The European Ecosystem is Entering Puberty

I just read Mike Butcher’s post entitled What is the future for tech VCs in Europe? and thought I’d share a few of my predictions of what I believe is likely to happen in Europe over the next few years; hopefully the predictions will serve to explain my rather crude choice of blog post title.

1. European entrepreneurs will become more sophisticated.

• The annual Silicon Valley Comes to Oxford conference which has been running since 2000 started being copied in Cambridge and London last year — and more people’s lives will change as a result. Having met several of the most successful entrepreneurs and investors from the Valley at the events in 2006 and 2007, I have some insight into the power it is having. A couple of friends of mine whose lifes have changed as a result are:

  Bob Goodson
  Bob met Max Levchin for the first time in 2004 and was headhunted to move to Silicon Valley 3 months later in order to become employee #1 at Yelp. Having helped take Yelp through to taking on $16M venture capital funding and over 4M monthly uniques, Bob recently left to found YouNoodle with Kirill Makharinsky, who was also headhunted by Levchin as an Oxford student. 

  Kulveer Taggar
  Kulveer met Evan Williams for the first time in 2005 and was soon persuaded to quit his job at Deutsche Bank and go full-time on BOSO in March 2006. After getting selected for Y Combinator in 2007, transferring what he’d learnt to Auctomatic and teaming up with Irish hacker Patrick Collison, subsequently raising investment from Chris Sacca and Paul Buchheit, his company was acquired by Live Current Media for $5M last month.

  Kulveer and Bob have now become role models for the younger generation of entrepreneurs – up and coming entrepreneurs such as Aly Chesney (Babuki), AJ Asver (Project Bluespark) and also Andy and I (GroupSpaces) have easily accessible people we can go to for advice and introductions. The foundations for a rich ecosystem are being laid.

• European founders will start reading and applying Venture Hacks. This is a blog/resource come recommendation service founded in March 2007 by serial entrepreneurs Babak Nivi and Naval Ravikant. I recently asked Babak what his motivation for starting Venture Hacks and he said:
  

  “First-time entrepreneurs usually negotiate sub-optimal deals that leave millions of dollars on the table. Or worse, they negotiate awful deals and screw themselves. Startups have one chance to raise money right. You can fix almost any mistake in a startup—but you can’t fix your deal. If you hire the wrong employee, you can fire him—but you can’t fire your investors.We try to level the playing field with knowledge, so entrepreneurs can do this critical job right. In the words of Francis Bacon, “Knowledge is Power.””

I went on to ask Babak what the most common mistake young entrepreneurs make with VCs was. His response was: 

“Entrepreneurs focus on valuation when they should be focusing on controlling the company through board control and limited protective provisions. Valuation is temporary, control is forever. For example, the valuation of your company is irrelevant if the board terminates you and you lose your unvested stock. The easiest way to maintain control of a startup is to create good alternatives while you’re raising money. If you’re not willing to walk away from a deal, you won’t get a good deal. Great alternatives make it easy to walk away.Create alternatives by focusing on fund-raising: pitch and negotiate with all of your prospective investors at once. This may seem obvious but entrepreneurs often meet investors one-after-another, instead of all-at-once.

Focusing on fund-raising creates the scarcity and social proof that close deals. Focus also yields a quick yes or no from investors so entrepreneurs can avoid perpetually raising capital.”

• European entrepreneurs will make stronger connections with and learn from their Valley counterparts. The knowledge and network of the ‘Y Combinator Mafia’ (as Sumon Sadhu has called them) will start propagating throughout the UK and beyond. Out of the 80 startups funded to date, 8 have been from the UK, which include friends of mine at Snaptalent, Auctomatic, Songkick and Clickpass.
• GroupSpaces was recently selected for WebMission which means we’re flying out to San Franisco next Friday. We’ve got an action-packed schedule lined up including the Web 2.0 Expo, presentations to VCs and the Press, and Startup School, for which Andy and I have also been selected. We’ll come back with increased social and intellectual capital, as will the other 19 WebMission companies, and this can only benefit the UK and Europe.

As more European startups immerse themselves in Silicon Valley, our networks and collective knowledge will grow and grow; like lots of neurons firing around a big brain meeting each other at an increasing number of synapses. Via a combination trial and error, face-to-face contact and reading the right blogs, Europeans entrepreneurs will evolve.

2. European Investors’ balls will drop. They’ll become more like Valley Investors.

• In my (limited) experience, speaking to, but mostly hearing/reading about European VCs, they only seem to want to invest in proven concepts. Whether that means a product that already has traction, or an entrepreneur that’s already done it once before, they are pussies when it comes to taking risk. On the West Coast entrepreneurs get funded at concept stage on a regular basis. Loopt raised over $5M from NEA and Sequoia very early on, Xobni raised $4.2M from a dream team of investors pre-launch, and there are countless other less high profile investments at a similar level.
• Why are they pussies? My belief is that it’s down to a lack of confidence and/or experience. Just like a good cook, many Silicon Valley VCs know what combinations of ingredients will make a nice dish; sure, they might need to taste the dish as they cook it, adjusting things along the way, but they’re confident that in the end, it will turn out right. European VCs, on the other hand, just haven’t built up enough experience, or don’t trust their own judgment enough. Index and TAG seem to be the most confident investing at an earlier stage, driven in part by Seedcamp co-founder Saul Klein, which ironically brings me onto my next point.
• Seedcamp will become more like Y Combinator.
  It seems that Y Combinator picks founders and focus on product. However, it seems that Seedcamp picks business ideas and focused on business –- the first time. Having listened to an inspirational 1 hour masterclass by Paul Graham and Jessica Livingston at Silicon Valley Comes to Oxford in November 2007, and also read Founders at Work, I see 2 changes necessary for Seedcamp if they want a ‘Seedcamp Mafia’ to form:

1. Interview the teams face-to-face and focus more on whether the founders are ridiculously hungry, smart, determined nutcases who can and will do everything it takes to succeed.
2. Beat teams up more on their product/idea. 3 of the 4 partners of Y Combinator are product guys. Many of the people attending the weekly dinners are also product guys. Seedcamp’s team and program seem to have too much focus on investment and marketing, and too few good hackers/product guys ensuring teams make things people want.

3. English people will stop being so ‘English’.

By this I mean people will be more open.

If you meet someone who could really do with meeting this other guy you know, well hell, you’ll make an introduction even though you weren’t asked.

If you’re wrestling with a good idea, you won’t get out an NDA with everyone you meet, you’ll trust in the wisdom and good nature of people and share your idea -– for every 1 person that will try to copy you, there are probably another 9999 that will want to help. One of my best buddies AJ Asver has been sharing his journey since day 1 of his new venture, codenamed Project Bluespark, I’m sure he would vouch for the good it’s doing him.

And anyway, you can’t really give away most ideas in a sentence, because they’re dependent on all the experiences and related ideas the founders have –- and no-one can steal that stuff.

The other big drivers I see for openness revolve around groups and events:

• OpenCoffee has been started, again by Saul Klein, to embody these principles of sharing and networking, and if it continues to attract the right people, people will keep evolving.
• Zenopy, a members-only network of young entrepreneurs founded by Sumon Sadhu meets about once per month in London. It too is encouraging a more candid, sharing culture. The current list of members are all on the road to achieving big things, and they acknowledge what a fantastic resource they are for each other. Next month, I’ll be attending my first Zenopy Meeting, and it’s an exciting prospect.
• Oxford Entrepreneurs (OE), Imperial Entrepreneurs (IE) and increasingly more university entrepreneurship societies are providing a platform for experience to be passed down to the younger generations. OE’s now up to 6 funded startups since its inception in 2003; and already this year, I’ve travelled down from Oxford to see Paul Graham, Brent Hoberman, Sutha Kamal, Kieran O’Neill and Steph Bouchet speak at IE in London.

I’m going to finish this post by naming and thanking a few people who I see to be the real catalysts for the paradigm shift which is taking place:

Some European investors who ‘get it’
Danny Rimer, Saul Klein, Niklas Zennstrom, Mattias Ljungman, Paul Fisher, Martin Varvasky, Alex Hoye.

Some young European entrepreneurs who ‘get it’
Jamie Murray Wells, Michael Smith, Sumon Sadhu, Kieran O’Neill, Loic Le Meur (OK, Seesmic is now Loic’s 5th startup, but he definitely gets it and he’s making waves with Le Web 3 amongst other things).

I’m sure there are many others who passionately believe, as I do, that Silicon Valley is more of a state of mind than a place, and you too are the agents of change — the next 5 years are going to be defining for Europe.

[The Gateway II — extended version] Team Talk

Last week we discussed idea generation and evolution. Here we’re assuming that you’ve got an idea, developed it into a planned product or service and you are now working out who else you need to work with to help turn your dream into reality.

First of all, you probably need co-founders. A quick analysis of all the recent success stories points to 2 or 3 being the optimal number. For example, Bill Gates had Paul Allen at Microsoft [current team of CEO Steve Ballmer and Chairman Bill Gates above left] , Larry Page has Sergey Brin at Google and Mark Zuckerberg initially had Andrew McCollum and Dustin Moskovitz at Facebook.

Setting up a business on your own occasionally works e.g. Jeff Bezos with Amazon, but the process of bouncing ideas around just isn’t possible in the same way. Finally, if the core team start off as 4 or more, people often end up dropping out due to having differing expectations or effectively becoming a ‘spare part’ due to there being an overlap of skills within the team.

A good way to improve your understanding of these sort of relationships is by reading Founders at Work (by Jessica Livingston, Partner, Y Combinator) – a collection of 32 candid interviews about the early days with founders from the likes of Apple, Hotmail, Yahoo!, PayPal and Firefox.

Having read the book myself, it seems that a common pattern emerges – complimentary skill sets. Guy Kawasaki (Author, The Art of the Start) explained the dynamic well at the annual TiE conference in 2006:

“If you’re a great engineer, you need to find a great marketer. If you’ve got a great engineer and a great marketer, then maybe you need to find someone who’s good at operations. If you’re a youthful young visionary, then you need to find adult supervision.”

OK. The last sentence is slightly tongue in cheek, but the point is clear enough and you can draw upon analogies from any number of sporting teams. However, it’s not necessarily essential to cover every single base of skills in the initial team. You’ll learn and develop skills on the job. For example, with GroupSpaces I started off having done a couple of banking internships and an alumni fundraising campaign which furnished me with reasonable finance and sales skills; and my co-founder Andy Young started off with several years of Web development under his belt. After working together for a couple of years, Andy’s developed into a top graphic designer and my understanding of management, marketing and corporate law has developed tremendously. That’s now resulted in us having pretty much all the bases covered

The other thing to bear in mind is quality. You need to “Keep the A-team the A-team”. In the speech mentioned above, Kawasaki also touched on the rationale behind this saying:

“A-team players hire A-team players, B-team players hire C-team players, C-team players hire D-team players and if that happens, before you know it, you’ve got Zee-team players.”

And finally, remember – lots of people have exciting ideas, but they’re worthless without good execution– it doesn’t matter how fantastic your idea is if you don’t have a sufficiently talented team to make it happen.

I’ve got a team, who else do I need?

Find the right mentors. For any first time entrepreneur, this is absolutely crucial. Unfortunately entrepreneurship isn’t something you can learn by studying, you learn by doing. I remember a Harvard MBA saying something particularly memorable to me while we were having dinner at Smollensky’s in Oxford last August:

“Business is a trade; you learn with an apprenticeship and you improve by practicing.”

Where this school of thought derives from is mistakes. You learn about how to start a business by trying stuff out and making mistakes. Gradually you realise what works and what doesn’t and this is called “experience”. This is where the mentor comes in particularly useful. Any good mentor will have lots of experience and can hopefully share the lessons from many of the mistakes which they themselves have made in the past so that you don’t have to make them yourself.

The PayPal Mafia are a prime example of the benefit which good mentors have. PayPal’s original CEO Peter Thiel invested $500,000 in Facebook when Zuckerberg went to meet him in June 2004, 5 months after they launched the website. Having already taken PayPal from zero to a $1.5bn sale to eBay in 2002, Thiel clearly knew his way around Internet business. Now that Facebook has over 50 million users and has been valued at 10 times this figure ($15bn) with 23-year old Zuckerberg and Thiel still composing 2 members of the 3-man board, most would credit Thiel’s guidance significantly.

Further evidence of the value of mentors and experience is provided when one realises that of the original PayPal team, Reid Hoffman (former Executive VP, Business Development) founded LinkedIn, Chad Hurley and Steve Chen (former developers) founded YouTube, Max Levchin (former CTO) set up Yelp and then Slide, and David Sacks (former COO) has recently started Geni. With a combined valuation in excess of $5bn, it’s not hard to see the value in sharing lessons learnt in setting up particular types of business.

At a more mundane level, it can make a big difference having someone with experience to call on when you want to incorporate a company, draft a shareholders’ agreement or even just write important letters.

My idea needs money to make it happen. Where do I go?

1. You’ve probably heard of Venture Capital. VCs (Venture Capitalists) give entrepreneurs cash in exchange for shares in their company. Generally, Venture Capital investments are £500,000+ and firms often don’t want to invest less than £1M in companies for their portfolio. In the UK, VCs tend to only invest in proven concepts; now this could be the entrepreneur running the company (i.e. he/she’s been successful before) or it could be that the company already has a well-developed product and lots of customers. It takes time to get to this sort of stage and a VC would almost certainly want the entrepreneurs they invest in to work full-time on their company. Therefore, this one’s unlikely to work for you.
2. Angel Investors are affluent individuals who provide capital for start-ups and they typically invest their own funds. This is in contrast to VCs, who invest the pooled money of others via a professionally managed fund. Investments of £50,000-£500,000 are typical angel territory, and like VCs, they probably want shares in your business. Connecting early-stage companies and angel investors can be difficult outside of personal networks, so angels often get together in “angel networks”. Formed out of a group of angels, these function like a real-time version of Dragon’s Den. Once every couple of months, a few lucky entrepreneurs get to pitch their idea to the network at a presentation and they are subsequently asked questions. Hopefully they end up receiving offers of investment too. Popular angel networks in the UK include London Business Angels (LBA), Oxford Investment Opportunity Network and Oxford Early Investments (OION & OEI) and the Great Eastern Investment Forum (GEIF).
3. Micro seed funding (as oppose to “seed funding” which is synonymous with “angel-level funding”) has been pioneered by Y Combinator (YC) in recent years. It is a biannual scheme with an intensely competitive application process: first, hundreds of entrepreneurs around the world submit answers to 25-30 questions; next, a chosen few teams are interviewed; finally, around 10 receive funding each cycle. For the chosen ones it was well worth running the gauntlet – not only do they receive somewhere between £5,000 – £15,000, but the teams also spend 3 months living in a start-up hub, get the opportunity to meet many successful entrepreneurs and at the end pitch their ideas and products at an Investor Day. In addition to YC which runs in Boston each summer and Silicon Valley each winter, Techstars (Colarado) and Seedcamp (London) have also launched micro seed funds.
4. If all the above options sound like too much hard work or you don’t feel confident of going through the gruelling process necessary to get financed through one of them, you can always resort to the Three “Fs”:

   >> Friends
   >> Family
   >> Fools

   Typically, people in these groups might give you up to £50,000. The great benefit here is that you’re unlikely to have to do lots of legal work agreeing everything and you can work under a more relaxed arrangement

In terms of student entrepreneurs receiving funding, Oxford Entrepreneurs society (OE) seems to be leading the way in the UK. Having spawned 5 companies who have received at least 6 figures of funding since its inception in 2003, they are developing a reputation for deal flow. As Thomas F. A. Whitfield (Founder, Miomi.com) said:

“Entrepreneurs build companies; OE builds entrepreneurs.”

And with highly motivated alumni such as Sumon Sadhu (currently on Y Combinator in Silicon Valley) graduating and setting up Imperial Entrepreneurs in 2006, the future looks bright. Today – LSE, KCL, Warwick, Bristol, Bath and a growing number of other universities also have societies using similar models. So if you’re looking to raise some money to help make your idea happen, the entrepreneurship society at your university should be one of your first ports of call.

Now you’ve got an idea, you’ve worked out what product or service you’re going to provide, you’ve formed an initial team, got your mentor(s) in place and hopefully raised a little bit of start-up capital. Surely this is great news? But wait. Don’t you still have a degree to do?

Coming up next week: How do I balance my degree with my business?

You can view the original version of this article on page 8 of this week’s edition of The Gateway.