US versus Europe. Different money build different businesses

How do investors look at businesses “born in Europe” versus the ones “born in the USA”? Are there any differences in your likelihood to raise money depending on your origin? Max Kelly, the Managing Director of Techstars London, took the stage at How to Web Conference 2015 to share his valuable insights on the topic and present the results of a report realized on a batch of 400 Techstars alumni.

Max Kelly has a long background running innovation and entrepreneurship at Virgin. Over the 12 years he had worked there, he was responsible for the strategy of the group, as well as for starting several companies that eventually exited for over 500 million USD (as for example Virgin Insight, Virgin Mobile USA, Virgin Mobile Canada or Virgin Healthbank). Alongside his Virgin commitments, Max also co-founded lastsecondtickets.com, a startup he successfully exited back in 2014.

Max Kelly is now managing the Techstars program in London, helping entrepreneurs worldwide to build great businesses and bring technologies to market. Techstars is a one of a kind, global ecosystem, having 700 alumni in both Europe and the US and 64 programs run to date.

Having such a wide network, a 1.5% acceptance rate, as well as an impressive track record with a couple of billion dollars raised by the alumni, Techstars does have access to valuable insights into the global investment market, as well as the opportunity to compare European companies with their US counterparts. If you’re a tech startup founder looking to raise money, read on to discover the findings of the Techstars report realized by analyzing 400 companies!

What’s the first thing to do?

“If you want to raise money, start by going to Crunchbase and look at all the meaningful VCs in the world. It’s there where you’ll find out where they have a focus in terms of both industry and location”, Max advises.

Where is the money?

The Techstars report revealed the US West Coast as the world leader, followed by New York City. There is a smaller concentration of offices outside the US, with London acting as the European VC capital, followed by Tel Aviv (if this sounds weird to you, just read “Start-up Nation: The story of Israel’s economic miracle” by Dan Senor and Saul Singer), then China and India. These are the coolest areas across the world where most innovation is occurring, and hence it’s no surprise that VC money is also available here.

“The amount of money that’s going into venture capital today is enormous. What’s worrying though is that the amount of deals closed is constant over the years, with the later stage rounds much larger now.”, Max explains.

What types of funding startups raise?

The analysis that Techstars did on 400 of its companies reveled three major types of funding startups raised:

  • Convertible Note Financing – 46%
  • Seed rounds – 33%
  • Series A rounds – 12%
  • Other – 9%

If you’re interested to find out more about the specifics of each type of rounds, check out the story here on everything you want to know about convertible note seed financing, as well as Mark Suster’s article “What is the definition of a seed round or an A round?”.

Not surprisingly, over three quarters of VC money go into tech. However, the split in Europe versus the US is very different. In the US, for example, 75% of the closed rounds are convertible notes, while in the European sample (UK focused) there are more equity investments, particularly because there are tremendous tax advantages in this case.

“VC money goes into seed and Series A rounds primarily. Unfortunately, most companies fail and the funnel gets narrower as you go up, with only 30% of the companies that close a seed round actually going forward to a series A”, Max points out.

The usual size of a round

Wondering how much can you raise depending on the type of funding? When talking about convertible loan notes, the usual value is 500 to 700k USD, with higher values in the US, whereas a seed round ranges from 1 to 1.5 million USD (contrary to general belief, the European rounds are higher, but it takes much longer to close them).

Time it takes to raise money 

Raising money is not something that happens over night, and you should be prepared to wait for quite a long time before actually signing the deal and cashing the check. According to the Techstars survey, here is the time it takes to close a round, depending on the type of funding and your location:

Convertible notes

  • US – 66 days
  • Europe – 120 days

Seed rounds

  • US – 118 days (approximately 4 months)
  • Europe – 175 days (approximately 6 months)

Closing a series A round takes even longer, up to 1 year in both US and Europe.

“Not any company will raise at this level though, since our study is made on curated companies. When looking at the average amount of money raised in a seed round, the value quadrupled over the past 8 years, from 400K USD back in 2007 to an astonishing 1.6 million USD in 2015. Things will level out eventually, but this is why it’s a good time to raise money now”, Max adds.

US versus Europe. Go where the money is!

“If you look at the top 10 European investors in 2015 and their US counterparts, the European ones are entirely different, pointing out the fact that investment is incredibly local. In the US, for example, the average distance VCs travel to invest is 220 miles. This means that if you’re raising a round, you’ll probably do so from local people.”, Max explains.

When looking at the European investment ecosystem, a quarter of the active micro VCs and seed funds are in London, then Berlin and Paris, followed by a combination of the Scandinavian countries. The distribution is more skewed when it comes to raising series A, with more than half of the funds having their offices in London, Berlin, and Paris.

“You can get funding basically anywhere, but it’s the level of challenge and the terms you’re able to get that differ based on your location. If you want to raise in the US, for example, you’ve got to be present there. European investors, on the other hand, are mostly looking across Europe. It’s much easier if you spend time where the money is: you have to meet the people, share your time, discuss. Doing this remotely is much more difficult”, Max advises.

However, all the VC funds out there, being them in the US or in Europe, are looking to invest in quality companies. It’s a well known fact that Eastern Europe’s got great engineering talent, so a model that investors love is to have the engineering (and maybe the product development) team in the region, while the sales & growth teams are located where the money is.

Key take-aways on the investment ecosystem

  • US remains the leader on the global investment market;
  • London, Berlin, Paris and the Scandinavian countries are the European investment hubs;
  • There’s a lot more money going into deals today, but a relatively constant number of deals closed and hence much higher later-stage rounds;
  • Over ¾ of money available in VC land goes into tech;
  • Funding is surprisingly local, with little chances to raise money in the US without having a presence there;
  • Funding takes longer in Europe than in the US.

Key take-aways on raising money

  • Research all the meaningful VCs on Crunchbase;
  • Go where the money is;
  • Account for approximately 6 months to raise money (depending on the type of round you expect to close);
  • Expect to raise 500 – 700K USD in convertible note and 1 – 1.5 million USD for a seed round;
  • You’ll probably end up with a portfolio of local investors on board, so search for angels to join the round with the VC.

Useful resources recommended by Max Kelly

  • If you are raising money and want to get familiar with data, check out the resources available on CB insights, a venture capital and angel investments database that provides daily real-time information;
  • Check out TechCrunch for general market news;
  • There are plenty of VC blogs out there: Max recommends you Brad Feld’s and Fred Wilson’s;
  • If you’re interested to find out more about the terms for your funding, Passion Capital presents some very clear and simple term sheet’s that are easy to understand;
  • Last but not least, you can get a general understanding of what all these terms mean by taking a look at the questions and answers on Quora.

Find more valuable insights by taking a look at Max Kelly’s talk delivered last November on the Startups Stage of How to Web Conference 2015. More information on Techstars London is available here, and the good news is that applications are open until March 20!

 

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