Apr 14

The Venture Gap in Europe.

European startup ecosystems have matured over the past three years. Most of the discussion was: which cities – London or Berlin – have most startups? Who has exits or lack thereof? My personal view: After an explosion in numbers of startups, I recently see a significant uptick in quality of startups in Europe.

I see better teams and better strategies. With companies like Criteo from France and Zalando from Germany and potentally Soundcloud, there are now the first “Billion Dollar exits” on the horizon. The best indicator of European success according to the EU is that app revenue in Apple’s app store are equally divided equally between US and Europe.

But what about the quality of venture capital firms in Europe? Turning the attention to VCs instead of startups should help entrepreneurs to separate the wheat from the chaff. It also shows that there is still a huge gap in the market for more US-style VCs in Europe.

1. Some basics about Venture Capital

(Experts in the field will want to scroll down to the next heading) 

While many companies have “venture” in their name, most are too small to be considered real venture capital firms. In my view, the minimum size to be able to have a diversified portfolio of early stage investments is 25 M US$. For a reasonable Series A size fund we look at a of 100 M US$ fund size. At my last count there were are acutally less than 10 funds in Germany who fit that criteria. To mind spring eVenture, T-Venture (corporate), Earlybird, Target Partners, Wellingon (Happy to amend if I missed someone). UK has a bit of VC history and larger fund sizes into 500 MUS$, but many of these are focused on non-internet industries. In France there are also several of the 100 MUS$ size. In most other European markets fund sizes peak at about 40 MUS$. In summary: There is simply very little European money in venture capital, paticularly in contintental Europe.

Venture Capital as an investment is on average a terrible asset class. This is not because 60% of funded companies are being written off – that is actually a good thing. It is because on average, the return is just 2%. And for that meagre reward, an investo – a limited partner or LP – is locked in for up to 10 years. And this average return includes the stellar returns of stars like Peter Thiel who seems to turn everything he touches into gold (Paypal, linkedin, facebook and a scary CIA funded beast called Palantir which he recently mentioned in Berlin as his best return). So if you take the stellar returns out, average returns are probably less than zero. Fees are high and often criticised. For a really good general update on what is broken in the VC industry, read the excellent report by the Kauffmann foundation. Regarding Europe: Returns are even a bit worse than US, but again that could change quickly once larger exits do come.

VC as an industry is in danger of being disrupted as well: Angellist built a platform that creates virtual VCs – syndicates – which will broaden the base of investors into super Angels and blurrs the lines to a professional VC.

2. Differences between European and US Style VCs

in the past ten years and across four companies, I have been working closely with more than ten US and European VC firms. I must have pitched close to 100. Two of the funds I worked with had US origins and then partially moved to Europe: Partech in France, the lead investor in Qype, was started by a French guy in San Francisco, and similarly eVenture, the lead investor in 9flats, was started by Germans in San Francisco 12 years before they opened office in Europe. Later I worked with Redpoint in Menlo Park and Greycroft. I have also worked with the larger German funds, Wellington and T-Venture as well as with some UK firms.

Longer History

The most obvious difference between European VCs and US is how old the US industry is. When I pitched Venrock three years ago, I was struck by the pictures in the lobby of aircraft that had been funded in the 1940s. Several of the large US venture funds were founded in the 80s. Very few in Europe were founded before 2000. With many VCs in the US you get an impression that people are very exprienced. Particularly with the principals you often get the impression – once you get to talk to them – that they have seen many cycles and are not easily thrown off. With experience and size comes a sometimes a fantastic network. When you talk to Alan Patricof, who prior to running his VC firm Greycroft was the founder of APAX, you get the impression that there is nobody in US media who is not in his Rolodex. Also with other US funds I was often impressed with how quickly they had access to a stellar expert on any given subject.

Different attitude to risk: Fail fast and back your winners

The most important difference between the good and the not so great funds is: The good funds will let companies fail quickly and reserve their cash for the winners. Companies are much more encouraged to pivot and start fresh. With quite a few European VCs having a background in corporate structures, there seems to be a bigger tendency to keep companies on the balance sheet as long as possible. Also there seems to be a slightly longer hesitation until a company will be allowed to pivot as this also has an effect on how to put the company on the balance sheet. In Europe I still often see a tendency to nudge all starters across some kind of finish line.

Boldness and ability that comes from past success

It is my observation that all investors become bolder when their past invesments were a success. This may be a simplification, but it seems to work. Unfortunately, past successes are still slightly more likely in the US. So later stage funds are rare in Europe, although some are being raised at the moment. Until now, nearly all large B, C, D rounds originate from US funds.

We have some fantastic VCs in Europe. Personally, I think the portfolio of Index is admirable. But Index in my view is very much a US style VC. And again with Index, you can see here that boldness comes from past success.

The effect of quick flips versus thesis driven investments

Experience does shape industries. In Germany, we see an amazing and long lasting success story of the Samwer brothers, who have not been innovating but have been extremely successful in globalising concepts. Sometimes this has lead to ultra fast exits (Alando to ebay in less than four months after launching, Citydeal to Groupon in less than a year and potentially a billion Euro IPO for Zalando in less than five years). In the same way that some American players have been shaped by their past of betting big on risky ideas, some very successful funds have been shaped with their experience of getting fantastic returns by backing the Samwers or similar outfits in clone stories. This of course leads to a predisposition for quick turnarounds with perceived low risk and may leave many more innovative companies waiting for investments.

I personally believe very much in the opposite model: Thesis driven investments. The most famous example of this are for example Union Square Ventures who with an exremely small team managed to fund nearly a fantastic roast of companies in a very short time (Twitter, Tumblr, Etsy, Foursquare etc.) – based on their thesis to focus on companies that can generate huge network effects.

In a more competitive environment for VCs, another extremely lucrative approach is specialization: One European example I like very much is Point Nine Capital. The portfolio looks quite mixed, but there is a clear knowledge in “software as a service” that helps the team to stand out for founders.

The role of limited partners

In the same way as there is a lack of experience in VCs, of course there is a lack of experience with limited partners in Europe. The asset class “venture capital” faces some severy challenges in Europe as many vehicles like pension funds or insurance companies often simply are not allowed to invest. But also the experience of the bolder limited partners in Europe who have tried VC in the past, has been mixed at best. Hence it is not easy to raise capital. Also in my observation if someone has made the family’s fortune with mechanical engineering, he is unlikely to be a bold investor in software afterwards. Again, a different past, inhibits a massive inflow of capital in the future.

3. How active are US style VCs  in Europe?

With all those differences and the notion that capital is free to roam globally: How active are US style funds in Europe? There are of course real statistics somewhere. From my point of view, I see some of later stage funds like Insight (Series B onwards) beeing very active. Particularly in Berlin, it is great to see how thought leaders like Union Square (Soundcloud, Auxmoney), and also Peter Thiels Founders Fund are investing. Blumberg Capital has also been very active in Germany in the past couple of years. But the majority of US funds I speak to, are still very reluctant to invest that far away.

4. Conclusion: A huge gap means a huge opportunity.

Given what I see in the startup market and the lack of venture capital and experience, I am convinced that there is ample room for new venture funds with the following criteria:

  1. Entrepreneurial approach of risk taking and letting companies fail if necessary.
  2. Thesis driven approach or niche specialists.
  3. Fund size between 25 and 100 M US$.
  4. European focus, as the number of sucesses per square mile is not big enough in any European eco system.

Given the pivotal role that venture capital has in generating innovations and future industries, it is vital that these funds get started. I also believe that right now is the time where new companies are being founded in Europe that justify these investments. The challenge remains to convince investors into these funds.

Jul 13

The Lost Art of Selling

I love growing companies. I love this so much, that I have done nothing else for the past 15 years, with companies like TravelChannel, DocMorris, Qype, 9flats, avocadostore.

Sustainable growth requires a very basic art:  Every business must figure out how to

  1. Acquire customers profitably and
  2. How to sell to them.

People who know how to do this well are few. Customer acquisition via SEM, SEO etc. is a well paid specialty. Still, to this day, I find way more people who do this on a superficial level than people who really know how to do it. Most of the good online marketing experts seem to be consultants.

People who master the second step, to be precise: people who know how to sell online, are extremely rare. In a functional way, there are now user experience (UX) specialists and even conversion specialists. People who know how they can make you press that “buy now” button. But this is not enough.Too few founders know how to really sell on the web

If you really know to what offer to pitch to your customers, how to present the offer, how to differentiate the offer and how to price it, then you are truly a master of your business. It is much easer to get investors if you know how to sell to your customers

If you decide to take on capital and can prove your sales mechanics to potential investors, then it will be much easier to get that capital. Investors love it when they see a formula that works. “Just add water” is what this is called. I love it too, in the rare cases where I invest.

Founders are often better selling themselves

There is this strong misconception that you have to be a good in business development to succeed. This is true for some businesses that really thrive on joint marketing deals or are service businesses, mostly business-to-business (b2b). But in my specialty: Business to Consumer (b2c), I much rather run a business with no business development, but a successful online model that acquires customers successfully.

Most founders I meet focus to much on networking with potential partners and investors, and too little on building a product that sells online.

Feb 13

Basics for Organizing a Startup

A couple of days ago I was keynote speaker at an EO Accelerator meeting. I was sharing my experience as an entrepreneur in building fast growing companies. While preparing my talk I realized how the basic principles for building an organization are very similar to those helping a six year old child cleaning up her room two weeks before.

When I helped my daughter to clean up her room, I tried to teach her principles. The principles we worked on are:

1. Less stuff
My daughter and I drove through piles of finished drawings, broken toys and she decided for every single item whether she wants to keep it or not. With this, we reduced the complexity of organizing stuff later.

2. Every thing has its place
We used amazon cardboard boxes and she labelled the, carefully. One for “stickers”, one for “small stuff”, one for “nature things”… you get it. All of a sudden, her chaos started to make sense to her.

3. Small tasks
When I ask my daughter to clean her room, the tasks seems insurmountable to her. But starting with: “let’s do the area under your desk now” is something she can easily achieve and be proud of.

4. Do everything only once
We tried to clean up one drawer first, and only when that was finished move on to the next corner. Arguably, we did not get very far here. Too big was the temptation to just look at an item in one corner of the room and arbitrarily play with something else, and then go back.

Here is how I apply these same principles  to organize a business, whether a small start up or a large organization:

1. Less Stuff Even at the earliest stages, startups do too much. Focus on your core service. You don’t have to maintain a great blog if you provide a terrific ecommerce experience. You don’t need to sponsor that conference, heck you don’t even have to speak at conferences. Stripping away activities that are not core is the best way to help your organization to focus on that core. I find this most fun of restructuring work.

2. Everything has its place Your org chart is perfect when every new task like “talk to a new customer”, “be responsible for the product launch” has one clear and logical owner. If you leave room for interpretation who will do a new task, then your boxes are not well defined. If some areas drown in work while others have time to do side projects then the card board boxes of your organization need resizing. Do that test with all new stuff that you come across. It really is worth fine tuning. Labeling the boxes means to give people good general understanding of everyone’s job with distributing the org chart and keeping it up to date.

3. Small and measurable tasks. This is probably the most obvious rule. Nevertheless we see many IT projects fail because they are invariably too big and complex. Rule of thumb: cut the “six week projects” into “one week sprints”. While the six week project won’t be finished after three months, you will probably find that you only need three “one week projects” in the end.

4. Do everything only once. One of my biggest frustrations in my companies: Projects are being started, discussed, delayed, restarted again and again. My lesson as someone who is often guilty of changing his mind: If something is in process of being done then let people finish it. Try to reach decisions quickly and then end the decision making process. This is hard with constantly changing information, but necessary. Do everything once is a rule which will make your product team smile.

There are tons of books for organising companies. I find that if you stick to these simple principles, you can’t go very wrong.

May 12

How to take a startup across borders

This text is a slightly longer version of my contribution to the May 2012 edition of WIRED UK 

Taking companies across borders is incredibly rewarding and also sometimes very challenging. Here a brief summary of some lessons learned. There is no right or wrong for all businesses. For some models you need to build a local salesforce, sometimes you can get away with just having a great central Search Engine Marketing team. Sometimes you need to do both.

Most companies chose to have product central at HQ and sales regionalized in other markets.This is tried and tested and works well if your product is „one size fits all“ like a facebook or Google. The limits to this system of a stong HQ and relatively weak satellites start to show if local tastes and preferences differ too much, or if the sales process has to be adapted massively.

I have seen many satellite offices where people did feel marginalized and unhappy because they had no influence on product direction or felt that top management did not understand their regional needs.
Some recipes to reduce international friction:


  1. Get local the local staff to work from the central office.
    If you are in an attractive location like London or Berlin, you can get the people from other countries into your HQ. We have done this for 9flats in Berlin. Currently we have 14 different nationalities working at 9flats. We have French, Italian and Spanish people who moved to Berlin to do local marketing in their home markets. Hence if something is not right for Italy, people will go up to the development guys and tell them until they fix it.
  2.  Hire key people from other countries.
    At Qype we had an English  CTO, French COO, and today we have even a British CEO for Qype, a company headquartered in Hamburg. At 9flats, our CTO is Mexican and our head of sales is from Russia. I like the culture this creates and it has worked very well for us.
  3.  Check you assumptions.
    People might say similar things but their different cultural context will associate totally different meanings. „Consider it done“ means something totally different in different cultures. I was often surprised, that our spanish colleagues often had a more germanic approach to work than the Germans. And language is more stressful than most people admit: I found that people do get tired more quickly if they have to run meetings in English.

May 12

Painting your own painting

This is a very short post but it contains an essential guiding principle for investors in dealing with CEOs.

At this years Annual Meeting at Berkshire Hathaway, someone asked Warren Buffett and Charlie Munger how they intend to keep their managers of Berkshire‘s subsidiaries. This and another question triggered Warren to explain that he does not do micromanagement of his firms. He said he speaks only maybe twice a year to several of the CEOs of companies Berkshire owns. „If we thought that they needed us to be successful, we would get out“ . He then went further to explain: „Charlie and I like to paint our own painting without someone else telling us to use more red or more blue. And we think that the Berkshire CEOs feel the same and want to paint their own painting“.

This attitude contradicts massively with what I sometimes observe in the behaviour of investors in startups. There is a difference, the argument goes: In startups, we often have inexperienced founders, and sometimes more experienced VCs.

Nevertheless: I strongly believe that most VCs would do well to remember the basic truth in “Painting your own picture”.  Nobody becomes a startup CEO because they want to do what Investors tell them to do.