How American and European investment styles differ and how to get an advantageJohannes Röll 27 / February / 20 Visitors: 57
How American and European investment styles differ and how to get an advantage from their combination - GR Capital experience
Maxim Filippov, Executive Director of GR Capital Venture Fund, in the column for AIN.UA, outlines the differences between American and European VC styles and describes how the fund unites them.
The world is globalizing, and differences in mentalities are gradually erasing. But if we take into account venture capital investments, then here you can still distinguish differences in approaches that are dictated by the characteristics of the markets. This article will discuss the specifics of the American and European style of VC and why we at GR Capital combine them in our strategy.
American approach to the European market
GR Capital positions itself as a European fund with Ukrainian roots. We intentionally use this positioning, which is why in the beginning we often encountered difficulties. It's all about reputation. In Europe and the USA, Ukrainian technical specialists are appreciated, but people from the world of finance are mistrusted. Therefore, we regularly have to prove our integrity.
To make ourselves known on the European market, we, as a Ukrainian fund, take many practices from our American colleagues. You need to be more flexible, faster and more unpredictable. And to further strengthen our position in Europe, we decided to attract an international partner. He became Jason Ball, an American investor with vast experience in Europe. Before joining us, Jason led Qualcomm Ventures' European operations for 11 years.
Attracting such a partner to the Eastern European Fund is not an easy task. But we managed to immediately find a common contact. Largely due to common goals: after leaving Qualcomm Ventures, Jason wanted to launch his own fund for $ 200 million with a focus on technology companies in the later stages. We at GR Capital have a similar medium-term strategy, so we quickly found common ground.
The next step was the opening of a second office - they chose London. We looked at options for Berlin, Paris, or Barcelona, but the UK remains the largest venture capital market in Europe with additional benefits such as language and logistics.
One of the main advantages of our collaboration with Jason is the similarity in approaches. Despite the long work in Europe, Jason remained committed to the "American" style of investing. We at GR Capital believe that with our new partner we will be able to get even more benefits from our strategy, which contrasts with the European one. But all in order.
Differences between the American and European Investment Approaches
Size and structure of the market. What distinguishes the American venture capital ecosystem from the European? The first is the market itself, or rather, its size. The US market is corny more: according to the Challenge Advisory, the average fund size in America is $ 282 million, while in the UK this figure is at $ 168 million, and in the EU countries - $ 128 million.
In the US, the capital invested in startups is mostly private. At the same time, there is more public money in Europe. Challenge Advisory data show that, for example, in 2015, 45% of the funds raised by European funds came from the European Investment Fund. Thanks to this, building startups in Europe is cheaper. This is especially true for the Nordic countries: they have such developed support for projects in the early stages that a startup can survive to series B without attracting a lot of money from the outside. From an early age, entrepreneurs learn to meet bureaucratic - and at the same time correct - requirements.
Speed. In the US, deals close faster than in Europe. Especially in the early stages, it resembles speed-dating. Often in America, the one who first made the deal wins the deal. Many companies do not even enter the market: contacts among funds are so tight that rounds close on existing acquaintances.
It happens that because of the high pace, American funds do not have time to look at companies, but rely on numerous small transactions. The results are known: in the United States, an ecosystem is well-developed, but the quality of companies in the pursuit of speed in the later stages may suffer, as the experience of WeWork or Uber says.
In Europe, this process is a bit slower. There are fewer funds, and they are more focused on discussing and analyzing everything in detail. Attracting many funds to a transaction in Europe is more difficult, so entrepreneurs are trying to avoid this practice and are increasingly seen in the venture transaction as investment bankers.
Reputation. In the USA, everything is built on automatic trust. The logic is this: if your fund has been entrusted with money, then you know what you are doing. The "club" format prevails in Europe: here the emphasis is on communication and long-term interaction. You need to prove your competence through helping companies, it is important to create a presence.
Criteria. Due to the size and speed of the US market, US investors value startups with innovative business models and marketing. Startups such as Uber, Airbnb, Amazon is an example of this. In Europe, markets are smaller, so investors are focusing on Product-Market Fit, a more thoughtful growth of the company. Expectations from a company at the same stage of development are much stricter from a financial point of view. They also particularly appreciate startups from deep tech, which are developing on the basis of deep scientific developments.
Ecosystem. A major role in investment is played by the political structure. The United States is one country with one language and similar regulation, and it’s not such a problem to leave one state in another. In Europe, everything is a little different. It happens that a successful product, for example, in the German market may not get along in France. If a product touches sensitive areas like fintech or medicine, then more time needs to be spent on regulatory requirements, because in different countries they can be very different.
A significant role is played by Brexit. For example, if before payment companies could only get one license to work in both the WB and Europe, now they need to get it in both jurisdictions. In general, Europe should learn from the United States unity.
Synergy of American and European styles
To summarize, the American approach to a greater extent involves flexibility and speed, and the European one - consistency and in-depth analysis. The combination of these approaches brings us many benefits.
On the one hand, we are more flexible: we are not tied to the narrow criteria for selecting startups (the so-called sweet spot) and look at the market more widely. For example, we can consider both a startup of series B with an estimate of $ 100 million, and a company of series D with an estimate of half a billion dollars, which for many earlier funds is already a taboo. There are rounds that are hard to get into with a large amount of investment due to the great demand and fame of the company, then we are ready to put $ 1-2 million. And there are rounds where the company is ready to communicate only with investors from at least $ 10 million, we find an approach and in this case.
On the other hand, figures and indicators are important for us, as well as long-term financial health, because under such a late model we cannot afford a high percentage of failed investments. Thanks to this, our steps are balanced and effective, as they are based on a clear analysis.
I will give two examples. One of our portfolio companies is Wefox Group Insurance Company. Investing in it three years ago seemed a real challenge for us. We really wanted to participate in the round of the company, but received more than ten refusals, partly because of the image of the start-up fund, partly because of the great interest in the company in the venture capital market.
But giving up was not an option; we, as a team, understood the potential of the deal. Already at the end of the closing of the round, we again went to the founders of the startup and made them another offer. It is important to clarify that during the whole process, our foundation actively interacted with them: introduced it to other foundations, showed the advantages of working with us. As a result, our final offer was fine for everyone, and we got our place in the round. Largely due to quick and unpredictable actions, which is not typical for European investors.
The second example is Glovo. We watched the company since 2017, when the startup attracted a round of series B. But then it was decided to abandon the investment, because we were not satisfied with the performance in their main markets in the light of the existing competition from big players, including our portfolio company Deliveroo. But as early as next year, we received information about the new Glovo round, as a result of which the startup’s assessment was to grow by more than 5 times.
An American investor would say that we were stupid, did not take the risk and missed the 5x multiplier, having access to the deal. But we were driven by analysis. Before Round C, Glovo's performance improved dramatically and a strategy that did not overlap with Deliveroo became apparent. GR Capital decided to enter into this deal at this stage. The challenge was that now getting into the round became more difficult, because there were more comers.
This is where the American approach helped us. We actively communicate with all funds, and in this case it coincided that our good partners in past deals were the lead investor of the C Glovo round. Our foundation invited the founders to participate, and they agreed, on condition that we show the startup its usefulness. Once in the round, GR Capital helped Glovo enter the Ukrainian market: the company started from our office, we participated in hiring key people, and recommended local partners. These are things that not all funds do, and which have brought us very close to management.
Now everything is going to ensure that the styles in VC will mix. We see that, on the one hand, European funds are concerned about the rapid growth of the US market, and are beginning to take measures to reduce the gap. On the other hand, more and more investors from the United States understand the value of Europe, and access to this market involves changes in approaches. As a result, this will most likely be a movement towards: European funds will accelerate and gain access to new sources of capital, while American funds will focus on quality rather than quantity. And those who will be able to combine these two campaigns will win.
Johannes Röll was born 1978 in Brilon,Germany. Graduated RWTH Aachen University. Over the past ten years he worked as Head of the plastic card team, where he was mainly responsible for the development of the distribution, Head of sales Department and Financial Analyst,where he got experience in planning and support sales figures for branches. For the present he works as freelancer