands) whilst IS can focus on optimised online marketing, CRM, operations, logisitics etc.  Online complexity is increasing, particularly on the marketing side; it take specific expertise and talent which is getting harder to find in the market. 
• This is a good example of touchless e-commerce.  Hence the operating leverage remains attractive.  Low cost of customer acquisition (partly because the brands are known), low returns (because the consumers know the products they are buying already), but high average baskets and reasonable margins all make for a sound business model.
• The team are veterans / pioneers in their field.  Michel de Guilhermier and Martin Genot were the founders of Photoways, the leader in online photo finishing (led today by the reportedly brilliant Stan Laurent.  Martin and Michel are true entrepreneurs who can knock down doors like no-one else and are masters of their trade (business and commercial development, back-end and logistics).  But these guys also knew their shortcomings and how to build a better team, so they brought on Erik-Marie Bion (one of the best known online marketers in France and a great people manager, as in his last role as MD at HiMedia) and Bruno Emsellem (CTO of GridXpert, IndustrySuppliers etc) to put together a kickass team with a very broad talent set.
• We just, you know, got along.  It's all about the social contract !

 

<--- Erik-Marie Bion with the "I got Flair" French look on him

Anyone who knows e-commerce will tell you it's all about execution, execution and execution.  With this team behind the wheel I am very confident that we have the right kind of obsessive, ambitious, high-impact people to build a really exciting property.  I don't like my entrepreneurs to be wilting lilies and these guys certainly qualify as true proponents of the unique "suspension of disbelief" required to make these project fly.

As a quick aside I am also glad to be finally doing a deal with my friend Greg Revenu at Bryan Garnier.  An added bonus.

Real all about it too on Michel de Guilhermier's Blog who added some nice quotes from some of the company's CEOs (and could not help post before TC got their hands on the story :-)).

<--- A high end umbrella from Alexandra Sojfer epitomises the kind of brands Inspirational Stores want to work with: great, best of breed niche products

Now on Techcrunch too courtesy of Ouriel (about 10 minutes from communication to post -- wow !!) here

When venture goes wrong according to LaTribune

An interesting diatribe has just come out in La Tribune and instantly grabbed the French VC market's attention.  The aim is to expose a perceived "dirty" practice of the venture community know as "le coup d'accordeon" or the "accordion squeeze". 

[Article Reproduced here - Olivier Pinaud: "Ces entrepreneurs pieges par les fonds de capital risque" - 10 April 2008].

The "accordion squeeze" is basically an Escargot-style extreme cramdown (where losses are used to reduce the value of capital) followed immediately by a capital increase and washed down with a cheap Cahors.  In and out, leaving the investors in control of the company, wearing the beret.

<--- Et hop

 

0.01% is good enough for you !

The article plays on the "dark side" of venture aspects and presents this as a usual trick in the book of the VC trade.  I find it interesting because it breaks the silence about what can happen when a venture goes wrong.  As we are heading into what may be a lasting downturn, "accordion squeezes" may well make the headlines again.  But let's dig a bit deeper here.

A look at 3 possible scenarios:

• The Supportive restart: company A raises $40M for its telecoms equipment play but gets hit by 2002 downturn.  Management has merit and talent but capital structure is screwed.  Hence, cramdown and immediate refinancing allow (a) the removal of liquidation preferences inherited from the past and (b) a clean incentive structure for management with a new option plan or shares.
• The Punitive wipeout: management underperforms badly, squanders investor money at the speed of light or engages in fraudulent behaviour.  Investors are understandably pissed and throw the book at management.
• The Dark Side of VC: investor has decided he does not like management anymore but sees value in the business, uses his superior behaviour of the law and board processes to screw management and throw them out.  Management has under-performed but probably not so badly that they deserve to be thrown out on the pavement.  From harsh to ugly, depending on your point of view.

Focus on the entrepreneur

If you are a VC worth your weight in salt, you will understand that entrepreneurs are the lifeblood of your own business, and your "clients".  Sure you will drive management hard and not shy away from difficult decisions, but you will do so in a way that is respectful, never forgetting that without them, there would not be a business to fund in the first place.  This is why some VC's will always the extra mile to help an under-performing founder find a place or achieve a graceful transition.  Take the 30-year view, and never screw an entrepreneur.

If you are a VC active in France, you will be tempted to act sometimes in a slightly doubtful manner by a law that protects investor representatives and board members way more than US or UK law, making "corporate governance" a bit of a joke and leading to some downright questionable behaviour.  Lack of consequences has an impact on behaviour, particularly when your partnership is breathing down your neck and pushing you to recover money.

Focus on your legals

If you are an entrepreneur, you will be well advised to negotiate hard on board consent and investor consent matters and make sure that you are not at the mercy of financially minded investors.  Don't ever think that legal matters can be left to your lawyers.  More importantly you will do your best to ensure that you have investors who understand your sector, have deep expertise in your business line and respect you.

When in France ...

As for the article, I would describe it as a hodgepodge because of the case studies it mixes.  One is B-Process, where I understand that the founders have been accused of defrauding the company, one is Sarenza where the company reportedly burnt through its financing with a vengeance (€5M in 12 months), and one is Glowria, which seems like it may well be a questionable "accordion squeeze".  Here is a company that had its fundraising mysteriously pulled from the market  and a decent sale only a few months after the wipe-out.  The guys pursuing the case, Crasneanu and Bachet, always struck me as honest fellows who would not do this without serious cause.  I understand that together the founder and former MD owned a mere 0.02% of the business at exit.  Surely that can't be right.  I am not sure about the company they are keeping in this Tribune article though :-)

Finally it's probably worth mentioning the obvious: if you are playing for upside, a cramdown is clearly not what you are shooting for !  The best way for entrepreneurs to protect themselves, regardless of the ethics of their investors, is to manage their cash carefully and generate measurable value-creating steps between financing rounds.

Atlantic Bridge: it does not take gazillions to be a player

ABVen a.k.a. Atlantic Bridge Ventures is a medium sized first time fund that had a hell of a time fundraising.  The fact that they succeeded at all in closing a first time fund is a testament to their quality and determination in a tough market.

Now they have come out with a headline grabbing deal with the £265M lead role on the acquisition of LogicaCMG's Telecoms Product business, leading a syndicate that includs Dermott Desmond.  Larry Quinn, former CEO of Logica Mobile, is The Player who made this happen.  Story courtesy of PEHub.

I really rate Kevin Dillon who led the interesting investment in Nero and I am not surprised to see them come out with these types of operations.  I hope it goes well on their way to Fund II.

technorati tags:abven, atlanticbridge, larryquinn, kevindillon, logicacmg

Red Herring Submission Deadline Jan 29

Hello Entrepreneurs !! If you're good, you want to be at the Red Herring Venture Market, where we will be shopping for YOU.  The official blurb follows, make sure to register by Janb 29.

The Red Herring 100 Venture Market Europe Conference identifies the 100 most promising early-stage companies in the EMEA region in the communications, computing, software, internet/services, entertainment/media, security/defense, biosciences and energy sectors.  Past winners have included companies such as Skype and Netvibes.  
 
This year’s event will be held in Cannes, France from March 25-27.  Themed “The Pursuit of Disruption,” Red Herring will feature the 100 award winning companies and investigate how to best capitalize on innovation as an entrepreneur, investor, or corporate strategist around discussion topics such as “Web 2.0:  How Passé!,” “Mobile:  Searching for the Killer App,” and “Gaming Goes Virtual.”  Winners are formally presented at the Conference, where not only do they enjoy the recognition of having been chosen by Red Herring’s editors as part of a select group of outstanding companies to watch -- the conference itself is an excellent opportunity in terms of networking and increasing visibility and credibility amongst investors, entrepreneurs, and the corporate community as a whole.

Applications for the award are submitted on-line via the following link:
http://aquarium.redherring.com/RH100/europe_accessreq.nsf/AccessRequest?OpenForm <http://aquarium.redherring.com/RH100/europe_accessreq.nsf/AccessRequest?OpenForm> . Note that the deadline is January 29th, and that winners will be contacted in February, following the close of the submission process.  

You can also visit the link of the conference:  http://herringevents.com/vme07/index.html <http://herringevents.com/vme07/index.html>

technorati tags:redherring, conference

Welcome Paul Jozejak

Old news are still news: if you haven't yet, add Paul Jozefak to your feed. Nice title: Babbling VC :-)  Aren't we all...

I wrote about Paul's move from SAP to Neuhaus Partners previously.

He kindly wrote a nice little write-up on our latest networking event called "Great Event Fred!" which shows a knack for great titles.  Nice plug.

[PS: Paul I wrote this before you commented, I promise]

technorati tags:pauljozefak

VC bloggers meetup

Well, we did not have to rent a big room for this one !! All of us London-based VC bloggers met at the Nobu Bar on Berkeley Street to sample a few drinks and soak up the atmosphere.

We missed Max Beyleben who is having a kid (fingers crossed) but had Shantanu, Jason, Paul and Nic.

Paul "the Guvnor" said he had no time to blog because there were too many deals going on and of course we all laughed at him...  What, not blogging between 12 and 1 every night ? We all bowed to Jason who has been blogging in some form or other for 8 years.  Respect!  Shantanu had to run off early because Anne Glover was made CBE (that's a Commander of the British Empire to you and me ...).  I understand that's not a reflection of her management style :-)

Good discussion around market evolution, whether IPTV is completely overhyped, to what extent raising big funds links to strategy creep, how much Benchmark is managing these days, what Accel plans to do about it, succession issues at a bunch of the funds, and so on. Oh yes, we did compare our devices for about 45 minutes.  Oh yes, and Esprit got beaten to the post by Brad Feld in annoucing WAYN.

Some blogger takeaways were:

• Blogging is still a pain because the tools are not robust.  Can't be that hard, when is someone going to put out a really user friendly app ?  I have been through BlogJet, Performancing, online, Qumana ... and now just use the Flock editor with the FlickrAPI.
• We are all so lonely out there.  There are not enough entrepreneurs and VC's participating in this to create really sustained conversations.  So we all pledged to comment on each other more and to convert 75 of our closest friends into bloggers for next year.  I have my eye on Frederic Court.  He told me he would start with a family VOx blog.  So work in progress !
  

technorati tags:maxbeyleben, jasonball, shantanubagwat, nicbrisbourne, paulfisher

PE Hub evolution: Primack goes Primalik

VentureBeat announced over the weekend that Dan Primack was launching a blog, PEHub, finally !  One to add to your RSS reader.  Dan as most of you know is the best place for breaking news in the private equity world.  I was waiting for the site to go live to point you to it.  Very Om Malik inspired, plus the subscription fee.

<--- Dan

I found it amusing that in the podcast he mentioned that "some folks started with a blog and ended up publishing a newsletter.  We did the opposite".  I had not thought of the newsletter as the disruptive end of reader interaction :-)

<--- Om

Regardless, this is great.  Whilst it is clearly not appropriate to start disclosing returns, getting better transparency into the venture capital industry can only be a good thing.

Dan sent an intro email to PEHub in which he cited Jeff Clavier who posted an open letter on his blog.  Here is an abstract:

Open Letter to Dan Primack: blog already

Dear Dan,

Like tens of thousands of your readers (my guess), I enjoy your daily column - both as a source of scoops and analysis regarding the venture capital industry. Over the past year, we have seen you link to a number of bloggers - and God knows you send us a ton of traffic when you do - and we heard you through a podcast interview on PodTech.net's John Furrier. Great? Only sort of - because we want more: a blog - a real one, with comments, trackbacks, permalinks for news, analysis, or snippets of information, an RSS feed, etc. Nothing less.

I like irony:  I have to note that Jeff Clavier leaves the scene as Dan enters it.  Or me.  Not.  He still is.

technorati tags:danprimack, venturebeat, ommalik, jeffclavier

Perfect hindsight on VC gloom is no predictor of future performance

The announcement by Sevin Rosen that they would be releasing their LP commitments was the timely reality check needed to buttress a number of comments announcing a deep crisis in the venture market.  The bellweather said it best.  Sevin Rosen is old news already, but I was prompted to post on this by the newly released NVCA data, courtesy of Primack again, who points to likely wrong conclusions based on lagging indicators:

So “stick with us,” the VCs tell their LPs, because "we’ll make you money in the end."  The “blind” part is that such statements do not seem to acknowledge that the 10-year VC performance figures are around one year away from a harrowing fall.

We must distinguish between VC seeming unattractive because of the difficulty in raising funds (arguably the result of wrong asset allocation decisions driven by past returns and not future market opportunity) and a structural change in the underlying market that would make VC unattractive in the long run.  Most of my simplistic thoughts on this topic had so far been focused around two central themes:

• Mature market: Has the industry matured and is it time to do brand extension (into, say, cleantech)?; the analogy being that with less cutting edge innovation, R&D really means process innovation rather than product innovation, which in turn favours the players with scale in R&D.  It happened to automotive in the 20's, it is now happening to enterprise software.
• Spoiled returns: Is there too much money chasing too many deals and are returns on average being depressed for everyone ?  In other words, every pension manager on the planet now wants c. 6% of assets in venture capital and that flow is essentially driving returns down for the industry on average.

I am with those who say that the death of innovation has been vastly exaggerated.  But you do need to rethink competitive dynamics in light of fast market evolution, and what LP's do need is a way of identifying managers that goes beyond looking at past returns, and in particular focus on ways of identifying promising managers.

There are in my mind two key factors that will help pull us out of the hole:

1. Key LP's will simply refuse, collectively, to overfund the market and will help in driving further industry rationalisation.  In Europe there has been a deep wave of portfolio secondaries which has benefited the likes of Tempo or Cipio.  More funds are likely to run out of dry powder in the years to come.  A number of my peers now think we are below critical mass, but apart from Germany  and Holland I disagree.
   
2. The best dealflow will continue its migration to the best funds, those with the best brand and most marketable partners, and best track record.  That will make it very hard for anyone but the top tier of funds to generate sustained venture returns.
   

Some bloggers have been thinking constructively about these issues, in particular about predictors of performance.  I like the VC 2.0 series written by Peter Rip, of which an abstract follows:

The net result is that the prevailing model for venture investments appears to be driven by two selection criteria: 

1. Longevity as proxy for performance and
2. Current top-quartile performance as a predictor of next fund top quartile performance.

Last year Alignment Capital published a really interesting analysis of fund managers that speaks to these two criteria.  After analyzing 645 separate venture funds, they found:

1. Longevity weakly correlates with IRR, showing continuous improvement between funds I and III, leveling off thereafter.
2. Second quartile funds were nearly as likely to have a top-quartile follow-on fund as the current top-quartile funds.

What Peter is highlighting is what we instinctively know to be true, i.e. that (a) great funds have trouble reinventing themselves and (b) looking at past returns is a poor predictor of future performance.  His final post in the series identifies boutique branded approach and crossover funds as the two valid alternative models to invest in early-stage tech.  Max, does that make you a crossover fund ;-) ??   What he describes as crossover funds are essentially like public/private hedge funds.

I am firmly of the view that, whilst hedge funds will come and steal a few investments, they won't be able to manage at our scale, and that ultimately "boutique", highly branded capital run by dedicated and highly focused individuals will continue to be the right way to fund innovation.   In fact, with venture becoming professionalised, I am reminded of investment banking.  Who will be the GS, MS, LB of venture ?  And why did they eat the European banks' lunch even though these Euro houses were so firmly entrenched in their home markets ?

I am also convinced that there will continue to be a way for new players to get into the market.  The most promising example of an emerging brand in Europe is Mangrove Capital Partners.  A number of people say they just got lucky on Skype, but I think such complacent attitude simply betrays a misunderstanding of what this team is really trying to do.  Being solely focused on ecommerce / digital media, it is perfectly possible that they will fail.  But the way in which they go about building their brand and business is what boutique venture capital is all about.

I bet you that in ten years time, you will read this guy and think "famous last words".  I will be there for the champagne opening.  If not I guess he will be the one buying the drinks...

[UPDATE: Came across some valid food for thought which I am stealing off A VC here in the comments: "I think you are ignoring some fundamental shifts. Everybody seems to ignore the fact that back in the 'golden age' the real secret to VC's success was that there was effectively only three centers of IT advanced technology excellence - Silicon Valley, Dallas/Austin, and the Boston Rt 128 corridor. The VC's in those locations basically charged monopolistic rents at exit for a scare resource which they had propriety access to - IT innovation. Today IT and tech innovation is broadly distributed on a global basis, as are the capital relationships and information flow. This serves to drive down pricing - and exit valuation. Things have changed fundamentally!"]

technorati tags:danielprimack, returns, peterrip, mangrove

ETRE afterthoughts

Back from ETRE where I had no time to blog.  A good 40 meetings later, I am exhausted but have the impression not to have spent my 3.5K in vain.

What's great about ETRE

ETRE is a community.  It's been going since 1990, and whilst it does not feature "Bill and Larry" anymore it remains a unique event because of its general tone and sense of togetherness.  Anand of ContextWeb summarised perfectly: "no one here has asked me for my elevator pitch. We just have conversations".

How to get the most out of ETRE

ETRE is not about the conference floor.  It happens mostly at the first floor lounge (or for really really hot companies, in your hotel room or the 33d floor) where meeting after meeting brings together business partners, investors and startups.  My good friend Francois Mazoudier, CEO of speakanet, had an incredibly succesful three days as he was able to meet with a number of senior wireless industry execs and pitch his story to them.  He probably saved 3 months of bus dev.  Brett Putter of Forsyth Group was even more direct: "I will consider it a very unsuccesful conference if I don't see a 15X direct return on my investment."

What ETRE should watch out for

As with all things there are areas of improvement.  Of particular note was the fairly low quality of the conference content (im my mind) with the same old stories from the same crowd.  It was striking to what extent some of the established networking and telco players still have no real strategy and are struggling to adapt to the new order.  I guess that's information too, but I believe Alex should start grooming some fresh talent to help him keep his network current and cutting edge.

Nuggets

VOIP is dead

Desde Barcelona, El Fon Liberator Avanza

I think Sony's next CEO will be Japanese

SAAS is not a market, it's just a delivery model -- get over it!

Best headline

Nokia has brush with toothbrush business

To ETRE - or not to ETRE

Yes, it's that time of year when the annual ETRE Extravaganza brings us all together, this time  to Barcelona, paying multiple thousand Euro's to the one conference you can't afford to miss.  Alex Vieux: one conference organiser to rule them all !

I look forward to some of types of nuggets I have come to expect of the conference:

• So much namedropping that no one can open the conference doors any more
  
• Alex generally getting away with it (and he calls these public pummellings "fireside chats"!)
  
• Tim Draper telling some Finnish or Icelandic entrepreneur to "get with the programme, son, this is show business !"  or alternatively"you don't sound like a $1bn opportunity to me, why are you hogging our stage, son" or some such.
  
• Someone with enough money to be taken seriously reminding Tim, in a timely manner, that his dad did Skype, really.
  

I  hope we avoid a 4-1 VC to Entrepreneur ratio that seems to have taken hold of late.

Anyway, it should be fun.  Starting with a late arrival and drinks courtesy of Rosemary Forsyth.

See you there !

technorati tags:ETRE, alexvieux

Oversyndicated, overprotected and underperforming

I had written a post previously about the sometimes excessive fascination for West Coast style VC but it of course it made me realise that I should really be talking about how to get more of a West Coast spirit in the way we do deals in Europe. 

I was fortunate in my early VC career to work alongside people like John Shoch at Alloy Venture (pictured) or Stephan Dolezalek at VantagePoint.  Whilst John is less known than say fellow Kasenna board member Steve Krausz (a Midas List regular),  the reason I mention him and Stephan is that these guys were both deal fiends who would not abandon that win-win California attitude.  In other words, they would write extremely tight term-sheets that provided all the protection an investor could want and thoughtful ways to align interests, whilst at the same time providing a stucture where management and the board felt empowered to run their business.

In Europe by contrast, and in particular in the French market, I have noticed certain behaviour patterns that can be associated with a lack of risk appetite, a single-minded focus on downside control and a tendency to be extremely paternalistic with management.  Needless to say I cannot recall one of these companies ever making it big ...

Some of the "Sins of the Seriously Risk-Averse" include:

• Low ownership, oversyndicated deals with too many investors on the board.  I hear you saying that is a self-serving comment coming from a relatively large fund; but I would wholeheartedly disagree.  Ownership matters, so if you are a small fund do fewer careful deals that you can significantly impact.  Local market leaders, as measured by number of deals, often belong to incoming syndicates of 4 to 6 investors.  As all of us in venture know, consensus among a broad group of investors is a surefire way to kill off any originality or boldness of vision, so you end up with middle of the road companies with a structural incapacity to reinvent themselves.
• Excessive vetos and in particular board and investor vetos.   This is when investors protect themselves against just about any eventuality by forcing through a nice long list of investor / board vetos, whose result usually is that the board / management cannot take any decision without formal consultation.  I have seen a n investor veto on spend in excess of €50,000 in one deal... Sure, any areas of conflict should be covered by investor vetos (since as a board member your fiduciary duty is to the company), but you have got to let management run the company !
• Ludicrously detailed reps and warranties.  No, dear investor, that €5,000 limit on compliance with labour laws will not fundamentally change your risk profile...
  

I would go as far as saying that some venture players seem to see their USP in their ability to generate and then manage extreme documentation complexity.  In my experience this desire to create paperwork worthy of Indian public servants is a way to exert power by using jargon and technicity, usuallt because said player has little to add on the business side.

If you don't think this is hurting our competitive position in the industry, see what Rodrigo, who is sowewhere between a VC and an operator himself, had to say on the topic:

Other European funds need to start thinking globally when they invest; I’ve met a *lot* of European VCs in the past year for vpod.tv. And I can see the difference between a globally minded player, and a local player. Between a risk-prone co-entrepreneur (I like that way of describing your investor), and a fund manager employee… And that’s not even touching upon some ethical concerns I’ve heard / seen on the market.

Sadly it is only one more reason why the US has been kicking our butts for such a long time ...

Benelux Tech Tour

Great picture from the Benelux Tech Tour just out.  A great event as ever.

technorati tags:techtour, benelux

Uncapped participating preferred prevalent on the West Coast

Participating preferred are very often a sore topic of discussion with entrepreneurs who point out some perceived "immoral" characteristic as they provide the venture capitalist with a "double dip" i.e. two bytes at the cherry.  Many Euro entrepreneurs will argue that "in the Valley (a.k.a the Bay Area), you just don't see that kind of stuff".  Recent data from Fenwick and West suggest that may be wrong. 

A.  Quick layman's primer on participating prefs

For those not familiar with the concept, participating preferred are such that upon an exit event, the exit proceeds will first go to the venture capitalist, and once the VC has received its money back, than to all shareholders ratably... including the VC.  Hence the double dip monicker.

Personally, I like to negotiate my term-sheets based on logical rationale rather than brute economic force, since "one has less trouble accepting what one can understand".  Many entrepreneurs have seized upon this over the years in attempts to negotiate away the double dip.  I usually defend this rather simply on the basis that (a) I am trying to move their "wealth" point (the equity value number at which there is a serious cash out event for the entrepreneurs) further out to make sure they create enough value for the investors before exiting and (b) I am simply improving my return profile, since they do not want to agree to my ownership target :-).

A common compromise is to agree a cap on the double dip.  For example, the double dip would apply up to a 4X return threshold for the VC, followed by a straight line amortisation between the 4x and 5x return points to bring the founders back to pro-rata.  That way VCs protect the return in mid-range scenarios but the entrepreneurs don't feel screwed on the upside.  This is a factor of complexity as few people really grasp the calculations and you end up having to produce exhibits to show what the proceeds are at which price level.  All the while you could have been closing a new investment !!  and My personal view is that less is more when it comes to legal complexity.

After writing this I will also point you to the man for a more detailed discussion.

B.  Is Valley grass really greener ?

The Bay Area has always captured our imagination as the best place to start a new company, and rightly so.  But fascination with the region's ecosystem should not go too far.  Yes, driving down 280 is a unique experience, but local VCs drive a hard bargain too, as evidenced below.

Fenwick and West are a great legal outfit on the West Coast (I can recommend Bill Schreiber who did a superb job as counsel of Inxight Software) and publish an extremely useful "Trends of Venture Financings" in the SF Bay Area" which you should all subscribe to.  Jeff Clavier does a good overview as usual if you want the headlines.

I wanted to zero-in on the following stats:

• 71% of financings provided for participation in Liquidation
• Of those, 64% were not capped

In other words, 71% of deals involve a participation and 45% of all deals are uncapped participating.  What I am missing of course is the all-important definition of Liquidation, which tends to be company specific and can be key (clue: when is a sale not a liquidation ?).  However I think the numbers are fairly eloquent and should help all of us to take a more holistic view of what "market terms" really are when it comes to participating preferred.

Simon Cook's vision for Esprit Capital Partners

Simon is something of an old-hand in venture, certainly by European standards.  From 3i through Elderstreet to becoming "Chief Esprit", Simon has followed an interesting path, from being involved in CSR at 3i Cambridge in the early days to a nice 2004 $225M exit with Caz's KVS.  And no, he never played cricket for Kent.  Here's what our conversation delivered:

<-- That's Simon

Simon sees European venture entering a "perfect storm" and believes it will be a "hugely exciting asset class over the next 10 years".  I hope he is right, because I certainly haven't felt like showering myself with champagne in the last 5.  The perfect storm results from a combination of

   
• lessons learnt, both by VC's and entrepreneurs, leading to market maturity
   
• the Silicon Valley model having been firmly exported to Europe (meaning companies built to be global from day 1)
   
• mild competition levels compared with other venture markets (I think this latter point is true but only if you belong to the tier I)

Esprit seeks to emulate successful models (Simon kindly cites Atlas, Benchmark, "older" Silicon Valley firms as inspiration) focused on building real businesses, one at a time. "We got a bunch of people who have been slogging away at VC for over 10 years, some for 20" [...] "and we are putting it all together in a team that understands what it takes to build companies and value over 5 to 7 years.  It was great to see the buy-in from the ex 3i guys that we have on board today" [like Paul Murray or Stuart Chapman].  "We see ourselves as part of a tier I group of funds who really understand the business".

Esprit follows a model that is tried and tested (and that we at Atlas fully subscribe to):

   
• around $40-50m per partner,
   
• cross-stage
   
• hands-on
   
• with no more than 5 "active" boards per partner
   
• with a 5-7 year exit horizon

"We want to hold on for a long as possible when we create value.  CSR made 6-7X pre-IPO, another 5-6X post.  you need these 30X returns to really shine".  Hail hail !

Nice multiples, but Simon does not believe in (too much) hype: "we can be discrete like some of the old Valley money and make great returns fund after fund without necessarily being in the limelight, whilst leveraging the heritage of years of investment experience."

We also talked culture and team. The structure is flat, with all members of the team as partners and an open culture reflected in an open plan office.  "We all talk and share ideas.  The common expertise is around building growth companies".  Esprit has an interesting team today with the combination of the early-stage techheads at Prelude and the more generalist profiles of Cazenove.  Yet Simon is clear that, unlike other funds, they are not specializing around sectors more than necessary.  And clearly when you look at the board seats you do get quite a spread of companies (Tom is involved with Lovefilm and Newnham, Catrina with Neteconomy and Powerlase).  Instead they like to work on investment themes, such as

   
• "Location aware apps and  tech": CPS (core tech), M-Spatial (location aware search), RoadAngel (in car navigation) fall in this group
   
• "Expanding the internet": Empower (IP / mobile messaging) and Xanadu (M2M communications) are examples
   
• "Go faster internet": Zeus (traffic efficiency), Polatis (next-gen switch), PacketExchange (IP transit and peering)

Really nice to see a credible team of people that has taken its independence, managed the transition to a younger team of partners well and joined forces with a respected early-stage investor.  As the European market continues to mature, it will become harder for funds that are not specialized or have the reach of the likes of Esprit (and Atlas ;-)) to compete for top deals.

... AND NOW for something completely different; The Quiz.  First person to comment on this blog with an answer to the following question wins a Road Angel courtesy of Simon (you will have to debate which model with him).  The question is  where does the name "Esprit" come from ?  Clues: (a) one of the great British technological advances of the 1970's and (b) spy.  Easy !

Tags: simoncook, espritcapitalpartners

EuroVCblogs soon to outnumber video sharing sites

Val says two more VCs are blogging.  I guess I should replace my Mandelbrot set picture here on the blog with the nice mugshot of me she tracked down...

technorati tags:alarmclock

Esprit officially launched on the back of Newham investment

It finally hits officialdom (as in VentureWire): the Caz/Prelude merger results in Esprit Capital Partners, to be headed by Simon Cook, to whom I will be talking to tomorrow.

Simon Cook, chief executive of Esprit, said the new fund will manage Cazenove's vintage 2000 Cazenove New Access Europe Fund of GBP234 million ($442 million) and the roughly GBP50 million ($94 million) under capital from the Prelude Trust PLC, giving the new firm a capitalization of about GBP284 million ($536 million).

Great site, I was particularly amused by the background picture on this page.  Nice one Simon ;-)  Amadeus team, when is your site revamp due ?  Esprit also boasts  a fellow VC blogger, MC Nic "The E Kicker".

The site puts forward the following exits:

"We have had great success with KVS (sold to Veritas for $225m), Alphamosaic (sold to Broadcom for $123m), Fillfactory (sold to Cypress Semi for $100m), DRI (sold to Invitrogen for $60m) and Blackspider (sold to Surfcontrol for $40m)."

New deals include Xanadu Wireless B.V and Newnham Technology, which Simon chose to highlight in his VentureWire interview. Martin Gibson led the Series A on Newnham.  Newnham's product is the NIVO (Network In Video Out) which essentially enables a display to become a networked device, much like a printer.  Besides the typically hardcore Cambridge innovation and difficult spelling, the company is interesting for a number of reasons:

• Founders include Quentin Stafford-Fraser of webcam fame (the legendary trojan room coffee pot) and Martin King, the man behind T9 predictive texting.  They know a thing or two about making a technology into a market standard...
• New CEO is Hamid Farzaneh, second in command at Genesis Microchip, which he was instrumental into turning into the dominant display silicon vendor. 
  
• ... and they got a deal with Kensington to make Dell's next gen docking stations a reality (shipping today)
  

UPDATE: I do commentary not breaking news but should have linked to this nice coverage of Newnham and ECP at a:c who were kind enough to help my readership grow.

technorati tags:simoncook, espritcapitalpartners, nicbrisbourne, newnhamresearch, martingibson, hamidfarzaneh

Changes at SAP Ventures as Jozefak joins Dr Neuhaus

Lisa Reeves who heads SAP Ventures came by a few weeka ago to explain SAP Ventures' extended investment focus and introduce new partner Nino Marakovic.

It is now public that Paul Jozefak (who was the Walldorff based partner for SAP Ventures) is joining Neuhaus Partners, the ex Dr. Neuhaus TechnoNord, as Managing Partner.  „SAP Ventures hat sich immer als gewinnorientierter Investor verstanden“ says Paul in trademark Jozefak style.  This is good news for the German VC market.

technorati tags:sapventures, neuhauspartners, pauljozefak

Only 3 women partners in UK Tech VC ?

Valerie says in our world you can't say "cherchez la femme", pointing to only 5% female CEOs in tech.  The same is true of venture capital itself.  In the UK market, as far as I know, there are only three women VC partners now that Diana Noble has left Reed Elsevier Ventures: Anne Glover at Amadeus, Sonali here at Atlas and Laurel Bowden at JVP.  France presents a slightly better picture of diversity, notably at Banexi.  Luckily there is some up and coming talent among which April Henry (pictured) at Index and Amy Jurries at Advent.  [... I'm sure I will get lambasted for forgetting someone, there's really no upside to this blogging thing !]

UPDATE: an Anonymous commenter (guys, do let us know who you are)  tells us that JVP is closing its London office.  Laurel tells me they are just moving offices, so this seems to be a misplaced rumour.

UPDATE #2: Ouch !  I told you I would forget someone.  Luckily I spotted in time that I forgot of course a relative newcomer in Judy Gibbons at Accel who joined them from MSN and is a Venture Partner there. and Clennel Collingwood of TTP also pointed out to me Eileen Tangal at Kennet and Catrina Holme at Esprit.  So we are up to 5 partners so far.  I did not include Vin at Elderstreet (who I really rate highly) because as far as I know she is working on an operational rollup with Michael Jackson, so not actively in the market for new deals.  And I did not cover LS, tech only.

technorati tags:women, anneglover, laurelbowden, sonaliderycker, aprilhenry, amyjurries

3i veteran goes green: from Tech to EnviroTech

Patrick Sheehan is leaving 3i, whose line-up in Europe Tech has been evolving in the past few years under the stewardship of Ian Lobley.

Patrick will be starting a 3-partner inaugural fund called ETF (Environmental Technologies Fund) which he indicates should have a first closing in coming months.  No site yet. I find the name confusing (reminds me of EuroTech Forum, George Coelho's now defunct ETF Group) but it may be a placeholder.  Perhaps he too was in awe of the reality of global warming and decided to do something about it.

The late career move to a new investment territory is interesting.  Patrick has proven his mettle in technology (set up 3i's Silicon Valley ops, some good IPO's attached to his name).  I have obviously no visbility on his returns record but I assume it must be pretty good since he spent 20 years at the firm.  But a natural question comes to mind:  can a VC switch segments ?  Say you have been investing in hardware for 20 years and developed a great network, can you decide to invest in cleantech in a completely new ecosystem ?

The folks over at Union Square wrote some nice posts about their investment strategy recently (which I can relate to since my focus is almost identical) and their "declaration of faith" includes the following on investment focus:

We invest in information technology. We do not invest in energy, biotech, materials science, or nanotechnology. Information technology is the world we know. We believe that when it comes to start up investing, success is dependent on understanding the forces shaping a developing market more than knowing the trade of investing. That conviction keeps us close to the markets we know best.

If you are in a hyper-competitive market where sticking close to the top 5% of dealflow is the only way you will make it, then very long-term focus is how you get there.

But funding innovation is what we do; it is not about this sector or that.  There are highly generic lessons learned from growing companies that can and should be applied across sectors.  One of the great risk a VC faces is to be stuck in the segment that its partners have expertise in, even when that segment has stopped being attractive.

I for one would think that a couple of years of dedicated and full-on network building in a new industry and a great track record as an investor in an adjacent space are good building blocks to leverage oneself into a new and less competitive segment.  I look forward to finding out who the rest of the team is and wish Patrick an oversubscribed fundraising.

technorati tags:3i, sheehan, climatecrisis, environment

Change of name (once only) for this blog

I had to change the name of this blog ... you can never do enough research.  Turns out Jeremy Levine over at Bessemer runs a blog called Nothing Venture Nothing Gained.  I doubt our readership will cross over much, but I switched anyway to simply using my name.

Atlas key player in the UK venture market

Interesting report just out from LibraryHouse, picked up by Valerie at Alarm:Clock euro, including this chart:

Institutional Investors with More Than 20 Deals in the Venture-Backed Portfolio

Shows Atlas as one of the key players in the UK VC market.  Of course volume of deals is not synonymous with quality, but my completely impartial feeling is that our portfolio contains many strong companies (Kalido, Icera, Picochip, ShoZu and many others).

The graph is interesting in that it also indicates "propensity to syndicate".  We like to syndicate and the graph shows our close links to Benchmark, Quester and, increasingly, Accel.

The market is dynamic so to reflect venture activity I would make the following comments:

• The graph misses the merger between Cazenove and Prelude into Esprit
  
• SEP have become quite active locally. 
  
• A number of these funds are not active currently for new investments, including TTP, Elderstreet
• Aberdeen Murray Johnstone and Apax are not in the UK venture market (anymore)
  

technorati tags:UK, AlarmClock, Atlas, Quester, 3i, venture, syndication

Dave Hornik too far from the Valley

David Hornik just posted a short and flawed analysis of Euro VC, reinforcing some age old misconceptions.

I am an avid and respectful reader of a bunch of US VC blogs, top of which Fred Wilson, Jeff C and Dave Hornik.  And I am a two week old blogger with no credentials.  So who am I to comment ?  But I can only assume David was looking to court controversy with this one.  So with the disclaimer out of the way...

I will just focus on two items here:

#1 Sweeping generalisation:

Europe remains more or less devoid of risk capital.

Wow!  Really ?  Currently active, agressive and generally professional funds that spring to mind include Index, Benchmark, Atlas, Accel, Mangrove, Wellington, Northzone, Partech, Sofinnova, Banexi, Innovacom, Ventech, Esprit, Amadeus, 3i, SEP, Advent, Eqvitec and many others to whom I am not paying justice.

Admittedly it is not that easy to find angel funding.  But look at the recent virtuous circles that have developed around people like Loic Le Meur, Martin V "Top Fonero", or Christophe Maire, to name but a few.  And France must be the easiest place to get your first million with all the support programs like ANVAR.

#2: Ill informed comment:

here are law firms that actually like representing startups (Fenwick, Gunderson, Orrick, Perkins, Wilson), banks and venture debt firms that actually like lending to startups (Silicon Valley Bank, WTI, Lighthouse)

In the last few months, Silicon Valley Bank, Lighthouse, Noble, EVP, have all arranged financings for companies in our portfolio ... and believe me most of these have a proper startup credit profile.

As for the lacks of legal advisors, we have a fairly wide choice of experienced VC lawyers who do nothing else, such as JonesDay or Morgan Lewis in Paris, SJ Berwin, Olswang, Bird and Bird, Evershed and a ton of others in the UK.

 

In a way these kinds of posts are good news: we will keep working here and do our job without the intense level of competition and price pressure that exists today in the Valley and around 128.  And we will welcome the new entrants like Highland to help us improve our already well functioning ecosystem ;-)

UPDATE: I got some immediate feedback that many Euro entrepreneurs will probably agree with David :-(   Well, our market only "really" started in 1995 (although funds like Atlas have been around in tech since the 80's) and then got both knees taken out in 2000.  There is so much stuff going on that I feel it is key to fight this negative perception and get on with building some great, world class businesses.

Most European VCs too shy for homeruns

RealDeals this week publishes some interesting data courtesy of TLCom and VentureSource that puts numbers against what we already knew: European VCs don't swing for the fences and hence keep producing exits but of insufficient magnitude.

A total of 43% of all venture-backed exits to achieve more than 5X were based in Europe or Israel.  However, only 27% of companies sold for more than $100m came from these regions.

I would love to know how much the "Israel skew" is as I am sure including Israel is flattering to the results.  The explanation provided by Maurizio Caio is that "all but a handful of firms need to invest more capital and take bigger risks to close the gap with the US".

Whilst the data is too limited to be conclusive, most of us know that to be true.  Success is really not about building the best security company in the Southeast of [England][France][insert region]; you need to believe you can build global winners to ever have a shot.  And unsurprisingly the players that have shaken the market in the last 5 years, Index excepted, tend to be new entrants from the US.

technorati tags:TLCom, RealDeals, Europe, Caio

US VCs going (too) global

The NVCA just published a new study looking at the globalisation of venture capital, sponsored by Deloitte.  The study highlights a key trend that industry players have known about for a while: VC too is truly becoming global.

Traditionally venture has been a highly localised industry with Don Valentine (I think) famously saying he would not invest in a company whose board he could not bike to. Here is a quote from the great man, through SiliconBeat:

Valentine said Sequoia hasn’t invested abroad in its 30-plus yearhistory, and it’s unlikely to begin doing so. Even investing in aBoston company is a big deal for Sequoia, he said, and most of ourinvestments are not only west of the Mississippi, they’re west of theCalifornia border, he said.

Now this quote is only from September 2004, and in the meantime Mike Moritz has driven Sequoia to acquire Westbrige to invest in India and more recently came into Index Ventures' PaperDoll, among other international forays.  So the world has kept on changing, very fast.

We have one partner here at Atlas Venture, Sonali, who spends much time in India and is real Indian market insider.  She keeps reminding me of how often she will come across Norwest, Greylock, Battery, Draper and our friend Rahul Kanna at Clearstone on the ground there.

The data from the NVCA study is really striking in my view.  A few years ago, when VCs would push their companies to run operations or manufacturing in India and China; these countries  have now shot to the top of lists where US investors would like to expand their investment focus.  And now ...

... China and India garner 55% of intentions to invest abroad.  Wow !

That's got to be great news for local entrepreneurs.

What's wrong with that picture ? In my VC opinion, if you thinkyou are busy in an overfished market in the valley and will find wideopen spaces in India and China, you should probably think again.  It ishighly unlikely that these countries will produce remotely enoughfundable deals to feed all the guys looking to play in the localmarkets, which means, probably, that only the top tier VCs or the guyswho devote local resources will make a real impact.

Digging further into the data:

• Why go to India ? US repondents say "access to great entrepreneurs" (c. 37%) and "emergence of entreneurship in new region" (32%)
  
• Why go to China ? US repondents say "access to market" (c. 48%) and "emergence of entreneurship"  (34%)

It gets really striking when you see why US VCs go to Europe: lower cost locations is the primary driver, access to dealflow and entrepreneurs do not even rech 20%.  In other words, here is the worldview of US venture capitalists:

• Innovation and great entrepreneurs will come from India and to a lesser extent China
• Access to market drives interest in China and to a lesser extent Western Europe
• There is no real interest in Europe generally apart from the lower cost alternatives offered by Eastern Europe
  

Here is the perception: Europe is being bypassed as Asia and the US essentially get on with it whilst our occasional StarDeal gets done by Sequoia (Stardoll) or Highland (Photoways and a few others).

Of course I beg to differ !  Valerie recently posted on another two Euro companies that are getting on the global innovation map, gigle and t-Vips, although peppered with a dose of typical European moderation ;-).  And we have our own , highly promising Icera (A funded by Atlas and Benchmark), to name but a few.  But I do think European VCs still are not completely together with the programme when it comes to thinking global.  I will post more on that topic in the future.

 

technorati tags:venture, capital, global, US, Europe, India, China, NVCA, globalisation