Market Overview

Startups' Least Attractive Elements Are…

If you're an entrepreneur who thinks it takes money to make money, you might wind up chasing away the very capital that you seek.

That's the advice of Dr. Hendrik Brandis, Managing Partner at Earlybird Venture Capital, who detailed the elements that can make a startup less attractive to investors. "Spending big before you know that it works" is a big problem for some startups, Brandis told Benzinga.

Brandis mentions vision ("[it's] not big enough"), a lack of focus, and a preemptive strike ("being too early" to market) as three of the reasons why startups fail to attract venture capital. "Poor operational execution" is another issue that Brandis has, along with weak team leadership and the inability for a company to quickly adjust its strategy to changes and new insights. But speed isn't the only issue -- some startups don't make any changes at all, Brandis explained.

On the flipside, when asked about the most important things to look for in a startup, Brandis said, "Team, team, team and beyond that: Size of the opportunity (market size), entry barriers for others, what we call 'lock in of the business,' speed of scalability."

With regard to startup accelerators, Brandis said that they are "good for a special type of startups like consumer internet e-commerce plays where industrialized marketing and sales capabilities and capacities can make a difference."

"For the broader range of more fundamental business and technology innovations accelerators don't play an important role," said Brandis.

Earlier this month, Earlybird Venture Capital announced that it had poured $100 million into a new fund. Jason Whitmire, a general partner with the firm, provided Benzinga with some additional details on the new fund.

"Our fourth fund will continue to invest in comparatively healthy industry dynamics in Europe," said Whitmire. "Over the past (especially) five years in Europe there has been a surge of entrepreneurial activity spawned by dozens of seed funds, accelerator programs, and a deep angel network of successful entrepreneurs that are recycling their wealth and knowhow back into the ecosystem, resulting in thousands of startup formations quarterly."

As a result, Whitmire said that there is "significant value creation taking place in Europe across the startup scene," with hundreds of venture-backed companies "growing at attractive rates (and many of these companies are cash-flow positive with good visibility on sustainable double-digit revenue and earning growth)."

"Also," Whitmire added, "Europe is producing venture-backed category leaders across the digital space, i.e., Europe is un-muting the web and becoming the leader in next generation audio and music discovery and distribution platforms (Spotify, SoundCloud, Shazam etc.). Europe is [also] becoming a leading gaming developer (Wooga, Gameforge, Big Point, Peak Games, etc.) and enterprise plays (Huddle, B2X, Criteo, Adconian, etc.)."

At the same time Whitmire said that there has been an "ongoing contraction of available capital at early stage in Europe (keeping in mind that declining fundraising is historically associated with higher returns), whereby companies today experience a higher hurdle for funding, lower valuations, and we see fewer me-too plays."

Further, Whitmire said that most "European early-stage VCs closing funds today are relatively robust players with well-defined strategies."

"Earlybird, for example, has a strong investment emphasis on German-speaking countries, where by all measures the entrepreneurial venture-backed ecosystem has exploded in the past five years (with Berlin at the epicenter)."

"Also, Germany is the G7 economy that has been the best performer over the past decade and the IMF forecasts that Germany will also have the fastest growth in GDP per head over the next five years," Whitmire continued. "This has created the perfect conditions for our new fund where we see about 85% of the available deals very early at attractive pre-money valuations, and have the time to carefully assess and benchmark opportunities and thus focus on the very best investment opportunities."

The combination of these factors is "leading to an unparalleled venture environment in Europe," said Whitmire. "Vintage year funds starting in 2007 have been investing in what we believe is a very attractive environment for returns. Deal multiples, for example, illustrate the impact of this environment, as well as data showing that big exits ($100m+) are well above decade averages in Europe. Also, the scarcity of VC money in Europe has led to low-entry valuations and has driven up capital efficiency and yield (hit rate)."

Finally, Whitmire said that despite the "gloom and doom over past few years at macro-economic level," Earlybird's message is that the "evidence does not support it at the level of monetizeable innovation (i.e., the startup / VC industry), especially here in Europe."

"The conditions bode well for VCs, with the number of active VCs declining, while the number of seed deals with attractive revenue potential are increasing," Whitmire concluded.

Follow me @LouisBedigian

Posted-In: Earlybird Venture Capital Hendrik BrandisEntrepreneurship Success Stories Be Your Own Boss Startups Tech General Best of Benzinga

 

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