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.

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!

VCs backing competing businesses

Following on from the last post on web deals last year, I have had lots of messages on the subject of VCs backing competing companies.

A quick look around shows there's not an awful lot of commentary on this subject.

What I did stumble across was a startling comment from Danner Rimer on investment strategy:

"What I am concerned about is that it seems everyone wants to start a company instead of just surrounding an idea and going after it," he said. "When you have mutiple companies going after the same opportunity, things are not going to work out for everyone."[link]

Maybe I am quoting out of context.  Maybe Danny was refering more to Entrepreneurs starting competing companies.  But Danny seems to be suggesting that if VC1 spots a nice company in a growth market, he shouldn’t back it if VC2 has already invested in a competitive company.  Instead he should try and “surround the idea” (does this mean phone up VC2 and try and get in on the next round?). Maybe this is Danny’s point as his portfolio bears it out out: success when he flipped Flutter into Betfair and not long ago Photobox and Photoways merged.

Maybe backing competing companies is a natural consequence of the current market: what happens when VCs "spray and pay" in a market, to quote Barry Maloney commenting on our research in the FT.

Fred Wilson also thinks that what he calls “me too investing” should be avoided at all costs:

“ the only thing a VC firm can do to protect itself from venture fratricide is stay small, avoid overly competitive markets, build your best companies quietly, and avoid "me too" investing at all costs. This may mean passing on some deals you'd really like to do, but that's an important part of the venture discipline.” [Link]

I suppose the idea behind having only one VC-backed business in each sector is based on an expectation that the whole is greater than the sum of its parts (e.g one big business in the online forex swaps market will either IPO or sell for a larger amount than the sum of 3 or 4 smaller exits).

The challenge here is that it's hard to get evidence. Day one of venture captial school teaches us that, where one company dominates a particular market, then its market cap is disportionate to its share of its end market.  But this does not exclude a number of VCs making a killing with a number of smaller businesses.  For example the traffic management market, one that I know well , has seen healthy exits for a series of players (F5 IPOed, Peribit (Accel & Mayfield) and Redline (Charles River ventures) were acquired  and there’s still value left in the market.

I think the key factor however is that as long as there are newer, ambitious VCs snapping at the heels of the established houses, there will always be a temptation to back a competing company.  Some have told me that this practice is about ego driven deal doing: I am not so sure.

It seems that every week we get contacted by a new investor looking for deal flow. I see a swath of new money coming back into the market whether is hedge funds trying to knock out Benchmark and Index or media corporates investing to protect their markets.

It just looks to me like healthy competition.

Postscript.  I love this photo.  Thanks to Wade Rockett for that.

European vs. US venture deal pricing

European VCs face price competition not just from corporate acquirers but also US VCs.

VentureSource stats suggest 2004 Median pre-money valuations were at $12.5 in the US, but only €5.5mn in Europe.

It is true that the European venture market is still a little behind the US when it comes to competition on deals (Private Equity conversely are well used to the harsh winds of competition). It’s one of my jobs to tell VCs when they have lost a deal and I promise you, when it does happen, they don’t like it.

I recently asked a European VC about this US vs. Europe venture price discrepancy: Why, I asked, does it exist?

“From the demand side, there are comparably less VCs with smaller funds chasing deals”

But the next bit was what surprised me:

“From the supply side, European entrepreneurs are not sophisticated enough to run competitive processes and decide to go with an investor pretty early in the process”.

Early stage VC being killed by Internet companies?

The Web2.0 event we held last week was a roaring success.

I will be posting a full overview of the presentations as soon as we have done the aggregation, but in the mean time I want to do a few posts on some of the important themes.

 

VC experiencing competition on deals from Yahoo.

Simon Levene at Yahoo gave a careful warning to Venture Capitalists that, if they hadn’t already, they were soon going to be competing for deals against Yahoo!

This links to my experience of many entrepreneurs, who still pre revenue, are asking me for an M&A process rather than VC.

(its not just Yahoo though: could Google also be on the case?)

Simon Levene gave the particular example of Accel being out bid by Yahoo on Flickr, which has been well documented elsewhere.

The more I think about this the more I think it is a quirk of this particular moment in the expansion for web 2.0.

I have raised this with a whole range people and there are two people (who I asked at the recent Silicon Valley comes to Oxford event) who I think are worth citing;

Allan Morgan from Mayfield:

His point was that, like many times before, we are part of a cycle, and right now this is frothy phase where certain coampnies are paying up. This has also lead to the Angels coming out again in a way we’ve not seen since the last bubble.

(Note. The logicial conclusion of this is that Angels see a quick return on the horizon and the company goes for it: remember off a $250k investment it’s pretty easy to turn an impressive IRR in a 12 month window.)

Allan believes there will still be many businesses who want to grow a significant stand alone business and these will always need venture.

Evan Williams founded Blogger and sold it to Google. Now in his second start up, Odeo, he’s raised venture this time around. Why?

Simple really

Because this time “The opportunity was big enough”

It seems some things never change: venture capital is most perfectly suited to entrepreneurs who have a compelling path to a half billion dollar business.

Not a six month flip.