The coffee shops of Mayfair

Entrepreneurs against the abolition of taper relief

I don't want to use this blog for politics (believe me, if you get me started, I'm not likely to stop).

However.

If you want to see the entrepreneurial climate in the UK continue to thrive, please sign up to this this Facebook group.

What's it all about?

In the recent pre-budget report, the labour government has decided to scrap business-asset taper relief. This is bonkers. Why?

If you are an entrepreneur and you sell your company you currently pay 10% on the capital gain.  The new rules will see this roughly double.

Various British governments from both parties have tried a series of initiatives to encourage entrepreneurialism, recognizing that it is a core driver of growth. Some have been failures (Uni Challenge funds, VCTs) but others have been successful, namely the taper relief (tax benefits for entrepreneurs), EIS scheme (tax benefits for angels) and EMI scheme (tax benefits for employees).

What are they thinking?  That they need do no more for British entrepreneurs?  Well sure we're doing pretty well compared to 10 years ago, but we've still got a long way to go.

Please do sign up.

The Ebay Skype write down is bad news for venture capital

Since ebay admitted that, really, they messed up with Skype, there is an amusing opportunity for the vcs who passed on investing into Skype 3 years ago due its lack of revenue model to say "I told you so".  It would not be the first time that the vc community thinks its a lot smarter than the listed markets.

But why does the Skype write down worry me? Surely, I hear people say, the vcs shouldn't care. They got in and out and made some good money.

This is quite wrong.

The point is that we will all need to sell a number companies into listed web companies.

We want their acquisitions to make them money so they come back to us for more.

The FT does a good job of comparing the terrible Skype acquisition with the wonderful myspace acquisition which has made lots of money from Newscorp.

A pity they can't all be like Newscorp.

I also think Nic is missing the point.  it's not what you can auction them up to in the short term, it what value these businesses create over the longer term.

I REALLY REALLY hope that CBS eventually turns a terrific profit line from Last.FM .  And I really hope, not that Facebook sells for $10bn but that Facebook creates real value. Real revenues and real profits for an acquiror or for retail investors at IPO.  Without real value being created, over the longer term VCs will be on shaky ground.

The Post-Google VC

I have been spending some time with some great entrepreneurs across Europe as part of the FOWA Road Trip and yesterday in Copenhagen was no exception.

In particular it was great spending some time with Nikolaj Nyholm and Nicolaj Reffstrup.

Nikolaj Nyholm made one comment to an entrepreneur which really resonated with me.  To paraphrase:

“You need to raise money from a post-Google VC.  An investor who has lead a company in the last 5 years since Google has been so dominant.”

At one level this is another contribution to the discussion of what makes a great VC (I will leave that one to Fred et al.)

It is, however, of far more significance for entrepreneurs with a web app or offering.

Working for Reevoo and Glasses Direct, both very different businesses, taught me the significance of distribution, and the dominance of Google.  Some examples:

You need first rate SEO?  That will be >£100k p/a for a 19 year old whiz kid.  Someone who will be impossible to manage but can transform your business with organic traffic.

You need to bolster traffic in certain niches?  That’ll be a potentially bottomless pit of adword spending.  (Particularly true if you’re late to a competitive market: look at the differential in adword spend between gocompare, moneysupermarket and confused)

That’s not to mention the possibility of Google using some of their warchest of come after your particular market.

Many entrepreneurs are so focussing on building such a great offering that they also assume virality of distribution is inherent or inevitable.  Unfortunately its not that easy, and Nikolaj is dead right to warn that getting help from people who “get it” is crucial.

Calling Copenhagen: Entrepreneurs & Angels

Are you based in Copenhagen and doing something cool on the web? If so come on down to the FOWA Road Trip tomorrow at The Dubliner .  Ryan Carson has put together some cracking evenings to date each with a whole bunch of great people. It’s sort of like Open Coffee but with beer, more entrepreneurs, more angels and local VCs (apart from us ).

If you wanna have a word or meet up before hand.  Ping me.

Why you probably don’t need venture capital

VCs are looking for freaks.  Wierdos.  We long to see mutants: companies that are not normal.

VCs are looking for category definers.  Companies that return five or ten times their investment.  This is weird. It is not normal to build a company that will grow from zero to $1bn in four years.  Yet, it can happen and this is the potential that most investors look for.

Saul Klein has been saying some excellent stuff recently from about how it IS possible to build billion dollar companies in Europe.  The presentation  he gave at Nextweb was a great motivational rallying call to us all.

European entrepreneurs should be going after the massive opportunities. 

But I want to remind entrepreneurs that its also OK to not raise VC.  There are loads and load and loads of great businesses that shouldn’t touch the VC world.  These companies can still make the founders rich.  Just probably not as rich as the founders of Skype.  Nor have the rewards of Last.fm at such a young age.

What are the reasons not to raise VC.  Why not?
·    VC is the most expensive money you can get.  This is a fact.  The cost of debt is lower than the cost of equity and venture carries the highest risk premium of all.  This means that you have to give up BIG CHUNKS of your company. (Nic has recently written on how important it is to get right the amount you raise at the first round.  My point is, however you do it, it's expensive). 
·    You can’t get big enough. Remember that VCs need 5 – 10 times their investment.  Ask yourself; can your web app really be worth $500mn? 

Ryan Carson is a great guy to talk to or read blog post on this.  Some time back, he analysed his DropSend business and realised that he could make a great business out of it.  It would make him money year on year.  Just it wasn’t going to take over the world.  He wouldn't need to riase external finace. Consequently his focus on building a brilliant web app and profitable business has made him very successful.

I chatted to him about this recently and he said his personal metric was 100 million dollars.  Unless he has a business that can sell for more than a yard of US, there’s no way to justify the dilution.

He also pointed out it’s a personality thing.  From some entrepreneurs there is great pride in keeping it small. It’s also a question of risk.  If you have the risk profile to keep betting the farm on three cherries you are right for VC (explanation).

So you should only really be looking to raise VC if
·    You need the brand, network and advice of a marquee investor
·    The market opportunity is massive.  Ridiculous. Whitespace.
·    You can’t do it off cashflow or debt.

For these companies, VC is a wonderful option because rather than having to re-mortgage the house and invest, what Fred Wilson calls “divorce equity, lack of sleep equity, gaining 15 lbs equity”  you can take someone else’s cash and risk that.  VCs can also offer loads of additional help in terms of sage advice (what not to do!) introductions and network.  Lots of our portfolio businesses also enjoy the additional credibility of having a marquee investor to show off about: it helps to gain credibility with certain partners.

If you still think you raise VC that’s great.  Drop me a line.

Why we love seedcamp

I am back to work this Monday and have a stack of seedcamp applications to process.

I think there are two particularly exciting things about Seedcamp:

1) Ecosystem

Seedcamp is a terrific opportunity for some young and bright entrepreneurs to spend a week meeting the most incredible set of people.(This speech and this link gives a flavor on the board, but I understand Saul will soon be revealing some incredible mentors flying in).

The power of a network is fascinating.  Some people seem to think that it’s an end in itself.  I don’t agree. 

A network is not a set of business cards.  A network is not someone you’ve met once at a rabid networking do.

The best people I know, I have worked with.  Working in their company, with their board, negotiating a deal on the same side or the opposite side of the table. Sharing my opinion and experience.  Having it shouted down, debating and sometimes being listened to ;)

What is wonderful is that the successful seedcampers will get to meet a cracking set of people and engage with them. Hearing their opinions and experiences inside successful businesses.  Strongly disagreeing, debating and sometimes agreeing;  The closest thing to actually working with them.

2) Thinking big

Seedcamp gives entrepreneurs the opportunity and a very supportive environment to think big. 

I am a strong believer that the “go big or go home” mentality is absolute rubbish. Entrepreneurs should not feel obliged to manically strive to create businesses that change the world.  Its just not the right path for some people, some business models or some risk profiles.

However, if you don’t consider how you can build your idea into a billion dollar business at the start, its very hard to turn it into one halfway through. If you don’t “just go for it” when you’re young, it’ll be much harder when you have a mortgage and a nice car to drive to a comfy job at a business park in Bracknell.

That’s why I’m excited about seedcamp.

European Venture Capital: What have we learned?

Now that I am no longer an advisor (albeit still on gardening leave) I can look back with some detachment on the whole process of raising capital or selling your company.  I want to do two posts: what does the VC market looks like today, and to answer the question, what is it with advisors anyway?

The market today:

Over the last 8 years I have been privileged to work with some incredibly talented management teams and entrepreneurs.  Through-out each process I have sat through some meetings with remarkably astute, insightful and experienced VCs and corporate acquirers and also some incredibly rude and clueless investors.   (I have also met a similarly diverse range of entrepreneurs!)

Let me focus on VC: I will cover M&A in another post.

I think that the European VC scene is a notably better place and that  THNGS ARE GETTING BETTER ALL THE TIME. 

• The ecosystem for entrepreneurs is getting better: from uni spin-out hubs & clubs to booze fuelled dinner table debates.
• The quality and segmentation of investors is getting better; from international success-stories like Index to small, ultra focussed funds like Eden Ventures. 
• The DIALOGUE is getting better; I doff my cap to initiatives like open coffee club which fosters mutual understanding. I believe VC –entrepreneur relationships are far less adversarial and far more informed than they were 8 years ago. (Fred has a nice angle on this too)

It is this last point that raises the question: what is the point of advisors? Let me explain. In the bay area there are no corporate finance houses running Series A B or C rounds.  This is done in-house, by an NED or maybe by the lawyer. European VCs ask me: why do European entrepreneurs need people like First Capital?  I will turn to that in the next post.

European Ventue Capital valuations: Value or growth investing?

Venture Capital valuations are a thorny issue.

In an earlier post I pointed out an investor’s comment about European entrepreneurs being relatively unsophisticated when it came to getting a good valuation.

Once again I was interested to hear another recent outburst from a large well respected Euroepean early stage VC. His word were “we‘ve made 9 pre revenue investments over the last 24 months. They are high quality companies and we’ve had no competition on any of those deals.  Early stage VC is still cheap.”

I thought that VC was all about growth.  Have I missed the point? 

Maybe the thing that makes venture capital an attractive asset class is that it operates in the greyest part of the market.  Not grey because it is underhand or corrupt.  But grey because it is inefficient: because entry valuations CAN be cheap. Because it is easier to follow a path of value investing rather than growth investing.

Well maybe for some investors.  But did Index Ventures get into Skype cheap?  No. Did SEP get into CSR on the cheap? No.

Did Accel, Benchmark or Atlas get into Icera on the cheap?  No. Amadeus?  Certainly not.

Of course it would be stupid for any investor to pay too much.  If Index only had got 1% of Skype then it would have made no dent whatsoever in their IRR.  But bragging how cheaply you can into deals?  Not sure it helps any of us.

NB. Just after I wrote this I went for drinks with a bunch of investors.  One partner at a tier one and half fund told me that he is delighted with competitive deals and efficient market: he is confident that his firm can differentiate themselves as sufficiently value add to not have to pay top whack. And I didn’t even prompt him!

2006 Early Stage Venture Capital into European Web2.0

I have now pulled together all the numbers for European Seed and First Rounds into consumer and internet businesses in 2006.  (The final list is  at the bottom of the post in all its glory). 

So what are the headlines?

European Web2.0 investments are BIG and have skyrocketed from last year. 

More than £144mn was raised in Europe across seed and first rounds in 2006 by 54 European web2.0 companies.  This total doesn’t include the “undisclosed investment” rounds, of which there were 16.

The growth is remarkable. 

In the UK in 2005, just £24mn was invested into web2.0 companies.  In 2006 that figure increased threefold with £79mn worth of early stage investments into 21 companies.

VC investment patterns are changing

Active VCs

Index Ventures is the most active. No surprises there.  But a quick look at their syndicate partners shows the (re) arrival of the Americans. Sequoia doing a first round in Europe!? Rather surprisingly the active investors aren’t just the London based mega-funds like Benchmark and Accel: Great to see Mangrove coming out on the front foot after the success of Skype.  Finally the activity of not usually headline grabbing Nordic Venture Partners.

Investment strategy

Astonishing that we don’t see any investments in the area from 3i.  I would have expected to see something from them, not just because they’re the biggest and oldest player in Europe, but also because in 2006 they recruited the incredibly web-savvy Daniel Waterhouse from Yahoo!  Maybe 2007 Daniel?

Also interested to see Atlas Ventures back with a vengeance.  Their investment strategy seems to be following copycat models Daily Motion (YouTube), Koodos (Yoox), and I understand another business (to be announced) is also directly competitive to a UK venture backed web property.  Is this accident or design Fred? 

Range of web businesses

Companies that make money

Good to see that many of this new breed of web company has very explicit revenue generating capabilities; they are either stores/services (Wiggle, Stardoll, Moo.com), or they facilitate the process of buying/selling somehow.

Models that build on models

I am really interested to see two types of companies using third-party web-services as a platform. Firstly, eBay is the platform for two VC backed businesses.  Autoquake  helps people sell their cars on eBay, auctioning4u helps anyone sell anything on ebay.  Secondly there are web-services which serve parts of their sites onto other peoples. Examples include Reevoo  serving their genuine customer reviews onto retailers sites, or Dailymotion allowing bloggers to show video on their
sites.

Ecosystem 2.0

European politicians should be delighted that we have a thriving entrepreneurial ecosystem which they have been attempting (hoping) to build to compete with the USA, principally the West Coast. 

Interestingly, this ecosystem is not centering on the Universities or the government sponsored funds.

It is instead the Silicon Valley model of second time round entrepreneurs, experienced business angels and VCs who have already been through a few cycles.  So we see the team behind Active Hotels either as Execs or Angel investors at Reevoo.com .  We see Mel Morris of match.com as an angel investor into SoFlow.com.  Firebox founder Michael Smith doing it again with Mindcandy. Pierre Chapaz, founder of Kelkoo.com is now at Index Ventures. We see  second time round entrepreneurs are Eyeka (CEO Giles Babinet sold Musiwave), the Skype guys doing The Venice Project & Fon's Martin Vavarsky previously founded Ya.com and Jazztel.

Company	Investors	Description	£MM	Location	Round	Date
Aggregator	Amadeus , Intel Capital , 3i	WebTV	9	UK	1	Jul-06
All Peers	Index Ventures , Mangrove	Private P2P media sharing	W/H	UK	1	Mar-06
Auctioning4u	Foresight Venture Partners	eBay drop-off stores	2.2	UK	1	May-06
AutoQuake	Accel Partners	Sell cars over the web	3.4	UK	1	Jul-06
Bebo	Benchmark Capital	Social networking community	8.5	UK	1	May-06
Exabre	Eden Ventures	www.thefilter.com itunes plug-in. Last.fm-esque	W/H	UK	1	N/D
Koodos	Atlas Venture	End of line retail.	W/H	UK	1	Jun-06
Last.fm	Index Ventures, Atomico	Consumer audio filter	2	UK	1	May-06
Mform	Artemis	Online mortgage comparison	2.5	UK	1	Sep-06
Mind candy	Index Ventures , New Media Spark	Online / offline games	3.97	UK	1	Oct-06
Moo Print	Atlas Venture, Index Venture	Customized printing solutions	2.83	UK	1	Apr-06
Murcia Solstice	Enterprise Ventures	Web and text social network	0.55	UK	1	N/D
Netvibes*	Index Ventures , Accel Partners	Ajax desktop / DLA /Filter	8.17	UK	1	Aug-06
Reevoo	Eden Ventures	Online publisher of genuine customer reviews	2.5	UK	1	Dec-06
Seat Wave	Not disclosed	Viagogo lookalike	W/H	UK	1	N/D
Skinkers	New Media Spark	RSS publishing	2	UK	1	Jan-06
Soflow	Kodiak , Northbridge	Social networking for  professionals	2.8	UK	1	Mar-06
Viagogo	Index Ventures, Atomico	Online Ticket exchange	9.9	UK	1	Jun-06
Wayn	Esprit, Angels	Social Network for travel	5.5	UK	1	Nov-06
Wiggle	Isis	ecommerce: online retail	12.5	UK	1	Jul-06
Yuuguu	Enterprise Ventures	Enterprise collaboration	0.6	UK	1	Oct-06
Jalbum	Nordic Venture Partners	Web photo album tool	W/H	Sweden	1	Jul-06
Polar Rose	Nordic Venture Partners	Online photo search	2.72	Sweden	1	Jul-06
Stardoll *	Index Ventures , Sequoia	Online dress-up community	6	Sweden	1	Jun-06
Fon *	Sequoia , Google , Index	WiFi sharing	12.33	Spain	1	Feb-06
Properazzi	Mangrove, Angels	Property Search	W/H	Spain	1	Nov-06
ebuddy	Lowland Capital	Multiformat IM	3.41	Netherlands	1	Oct-06
Spotzer	Undisclosed	Ready to air video advertising	W/H	Netherlands	1	Jun-06
Pigsback	Angels	Consumer coupon and discount site	2	Ireland	1	Oct-06
SevenLoad	New Media Ventures, Stroer	Video platform & white label service	W/H	Germany	1	Nov-06
CoComment	Netage Capital Partners	Blog comment tracking	0.75	Germany	1	Dec-06
DJTunes.com	High Tech Gründerfonds	Online music Download	0.3	Germany	1	Dec-06
Imageloop	Angels	European Slide.com	0.6	Germany	1	Dec-06
Kimeta	High Tech Gründerfonds	Vertical Search (jobs)	W/H	Germany	1	Dec-06
Locr	High Tech Gründerfonds	Photo Tagging	0.39	Germany	1	Dec-06
Nachtagenten	Burda Digital Ventures	German Clubbing Social Network	W/H	Germany	1	Dec-06
Page Flakes	Benchmark	Ajax desktop / DLA /Filter	W/H	Germany	1	May-06
Qype	Partech , Advent Ventures	Local search services	W/H	Germany	1	Aug-06
Spreadshirt	Accel Partners	Consumers design  T-shirts,	W/H	Germany	1	Jun-06
Wazup	Innovacom & Wellington Partners	Game Search Engine	5.20531	Germany	1	Dec-06
Criteo	Elaia, AGF Private Equity	Recommendation engine	2	France	1	Apr-06
Dailymotion	Atlas Venture , Partech	Euro YouTube	4.77	France	1	Aug-06
Eyeka	DN Capital , Ventech	Mobile video and image market	2.72	France	1	Feb-06
Kewego	Banexi Ventures Partners	UGC Video	3.4	France	1	Apr-06
Olfo	Members-only e-commerce	Edmond de Rothschild, OTC Asset Man.	2.1	France	1	Dec-06
Viaduc	AGF Private Equity , Ventech	Viadeo.com is social networking for  professionals	3.4	France	1	Jun-06
vPod.tv	Innovacom, Angels	Online video	2.5	France	1	May-06
W2.Media	Angels	www.Vozavi.com "consumer expert" decision-making	0.8	France	1	May-06
Wikio	Loic Le Meur, Martin Varsavsky, Pierre Chappaz, Jeff Clavier	User managed news search engine	W/H	France	1	Jun-06
Yoono	Social Bookmarking	AGF Private Equity	1.02	France	1	Aug-06
Igglo	Benchmark , Taivas	UGC Real estate	8.51	Finland	1	Oct-06
Quintura	Mangrove , OpenView	Visual Search	W/H	Europe	1	Nov-06
Joost	Not disclosed	Non-linear webTV	W/H	Europe	1	N/D
Zyb	Nordic Venture Partners	MobilePhone backup	0.6	Denmark	1	Oct-06

A vintage year for investing. I am honoured to be working with the entrepreneurs who are driving it. Of course, the real test for us all comes of course at exit….

Methods. This has been a mixture of old fashioned primary research, desk research and most significantly help from readers: thanks to all those who posted or wrote with deal deals, many of which were missed by the mainstream deal databases.

*These deals have had Seed and First rounds in 2006 and total funding has been summed in the table

Reference sources used: Venture Source, CalibreOne research

2006 Venture Capital Investment into European Web companies

2006 Internet and media investments

It’s a little premature to be releasing any numbers, but I have been taking some time to look over the deals done so far this year at Seed and Series A Level.

As I noted when First Capital ran the web2.0 event last year, I was convinced that we would see not only more deals into European web companies but also a significant up-tick in the amount invested. Just from the list of companies noted below, you can see we’re already far ahead of last year’s numbers.

 
The list is interesting as it shows new investors to Europe (who’d have thought we’d see Sequoia active here?), some other investors appear to have woken up. The type of companies are fascinating too: Far more online-offline models such as Moo and Spreadshirt, some of the filter technologies that excite me so much like Netvibes, PageFlakes and Last.fm, and also a new breed of online media properties like the wonderfully named DailyMotion.

Worryingly I also see a few directly competitive investments from competing VC firms… feels like 2000 again.

Dear reader, this is not yet a complete list, and I need your help. Which have I missed or got wrong? I know are few are missing but they not closed yet ;) but there's others I will have just overlooked.

Send me mails if I’ve missed stuff off (remember only seed and first rounds, only European companies) and I will publish the complete list with investment amounts at the end of the year.
 

2006 Consumer internet and media investments

Seed and Series A Level

The story so far...