White Bull, Pathways to Exit
In the last two to three years, Europe, and especially the UK, has seen an explosion of initiatives in the technology start-up space. Inspired by Rob Conway’s Y-combinator and Brad Feld's Techstars in the US, accelerators such as Springboard and start-up competitions such as Seedcamp have been helping entrepreneurs all over Europe and beyond.
All good stuff, but there is also a need to support the "gazelles", or the very high growth potential companies that have made it through the first two-three years and now have proven products, traction, revenue and, in some cases, even profits. This is precisely the market White Bull addresses. Its mission is to help the growth stage companies of the European Technology, Media and Telecoms (TMT) sectors and champion the European innovation ecosystem.
The UK's Global Entrepreneur Programme has been working with Elizabeth and Farley Duvall, WhiteBull founders, to support this mission. Over the last few months colleague Tony Kypreos and I have helped run the Tech Entrepreneur series to meet these entrepreneurial companies and key stakeholders in six cities around Europe: London, Stockholm, Amsterdam, Paris, Berlin and Tallin. The White Bull, Pathways to Exit summit in Barcelona was the grand finale of a year’s worth of scouting and screening.
Day one of the summit started with a tour of 22Barcelona, the local equivalent to our Tech City in East London. A large area of the city, near the centre but in need of regeneration, is being redeveloped to house tech start-ups and large companies as well as universities and people. Cleverly, developers were granted planning permission in exchange for giving 30% of the land back to the City who are using it for affordable housing, universities and open spaces. The result is an attractive and colourful mix of eclectic modern architecture, revamped factory buildings and green spaces with good transport links to other parts of the city. Just as there are many accelerators focused on the start-up space in Europe, so are there government-led economic development initiatives targeted at the tech sectors.
In the afternoon’s Bullpen session, 12 companies received feedback and coaching on their presentations ahead of the main event from industry experts including Jeff Coe (Linden VC), Ashley Ward (European Leaders), Tony Kypreos (springboard.com), Paul Cautracasas (Aquaa Partners) and John Paty (independent investor).
In the morning Farley Duvall set the scene for the next two days: a marathon of 31 company pitches and eight keynotes/panels with only short breaks for coffee and lunch. I will cover the keynotes and panels in this post, the company pitches in the next. Apparently there were eight exits among last year's finalists. Pretty good going and I could see why. In attendance was a stellar cast of movers and shakers including venture capitalists, investment bankers, corporations, law firms and sector experts from Europe and beyond.
First speaker was Manish Madhvani of GP Bullhound who summarised what was going on in the markets: any return to growth at the start of the year had been eliminated. But, even so, there were still a respectable 173 digital media transactions in the year to date, probably because Internet is so capital efficient. Transaction sizes were a little smaller than last year however. The hotspots for M&A and investment are in e-commerce, games, mobile, social networking and dating.
US corporations currently have largest cash reserves ever (approx $1.8tr), so the recent buying spree is set to continue. Interestingly, cross-border acquisitions are on the rise, but acquisitions by Asian companies are still a long way behind European and American ones. Manish highlighted some likely acquisition targets: the European online advertising market is worth 80% of the US market, yet the value of the top 10 European digital media companies is only 4% of American counterparts.
Manish was ambivalent on the future direction of the market but his position on whether we're in a bubble or not was clear: quoting Ben Horowitz, he believes that that major adoption wave for the Internet is still to come. Based on mainframe and PC adoption cycles, that will come in the next eight years.
The second keynote speaker was James Sperans of Morgan Stanley, a successful private equity investor and founder of four start-ups. His inspiring presentation was titled "Why Venture Capital Stinks" and discussed whether VC is dead, the European risk culture, the enduring mythology of America and the metaphorical similarities between innovation and plantations (orderly, systematic and efficient monocultures that do not like interlopers) and rainforest (chaotic, thriving, evolving and adaptable). The key insight is that some European business cultures such as Germany appear to favour the plantation over the rainforest. He finished his presentation with three observations about European innovation:
- Don't obsess about Silicon Valley
- Do what you do better than anyone else
- Embrace diversity (don't be isolationist)
In the Corporate Venturing panel, Nagraj Kashyap from Qualcomm Ventures and Jorg Sievert from SAP ventures told us that corporate strategy is not the main driver behind investment decisions, but only a by-product. The main objective must be ROI in order to be aligned with the venture's founders and co-investors. Corporate acquisition targets may not be good venture deals; in fact they are often overvalued.
Qualcomm favour early stage investments and give early access to new devices and expertise on what it takes to get a mobile product out. SAP, on the other hand, favours mid and late stage, as their strength is in helping companies build out globally by leveraging SAP's global presence.
In contrast, Anu Shah from ZAG (the venture arm of ad agency Barty Bogle Heggarty) stresses the benefit of introducing an entrepreneurial culture into the corporation and the ability to take managed risks, as well as the potential upside of venturing. ZAG is a better partner for early stage ventures as they can road test new ideas with their portfolio of clients and move forward with operational support and cash for the successful ones.
In the most interesting panel session of the conference, Building Billion Dollar Companies, colleague Tony Kypreos created an alternate reality world in which funding is the commodity and talent scarce. In other words, a reverse "Dragon's Den": the investors on the panel needed to pitch themselves to the entrepreneurs, Ryan Gallagher from IOVOX and Paul Veugen from Usabilla.
Yves Cornaz, echoing the previous corporate venturing session, explained there are two distinct investment groups at Google. The first, Ventures, invests around $100m/yr across all sectors and is focused entirely on generating returns. The second, Corporate Development (his group) makes outright acquisitions into innovative and proven technologies that will support the growth of Google. They have made over 100 acquisitions in 10 years, including YouTube, Android and Motorola Mobility. Google has the know-how to develop the right strategy for a product and can provide access to its platform and distribution to take it global.
In his pitch, Bernard Gander explained that Logitech makes and sells 10 products every second and has sold over 10bn mice! They generate £2.5bn in sales annually, 50% of that from acquired companies. As most of them are doing about $10-15m at the point of acquisition, Logitech is clearly very good at leveraging its channels to grow them globally. Interestingly, Logitech has moved away from corporate venturing: they either license the technology and work with the entrepreneur or acquire it. The objective is to share experience and provide access to all Logitech assets. This wouldn't work for anything less than outright acquisition.
Bernard advised entrepreneurs to focus clearly on the disruption on which they're building their company. Bring something new to a market and dominate it. You don't need to be a $1bn company, just dominant in your area. Become a big small company, i.e. stay flexible and agile.
Open Ocean Capital has specific expertise in monetising community and open source businesses and that is where they invest. Tom Henriksson and his team leverage their broad and deep experience to help startups with an established user base build scalable, global businesses. Tom's advice was to focus on the customer and the business model will follow. Also that 30-50% of a company's value is in its story and all $1bn companies have investors.
Hubert Deitmers from Van den Ende & Deitmers is an Endemol board member and private investor. His passion is sharing his experience of building a global company with other entrepreneurs. His preference is to get in early, not necessarily as a board member, but as a partner to help grow a company. They take a large stake (20-30%), prefer not to co-invest with venture firms and prefer a maximum of two or three shareholders.
Hubert has a problem with acquisitions: if you acquire 100% of a company, then the entrepreneurs are no longer entrepreneurs. He thinks it's better to keep them in their own building and leave them alone. Acquire fully when proven. His advice was to focus in order to grow. Don't think pathway to exit, but pathway to strategic and personal goals. Be bought not sold! Only enter markets where you can be a top three player and partner with the best local players.
As Ryan Gallagher from IOVOX (Google Analytics for telephony) believes that board members earn their seats rather than buy them, Hubert was his favorite investor. IOVOX investors don't sit on the board and provide more than just money - advice, experience, a partner but definitely not a boss.
Paul Veugen felt that Google offered the best path to global growth for Usabilla (the easy and fun way to collect feedback on your website). He thinks European VCs are too focused on business model and early traction, rather than seeing the bigger vision. In the US, VCs focus on building a user base and have faith that a business model will follow.
In the Q&A session I asked what governments can do to help build billion dollar companies. Ryan said that high payroll taxes in Europe actually encourage employers to offshore. He also thought that government had a role in encouraging entrepreneurship but not in making investments. Hubert agreed that it was about changing the culture and education, while Paul said that although government support is well intentioned, ultimately it is down to the entrepreneur.
In the less sceptical corner, Tom spoke about how the Finnish government is a co-investor in their fund and how a portfolio company received very helpful startup advice from a government agency. Bernard mentioned that the mouse was invented by a university in Lausanne but commercialised by Logitech, so they were the beneficiaries of government funding also. Another very interesting suggestion was that Governments put pressure on large customers to pay their suppliers within 30 days. This would be even more beneficial than increasing bank lending!
In his entertaining keynote, Ashley Ward from European Leaders spoke about talent alignment. Surround yourself with brilliant people, align them around the vision and then let them do their thing. There's no need to micro-manage if you have a good execution plan.
Marcel E. Smit of Q-go, the natural language search company which was acquired earlier this year by RightNow for $34m, gave an insightful talk on what he'd learnt on the pathway to exit:
- Focus – define the best battlefield for your business
- Be different – stand out from the competition (Q-go offers a money-back guarantee)
- What is your mantra? For Q-go, it's the highest relevance search
- Be due diligence ready – operational excellence
- Get on the radar – with press, analysts and anyone else you need to attract
In the Building a Brand panel, Jane Gideon from Incendio emphasised that you need to make sure you're communicating the long term vision as once you have marketing in motion, changing direction is like trying to turn a barge. It's about establishing your values and an emotional connection with customers. It isn't one off activity.
Tony Kypreos added that brand and marketing are easy to do badly and many technology companies and investors fall into this category. Brand is the essence of what you mean to your customers and stakeholders. Emotionally and functionally it mustn't be confused with branding which is merely the wrap-around. Tony emphasised the essence of authenticity i.e. substance over style. It's better to be authentic and not slick, than slick and not authentic. Don't try to create a personality that doesn't exist was also Jane's message. Brand personality needs to reflect the personality of the business executives. What's unique about us, what are we passionate about?
Mindy Hall of Mercury asked who is the core audience? Think about what the audience needs and what's relevant to them. Focus on specific niches and understand them. Don't try to do everything at once. Mindy and Hanna Manninen from Ink also mentioned that a SEO optimised headline in a press release is more important than a catchy headline!
All in all it was a very insightful conference. The focus on "gazelles" feels absolutely right. After all, according to the Kaufmann Foundation, these firms created 40 million net new jobs between 1980 and 2005. Helping them along the pathway to exit is also right. The National Venture Capital Association in the US says that 90% of job creation by venture-backed firms is after they go public.
Enough bull for now. Stay tuned for part 2…