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European VC is alive and well

The general perception of the European VC landscape is often held to be that of a distant poor relation to the freneticism, ambition and volume of the US West Coast.

Fig 1. The Finnish PM takes the stage at Slush 2014 for the first day opening address

Indeed, top level data from EVCN and Pitchbook generally tend to reinforce this subservient view with total 2013 investment at Eur 3.4bn, approximately half of pre-crisis peak of Eur 6.3bn, and with the median time to exit in Europe now approximately 20% longer than for equivalent investments in the US (See appendix 1). It would seem that there are fewer targets, and targets are of lower quality.

But somebody forgot to tell this to the organisers of Slush, Northern Europe’s (and fast becoming Europe’s) top tech and VC conference held every year in November in Helsinki. In opening the event to some 14,000 participants and 1,000 investors, the youthful Finnish PM Alexander Stubb referred to Slush as the “third reason to invest in Finland”. It seems here at least, European VC is very much alive and well.

Key investment sectors remained clustered as at Slush 2013 around gaming, health-tech/wellbeing, music/entertainment and enterprise software, with the new addition of edtech and with ‘horizontal’ cross-sectoral focus on product design and social responsibility. Notably absent, perhaps by virtue of locational bias were major themes around fintech (particularly bitcoin), adtech and martech/big data.

As always the opportunity to understand the ebbs and flows of European VC were amply on show on 5 different stages, if only an attendee were able to be in multiple different locations as any given time. Some of the more interesting themes might be grouped in 5 buckets:

  1. Platforms and infrastructure are the backbone of opportunity. In his opening headline slot, Jian Wang, CTO of Alibaba described the company’s strategy as “changing commerce on the internet” and no longer simply “changing retail to online”. With 97% of Alibaba’s transactions now ‘in the cloud’ versus only 20% just two years ago, internet infrastructure was described as a “key focus” for the internet giant. JP Rangaswami, Chief Scientist of Salesforce went further to describe the ‘importance of platforms’ as representing the “logical reconnection of the fabric of society through technology”. We live in a world where physical separation is no longer the defining factor of dialogue – the ability to shift place and time has changed dramatically. Platforms are playing a fundamental role in the re-shaping the trust boundaries of modern society and will continue to be the baseline for technological innovation.
  2. With scale comes great responsibility. Social responsibility has long been a mainstay of the corporate agenda, and increasingly it is front and centre of the technology agenda. Facebook’s head of operator partnerships Markku Makelainen described how the social platform’s 1.35bn registered users spend 35,000 man years of time every day on the site. Technology creates un-regulated opportunity through the ability to scale rapidly – 10% substitution of 2G by 3G is recognised to deliver an additional 15 basis points of GDP growth, doubling mobile connectivity 50 basis points. This responsibility should therefore be a defining feature of good business practice.
  3. Failing fast is key to not failing fast. A strong theme throughout many of the topic areas of Slush 2014 was a focus on rapid prototyping and an ability to change direction according to customer demand. “Change can never be managed or announced…it can only be released or steered” according to Esko Kilpi and Dr James Wilk, founding members of the Helsinki Institute. Properly designed change takes place all at once whereas its design takes time – just like running a marathon takes time but winning happens in a moment. Jens Bergemann, co-founder of Wooga the social games studio, put this into practical effect by describing Wooga’s ‘hit filter’, a programme that empowers teams to kill projects in the early stage, then work up ideas quickly, and to end them if they are clearly not capable of being a top 50 game, resulting in less than 1% of projects being commercially released. “The faster you test, the more you can learn” as pointed out by Martin Willers, the co-founder of design agency People People. Product design was a key theme with a full afternoon track on one of the 5 different event stages.
  4. Gaming as a sector is under-valued. Helsinki is the European capital of mobile gaming – Rovio and Supercell share the same postcode in the centre of one of Europe’s smallest capital cities. Large sums have created headlines in the VC world with Softbank’s $1.5bn acquisition of 50% of Supercell, and King’s recent $7bn IPO valuation. Gaming has since been seen as a risky investment, and these prices as perhaps high end given king.com’s subsequent crash to 50% of its IPO value. Yet Nikolaj Nyholm, partner at Sunstone Capital pointed out that Softbank’s acquisition was made at an estimated p/e of 8.5x Supercell’s earnings compared to Softbank’s own 18.2x rating – a highly accretive purchase. Heini Vesander of Vainglory and previously of Supercell further pointed out that there are 4 or 5 console game developers in the $20bn+ value range, whereas the top valuations for today’s casual gaming companies are in the $3-5bn range (Zynga, King, Supercell, Rovio). With 72% of worldwide revenue focused in “core” gaming on consoles, there was also a theme of untapped potential in higher engagement “core” gaming spaces in the mobile and mobile free to play gaming space.
  5. The value add VC is an inclusive VC. VCs need to educate entrepreneurs before they negotiate in order to avoid destroying value, according to Gil Dibner of DFJ Esprit. Series A investments are hampered by VCs who might have traditionally negotiated hard with naive first-time entrepreneurs to achieve super low valuations. The entrepreneur should in turn look at the needs of their business, and find a VC that understands that every investment case is different. Steven Dietz, Partner at Upfront Ventures further suggested that an entrepreneur should be encouraged if feeling that the first meeting with a VC is resolving into an argument, given as John Malloy of Blue Run Ventures (PayPal investor) pointed out, “the job as an entrepreneur is to predict the future, not compete in the present. Silicon Valley is the yellow brick road…it is paved over every night with those that fail, but the people who are skipping on that yellow brick road get to change the world”.

So to 2015 and a very healthy European VC landscape.