In the US, if venture capital investors or tech company founders need to find each other, they go to one of two places: Silicon Valley or New York. Companies that need tech workers, and the media that follow them, eventually relocate or open offices in one of those two areas.
The scene — and the money that funds it — is highly geographically concentrated.
In Europe, the opposite is true. VC firms and companies are scattered around a dozen major cities. The next Facebook may be in Prague right now, but unless the VC firms in London fly to Prague (or learn to speak Czech) they might never discover it. It is very difficult for an investor in Paris to just grab a coffee with a founder from Helsinki, even though that kind of random encounter happens all the time in San Francisco.
Yet bizarrely, European tech venture funding is organised almost as if it’s a mirror of its larger American friend. Each major American VC fund has a European “copy.” Roberto Bonanzinga, a VC who left Balderton Capital last summer to strike out on his own, uses this slide to illustrate the “sameness” of US and European tech funds:
(Only Eden and Rocket Internet are uniquely European, according to Bonanzinga’s chart, because they have a country-by-country focus that the US obviously cannot have.)
And yet the VC firms in Europe operate in the same labour-intensive way that their American counterparts do: Individuals take meetings and then return to the office to compare notes.
This is highly efficient in the US because everyone is within driving distance of San Francisco, or a subway-ride away in Manhattan. Yet in Europe, these meetings require plane trips or extend tours of the continent. It is not unusual for VCs to get on a plane in the morning, travel from London to Italy, and then get another plane back home in the evening.
“The most advanced software tool adopted by most VC partners has been Gmail.”
Bonanzinga believes he can completely change the way tech companies are funded in Europe. He wants to do the one thing that VC firms have been slow to do regardless of where they are based: use technology to drive the VC funding process.
The irony of the VC world is that while these firms are trying to find the most advanced, innovative new devices and software imaginable, venture capitalists themselves actually use very little tech of their own. Face-to-face meetings and phone calls are the main currency. Email, PowerPoint and Excel are the platforms of choice. The tech that VC firms use today has hardly changed since the late 1990s. “The most advanced software tool adopted by most VC partners has been Gmail,” Bonanzinga wrote on Medium recently.
Bonanzinga, with partners Ben Smith (the former UK Director of Engineering at Yammer/Microsoft) and John Mesrie (the former General Counsel at Balderton Capital) have created a tech startup discovery platform called DIG, which automates the discovery of new companies. Their new VC firm, InReach Ventures, will use the software to locate new investment opportunities. Once investment deals have been struck those companies will also be given access to InReach’s internal company development platform.
DIG is a kind of search engine. People who use a search engine normally know what they are looking for. Yet in VC funding you don’t know exactly what you’re looking for because it hasn’t been invented yet, and often founders are trying hide their inventions from outside observers in order to get a jump-start on the competition. Yet people who begin new companies or projects start leaving clues and traces to those new ventures almost from the moment they have their first idea. They may adjust their LinkedIn profile or Facebook bio. They may buy a URL. They may start tweeting about a new topic they previously didn’t seem interested in.
DIG monitors all these clues — along with sites like Crunchbase, Product Hunt and AngelList, and alerts InReach when it discovers interesting changes that may indicate an individual has a good idea for a new business.
“My platform will still identify them even if they don’t go to fancy bars with cool journalists.”
For instance, DIG recently alerted Bonanzinga to a guy in Berlin who had been working in the online payments business. “The guy started putting the company name on a couple of websites, extremely low-key, not spotted by any other investor, there was no real fundraising process, and I sent him an email saying ‘Can we have a chat about it?’ and the question he asked me was: ‘How did you know?'”
Inreach is hoping that DIG will solve the obvious contradiction in tech investment: VCs say they are looking for the best investments possible, but usually they are only encountering the investments that are geographically convenient to them. Which is a ridiculous way to choose companies to invest in.
“If I see an interesting company which has got some interesting momentum in the traffic on their website and on their mobile app, these guys may be, for all we know, in the middle of Sweden and not even in Stockholm, my platform will still identify them even if they don’t go to fancy bars with cool journalists.”
Once InReach has made an investment the company will be given access to InReach’s internal company development platform that will allow Inreach companies to talk to each other, learn from each other’s mistakes, and benefit from the management experience of Bonanzinga, Smith and Mesrie.
InReach has also got a new twist on how it funds new ventures. Instead of raising one giant bloc of capital from large institutions and then charging a management fee for handling the investments, InReach will be open-ended, meaning that funds will provided on a deal-by-deal basis. Bonanzinga says he has partners already lined up that can keep InReach going for the next five years. And Inreach won’t charge a management fee. The firm will be compensated solely from the success — or failure — of the investments it makes.
It might sound like PR spin — surely every VC firm thinks it is unique compared to its peers? — but InReach does pose one major cultural challenge to the VC business. Previously, venture capital has been conducted as an artisanal process in which individual visionaries or gurus pull from their personal insight in order to make investments. The VC world is bejeweled with great minds and legendary names, like Marc Andreessen or Bill Gurley. It’s a star system, in other words.
InReach by contrast is saying “no, there’s a machine for this. A piece of software can make these connections for us.”
“I’m trying to use technology to scale what has historically been a quite unscalable business, that is venture capital,” Bonanzinga says.
And here is the scale he is hoping for: “What I will be happy with is if in 10 years time through DIG, I discover somebody under the radar screen that maybe is in Prague or somewhere like that. I gave him some money and help him, and through that he will be able to unleash his potential and to really be able to build out of Europe a really large sustainable business with hundred of thousands of jobs. Obviously it will be a global company and there is no reason that such as company should not happen in Europe.”
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