VCs woes in U.S. so extensive that Europe lies fallow

Britt Tunick

Venture capitalists may like to think of themselves as having the panache of riverboat gamblers, but they’ve been looking more like bingo parlor pensioners of late, as troubles in the U.S. have proven so extensive that VC firms have been afraid to venture into Europe despite what seem to be glittering opportunities there.
“People have to clean up the debris that’s left in the U.S. market, and there’s a lot of debris out there right now,” said Steve Susel, a vp with Still River Fund, a Boston-based VC. “Until things settle down and they sort out what’s good and what’s not in their portfolios, I think most of them are going to step back and say Europe is a great idea, but the fact of the matter is I have to take care of my home first before I can really go out and put new money in there’.”

Indeed, the majority of VCs are grappling with poorly performing, tech-heavy funds and inflated investor expectations. That has made them cautious. Those with cash are simply sitting on it, and the few that are actively investing have become excruciatingly selective. Unfortunately for startups, that means many good ideas are simply being overlooked. And though VCs argue that strong plays can still land backing, they also admit that even the strongest of European startups seeking funding from US VCs probably shouldn’t hold their breath.

What a difference a year has made. In early 2000, U.S. VCs were elbowing each other to be first in line for Europe, viewed as a virtually untapped market with huge promise. Now they wouldn’t touch the Continent with a barge pole. Part of the shift in sentiment can be attributed to poorly performing U.S. investments, another part is simply the general fear of uncharted waters, and another is the paucity of success for the VCs that have already made the journey abroad.

“The reality is [Europe] is a good place to invest, but I think the experience of the U.S. VCs that have come to Europe and not been as successful will have a backlash on the VCs that may have superficially looked here and then decided No, we’ve got to stay away from that because the big guys haven’t been successful’,” said Lucy Marcus, a managing director with U.K.-based Marcus Venture Consulting company that specializes in consulting for both U.S. and European venture capitalists and start-ups. “There is a great opportunity for investing here, but it really is a question of understanding the landscape.”

Most American VCs believed that taking advantage of Europe’s burgeoning Internet market would be a no-brainer. Armed with their first-hand experiences in the U.S. start-up community, they hurriedly set up branch offices across Europe. That belief quickly proved incorrect.

“Almost all of them completely underestimated the complexity of the European marketplace,” said Martin Gagen, chief executive of the U.S. operation of 3i Group Plc.

As a VC whose expansion was the opposite of most-having begun in the U.K., moved on to Europe and then launched in the U.S.-3i is regarded as one of the most successful examples of globalization to date within the VC industry. Gagen attributes the firm’s success to its first-hand knowledge of the complexity of the European market and its willingness to cater its business operations to each of the region’s 17 or 18 different cultures, languages and regulatory regimes.

“The venture capital community in Europe is actually quite sophisticated in that regard, and it understands the complexity of cultural difference and all of the challenges of scaling a business from one country to another,” said Gagen. “So when a U.S. VC arrives in Europe thinking that it’s an easy place to do business, they discover there’s a hugely competent group of venture capitalists that have really been living and working in their environment for years, and are much more competent than people realize.”

Indeed, though they are less well backed than their American counterparts, European VCs have been so turned off by the arrogance of some U.S. VCs that they try to avoid working with them at all.

Simple arrogance and underestimating the complexity of the European investment industry have doomed the expansion plans of most American VCs, according to Tim Taylor, CEO of Greenfield Ventures, a U.K.-based headhunter that has been catering to the VC and start-up community for 18 years.

“There is a massive cultural difference,” Taylor added. “Basically the U.S. VCs would turn around and say, Okay, we want it done this way and we want xyz equity,’ and the European companies would turn around and say Forget it, we’re not interested’,” said Taylor. “There is very much a cultural push from Europe saying No, we don’t want to do it that way’.”

Irresistible draw

But while the international expansion efforts of U.S. funds to date have been less than impressive, European opportunities still abound, and industry players believe it is only a matter of time until those with cash again turn their attention overseas.

“Germany now is full of companies which have been funded by VCs who no longer have any money, so they can’t re-invest on second rounds or keep companies going through specific milestones. They have no flexibility to move at all,” said Joel Plasco, a director with New Media Spark, a U.K.-based Internet incubator. “The American VCs are beginning to look at that opportunity as somewhere that they can possibly pick up very cheap deals.”

And most U.S. VCs still hold the advantage of long-term experience and outright deeper pockets.

“In Europe we have companies that have far better revenue terms than in America, but the VCs are just not getting behind them,” said Taylor, noting that many European VCs don’t understand the importance of early stage investments and those that are made are often sparce. “The seed level in the States is much higher than it is in Europe, and you can land angel/seed investment with $2 million or $3 million before you’ve even done anything, where in Europe you’re lucky to get $50,000.”

Reprinted from Investment Dealers’ Digest http://www.iddmagazine.com