Articles Dragos Novac

Why should the government save startups?

The case against is simple at the edge - Darwin. The argument in favor is what essentially differentiates EU from USA on a philosophical dimension, making it a better environment for building a business.

But - I don’t believe in governments bailing out startups. People don’t need to be given fish to eat, they need fishing rods to do better and more fishing. I do believe that companies need a stable and predictable environment for planning ahead. That’s the government job.

And yes, it is tough for founders. Having been through this kind of shitty period before - this is the kind of time when little boys become real men. It is up to you to figure it out, and certainly not the government’s job to wave a magic wand.

And since it’s on you, you will notice that most of the people who were around you during jolly times are not available anymore. People who you thought were rational and reliable, not being reasonable anymore. You will hear stupid advice and you will have all sorts of panicking instincts.

But… you are on your own and you will eventually figure it out, no matter how deep you need to cut. The stronger your network, the more chances of survival. And never be ashamed to ask for help - friends, family, peers, the shareholders.

Worse case scenario: you fail and you learn. It is yet another experience that sets you apart from the kibitz-types. And then you start again. That is a true entrepreneur’s life, any ending is a new beginning. Btw, if you fail, it is also important how you do it.

And so this is your fight, not other people’s, even less of the government.

- The UK government shouldn't set up a bailout fund for startups. That's their investors' job.
- thread + argument

Disrupting the VC industry

Northzone changed their website - some fresh paint plus standard buzzwords you can find on any VC website, attached to a board with jobs aggregated from one company from their portfolio, probably for now. Looks nice and clean, finally at par with some other top tier European VCs. But - it could have been as well a powerpoint presentation embedded over at Slideshare.

Not trying to pick on Northzone, they are nice, smart guys and all. But I keep wondering when the European investors will discover how to transition from a static, online PR exercise to a digital product powered by knowledge and network, which are any investor’s competitive advantages besides $$. Aka using the technology for leveraging the strengths of a money product wrapped in consulting services. Maybe closer to what those guys are doing. Or those. Or those.

This industry, especially in Europe, is a cohort still living in the 2000s in spite of investing in the future - some nice static pages and a Medium account mostly with press releases make a solid (so-to-speak) marketing effort but is this at par with investors’ customers and their needs? How about using the concepts they’re supposed to consult their companies with but applied to themselves? You know, operating like a company, not like a fund.

I’d give them some years though - Europe is still minor league compared to US, with less competition and hence little need of differentiation. But, after education and healthcare, the VC industry will hopefully be the next vertical disrupted by technology. :D

Muddy waters and lockdown

Writing this from Stockholm - it really feels good to be back in Europe, away from the US hysteria and their own way of dealing with chaos.

The past 4 weeks have been surreal and unfolded extremely quick. We’re living unique times, with many unknown variables and uncharted territories.

Unknown variables means uncertainty. Uncertainty means higher risks. Higher risks means losing money, for both investors and founders.

For some investors this is a rather new situation, augmenting drivers such as panic and greed.

Why panic - well, overnight the market value of the assets under management halved.
Why greed - the assets available for purchasing from the market are at half price too.

Does it make sense? No and yes.

No as in fundamentals of a company don’t change overnight. One day you sit on a healthy foundation executing a strong plan ahead. The next day everything is fundamentally different and you need to adapt for a Covid-19-degraded market.

Yes as it’s a textbook example about how the macro environment is collapsed by an unexpected event triggering rollover effects for any great business, altering its course in a dramatic way.

This is a systemic risk, usually accounted for by investors’ due diligence. A coronavirus type of event is not a common occurrence, it is arguably a white swan - a market reset has been anticipated for some time now.

So what can we make of it?

It is likely that some investors didn’t even deal with this kind of situation before - with notable exceptions, most people in the VC business, at least in Europe, are in their 30s, and hardly experienced when it comes to dealing with wartime management.

The theory frameworks they are taught to use for doing their job have become suddenly more complicated - the last period with somewhat similar circumstances was 10-12 years ago, when they were probably with different jobs or still in school.

The theory frameworks they are taught to use for doing their job have become suddenly more complicated - the last period with somewhat similar circumstances was 10-12 years ago, when they were probably with different jobs or still in school.

On the other side, most entrepreneurs are actually used to operate in this type of environment - being in the unknown and dealing with the unexpected is standard for people building companies. However, this is a particularly opaque situation as i) there is no timeline in sight for a macro resolution and getting at an equilibrium and ii) because of that, you cannot plan and budget accordingly.

Subject to stage and vertical, that means the 2020 resource allocation needs to be changed i.e. changes in headcount, different cash management, customer discounts etc.

Particularly laying off people is very challenging as you are trying to build a long lasting org and it is not easy to hire great people anyways. And they are your people, not just numbers you need to accommodate in a budget. Quite frankly, the most difficult time of my life as a 15+ years entrepreneur was when I had to lay off half of my team so I could cut expenses for survival, back in 2009-2010.

It is what it is and you gotta do what you gotta do. The more the unknown persists though, the more likely it is that startups will dry out and die.

We’re dealing with a 2-in-1 context: a healthcare crisis and an economic recession, one triggered by the other. Until we get a resolution for the first, it is basically impossible to anticipate diligently the circumstances for operating in the second one.

We are most likely looking at a U-shaped trajectory spread on a 18-24 months span, with the following 3-6 very much under day-to-day basis, probably the bottom of the U. Thereafter it will be more difficult to re-create a decimated environment and get to a healthy overall context. Time consuming and expensive.

The good news is that if you come out of it, you will be in a stronger market position.

The bad news is that if you are looking to raise today or in the next 3-6 months, this is not ideal.

The VC market has locked up and investors are pulling the rug from under founders - effectively frozen, straight talk and elegant explanations - with the nuance that most of them are still open for business in the sense of not saying no to look at a bargain and/or simply taking pitches because their pipeline is as important as their portfolio (here is a handy list).

Nevertheless, now it is not a good time to meet strangers. Let me explain a little.

When pitching, your job as a founder is also to build a relationship, to sell yourself, to make the investor like you and feel a sense of connection and obligation to you personally so that they will eventually give you the money to build a business mechanism that you are ostensibly there to explain.

This is hard to do via Zoom only, when the whole world is under quarantine.

It is hard for investors to get a good read of the dynamics, the hands-on approach and the DNA of the team - the investments are made based on teams at least on equal grounds as on markets and on opportunities per se.

It is equally harder for a founder to get a read via a video call on the VC team relationships and vibes, and make an educated guess about how they will treat you after they give you the money.

And assuming things go further than the pitching call, the lack of future clarity will give founders little leverage to negotiate reasonable terms with people they have never met in their life anyways.

The mileage can vary of course i.e. no-brainer opportunities, already-existing vc-founder relationships etc.

This is the period founders need to keep their heads down and make the product/business 10-100x better keeping it alive with the available resources. Because growth - what investors are interested in the most - is not going to happen in this period. Kind reminder: this is the best time to start a startup.

The current uncertainty will also lead to odd situations such as investors not honoring their commitments. Yes, it is unprofessional but this happens sometimes. There is even a rule about who is doing it. Some even try to explain this behavior.

These individuals will never be named publicly because this is a relationship business. Founders don’t want to burn bridges and investors are friends with each other. And deal sharing opportunities are more frequent and important than “that time I screwed a founder because I coronavirus panicked” situations. It is part of their job. And no, I don’t buy the rep theory in this case.

Investors and startups are in limbo

The past days have evolved dramatically on the investment ecosystem from US, where I am writing this from, as the Coronavirus started to be taken more seriously across the ocean and put almost everything in limbo.

Most investors canceled their trips and started to get meetings online only - but, in spite of what they claim as being business as (un)usual, it is mostly related to deals already sourced and/or existing in the pipeline. No fresh meat, just minimum exposure, obsessive peer talking and twitter checking. It is all about the social distance and staying up to date.

The investment business is about real meetings and building relationships and this process is on hold now until we get to a market status quo and predictibility.

And even though there is a lot of money to be deployed, it will take a while until things will resume to normal as they will get much worse before it will get better.

Probably we will reach to a new normal - if you put away the Twitter/social media chatter (VCs usually are different than what they say and pose online like) and talk to the real people, it is very likely that the way business is done will change and this is just the start of it.

The fundamentals like supply and demand are not that much changed since the end of last year, uncertainty and unexpected developments are what matters.

And, especially since a lot of governmental involvement ($, policy etc) will be in play, a better case scenario looks like a rather short-term situation which will rebound as soon as things get under control.

A worse case scenario, based on modelling or on early evidence of what is happening today in Italy and Spain, indicates that we’re looking to a crisis of enormous proportions.

There are many unknowns and collateral effects and, more importantly, it is way too early to anticipate and plan, situation is pretty much fluid on day-to-day basis.

On the other side, founders already see their revenues affected, both in b2b and in b2c, with a few notable exceptions - video tools, voice and gesture-based software, health sensors/software/businesses etc.

There are already layoffs, uncertainty and an unstable global macro situation. Companies dependent on consumer spending are more affected - they will lose money as consumer attention is already elsewhere. This also applies to second degree players - i.e. b2b2c.

Not least important, if we’re to look for an upside, this is a a very good opportunity for a builder to keep her head down and focus on what is important, as times like these are the best to develop a new company. There’s also a strong case for a spike in the natality rate. And the divorce one too. :D

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.