Silicon Vikings


Blogginnlegg   •   aug 31, 2012 20:07 CEST

In a recent article the Economist called European entrepreneurs Le Miserables. An important part of themiserable condition is poor access to capital. As the Economist wrote

"The total money invested in European venture capital halved from €8.2 billion in 2007 to €4.1 billion last year. Much of it now comes from governments rather than from private investors." 

When we started our first company in Copenhagen in 1996, the only venture capitalists over there were focused on leveraged buy-outs – they didn’t care about or understand early stage technology investing. We were wanderers in a  desert in search of an oasis. So the thought of talking to four HUNDRED technology savvy VC firms in and around Palo Alto and Menlo Park instead of four VC firms in Copenhagen certainly seemed compelling. 

With time we learned that there were other significant differences between Euro VCs and their Silicon Valley cousins. Established Valley firms have been investing in startups for the past 30 years or more. Their breadth and depth in early stage investment is unsurpassed anywhere in the world. They have seen far more companies than other investors - successes and failures - and that makes for an amazing knowledge base. They call the ability this gives them “pattern recognition”. Silicon Valley investors have also built networks that other venture capitalists can only dream about. This can help entrepreneurs make valuable connections for their companies.

So your chances of finding an investor or board member who actually understands your business and can help you build it are much better here in Silicon Valley. The investment terms are also better, i.e. more entrepreneur-friendly. More of the individual partners are former entrepreneurs themselves. There are more engineers, and fewer bankers among them. Entrepreneurship is something they have lived, not something they studied during a semester of business school while majoring in Finance.

Due to all of the above, Silicon Valley money seems like a great idea to most international entrepreneurs. So not surprisingly one of the top ten questions of international entrepreneurs is “How Do we raise money in Silicon Valley?” In theory this seems like a great idea. The reality is more challenging.

First of all, no matter how brilliant the business idea, Silicon Valley investors mostly invest in Silicon Valley companies. Some of the partners like to make short trips in their private planes - so an occasional investment in San Diego, L.A., or even Provo Utah might have its charm. Vilnius however is out of range.

What Silicon Valley venture investors almost never do is invest in European companies, based in Europe and subject to European laws. I spoke to a local VC a few days ago who told me his firm “almost invested in a German company recently”. After $50,000 of legal work, just to get the process going, they decided against it. “It was just too hard” – it was too different from the familiar “cookie cutter” model here in the valley. And of course even if they had done the investment it would still leave the firm very far away from its investment.

In my work with international companies, I meet a lot of entrepreneurs who come to Silicon Valley - sometimes on “techno tours” arranged by the local trade outpost. Most often they want to meet with and pitch to Silicon Valley investors. Most of the focus is on “pitch training” to make them better presenters – more like local startups. Sorry, but this is ass-backwards.

While you may get some great feedback and new ideas talking to Valley investors, one thing you can be almost certain of not getting is an investment into your European company. And while pitch training can be a good thing at the right time, what most companies are missing is HARD EVIDENCE, not more slides.

Is it impossible for European companies get Silicon Valley funding? No. But you need to jump through a lot of hoops to get there - a ton of focused, hard work.

You will need to get real insight into the market and reach a deep understanding of how and where your product fits in and figure out how to get customers. This takes time, so it’s not a viable strategy if you will be running out of money, say a week from Monday.

Assume it will take 3 - 6 months to validate your business model and another 3 - 6 to get some customers onboard and get ready to take your investment case to the venture community. From the time you start pitching it will take you 6 months or more until you have a next round of funding in the bank. You might do it faster and be pleasantly surprised, but those are the kinds of numbers you should expect. That is a total of 12 – 18 months. In the meantime you will need your Euro VCs, angels, government agencies, income from European customers and whatever other sources of cash you can see your way to.

The decision to move (part of) your company to Silicon Valley is a major commitment of time and money, and if you have a family it also involves a spouse, your spouse's career, maybe some kids and more. Since the odds against startup success are around 10:1 it's not an easy decision. Fortunately you can dramatically improve the odds and reduce the risk before you commit, and you can do it for a fairly modest investment.

The best way to get started is for one or two company founders to come over here for a 8 - 12 weeks on a "scouting and reconnaissance" tour. We refer to this the LEARN phase and will talk about it in an upcoming post.