In Germany there are 4 (four) VC companies with considerable funds within the range of EUR 100 million or above. Taking into account that Germany is one of the biggest economies worldwide this fact is a shortcoming, to say the least.
Why is that?
One possible answer you’ll find watching this talk with Marc Andreessen. Marc describes the “American Way of funding a Start-up” as “fund it, scale it, and then look for a business model”. Now — call a German VC, show him your powerpoint and explain the Andreessen strategy to him. Or quote Facebook’s Peter Thiel by saying: “We’re also focused on getting the product right,” says Thiel. “Getting ads right—that’s not the top user demand.” Unless you aren’t Marc or Peter himself or you have sold a company successfully before — the VC will throw you out.
In other words: invent the next facebook or twitter (don’t take this literally — I mean the next big thing) and no single German VC will fund you — promised. Maybe it’s unfair to limit this to German VCs — the reason for Loic LeMeur with Seesmic to move from Paris to San Francisco or Jajah to move from Austria to Silicon Valley were the same — they felt having scalable businesses — but they lacked a business model at that period. This did not prevent US-VCs from funding.
Haven’t European VCs read Talib’s Black Swan? Do they think inside the box — are they trapped in induction? Is there a lack of vision? Or is it — plainly spoken — too risky to invest into a facebook or twitter in its first months?
Interesting post, Michael. Times are out of joint. Maybe VCs are not the only ones missing lack vision.
Thanks, jeb. You’re right — we experience tough times. But I do not think that ‘tough times’ explain the little impact VCs have in Germany or Europe. Au contraire — not to invest in a crisis should be evidence of incapacity, shouldn’t it?
thanks, Loic. Yep — I ignored Wellington, one of the four German VCs with big funds. There are exceptions 😉
Then, taking the information presented in total, 25% of German VCs with major capital will invest in unproven innovation. I doubt very seriously that 25% of U.S. VCs with significant capital would invest in an early stage, unproven, forward looking business (if I am mistaken, point me in the right direction, I have a venture to fund). Therefore, the big issue is the low number of VCs with significant funds in Germany, not their approach to risk.
Margaret, what do you mean by saying “I doubt very seriously that 25% of U.S. VCs with significant capital would invest in an early stage, unproven, forward looking business”? What is a proven business?
Honestly — to fund a proven business I don’t need VCs — I talk with my banker (admittedly not these days 😉 or I fund it with my free cash flow. Don’t you see VCs as risk takers?
good post, I am not sure Seesmic is the next big idea, but note it has been funded also by German/European VC Wellington 🙂
Michael,
I’m afraid you’re mixing different concepts: the fact that an investor would ask for a business model is not necessarily an explanation for different patterns of development for European venture investors. Intolerance for failure is perhaps the weakest points in the European way of doing and that’s where you have a point. Not too sure about your interpretation of Taleb’s analysis in the Black Swan if I may… Reading carefully Taleb’s works you will see that he questions success based on large initial samples where success is as much the product of randomness as it is a matter of skill. Furthermore Taleb insists on the idea of mathematical expectation of return as opposed to decision making based merely on probability of occurrence of one event or scenario. IMHO the US venture model is in stark contrast with Taleb’s take and the European one probably much closer.
I’d also like to offer another perspective which has to do with time spans: if you take long periods of time I doubt the US model is always adequate in particular because it does not seem to care much about side-effects, collateral damage, waste, social impacts, human impacts, environmental cost as it tries to boost the development of young companies. Europe has a tradition of companies growing steadily for 8–10 or more generations in the same family and I believe it is possible to prove that they deliver more value in the economy than “Blade Runner” companies, i.e. those that “shine twice as bright but live half as long”… In fact you might want to take a look at Bo Burlingham’s Small Giants if you haven’t done so already…
Thanks for your post, which gave me great food for thought!
Alex,
thank you very much for your thoughtful comment. So we apparently agree on this:
»Intolerance for failure is perhaps the weakest points in the European way of doing«
Perhaps we interprete Taleb’s stream of thoughts differently: My experience is that German investors are trying to rationalize what cannot be rationalized by operationalizing criteria only within the ‘normal distribution curve’. They ignore “Extremistan”.
I appreciate your ‘long periods approach’ — yet I feel unsafe to assert a general ‘US single-mindedness’ vs a ‘European holistic perspective’ — if I summarize your take correctly. This is what we Europeans often adorn ourselves with. But is it more than anectdotal evidence?
This is probably true. The top VC names in Europe are probably not comparable to the KPCB and Sequoia Cap in US, more like the second
Lian Pheng, Managing Partner, Gingko Capital (lianpheng@gingkovc.com) has widely published on top-tier journals and publications on insider secrets to fund-raising from venture capitalists, entrepreneurial finance and startup valuations. See 99 Insider Secrets to Startup Financing (www.gingkocapital.com)