For some young internet entrepreneurs, chasing venture capital is automatically at the top of the to-do list. For many, though, it won’t be the best choice – as pointed out during a recent gathering of top European VCs in Berlin.
“VCs are a major pain in the ass, so if you can avoid that, avoid that,” Balderton Capital partner Roberto Bonanzinga joked. “Some of them, on the contrary, might be helpful, depending on what you want to build…”
He spoke as part of a wide-ranging panel discussion also featuring Index Ventures’ Gil Dibner, Wellington Partners’ Christian Thaler-Wolski and angel investor Christophe Maire, moderated by EyeEm founder Florian Meissner. The panel headlined a one-day conference on fundraising hosted by General Assembly last Friday.
“Investors are not gatekeepers of opportunities”
Index Ventures is one of Europe’s more established VC firms, known for multi-million dollar investments in Skype, Dropbox and MySQL. It’s also an active seed investor, with over 50 investments under $1m in the last three years.
Those investments will have pushed many to success – but shouldn’t be seen as the only deciding factor: “There’s a tendency to look to the investors as the gatekeepers of the opportunities that you face,” Dibner said. “That’s not what we do.”
Make sure growth expectations are matched
This might sound like investors talking themselves out of good potential business. It’s more about making sure both sides get what they’re after:
“Put yourselves in the shoes of the investor,” Bonanzinga (right) explained. “At some point, I need to return enough capital from my fund to ‘move the needle’. My fund, right now, is $500m. So to move the needle means what? Between 10 and 20 per cent? So I need to return, let’s call it, between $50m and $100m.”
Following the maths, he needs to believe the companies he backs can become “multiple-hundred million dollar businesses”.
If that ambition isn’t shared, founders should probably think carefully before they approach him: “Even if you convince me to invest, we’re going to have a problem in six months time because our expectations won’t be in sync.”
The pace of growth also needs to be a good fit: “For a lot of entrepreneurs, there’s something very appealing about getting to a sustainable business,” Dibner pointed out. “We, on the other hand, want you to invest in growth and get bigger, faster…
“Obviously, we will try to give you smart advice. We don’t want to wreck your businesses. We want to support you in your vision. But, fundamentally, we get rewarded by the small set of companies that grow really quickly.”
The advantage of B2B: clients who pay from the start
Getting paying clients on board before approaching a VC can make it easier if you do decide you need the growth boost: “The balance of power shifts,” Dibner pointed out. “Once you have a real business, we chase you.”
Thaler-Wolski gave the example of a company he’s met with this year in Tallinn, Estonia. “Three guys, enterprise software product, B2B, $10,000 revenue per month, 90 per cent of their customers in the US” – and without taking on any outside funding.
“They’re really laid-back – not slow… laid-back, thinking about what to do next. That is a situation that I really admire and have huge respect for,” he said. “I’m waiting for more stuff like that in Berlin to pop up.”
“If you can’t raise money from a Berlin investor, you can get on a plane to London, you can get on a plane to the Valley… there are a million options”
Venture capital is a remarkable tool for accelerating the growth of a select few companies (for the mentorship as well as the cash). For the rest, crowdfunding, government grants or even good old-fashioned bank loans might be better options.
In general, Maire said, the more access to funding in Berlin the better: “On average, any company that I see here has five times less money at his disposal than his US competitor. Sometimes it’s a good thing but still we are fighting with less.”
From Dibner’s perspective, access to plentiful funding is – again – less important than ambition. “My view is that there is enough capital here to fund some fantastic companies,” he said. “If you really can’t raise money from a Berlin investor, you can get on a plane to London, you can get on a plane to the Valley, you can go to Seedcamp, you can go to YC, there are a million options…
“I don’t think there’s a funding problem. I think there might be a self-confidence problem. I think we just need to get on with it and build these great companies like anywhere else.”
Image credit: tackle, by Flickr user Schlüsselbein2007