As investing into venture capital as an asset class is becoming more common than in previous decades, the interest in venture has brought in many new kinds of investors across the world, most new to the space. Some of these investors might invest into one particular venture capital fund as a one-off but assuming the price point of investing into one VC fund (usually at a min. $250,000 and max $10MM per fund) and given the high-risk nature of the asset class, the best way to apply venture capital investing with $1MM or more would be to invest into multiple venture capital funds. Some stick to the 1/3 or 3x rule; for every major win, expect one failure and one break even. If this is the case then new investors to venture capital should be investing into a couple venture funds at a time, which I think many are.
Are Fund-of-Funds Worth it?
There is already a mechanism for investors to invest into one central place and have those monies spread across multiple venture capital fund placements—this is a fund-of-funds or “FOF” structure (example here). If there’s already a fast-tracked way to get venture capital placement and have the risk significantly lowered, as well as shared fund costs with other investors, why wouldn’t any investor investing more than $1MM to venture capital use a fund-of-funds? The simple answer is the fees, the implied “cost.” FOFs charge management fees of around 1% assets managed, and this fee is on top of the fees that venture capital funds themselves charge for management to the FOF which is around 2%. What most investors don’t realize is that the fees in the venture capital funds comes out of the investment itself so the true “out of pocket” cost is still only 1% to the investor if they use a FOF. The worry over the “extra fees” investors might pay for a FOF is short-sighted as managing multiple venture capital investments comes with its own internal costs which I will explain below. So instead of instantly using a FOF or deciding to setup a program in-house for managing venture capital, there are some items to contemplate.
Cost: Fund-of-Funds vs. In-House
This is an example of an investor with $10MM for venture capital. The comparison is costs for managing venture capital investments internally vs. leveraging a FOF. [Cost calculations are based upon common adjusted fees and my own internal knowledge of FOFs operating costs and VC fund operating costs]
If an investor plans to invest into more than one venture capital fund, particularly in the example above the cost is actually higher to manage internally than using a FOF. When considering managing venture capital investments in-house here are five other areas to think about when evaluating if a FOF structure could be valuable to your organization.
Access and Blindspots
Most emerging and hot fund managers first raise investments from within their own network, so unless a FO or corporation already has direct access to founders and emerging managers, any fund pitch that naturally crosses their desk does not have verified quality. The other consideration is that 60% of founders choose to found their endeavors where they are from, so location can also change the type of dealflow an investor can get. Especially for those investors which aren’t coming with “value add” or experience which can uplift a VC fund, if it’s simply a financial transaction then the biggest concern should be VC placement or “access.” How do you vet these VC funds internally? How do you network check an unknown fund manager or otherwise make an investment decision? The time spent on answering these questions or filtering through a dozen VC funds can internally cost a FOs manager half their time for months. I listed this as $50,000 in cost above however considering most FO managers make $250,000-$450,000 annually, even half time would average $125,000-$225,000 in operating time taken up for accessing venture capital funds and doing diligence.
Tracking and Reporting investments
One area often overlooked by FOs and new VC LPs alike is reporting. Everything seems easy enough until there’s a couple different investments moving at different speeds, years, and traction. How are you going to consolidate the data to know how your overall performance is? One VC fund might only report twice a year, another every quarter, some will report numbers from 60-90 days from the data collection date, so at any given quarterly deadline you could have several VC reports to which you will need to find the right common data points to equally evaluate them. To make this more exciting every VC fund REPORTS DIFFERENTLY. VC fund reports come in all sizes, templates, design, what numbers they track, dates the data was collection AND each fund might list reporting in a different order. Fun. With 3+ VC fund placements, any time a FO or asset manager needs to find out overall venture capital investing performance it’s going to cost in time, software, or both. I listed this as $15,000 in cost above although its known that some software programs to assist cost thousands quarterly so the cost could easily exceed $30,000 depending on the manager. In addition to decipher the reporting the manager will need working knowledge of how startups are valued. A cool startup cap table tool for that can be found here.
Let’s say everything goes smooth and several venture capital fund investments have been made. The reporting puzzle has been figured out. If managing venture placement directly, there will be little things that come up: amendments to sign, changes to terms, changes of placement. It might be best for your firm to sell a positon on the secondary market, or maybe a fund manager needs to let in a new LP and has to change its own fund rules and needs your confirmation. All these little items around managing a portfolio of venture capital fund positions will certainly add up annually. I estimated this as $80,000 in the cost example above. A FO manager can expect to spend 5% or more of their time on this although the problem will be there is no planning— these items will pop up as needed and when they do can take any amount of time, usually with short urgent deadlines. The decisions themselves will affect portions of profits later on, so the time isn’t the problem it’s the expertise and thus this “on call” type of expertise is not cheap and is paid either via an internal asset managers time or outside law firms (who are even more expensive). Another example of this might be an investor is getting capital called more aggressively than expected and the manager has to go research and figure out why. VC funds in diligence (prior to investment) will give a “projected capital call schedule” to plan when they need capital yet its pretty known any later fund investors will have to catch up, and thus, be on a more aggressive capital schedule than they realized at inception.
Influence as an Investor
As a direct investor into a venture capital fund your % position is smaller than a FOFs position can be. This comes with collective bargaining power that cannot be competed with, so assuming changes will need to happen in the future, most investors gain more power and influence as an investor through a FOF. An example of this might be a FOF negotiates a side deal, special terms, special voting powers or access rights a FO might not even be aware existed. There is also a level of savviness that FOFs carry internally from having done more VC transactions by volume, so in the case of changes or shifts in VC positions most direct LPs who could be FOF LPs have less influence going direct.
Understanding “Vintages” and Performance
Another nuance in venture capital is deeply understanding how the asset class organically performs and expectations. Some examples might be, to know of certain hidden fund costs the first 1-2 years where a fund manager might (logically) hold back up to $300,000 in expenses to wait for the fund to get traction to deduct. This is common practice that shocks FOs at times so see an odd number deducted years later. Another might be a Seed stage startup that hasn’t moved a 1.0x value in 2+ years in an early stage fund that could likely be dead or a “ghost” startup. If they have not raised capital their valuation hasn’t shifted and if their valuation grew a bunch then they would have raised capital—this is the venture capital cycle. So after a while, an experienced fund manager can start calculating how much of a VC fund is “dead” and focus on the winners or, take on additional and different VC fund positions keeping this information in mind. There also needs to be patience: startups need 6-18 months to figure themselves out at the early stage so there can seemingly be no action because the startup in a venture capital fund is busy building. An expert fund manager can tell the difference between which underlying VC assets (startups) are the builders and which ones are “ghost ships” and this expertise is (1) not cheap (2) hard to find in-house.
What is The Right Answer?
When it comes to investing into venture capital by building a management group internally or using existing FOFs, every firm has different needs to consider so there is no one “right” answer and there are no rules—sometime the best is to balance both!
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Three years ago when I arrived in Europe with the mission of creating a Fund-of-funds to help spearhead European startup growth as well as be fully global the plan seemed perfect: build a fund compliant with Europe and with the agility of American business building so the best of both worlds could be leveraged. Only while on the ground, and after considerable time working and investing in Europe, the data I was reading was not matching what I was seeing. Having lived through several emerging markets for venture capital, it can be normal for discrepancies between what has been done and what could be done, that is what ‘emerging’ is. Back in 2011 when I moved to New York, the startup scene there was new and upcoming and that is what made things exciting: there were tech events each night, startups coming together to feed and learn from each other, anyone who knew anything wanted to share and make each other better, it was really an exciting time. Back then NYC was doing less than $5BN a year in venture capital, today that number is $17.2BN for 2019. When I was asked in March 2017 if I would move to Netherlands with the concept of building a fund which could help power venture capital in Europe, the answer seemed easy. If NYC was growing so quickly surely Europe was next.
EUROPEAN VENTURE CAPITAL GROWTH VS. NEW YORK CITY
Source: European Venture Report 2019, Pitchbook
Source: CBInsights MoneyTree Report with PWC 2020
EMERGING MARKET INDICATORS
One of the biggest indicators of emerging markets, in particular with venture capital, is when the # of annual deals peak. Because of the nature of valuations, and the constraints of space and people, there are ultimately only so many startups which can launch in any given timeframe of a region, so the # of deals annually eventually will cap out before capital increases as prices go up (in this case startup valuations). In all cases there will be a ‘peak’ and this peak is when the annual deals reach their maximum # but the capital pricing has not reached potential yet. Its hard to know when a peak is happening until data from the later years follow. Once the annual deal count stabilizes, several years will follow where capital will steadily increase before reaching full potential.
Assumptions about European venture growth (back in 2017):
From my calculations Europe seemed ripe for deploying venture capital and growing it. As an emerging market all the signs of hyper-growth were there: growing labor pool of expertise, mobility conditions, political stability and of course as seen above, resources of capital.
THE EUROPEAN ANAMOLY
Throughout the years I kept checking various data points on Europe and LATAM getting confused. Many reports were showing capital growth with Europe on a NYC-like trajectory, but on the ground so much was missing in the ecosystem that most EU startup founders didn’t know what a termsheet was or how to value their company. How could this be? Other reports showed LATAM didn’t have much in capital, yet Latin startups are growing and scaling like crazy. It didn’t make sense. Despite being invited to help create a fund-of-funds for Europeans, via Europe, many Europeans are still skeptical of venture capital because no one they know directly have profited from it. Netherlands specifically has its own set of issues despite having one of the largest growing workforces in Europe, political stability and access to capital, NL has not been progressing much for VC. A 2020 report from TechLeap.NL specifically lists some of the issues as lack of access to top technology talent, knowledge of termsheets and lack of investor momentum This Dutch report explicitly states the need for a “Public-private fund of funds structure to attract and boost VC funds that invest across funding stages” but that is exactly what my fund is and the Dutch ecosystem still is not moving, however Dealroom and various report make it appear that Europe VC is on the rise, how is this possible? Here is a detailed look at European VC by country:
Source: German Venture Capital Landscape Report 2020, Whitestar Capital
As can be seen on the country level, the YOY growth for EU venture capital is not particularly markable. Even Italy has been unofficially reporting €1.5BN and with the average global family office having $1BN assets under management, one or two family offices could easily sway these numbers. Any particular EU pension could also shift VC growth numbers, and yet it’s not happening, why? Because the capital coming into Europe is mainly American capital one way or the other. The acquirers of European startups? Also, American. It’s not explicitly listed out but even when looking at Germany’s exits 81% were done by “international acquirers” which is a mix of mainly American and some Chinese capital.
Source: German Venture Capital Landscape Report 2020, Whitestar Capital Data powered by Pitchbook (link)
When looking at overall European exits we see the # of deals plateauing, with the average exit being €31MM, aside from outliers in 2018. In the U.S $31MM is the average size of a Series B funding round so Europe is still “emerging” with good pricing but it’s very far from being mature.
Source: European Venture Report 2019 Annual, Pitchbook
If we take an even closer look at a different set of data we see again, outliers aside, $31MM is the acquisition sweetspot for European companies which makes sense in general because statistically companies $100MM or under have a greater chance of being acquired due to corporate affordability. We can infer from this the EU acquisition $ averages will go up but the total market cap is likely €75BN
Source: State of European Tech 2019, Atomico / Dealroom
WHO ARE THE LPS OF EUROPE?
If we know that funding is happening in Europe as well as exits, but we also know that EU pensions are not even 0.01% engaged with venture capital, and European family offices only make up about 3BN a year for venture in Europe, then who are all the LPs of Europe? Again we know 70% or more of EU venture is actually American capital. 11% of American Venture Capital comes from Europe too, so Europe is investing into America, to invest into Europe, in a cycle which mainly profits the U.S.
According to several reports including UBS’ Investor Watch Report We know that 65% of founders prefer to start something where they are, that means European founders are founding wherever they are. We also know 7 out of 10 investors want to hedge on “mega-trends” that is why we see many European startups as EU versions or types of companies that do well in America, but this doesn’t always work out the same in Europe. If we look at the demographic of investors for venture, those under 35 tend to be almost twice as likely to embrace change and exert flexibility:
Source: UBS Investor Watch Report Year Ahead (LINK)
Ironically the average age a manager takes control of a FO is 40-45 years old so we can see here a new wave of managers coming into play and before the next generation takes control wealth is already up 70%
Other data sources, Like FINTRX also confirm that the average family office is about $1BN in size.
FAMILY OFFICE ASSETS UNDER MANAGEMENT
Source: FINTRX Family Office Industry Report, 2019
66% of family offices in the world are based in North America with about 25% being in Europe but if Europe family offices invested 3BN last year into venture capital, this 25% might as well be 0.05% in relevance for venture capital.
Source:FINTRX Family Office Industry Report, 2019
If we look towards the U.S to get more insights on how LP and investor categories breakdown we can see quite clearly the common types of investors, as explained by Preqin and First Republic Bank
Source:Prequin and First Republic Bank US Venture Capital in Q3 2019 (LINK)
The U.S market is pretty clear that the LP base of venture capital usually ends up in four main categories: Foundations, Pensions, Family Offices, and Other. If there’s currently a 50BN opportunity for Europe, and if it is to act similar to the U.S market, that would be 12.5BN per LP category. If we know 3BN of European venture capital is coming from European FOsthen the market is 1/4 maximized in that category alone. It would appear of all the types of LPs EU FOs and EU pensions are likely to have the hardest time getting a slice of the venture capital pie and yet they continue to wait and not sense any investment urgency.
SITTING ON THE SIDELINES
By reverse calculating the market opportunity of Europe which is currently at 30BN annually (for venture capital) it is very likely the market will cap out at around 75BN including assumptions for growth, price increases and currency fluctuations. This leaves 45BN unassigned in European venture to be gained upon, again 50BN.
With the UK having left the European Union, that means EU venture potential has both cut in half and doubled at the same time and here’s why: on one hand London has always been a major hub for talent and capital, however with the UK out of the EU, talent opportunities have dropped to import skilled workers so mobility has dramatically decreased. On the other hand, taking out British investors as LPs into Europe creates more room for either American’s to take up marketshare or Europeans to finally jump in and get a piece. On a high level that means about 12BN annually has opened up for the EU community LPs to jump on, assuming the Americans do not beat them to it.
Below is an infographic which shows how big the UK had been in the European wealth market as compared to several regions and prior to Brexit
Source: The Wealth Report, Knight Frank (LINK)
If we assume the current European VC market is 30BN, and American capital conservatively accounts for 50% or more of this (say 15BN), and Brexit has taken UK capital off the table for the future (13BN) and startup prices will continue to rise over the coming years (even at a rate of 30%) this would mean there’s about 50BN on the table over the coming years, and specifically all that’s left for European investors!
With only 50BN for EU pensions, family offices, individuals and HNW, this is nothing. If the average EU family office invested only 2% of their AUM that would allow for $20MM per family office or room for about 500 family offices to get involved with venture capital. However, its known statistically that often FOs, when they DO invest into venture its closer to 15-30% of AUM. On the conservative side of things, and accounting for room in this 50BN opportunity for pensions and individuals, European venture capital in the future only has room for about 125 family offices to participate. In several simulations that I ran, this number could be as low as 50 slots for FOs.
THE GREAT RACE TO MARKETSHARE
If the US venture capital market is the closest in comparison to Europe, we can see both
(1) the EU market cap will not surpass 100BN and
(2) strategically every few years 10-15BN of American capital is diversified to Europe nearly
For example, 2019 data might indicate a ‘decline’ but it also indicates capital was diverted from the US to EU to reduce risk and maximize better European price points.
THE ALLURE OF EUROPEAN AFFORDABILITY
The Dutch government estimates that 12,000 additional skilled workers a year are needed to assist with growing and scaling startups. Germany, who’s market is 3x Netherlands would need even more. As a whole, it’s likely that Europe will need 100,000 jobs a year to sustain venture capital growth and scalable companies. Even with EU unemployment at an all-time low (under 4% in most European regions) there still is not enough people to power hyper growth aka “unicorns.” In 2019 Netherlands was home to 12 unicorn companies and Germany 9. Estimates are that Europe has about 30 unicorns in total in its region. The U.S recorded 199 unicorns in its pipeline Referencing these data points, it’s likely that Europe’s unicorn cap in optimal conditions is somewhere around 100 so the EU VC market is 1/3 of the way matured.
On a positive note we see European VC funds decreasing in volume (# of funds) and increasing in the capital that is in them. EU VC funds becoming bigger in size is an indicator of market maturity but it’s not a reflection of European operated maturity or labor expertise.
This “growth” of European VC is happening on the accord of American capital infusing the market which is helping American investors profits but not necessarily helping the EU.
GLOBAL FLOW OF VENTURE CAPITAL
So, what does this all mean? In my case it means that I launched my fund backwards: I should have raised the funds in the U.S and deployed them in Europe—versus raising in Europe and trying to deploy globally. It also means Europe is in great danger of not owning its own marketshare or controlling its destiny. It also means that European citizens are missing out on the possible gains that their pensions could be making them by investing into venture capital while also generating jobs.
When I review again reports from Netherlands and Europe I see that despite evenmy own efforts to help the ecosystem, European investors have not budged in movement nor understand the gravity of the situation. I moved to Netherlands in April 2017 and nearly three years later do not see any signs on the ground that people are excited and learning about venture capital the way New York does and has in the past. This is presenting itself as quite the awkward situation for fund managers like myself, when we know that fund managers are paid 30% more working in North America vs. Europe:
It is also known that funds raising in the U.S can often take 18 months to fill their fund and this is in ideal hyper-fast conditions with investors savvy in the asset product, so I can only imagine European funds need twice as much time (36 months to fundraise) and in this time can miss out on entire vintages and opportunities. It also seems clear to me without a more robust labor force and cultural appreciation for the kind of hard work running Unicorns take, if Europe wants to be a major player in venture capital it will have to come to a compromise with many of its cultural norms.
And lastly, when I think about all that I have seen and experienced the last few years it seems obvious to me that if Europe does not quickly become familiar with venture capital and investing into itself it might miss the boat altogether. From a global perspective the EU VC market will continue to grow whether or not European investors figure it out in time, which means the people benefiting the most off European growth are not actually Europeans which explains why there is such slow movement with EU LPs and talent. It also means the European market is at risk of not reaching its potential if those on the ground do not care or understand what’s going on the way other regions do.
At the end of the day it seems that Europeans need to be honest with themselves about the 50BN elephant in the room, before the elephant is gone.
INDUSTRY REPORTS AND CITATIONS:
6 European Venture Report 2019, Pitchbook https://files.pitchbook.com/website/files/pdf/PitchBook_2019_Annual_European_Venture_Report.pdf
7 CBInsights Moneytree report with PWC 2020
8 Managing Venture Capital Relationships 2019, Cachette Capital
12 German Venture Capital Landscape Report 2020, Whitestar Capital https://www.slideshare.net/JeandeLencquesaing/white-star-capital-2020-german-vc-report
13 European Venture Report 2019 Annual, Pitchbook https://pitchbook.com/news/reports/2019-annual-european-venture-report
14 State of European Tech 2019, Atomico and Dealroom, https://www.atomico.com/presenting-the-2019-state-of-european-tech-report/
15 UBS Investor Watch Report, Year Ahead, UBS
16 FINTRX Family Office Industry Report, 2019
17 Preqin and First Republic Bank Q3 2019 https://www.firstrepublic.com/~/media/frb/documents/pdfs/innovators/preqin-and-first-republic-update-us-venture-capital-in-q3-2019-v1.pdf
18 The Wealth Report, Knight Frank
22 UBS family office https://www.ubs.com/global/en/wealth-management/uhnw/global-family-office-report/global-family-office-report-2019.html
The last two years have been brutal: discovering a market need, building the product fit, testing it (omg does it work?!) and launching it. Unlike a mobile app prototype-- which for zero dollars a splash page can be set up with fake screenshots and nobody bats an eye -- setting up an investment fund, particularly a fund-of-funds, requires copious amounts of legal paperwork and it’s about 100x more paperwork than any standard venture capital fund is required to do. We’ve done this, and at the same cost of a VC fund that’s around $50MM in size. Add in immigrating to Europe, dealing with LPs (investors) from all over the world and a diligence process that would make any American VC pass out: if I knew how hard it would be from the beginning, would I have done it again? Probably not. But once a soldier is in the trenches it’s too late to ask why, instead, how do I win? Taking a Silicon Valley approach to European venture investing is one of the greatest blessings and advantages I think my firm has, and like anything new and disruptive it will not look or act the way everyone suspects.
Venture capital by definition is an asset class that attracts a certain personality type. The industry is built on hype and that is both what is fantastic and tragic about the space—you want fund managers who can hype and communicate quickly, to pump up and evangelize their investments, in this case their startups. At the same time, VC fund managers are the first to panic if not texted back within minutes, smaller funds are often disorganized, and depending on the fund size (usually the ones $100MM or under in size, particularly the ones around $30MM) are the first to send both love and hate. To not understand their own documents and to stress. With experience this gets better over time; its not something that be rushed, downloaded, or learned. As a fund-of funds specializing in early stage venture capital, the thng which is most valuable to investors who are large institutions is getting into smaller VC funds. At the same time dealing with smaller VC funds can be painful, and thus my value as a FOF manager is often to absorb the pain. And like most debut fund managers I’m learning at the same time as investing, yet instead of making mistakes on startups (usually $250,000 a pop) I have to learn how to make mistakes on entire VC Funds ($5MM a pop). If that isn’t enough to make your stomach curl, image what it’s like doing this, half-way across the world from all your family and friends, and sometimes in a different language. Gulp.
Europe is a B*tch
The other day our Amsterdam office was too cold and I needed to turn the temperature down. To do so, as I was told, I would need to read a 57 page PDF manual on the building, find the reference to temperature control, find the mobile app mentioned, download said mobile app, get a login username / ID from the building, email with IT to get it activated, revisit the mobile app, and about five hours later I was finally able to turn the temperature down my office. While running a fund. If this is not symbolic of what it’s like doing business in Europe, I don’t know what is.
Everything which should be simple here, isn’t. Getting talent is impossible or hard. Any time I have made an estimation of any timeline I have been off, and if you try to get upset or put pressure on anyone around you in Europe, the Silicon Valley "VC hype" attitude does not work at all. People take holidays. People do not like stress. There is not a Postmates around the corner. You cannot use most on-demand apps in Europe to fill any gaps… you are completely on your own. When you are in a country dealing with different cultures and languages, with 1/1000 of the resources you are used to it’s not fun and if you even try to “American complain,” the first response you will get are blank faces.
Working in venture capital in Europe is like being on Mars
explaining why people need to dig into the dry dirt to put in plumbing pipes:
until someone experiences running water, its very hard to sell
Europe is Opportunity
On the flip side to America, Europe is filled with massive opportunities. Most Startups here come out the gates with revenue. The idea of being venture-backed is novel and companies here are more sustainable in their growth. There are a couple of European startups I have been mentoring, who are high growth with sometimes 100,000 mobile app users or $100,000 a month in reoccurring revenue. You can tell them to meet with VC firms -- but they don’t, they build. It isn’t until the actual moment they need capital to speed up growth and have hit a wall that they call. Just this morning a startup called me “what should I do? I think we need venture capital?” It was tough to respond because I had introduced nearly a dozen venture capital funds to this founder over the last two years, which he could have cultivated a relationship with. Instead he took one meeting and hit a dead end. Now he asks “how do I raise money?” I felt choked up. He’s had all the right contacts and over a year to get closer to these relationships but that’s not how Europe works. Europe is skeptical. Europe is paranoid. Europe does not like newcomers. Except when it’s time (sometimes too late) to raise money, European founders panic… what should I do? And it’s hard to explain that they have had the solutions in their hands the whole time. This is Europe. This is where things currently stand.
Europe has Capital, But it’s Different
Netherlands, for example is one of the world’s richest countries with massive amounts of capital in reserves.Its banks, pensions, and family offices are just now getting around to what the U.S figured out a decade ago. It doesn’t mean Europe is late, on the contrary I think Europe is getting ripe. Now instead of spending weeks of time and dozens of thousands of dollars circling investors in San Francisco, European founders can raise money locally which means no waste of time AND no ridiculous and over-hyped startup valuations. Europe is cash-on-cash, the only points here which matter is money not users. You could have two startups doing the same exact thing, one in Germany and one in the U.S and while the European one might have a lower company valuation they will make the money go further and have an even better chance of an exit because European investors are not expecting a 20X on an overhyped valuation but 10-15x on a REAL income related valuation. For this reason and others I actually think both Europe, and Netherlands specifically, is geared up to make a great amount of profits in venture capital; it just needs to get its momentum. It’s the reason why early movers in the European VC space are on top and why as of recently, Europe has more Unicorns (billion dollar company valuations or higher) than ever before and maybe even more than the U.S itself.
We have already seen how the path to IPO can be not ideal for venture capital—it takes a lot of money and longer periods of time with no guaranteed output—yet, as most know the sweetspot for being acquired is at the $100MM or so pricing which means startups which are getting funded at the Seed level here have a shot at being acquired or exited within their next 1-3 years post funding. Not a bad setup at all. Europe is filled with capital and opportunity; it’s just a matter of connecting the dots. That’s what our fund is doing, but it’s painful. Pain is not a virtue its a value, and as time passes I realize the value of my fund is to absorb the pain. Make it easy on our investors. Make it easier on our investments.
Earlier this year, as a first time fund, we had to go through a very rigorous process to have our full fund underwritten and diligenced by a couple of the world’s largest banks. They asked for everything, every tiny paper, every notary, every line of finances. At one point there was a two letter typo on ONE page out of about 5,000 pages of stuff and we had to update that one page. That single update alone probably cost us about $5,000 between the various lawyers who had to do it. When I called around to other fund-of-funds and experienced venture funds to complain, everyone just shrugged “yup.” It wasn’t news at all and there was zero sympathy. When we had to send our entire fund’s strategy and commitments to some large LPs, including some who would replicate us if they wanted, I didn’t get any sympathy there either: “That’s how it goes.” When I further went to complain I later learned that the process my fund passed through with flying colors in six months normally takes eighteen months! A Dutch based FOF called me for lunch two weeks ago and I was super excited to ask them some specific questions about their diligence process, because we would have the same investors, and when they came into my office they asked for a job. Their fund didn’t pass the diligence that my fund had. It turns out slow and steady does win the race.
We moved into a new office space in Amsterdam. I went looking for our office invoice via email and couldn’t find it until I contacted the office, and apparently they send invoices but do not mention the building name or have the building name in the email address. If you searched an inbox looking for it, it would have never been found. We ordered printer ink online and after a week it arrived (despite paying extra on Amazon Prime) and it was the wrong size for our printer and hence useless. When we posted for job openings asking for Dutch native speakers we got 98% non-Dutch speakers; most Dutch persons with the background we wanted are instead taking the safe path of multiple masters degrees and pursuing jobs lined up by their families. When I try to explain all the obstacles we deal with in Europe to my American colleagues it simply doesn’t make sense, its unfathomable, can’t be true… but it is. And despite all this we continue to move forward. One step at a time. My fund started investing into venture capital funds last year and as the fund grows we learn more about how to adapt our strategy for a large fund of funds. I haven’t personally gotten a paycheck in the entire time of the fund; founding partners are usually the last to be paid. And so, as I get to work with my New York mentality expecting to accomplish 80 things in the day, I have learned to be content with getting 10 things right.
Are we behind schedule to launch our first fund and meet our commitments? Yes, we are. But this isn’t a mobile app prototype that I can simply trick people into downloading for vanity metrics, this is an investment fund. While Silicon Valley has the mentality of “f**k it, ship it” Europe has the mentality of “build it, and build it well.” All the roadblocks and inconveniences, in a way, seem like a system for keeping me more mindful and more thorough about how I build this fund. It is simply not worth doing anything in Europe unless you are going to do it right, do it well, and do if for the long haul. Europe is not in the mood for any short term sh*t, so leave your American sales mentality at the door, and drop the accent too if you can.
Do I feel rushed by the expectations of everyone? Of course, especially the pressure from America where all the infrastructure is already there. The U.S will never understand the movement which Europe is currently going through, and despite all these hardships I still feel excited.
Last week we hosted one of the first ever “VC Nights”in our building and in two weeks notice over 100 people came to learn, in Netherlands. Reminds me of when I moved to New York circa 2011 everyone told me New York was a waste too, and now look at that startup community? I remember calling Women2.0to mention I wanted to start hosting female founders nights and I was told there likely wasn’t enough female founders, in New York. Within a couple months we built out a 200-300 person monthly event, selling out weeks in advance.
In the meantime, we will be building what needs to happen. There’s no point in building something short-term when there is an entire continent about to break into an untapped asset class, which needs our product. I simply have to keep building. Am I late? Yup. And I’m the first one to admit it. Just like a soldier on the front lines, I see the sky clearing and the magic happening here in Europe and I if I had put my finger on it, it’s hope. The breakthrough is just around the corner.
As a professional project manager I’ve lived my life attempting to launch projects on time and on budget. In Europe however you simply cannot plan the same and make the same assumptions as New York or Silicon Valley. If we only have one shot, I’d rather be late and the best, than not in the race at all.
Afterall isn’t it the turtle who won the race against the hare anyway?
Ellie Cachette is the Managing Director of Cachette Capital Management and experience entrepreneur now living in Netherlands. For more information or links see www.elliecachette.com or www.cachettecapital.com
Why Netherlands??? Out of all the countries I am often asked "Why Netherlands?" Why choose to have my life and career here, to that the obvious response is "Why not?" but it's much deeper than that and if you care some of the personal backstory is here.
Flashback to 2007: When all my friends were taking cushy software jobs for Twitter and Facebook, and some of them self-made from doing such so early on (Mark, your Tesla is beautiful and you DESERVE IT), I was always a risk taker. Why not Romania? Why not work for a French fintech company in San Francisco? Why not share Silicon Valley hustle with Europe? Perhaps it was my curiosity or entrepreneurialism, or maybe something deeper but I was always up for the challenge. As I have talked about those early years and how and why I took certain projects I did, the power of Europe is not simply a cliche is a robust industry which has taken over a decade to collect itself which massive market data to prove its not only ripe for venture capital but startups as a whole.
Now as we see the collective global innovation "war" being brought on and billions of dollars to support these efforts, as most Americans are learning the soil doesn't matter. It's where knowledge is generated. Where ideas and software is made. Technology is both the beauty and the pain of how Facebook can be easily spammed with misinformation affecting even the highest levels of democratic elections (I will reserve more comment or details on that here) and also why you can use Uber in nearly 72 countries across the world. The expansion of tech usability is not simply an accident its part of the plan of Globalisation, we are all living in it. We are all placing bets everyday with the products we use, things we support and things in which we pay attention.
Netherlands has a population of 17 million people, by American estimates that's basically the total populations of LA, SF, and New York City and some change combined. Netherlands by land space is essentially .003% the size of American soil and yet doing so much. If you are curious you can go here and compare land space and populations. Yet despite this small European country, Netherlands has seen over 3MM new people in the last couple years and massive economic growth, ontop of having massive amounts of capital in its savings (read: no gazillion dollars of debt like the US) and everyone is walking around with health insurance. However this isn't a post about not America but instead, why not Netherlands? New York City was even once Dutch territory and for various reasons given to (however you decide) is now America today. Netherlands is surely a small country but a smart one.
Whats Going On?
Firstly if you are keeping up with the news, Europe is having just as much economic growth as the US is used to as a norm. Let's first take a look at simple Dutch employment rates. How is Netherlands doing with all these new-coming workers?
NETHERLANDS EMPLOYMENT GROWTH
Netherlands represents itself in the top #7 European countries with workforce growth (ATM p.16). Besides current stability of a workforce, data indicating a growing workforce and an increase of nearly 1 million more jobs in the last year (ISHN) Netherlands has positioned itself as a contender in the next great race of innovation with access to talent (EDF p. 9), Amsterdam as top #7 developer hub in Europe (ATM p. 45) and aside from the U.K, Netherlands is a top 3 destination for American trained and employed software engineers looking to migrate (ATM p.50). Netherlands is currently #1 in Europe for job positions open for “Software Engineer” (ATM p.50) On a networking level, Netherlands is a European leader for attracting talent in general (EDF p.21) with strong coding programs for developers and technology enthusiasts (EDF p. 13)
Talent Within Netherlands and More Coming In
As a robust economic working force, friendly technology infrastructure and English fluency as a country, Netherlands is a top #3 destination for international movers (ATM p. 46) and non-Europeans feel very comfortable immigrating.
Netherlands has roughly a population of 17 million inhabitants and growing, with nearly 3 million in new constituents immigrating in just the last five years (WDM).
With about 33,720 km2 of land and 91% of Netherlands workforce being urban, there is both plenty of room and potential for the expansion of several working hubs in Netherlands. The average age in Netherlands is 42.3 (WDM) which also means, there’s room for growth of new generations and working forces. Lots of room and lots of opportunities.
LOCATION AND INFRASTRUCTURE
Netherlands is seen as a Top #3 Destination for non-European Talent
Netherlands’ advantage to global economic viability but it is not just its workforce which positions Netherlands uniquely but also its location and infrastructure. Non-Europeans find Netherlands as a great place to immigrate into Europe as a physical and economic gateway. Non-Europeans place Netherlands as a top three European country to migrate into (ATM p.53) and some of Europe’s best schools are in Netherlands (ATM p.83). Coding programmes also support skills outside of academia (EDF p.13) and the government’s flexibility in supporting its own initiatives vital to growth and chance. Diversity is also seen as a priority with women being roughly half of the Dutch workforce (ISHN) and the government vocal of its support for women (EDF p. 19) even in industries where there can often be male-dominance, “I will never sit on a panel without women, ever again” (FNTS) HRH Prince Constantijn told Financial Times in 2019.
"Ik ga nooit meer in een panel