UK entrepreneurs: know which VC to pitch to based on the size of your company

Raising VC funding is most certainly a time-consuming task — and can mean lots of headaches for entrepreneurs. In fact, the funding process may even distract a CEO’s attention away from the company for a long period of time.

Entrepreneurs can make this process more efficient (and less frustrating) by targeting the “right” VC funds: those after the type of investment opportunities that their start-up represent.

When shortlisting VCs, you should apply some simple selection criteria such as:

  1. Depth of experience in your industry (e.g. how many deals have they funded in your category)
  2. Success rate (e.g. how many exits have they secured in recent years?)
  3. Geographic proximity (as most VCs like to be “hands-on” with their portfolio companies)
  4. Do they mostly participate in seed funding, series A funding, or both?

This post tries to to bring some clarity to UK entrepreneurs on that 4th bullet.

I used the ventureloop dataset (the same used in previous posts, such as here, and here) and captured, for each company backed by one of the UK top 10 VC funds, a company size estimate defined as the number of employees listed on LinkedIn.

The results, charted in the graph below, enable an indicative comparison of the relative propensity to invest in early-stage companies for each of the Top 10 VC funds (click on the picture to enlarge):

Propensity to invest in early-stage companiesVC funds in the above chart are sorted from left to right, with VC funds most likely to invest in early-stage start-ups on the LHS and least likely on the RHS.

Key takeaways for UK entrepreneurs include:

  • The 3 VCs most likely to invest in early stage companies are Wellington Partners, DFJ and Index Ventures
  • The 3 VCs least likely to invest in early stage companies (i.e. more focused on later-stage rounds of funding) are Benchmark Capital, Bessemer Venture Partners and Atlas Ventures 
  • Index Ventures and DFJ were the only two funds covering the full spectrum of company size with their portfolios. In other words, not only do they seek to get involved in early stage companies, they also have the capacity to follow-through on their seed investment!

Technical comments / word of warning regarding the analysis:

The analysis was based on a sample of companies and this sample may not be very representative of a whole VC portfolio (in particular, for Atlas Ventures, for wich only 6 companies were in the sample):

VC fund Number of portfolio companies in the sample
Wellington Partners 8
Draper Fisher Jurvetson 16
Index Ventures 31
Accel Partners 11
Kleiner Perkins Caufield & Byers 8
Balderton Capital 13
Sequoia Capital 18
Atlas Venture 6
Bessemer Venture Partners 8
Benchmark Capital 17
Total ventureloop sample 211

There is a selection bias in the ventureloop dataset since companies listed on that website are companies that sought to hire during Q1 2013. Over such a short period of time the likelihood of a big company hiring is higher than for a small company, hence I believe many small start-ups in the 1-25 employees segment were ‘screened out’ of the sample. This bias is obvious on the last column of the above chart: you can see that there are way too few small companies in the total sample compared to large companies.

This implies that the propensity to invest in early stage companies as estimated above is probably underestimated.


These 30 VC-backed companies are creating jobs faster than any other in Europe…

In total 1,465 job positions in VC-backed start-ups were listed on the Ventureloop database over the last 7 weeks (Jan 15 to Feb 28). By splitting these jobs by country and VC fund backers I  identified in my previous post (published last Saturday) the list of Top 15 VC funds in Europe for the period Jan-Feb 2013.

I have now also split these jobs by start-up and industry segment to produce the list of Top 30 EU start-ups over the same time period and to get a feel for industry segment dynamism by country. The results are presented below:

Top 30 EU start-ups by job creation

High-level comments:

– the two biggest job creators were and Spotify –  both have a predominant footprint in Sweden

– Criteo is ranked 3rd and is the only start-up with a majority of job creation in France…

– 9 of the top 30 start-ups created jobs in 3 or more of the 5 EU countries analysed here, highlighting that these companies have already undergone significant geographic expansion

– c.57% of the Top 30 companies had a majority of job creation in the UK

Top Tech segments by job creation in Europe in Jan-Feb 2013

High level comment: Digital gaming, Digital advertising and Digital music are the most important Tech segments in Europe.

Industry segment dynamism in the Top 5 EU countries in Jan-Feb 2013

High level comments (Note: the above chart was based on an industry classification of the top 43 start-ups, which represented 53% of total job creation in Jan-Feb 2013):

– the UK is the most diversified start-up eco-system, with no industry segment representing more than 16% of job creation

– by contrast, Sweden had two segments representing more than 27% of job creation (Digital games and Digital music) – highlighting that the Swedish eco-system is still young and may currently be over-reliant on few major but recent success stories

– the German start-up scene enjoys a level of maturity that seems to sit in between the UK and Sweden, with a reasonable coverage of key Tech industry sectors

The VC industry is beneficial to innovation ecosystems… but that doesn’t mean it will survive in its current shape

The beneficial role of VC on innovations eco-systems is clearly established

Whilst it may be an underperforming asset class, the VC industry has nonetheless established itself as an indispensable element of innovation ecosystems. Evidence shows that VC-backed start-ups grow faster and bigger than bootstrapped start-ups. I identify two main reasons for this: firstly, VC-backed start-up gain greater financial stability (and are free to “aim for the stars”) and secondly VC investors add tremendous value by teaching entrepreneurs the ropes of growth hacking. 

1. VC as a reliable source of finance: just like bigger and established companies, start-ups operate in an increasingly turbulent business environment. A big part of why venture capital actually is important is because it helps start-ups stay the course and ignore cyclical fluctuations in the public market, in the late-stage investors market, and even, for that matter, in the consumer market. VC funds have a 10-year lockup on the money they receive from Limited Partners, so an industry segment can go in and out of fashion several times in 10 years and that’s something that VC-backed start-ups can disregard because they have the financial stability to stay the course
2. VC investors as growth hackers – in the B2C segment: Oliver Samwer, one of the co-founders of Rocket Internet, a successful but most controversial VC fund, has put to the test the recipe for success that he laid out in the academic thesis he wrote in 1999 (I am paraphrasing two key arguments from that thesis below)

The fast pace of change today means that B2C start-ups need a lot of funding from the start to create an aura of success, claim leadership in a hot market and sustain this claim. To achieve this, they need a comprehensive operations team (including marketing and sales) right from the start. Essentially, what many companies in the Silicon Valley do is to declare victory before they have won. In fact, they may only have a beta site and not yet shipped or even developed a working product

A very important game in the B2C segment is securing mindshare of the target consumer population – that’s a game that requires a great PR network and a serious advertising budget. In many industries customers rely on the press, analysts and other influencers for their purchasing decisions. Especially in industries that move very fast such as the fashion  industry, customers cannot keep up with all the things that are happening and they make their decisions based on what key opinion leaders say

3. VC investors as growth hackers – in the B2B segment: For B2B start-ups, securing the first 10 major corporate clients is absolutely crucial. According to Chi-Hua Chien from Kleiner Perkins if your start-up is the first to reach this milestone then the chances are you have beaten the competition already. In that context, B2B start-ups can gain a clear advantage over their competitors by choosing to partner with the appropriate VC fund since the top-tier Venture Capitalists are incredibly well-networked and can effectively be seen as gatekeepers: they have direct access and influence over key enterprise accounts (you may call this the “Harvard MBA advantage”).

However, the VC industry not only performs poorly as an asset class, it also needs to evolve in the near future due to the increased involvement of new types of participants

The ongoing economic crisis acts as a wake-up call for developed economies and a painful reminder that sustaining wealth and a large pool of high value-added jobs is heavily reliant on winning the innovation game. There is also a wide understanding that the availability of early-stage capital is an essential condition for a thriving innovation ecosystem, very much in the same way that rich nutrients carried by the warm East Australian Current are a key condition to the fertility of the Great Barrier Reef.


(picture from

As a result, three categories of players in developed economies are upping their role in the provision of early-stage capital and challenging the traditional VC model:

  • Major corporations are setting up their own Corporate Venture Capital funds (think Intel Capital and Google Ventures) – I have already described in a previous article recent developments in the CVC industry
  • Governments are increasing their participation in VC funds / PE funds and even setting up new investment structures in order to fill the funding gap affecting some innovative industry sectors. Cleantech is a typical example: New York Governor Andrew M. Cuomo proposed in January 2013 a $1 billion “Green Bank” to draw in private sector money and spark investment in clean energy projects; likewise, Greencoat U.K. Wind Plc aims to raise £205m via its IPO on the London Stock Exchange in March 2013 with strong support from the UK government (the Department of Business, Innovation and Skills plans to take shares worth about £50m)
  • The Crowd: crowd-funding platforms such as Kickstarter, Fundable and Crowdfunder enable you and me (anyone really; no need to be a professional investor) to donate money in order to support start-ups

Out of these three categories of participants, crowd-funding is by far the most exciting development. A study from reported that about $1.5 billion was raised from 452 crowdfunding platforms in 2011, and this was expected to double by 2013.

And it’s not just about seed rounds; we are now seeing mammoth series A rounds going down that route too… I was fascinated by a piece of news last week that describes how an entrepreneur raised $8M in two weeks (!) via AngelList, a social network for business angels and professional investors, establishing itself as the largest crowdfunded Series A round to date.

It is truly amazing to see the speed at which crowdfunding has become an effective fund raising method for legitimate startups, despite the fact that the payback for people giving away their money has so far been limited to goodies such as T-shirts, novels, CDs, and a few new toys.

Still, this is just the beginning. The passing of the JOBS Act is about to accelerate that growth even further as it will allow private businesses and startups to sell equity (i.e. shares of their business!) via crowdfunding. Once the rules are in place later this year, anyone will be able to become an investor in a start-up and to get an actual monetary return. Fred Wilson, co-founder of the venture capital firm Union Square Ventures, predicts that once it gets up and running the equity crowdfunding market could reach $300bn, largely driven by families and individuals investing a small percentage of their assets via crowdfunding. As a point of comparison, the total amount invested by traditional VC funds across all industry sectors and all stages of maturity in the US in 2012 was $24.3bn (according to latest NVCA data)… In other words, the VC industry could very soon get crowded out…

A (lasting?) rise in Corporate Venture Capital

Corporate Venture Capital (CVC), a subset of Venture Capital, refers to the practice of capital investment in fast growth start-ups by organisations that are themselves subsidiaries of non-financial corporations (renowned examples include Intel Capital and GE Energy Capital). Such CVC activity goes back at least 50 years, and corporate interest has ebbed and flowed. 

Historically, corporate venture programs have waned during difficult economic times; but this has not held true over the 2008-10 recession. Furthermore, according to statistics recently published by the US’ National Venture Capital Association (NVCA), CVC investment has reached a four-year high in participation (i.e. share of deals with at least one corporate VC), at 15.2% in 2012 from 14.1% in 2011.

These indicators coupled with the fact that corporate venture capital groups now represent the fastest growing new member segment for the NVCA suggest that the sector is poised to become a very important part of the US venture landscape in the next five years. 

According to a 2011 study by Louvain University, around 20% of the Fortune 500 have created a CVC unit. Examples of well-established CVC funds include:

  • Pharmaceutical companies such as Smith Kline Beecham, GlaxoSmithKline, Johnson & Johnson, Eli Lilly
  • Technology companies such as Google, Microsoft, AOL Ventures, Deutsche Telekom, BlackBerry and Intel
  • And industrial companies such as BASF, Chevron, GE Energy, Dupont, Siemens, or Cargill

What’s in it for these corporations?

CVC programmes obviously aim to benefit their corporate parent. As such, they tend to focus not just on short-term financial returns but also on strategic returns i.e. the development of synergies.

Interestingly many CVC funds invest in ventures that do not operate directly in their own industry sector but rather in adjacent sectors. For example, only 18% of all CVC investment by semiconductor firms goes into semiconductor ventures according to a study by the London Business Schools. Corporations can also use their CVC arm to learn about geographically distant markets or to access distant technologies

Essentially, corporate venturing activity is an acknowledgement of the importance of having a way to scan, identify and leverage innovative ideas developed outside the corporation.

What’s the impact of CVC on the innovation eco-system?

In the past, the limited lifespans of CVC programmes (c.1.5 years compared to 6-7 years for a traditional VC fund) as well as inappropriate compensation structures for CVC personnel (flat salary and corporate bonuses not aligned with ROI performance) have been major hurdles to the long-lasting impact of CVC. The new generation of CVC funds, however, brings reassurance on these scores and one may hope that CVC is now well on course to boost established companies’ innovation capability… and support innovation eco-systems!

CVC funds are active at all stages of investment maturity. They often co-invest with traditional venture firms and also sometimes take the lead and invest prior to any other traditional venture investors. In principle, CVC activity can have a most significant impact on innovation eco-systems in specific industry sub-sectors that are not already seen as prime investment targets by traditional VC funds.

For instance, innovative sectors with high capex requirements and slower maturity curves such as the Renewable Energy / Cleantech sectors have historically suffered from a lack of VC funding. They simply do not fit the investment model of traditional VC funds and very often do not pass their discount rate hurdle. Last week brought the last straw in a series of bad news for VC funding supply into the Cleantech sector, as VantagePoint announced it was forced to give up its attempt to raise a new fund focusing on Cleantech due to lack of interest from the LP community. This news came after many other traditional VC firms have also pulled back in recent years (or changed their strategy to focus on green IT) including Mohr Davidow, NEA, Draper Fisher Jurvetson, and Kleiner Perkins.

Bearing this in mind, I had a look at NVCA statistics to identify the sectors that attracted a high share of CVC engagement in 2012. As it turns out, only four industry sectors scored high both in terms of share of deals (>15%) and share of total investment (>10%), as listed below:

  1. Biotechnology
  2. Healthcare Services
  3. Retailing/Distribution
  4. Semi-conductors

For these four sectors the rise of CVC is very good news indeed. I hope Cleantech will make it to that list in 2013…

Why 3D printing will be a game-changer sooner than you may think…

The 3D printing industry wasn’t born yesterday; the technology has been around for more than 20 years and has seen significant revenue growth over that period, as summarised in the Wohlers Report 2012 (“Additive Manufacturing and 3D Printing State of the Industry”):

In 2011, total industry revenues for industrial and professional purposes had grown to more than $1.7 billion, including both products and services. The industry’s compound annual growth rate has been 26.4% over its 24-year history, and double-digit growth rates are expected to continue until at least 2019”

So why the sudden hype ?

Over the last few years, the technology has reached an impressive mix of affordability, ease of use, performance, and compatible materials (it used to be only plastic, now you can use gold, titanium, ceramics, marble powder, etc…), which has resulted in a tremendous widening of the range of potential applications. Here is a list of notable examples of applications, current or future:

  • 3D printed moon buildings that could be constructed from material already on the moon’s surface (designs were developed by Architects Fosters and Partners in partnership with the  European Space Agency)
  • Wiki Weapon’s 3D-printed guns: the idea of digitally transmitting a gun, perhaps encrypted and over an anonymous network, is truly chilling and is stirring a warm debate in the US

This is by no-means an exhaustive list. The truth is, we are only starting to grasp the limitless potential of 3D printing technologies. What truly amazes me with this technology is that it is powered simultaneously by two complementary adoption waves: the top-down industrial wave (think: big R&D labs of major aerospace and defence companies) and the bottom-up prosumer wave (think: hobbyists/ designers/ entrepreneurs working in their garage). The reason I find this amazing is because I believe these two simultaneous waves will boost the speed at which 3D printing technologies spread and change the world.

As a point of comparison, let us consider how computers got to progressively change the world we live in. In a recent interview by Techcrunch, legendary entrepreneur and investor Marc Andreessen described the different phases of diffusion of the computer and software technology:  

The computer industry started in 1950 and basically ran for 50 years with the same model, where all of the new computers and the new software started out being sold for the highest prices to the biggest organizations.

So originally the customer was the Department of Defense and the first computers in History got sold for, I don’t know, tens of millions of dollars at the time.

And then five years later computers’ price dropped, so the big insurance companies could buy them. That’s when Thomas Watson, who ran IBM at the time, was quoted as saying, “There’s only a market need in the world for five computers”.

Years later the PC came out and then all of a sudden individuals could start to buy computers. But the PC only ever got to hundreds of millions of people. It never got to billions of people.

Years later, the smartphone came out and it will get to billions of people.

This kind of trickle-down model has been true for 50 years but around 10 years ago the model flipped. Today, the most interesting and advanced new technology comes out for the consumer first. And then small businesses start to use it. And then medium-size businesses start to use it, and then large businesses start to use it, and then eventually the government starts to use it.”

Now compare this 50-year timeline with the progression seen in 3D-printing over the last 20 years. It almost seems as though 2012 was to 3D printing what the launch of smart phones was to the computer and software industry. Except that in the case of 3D printing this tipping point is happening at both ends of the spectrum: both on the enterprise side AND the consumer side.

  • Enterprise side

To date, rapid prototyping has been the main use for 3D printing in the manufacturing industry, enabling higher efficiency in product design development cycles. However, machines have become more reliable and the range of materials more empowering, to the point that 3D printing can now be used as a real production method to make the final product. Indeed, experts have estimated that whilst 28% of 3D printing investment in 2012 was in final product applications, this will increase to 80% by 2020.

When 3D printing as an industrial production method reaches maturity, you can expect a game-changing ripple effect on supply chains. Think of it this way: your entire factory will be mobile! What happens when your factory becomes mobile? The offshoring trend of manufacturing that started in the 80s’, resulted in billions of investment in developing countries by manufacturing companies headquartered in developed countries. This mighty offshoring trend brought tremendous benefits to the economies of China and Mexico, caused millions of jobs in developed economies to shift from manufacturing to service industry sectors, and re-shaped global supply chains around the world. And to think that all of this was justified by one element: the cost of labour gap between developed and developing countries… Try to imagine what impact 3D printing will have when it sets foot in a previously labour-intensive industry and altogether removes labour from the economic equation,

Of course, it will take years and billions of R&D spending for 3D printing technologies to get to the point where they can fully deliver these promises on the industrial side… but make no mistakes, it will get there. (Do you think the clothing industry won’t be affected? Have a look at these 3D printed marvels)

  • Prosumer side

The first two retail stores selling 3D printers opened in 2012 in the US with models ranging from $600 to $2,199. One store is on the West coast (California-based Deezmaker) and the other one in New-Yord (MakerBot). At that pricing point 3D printing is now accessible to pretty much any professional with a design engineering degree. Actually, CAD software is catching up, so any amateur – not just engineers – will soon be able to design their own models and print them with relative ease…

Economies are essentially based on the trade of three categories of goods: raw materials, manufactured goods and knowledge (i.e. services). In the same way the Internet brought to the masses the power to create and share knowledge, 3D printing is bringing to the masses the power to design and produce manufactured goods. For that reason, I believe 3D printing will bring to manufactured goods the same level of disruption that the Internet brought to the services/knowledge industry.

[I intend to publish further articles on the 3D printing industry looking at current competitors, analysing their business models and revenue sources]

Why the PE & VC industries have bright days ahead of them… Part 1: late-stage / mature investment

Russel Steenberg, Managing Director and Global Head of BlackRock Private Equity Partners, gave an interesting view on the future of the private equity industry last week in an interview by PrivCap. The money quote goes as follows:

Steenberg: How many stocks do you think there are out there in the world that you can invest in today?

PrivCap interviewer: Globally? I don’t know.

Steenberg: The number is someplace in the 30,000 to 40,000 range my experts at BlackRock tell me. What’s the capitalizations of the world’s public stock markets?

PrivCap interviewer: I can’t guess.

Steenberg: It’s in the trillions of dollars. The amount of money available in private equity funds, even if you count the leverage which people like to add, is less than 1% of the capital available to chase these 40,000 stocks. I’ll put it to you, there’s comparatively much more money chasing public securities in the world today than there is in the private equity world because the number of private companies that exist in the world today that would be investable goes way beyond 40,000. So we have only scratched the surface on private equity.

[…] The biggest barrier to entry to the private equity business always has been and still is the ability of a group to raise their first fund.”

Beyond this bold “back of the envelope” estimate, there are a number of underlying trends supporting the argument that the late-stage PE industry is set for long-term growth, both in the pre-IPO and post-IPO segments.

  • Post-IPO growth

Public-to-private buyouts will increasingly represent a much needed vehicle for publicly-listed companies to get out of difficult situations when drastic decisions/pivoting are required. The truth is public companies are not well structured and incentivised to implement such significant/brutal pivot because of the enormous pressure they receive from the stock market; shareholders expect stable and predictable financial results on a quarterly basis! For instance, have a look at what happened last week to Apple’s market valuation (despite record-breaking earnings!) when its latest results turned out to be below analysts’ forecasts. As a consequence, executives of public companies are not under the right incentives and most adopt the unfortunate “boiling frog” tactic when faced with tough challenges, instead of implementing a new course of actions. Executives in PE-backed companies, on the other hand, are free (and in fact incentivised) to make these difficult changes. Going forward, given the ever more challenging and competitive business environment companies operate in you can bet there is not going to be a shortage of public companies finding themselves in tough situations. Consider the recent demise of HMV in the UK: would this bankruptcy have occurred, had the company undergone a strategic U-turn, supported by a buyout, 2-3 years ago when the signs of imminent failure were already obvious?

  • Pre-IPO growth

Ever-larger injections of private investment are required before growth companies can have a shot at an IPO, in part because the Sarbanes-Oaxley regulation in the US has made the IPO process more costly and more difficult to pull through. The resulting need for bigger pre-IPO deals has fuelled the creation of “mega-VCs / secondary market funds” whose investment model sits somewhere in between VC and Private Equity funds. Digital Sky Technologies (DST) is a prime example, having pioneered this type of mega-deals by investing $200 million in Facebook in May 2009 and then launching in July 2009 a tender offer of $100 million to Facebook employees.

Given these two trends I expect to see a continuous rise in the global amount of assets under the management in private equity funds focused on late-stage/mature companies.

[This article will shortly be followed by a second part with a focus on early-stage / seed investment]

e-commerce vs. UK High Street: who will be the next casualty?

The iconic music and movie retailer HMV has confirmed this week that it intends to appoint administrators. Whilst HMV will continue to trade and seek a purchaser for the business, things are not looking great.

HMV’s 239 stores in the UK have entered last week a month-long sale with 25% off prices, as the company needs to liquidate stock after poor Christmas trading and The Financial Times has reported that key suppliers, including music labels and film companies, have declined to help HMV with funding so that it could continue trading. Clearly music and film companies no longer think that HMV constitutes an indispensable distribution channel…

This Wednesday brought another bad news in the same industry sector, with Blockbuster UK confirmed to go into administration, putting into question the survival of its 528 high street video rental stores.

Frankly, these recent events are hardly surprising. The demand shift from physical goods to digital goods in the music and movie industry has been obvious for years, led by iTunes, LOVEFiLM, Netflix and their peers. For instance, publicly available data (as reproduced below from the 2012 US music sales report by the Nielsen Company) shows the evolution of the digital market share of music albums and track equivalent assets sold in the US since 2008:

  • 32% in 2008
  • 40% in 2009
  • 46%  in 2010
  • 50.3% in 2011
  • 55.9% in 2012

As you can see, the Digital distribution channel overtook the Physical channel for the first time in 2011. You don’t need to be clairvoyant to be able to spot the trend here. HMV’s and Blockbuster’s management can’t possibly say they didn’t see that one coming…

In their defence, they are not the only ones who have failed to adapt their strategy in this changing environment, as attested by a number of recent high-profile demises of UK High Street retailers in other industry sectors, as summarised in a BBC article:

  1. Camera chain Jessops also went into administration last week
  2. The last Comet stores closed in the week before Christmas after the electrical retailer ran out of credit
  3. JJB Sports went bankrupt last year; with rival Sports Direct buying 20 of its stores but the remaining 133 closed in October
  4. Clinton Cards went into administration in May; a US company later bought the brand but 350 out of a total of 784 stores closed

As the French saying goes, “le Malheur des uns fait le Bonheur des autres” i.e. all is not lost for everyone. In this case e-commerce players are amongst the obvious beneficiaries of the High Street’s mishaps, with the following companies springing to mind, in respective order:

  2. and
  3. and
  4. and

And in HMV’s and Bockbuster UK’s case: the big winners are iTunes, LOVEFiLM, Netflix and Spotify… That’s the effect of disruptive innovation in practice, you can’t have omelette without breaking eggs (another French saying for you!).

So who do you think will be the next High Street casualty? I’m looking forward to reading your best guesses in comments below!!