Hi,

Last week, I’ve been busy writing about the investment-climate for technology-start-ups in the Netherlands for my thesis, and here’s a number of thoughts about it. Your own feedback on these is very welcome, if it is good, I’ll include them in my conclusions.

The role of government in funding innovation

It’s odd and goes against any capitalist streak I may have, but I think that the role of the government is vital in funding innovation. This applies to any country, and by government I define any public institution, from universities to subsidies. The fact of the matter is that innovation is difficult to value, and success is equally difficult to predict. As such, you need a different kind of investor for it, and I think government fulfils that role best.

Banks are changing

Here in the Netherlands, after talking to a number of incubators, as well as technology-start-ups, you hear about special branches being started by by banks, focussed entirely on venture capital-activities. This is nothing new of course, but, for instance in the medical field, the people managing these funds are actually quite knowledgeable about the industry and take an active role in the investment-process—very uncharacteristic of banks.

Of course the majority of start-ups that I interviewed and have data on (about 500 in total) still perceives banks as risk-adverse, bureaucratic, and unpleasant.

Informal investors are merging

A few years ago, I had to look for business angels (on the internet of all places) for a tech start-up, I was working for. All I could find was so-called BANs (business angel networks).

As a lot of investors got burned during the last bust 5 years ago, you see a lot more consolidation amongst them, forming professional organisations that evaluate business-plans like a venture capital would. And since a small investment takes as much work as a big one would, for a while you saw these BANs shifting upwards in the investment-market, towards 1st-round and later-stage investments.

Entrepreneurial finance is a cyclical process, so there’s more seed-investments again, but that idea of an individual business angel is disappearing, I think.

Venture capital is the same as it always was

Apart from the fact that the definition of what venture capital varies from country to country—I define it as a fund managed by an active investor, but how is that different from a BAN?—I think that the role of VCs in European countries is still very much restricted to the later stages of venture development—buy-outs mostly, and funding companies who are at a commercial stage.

Several sources mentioned that European VCs are very wary about any technology-risk and often about commercial risk as well. In other words, with VCs, it is recommended to have a working product and some clients as well.

Major obstacle: Exit market

This is actually a global problem. Sarbanes-Oxley has definitely handicapped the going-public option for US-companies, and most other countries, with the exception of the UK, are hampered by underdeveloped stock-markets also—not to mention that, culturally, Europeans are more likely to save than they are to invest in stocks.

As a consequence, it is not surprising (to me) that the major exit option for start-up is to be acquired, with all the consequences that entails.

The other option is to not exit at all, keep costs low, generate revenue quickly, and survive on your own. Unfortunately, for high-tech companies, neither low costs or quick revenue are usually an option. One incubator-manager I spoke to though, in the engineering-field, mentioned that a number of his high-tech entrepreneurs did some consulting on the side. The danger with that is that it is not the core-focus of these start-ups and distracts them from actually developing their business.

Final thoughts

I don’t consider the picture I paint to be either positive or negative. Starting a successful company is not easy and there will always be some kind of barrier or other. Innovative companies have it a little harder though, especially in the early stages and will likely have to make deals with some governmental organisations for funding, which may also have consequences on e.g. their geographic location for years to come. Commercial investors are there and the better your business-plans and the better your team, the better your chances also.

My thesis is actually a three-parter—I focus on the perspectives of start-ups, of incubators, and of investors to paint a comprehensive picture for the state of the commercialisation of innovation in the Netherlands. No promises as to when, but I’ll try to post some thoughts about other aspects of my thesis soon.

Vincent

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