San Francisco Sarah Cannon is having dinner in front of the laptop. Not because it’s overworked. The partner at the venture capitalist Index Ventures has dinner with founders to get to know each other and explore possible investments. What the 36-year-old used to fly around the world for is now done from her home in San Francisco. As good as it gets: “It’s hard to make a deal with someone you’ve never met in person,” Cannon says. “But we are open to it.”
Cannon and her colleagues have to be too. Index has a lot of money to invest: The former Facebook and Skype investor only launched two new funds with a volume of around two billion dollars in early April.
Other major Californian start-up donors, known in the industry as venture capital (VC), are also going into recession with their pockets full: General Catalyst, investor in Airbnb and Stripe, raised three funds with $ 2.3 billion even before the corona crisis , New Enterprise Associates (Uber, Buzzfeed) $ 3.6 billion, Insight Partners (Twitter, Shopify) even received pledges of $ 9.5 billion from its donors.
At least with the large, traditional VCs and their donors, there was at least no fear in the first quarter. On the contrary: According to the Pitchbook specialist, VCs raised $ 21 billion in new funds between January and March between January and March, compared to only 51 billion in 2019. The cheap money of the last decade is also looking for returns in start-ups.
“In terms of numbers, everything is as usual: We have completed ten new seed and A-series financings in the United States since March 1,” said Andrew Reed, partner at Sequoia Capital, last week during a virtual discussion round. To this end, the renowned VC from Silicon Valley led 280 million euros in financing for the Robinhood investment app.
“Everyday life is completely different: When the founders of Robinhood called me, I was sitting in this room,” says Reed in his laptop camera. “When we transferred the money, I was sitting in this room too.”
The industry that previously worked with pitches in meeting rooms and getting to know each other through espresso cups has to find a new modus operandi. Investing in startups is suddenly a desk job, traveling to Europe is impossible. Currently, this makes the competition between start-ups in Silicon Valley and in Europe even fairer in theory. But the cafes in Palo Alto will reopen earlier than tech conferences in Europe.
Close contact with the founders is hardly possible
Sarah Cannon is an interesting case. Her specialty is “productivity start-ups”, which enable collaboration in decentralized companies and therefore benefit from the current curfews and the need to work from home. She was on the board of the office messenger company Slack and today oversees, among other things, the index investment in the Berlin start-up pitch from Wunderlist founder Christian Reber, which is working on a better PowerPoint. Her entire career is based on the thesis that collaboration is possible even without personal contact.
When it comes to investing, the index partner relies on close combat – which is now much more difficult. In mid-March, she also convinced the currently booming collaboration start-up Notion to accept his first major investment of over $ 50 million.
Before that, she had invited his art-loving founder Ivan Zhao to an exhibition in San Francisco with a postcard with a picture of Dadaist Marcel Duchamp, her favorite artist. She courted the start-up for more than a year, advising Zhao on strategy and personnel issues before finally approving an investment. “If you wait for calls, you lose,” she says of her job.
So far, she has traveled to Europe about once a quarter, for board meetings and to meet with start-ups. Cannon has an 80 percent theory about the post-crisis world. Normality will return in many areas, but not completely. People would continue to shop in supermarkets, but have food delivered more frequently than before. And she would probably only fly to Europe three instead of four times a year.
Most recently, the venture capitalist industry has globalized, also in favor of European start-ups. The Softbank Vision Fund, the world‘s largest tech fund, has invested three-digit millions in European companies, in 2018 in the used car dealer Auto1 and in 2019 in the Berlin tourism platform Get Your Guide. Sequoia hired a partner in Europe shortly before the crisis began, which is due to start in September.
“Since last year, we have seen the rest of the world share our belief in the European tech scene,” said Tom Wehmeier, partner at London’s Atomico fund, in January. According to a study by Atomico, the continent’s startups have raised more capital than ever before at $ 34.3 billion. In 2019, an investor from the USA or Asia was involved in more than every fifth financing round in Europe, a doubling within five years.
But the crisis threatens to reverse the trend and cut the still delicate thread between the powerful VC companies of Silicon Valley and Europe’s startups – at least if history repeats itself. Already in the first internet boom, shortly before the dotcom bubble burst, the Silicon Valley donors extended their feelers to Europe. But not everyone stayed after the crash.
In 2000, Benchmark, which had made billions with AOL and Ebay, opened a branch in London – seven years later it was abruptly split off and is now called Balderton. Smaller VCs like IDG Ventures completely disappeared. Of the California VCs that came during this period, only Accel grew to a permanent size in the European investor scene – and financed some of the largest tech companies in Europe with Spotify or the Finnish game company Supercell.
At the moment nobody is talking openly about retreat. And there are counterexamples: One wants to expand the activities in Europe, says Sequoia partner Roelof Botha the Handelsblatt. “When it comes to topics such as AI microprocessors, design or fintech, there are just as exciting companies in Europe as there are in the USA.”
Withdrawal is not an option for index either, says Sarah Cannon. The company has its origins in Switzerland and has long had two headquarters, in San Francisco and London. No company listed more early-stage investments in European start-ups than index in 2019. “It was nice to have less competition in Europe,” she says. “But it is good for Europe that this has changed.”
Successful IPOs such as that of the Dutch payment service provider Adyen or the British fashion platform Farfetch have completely changed the European ecosystem and given it credibility in the eyes of US investors, she says. That was still different in the mid-2000s. There is more capital, more investment companies, more experienced start-up employees.
However, Cannon does have one restriction: “If the headquarters of a VC performs less well than investors expect, many will withdraw to what they know.” But if you restrict travel or even close offices, you will ultimately become less in Europe invest. “You can’t run a VC fund permanently from a distance,” says Cannon.
Less money for European startups
It is already hinting that venture capital will again tend to flow into US start-ups: According to the industry service Crunchbase, start-ups in North America collected more money in the first quarter of 2020 than in all the rest of the world for the first time in three and a half years. The share jumped from 41 to 54 percent in just one quarter.
While VC investments worldwide declined from $ 69 billion in the first quarter of 2019 to $ 63.8 billion a year later, they actually rose slightly in the United States and Canada. In contrast, less investment was made in China and Europe.
Early-stage start-ups are particularly badly affected. While more developed companies are more comparable based on sales and other metrics, start-ups have to convince with their vision or their team spirit. “We spend a lot of time in coffee shops for such investments,” says an investor from San Francisco. “No chance that I will issue a five million check over zoom.”
The lack of freedom to travel is only a problem. Up to now, Europe has also been attractive to US investors because the start-up valuations there were often lower. Meanwhile, some criticize that valuations in Europe have caught up without there being enough exits, i.e. sales or IPOs.
In addition, the US market is cooling down: Even with healthy start-ups, whose markets are at most affected by Corona, Cannon predicts many “flat rounds”, i.e. new investments at the same valuation and the same conditions from the previous round. Companies that were more severely affected, such as the Airbnb travel platform or the e-scooter provider Lime, even had to accept significantly worse conditions for fresh capital.
For investors with a little optimism, however, this means that good deals can also be made in the USA. “Valuations are already falling and will continue to fall,” says an investor from the US west coast who specializes in so-called “secondaries”. He does not buy start-up shares from the companies themselves, but from founders, employees or other funds that need liquidity.
Such transactions are more common than rounds of financing, which is why secondaries are an early indicator of the overall market. “Supply and demand prices are still far apart, that will move towards each other in the coming months,” he says.
He had traveled to Europe last year and his fund had hired an employee in a European capital to explore the market. Now he has enough to do in the USA: “We have had a very good deal flow here in the past few weeks,” said the investor.
More: The federal government’s corona aid for German start-ups is coming too slowly, warning Christian Miele and Jeanette zu Fürstenberg from the startup association – and warning of numerous bankruptcies in the industry.