There is nothing wrong with the mindset of many European entrepreneurs. It is fine. The problem is largely in the ecosystem in which we build our startups, and the dependency between startups and their ecosystem. Also many of us are first time entrepreneurs. To think big, we entrepreneurs need to either push 27 boundaries on the EU continent or simply move to the US and Asia. But in case of  the latter we are no longer building the so much needed European success story, or a European ecosystem similar as it exists in the US or am I wrong here?

For us to seed stronger startups and become more independent and have entrepreneurs taking care of other entrepreneurs we need more and bigger European exits. We need more EU successes, and EU companies with guts buying US companies (i.e. citydeal buying groupon). We need more European angels investing in Europe (who are the European Super Angels), more serial entrepreneurs backing start-ups, more VC teams managed by entrepreneurs, governments valuing true entrepreneurship the same as innovation, entrepreneurs that can execute upon their vision rather than being pushed to focus on monetization from day one, …

Typically entrepreneurs from small EU countries (Belgium, Latvia, Luxembourg,..) are quicker in building international companies: Playfish (founded by Sebastian Halleux who moved to the US – Belgian), Tapulous (founded by Bart Decrem who also moved to the US – Belgian), Netlog (BE), Nimbuzz (NL), …

Nonetheless, there are plenty of kick-ass entrepreneurs building kick-ass products and businesses in Europe: Skype, VentePrivee, Spotify,…

So, to conclude, there is talent working on the next big thing here in Europe. We just need to make sure that some of the spillovers as a result of exits (money, networks, expertise) stay in Europe for the benefit of the next generation of Entrepreneurs.

As I have been working the whole day in a loungy coffee place (Plaza Toros) with free WIFI (thanks!) downtown Skopje, I was surprised to see so many iphone users around (!  = niche market that can be served). Automatically, my gut feeling would argue that mobile technologies should be something the Macedonian people should be focusing on (lower entry barriers, quicker ROI compared bio/cleantech). Also with 50% of the countries living in one city, it is a perfect living lab for mobile technologies.

Tomorrow I am supposed to engage in talks with local entrepreneurs and business angel initiatives originating in other parts of SE Europe (Bulgarian BA, Romanian BA and Slovenian BA) and provide some experiece/toughts on ‘venturing in Belgium/Europe’ and on the general ‘access to finance markets’ in Europe/US.  Also a few VCs active in Central/Eastern Europe will be present. Previously, I had the benefit of digging into other early ‘ecosystems for startups’ in other eastern European countries (Poland, Hungary, Czech Republic), but Macedonia is quiet different. It is not an EU member country, and also not yet a candidate one (but talks with the EU are supposed to start soon). Especially if you’re just outside a 500M user market it offers a lot of competitive disadvantages (but luckily also some advantages).

Anyway, I am looking forward to what I am about to experience and learn in the next 2 days.

Some things to remember from the panel with Filip Tack (CEO Nomadesk – awarded as most promising start-up in Europe for 2009 by Innovate), Bart Becks (CEO Glechar, SonicAngel), Felix Van de Maele (CEO Collibra) on Venturing USA.

• The panel anonymously agreed: “entrepreneurs should give “Venturing USA” a try, even if it was for a month, embed yourself in the Valley and just experience it“;
• Also mentioned by Xavier in his video (see below). The valley is crowded with entrepreneurs. Its a hot spot with tons of events to go to, which makes it much easier to meet founders/CEOs of successful start-ups, business partners, developers and investors;
• If you’re serious then “venturing USA” is a necessity. Venturing in Belgium (i.e. focusing on a small market) for a lot of start-ups implicitly means a slow death. Markets in Europe are complex (fragmented, culturally diverse). If you need to sell to big companies it’s hard as companies like Yahoo, Cisco, Google mostly only have sales reps and marketing guys in Europe and no decision makers. This way its hard(er) to get your product sold;
• Also the abundance of capital is one of the key reasons for us start-ups to give it a try in the US. For every VC in Belgium there are 100 VCs in the Valley (i.e. there are not a lot of VCs in Belgium).  Though, I personally feel that this remains a very hard to access resource for us European entrepreneurs. Even US entrepreneurs are required to have a tier 1 team with the right blend of degrees and experience. As Bart described “being a former CEO of Belgacom Skynet doesn’t ring any bells in the US as they simply don’t know Belgacom”. I would add that you need to have a US customer base or a clear US strategy if you were to consider raising money in the US. Also having a local US based partner (as a core team member in your start-up) is probably required. If you don’t have a clear plan, or just ain’t able to raise money/interest in your local market then don’t hope for it in the US. But then, from a learning experience, its for sure worth to engange yourself in a discussion with a US VC;
• Being VC backed in Europe doesn’t help a lot or better means a lot to US VC’s … “as they are not impressed by European VCs” dixit Filip;
• A market tailored for start-ups, a market that understands the start-up ecosystems and provides services accordingly, e.g. lawyers, advisors are supporting companies with transparant fees or even defer payments to after the company raised the necessary capital. In Belgium you have to pay (legal) advisors huge amounts for basic services (upfront) taking away the resources to build a company etc;
• necessity to have an introduction. Its a fiercely crowded and competitive space. Even if you’re a guru in a country like Belgium, you’re nobody in the valley. You have to start from scratch. Introductions by peers/entrepreneurs from the valley might help/fasten the process of building your local valley based network;
• related to the introduction is the importance to have a local advisor (should be an entrepreneur who knows the ins and outs and can guide/advice on venturing USA (we’re not talking consultants here);
• Whereas it’s difficult to get people understand an innovative new media concept/business in Europe, its very easy to do so in the US. You don’t need to explain Twitter since they’re all using it!;
• In the Benelux you don’t need to worry about sharing your idea. The scarcity of entrepreneurs means that the only person who’s putting the idea in practice will be yourself;

So far some of the findings shared by our panel yesterday!

But guys we’re doing great in Belgium/Netherlands. We just need to keep ourselves bechmarking with the best to become even better! On the same day of Pitch Arena, Netlog announced that they were growing at 500k users/month. Also Nimbuzz (3rd most popular mobile app in the US after Facebook and Google) is showing a steep growth curve with 40k users registering a day (check video of Tobias below).

Here I am sharing with you the video’s of Tweetag and Nimbuzz on when/why they went to the US and their experiences so far.

Video by Xavier Damman (Tweetag, twitter: @xdamman):

Video by  Tobias Kemper (Nimbuzz, twitter: @TEK):

Even when you’re business is online, spreading your message to the other side of the world is not that easy. Recently the CEO of Nomadesk, Filip Tack who will also be present at the next Pitch Arena was putting a lot of effort into getting selected to the JuicePitcher. To me a unique opportunity to pitch in front of the tier one population of investors, entrepreneurs and business executives from Silicon Valley. Being accredited by such events is not only good for the entrepreneur’s ego, but more importantly will prove to be the so much needed path of introductions into the “ecosystem”.  I hope to digg more into that during the talk later this month.

So what can you expect on the 29th. Like I mentioned there will be panel on Venturing USA with the CEOs of Nomadesk and Collibra and the serial entrepreneur Bart Becks. Since that the group is limited in size there will be enough room for discussions.

Equally important are some pitches from young promising start-ups. We have Dirk Stevens from Wondergraphs about his new venture that he’s about to launch to the world. The guys from PressDoc whom I met at TechCrunch50 will pitch about their business that makes is easier for companies to manage there press articles, something that is especially important for start-ups who need to work hard for getting visibility. Also a presentation of Bart van Loon (i don’t know how many projects he’s incubating at the moment) but one of his latest businesses Thedatatank is -how I understood- a spinoff of myownDB. These are very smart guys and I for once hope that they can get the ball rolling, even in a hard market as Belgium. The guys from 8seconds will pitch a new business that is being rolled out aggressively as Pieter (the executer of it all) is pushing hard to get his business adopted in the market! I look forward hearing their stories, how they plan to rule the world and make Belgium a few success stories richer!

More info on the event: check www.pitcharena.com and fellow entrepreneurs reading my stuff get another 50% discount by using promocode “PitchingRocks“

So see you all on the 29th!

Pitch Arena

In a few days (Sept 12 – Sept 16) I will be heading again to the heart of the valley to attend the TechCrunch50, a conference focusing on the launch of 50 pre-selected new start-ups from accross the globe. It is also the event that attracts todays best and most active VC’s and angel investors. Just have a look at the panel of experts.

Of course, more importantly to me is that I will prepare the launch of my own start-up CashCollie. We are planning our private beta launch in Autumn this year. More to be announced later.

Also note that there will be a delegation of Belgian Start-Ups (YourTour, Tweetag) attending the TC50 event. If you should attend the conference as well, let me know and we’ll meet up!

But as a matter of fact, today the majority of European VC’s are publicly funded. So can we say that the overall performance of Europe’s VC industry is not so good (?). I guess so. But then again, how to change this? Today there is little to no choice for a VCs to raise money (story most often heard from start-ups as they complain the lack of money) then to raise it from public bodies (EU funds, national funds, regional funds like the JEREMIE initiative).

Face it: Europe’s VC market is public.

But then ok, we are dealing with one dominant investor in Europe – the EU itself – who’s strategy differs from that of private money.

Result:

• More fragmentation. Every European region can have a tiny regional VC fund to invest in local successes. If unperforming region A needs money, then also lousy region B needs to get that money. We have a scattered market place with a lot of tiny VCs (they invest little, they invest in few, they’re not pragmatic, e.g. not like the seedcamp initiative that is about seeding for EU wide successes, instead these tiny VCs are seeding local regional successes). Good? I don’t think so. This way we further stimulate the EU as an engine that grows small SMEs instead of continental size success stories aka Google/Ebay/Amazon/ in the US. I admit we have some successes, though Skype was just luck and coincidence and not planned (too disruptive for many European VCs).  But respect to the guys from Mangrove who took the bet and backed them (incuding the EU money). Pity again that we lost it to the US. But again the trade-off is that the founders of Skype are backing smaller EU start-ups.
• No market for EU venturing funds. These commercial vehicles pick the good performing VC funds to invest in, but if there ain’t any in europe (when comparing the funds with their US counterparts) then they seek elsewhere (e.g. European money goes to the US).

“The capital constraint of European VC is a serious problem and is part of a vicious circle whereby small funds try to build global companies, find they don’t have enough money to finance this growth, which leaves the door open for US VCs to swoop in and generate the big returns at the expense of the European VC, which means LP cash pours into US funds (or at least used to) rather than the European ones, constricting fund sizes, and so the cycle continues (full article from EVCJ).”

• Biased strategies. The dominant involvement of a stakeholder who’s interest is to support plain growth and local innovative SMEs and not to make money and thus grow international successes scares away performance driven venturing funds.  These funds are favouring VC teams that can pick the best opportnities from growth regions throughout the word (the valley in the US, the London area or even in India) instead of investing in small funds bound to only invest in a small local market because that’s required by that other big investor, Mr. public.

My take is that the EUs involvement is fine! We are a different continent that’s a fact. But to grow a European VC scene we need more transparancy in the market. Who are the challengers, the emerging funds…. For start-ups its sometimes easier to name some good US VC funds then to name a good European fund. As such, high performing entrepreneurs are contacting US funds instead of their European counterparts (remember:  entrepreneurs are in for growth, seek expertise and value adding money…).

To find out who’s “hot”, we have to stop focusing on public versus private funds. Public will always be worse. And especially since in Europe the majority of the funds are publicly tied (directly or indirectly) it is interesting to look to other parameters to figure out which funds are doing better. As a result, a better European VC market should be created. Thus, don’t only benchmark public versus private. Instead, consider other parameters: VC teams of entrepreneurs, versus VC teams of MBAs, versus VC teams of public officials, VC teams who contributed personal investments in the fund, versus VC teams with no personal investments in the fund (generally every partner invests some money in the fund, e.g. totalling 5% – though this hardly a fact for EU VC’s), sector focused VC’s from Western EU versus those of Southern EU, etc…

This way national VC bodies and European ones like EVCA should give proper advice and insight to the EU. So they can invest their money wisely, into the right teams with relevant backgrounds, with relevant track records and who above all understand ‘entrepreneurship from experience’ and understand today’s industry (not yesterday’s).

We, entrepreneurs, are not waiting for another small specialty fund X in region A to only support a few local ventures. Instead we need the good VC funds to stand out, that they are able to attract more financial means and better talents from all over Europe, that they attract sources to build European ventures instead of local/regional ventures. We need VC’s to grow EU’s successes.

Now, the problem of big funds is that they invest big money. But actually today’s small and agile start-ups don’t need as much money as 5 to 10 years ago. Barriers to growth and scaleability are small. Today’s entrepreneurs need VC’s which are as agile as themselves. Invest small money, spread risk over more start-ups, and manage their growth (of course that involves more work for the VC). But isn’t that fun, running 20 small ventures to growth instead of 5.

Another point discussed is that there are little to no entrepreneurs anymore running the VC industry. Originally, the VC industry was built by entrepreneurs. Today most VC’s are MBAs with little to no experience of running businesses. This is even worse in Europe, where the majority of the VC’s (basically all VCs in Belgium) are publicly driven and a significant amount of the investment managers have a public background (here we are not even talking about a MBA).  Though in Europe, if there was no public support, there would not have been a VC industry (even anno 2009).

Another negative aspect is that ‘old boys‘ who’re in the ‘network’ keep on attracting money to their funds (e.g. Koshla: one of the backers of Sun in the early days announced yesterday the closing of a $1 billion fund of which $750M might be used to bail out companies in which Khosla has already invested – is this a good thing? The crisis justifies things but 3/4 of the total fund). We’re talking venture capital here and no later stage private equity, M&A or hedge fund activities. We need companies to make money not to burn money!

Also most of these old boys don’t have any feeling with the industry anymore (Though Koshla is an exception as he’s exposed to the best deals (read: start-ups) in the market) but that’s not the case for many other, in particular European “boys”. Let me explain based on a company’s lifecylce. Sun Microsystems, recently acquired, and a Koshla Ventures portfolio company had a lifespan of almost 30 years. Though, for today’s companies, especially in the new media industry, the life cycle of a company is so short. Facebook only got founded 5 years ago and that’s pretty old already. Twitter is only 3 years old.  Running a business today is not the same as running a business 10 years ago. Though, I agree that value creation today remains as important as it ever was. Though the methods and tactics to reaching those vary.

I hope that initiatives as Seedcamp in Europe (supported by the VC community), and Y Combinator, TechStars in the US are paving a way towards revamping the early stage VC market and towards more similar (preferably) privately driven initiatives. Seeding small, pragmatic and seeding with an understanding of the market.

Every company is unique and that uniqueness is also translated in the capital needs of a company. Sometimes it requires a careful thought on what is the best and most viable way to secure the capital needs and to pursue positive growth for your company. There are financing structures for companies that have small potential and structures for companies that have big potential.  There is not a one-size fits all strategy for capitalizing a company.

Ultimately, financing a startup properly boils down to aligning the financing structure with the business opportunity and capital needs.  In other words, the way in which you elect to finance your company should at a high-level be determined by 1) how big of a business opportunity it presents and 2) how much capital is required to breakeven.  While there are a number of other considerations, but I would argue that these are the first two dimensions to consider as they should help entrepreneurs more quickly find the right direction for their financial strategy.

The 2×2 chart below should help to illustrate how to think about which fundraising category that they are in.

Venture Capital
If you have a big idea that can generate at least $50M in revenue and the business requires millions of dollars to get the company to a cash flow positive position, you should probably pursue venture capital.

Not Viable
If your business requires significant capital, but is not poised to become a large business you may not be able to find a viable funding source.  If your company falls into this category, you should probably go back to the drawing board and find another opportunity to pursue.

Bootstrap
If you have the potential to build a small business – one that generates single-digit or low double-digit millions in revenue – while requiring little capital to achieve breakeven, you have a lifestyle business.  In my opinion lifestyles business are best financed when the founders take as little outside capital as possible – these are companies where it’s really only exciting for founders if they own a large percentage of the equity.

Depends On Barriers
If your company has the potential to become a big business and requires little capital to get there the decision between bootstrapping the company and raising venture capital generally boils down to your expected barriers.  If there is little risk of a competitor beating you to scale and taking the opportunity, because you have a unique approach, protected IP or otherwise, then you may want to bootstrap the company in order to maximize your ownership of the company.  If your barriers are limited, however, and additional capital can help you capture market share more quickly, securing the opportunity, then you should consider venture capital.

Picking the right fundraising strategy is often as significant of an indicator of the founder’s payout as selecting the right business strategy.  Take the time to understand what type of company you are building and finance it properly.

I have encountered many European entrepreneurs who are thinking too much in the short-term. They’re running a business ‘destination unknown’ or thinking only one financing round ahead. They have a technology that they wish to market, though have only vague ideas on who could eventually benefit from their technology in the long run, i.e. who would be potentially interested in acquiring the company. A blunt answer “that the company’s ambition is to go IPO” will not convince your investors. That’s why as an entrepreneur you should think carefully about the possible exit routes, and note that 1 route is not enough.

Another important aspect is to understand the financial resource requirements of your venture. What is truly needed to make your business opportunity tangible. Tangible for getting the business model working, tangible to be a threat for your tier 1 competitors, tangible to start becoming a threat for big dino’s.

In terms of fundraising you might not have enough in one financing round, though on the other hand 1 big financing round is not feasible to raise at this stage. And when splitting the needs in various fundraising rounds you need to be very careful in how you’re splitting the rounds, who you’ll be addressing in each and every rounds, what the value is of your company and if that matches reality and what you can realize if you’re offered another financial slice.

Capitalisation Table

To get a first understanding the attached capitalization table will help you to get an idea on the financial needs from start to exit. Also you’ll see what dilution means for your as shareholders in the company. How you’re shareholding is evolving, but not necessary harming your financial position. At least that is as long as you’re creating the promised value associated to each and every financing round.

Oak Investment Partners, the largest VC firm is facing a slow death. Though, here the problem is mainly related to bad management. The firm’s 2004 and 2001 vintage funds had produced net internal rates of return (IRR) of just 1 percent and 5 percent respectively, according to performance data posted by the Washington State Investment Board. Those rates are significantly below expected returns for such a risky sector. Nonetheless, VentureBeat posted an article that they raising another big fund of $1,5 billion.

You’d guess why and from who they are getting money. Seems that the due diligence is biased to a small circle of friends in the LP community. Instead of funding the same unperforming VC firms, they should better give more resources to young talented 1st and 2nd generation funds who’re mostly closer to the market and are driven by growing ventures rather than management fees.