The Delicacy Of European Investments

I just came back from a trip to Europe and let me tell you: Belgian chocolate, raw herring from Holland and ficelle from France – nothing is more authentic and delicious.

But few of these travel well or find a sizeable deserving audience in the United States. Much like technology in the opposite direction of travel.

The state of the technology industry and the accompanying investment ecosystem in the US are quite a bit more developed than in Europe, 15 years at least.

In the US, roughly $30B per year is poured into early-stage companies by some 300 investors in my backyard in Palo Alto, not including Private Equity deals. In contrast, only a handful of European early-stage VCs exists, and the majority of all European investments are late-stage investments done by Private Equity firms.

In Europe, early-stage VC valuations hover around $1M, compared to $4-7M in the US. As a result, desperate European entrepreneurs often default to Angels who show some flexibility. Still, those investors are often very inexperienced with the technology sector and early-stage investing, or their combination. Because of the young history of technology success in Europe, very few European investors (either VC or Angel) have had the personal experience of building an early-stage technology company from scratch. They made their money somewhere else.

To sum it up, European investors (with a few exceptions) take sizeable early equity stakes, provide limited relevant business insight and push those companies to early profitability (even at 250K euro investment levels). Selling a product or a service too hastily before it is ready to enter a global marketplace delivers NO validation of the business, good or bad. But it is a sure way to hollow out its innovation, differentiation, and disruption.

So, underdeveloped access to quality early-stage money makes the life of entrepreneurs in Europe quite difficult.

But, let’s assume you passed the bar on all the above, and your company is on its way to the United States. No one can stop you in the pursuit of the great early exit opportunities only Silicon Valley can offer.

So here are some things to be aware of:

1/ A cherry, picked by an investor in Europe, is not always a cherry in the US. Be sure you understand – or seek advice about the timing differences between continents that attract follow-on investors in the US. Some of that timing has to do with technology, but market timing is even more crucial.

2/ To US investors, foreign companies are yet another risk they need to mitigate. Plan ahead. Allocate a larger fundraising runway than you would in Europe. By default, you are less attractive than a US company.

3/ Modify your operating plan. Change it from a plan to profitability to a plan to market dominance (which could include profitability but can also have other primary denominations as drivers, such as owning a majority of eye-balls in the consumer space).

4/ Move your headquarters to Silicon Valley. Without it, you’ll find very few prime US investors interested.

5/ Assuming you get this far, be open to a recap. US investors understand the equilibrium of shareholdings will provide the best business value, not extreme ownership of the initial investor achieved through a low-balled initial valuation. But since the US valuation should increase significantly, the initial investors should not lose too much net value, if at all.

6/ Hire a local management team that understands how to perform in a petri-dish entirely different from the European petri-dish of early adopters.

My final recommendation is to be prepared before you come over and not put your head in the sand. I can give you a long (and still growing) list of foreign companies that were forced to move back.

There is a fantastic opportunity for larger US VC firms to scout for technologists in Europe and fold them into their US investment model before they’ve taken on too much local money. I see technologists in Europe building innovation that is at least as good as in the US. Remember the most delicious chocolates from Belgium?

But, the world’s largest chocolate factory is Hershey’s, located in the US. The name of the game remains, matching sufficient technological capability to a fast-growing market. In the same way, Hershey’s reaches a much larger audience than Belgian chocolates – with a quality that is good enough for most.

Market timing, not technology, is critical.

The sign of an intelligent nation is its willingness and ability to reinvent itself, upstream. Let’s inspire the world with new rigors of excellence we first and successfully apply to ourselves.

Click to access the login or register cheese