Are The European VC Fund Sizes Going Down For Good? Perhaps, But Who Cares

Just recently Mårten Mickos, former CEO of MySQL, joined Index Ventures as an entrepreneur-in-residence. He also serves in a similar position with Benchmark Capital in US. We of course welcome this as a positive news for the European entrepreneurship.  But just a little earlier in January Fred Destin and the whole Atlas Ventures packed up and moved to Boston, leaving just enough staff to support to current European investments.

What is going on in Europe? Are we going to see the existing VC model literally disappear? Just last week I came back from DLD conference in Munich, Germany where I talked numerous people influential in the industry from Israel, London, New York and Zurich about the situation on the ground and most concurred that what we used to know as A-round-sized-VC-firms are becoming fewer and fewer. The smart ones are either going towards smaller deals and much more hands-on model or gravitating towards private equity sized funds (not least because of the hefty management fees) ...well, or moving to Boston.

I'm not saying all of them will die. Index Ventures is clearly not doing that bad. For one, Mickos will focus on seeking out new investment opportunities within the European technology market, helping to identify and evaluate companies on behalf of the VC firm. But in all honesty, there's only so many deals that Danny Rimer or Saul Klein can manage and Fred Dustin has his address already set out in Boston.

This is happening because the venture capital returns are just not there. According to the FT, 'By the end of 2010 the 10-year VC return figure will almost certainly turn negative for the first time ever (the current 9-year figure is -6 per cent.) At that point there is a good chance it will sink below the return on the Nasdaq.' That's heavy news and even heavier reality for the VC trying to raise new funds! Before we see the IPO market come back the institutional investors won't touch venture capital and they shouldn't. It's bad business if they can get a similar return from Nasdaq with a lot less risk.

What this means for entrepreneurs is that if it was hard to close a round before, now its really really hard. I don't want to suggest entrepreneurship has stopped to be the best job in the world. It hasn't. You just need to have the right mindset going in.

It's 2010 and to build a great company you don't need venture capital. It might clearly help in some situations, but its not the requisite. That's partly the reason why we are seeing so many seed funds sprung up: The capital needed to get something off the ground is a lot less (except with some capital intensive fields like biomed or cleantech). If the Consumer Web is your game aim small burn, use public transportation, share an office and take a loan or go for a angel or seed round with couple of seasoned entrepreneurs-cum-investors. I argue you'll be better off running a tight ship with small burn than having a lot of money and a Wall Street type on your Board that owns half of your company. On top of that, it's a lot more fun. And if you really have gold in your hands that implodes and you need capital to scale, the money will never be a problem.

And for those living in a country with a open handed social democratic political structure with a state agency giving money out to help 'the right projects' to go international, make sure you don't confuse that with entrepreneurship. It's two very different things going to a state agency asking money to start a company and going to get a job if you don't get it VERSUS going to ask them if they want to be part of the success story that you will bootstrap off the ground with or without them, whatever the cost. It's called having skin in the game and real entrepreneurs have skin in the game regardless of where European VC firms decide to relocate.

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Fred Destin, February 02, 2010

Some shrinking won't hurt. Industry is far from gone, was too large though. No need for dramatic pronouncements, no one is going to die :-)

We do not need more VC's but better VC's.

A bunch of the European franchises are strong (Accel, Balderton, Index, Wellington, Northzone and a number of others) and there are some new closes (DFJ apparently, Sofinnova).

We need some smart new seed stage initiatives though for sure.

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Ville Vesterinen February 03, 2010

Fred,

Good to hear things are still somewhat on track. That said, few people have good ideas how the VC industry will come out from the structural change.

Shrinking won't hurt, but going to early-stage means smaller returns, which does not scale when a partner still has the same 24 hours as the rest of us. Then you have players like DST who goes for big hits like Facebook and Zynga, take big risks with expensive valuations without distributing the risk. That will hardly scale either.

There's always room for good VCs, but its hard to see where the industry is going in Europe when the direction is down and it wasn't exactly blooming to start with. Small local seed stage initiatives all around?

Will Europe see the emergence of small seed funds while the what-is-now-a-decent-size-VC-fund will fade away to make the math add up? Or is the problem exactly the fact that we try to make the math add up?

When we never got the Valley modelled VC ecosystem to work here in Europe, are we going to see Europe build a better functioning seed model for itself now when even the Valley is forced to scale back?

Venture and risk capital is still big part of the growth entrepreneurship equation and of our future, and I believe these issues are worth discussing.

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Hannu Makarainen, February 03, 2010

Thanks Ville and Fred. Not so pleasant to read that kind of news, but not so pleasant to write, I consider. Honest thoughts.

I'll rock the boat more with an article in Kauppalehti "Suomen pudotus on henkeäsalpaava" Link http://bit.ly/9twGTI. Sorry it's in Finnish. The clue is that we got only 44 million euros foreign VC money (from venture capitalists to high tech companies) to Finland during last year. Yep! It's disaster, what else can we say? Year 2009 started well, but.. but but the river's dried up.

Don't panic! The sun will rise again, in one day.

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Ville Vesterinen February 03, 2010

On one hand I'd like to say that just because the dating service is broken does not mean supply and demand are, but I agree with the article that for example the tax code could be more 'inspiring'.

To quote why it's so hard to get risk capital to Finland: "The biggest obstacle is taxation. In the US options are taxed under capitals gain tax, whereas in Finland they are taxed under income tax. In Finland the taxation is disincentive.

Because of taxation we can't get more fast growth midsized technology companies like Suunto, Vaisala or Polar Electro to Finland!"

Can't disagree with that statement, even though I think there's much to rethink about the whole venture capital concept in and out of Finland.