Articles Dragos Novac

Tech founders need to stop handing over so much equity

This is a VC-centric perspective, applicable not only in health tech, and which basically starts from the idea that the management team (founders) needs to be incentivized appropriately with equity for being aligned with good execution.

Also, as a new shareholder, restructuring the cap table is more expensive than diluting the founders and other investors to get at the table. And not worth it more often than not.

The other side of the table says that founders building companies don’t optimise for investors’ business model but for sustainable development or business survival. The latter combined with lack of experience will often lead to messed cap tables, which investors tend to avoid in spite of an interesting opportunity.

Truth is, if you are a founder who anticipates using risk capital down the road, your cap table is as important as your team and as your business fundamentals.

Why startup accelerators suck

Here is an anonymous opinion of a founder explaining why startup accelerators from Europe suck. The guy is not wrong, most of startup accelerators are simply not worth it, and, in most cases, are probably useful for beginners nowadays.

Conventional thinking says that, at worst, an accelerator will help crystallise the story you want to sell to the investors and practice for delivering it in a 5 minute, on-stage format. At best, you actually run into interesting people, who can help with mentoring or even invest in you.

The under-rated experience of an accelerator is meeting other fellow entrepreneurs, from whom you can sometimes learn more from than from the program per se, and build friendships, partnerships or future biz. You know, kinda finding your like-minded people tribe.

But in general I can see why most accelerators are simply considered to be a waste of time, money and equity. They are not painkillers but rather vitamin providers, at best.

Plus, in Europe, the market of startup accelerators is very fragmented, very local-oriented and heavily subsidized by EU and government money, so no sustainable economics that’d force them to be competitive. Their model is selling real estate as *free* working space, while scouting for local investors and reselling services for Amazon, Google and the like.

There is very little differentiation - go ahead and open up any accelerator webpage, you will read the exact same promises and standard benefits (it is actually the same with most of institutional investors, but that is a different story as they have discovered and are active on twitter and medium for building pr).

As long accelerators are not done by doers but by talkers, it will be hard to build a good program and… YC will remain the best (after 15 years) and will have no counterpart in Europe.

This is actually a great question - what is the best European startup accelerator? Anyone?

I still remember the first years of Seedcamp, which has since pivoted to an early stage VC fund, probably for better economic reasons. (I was actually on the very first Seedcamp batch in 2007).

As always, this can be a problem or a great business opportunity - however, if I were to build a startup accelerator today, I would do a vertical-based one.

The member-based club model

Citymapper launched a club option asking for $100/year and hopefully this is just the start for adding serious stuff justifying quite a big money ask.

So far, the features they provide for club members are rather emotional and intangible, there is no utility whatsoever.

I am a big fan of the club model - i.e. paying a subscription for getting access to special stuff, especially related to lifestyle, as long as you get the utility rightly aligned with the $$ value.

And while I am not sure that building a city guide is best on top of a map app, I am rooting for Citymapper, as they compete against the cyborg, Google.

Google has been trying to make a business in this space for 15 years, unsuccessfully.

Dinosaurs like me still think that Zagat-like products are the way to go for tackling this market, if done right by using tech.

Google actually bought Zagat in 2011 and based on it tried to clone Yelp for 7 years - they failed, as in the publishing business, user-generated and/or tech will always be beaten by well written content by specialists using the right tech. Tell that to engineers…

Apparently, since hiring a new CFO in 2015, all Google’s bets are on making Google Maps a profitable city guide product, which now looks solid. So go-go Citymapper!

Thoughts about investors and startups database business

Dealroom announced that it raised €2.75 million at a 10 mil. valuation.

Dealroom is the underdog trying to grab a piece of the market and build a comparable business with Crunchbase and Pitchbook, the standard tools for most of the venture investors.

For context, Crunchbase raised $30M series C last year and almost $60M in total since being spun off from AOL and Pitchbook was acquired for $225M by Morningstar three years ago.

The market for this kind of business is quite crowded and fragmented, with a bunch others having raised VC, including Owler (almost $30M) or Tracxn (about $15M). CB Insights raised only $10M in 2015, after having bootstrapped the company for about 5 years.

Add in the mix other vertical and horizontal service providers trying to grab market share with similar products - accounting cos such as KPMG or PWC or big guns such as Dow Jones or Bloomberg.

It is a delicate business, as data needs to be accurate, not easy particularly when you have a bottom-up approach (i.e. user-generated or scrapped data). I am aware of a few product methodologies, combining tech and manual curation which can be done in multiple ways. It is a thorough and skill-based process, if done right. On top of it, the tech stack and UX are equally important for crafting a good overall product.

I find both CB Insights and Dealroom to be more decent products, with better fundamentals, as opposed to, for example, Pitchbook and Crunchbase, which casually scrap other databases via their India-based offices. A personal note for Crunchbase, whose front end (website and mobile app) is also quite bad.

However, business-wise and in the great scheme of things, these details don’t really matter as long as you have an average product. The GTM and sales approach are much more important, and can make or break a company.

Otoh, Dealroom is the only one with a better European value proposition because, well, it is in Europe and because all others started from US and focused on US. At the end of last year, Pitchbook announced that it opened an UK office though, obviously hungry for more biz - their sales ppl are quite aggressive afaik.

The industry is very competitive and a tad boring, not really touched by what you can do with data and tech these days. That is actually the upside of it.

All companies have the same model - on-demand data and API access and ocasional research to build up rep and sales support. It is rather a zero sum game with lower switching costs.

Obviously they compete the same way, on price, which will likely lead to a bit of market clean up and consolidation. A special reminder for newbies about Mattermark which pissed away about $20M and failed spectacularly.

As mentioned last week though, Europe has a lil’ extra money which creates demand for better data and Dealroom has a little local edge compared to the Americans. So far.

Does this edge alone justify the investment bet? What is the end game and what makes this market interesting? Is Europe alone a good enough place for creating 3-5X value increase for a 10 million asset today in the following 3-5 years? How much is growth capturing and how much is share from the others?

5-10k potential clients (let’s just say) seem a reasonable number when doing Excel modeling - but… the next period will presumably see a market correction as it kept going up for 10-12 years now. Competition is fierce, sales cycles are long and investors are very difficult customers.

Will Dealroom go after business overseas? The sales process is way easier with Americans tbh, and Dealroom certainly started adding non-European deals in their dbs. It’d be a bold tactic but probably they will not, focus is key and not sure 3 mil is enough muscle for building a solid b2b sales force on both sides of the pond while strengthening the product.

As always, the better strategy makes the better players and there are a few cards to be played in this game. I am certainly curious about how the following 2-3 years will unfold.

Disclosure: I built a similar biz which covers the Nordics and, lately, Spain.

What to expect when pitching European VCs

If you’re in the United States and you’re sending your pitch deck to investors, you can expect about 50 percent of your views to come in just the first nine days. You’ll also hit 75 percent of your visits in just over a month, which is very much in line with the 11-15 week average window.

Sending out your pitch deck in Europe, you can expect to wait over two weeks (15 days) for the first 50 percent of your visits. And you’ll likely wait nearly two months (53 days) for 75 percent of your visits.

There are a lot of reasons for the discrepancies. It could be that your potential investors are more spread out. We also don’t see the same level of urgency in EU funding rounds as we often see in the U.S.

About European tech media business.

As I have built and sold a media company in a different life, media industry is a subject close and dear to my heart. I find it fascinating to follow how the companies, small and big, new and old, are still struggling to adapt and figure out a sustainable business way.

In the European tech media - the English speaking one - we’re seeing a transitional phase from ad-based, optimized-for-traffic media rooms to a leaner, based on a subscription model, thinking. Add into the mix the multi-language and 27-country fragmentation of the market and you have a difficult business problem to solve and market to conquer.

On one end, there are providers such as EU-Startups and, mainly acting as aggregators of press releases given away for free as *media* and making money from either selling reports or events. also has a soft sub model, charging for a more complete aggregation sent by email, I would be surprised if it has more than a few thousand subscribers though.

On a higher end, there is, subsidized by FT, aiming to create quality content which it still gives away for free. Still waiting to see where it is going, as there is no free lunch and quite curious whether reaching breakeven will justify keeping up the pace of writing great content.

But this positioning buys them a good brand building process in the market, helpful when and if they will start monetizing the content. Still think they are searching for their North Pole, but it is an exploratory process, there is no recipe on how to do it right, just gut feeling and experiments, and in Europe a rather singular model on this vertical.

Notably, FT also acquired TNW last year, which owns one of the better tech events from Europe. There are obvious synergies and a bigger picture in place (FT’s mother company has a similar strategy in Asia) but also rather disparate expensive efforts at a cost of focus - probably it makes sense to cross sell and bundle in one or more packages, together with FT’s proposition. We will see rather soon, creating great content is expensive and not really sustainable if you just want to live off of selling it.

There’s also Techcrunch, which has a good brand name backed by veteran journalists, and more oriented towards scoops and better-documented articles - still, difficult to assess how profitable the European operation is, market estimates indicate that overall TC makes north of $20 million a year.

However, TC looks more like a dinosaur living off of its inertia, good brand and lack of real competition in Europe. And have you checked their website and mobile app? Simply terrible, come on, it is already 2020.

And in the middle there are a lot of small outlets, either small, English-written brands or in a local language-written, bigger fish in a small one-country pond, usually owned by the larger media groups.

Quite sure this is an incomplete picture but fact is that as the European investment ecosystem becomes more mature, competitive and border-less, there is a need of good sources of coverage and insights.

The question is how much is the market willing to pay for it. EU Startups’ valuation can be an indicator. A back-on-the-envelope calculation starting from Sifted’s payroll can also point to how much is FT is investing.

It is obvious though (to me at least) that in the years to come, media will not be won by the outlets with the highest traffic or social media following but by the ones with the better brands and smarter product strategy.

Conventional media thinking from the past 10-15 years, ever since media business discovered the internet, is long outdated, probably the best example of a good media biz done for the 21st century is Skift.

American investors looking for more startup opportunities in Europe.

A lot has been said about American investors interest in spending more time and money in Europe.

In general competition is good for consumers aka founders, especially since the American way of doing business is more pragmatic and risk-taking oriented - in Europe the VC investor job is still a very young profession, as (tech) startups as a class started to get serious traction only in the past 10 years or so.

Inevitably the effects will be felt at the seed and pre-seed level, once the competition for later stage deals will lead to high level valuations and everybody will look for undervalued assets down the value chain.

The early stage infrastructure in Europe is incredibly fragmented and unprofitable, supported by high subsidies of local governments and EU.

Add also the fact that the knowledge is also scattered and rather local than global, inefficient and insufficient for the founders’ quest to get to the next level until the exit.

This is probably the biggest vulnerability of the European ecosystem, startups growing make it in spite of that not because of that.

And this rather than the lack of capital access makes European startups to flee to US/Silicon Valley. There’s never been so much investment money available in Europe.

Besides a more homogeneous 300m ppl market, the US offers entrepreneurs access to a concentrated area of investors available, knowledgable and experienced, three attributes that are still difficult to find aplenty in Europe.

It is as easy to book a ticket and fly to the East or the West Coast as to go to London, for example, in order to internationalize and raise money. And yet the US investors are more available, easier to talk to and sell to. They get it and their risk appetite is different than that of the Europeans.

And hopefully this is where a more active US VC presence will impact by doing business directly in Europe. Competition creates market efficiencies.

Data driven insights about VC-backed start-ups in Europe

Start-up growth can be sorted in five profiles – laggards, commoners, all-rounders, visionaries and superstars.

Laggards dwindle, commoners grow mildly, all-rounders record considerable progress across all indicators, visionaries’ intangibles skyrocket and finally, superstars’ growth is astronomical on all fronts.

Apart from laggards, VC made every other profile grow considerably more than their non-VC-backed counterparts. Furthermore, almost half of high growth start-ups would have either fallen into a less successful profile or defaulted in the absence of VC. Overall, when an entrepreneurial idea has a high potential for success, the “VC factor” expands their opportunities for growth and enables start-ups to unleash their full potential.

This is from a paper in EIF

words of wisdom

Sometimes you want to do too much. Sometimes you feel you don't do enough. Either way, if you're true to yourself and what you stand for, putting the hours, the resources and your mind to what you try to accomplish should do. Even though, sometimes, there are no visible results.

I recently ran into some notes that I made about 15 years ago, when I was starting my first company. It was refreshing to see how many are still applicable even today.

#1  Being too busy is not good. Having some buffer time increases quality, responsiveness, creativity, endurance, and enjoyment.

#2 At any given time, focus on as few things as possible.

#3 Always start simply.

#4 There are always more opportunties and ideas.

#5 Business can be fun because it's a competition, and winning is fun. And, even better, it can make a difference to people and the world, and also because it can bring you security and nice things.

#6 Good people want to kick ass. Join forces with good people and let them.

#7 Take the long view.

#8 You know what to do next. You don't have to know what do to after next, because you will when you get there.

#9 Think big.

#10 There are few things more important than where you put your attention.

#11 Measure. Machines are better than humans at knowing what is really going on inside machines and can even be helpful in figuring out what's going on inside humans. Make them tell you and make better decisions.

#12 Pretty much everything is about user experience.

#13 A better work environment leads to a better customer envionment (product). A better work experience leads to a better customer experience.

#14 Making money is good. Even when you don't have to.

#15 Make it easier to do the right thing than the wrong thing. (Reduce the sin gap*.)

#16 Things that make for healthy people often lead to healthy companies: balance, good communication, breathing, grooming.

A death by a thousand cuts - how do you challenge Apple if you are a startup.

A death by a thousand cuts - the way a major negative change which happens slowly in many unnoticed increments is not perceived as objectionable.

The idea is that a dominant position such as Apple's can be challenged not by attacking frontally but by creating and/or dominating some specific verticals, with a powerful brand & utility combination.

Taking a small, undeserved segment at Apple's edge, and creating value backed by solid marketing could lead to having a noticeable position in a difficult market with startup resources.

Basically, in a startup play, you spend $4-5M in a few years and which presumably would lead to a good brand, an economic model and arguably a functioning team. It is dificult to do that in a huge corporation with this budget.

Another way of doing is a bit risky - playing a complementary role to Fitbit's effort to attack frontally Apple. Risky, as Fitbit doesn't seem as equally fit to strategically compete with Apple head to head.

But... Fitbit knows best how to do hardware and, under Fitbit's arm, a startup with a dominant position in a niched vertical can leverage knowledge of building a combo of cool brand & utility in other markets - i.e. snowboard, water surfing, tennis (yes, BestShot).

The way Fitbit goes now by competing with a Fitbit OS, and w/ a general smart watch competing against Apple Watch, is a bit dangerous as they willl need to have at par Apple's developers ecosystem and their integration. And if they go frontal they will crash loudly.

But if they sneak in, step by step, by owning some key verticals, they might have a decent chance to count in the game.

And this is what tiny incumbent may be able to put on the table. And, very important, in a dual Fitbit/startup play, they need to integrate and manage those brands the way Google did w/ Youtube, or Facebook did w/ Instagram or Whatsapp - let them grow by themselves, don't corporately suffocate them.

The opportunity is that on specific verticals people are more inclined to adopt a saas model and pay monthly for their hobby as opposed to a general device such as Apple's.

That is, in a nutshell, a startup sale pitch positioning, the rest is execution, networking & bullshit magic. The big question is, given it is active in that underserved vertical to exploit, can a startup gather the required resources, the key people and visionaries to take this long term and make it happen?