Articles Dragos Novac

when your LP wants to be a VC

The EU started to operate the EIC Fund, an initiative announced last summer and which is a fund that wants to invest equity alongside venture companies from Europe. They call it a breakthrough initiative but it is unclear why, probably because it is a first of its kind within the EU.

From what I gather, it is an equity vehicle part of a grant accelerator that has been functional already for some time.

It is notable, of course, any fresh money in the market is a good thing - after all, more money in the market is better than less money, right?

The EU is already the largest spender on the continent as a fund of funds administrator - if you are an Euro VC and don’t have EU money in your fund you are at a competitive disadvantage. They’re not only an LP but also involved in many projects as customers, including media and research initiatives aimed to contribute to the private investment ecosystem (this is made with the EU’s money, for example). And, as always, when you spend a lot of money, you have a lot of friends who say nice things to you and about you.

However. While the intentions may be wonderful on the paper, the EIC fund is a head scratcher, for many good reasons, such as the fucked-up cap table example.

I will just mention one: this transforms a passive money distributor whose job is macro and policy into an active money manager having to micromanage in order to maximize ROI.

Make no mistake, they are two very different jobs. And, btw, it’s not a secret that politicians and state employees are not exactly the best (micro)managers in the world.

Oh wait, I hear you say, there is a catch - the EU fonctionnaires from the board have hired some VCs on their investment committee in order to get their valuable advice on how to handle this.

Yes, of course, you pay those guys for advice but the question is how accountable are they, since they are not employees but consultants. This is just a nice, hopefully well-paid, side gig, while their main job is their own fund, catering to their own interests of their own LPs and portfolio companies. Turning the tables a bit, if you were an investor, would you back a company whose core competence is outsourced to consultants?

Another instance - if a portfolio company of the investment committee members raises money from the said EIC fund, is that a conflict of interest? Or, the opposite, if those portfolio cos are not allowed to raise from the EIC Fund because of presumably conflicts of interest, is that a fair decision aligned to the EU’s mission to support all Euro startups?

There’s many scenarios that can go wrong in the VC business, it’s the job. And in the VC business shit hits the fan more often than you see happy times. When all is good everybody is happy and friendly but when shit hits the fan how are things going to play out? Here’s another example of a working scenario.

As an entrepreneur you will need to evaluate this, as dealing with the EU institutions is difficult at best and a mess in general, that is a fact. It is bureaucratic and slow, they have bad comms, bad PR, contradictory info and so on.

All of this red tape has been compensated until now by the fact that the money you get in exchange was quasi-free - you go through the bureaucracy hell to get it but it is equity free and don’t have to fight with those guys in your board until you buy them out.

Now you do.

Execution follows strategy, they say, and if you sit on top of a pile of money, as the EU does, decide that supporting startups is strategic for your job and then decide that one the solutions is to become a VC - it is telling about what problems the EU thinks the local ecosystem has.

And let’s be honest with each other, Europe’s problem is not the lack of VCs. Oh, sure, it badly needs good ones, but is the EIC Fund going to be a good VC just because it’s also the largest Euro LP?

Digg is back - is that a good thing?

Kevin Rose wants to buy back Digg for $1 million.

On one hand, I kinda miss the old online products from 10-15 years ago which were just working and were not cluttered by algos and “stories” and a lot of BS aimed to engage the mainstream passive audience.

On the other, Digg’s failure and implicitly KR’s as founder back in the day was exactly his business inability to make it a product available for the mainstream audience. Dude has become a VC since then, fwiw, so not holding my hopes high.

crazy pizza unpacking

EU revealed more details about their plan to regulate Big Tech. If companies refuse to obey, they could be forced to hand over up to 10% of their European turnover.

It’s long due as the last scheme was made 20 years ago.

While the EU will never admit it publicly, this one looks like it’s particularly made as a groundwork for controlling more what Americans are doing in Europe.

The politics and regulators are far behind in understanding and controlling what businesses do with technology these days, and this is a catch up, reactive move.

There are some good points in there, there’s no doubt, but, in general, regulation is one of the main deterrents of innovation. And Europe badly needs incentives to be innovative and come up with strong stuff.

This ain’t one, as this aims to prevent the other guys from doing stuff. And it is inevitable that this is the kind of regulation that will, sooner or later, also affect equally European tech, should we ever have an Euro FAANG.

Here’s an example of a rule that will prevent competition and innovation:

companies will be obliged to not use data gathered via their main service to launch a product that will compete with other established businesses

This is exactly one of Spotify’s complains against Apple. Word by word.

While I agree with Spotify’s position that Apple is being unfair and aggressively using its Store power to promote their competing inferior service, they are not right in this case.

And moreover, making an unsubstantiated complaint a general rule with the power of law doesn’t make sense to me and think it is unjustified.

Let’s unpack it a bit.

Let’s say I have an Italian restaurant and my customers are crazy about pizza. I know that because I have a loyal clientele, I know everything about them and I make a good business out of it. That’s data.

However, I notice that there’s another restaurant, pizza only, which has a good dish that sells like crazy. A dish that I don’t have in my restaurant. That’s an established business.

Should I add a similar one in my menu? Yes, if I am business savvy, my customers will probably like it and my shareholders would say that I am a proactive manager.

However, the above rule would restrict me to sell a similar dish for my loyal clientele. That would be a new product competing with an established business.

And this, in layman’s terms, prevents competition. And that’s not right.

Other examples: banks complaining that Klarna is using its users data for launching banking services. Or Spotify complaining that a radio station is using its customers data to launch a digital music database service.

You get the idea. That is to say that the data gathered in a lawful way about your users behaviour and preferences is proprietary IP and is a competitive advantage. In a free economy, you should be able to use your competitive advantages against other players.

I understand where it comes from and I feel for Spotify as Apple is a rich loser abusing it in many ways but this ain’t one.

This kind of stuff prevents a market to work properly. Really hope there’s a larger context and clearer boundaries defined beyond that. Would be curious to hear other opinions.

Google gets EU's blessing for the Fitbit acquisition

Google says that the Fitbit deal is about the hardware rather than getting access to its health data. The EU got some sort of assurances and greenlit the deal.

Google is a media company good at tech advertising, and has no idea and capabilities for building good hardware. They have tried and failed many times.

The Fitbit deal is very strategic as G wants to compete with Apple Watch, which is already a platform and which has a huge upside potential. They sold more than 100 million units already and grow double digits yoy.

It’s harder to get it and grasp the size of it because you don’t see it now in Europe since Europeans are cheap and prefer Android devices. Therein lies the opportunity.

On the other hand, if you want to see good corporate strategy rollover, study Apple watch’s evolution from launch till today.

And Apple is beatable, there’s a strategy playbook for it.

Macron and the dentists

The below observation was triggered by a boring interview about European entrepreneurs given by France’s president Macron, where, among other things, he says:

We need European financing, European solutions, European talent. We have GAFA in the U.S., BATX in China and GDPR in Europe.

No, we don’t. *Macron* does, for a nationalistic rhetoric made by a politician.

That is just another way of saying that Europe needs heavy protectionism, which any undergrad will learn in school that it hinders competitiveness, not encourage it.

The top down approach is not going to work for creating a thriving environment. From a macro perspective, we need a functional economy, access to capital and as little bureaucracy as possible. That is Macron’s job. Other than that it is a market’s problem and usually free markets are efficient in self organizing.

The capital part is there already but we all can see that throwing money at a problem, like Macron did in France in the past years, will not make for more and better entrepreneurs.

The continent is full of money already and the entrepreneurship level backed by investors in Europe is mediocre at best.

Maybe we’re not hungry enough and certainly we could use better incentives and models but the European paradigm of building tech startups seems to converge towards copying things from the Silicon Valley sorts and, if they stick, selling it to media as a success story.

There is more money than projects, the good ones are not too many and Europe lacks entrepreneurs, ideas and a proper overall environment for matching the good ones with the right kind of money.

Sure, it’s not black and white and that is the half empty part of the glass. You can argue that it has some of those elements (hey, we only saw tech unicorns on TV 10 years ago and now we have a good hundred) - but is it enough when your best value creators simply go to US in droves?

And that is also investors fault, as their industry from Europe as a category is pretty old school and narrow-minded, and that is probably top reason for the brain drain - you will go work with people who get it, and Europe doesn't have too many of those in excess too.

And btw, if you don’t go to America, America comes to you. Competition is probably even a better incentive than what Macron can do for the venture investors in Europe.

And listen, Macron and the likes may have good intentions as long their agenda allows them to but will have a hard time to understand that because the job of being a politician has nothing to do with entrepreneurship. It’s the same with him or with my dentist - they may have a cogent opinion when asked, but in particular have little knowledge about specifics.

the small sample

If you’re an investor or intend to become one, you need to be familiar with Atomico’s report released this week - it’s by far the best and most comprehensive research piece covering the venture business in Europe.

It’s free.

However, turning the tables around, if you’re a startup founder - not that helpful.

Why is that - the research represents a very small subset of people making a living as entrepreneurs. Atomico’s research covers only venture money - i.e. startups that already raised money from professional investors.

Do you know how many entrepreneurs *do not* use risk capital in Europe? Here, I looked it up for you.

EU countries had 23.5 million small companies as per 2015 - EU’s nomenclature considers a SME an org with less than 250 employees.

Assuming 10-15k venture deals in Europe a year and a 30% margin of not covering all the deals - let’s say we have 20k companies per year that we can infer data about from what various vendors track. Let’s assume for the sake of simplicity that in 10 years we have 200k companies having at least once used a risk capital product - this number is pretty much a standard proposition of data venture whole-sellers.

200k in a 23.5M universe. So Atomico’s research is representative for a sample lower than 1% from the European “startups”.

Point is - most of startups don’t or won’t work with professional investors. If you go outside that bubble you will discover that most entrepreneurs don’t build stuff to become filthy rich, or to change the world or because they want to become unicorns in 3 years. That’s the investors narrative because that is their business model.

Most entrepreneurs are usually simple people with a pragmatic mindset, trying to figure out how to make a buck by solving problems and having an independent lifestyle. That's more fulfilling than having 100 million instead of 10 million or even 1 in the bank. And they also built economic mechanisms using tech (which is pervasive in 2021), employing people, paying taxes and planning to grow their business. Just like the startup guys working with professional investors.

For every 1 founder that raised risk money, there’s 10 that didn’t make the cut (conventional wisdom) and 90 that most likely didn’t even consider this.

This is a lot of entrepreneurial value creation not accounted for by Atomico’s research. A research report as comprehensive about those guys would be really cool, wouldn’t it? 😊

The clones race has become a war.

Quick reminder, if you’re new to the saga - a hot thing in Germany this fall was investing in aggregators of Amazon-based, small retailers. All of them are copying the model of an American company named Thrasio, which is market leader and also which was valued at $1 billion earlier this year.

And so there’s been companies launched and money raised - I known of at least 8-9 wannabes only in Germany, and of one notable from the UK (notable in the sense that they raised $65 million for it).

However. Compared to a decade ago when the Americans mainly ignored the Rocket Internet people blatantly copying their businesses, things escalated a bit this week.

Specifically Thrasio, the business which is being imitated, just acquired one of their clones from Germany, Thristii, and made it their European office. It says that they now have two offices in Germany, in Berlin and Dusseldorf, operating a $50 million local business.

Not only that, but they also published a press release saying that they put aside $225 million to complete acquisitions of German companies and explicitly stating their differentiators.

What distinguishes Thrasio from other purported acquirers is that we are committed to closing every term sheet we sign, have the ability to close quickly, and can operate a company in the Amazon ecosystem well enough to generate real earn-outs for German sellers. Thrasio's expanded market presence gives German entrepreneurs a much better option: working with the company that is the gold standard in the space (with nearly 100 deals closed), a company with a real track record, and industry-leading data and performance.

Quote of the president dude of Thrasio, no less.

They also do something very smart namely creating the rules of the war:

Thrasio purchases these category-leading brands for a typical purchase price of $1+ million, giving small business owners their hard-won payout.

“You get an offer lower than 1 mil? Come talk to us!”

Read the whole thing. The Yankees got pissed and Boston people are the feisty sort.

A somewhat virgin market has become all of a sudden a zero sum game, and not a friendly environment either. Kinda wondering how much this risk was accounted for.

I guess at least we really get to see if the formula “copy others + consultants + money” makes for successful entrepreneurs in Europe.

PS. The winner of the whole thing? Amazon.

Accelerators for startups in Europe

Speaking of Europe vs Silicon Valley, it looks like YC increased the number of Euro founders they took into their last batch (26).

What the article doesn’t say is that YC actually is aggressively scaling its operations - just look at the size of the staff (I’ve been saying it for a while). And scaling includes increased scope and size of their school as well, which is a great funnel towards the YC accelerator.

YC is free of charge, open to anybody and competes directly with the local accelerators that matter in Europe, which, in turn, rather focus to convert corporate heads into startup people than having an all-inclusive approach.

In other related news, there is another American accelerator which notably hired two employees to do sales on the European grounds. Their model is different though as they require customers pay for materials and network, and upon graduation may get funded.

Cloning race heating up

It looks like the cloning race has gotten amped up a notch in Europe.

After a timid German start with classic pre-seed announcements, noted in last week’s email, two Italians based in London announced securing funding of $65 million in debt and equity for building a business aggregating Amazon’s SKUs operators.

And just as the week was ending, some of the Germans rebounded and announced adding $25 million to the table (includes a credit line, which is important).

If you’re curious like me, you can read the announcement of one of their investors, which probably is copy/pasted from the investment memo.

It doesn’t say anything else than hope and wishful thinking. I truly wish we could see this type of investments in Europe more often, funding this kind of risks is what makes an investor to be different than a money manager.

But, realistically speaking, this is less of a conviction investment - the likely hedge to putting so much money in a pre-revenue, pre-product, pre-everything, is the fact that the founders just need to copy an already existing blueprint and they were previously employed by McKinsey and Rocket Internet. How badly can they screw it up, right?

Also, you may find handy to learn that Amazon has 65k 3rd party sellers and operates 100k EU marketplaces and some numbers to crunch if you’re into evaluating TAM.

Oh, and there’s also a great interview with the Thrasio CEO, the guy who had the vision, executed it and now is an inspiration for the entrepreneurs part of the Euro ecosystem that wants to compete with Silicon Valley.

The fast unicorn

I am not the type of guy who gets excited about uni or deca or uber corns from Europe or elsewhere, that’s investors job. I am more into interesting stuff built by smart people.

And what Hopin has been doing is nothing far from remarkable for an European startup - if we’re still considering Brits as Europeans, that is. :-)

In 18 months to build something from 0 to 3.5 million users and 50,000 customers bringing in $20M in ARR - this is really inspiring for any founder aiming to build products people want.

Sure, corona played its factor and the timing was perfect, but it really doesn’t matter. Execution does.

It’s true, the $2.1bn+ valuation is a bit too high for a 20 mill a year business, but it factors in the upside, the execution and the demand - investors have not had too many opportunities of this kind in their career in Europe.