This week, UK-based tech firm DataSift received its first round of funding all of which came from US venture capital firms GRP and IA Ventures.
DataSift founder Halstead says that despite being a “huge advocate for Europe” (and spending two months pitching to European VCs), he was forced across the pond to find investment because American VCs are friendlier, have larger funds and take bigger risks.
So, was he right?
To say that there are more and bigger funds in the US is true. However, in a market chasing “the next big thing”, more money isn’t always helpful. Frankly, the US market is rather overheated with an over-supply of money inflating both valuations and on-going costs for early stage companies such as hiring good people and securing office space.
This can often lead to rather frenzied decision-making by the VCs. It can also lead to companies raising more money than they know what to do with. Both of these things make it more difficult for these investments to deliver good returns.
Dropbox recently announced an expected valuation of $5bn and it will have to execute flawlessly to live up to this. There is a fine line between a healthy appetite for risk and throwing money at a business no matter what the cost.
There also seems to be a perception that VCs do what they do in order to stimulate economies and help entrepreneurs. While venture capital does help to create a thriving startup eco-system that in turn stimulates the economy, the main reason that VCs invest is to make money in the long term. It shouldn?t be a surprise that VCs want to get a good deal for themselves. Clearly VCs should do what they can to support entrepreneurs but it has to go hand in hand with making money.
Naturally, a well-structured deal should be fair to both parties and help to drive business growth over the short and long-term, but it’s worth remembering that VCs are not doing it out of the kindness of their hearts. Targeting those venture capital funds that have entrepreneurs on the team, no matter which continent they are from, is the best way to ensure that the business gets both the funds and the entrepreneurial empathy it needs.
I would be inclined to agree with Nick that there is a history of risk-averse behaviour in Europe but there is a wave of more “US style” funds coming through now characterised by having proven entrepreneurs on the team, a significant partner contribution to the fund, clear focus and expertise in specific markets, and a greater appetite for risk in striving for big outcomes. Index Ventures perhaps paved the way in Europe but more recently a number of others have come on the scene including Notion Capital, Atomico, ProFounders and Open Ocean.
There is a lack of supply in the European venture capital market but there are still plenty of great companies out there to invest in, such as DataSift. I expect the high quality European funds with strategies in place to address some of the mistakes of the past such as overly defensive attitudes to take advantage of this and start to close the gap with the US market in the coming years.
Jos White is the founding partner of Notion Capital and the co-founder of MessageLabs