SpinVox: Why its extinction wouldn't matter

This week I’ve run into a few VCs while rattling around London and each time I’ve asked them about SpinVox. I was interested in their answers, because the recent controversy surrounding the company appears to be gradually affecting the way the mainstream media views, as they put it, the “dotcom industry”.

On Monday, the BBC’s Rory Cellan-Jones came off holiday to write a blog post telling us why the Spinvox debacle matters.

Well, there are two reasons we should care about the Spinvox affair – and both are connected to the reputation of Britain’s technology sector.

First, this could make it harder for many of those eager young technology entrepreneurs I meet in places like London and Cambridge to get their ideas funded – the kind of people who scrimp and save, and sometimes bet their house or their overdraft on the hope that a venture capitalist or business angel will eventually back them. Let’s hope then that Spinvox does eventually give the likes of Goldman Sachs, GLG and Toscafund Asset Management a return on the large sums they’ve invested. If not, they aren’t likely to give much of a hearing to the next technology hopeful who comes along with an idea that will change the world.

Quelle horreur! Here’s another reason why the media should now pile in and start to trash tech startups as frauds and charlatans (OK, Rory, I know you meant it with the best of intentions, but plenty of other journos would be happy to pile in on this line).

So I wanted to know from real VCs what they thought? Did they think Spinvox had “pissed in the pool” and dented the chances of other startups? Is it all over bar the shouting?

In short: No. And here’s why.

Is there any real venture capital fund backing SpinVox? Answer: No. Who is backing the company to the tune of $200 million? Private equity institutions, in the form of Goldman Sachs, GLG and Toscafund Asset Management. These are the people commonly referred to in the venture world as “dumb money”. Where is Balderton, Atlas, Accel, Index? Nowhere near SpinVox. It is significant that no real VC house has invested. Yes, all these PE houses must have done some kind of due diligence on SpinVox – but I doubt very much they looked very deeply into the technology, which is something a real VC would have done. Spinvox would have benefited from a VC with telecoms experience, there is no doubt. Having no real VC involved at an stage in its financing is an alarm bell. PE houses are not designed to give the operational advice a VC can.

Secondly, SpinVox’s fund-raising methodology is far less the ‘modern startup’ than it is a dinosaur from the dotcom boom era of 1999. Here’s why the basis on which it was founded is fast becoming an extinct model.

If you look at the trends of venture financing in the last couple of years, you’ll see some common themes. In Europe, certainly, VCs have slowly but surely steered away from the big wham-bam financing rounds (at least in Web tech) of the kind that super-charged SpinVox. They have instead headed towards either late stage deals or what they call ‘growth capital’ – that is, financing businesses which already have decent turnover and revenues and now need to be supercharged into the stratosphere.

Eurpean VCs are not now commonly going after Europe’s ‘next Twitter’ (OK, one or two are, like Wellington is with Spotify). But in fact, there is a scramble to find those 3-5 year old e-commerce businesses run by 30-year-olds selling T-shirts, underwear or musical instruments online and turning over a healthy €10-15m a year.

What are they like? Wonga (funded with £19m for a short loans business), Seatwave (secured £10m for secondary ticketing market), Glasses Direct (£10m – classic E-commerce with a twist), Alertme (£8m – Subscriptions) etc etc.

Why else has there been such a chorus of praise for the new PROFounders fund set up by Brent Hoberman, Peter Dubbens and Michael Birch? Precisely because so many VCs have deserted series A rounds and seed financing. Those VCs can’t justify smaller rounds because of the size of their funds – investing a million here and there will do nothing to move the needle when the investment exits. So with PROFounders playing in the £200,000 to £1.5m space, early stage startups are pummelling them with business plans right now, from what I hear.

So why would VCs and the wider startup ecosystem actually care about SpinVox failing? As one said to me this week, shrugging his shoulders – “Hell, it just would have been nice for the European scene to get a billion pound exit.” It just would have lifted the whole scene, that’s all. We could all have pointed toward this massive success story in Europe. I hope for their sakes they pull it together, but at the moment that doesn’t look like it’s going to happen. For, as another VC said to me over coffee yesterday: “I mean come on, what are they doing? Burning the money in a bonfire?”

That sounds like an old dotcom era model to me.