October, 2017 : Seedcamp

We are delighted to announce the sale of Seedcamp Funds I & II to venture capital firm Draper Esprit, delivering a 4x return to our investors.

We created Seedcamp with the belief that European entrepreneurs have the power to compete on a global scale and we believe we have found the ideal partner in Draper to work alongside us and our Funds I & II companies to achieve just that.

We will continue to manage the companies as part of the sale which includes the likes of fintech unicorn TransferWise along with scaling European businesses such as Codacy, Edited, Erply, Fishbrain, Codility, Winnow, Codeship, and Try.com. This move will see us move from multiple LPs across Funds I & II to just one and will create further value to our founders by opening up access to follow-on investment from Draper.

Seedcamp Co-founder and Managing Partner, Reshma Sohoni, comments:

“We are thrilled to help our Seedcamp companies scale to the next level with the support and firepower of Draper Esprit. As the Seedcamp team continue to manage Funds I and II, Draper is the perfect partner to help us manage these businesses.”

Managing Partner, Carlos Eduardo Espinal, adds:

“We see this as a great outcome working alongside experienced and knowledgeable investors who’ve supported us for many years. We believe this transaction is a win-win for everyone involved. We look forward to continuing to work with the growing companies and founders from our first and second funds with Draper’s added horsepower.”

Simon Cook, CEO Draper Esprit plc commented:

“Although principally a primary series A, B and C VC Growth investor, we have also been very active over the years as a secondary tech investor in Europe having acquired a number of well-known VC portfolios and increasingly taking large direct stakes in later stage companies. Together with our recently announced seed fund of funds strategy we can offer long term patient capital solutions for all European tech companies and their investors outside of the constraints of a typical 5+5 year fund.

“We have a great relationship with Seedcamp and recently invested directly in their Seedcamp IV fund to give our investors access to seed stage opportunities. This acquisition further bolsters our growing secondary business; increases our exposure to a really good portfolio of European technology companies including Transferwise, one of Europe’s most successful startups.”

We look forward to working alongside Draper and our founders to achieve further growth as part of this move which does not have any implication on our Fund III.

On Friday 6th October we hosted the second Seedcamp CTO summit, bringing together technical leads from across our portfolio to share insights, learnings and ideas with their peers. We asked Huss EL-Sheikh, CTO and co-founder at 9Fin – using AI to capture high yield bond data – to share his key takeaways from the session. Over to you Huss!

The other week I attended the second ever Seedcamp CTO summit. It was a half day event, hosted at Amazon’s offices in the City of London, and a great chance to meet and exchange ideas with other tech leads, CTOs and VPs of Engineering from the many Seedcamp portfolio companies present.

Kyran from Seedcamp opened up the event with a few introductory words I think worth mentioning. Seedcamp is approaching its 10th year, over which time they have invested in over 250 companies and supported more than 700 founders. Alongside longtime partners such as AWS, the ‘Seedcamp nation’ is quite large!

Myself, being part of one of the more recent companies to receive investment from Seedcamp, it was great to feel part of this extensive network of startup founders and operators — and also to see up-close the depth of experience and knowledge there for us to tap into. This “Knowledge Recycling,” as Kyran put it, and community of founders experiencing many of the same issues we’re going through is a pretty unique asset which 9fin, the company I co-founded, has been able to leverage during our journey.

Here are my 5 top takeaways from the day’s events:

1) Culture Shifts – But stick to your core values

The first panel was on the ever-present topic of hiring and retention. Culture plays a big part in this but it’s actually really hard to define and articulate on paper. Plus, as you grow your company, the culture will inevitably change too. Jun from Poq, who has tripled his engineering team since starting his company, finds it best to think hard about your values and assess people against that, rather than trying to artificially ‘shape a culture’.

It was also mentioned that hiring for “culture fit” can cause you to inadvertently go down the route of hiring in your own image — whereas company values and/or mission can be shared and embodied by anyone.

2) Developer autonomy is important

An interesting split across the room emerged around the topic of engineers working on personal projects. Of course, the so-called “20% time” made famous by many Silicon Valley giants — where engineers work on something totally unrelated to what they are currently doing for 20% of the time — could be hard for a startup already running a lean operation to justify. But how can you maintain the free-thinking spirit and non-corporate environment that attracts people to startups in the first place?

Dan, Head of Engineering at CharlieHR, suggested that the key is actually autonomy. A product feature may be required but there is total freedom in how to implement it in his team. Another idea from Jun was to also encourage people to work on their own ideas on the “platform”, these being items which are not product features but which improve the underlying tech infrastructure/processes the company runs on.

3) Decisions are reversible

Between the two panels, we had a great talk from Asaf, Head of Innovation at AWS. Some cool insights into how innovation is turned into a repeatable process within Amazon and AWS. A crazy fact was that in AWS this year alone over 1,000 new products were added! The point I really liked from Asaf’s talk was about what he termed “one-way” and “two-way” door decisions. If you’re dealing with a reversible decision i.e. it is easy to undo/rollback then you should not wait for that bit of data to take you a 90%+ level of confidence. If you’re at 60-65%, then just go for it.

4) Outsource, offshore, contract…it depends

If you can get a very self-contained piece of work scoped and defined, then the services of a contractor or agency could be worthwhile. Otherwise, it can be hard to find the time required to give remote or external team members the context required to be good at the job. Also in the area of testing and QA, Jerry from fractal labs suggested, specialist testers will find bugs and issues that developers won’t. Simply because they are testing from an objective independent point of view, and may see bugs you don’t.

5) Pay back your technical debt!

As the panel chair, Jonno switched gears to this topic, a knowing laugh went out across the room. Technical debt is something that everyone deals with, but it doesn’t get anywhere near the same airtime as other newer shiny topics in software engineering!.There was universal agreement from the panel that we need to be working towards removing it, but the nuance came in how to best present it. In some cases, it works to present working on technical debt as an enabler to do the new work that advances the product forward.

So why do I think this is all important? The Seedcamp companies cover a wide variety of industries, geographies and demographics but the hallmark of this current wave of startups and entrepreneurship we’re in is that technology is the enabler and force multiplier at the centre of all of our businesses. So this was a great chance to pull ourselves away from our desks, to hear from our peers and ultimately learn from each other’s’ experiences and the fantastic community of founders and vertical experts within the Seedcamp portfolio.

Following our recent event “Distributed Futures; Blockchain, tokens and ICOs”, Partner Carlos Espinal shares thinking around the recent increase in successful ICOs and what that means for the future of venture.

With the number of successful ICOs (initial coin offerings) that have been completing in the last 12 months ($1.5Bn raised in 2017 alone), some have declared venture capital on its dying legs.

“I think the Sequoias of the world will go out of business. I think all the big VCs are done. The role isn’t there anymore.” Brock Pierce, Founder of Blockchain Capital.

Is venture dead? While worth posing, I think the question is inherently incomplete, as it conflates many ideas into a simple debate for impact. In this post, I’m not hoping to declare one type of investment as the winner (or loser), but rather, to showcase where each has their place — and where the models might even be reconciled or combined.

Firstly, there is a difference between the mechanism/structure investors use to invest in a company, and the value-add (if any) which the investors bring to the founder, alongside their financial investment. Another way of thinking about it is to think of Venture Capital as a bundled product, combining capital, advice and assistance (e.g. with hiring and recruitment). From this perspective, ICO’s represent one further evolution in the commoditization of capital and the beginning of the de-bundling of venture capital — and perhaps even progress for LPs, measured through liquidity (see Spice VC). From the capital point of view, an institutional investor, typically a VC, in theory, can invest via any mechanism/structure (eg. crowdfunding, ICO, etc), but there is a reason why they prefer (for now) some structures and this partly has to do with governance & institutional restrictions (which is usually imposed on them by their LPs and from prior experience of where things can go wrong) and partly due to economic return alignment (more on that below). A non-institutional investor (eg. someone participating in crowdfunding), by contrast, has fewer limitations and thus can invest in whichever structure she or he wishes to.

From the relationship point of view, a founder circumventing traditional pools of institutional capital of high quality (let’s put aside those less value-add investors which generate some of the pain founders feel when raising), might be passing up more than just a source of capital. They may also be inadvertently relinquishing key industry/financing relationships, as well as investor experience that cuts across industries and founders they’ve worked with in the past.

Thus, the original question of whether to ICO or to pursue traditional Venture could be broken up into these parts that are included in the conflated question:

1) What does the investor(s) bring to the table above and beyond their capital? Do you need that value-add for the specific project being worked on?

2) How many investors will be allowed to invest in Token sales / ICOs by their LPs and get comfortable with the idea of questionable liquidity to fiat in the short to medium term (thus forcing founders more towards crowd-funding via ICOs and at the exclusion of traditional VC)

3) Will the ICO/Token-Issuance deal-structure be the preferred investment structure over traditional equity/convertible rounds in the next 5 years for professional/institutional investors due to reduced complexity?

4) How will governance evolve in the ICO world to capture some of the best practices which have been honed over years in the VC world, within the ICO world?

In the words of my colleague Kyran Schmidt —

The question of governance is an interesting one and I think we may well see evolution in structures so that token builder incentives more closely replicate the traditional incentives provided by venture capital — e.g. milestone-based financing. You could even see blockchain-based smart contracts as an enabler for that e.g. capital is only sequentially released to a foundation or developers if certain milestones are hit (network usage, transactions processed, etc).

My colleague Tom Wilson has this to say on this point —

I don’t think the primary driver behind higher governance in ICOs will necessarily be VCs’ LPs, but it will likely be a driver as the market matures and LPs understand the space more. I think that many of the key governance matters (information rights for example) actually help companies rather than hinder and hence why they’ve become standard in all financings and will find their way into ICO docs etc. Good governance can actually align interests and ICO companies should look to incorporate rather than fight against such rights.

I also think another driver of higher governance in ICOs will, unfortunately, likely be a large high profile failure (i.e. a team, ‘company’ or protocol developer, that has raised a large amount on an ICO making off with investors’ money) — this will not only drive the market to get hotter on governance matters but will inevitably drag the regulators and legal system to look into regulations around ICO offerings (this will probably happen quicker in jurisdictions where it’s possible to offer to non-sophisticated investors).

So, what do I expect to be the outcome over the next few years? Firstly, I think that there will be some mapping of traditional investment best practices into ICO structures, secondly, I think more and more institutional investors will get comfortable with investing in the new structures and assets being created by ICOs, and lastly, as an industry, we will develop better ways to leverage relationships with token developers, token holders and sources of capital.

Have you turned away from raising through venture and opted for an ICO? We’d love to hear your thoughts. Get in touch via Twitter @Seedcamp

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