A foreign VC fund that shall rename nameless solicited my help the other day on opening a European presence. Actually, the specific request was simply for an introduction to a few top European VC funds so that they could join an investment syndicate to co-invest with “big names.”
The request struck me as a bit half-baked, so I inquired about this fund’s strategy for Europe, which revealed itself as not being so well thought through.
While riding the coat-tails of a group of big-name VC funds sounds like an easy way to quickly join in the best investment opportunities, I explained that it’s not quite so simple.
Several things betrayed a bit of naïveté on the part of this foreign fund.
First, as I’ve preached in the past, investing in European venture is not merely about finding the deal. Yes, finding good deals is important, but there’s so much to it than that.
Secondly, unlike this foreign fund’s home market where crowded club deals are the norm, in Europe most investment rounds do not consist of 4 – 8 VC investors simultaneously, but a more limited group, at least at the early stage which this foreign fund was targeting. In European deals, there is usually a strong lead VC who orchestrates the entire round, and perhaps 1 or 2 additional follower funds who join based the lead VC’s preference. If they had known this, they would have approached the request a bit differently.
Thirdly, in light of the above two points, I would have advised this foreign fund to think carefully about the unique value proposition they would have to offer. Again, the investment round is limited, why would a lead investor choose this unproven foreign fund over one of their traditional syndicate partners ?
Finally, participating in the venture capital business in Europe, not unlike many businesses, requires building long-term relationships over time. Showing up in a new market without a compelling value proposition and asking for a handout is not a viable strategy. I’ve even known established VCs, spotting an easy mark, to seduce the naïve outsider into throwing capital into one of their portfolio dogs.
It’s okay to not have all the answers. In fact, approaching a new market with a radically different set of cultures and business mores thinking one has all the answers is a recipe for disaster. I’ve witnessed this myself as I began investing in Japan three years ago. Seeing Western firms and investors stumble in ignorance in Japan made me determined to not make their mistakes, so I’ve gone overboard on trying to team up with local experts — and finding ways to repay them handsomely for their guidance.
