Articles Dragos Novac

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.

The Germans pulling a Rocket Internet. Again.

A hot thing in Germany is investing in aggregators of Amazon-based, small retailers. The trick is to find the top-reviewed, bestselling essential everyday products on Amazon, and buy the brands from the small business owners selling them.

You then build a platform aggregating the products and can have a good DTC op in place with nice economies of scale.

It is a smart insight, the long tail of Amazon is huge and there are a lot of unsung heroes of businesses doing seven figures this way, just out of Amazon infrastructure, which charges about 30% for all the overheads.

Now, don’t imagine for a second that the Germans had this insight or invented something on their own - far from it, they simply pulled a Rocket Internet and cloned the model of some Americans which were just valued $1bn back in July.

And shortly after, we have:

1. Razor, founded in August by, among others, the former venture director at Rocket Internet, and which already raised about $1M from 468, GFC and Redalpine.

2. Seller X, also launched in August by the founder of Dafiti - Zalando for Latin America, also backed by the Rocket Internet. They just raised from Cherry and Felix Cap.

Building startups and raising money in Europe is not that difficult if you come to think of it, right?

Now, can Europe become the most entrepreneurial continent? :D

The European startup model

Cedric O, French junior minister:

“Europe has an economic opportunity, as the US economy isn’t as good as it used to be, and the European model is attractive. Therefore, we need to create the right environment and framework to nurture our startups."

Idle observation: there is no European model and there never will be one. If there were, that would involve a blueprint, alternative to build cool shit and apply to YC.

Besides, Europe is a pot of almost 30 cultures and ways of doing business. French are doing it different than Spanish, who are doing it different than Germans or Swedes.

Brexit ain’t making it easier either, since London is the place to go to take people’s temperature, pre-applying to YC.

PS. “the US economy isn’t as good as it used to be” - the US economy is in better shape than the EU’s.

Klarna dancing with Paypal

Klarna’s CEO bought Twitter ads to make the following claim:

Thank you CNBC for making it official: Klarna is now the global innovation leader and Paypal the follower. We are humbled but eager to push the innovation and customer centricity in this industry forward at an increasing pace!

A few observations:

1. No matter how innovative you think you are and how bold your vision is, the difference in the market is made by the strategic execution, not by public statements.

2. Business and thusly the leader and its followers are solely decided by the customers and their wallet, which ultimately dictates everybody’s market share.

3. So why this reaction? Public statements are usually signals you want to send to the market aka your stakeholders.

One way to interpret this is “we’re leaders and not afraid of the threat of increased competition”.

But… it can be translated into showing a lack of self confidence. When you publicly claim you are not afraid, you usually are afraid - leaders are busy leading, not publicly shaming followers. Besides, leaders are always wary of risks which is also controlled fear.

4. Who is the recipient of the message? The customers? The employees? The shareholders? Unlikely. There’s direct better channels for talking to them.

The other competitors, particularly PayPal? Likely. They get a direct mention in an ad purchased by their competitor - btw, comparative advertising is very unusual and generally prohibited in Europe.

But there’s backdoor channels with competitors too.

Fact is, this ad is an unusual move in the European ecosystem. It looks like an impulsive reaction not vetted by the PR and made when you feel threaten.

And another fact is that Paypal is gaining market share in Europe at a higher pace than Klarna has been advancing in the US. And, rather a personal observation, Americans are better at business development than Europeans.

And my intuition tells me that there’s a background story that led to this reaction.

5. Maybe there was a background deal between the two that didn’t work out and this is an ego burst - maybe Paypal wanted to buy Klarna but offered too little money and things escalated, or something.

6. Or maybe Klarna started losing key business to Paypal in its home markets and this is some hurt ego reflection.

Or a combination of both.

7. Also in Paypal’s advantage: better brand awareness and a few strategic acquisitions, including a $2.2bn iZettle from Sweden (Klarna’s turf), a payment processor already working with most of the Euro retailers.

Providing a solution covering the whole spectrum of needs down the chain for a merchant can be a differentiator, see the next point.

8. Also on topic, interesting to note a quote taken this week from the founder of Lunar, a Danish neobank which also wants to eat Klarna’s lunch:

The “schizophrenic” Nordic banking market is the reason why Lunar is launching BNPL. The Nordics is the most profitable banking landscape in the world, but also the most defensive, with least competition from the outside. This means that the traditional banking customer is buying all their financial products from their bank.

It is within this context that Lunar’s BNPL products are built as “post-purchase,” where Lunar will prompt its users after they have bought something. For example, if you were to buy a new television, the app will ask if you want to split the purchase into instalments. This does not require merchant agreements etc, and will work on all transactions both retail and e-commerce.

We do not view Klarna as a direct competitor as they are not in the Nordic clearing system. Hence, you cannot pay your bills, get your salary and use it for daily banking. Klarna is enormous in Sweden, but relatively small in Denmark, Norway and Finland.

9.  Whatever. If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.

So there’s that. Increased competition, different points of market attacks and the feeling that all of a sudden you are not just a pioneer opening markets and risking arrows in the back. You are fighting head to head with solid competitors on multiple fronts. The game has changed. 10. It is a complex strategic one that requires different skill sets than building a company from scratch.

It is also a bit unusual that a founder is involved in the management thus far in the company’s lifecycle such as Klarna. At this point, the beast needs to be steered differently and usually investors prefer professional CEOs for handling $6bn companies. Not impossible for founders, take Daniel Ek as an example. But definitely a different cup of tea.

The Glassdoor for VCs

There’s a new attempt of building “Glassdoor for VCs”.

Quick thoughts:

- I don’t believe in the thesis of startup founders public shaming the investors, even anonymously - I explained here why. The founders alternative today is direct reference asking and checking - easier, direct and more useful.

- The review-based business, especially user-generated, is easy to game and difficult to scale. The more complicated the system to prevent the gaming, the higher the friction to add in the content.

- Here’s another angle of it: what would a founder do if a VC asks her to write a review as part of the funding package they provide? Would it be honest knowing you have to work together for the following years? Not unrealistic, probably you all read about worse things happening.

- The private investors market is quite small and by definition VCs are a difficult genre of customers - how will Landscape make (the big) money? Glassdoor makes money from job ads btw - users come for the reviews and stay for the jobs. Will Landscape go this way and build yet another job site?

- And because when contrarian it’s also nice to suggest a constructive solution: if this flies at all, a) it shouldn’t be a big op, and b) if the VCs are really aligned to use this avenue for cleaning up their business, they can get involved directly, make it a non-profit and all chime in with $ supporting it as an industry organization.

Not an easy case.

The media opportunity

IAB Europe’s ad tracking consent framework found to fail GDPR standard.

What this means - while users want privacy, IAB encourages publishers to use tech that not only doesn't respect privacy  but also is illegal.

Media has become a sick industry because of the digital advertising model, which is mainly dictated by the tech suppliers aka Google, Facebook and the likes.

It’s so bad that media properties have become mostly unusable because they throw down the users throat popups, over and under layers as well as a bunch of spying cookies in the name of providing content for free.

It is a chain reaction started from the money payers: advertisers command control of their budget through tech, the tech providers have a mechanism that does that (and more for their own business model) and publishers need to comply or will not get the budgets. Not having the ad budgets, media will cease to exist.

We are in the middle of a transition towards a model that includes a sub-based model but that is a hybrid, sub-optimal one, because sub money is still not enough and media cos need to deal in ads compromise.

To make things worse, because of higher regulation scrutiny, ad tech suppliers will increasingly start paying to access for the properties, perpetuating the compromise and the horrible front end experience of the media assets, controlled by the tech tracking needs.

Unless you as a media are in control of your tech stack and of the conditions under which you will handle advertising, it will be a tough spot for building a healthy media business.

Or, there is an alternative: you go all in for subs and quit* advertising altogether. You know, similar to taking to test the ultimate metric of media: if it suddenly goes away tomorrow, will anyone miss it? Will anyone be less functional at job?

The bold ones took their fate in their hands and started going sub-based only, providing a clean UX and not allowing cookie trackers - think of Substack as a preview of the next gen media companies based on a DTC model.

And that is one of the reasons for which why I am bullish on the media today, it is still trapped in an old paradigm thinking and the business potential for building a new one is huge. All those problems are opportunities in disguise, we only need entrepreneurs to make it happen, the change will not come from within.

*not quit-quit, but do it smarter :P

Crowdcube and Seedrs decided to merge

Crowdcube and Seedrs decided to merge to create 'one of the world’s largest private equity marketplaces'.

In 2019:

- Seedrs made a £4.6 million loss on a revenue of £4.2m.
- Crowdcube made a loss of £2.47m on revenue of £7.7m.

The combined company will be worth £140 million - that is 10X+ total revenues. The split is 60/40 - Crowdcube is valued at £84 million based on its most recent fundraising round while Seedrs is valued at £56 million.

Some assumptions:

- Seedrs does about 600 deals a year (250 investments + 320 secondary)
- Crowdcube did about 200 deals in 2019 and 60 in Q2 2020 + just started operating secondary.
- Side note: Crowdcube made more money than Seedrs at a lower deal operation.
- For simplicity assume an average transaction value of £500k. On Seedrs, only 20% raised more than 1M and secondary transactions have a lower unit value.
- Assume a 10% cut.

1000 deals * £500k * 10% cut = £50M per year.

It is a very simplistic calculation and likely missing variables out - now at 800 deals they just bring in 12 million.

So is it just me or the valuation is quite high? Will they operate 3-4k deals per year in 3-5 years? What is the realistic TAM?

Other random thoughts:

- Europe has about 10k venture deals per year so that is a roughly 30% share of that deal flow.
- Is there an untapped market? Absolutely so, the number of companies not raising from VC is big but most of them are not suitable for risk capital anyways.
- Crowdfunding is an alternative for the long tail, question is - is it just a lower hanging fruit for those not qualifying for going direct to professional investment houses?
- Or turning the q upside down, is the 3-4k from what VCs presumably turned down a reasonable number still suitable to raise money?
- Other non-equity financial products are emerging as well. Market overall is liquid as is flooded with venture money so competition is there as well.
- Is the secondary market a nice to have or a serious revenue driver?
- Who is it going to be active in the secondary? Lazy (angels) investors missing out? Second tier VCs? Why would they trade on crowdfunding when public stocks are cheap?
- The secondary market is by definition weak in Europe and there is less PE activity in the lower market (<10M). Besides, Europeans don’t really have this quick growing by acquisition tactic in the playbook.

Would love to hear/read other opinions on this.

Why Google will start paying media companies more and more

Google finally gave in and officially decided to pay media companies for the content they are crawling.

It is a big compromise wrapped up in a new news app they are building. I think it is just a piece of the battle as things will change more in the future, whereas Google will start paying more and more for the right of crawling media websites.

Let me explain.

While the right of freely crawling a news site is debatable in principle as it’s also a free distribution channel for the said media, for Google it is strategic to get access to the media content.

That is for a simple reason: its ad layer, which is where it makes money from, is useless without having access to data to make it work. A very good part of that is gathered from the media assets and the data associated with it.

The data points collected from crawling websites are richer than the regular guy would be able to tell. The sites content and its meta are corroborated with the behavior data extracted from the Analytics and with the one from the cookies tracking the user journeys throughout the entire internet. The more data points connected over a longer period of time, the better.

And bonus, if you give Google your inventory for placing ads (a very common scenario in media business) that would be an extra data boost.

And one more bonus: if you browse while you are logged in with a Google account (YT, etc) that history data is equally valuable, dully tracked and thrown into the Google matrix.

That’s just an overly simplistic view - suffice it to say that an AI-based software product, such as the ad stack built on top of Doubleclick, is useless without the data you feed it with. The more data you feed it, the better the output becomes.

That data is a result of the content access - that is why it is strategic for Google and it will start paying for accessing content more and more.

Add to that the scenario that media properties started getting paywalled and thusly become unavailable to Google’s spiders.

And getting paywalled combined with DTC (newsletters) and good brand can make for an interesting strategic play trading off free inbound traffic from search engines.

Which inbound traffic you:

i) convert into ads, which is a one time play because that traffic is lost if you don’t have ads to serve and bounce rates are very high anyways - that is the standard go-to-strategy for media biz


ii) convert onto getting customers to pay for content or at least create an account, if you have a pure SAAS play that is - publishers are terrible at this tactic btw.

The more bloated and horrible the reading experience of a media property is, the more a publisher optimizes for the first. And that includes the cookies the GDPR enforced warning about, which are a must only if your business needs to use tracking cookies, which are for ads purposes.

Also why Google Analytics, which is a very powerful analytics product, has a compelling free version which is pretty much standard for publishers - that data is also feeding off Google’s ad tech, building sophisticated consumer behaviour models based on which it serves ad products.

And, of course, that is also the reason for which Google pays a few billions a year to both Apple and Firefox just to be one of the search engines in their browsers.

No data to feed its ad stack with, no business for Google.

PS. Weirdly fitting to this is that my son randomly asked his friend Google last night:

Hey Google, do you have a brain of your own?
G’s answer: have a good night!