• more investors than ever in Europe
• the VC model at scale
• are social networks monetizable?

 

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Observations

🇪🇺 The numbers for the first half of the year

Over at Nordic 9, we have crunched the numbers from the private transactions market for the first half of the year, and, in a traditional fashion for Sunday CET, I had a closer look over the big picture.

My favourite metric for getting a quick pulse of the market is the number of dealers (i.e. active investors) and their appetite (how many transactions they did). Appetite beats size - the absolute $ number of the money deployed, usually talked about in MSM, is less relevant for me as it is highly related to the deal valuations, which, you may be aware, are on a downward spiral these days. You can have record $ spent only from a few deals at high numbers and that can be misleading - besides, valuations numbers represent a moving picture, particularly as in the past couple of years investors spent money like kids in the candy store. However, the dynamic of number of active people combined with the frequency at which they deal with is a quick indicator showing if the market is having a good appetite or not.

And so, at N9, we have tracked a number of 5407 investors active in startups based in Europe countries in the first half of year 2022. That's 400 more than the 5000 we have tracked for the same period in 2021.

The breakdown this year is as follows:

• 1586 VC companies
• 2037 angel investors
• 1784 other types

From this list, we have filtered out the investors involved in at least 6 deals this year - given the record money deployment from Europe, a once a month pace should be reflective of the whole big picture of what is going on on the continent.

The screening selection resulted in a number of 248 investors who did at least one deal per month in Europe in the first 6 months of 2022. That's a mere 5% of the whole active ecosystem for the period but in absolute terms it is a big number - almost 2X as high as the 140 from the same period from last year.

Considering that just a few years ago this number was in a sad single digit format and putting it together with the number of deals (3300) and the value of money deployed ($55 billion), also at similar trajectory growth yoy, we're looking at a hyper growth market model in Europe. Nothing new for people familiar with this business, I also have been writing over here about a hyper-competitive environment in the European VC market for quite a while already.

The deal number breakdown is as follows (2022/2021):

• 40+ deals - 3 investors (2)
• 30-40 deals -  5 investors (5)
• 20-30 deals - 7 investors (9)
• 15-20 deals - 21 investors (12)
• 10-15 deals - 35 investors (30)
• 10 deals - 20 investors (9)
• 9 deals - 18 investors (13)
• 8 deals - 31 investors (16)
• 7 deals - 48 investors (16)
• 6 deals - 60 investors (35)

TOTAL: 248 investors (147)

The appetite has gone up, at all levels. The most active ones did at least one deal per month and are way more than in 2021 (60 vs 35), the number of dealers at 10-20 level also has gone up (56 vs 42) while the number of champs involved in a deal per week is about the same (15 vs 16 last year). But what strikes me the most is that the number of 6-10 deals investors doubled from last year (187 vs 89) - those are the guys involved in 1-2 transactions a month. 

Here's the country breakdown (2022/2021):

• UK - 59 investors (29)
• Germany - 38 investors (24)
• France - 36 investors (18)
• USA - 31 investors (21)
• Spain - 15 investors (9)
• Norway - 11 investors (2)
• Switzerland - 10 investors (4)
• Sweden - 9 investors (8)
• Netherlands - 8 investors (2)
• Finland - 6 investors (4)

Look at the growth of the second tier markets! That's not only more money available for startups but also more competition for the traditional household investors - this is how fragmentation looks like. Markets such as Norway, Switzerland, Netherlands or Finland, which size-wise are tiny in Europe's big picture, have a spectacular growth in the number of dudes who all of a sudden discovered the startup investment market and took risksaccordingly. Sure, the old timers will be quick to point out that most of them are tourists (i.e. wannabes without experience) mainly acting locally, but there's an increasing number of them playing the game right and doing competitive deals. And the market is wide open, given that there's no room for too much information barrier/asymmetries anymore, the local tourists from today can become quickly global players from tomorrow. 

Also notable, there's quite a few investors that did at least 6 deals out of Eastern Europe - Poland, Estonia, Bulgaria, Greece and The Czech Republic each have at least one investor in this category. Never underestimate the ambition and hunger of those guys.

Last but not least, the names at the top, which are not very surprising either:

• Y Combinator
• Speedinvest
• Seedcamp
• Kima Ventures
• Octopus Ventures
• High-Tech Gründerfonds
• Global Founders Capital
• Eurazeo
• Tiger Global 
• Insight Venture 
• Index Ventures
• Vækstfonden
• btov Partners

The full list with the 248 names, together with the breakdown for each country, available here (N9 subscribers only). 


💲 Venture models at scale

Here's a model at scale in the early venture business*: 

• geo agnostic, (mostly) industry agnostic
• 17k leads screened
• 50%+ of them already raised at least a round
• 33% were pre-revenue startups
• 10% had more than $50k of monthly revenue
- - -
• 2.4% of those leads were funded

*numbers are for the first part of 2022.

This is, of course, Y Combinator. Wait a minute, I hear you say - but that's different, YC is a startup accelerator not a venture capital firm. Yes. But no. Here's why:

The last couple of years the private investment market has evolved to the point of disruption, mainly because of capital abundance and of the entrance of multiple new investors, of all sorts, with all kinds of strategic plays - just look at the Euro numbers from above. This has fragmented the market and made it hyper competitive, and its dynamic not only was changed by what old school investors call tourists, it's also household names that have adapted their game, setting the rules at the top of the market. Y Combinator is one of them.

And just like in any business, the trick is building competitive advantages in order to achieve a sustainable, differentiated market position. All professional investors have an internal model they follow - one way to capture signal for a very fragmented growing market is to index it. The investors playing at scale have become multi-stage crossovers aggregating all sorts of assets, shifting market funding based on the cycles and/or their respective risk/reward ratio (returns). And not only they have a more complicated model blending private markets with public markets, but also have built their assets in their balance sheet used to capture value (leads) across the value chain. 

A quick few examples: 
• a16z made their own Y Combinator. So did Sequoia.
• Y Combinator made a Product Hunt. And has a growth fund. 
• Angel List acquired Product Hunt and raised money from Tiger Global.

Those are some of the more visible strategic moves but they're not singular. And, more importantly, they should feed into an index-like model that brings quality leads at marginal costs - the key in the private market is to make sure you're not missing any of the big deals (with losses offset by the public market plays in the crossovers case), as opposed to gambling on only a dozen of moonshots every year, in the VC case. 

The above-mentioned model of Y Combinator is an example of an index-like output generated solely by balance sheet assets and with a solo variation of playing only in the private market. As of yet.

Those market dynamics can make some of the investors uncomfortable, because they can't and won't compete with this model. The traditional VC metrics are still the return of the fund (for raising) and the rep in the market for the startups and their peer investors (for leads). They solely rely on their network for lead gen and the working assumption, and underlying differentiator, is that the portfolio founders really need their strategic input and thusly they should make a great team executing all the way to the liquidity event. Personalised advice is where the traditional VC model draws the line in the sand today - some founders are that kind of customers i.e need that kind of hand holding, and some are not. Not a black and white situation but you get the idea - as the market keeps growing, I suspect the first time founders may be in the former category; alas, the number of investors being able to competently advise startups is not growing at the same pace as the number of startups.

Also interesting for me - is there a European investor doing this kind of strategic thinking and execution? I just don't see it, not yet, but the current bear market environment may be a good context for that. There's tactical bits and pieces done by local market movers, it's true, but not at this scale, as we don't have the same fund sizes in Europe anyways. A quick example, I am intrigued about what kind of assets can $158 million build for a rather non-conventional op wrapped as a startup accelerator, with huge potential and run by a handful of smart, young people. (I assume they don't deploy off the balance sheet)

On an ending note, some food for thought: what is easier to do - 10X return on a 100 million fund or 1.9X return on a 1 billion fund?


🤔 BeReal gets real

I have written about BeReal more than a year ago, when a bunch of American investors fought for funding a half-baked app with 300k MAUs in France - it ended up in a 30 million deal at $150 mil post. 13 months later, BeReal is #1 most downloaded free app on the Apple Store, at 300k+ downloads per day, and they're in talks for a follow on round at around $630 million valuation. And, frankly, you know BeReal is getting across the chasm when mainstream reporters notice it.

What's interesting to me though about BeReal is how big an agnostic social network like this can become and how sustainable a business they can build. Those are two distinct fundamental issues, in a particular ecosystem context.

From a size perspective the sky is the limit, and, at this point, the conventional investor thinking rightly goes on focusing on the growth spending, without worrying at all about monetisation. That is because the app is at a point where the virality keeps the acquisition costs low, allowing for a hyper fast pace of downloads and converting MAUs. Put your money on making it as big as possible, as fast as possible, and don't get distracted by the making money side of the business.

It makes sense, especially considering the somewhat vacuum from the actual context whereas the traditional social networks got outdated and are struggling - i.e. Facebook keeps changing Instagram (agnostic network without a vision) every month by desperately copying TikTok's features while Snapchat (pure network, with its own identity, but still agnostic) is also having some bad days. 

However.

A general social network remaining agnostic can easily become irrelevant and eventually fading out. It is just a matter of time, we have seen those cycles all the way since Blogspot and My Space days. It looks like we're at a such turning point these days.  And that is why, in this position, I believe that BeReal also should at least try testing the waters on the monetisation front, with in-app purchases and/or premium features. That's creating utility validated by people's wallet - the earlier you do it, the higher switching costs can become later on, when scaling.

Two reasons for that.

First of all, you strategically build an early hedge to advertising, the go-to model of a massive social network. The ad space not only is super competitive and crowded, but also Apple made it more difficult to execute at scale, while sitting comfortable in a duopoly game together with Google. 

Secondly, you get your users accustomed early on with paying for stuff, and get the chance of experimenting models, while having your early users involved. You have them onboard instead of fleeing when you transition the product to a different user profile because of scaling (i.e mainstream from early adopters). 

Not trivial to implement, I know, but I am on the school of thought that building a revenue model early on is super important for a consumer tech business. We're not in the 2010s anymore and I don't think monetisation should come at the expense of growth, there's smart ways of incorporating a business model (while testing it) into the acquisition and retention loop, without too much friction. There's actually four consumer chains that can reinforce each other:

awareness (acquisition) - trial (convert) - return (deliver) - loyalty (recurring utility)

The $ model can be experimented with anywhere on the last two steps and if this loop is implemented early on with smart hooks feeding each other, they may be part of a much healthier foundation for later, when the company is ready to fully focus on extracting value from their assets. You just need to be creative, smart and listen to your users.

And because theory is nothing without real life examples, take a look at what another French social network is doing while growing like crazy - Sorare, that started as a fantasy sports game based on collectible cards, enabling users to collect and trade player cards from their favourite football teams. They let them do it for free, while in parallel the startup did partnership deals with clubs which seeded biz devel grounds for issuing and selling new cards on its platform. And so in 2021, Sorare had 150,000 users trading over $150 million of cards, while also building in parallel another business pillar in the US, with a licence deal with MLB on the way to attacking the gambling market. 

Granted, you may claim that Sorare has a fantasy sport focus with a particular model, unlike BeReal, which is kind of an agnostic social network. BeReal does have a photo focus though and fantasy sports is as generic as photo sharing - the difference here is the vision and business understanding of the opportunity. Laying the foundation right, combined with an early on vision on how to extract value from the network - this is what gives Sorare better odds to become a sustainable business that's not dependable on advertising solely.

 

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Watercooler talk

🇸🇪 Minecraft says that integrations of NFTs within their assets are not something they allow since they can create models of scarcity and exclusion, leading to a scenario of the haves and the have-nots. The speculative pricing and investment mentality around NFTs takes the focus away from playing the game and encourages profiteering, which the Swedes and their owners, Microsoft, don't agree to.

🇸🇪 Micropayments in the 2020s Here's a good profile of a bunch of Swedes trying to build a model of pay-as-you-go or single purchase options for the digital content business. This model has been tried in various shapes and forms for more than a decade in many verticals but those guys are experienced (they did Acast), have a blueprint and have raised some $5 million locally from Sweden for it.

🇪🇺 Tell me you're a VC without telling me you're a VC What do Europe’s leading founders have in common?

• Prior experience as a founder (~65% were repeat founders)
• No previous industry experience in the sector of their unicorn business (~55%)
• A Master’s or PhD degree (~55%)
• More than 10 years of work experience before founding the company (~35%)

This and more findings from a lil' analysis did by the people from Mosaic Ventures. Turning the tables around, how would you describe what most European VCs have in common? Besides the standard consultant, with little to no startup experience type? Best responses get a vin blanc de ma part.

🇪🇺 Moar Euro VC:

• Frederic Court of Felix Capital link
• Danny Rimer of Index Ventures link
• VCs at Series A - Europe vs USA, part 36252. For more context, this read may come in handy.

🍾 Open up the champagne, Europe is finally kicking some American ass:

This complex 27-member socialist union . . . is now ahead of the US by a solid six months.

🚴‍♂️ Amazon has opened a micromobility hub in central London, powered by e-bikes and walkers that should substitute van deliveries, and is also targeting Tesco with Clubcard price matching in a push to expand its UK grocery business. It also signed an option to acquire a 2% equity stake in Grubhub, as part of a strategic partnership involving free GrubHub memberships and no fee deliveries - current Grubhub owner Anglo-Dutch Just East Takeaway is looking actively to divest it, after it acquired Grubhub for $7.3 billion in 2021. 

Speaking of Amazon, it also announced buying a primary healthcare American business for some $3.9 billion, complementing their own Amazon Care service. Another leg growth in the American market and a similar move to acquiring WholeFoods for nurturing their food vertical, MGM for content and PillPack for pharma. (Very) Long Amazon. 

🇩🇪 Porsche’s long-awaited IPO seems to face a serious markdown from an expected €90 million to some 60 million - mainly because the macro is not right for an IPO now and Porsche is a great company but not Ferrari, anyways. Besides, the mother company VW is also in troubled waters as their CEO just resigned and and Porsche’s Blume took over while retaining Porsche position.

🇩🇪 Deutsche Bahn wants to keep all the rail forecast data for itself because it's simply more efficient that way - and its competitors don't really need it, anyway. That's an official statement provided to the local antitrust authority, which thinks otherwise.

🇨🇭 The Chinese firms are now tapping the Swiss market instead of listing in London, with three Shanghai-listed companies planning to start taking investor orders for their global depository receipts in Zurich.

🇬🇧 Brits doing business in China Speaking of Chinese - I mentioned in a previous Sunday CET edition that the top six global banks made a mere $42 million in China last year. It looks like HSBC came up with a tactic to figure this out - HSBC has become the first global bank to install a Chinese Communist party committee inside its investment bank, allowing CCP "activities" to be carried out inside the group's China business.

🇬🇧 Losing the plot - London Heathrow is not only in disarray, but also seems rather desperate? The two bosses worked it out eventually, but flying outta London ain't looking good.

🇮🇪 Stripe - good background story on the fine people from Stripe. Speaking of which, Stripe lowered its own valuation to around $74 billion from $95 billion, a 28% declineassumed internally by the company, because controlling your narrative is better than the market controlling your narrative. Instacart notably did a similar move back in March this year.

🇪🇸 Spain will offer free season tickets for suburban and regional trains, which host roughly 48 million journeys per month. Sept. 1 to Dec. 31.

🇳🇱 The Dutch Ministry of Education suspends the use of Chrome OS and Chrome browser until August 2023 over concerns about student data privacy and GDPR violations. Denmark announced a similar measure last week.

🇸🇪 Epidemic Sound, a company that provides flat-fee royalty-free music to creators on YouTube, TikTok, and other social platforms, sued Facebook demanding at least $142 million in damages. It claims that FB's properties hosts 94% of its 35,000 song catalog without licenses.

♨️ Climate change business cases.

🦆 Sequoia says that it doesn't have a standard equity deal for startups doing its accelerator. 

🐯 Tiger - what investors think of Tiger Global's market position. TL;DR: it's rather conjecture than fundamentals, they're solid. 

🦾 Google is worried about TikTok as their exec suggests Instagram and TikTok are eating into Google’s core products, Search and Maps.

💲 Andreessen Horowitz announced that its headquarters will be in the cloud going forward, ditching a centralized HQ - it also said to open new offices in Miami Beach, New York and Santa Monica.

🤔 San Francisco is getting its first NFT-based restaurant and private club, which will charge a top-tier membership fee of $300,000 a pop. Yep, you read that right.

 

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