We live in a scary time. The questions on the collective mind of investors and start-ups are: how will the current economic climate impact business growth? What does investing in a time of uncertainty look like? Should start-ups anticipate a curbing of investment activity?
On the flipside, I believe that the current crisis will play in favour of an acceleration of capital deployed by US funds into Europe and the UK, as the VC industry will have to adjust to the new norms the virus is dictating.
The movement of US capital towards European start-ups isn’t new. US funds have been looking to the European ecosystem to fund promising start-ups for a while now because of fierce competition for B2B investments in the US, sky-high valuations and the relentless war for talent.
Storm Ventures has been part of that trend and we’ve invested in several successful companies started by European entrepreneurs looking to tap the US market. These investments include Talkdesk (Portugal), Digital Shadows (UK), Algolia (France), and Pipedrive (Estonia).
While supporting European B2B enterprise software start-ups to enter the US market, we have learned a lot about the dynamics across the Atlantic. As the crisis unfolds, I believe that three main reasons will drive even more US investors to pay attention to the Old Continent.
This is the first roller coaster for new funds
Many European funds are in a scary position. Many of them have popped up in the past five years, and COVID-19 is the first major crisis that they have ever had to face. In comparison, VC activity in the US has weathered many storms in recent decades. US funds which began before the downturns of 2001 and 2008 understand the tide of such crises.
While many European VC firms may begin to slow or freeze funds in the midst of their first crisis, many US VCs know that this is a time of opportunity and may decide to finance promising start-ups struggling to raise capital in their local market. This is also why we have seen some larger Bay Area funds raise ‘opportunity funds’ to take advantage of the situation about to unfold.
Cheaper talent, longer runway
The long bull market we’re coming out of has been dictating our focus on growth for investment decisions until now. In this new economy, cash is king and managing the burn is becoming equally, if not more, important; a start-up’s runway has to be long enough so that companies can survive until the economy picks up, which may take up to 24 months.
European start-ups have a competitive edge thanks to their access to a tremendous pool of talent for a less expensive salary. US VCs are well aware and this will only increase their comfort in investing in European businesses.
Zoom makes location irrelevant
COVID-19 is also accelerating the trend of remote work. We don’t know how long uncertainty and travel restrictions will linger, but we have to be prepared for remote work to be the long term new normal. VCs will need to build conviction in the future success of a business with limited face-to-face contact.
In pre-pandemic times, meeting a CEO in person was a key part of the diligence process so signing a cheque without meeting a team in real life will be a challenge.
Fund managers and entrepreneurs alike will have to develop their media skills to perform these negotiations. As companies and investors become more comfortable with this new way of working, it will mean less travel time and more Zoom calls.
This trend is going to remove the friction caused by the distance and streamline the investment process for investing in European start-ups from the US, both during and post-COVID. Why fly when a Zoom call is enough?
We have seen great things happen when smart people have time and a problem to solve. Previous downturns have produced some of the most successful businesses of the modern economy: both Uber and Airbnb were founded in the wake of the 2008 recession. There are currently thousands of entrepreneurs and engineers stuck at home with a lot of problems to solve.
We will most probably see an explosion of great companies in the UK, Europe and US alike across many industries at the heart of the current pain: remote work, connectivity, education, health, etc.
I believe this is an exciting time to be a VC.