The European venture capital industry is really just making money for America. It has one play in its playbook: to find the best European tech entrepreneur from Helsinki to Madrid, and to sell their business to a US technology platform company, 25 of whom buy most of the continent’s venture-backed start-ups.
Why should you care? This doesn’t matter if you are concerned only with creating start-up supernovas. If you take a short-term view, as soon as you cash out everyone is happy. Why think too hard about the whoosh of value going to Silicon Valley’s Palo Alto?
Palo Alto does two things well. It systematically and consistently creates great companies, while also marketing 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 Palo Alto. Their customer acquisition tends to be through app marketplaces belonging largely to companies headquartered in Palo Alto (Apple, Facebook, Amazon and Google). Finally, the Euro VC sells them to one of the same Silicon Valley tech groups. Funding, distribution, exit.
With apologies to Gloria Estefan, how do we turn the beat around?
If Europe tries to imitate Palo Alto it will always be second rate. You would not tell your daughter who is good at ballet to play football. Life is about figuring out your strengths and playing to them.
Silicon Valley is a later-born child. It believes it can perfectly build a new universe and rip up the old. If you listen to the titans of venture capital out there, bitcoin is imminently threatening the pound. The new new thing always wins. This model is based on raising hundreds of millions of dollars, telling a huge story, and being early. It is inherently B2C — that is retail. This is creative destruction, and it benefits the consumer.
Europe, however, is a firstborn child. We have a stake in the outcome. Our social welfare state operates differently. We have a dearth of risk capital. Our entrepreneurs are not as good at telling big stories. We recognise that innovation is additive. We didn’t stop listening to radio when television arrived. We want to enable and extend the existing infrastructure, not rip it up. We fundamentally want a sustainable ecosystem: for consumers and employees both to 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 who has a 5 per cent stake in a £50m European fund, I am very interested in the capital efficiency of our investment strategy. I am convinced the unit economics (which is what all good VCs are interested in) are much stronger in start-ups that enable and extend the existing infrastructure than in those that disrupt the incumbents.
But we never get the chance to compare because Europe is always a couple of years behind Silicon Valley. We are in perpetual catch-up mode because, instead of playing to our strengths, we are trying to be Palo Alto: to play football when we are good at ballet.
This is a recipe for being second rate but it need not be so. Established companies are working on the same problems as Euro VCs, but from the other end. Non-tech traditional businesses — banks, retailers, etc — have customers, distribution, audience and reach. Digital start-ups bring them a way to make money in this digital world. The start-up is a revenue-generating “digital enabler”.
By engaging with them, non-tech traditional businesses become platforms in their own right, achieving network effects, securing net new revenues and turning their industries into ecosystems.
Venture capitalists still have to be rational about selling portfolio companies. My firm has sold to Google too. But the industry desperately needs to think more systemically, to reflect on the unique assets of its entrepreneurs, 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.