It’s not Europe vs. US – it’s just the end of a decade of European self-flagellation

Ciarán is a Principal at Earlybird Venture Capital and represents the first institutional VC to set up shop in Berlin. His current investments include Peak Games, CrowdPark, Madvertise, simfy and B2X Care.



When fellow Earlybirds Jason Whitmire and Hendrik Brandis published their report on European VC performance, strongly suggesting there are valid signs that European Venture Capital may have become and will probably continue to be a more attractive asset class than it has ever been before, and given that U.S. VC is considered the gold standard for comparison, we wanted to kick of a well-needed and overdue fact based debate on the whole topic. Not the simplistic “Europe can’t produce category leaders because it has no Google” debate, but a refreshing exchange of facts and views on them. Wow, we sure have that debate on our hands now.


Some people made the suggestion that we have an obvious agenda. Hell yes we have an agenda: we love Europe and are extremely excited about it’s start-up ecosystem (from our side, 20 new investments in the last two and a half years, more to come!) and we are going to be rooting for European entrepreneurs and VCs maximo style. The problem however is this: As amazing, ambitious and active as Europe has become, we’re still really good at one thing: massively under-selling ourselves and indulging in acts of self-flagellation, to the point where entire guest posts lambasting the industry can be written and hardly any one European VC comes out to disagree (apart from the odd exception). This mea culpa attitude spanning our ecosystem has tarnished the image of an industry which almost everyone in Europe knows is back on its feet, and there is no turning back – so at Earlybird we’ve simply decided we are not having it anymore and that its about time we started taking control by joining the discussion with new facts vs. being a passive reader of Dow Jones VentureSource data, which makes no distinction between early and growth stage and barely makes an effort to call out the boom in technology enabled services, where most early-stage VC money is headed to these days.



Back to “the report.” Most responses have been positive, some critical, but all have definitely been helpful. Many entrepreneurs have come out praising the new attitude, whereas some have raised the valid point that the report suggests Europe is a tough place for them and they should potentially be fundraising in the U.S. Ouch. We neglected to highlight what this means for entrepreneurs, but I’ll touch on that later. Other responses have been largely obnoxious and sentiment vs. fact based – such as David Cowan’s.  Whereas he has some valid points, he obviously also didn’t like the fact that we were giving credit to the intern who helped gather some of the data, or the fact it looked graphically polished. I don’t think that needs further comment. I’m just going to focus on some of the more substantial points made where we have a different opinion (no surprise here!):


  • We looked far beyond the last two years (2009 and 2010) to derive our key messages; the data on returns is from 2004/2005 onward, and in other cases we show an even longer timer period. We only mention the 2009/2010 period on a single slide. And in any case 2009 / 2010 was incredibly tough in Europe too, not just in the US. 


  • Yes, there are a couple of monster U.S. exits down the road. But will that mean the few (massively) outsized returns in the U.S. will be superior to the more stable, spread-out returns now achieved in Europe? Moreover, suggesting that there won’t be any or many outsized returns in Europe over the next two to three years is probably a false assumption.


  • Unlike their U.S. counterparts, European funds do not have to report their performance, and thus many top funds choose not to, i.e. the official dataset in Europe is largely driven by the underperforming funds, which are irrelevant to LPs going forward.  Our report offers a broader view dataset on European funds than official datasets in Europe, which are misleading because 85% of the funds listed in DowJones and Thomson databases are from “Zombie VCs,” which is why we filtered this group out of the data for the first time.


  • The fact is, European-backed IPO performance has, since 2004, matched US performance both pre-and post IPO.  The full dataset is available for anyone to test, and this conclusion is nothing short of astonishing. Why is it irrelevant that Europe is creating sustainable capital market champions?


  • Many of the factual statements within the report are now common knowledge in Europe (i.e., large demand-supply in-equilibrium in the market, etc.) and are deemed “assertions“ only, or in the case of the exit data “anecdotal,“ when in fact the numbers are the numbers.


Okay, now back to what really matters in this discussion: European entrepreneurs. We’re in this together. If we can bring across good arguments (“the report”) why Europe is (and is going to be) a kick-ass place to invest in start-ups, we are likely to improve the funding situation for European entrepreneurs, which without a shadow of a doubt are currently chasing after a more limited pool of capital than in the U.S. Let’s change this together. Whereas we have come out waving the flag for European VCs, we are rooting even more for European founders – after all they are responsible for 100% of our success.


We know how great European entrepreneurs are and we love them – but they too have an image problem. Whereas it is improving dramatically, there is still a misplaced but relatively widespread view that European entrepreneurs are not as ambitious as their U.S. counterparts and are focused on copying U.S. business models. This view is based on general sentiment and not facts, so let’s put ourselves in charge of this discussion too. I’ve looked at a couple of VC portfolios (Balderton and Index for UK, Prime Ventures for Benelux, Northzone and Creandum for Scandinavia, Ventech and Sofinnova for France, Wellington, Target and Earlybird for Germany, 360 partners for Italy) and have found that:


  • Only a mere handful of copycats exist in these portfolios, which are largely comprised of truly non-linear deals; copycats are definitely less than 5%, so we are massively funding innovation.
  • 90%+ of the portfolio companies are international businesses serving a global market, so there is little hint of “I’ll make it big in my home market and exit early”; there are now too many role models to not shoot for the stars.
  • There is almost an even ratio within founder teams of passionate newcomers and repeat entrepreneurs (in our case nearly exactly 50/50), suggesting that European entrepreneurs are not happy with their first exit, but are natural born entrepreneurs. It also means European VCs are not hesitating to take risks to back passionate newcomers or swing for the fences also.


Sure, there are a couple of prominent copycats (and they have helped contribute to the ecosystem by the experience they provide and the money people have made while exiting them) and the media love writing about them. But it’s not the dominating reality on the ground based on facts.  European founders are just as innovative and ambitious as their US peers. And I am not even going to comment on long lunches or work ethics – that discussion is not only wrong but also especially silly.


Now that we’ve helped make the case for European entrepreneurs, are they really being hindered by evil, risk-averse, “founder unfriendly” European VCs? Should not all halfway respectable entrepreneurs head to the U.S. to get funding? Don’t get me wrong – if you can get a U.S. VC on board it’s just brilliant (in fact I would say definitely try to at some stage!), and of course a supply-demand imbalance at times leads to an unbalanced bargaining power position for European VCs. And do some people in the industry misuse that? Certainly. Do a majority of European VCs do so? Hell no. We all realise that venture capital is about backing great teams with great products and not engineering a financial deal – forget about the first generation European VCs: look at who is actively doing the deals now – they get it. While I have not had the time to analyse the portfolios of the above-mentioned VCs in detail for the next points, here is some evidence from our portfolio that paints a slightly different picture.


  • Risk-averse?: Over 90% of our investments were pre-revenue, with a ton of product development left to be done, partially incomplete teams and creating disruptive new models – i.e. no safe bets (which suck anyway because they don’t exist). We take these risks not with a couple of hundred thousand initially, but with a couple of million. I am sure the same can be said for many other VC firms in Europe – so I am not too sure where the “risk averse” rumour is coming from. Sure there are some European VCs that entirely nuked their first fund in the 1999 / 2000 era and, were unable to raise new funds, and are now pushing for early exits and extreme capital efficiency to survive, but this isn’t because they are evil. Again, this is the low end of the market, and it’s time we stopped focusing on them as they are already peeling away.


  • Evil terms / low funding?: Sure, we have a couple of old deals where we feel terms may have been a bit too harsh – that’s if you call a 1.3x liquidation preference or a 8% preferred interest harsh; we’ve never (at least in my time) indulged in the 3x liquidation preference deals etc. that we heard went down – those optimise downside; good VCs recognise it’s more important to optimise upside. Nowadays we usually have a 1x liquidation preference, often non-participating or capped at a low multiple on the total deal, 0 preferred interest (yes there are exceptions), a weighted average anti-dilution or none at all, we invest up to €15m per business (we try to build a syndicate that can invest €30m-€40m though), and for that amount of money we usually (yes there are exceptions and sometimes things go wrong) hold between 15%-25% of the company. Again I am sure that the majority of VCs in Europe active today have similar metrics. To me they sound pretty un-evil. We are simply not in the business of screwing over founders, as it hasn’t worked, ever. We have also, with a whole bunch of other European VCs, joined the initiative for a common term-sheet. All in all it doesn’t exactly sound like were the anti-entrepreneurial bunch were made out to be sometimes. ;)


Sure not everyone is running into “high-quality” / “founder-friendly” capital (no surplus anywhere), but we’re making it sound like it does not exist in Europe at all, which is simply wrong. But we’ll be the first to agree Europe needs more of it!


To wrap up, as Fred Destin rightly pointed out, we have bigger problems than U.S. VC vs. European VC, especially if VC funds are competing against the risk / return profile Chinese forests and other asset classes are delivering. Perhaps more than anything I have read recently, this insightful manifesto from the Founders Fund underscores subjects that truly affect the global VC industry, and we will need to tackle these together to stay relevant as an asset class. What we are saying though is this: the European ecosystem has staged a painful yet broadly evident comeback, and it’s about time we let everyone know: the decade of self-flagellation is over.