Bayesian methods for Neural Networks, as discussed on the Piccadilly Line.

Travelling late one night on London’s Piccadilly line, I overheard two guys in deep conversation on the various ways to apply Bayesian inference methods to neural networks.

It wasn’t the topic that caught my attention, rather that it was happening at all. I’ve had the good fortune to be involved in Entrepreneur First (EF) where such conversations are common place, so I wasn’t surprised to learn these two were familiar with EF and were building a deep tech company in West London.

To come across such an interaction on the London Tube suggests two things: that Entrepreneurship is now widespread in Europe and that democratisation of start-up tools means building a minimal viable product at an acceptable cost to even the most conservative angel investor is now possible.

Over the last five years the number of European VCs has doubled.

Comparisons with Silicon Valley’s venture titans are inevitable, but to my mind of little value. It’s simply a question of time — evolution doesn’t accept shortcuts. As Malcolm Gladwell’s Outliers theory describes, it is all about the accumulation of investment experiences: the longer you do it the better you get. That is not to say we can’t learn from West Coast experience nor understand the fundamentals that have made them successful.

To explain what is going on in European Venture, I’ll use some of the fundamental approaches we apply at Isomer to understanding promising Venture Capital teams.

Teams

The evolution of teams post-2008 is probably one of the most significant developments in European Venture Capital. Not in terms of volume but in make-up and quality. With some very notable exceptions the most common background of venture teams pre-2008 was finance. This made for good financial engineering and company capital efficiency — to this day an attractive attribute of European start-ups — but now the mix is richer: successful entrepreneurs, corporate executives, and just naturally gifted minds who turned their talents to Venture Capital.

Here’s a quick sample of teams to illustrate the point:

Successful Entrepreneurs

• Filip Dames and Christian Meerman, founders of Zalando which had a $2B IPO are now building Cherry Ventures (Germany) with Quandoo Founder Daniel Glasner
• The Notion Capital (UK) partners: founders and executives at MessagesLabs, successfully sold to Symantec
• Germany’s Gate5 founder & CEO Christophe Maire, now building Atlantic Labs in Berlin
• Skype founder Niklas Zennstrom and Siraj Khaliq founder of The Climate Corporation today building Atomico
• Italian entrepreneur Pietro Bezza, founder of Neo Networks, now a founding partner at Connect Ventures

Corporate Executives

• Christian Hernandez, founding partner at White Star Capital (UK) who helped lead Facebook’s early expansion into Europe and was previously part of Google’s nascent mobile efforts
• Rob Kniaz, founding partner at Hoxton Ventures (UK), an early employee of Google in Mountain View
• Margus Uudam who had an extensive corporate career in Estonian service companies before managing the Skype founders family office and then founding Karma VC
• Join Capital (Germany) where Tobias Schirmer and Jan Borgstadt are building a new VC after extensive careers at Bertelsmann

The Naturally Gifted

• The Octopus Ventures team led by Alex MacPherson : £15M in FUM in 2008, today investing in excess of £100M a year with exit successes including Zoopla (£1B IPO), Swiftkey to Microsoft and Magic Pony to Twitter
• Entrepreneur First founders Matt Clifford and Alice Bentinck who developed a new investment stage called pre-company: their remarkable story is outlined here

Ambition

Venture Capital is about building companies and then passing them on to the next owners to continue the company’s growth — that’s obvious. But a fundamental question remains: when to make that change of ownership? We have witnessed a sea change in the last five years in the ambition of European Venture. Company values are being realised at a later stage, benefiting venture fund multiples. European Entrepreneurs and VCs are much more ambitious about the value of their companies and are prepared to wait longer, selling companies at a higher value and later stage. This impacts IRR but, let’s be clear, Magic Pony Technology outcomes (triple digit IRR) are as rare as… magic ponies.

Another obvious statement: general partners of VC funds have a greater desire to realise their investments if they sense an urgency to do so would improve the chances of successfully raising the next fund. The European landscape for investing in Venture is improving and this has a consequence on VC’s confidence in raising their next fund. This makes longer company asset hold times more likely and performance can improve.

Evidencing these points given the proprietary nature of the data is more difficult, but we know Octopus Ventures held Zoopla through to IPO and that Deliveroo and Darktrace seed investors have still not sold.

The Entrepreneur is the Customer

Who is the VC’s customer? Their investors or the Entrepreneur? Of course, any savvy general partner is going to say both. (I would argue that tilting the answer more toward the Entrepreneur will be beneficial for both the VC and their LP investors.) But the dynamic is changing both at the beginning and the end of the investment cycle.

Europe is becoming a buyer’s market. As entrepreneurs build ever more attractive propositions the best of them are able to select from a number of quality VC investors. Those VC’s that continuously think about the “customer“ (i.e. Entrepreneur) proposition are likely to be the winners. Gone are the days when historic reputation was enough. The ever-younger, highly-networked Entrepreneurs determine their own views on the VC’s value.

Some VC’s focus on specific investment theses or building company value and this becomes part of their value proposition. Notion Capital are the go-to VC’s for enterprise propositions as are Berlin’s new VC, Join Capital. Felix Capital focus on brand building consumer companies and Octopus Ventures are growing in company expansion in the US from their office in New York and have Venture Partners placed in Shanghai, Singapore, and San Francisco. It could be argued that this was an important factor in Digital Shadows accepting Octopus Venture’s recent investment offer.

The truth is, the Entrepreneur has a lot to say in the timing of a change of control event. The topic is pan dimensional, however one measure of success is clear: does the Entrepreneur come back to that same VC for their next project? Octopus Ventures are understandably proud to have invested eight times in the original entrepreneurial team that started Love Film.

The Future

At Isomer Capital we focus the above and other factors to form a picture of how a ten year plus partnership with a VC might work out. Looking at the sheer number of teams coming to market and brand new teams still in stealth mode, we are convinced there is a bright future for European Venture. Xavier Neil’s building of Station F to be the world’s biggest start-up campus and Reid Hoffman leading an investment into Entrepreneur First backs up our enthusiasm. So has the smart money spotted an opportunity? Going back to the Piccadilly Line in answer to the question, “What are your funding plans?”, the answer came: “We only need £100k to build a first product. That should take us four months and we are already talking about a future institutional seed round…” Bayesian Inference aside, that makes sense to me.

Chris Wade is Co-Founder and Partner at Isomer Capital, which invests in early stage European Venture Capital. He is a non-executive director in companies including Calastone, Ultrasoc, MIRACL, Funderbeam and Magic Pony Technologies, acquired by Twitter in 2016. Chris is a Senior Advisor at Entrepreneur First, a Venture Partner at Octopus Ventures focusing on Asia development and advised the Singapore Government on European VCs. Prior to mentoring over 15 companies to successful seed funding, he had over 15 years technology operational experience at US-based DSC where he assisted in its $4 Bn sale to Alcatel and Northern Telecom.