Entrepreneurs expect more from Venture Capital firms
[Article initially published in a longer form in INFO Magazine]
In most European countries, it’s now easy to start a company. For young people, creating or joining a start-up is even the new ‘sexy’. In a 2016 survey, 60 per cent of French young people aged 18–29 said they wanted to become entrepreneurs. The top universities have understood this really well, and as a result there are more than 230 Masters in Entrepreneurship offered across Europe.
Early stage financing has become more available than a few years ago and there are a few factors to thank for this. In the UK, SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme) represent extraordinary incentives for business angels to invest. In addition, crowdfunding platforms, accelerators and public grants make it possible for great teams with ground-breaking ideas to raise money fairly easily.
At scale up stage (Series B, C and beyond, most talented entrepreneurs will be known by investors. The number of funds has increased and there are, by our count, more than 500 VC firms in Europe alone, not to mention that many American VCs also invest in Europe from Series B onward. As a result, these days, entrepreneurs are often in a situation where they can choose their investor, creating a demand/offer imbalance in favour of the entrepreneurs.
The best entrepreneurs choose their investors
Some of these entrepreneurs will be tempted to raise money at a much higher valuation. This has happened in Europe to some extent, but even more so in the US.
Rather than focusing just on the short term money, the smartest entrepreneurs choose a VC firm that will make a difference to their business and help them to accelerate on the path to deliver their vision. These entrepreneurs are after more than a just one-to-one relationship with an experienced partner who has a vast network of relationships — they want pragmatic support, rather than simply introductions.
Accelerating growth often means negotiating the best contract, rather than being introduced to a great lawyer. It means coming up with an innovative pricing structure thanks to a lengthy brainstorm session with an executive who has experience in the same sector. It can also mean being coached on how to recruit your next head of sales, rather than being put in touch with a top recruiting rm.
The future of venture capital
A few months ago, an article in Forbes listed the 10 European VCs that entrepreneurs most want to raise funding from. When highlighting what makes these funds unique, it was not about what they can actually do for the entrepreneurs. Interestingly, most VCs in Europe — who are constantly looking for disruption — haven’t changed their ways of working much.
For a VC firm, there are two ways to address the entrepreneur’s expectations and therefore be their chosen partner: vertical focus and operational support.
Investors will never be bigger ‘experts’ than an entrepreneur at what they do, but as the world gets more complex, it is crucial to have a deep knowledge and specific network. The best way to get that is to be focused. Most VCs repeatedly tell entrepreneurs to focus on a handful of things and do them really well… but do they do this themselves?
The market is progressively changing and new funds are emerging that have a clear focus, either in terms of sector or business model. Examples, among others, include Piton Capital (which focuses on marketplaces), Data Ventures (big data), Hardware Club (early-stage hardware) or Felix Capital (Digital Lifestyle). At C4 Ventures, we chose three themes: smart hardware, the future of commerce and digital media.
Having a focus allows us and these funds to perform their due diligence more quickly and be much more relevant for the start-ups that we invest in. In addition, conveniently for Limited Partners, specialised funds return on average 6 percentage points higher than generalist funds.
An investment partner, whatever his or her experience and skills, cannot cover all subjects and all the challenges a company can face, and the people in their network usually cannot dedicate the time to fully understand what is at stake.
There is a need, therefore, for VC fund managers to reallocate some of their management fees to recruit key operating executives who, without substituting employees, can bring their expertise, experience, preferred suppliers and own network to portfolio companies. The entrepreneur that these fund works with can benefit from the best and most qualified support whenever they need it.
In the US, the leading VC firm, Andreessen-Horowitz, fundamentally changed the VC scene by introducing a new model, run by a handful of partners supported by an extensive and specialised team of operating partners.
In Europe, after years of telling entrepreneurs how they should run their business, VC firms that are being challenged by new fund managers must now evolve to also embrace these differentiators. This is what will strengthen the European ecosystem, much to the benefit of talented entrepreneurs and, therefore, the wider economy.