Last week Milo Yiannopoulos wrote an interesting piece in The Kernel about the poor performance of the European Venture Capital industry. He provides some reasons for this underperformance including funds being to big relative to exit opportunities, investors being too conservative and the fragmented nature of the market.
I actually agree with all these points. I remember, soon after I got into the world of investing, a well-known VC showing off to me about how none of the companies that he’s invested in have ever gone bust. There was no mention of returns but he was obsessive about protecting the downside. This sums up a worrying attitude that seems to be fairly prevalent in European investing. There is too much time spent on the downside at the expense of looking to the upside and putting the funding, the team and the strategy in place to realize the full potential of the business. This is an important subject that I think about a great deal – I actually wrote a post about it a few months ago.
On a brighter note I do think the tide is changing in European early stage investing is for three good reasons:
1/ Market Dynamics – the market has moved from an over-supply of money in the heady late 1990’s Dot Com era to an undersupply of money now. In 1999, there were 1600 VC funds in Europe and now there are less than 600. In this way the market has ‘right-sized’ meaning far greater opportunities for investors to strike the right deals at the right prices and gain a larger share of the exit market.
2/ Higher Quality Funds – the funds that are active now in Europe are higher quality than was the case a few years ago. Those that survived through the Dot com crash, and the subsequent Darwinian-like culling, were the strongest and fittest ones. Plus, there is an ever-increasing number of entrepreneur-backed funds emerging, who have proven experience in the sectors they are investing in, something that I believe gives them an advantage in the market.
3/ European Hubs – the European tech scene has continued to mature and grow, with the start-up activity coalescing around central hubs (mainly London and Berlin) pulling in talent and resources from across the region and addressing some of the fragmentation issues of the past.
So I believe that there is now an under-supply of good quality funds serving an ever-increasing and ever-widening market opportunity within Europe. This imbalance will lead to a larger market share for the investors and also stronger and more experienced partners for the entrepreneurs.
The results could mean a step change in the performance of European VC’s that will in turn lead to further growth and investment in the market. I’m very excited to be investing in this opportunity.