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Ivan Farneti, Expert in Residence for Seedcamp and long time venture investor, has shared his thoughts on a recent article published by the New York Times, looking at how European startups, like the US, are beginning to feel the pinch, with lower valuations and new capital becoming harder to come by.

The New York Times article, titled “European Tech Scene Begins to Feel Silicon Valley’s Woes”, was making the rounds across social media this week and was picked up in the Seedcamp office too, where the team has definitely started to see signs of this happening.

This Economic slowdown certainly isn’t great news, but this is hardly a surprise. It is not the first time we have seen this correction in Europe’s tech scene. For those old enough, this is the third time.

The signs are always the same. Public stock markets falling, tech IPOs trading below issue price, 50-100x revenue valuations by private markets (therefore private company valued much higher than public market peers), non VC-expert/trained money coming in (Hedge Funds, Family Offices, Corporates), US investors flying to Europe not just for holidays, and, at a micro level, more companies raising very large rounds on unproven metrics and fundamentals.

The first time the US tech market fell big it took Europe more than one year to follow suit. The second time it was faster, just six months later. This time, it is happening in tandem with the US.

This is not the time to run for the hills. This is the time to be found ready and get pencils sharpened on both sides of the table.

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Startup CEOs should have gotten the internal memos and calls by now. Budgets and business plans are normally signed off in December and a first forecast may need to be prepared already, mainly looking at the rate of expansion for not-yet-profitable companies using more caution. New CapEx, new hires, new office openings etc. should be re-reviewed in the cash flow forecast, with an eye to when the business will need to get back to raising capital.

Down rounds may and will happen, and they need to be managed. Some drama is inevitable, but open discussions as early as possible can reduce it. Anti-dilution provisions (if in the shareholders agreement) may shift some value. If the size of the interim financing is not too big, the effect of the weighted average anti-dilution provisions could be surprisingly quite small. Expect fundraising discussions to take longer, due diligence to be more detailed, so it makes sense to be sensible and start much earlier.  Board discussions and legal/tax advice may be needed if, as a result of down rounds, option plans go under water and need to be cancelled and strike prices reset.

VC funds will need to review their reserve allocations, more critically and more frequently. Founders should ask about reserves to their investors, enquire if they can rely on any dry powder reserved against their company.  As interim internal rounds can be effective at bridging businesses without exposing valuations.

The good news is that these corrections do not last forever. Markets forget and forgive and bounce back. And focusing on efficiency and productivity for a while has never killed any company.

So be prepared and sharpen your pencils. Game on!

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In the ‘Seedcamp Podcast Series’ we talk with key people in the tech startup industry to hear their stories, key advice and learnings from their experiences.

Dimitar Stanimiroff, Managing Director of Stack Overflow Developer Insights at Stack Overflow, a Q&A site for programmers with over 4 million members, joins Carlos and Dave for this deep dive into hiring. Discussing everything from the hiring process, how to overcome challenges, hiring from within and how to recruit technical talent if you’re not technical.

Dimitar was the first European employee of Stack Overflow. He launched Stack Overflow Careers in Europe, scaling the team from 0 to 60+ people across the UK, Germany and France. Dimitar is currently the MD for Developer Insights – Stack Overflow’s Talent Mapping, Analytics and Business Intelligence unit. Prior to joining Stack Overflow, I co-founded OVIA (now WoPow), a pioneering video interviewing technology.

 

 

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Following our announcement last month looking at the investments we’ve made since 2007, Carlos Espinal and Reshma Sohoni have written this piece on Seedcamp’s anti-portfolio – the startups we didn’t invest in and the learnings we’ve made along the way. 

Investors are generally judged by the size and volume of their successes, for, after all, it is expected that you will lose some to win some, but rarely do investors talk about their mistakes and misses. There are a few investors out there, however, who have had an investment portfolio they call the ‘anti-portfolio’ which highlights their most regretted ‘passes’. Effectively, which companies would have yielded them amazing outcomes had they invested. Not all anti-portfolios are the same, however, sometimes companies will go up before they ultimately don’t materialize into what was expected of them. So in the short term, some companies might be part of an investor’s anti-portfolio, even though in a longer term, they might ultimately (or not) be satisfied with their decision – just comes with the territory.

It is, therefore, no surprise that in spite of our successes, with 206 companies backed to date and $365Million in follow-on funding raised by our portfolio, here at Seedcamp we’ve had our own anti-portfolio in the making since 2007. This includes companies such as Citymapper, Pipedrive, Skimlinks, Deliveroo, DataHug, and SimilarWeb to name the most notable ones. Whilst the process of decision-making internally is beyond the scope of this post, what I would like to do is highlight the kinds of issues we felt companies like the above had that, at the time, we felt were sufficiently significant that we chose not to invest. Hopefully, this effort to highlight the investor decision process and how, like everyone in life, we can get it wrong.

When we get things wrong, we learn. Here’s what we have learned from these misses which happened between 2007-2011. We have learned to invest in more companies than less. We learned that 6/10 investments a year wasn’t enough. We learned we need to make 30+ in order not to miss any edge cases. We have learned to invest all year round. Historically we only invested a few times a year. Now we invest 365 days a year. We learned we need to be flexible with structures. Today you can see we offer pre-seed equity, a warrant option, and seed equity. We also do convertible notes.

We are often told by founders that pitch to us that we are very clear about our decisions and the Pros and Cons of why we ultimately say Yes or No. Learning from our misses and our successes has directly enabled us to be just this clear and upfront. Because we fully know, some will have been the right decisions and some will be ones we regret. We don’t have a crystal ball and our views of where markets or technology are going may be right or wrong.

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At the pre-seed stage, there are many variables that are in flux across every crucial aspect of the business – product, marketing, talent, business model. There are holes and weaknesses nearly everywhere you look. As such, when we meet a founder/founding team it isn’t always clear how they’ll be able to execute their vision, or worse, they’re unable to articulate their vision in a way that will bring a customer, team, or investor along with them. Sometimes we haven’t been able to envision product development out far enough. Or we struggle with the go-to-market being considered. In a few cases we question how they will make money because, for most of them, they will need to do just that at some point.

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One of the things investors are regularly criticized for is having a ‘lemming’ mentality, whereby as soon as one investor of note is ‘in your round’, others naturally want to jump in. However, what if you’re an investor who chooses NOT to be part of that lemming mentality? What if you feel that you just can’t wrap your head around the viability or scalability of the idea? Then what? Sometimes there is a reason why smart mentors, advisors, and investors come together, and it’s because something is worth the time in spite of your anxieties! And likely, if so many people we respect push for a founder/company, then it’s as likely that users and customers will also love the product.

Many times we follow these recommendations and choose to invest. In a few cases, we don’t, and we agonize over these decisions. Investing is also about saying No, not just about saying Yes.

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It isn’t unusual to have investors invest in a new segment across several companies competing for the same market at the same time. You want to ensure that the company you back will be the winner. That it’s this team and this product that will be the one that attracts the most brilliant talent and can raise the required amount of follow-on funding to enable the business to be the category leader and create enough distance between itself and its competitors. The investor anxiety, therefore, is around all the question marks about whether that particular team and product have what it takes to go the distance and whether the time is NOW. Companies often need a sizable amount of capital to grow. The worst thing to see is a smart team and product that just can’t raise enough capital to reach escape velocity versus competition.

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When one invests at the early stage, it’s difficult enough to value companies. Added to that if you operate as much of a standardized investment model as possible, there is a relatively narrow band of valuations typically associated with seed and pre-seed investing. There are always outliers and when an investor is confronted with one and it isn’t clear how the company merits this higher valuation to break through to the company being worth its valuation, this can also create a paralysis moment for investors. As much as standardization of valuations and terms allows for a better outcome for both startups and investors, time does pass between the first time you get an application or meet a team and when you ultimately are in decision-making mode. And in that time, gaps can build between valuation expectations of the team and the investor.

With the recent announcement of the numbers we’ve had to date, we’re very excited about the companies we have backed, many of which are in line to be a hugely disruptive business that will affect the lives of many.  In that spirit, in spite of sharing with you all part of our anti-portfolio, we are excited for what the future brings, even if it comes, at times, in the form of the ever humbling realisation that we can’t predict this future and that sometimes we will get surprised by the brilliant founders in whom we did not invest. Hindsight is clearly 20/20.

Seedcamp applications for pre-seed investment will open again soon, for more information go here

In the ‘Seedcamp Podcast Series’ we talk with key people in the tech startup industry to hear their stories, key advice and learnings from their experiences.

Will Herrmann, Head of Commercial Operations for Hassle.com, joins Seedcamp’s Dave Haynes in this podcast which follows Hassle.com’s recent exit, having been acquired by Helpling. Following a session with some of our startups, Will discusses everything from scaling company operations, following Hassle.com’s Series A round, to valuations and M&A.

Prior to joining the Hassle.com team, Will spent a decade at Accenture, where he specialised in the operation of Programme Management Offices. He is a specialist in PMO leadership, mobilisation and improvement, prohect planning and financial management.

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In the ‘Seedcamp Podcast Series’ we talk with key people in the tech startup industry to hear their stories, key advice and learnings from their experiences.

Jon Bradford has played a key role in shaping the European tech ecosystem. Through his involvement in many accelerators (Springboard, Techstars, Ignite 100) and numerous supportive initiatives, he has had a big impact shaping the infrastructure that helps develop and build great startups across Europe.

Carlos sits down with Jon in this Seedcamp podcast to talk through his personal journey, share insights into the many lessons learned from accelerating early-stage companies and what the future holds for him next.

Jon is the Co-Founder of F6S and Tech.eu (and is currently unemployed). Previously, he helped to launch Techstars internationally as the Managing Director of Techstars London.  He has also helped to launch accelerators from Montreal to Hyderabad. In a previous life, Jon trained as an accountant with Arthur Andersen, and subsequently has worked in various start-ups and turnarounds.  He has worked in London, throughout Europe, Australia and also the United States.

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Last October, we were happy to announce a group of new faces joining the Seedcamp team as we bolstered our skills across the board to make sure we continue to support our Founders with world-class expertise. Today, we’re delighted to add two more names to our growing list of Experts in Residence. Joining Keith, Scott and Taylor, we are now very excited to welcome Ivan Farneti and Yoav Ben-Ari to Seedcamp.

Ivan Farneti joins Seedcamp with 16-years experience investing in early-stage technology companies across Europe and the US. Ivan spent 13-years at Doughty Hanson Technology Ventures, prior to which he was Vice President at Deutsche Bank. This isn’t the first time Ivan has been involved at Seedcamp, having been a board member back in 2012 till 2013 and he has been an active mentor since 2008. In 2013 he stepped away from VC and became an entrepreneur, leading Glory Sports International. As an EIR, Ivan will support our Founders with expertise on fundraising, board dynamics, development of marketing positioning, strategy and commercial business development. His current interest is in Foodtech, and companies across the food innovation value chain, from farm to fork.

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“After so many years as a venture investor, I had the chance to sit on the entrepreneur’s side of the table for a few years. My new perspective on company growth and the relationship with the capital market is ‘experience equity’. I’m really excited to be working with Seedcamp again and to advise its portfolio companies.” – Ivan Farneti

 

 

Yoav Ben-Ari recently left Google where he headed up business development for Cloud Platform in Europe. During that time he helped many startups get their business going and built Google’s global startup programme giving him a great insight into the common issues young companies face. As a founder of both bootstrapped and funded companies Yoav has intimate knowledge of the challenges faced when trying to define and scale your product and has seen both failures and successes. Yoav is passionate about product, starting with the underlying tech and user-value points all the way to go-to-market strategies. He’ll be working with Seedcamp teams on their products, and longer-term strategies.

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 “Having worked with Seecamp for several years through my work at Google, I’m really happy to now take part and actively help. I look forward to meeting more of the companies and find new ways to contribute to their success.” – Yoav Ben-Ari

 

 

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