The European venture capital industry is really just making money for America.
Much of the European venture capital industry has one play in their playbook: to find the best European tech entrepreneur from Helsinki to Madrid, and to sell their business to a US tech platform company. Twenty five of these buy the overwhelming majority of European venture back start-ups.
Why should you care? Why does this matter?
It doesn’t if you are only concerned with creating supernovas. If you take a short-term view, then as soon as you cash out, everyone is happy. Why think too hard about the whoosh of value going to Palo Alto.
Palo Alto does 2 things well. It systematically and consistently creates great companies, and, it also markets itself very effectively. It tells the world that great companies come from Palo Alto, even while the macro trend is that great entrepreneurs are everywhere.
So your average European technology entrepreneur is socialised early to believe they have to get their funding in and around Palo Alto. Then, their customer acquisition route happens through the app marketplaces, which are largely companies whose HQs are in Palo Alto (Facebook), near Palo Alto (Apple, Google) or further up the coast (Amazon). And then finally, the Euro VC sells them off to a US tech firm (same as above) based there too. Funding, distribution, exit.
With apologies to Gloria Estefan, how do we turn the beat around?
If we try to imitate Palo Alto we will always be second rate. You wouldn’t tell your daughter who is good at ballet to play football. Life is about figuring out your strengths and then playing to them.
Silicon Valley is a later born child. They believe they can perfectly build a new universe. Rip up the old, and create a new order. If you listen to the titans of venture out there, bitcoin is imminently threatening the pound sterling. The new new thing always wins. This model is based on raising hundreds of millions of dollars, telling a huge story to the world, and being early. It is inherently B2C – that is retail. This is creative destruction, and it benefits the consumer.
Europe however is a first born child. We have a stake in the outcome. Our social welfare state operates differently. We have a dearth of risk capital. Our entrepreneurs aren’t as good at telling big stories. We recognise that innovation is additive. We didn’t stop listening to radio when TV’s arrived. We want to enable and extend the existing infrastructure, not rip it up. We fundamentally want a sustainable ecosystem: for consumers and employees to both win.
I have a strong hunch that enabling and extending is better than disrupting. It might be a girl thing too. I never got excited about blowing things up as a child, but I do like to win.
As a venture capitalist however, who has a 5% stake in her £50 million fund, I am very interested in the capital efficiency of our investment strategy. I’m convinced that the unit economics (which is what all good VCs are interested in) are much stronger in start-ups which enable and extend the existing infrastructure than in those who disrupt the incumbents. However, we never get the chance to do the A/B comparison because Europe is always a couple years behind Silicon Valley. We are in perpetual catch up mode because instead of playing to our strengths, we’re trying to be Palo Alto, to play football when we’re good at ballet.
This is a recipe for being second rate.
Think system level. How corporates innovate is the opposite side of the same challenge that the Euro VC faces in what to back. Non technology traditional businesses whether banks, retailers, telcos, transportation firms have customers, distribution, audience and reach. What digital tech start-ups do is to bring them a way to make money in this digital world. The start-up is a ‘digital enabler’ or a revenue-generating algorithm. By engaging with them, non tech traditional business become platforms, that is achieve network effects, secure net new revenues and turn their industries into ecosystems. Start-ups are cars in search of their highway. The entrepreneur starts with a consumer insight and the ‘C’ is inserted between ‘B’ to ‘B’ so that the winning business model of the enabling tech space is B2C2B, not B2C, and not B2B.
We still have to be rational about selling our portfolio companies. We’ve sold businesses to Google too. However, the industry desperately needs to think more system level, to reflect on the unique assets of its entrepreneurs and their visions, and the context in which they build their businesses.
Every industry faces a digital disruption. The answer is not to build supernovas but to use digital enablers to build platforms in order to build ecosystems.
– Julie Meyer is the Managing Partner of the Ariadne Capital Entrepreneurs’ Fund; she grew up in Palo Alto.