Alexander Mann, an Investor at Concentric, on how the UK can compete with mega investment funds.
The global startup scene is awash with cash, with VCs closing a record 55 rounds of more than $100m in July, amounting to over $15bn in total across the month. But while you might think entrepreneurs will be rubbing their hands together at the prospect of landing one of these so-called ‘mega rounds’, take a closer look and you’ll soon notice that not a single one of these deals happened in the UK or Europe.
Mega rounds have become commonplace in the US and China, due to the growth of ‘mega funds’ – roughly classed as funds of over $5bn. But this side of the pond, these are few and far between. Funds here are gradually getting bigger, with at least one £1bn plus fund announced in recent months. But with just a handful of £100m+ rounds this year so far, we’ve got a long way to go if we want our startups to scale as fast and as far as those in the US and China.
Venture capital is still a relatively new and underdeveloped market in the UK and Europe, at least in comparison to the US, where institutional LPs have been pumping money into the sector for decades.
US institutional LPs have a greater propensity to take on venture risk and are more comfortable with the return profile offered by venture capitalists. A better understanding of the sector means they are more willing to provide ‘patient capital’ to venture funds who will often have to work with businesses for up to 10 years before realising a return. There is also an argument that US LPs have a better grasp of the impact technology is having on society as the most powerful companies in the world are US based and venture funded (think Google, Amazon and so on).
For their part, the Chinese have arrived on the VC scene later than us here in Europe, but the state has turbocharged the industry. They have a powerful shared vision as a nation and they want to make up for lost time by leading global technological development in the 21st Century.
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In contrast, European LPs are traditionally more conservative, still seeing venture capital as a peripheral sector. It’s in part because Europe has not seen tech success on the scale of the US, so the case for European venture has not been as strong. But breakout venture cases are beginning to appear and LP attitude toward the sector is changing.
Attracting institutional support
We certainly have the potential to compete. Europe as a whole incorporates more tech companies than the U.S., possesses five of the top 10 computer science schools, and produces more developers. But our tech entrepreneurs and innovators need big institutions, such as pension funds, endowments and corporations, to become more comfortable investing in venture, to bump up fund sizes and supercharge our spending clout.
The VC industry is now starting to target institutions more proactively, by educating them on the return profile and bolstering corporate governance. But we can do more to make a broader case for the benefits of venture, not just monetary but also societal. At its best, it’s an important social pressure valve, empowering anyone anywhere to build a world changing business off the back of a good idea. It’s also one of the ways we prevent corporations taking advantage of their market power.
Governments play a huge part and we’re seeing the difference they can make, with recent funding initiatives from the British Business Bank and European Investment Fund. European Governments are realising the strategic importance of a dynamic tech sector, wanting to prevent local industries, that historically provided middle class jobs, from being monopolised by engineers in another country (think the Taxi industry and Uber) for example.
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Governments here have also been burnt by the struggle to influence tech businesses based abroad, whether it be combatting fake news or trying to tax them. Foreign tech firms can lie with impunity, as demonstrated by Facebook’s promise not to use data from the WhatsApp acquisition.
On the other side of the equation, we also need European startup founders to step up and match the ambition of those in Silicon Valley. We’ve seen too many founders in Europe sell up to US or Asian companies, rather than taking their business to the next level themselves. In addition, European founders have been slow to expand outside their country, or continent, automatically reducing the level of capital they’re able to attract by limiting their addressable market size.
In contrast, US businesses start with ready access to the world’s largest economy, immediately giving them a platform to build global champions. A European startup may only aspire to conquer its domestic market and not even conquer Europe. Admittedly, barriers to expanding through Europe are higher as a result of language and regulatory differences.
There are changes afoot however, with more European founders now showing the will and the drive to take on Silicon Valley. But in order for them to do so, the whole ecosystem must work together towards a shared vision of the future – and critically, achieve the buy-in of those institutional investors.