Europe’s Changing Technology and Venture Capital Landscape

Both as the CEO of Result and as the President of the European Tech Tour Association‘s Web & Mobility Summit, I spend a substantial amount of time looking at new businesses, from ideas to the financing and rollout of successful concepts. Also, I raised capital for a company I founded in 2002, at a time when it was extremely tough to do that. Looking at the economic environment, we now seem to be in a similar situation to the bubble aftermath in 2002/2003.  At the same time, however, there seems to be a quantum leap in creativity and the number of new companies springing up.

I see a number of major reasons for this unleashing of creative potential, especially in Europe. For starters, the current crisis was not a ‘new economy bubble’ with inflated valuations for companies in a special sector. It has hit the core of our economies, induced by what seemed to be the extremely “solid” and stable banking and real estate sector. So the particularly European perception of stability and continuity as a whole has been affected. Most people reacted with angst, ignorance or paralysis – depending on how badly they had been hit. But for a small percentage of entrepreneurs not being able to trust the establishment was a signal to now go out and do it themselves.

Secondly, the necessary infrastructure is in place to allow entrepreneurs to fulfill their visions. The widespread deployment of high-speed Internet/broadband access and the availability of mobile Internet access devices and open-source software has allowed a lot of business models that failed miserably a couple of years ago to resurface and now work profitably.

Thirdly, it has become much easier and cheaper to create and build a web company and to test drive ideas than it used to be. Whereas you needed at least half a million euros back in 2002 to get a company up and running, you can do so with 50k Euro or less and sweat money today – literally garage operations.

Another reason is that there is much more talent in the market. The Internet and mobility industry has now matured and there are many people with 10 or even 20 years of experience. In a relatively short period of time, they have experienced several business cycles and involved in building multiple companies. The ones who “made it” became very well known and wealthy, so they are adding to the industry’s attractiveness as a whole.

Last, but not least, the venture capital industry has evolved as well. While there was very little venture capital for technology companies 15 years ago, there are dozens of funds today – some of them very large. Their professional experience as investors and former entrepreneurs is helping start-ups to thrive.

Now, having said all that, we are facing a peculiar situation in the market, where we have a number of very successful venture capital funds who are accumulating more and more money under management. The management fee on this money is necessary to fund extraordinary investment teams. However, the large funds become a victim of their size and also have to go for larger transactions. So as the industry matures, many funds move towards larger transactions and the origins of venture capital – to enable ideas at a very early stage – are no longer really served.

One might argue that there are still many smaller investment funds around . However, they are ultimately  subject to the same dynamics: they have to afford a team based on the fund management fee and the fee limits the size of the team and hence the number of deals.

So, how do we get all these great ideas to work in order to get some first traction? My conclusion is that this gap has to be increasingly bridged by seasoned entrepreneurs, who are today active as angels or creating new companies.

Business Angels play an increasingly important role, since they finance ideas and teams – in many cases it’s about the passion and the idea to disrupt or create something new, much more than the financials of the company to come. Most of the angels are (ex) entrepreneurs, who have made / set aside some money to invest in young companies and teams. Some of the angels are even what you can probably call serial angels, who set up the company and the team to get a first proof of concept, then go fundraising with VCs and move on to the next venture.

Also, it looks like the “incubator model” is back – although it’s been claimed dead for a while. This is being shown when successful entrepreneurs decide not to just launch one more company, but several at the same time and realize synergies to get smaller companies test-driven quickly through shared programming, design, SEO, SEM, payment etc. The Samwer Brothers are demonstrating this very successfully with their Rocket Internet.

The Web & Mobility Summit, taking place November 18 and 19 in Montreux, Switzerland, will examine some of the changes in Europe’s technology and venture capital landscape. A panel is planned on the future of the VC industry entitled “Is the current VC model producing a gap between ideas & their implementation- how is Europe different from the USA?”   Panel participants will include Philippe Collombel, Partech International; Rainer Maerkle, Holzbrinck; Christophe Maire, business angel; Paul Jozefak, Neuhaus Partners; Mike Reid, Frog Capital and Sebastian Wossagk, Acton Capital.

What is heartening is that despite existing challenges and a challenging economy Europe is producing a wealth of great start-ups. Some 25 of them, in areas such as mobile, e-commerce, gaming, and online/mobile marketing, will be presenting at the Web & Mobility summit. See you there!

 

 

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