This article was written for Silicon Allee by Roman Scharf. The Austrian, Roman Scharf, is the co-founder and partner of capital300, a European Series A Venture Capital fund that backs disruptive technology companies run by ambitious entrepreneurs. The fund was founded in early 2018 by Roman and Peter Lasinger who have built, supported and funded various successful international businesses.
Looking at our social networks serves as a constant reminder: the whole world is connected. And while for many jobs these days it may not seem too important where people are located exactly, it should never be underestimated how crucial in-person interactions are for building relationships. The venture capital world is a good example when it comes to highlighting the relevance of a solid professional network. VCs rate personal contacts and introductions over cold calls (e.g. LinkedIn). Thus, VC money is being deployed in regions with high startup ecosystem and network density.
Silicon Valley vs. Europe
In Venture Capital there is still one hotspot like no other: Silicon Valley. The Quarterly European Venture Capital Report for Q2/2019 shows that major parts of mega rounds (> €100M) are still made in the US followed by Asia and then Europe. Many U.S. VCs prefer to stick to their territory; some even limit their investment region to a 2-hour-drive radius. Consequently, these VCs usually lack valuable introductions to promising European founders. This is causing a funding gap in Europe, which is reflected in the comparison of the average financing rounds on the two continents. Around €5M per round is invested in Europe vs. $7M (€6.3M) in the U.S. A further difference between the two continents is that the quality and acceptance of the startup ecosystem seems to be much higher in the U.S. Not only do founders and startups share a long history, but Silicon Valley is also where computer science and digital technology matured.
But Europe is catching up: the 2019 figures from the European Venture Capital Report show that although Europe is the smallest market in raising VC money, it is continuously growing. Already €19 billion have been invested in Q1 and Q2 of 2019 compared to €15 billion last year.
Now is the time for European startups — an opinion that is also shared by Tobias Balling, Co-Founder and CTO of Blinkist:
“In Europe, the ratio of new startups pushing to market and market saturation is just right. In addition, the number of new funds in Europe is not covered [in the media] and capital from the U.S. is in high demand. Practically, the exit volume is also increasing.”
Blinkist was funded by U.S. VC Insight Partners.
To put it in a nutshell Europe is growing consistently in the global Venture Capital scene. But it is remarkable that the recent growth comes from France and not from Germany and the UK as one would expect.
Why Silicon Valley struggles with Europe
Even though it has always been hard for American venture capital funds to dive into a very fragmented and diverse Europe, recent developments have been making the continent a more attractive investment target for them. For example recent European Unicorns like UIPath, Revolut, Celonis, Taxify and Deezer have created buzz about the potential and talent in Europe.
Nevertheless, most of the U.S. VCs do not dare to make big investments. As their network throughout and the affinity to the European startup landscape is rather weak it is hard for U.S. VCs to get access to hidden champions and local references for assessing the founders.
There is not only great European founder spirit and projects that warrant a closer look but Europe also runs short in local capital. Still investors from the other side of the pond are more than hesitant to put much money into European startups partly because they cannot rate them properly during the due diligence process and feel uncomfortable being too far away from their portfolio companies. The Silicon Valley Bank showed in their quarterly report on the global startup market end of 2018 that “the sheer size of European markets makes it attractive, but the challenges are compounded by so many borders and regulatory regimes. Those companies that achieve scale have built a protective moat around their businesses and show superb adaptability, making for a more resilient ecosystem.”
It also shows that venture firms are changing in Europe. Although they still raise roughly one-fourth of their U.S. counterparts, funds are growing from smaller family offices to state-sponsored powerhouses. Overall, more €250M+ funds have been closed than sub-€50M funds, signaling a new scale of capital.
With its seven investments in 2019, the U.S. Venture Capital Fund Index Venture is one of the the most active players in the European VC environment. Nonetheless it is remarkable that some of the other big powerhouses from the U.S. are still hesitant investing in European companies. VC Sequoia capital is one of those and only made five investments in Europe over the last 15 years.
When it comes to the challenges mentioned with regulatory as well as cultural fragmentation in Europe, maybe mediators are simply missing, who function as experts on the continent? With European startup expertise, these mediators could introduce high potential startups to top-class U.S. VCs.
capital300, our VC firm from Vienna, aims to bridge this gap between Europe and the U.S. by playing an intermediary role. We have a clear strategy and only invest with partners from Silicon Valley aiming to build the next unicorn in Europe. To better understand the benefits of such partnerships, one should evaluate the development of the European startups that received U.S. capital.
One such startup capital300 has co-invested in with Silicon Valley VC Draper Associates is Authenteq from Berlin. Authenteq provides a blockchain-based Know Tour Customer (KYC) tool. Kari Thor, CEO and founder of Authenteq, shared the following insight about the differences he perceives between VCs from the two continents:
“The way they [U.S. VCs] evaluate investments, in my experience, is different from European VCs, with a stronger focus on future high-growth possibilities and the vision of the founders to build a multi-million dollar company.” He adds that “many European VCs put more emphasis on past traction and KPIs. This doesn’t apply to all E.U. VCs obviously but most of the ones I’ve talked to, especially the more local ones.”
To better understand the founders’ thinking, motivation and vision, partners at VCs like to spend some time with founders and meet them in person.
Next to the capital itself, other values can be equally seen as valuable input: “As our investor has a very good reputation and network, this has opened doors for us when we have sought to speak to other investors and potential customers. Draper Associates provide us with some credibility when reaching out to companies and the press, as they are known for backing high impact startups such as Tesla, SpaceX, Twitter, Baidu, Twitch and more.” These are big names which would be very hard to approach with no introduction from a credible third party.
Co-investing into European startups with a fund based in Europe like capital300 could be the way forward for U.S. VCs and hopefully will soon change the European startup landscape to make it easier for founders to access global markets and growth.