The charts above are both from the new KPMP/CB Insights Venture Pulse Report.
There’s a lot more data contained within, but my read from these is that VC investment is down significantly since the highs we saw in 2015, but is now holding steady at it’s new level, both globally and in the UK. (The last bar in top chart on global investment might suggest a different interpretation, but Q3 is often quiet for venture investment.)
Moreover, overall investment is holding roughly flat despite a big drop in mega-rounds, buoyed up by activity at the earlier stages. Only one new unicorn has been created in Europe this year (11 in the US).
McKinsey have just released a report which predicts:
that the global revenue pool from car data monetization could be as high as $750 billion by 2030
That caught my attention for two reasons. Firstly $750bn is a truly huge market to come out on nowhere. For context Gartner predicts the wearables market will be $29bn this year (including Fitbit and smart watches). Secondly, in my experience it’s hard to make money out of data that’s produced as a by-product of another service, at least directly. Lots of startups have ‘sale of data’ lines in their business plans and they very rarely come to much. Rather, the way most companies make money out of the data their service produces is to use it to build better products – the way Google uses our search data to sell better advertising (and build a better search product).
The excitement is coming because cars, particularly electric cars, are increasingly connected and will generate huge amounts of data. To their credit McKinsey developed 30 use cases for automotive data. Most of the aforementioned startups don’t go that far. They just assert that their data will be worth something to somebody.
However, the excitement doesn’t make it much beyond that. Some of the use cases McKinsey lists out are interesting (predictive maintenance, usage based insurance), some a bit so-so from a revenue perspective (emergency call service, over the air software add-ins) and some are merely enabled by internet in the car (car pooling, in-car hot spots).
There isn’t much in the report on how they get from these use cases to a $450-750bn market. There are around 1.2bn cars on the road now so that would be $375-625 per car – which is quite a lot. The most obvious way that will happen is if a chunk of the maintenance and insurance markets start to become counted as part of this total.
That’s already starting to happen, particularly on the insurance side. Overall, I haven’t found the new opportunities I hoped I might when I read the report’s $750bn headline figure.
The European Investment Fund (EIF) is an EU institution that exists to stimulate the startup ecosystem by investing in venture capital funds. They have made a huge contribution to the UK scene, backing 37% of UK based venture funds between 2011 and 2015. Moreover, they are often the first investor to commit to these funds making their role even more important than the headline figure suggests. Back in July Bloomberg wrote:
It is an open secret among British venture capitalists that many of their funds would have never gotten off the ground without a hefty check from the European Investment Fund
To state the obvious, if the venture funds hadn’t gotten off the ground, the startups they back would also still be on the drawing board. So the EIF has had a huge positive impact on the UK. It’s a big deal.
And post Brexit there’s a chance we will no longer have their support. That would be very bad news, and might happen as soon as Article 50 is invoked. The EIF hasn’t invested in our fund to date, but they might in the future, so there’s an element of self interest at play here, but this is bigger than Forward Partners and I would still be writing this post if that wasn’t the case.
It’s therefore imperative that maintaining the role of the EIF in the UK is part of our Brexit negotiations. In the medium to long term we could well manage our our own programme for supporting UK venture funds, and the programmes of the British Business Bank augur well in this regard, but replacing the EIF’s programmes would take time and a short term hit to venture funds raised of around 40% would inflict damage on our ecosystem that would take years to repair.
I often get asked about whether the EIF has pulled back from investing in the UK already. There are all sorts of rumours swirling around but the best intelligence I’ve heard, including comments directly from the EIF, tell me that they are carrying on with business as usual. Additionally, I know for sure that one UK fund which closed after the June 23rd referendum has the EIF as an LP.
Earlier this week, David Kelnar of MMC Ventures wrote an interesting blog post setting out the implications of Brexit for UK startups. He included the following passage which describes in detail what we will have to do to keep the EIF investing in the UK. As he mentions, we will need the consent of 33% of EU governments, so this is not something we can take for granted.
The UK’s formal influence over the EIF is limited. The EIF is 60% owned by the European Investment Bank (EIB), 28% by the EU and 12% by 30 individual financial institutions in member countries, with votes cast proportionally. Decisions by the EIB’s Board of Directors require the agreement of one third of EU members. Post-Brexit, therefore, extending the EIF’s core activity to the UK will require at least one third or more of EU members to be supportive. Given the extent to which UK VCs invest across Europe, the attractive returns available from UK funds and the UK’s informal influence, they may well be. Alternatively, other countries may assert their interests to the detriment of the UK.
Other important points are that if the EIF is to keep investing in the UK, the UK will have to keep paying into the EIB, for which a mechanism will need to be established. The good news is that there are precedents, as David notes Israel has a deal which allows the EIF to invest in their country and Norway has something similar.
As with all things Brexit, there is much to do if we are to make the best of our situation. Our task in the startup community is to make sure our agenda doesn’t get forgotten.
Every company has to strike a balance between focusing on being great at what they do and telling the world about it. Some very successful companies lead with hype and have their people permanently scrabbling to keep up. You might call that the Elon Musk school of entrepreneurship. Other successful companies focus on delivering value rather than making promises – Google and Facebook spring to mind as examples here.
There are pros and cons to both approaches. Leading with lots of ‘noise’ and hype can maximise interest in a business, helping to gain attention from investors (thus paving the way for fundraising) and can also ultimately drive growth. However, chaos behind the scenes kills many companies that take this path. Focusing on delivering value first is a safer approach to building companies of substance, but unfortunately this often results in slower growth and can mean that a business is left trailing behind hype-charged competitors.
Here at Forward Partners we’ve focused on delivery first and have prioritised telling our story second. That’s our natural predisposition anyway, but it always seemed that the most important component in our mission was to deliver value to the founders we back and to our investors, rather than telling the world about our work.
Since I founded the business three years ago, we’ve concentrated on building a well-oiled machine which can supercharge our partner companies, providing not only the funding but also the operational help needed to achieve rapid growth. However, as we now enter the next phase of our own growth, we are beginning to focus on telling our story a little more. This is largely in the hope that we can speak to more of the next generation of entrepreneurs and more founders at the earliest stages will understand our unique approach to VC.
A big effort for us recently has been redesigning our website. It has become clear to us over the last year or so that the primary benefits founders get from working with us are speed and certainty of execution, and that comes because when we invest founders gain immense leverage from using our team. We wanted to communicate that message front and centre and also to have a more approachable look and feel. The homepage image you see above provides a flavour but please check the site out for yourself!
As well as working on our marketing materials, we’ve also been building out our press and storytelling function, for both Forward Partners and for some of our partner companies. Last week, we were pleased to be profiled in The Times alongside our partner company Live Better With – a really exciting step forward for our brand and incredible to share it with Tamara Rajah, one of our inspirational entrepreneurs.
Regular readers will know that for me the rising pace of change is one of the defining features of the early 21st century. Things are now changing so quickly that traditional structures are breaking down. Within a decade or so we will have adjusted to rapid change as the new normal, but in the short to medium term expect more disruption rather than less.
One example of traditional structures breaking down is that large companies are increasingly unable to keep up via internal innovation. Instead they are looking to partner with the startup ecosystem. Corporate sponsored accelerator programmes are one of the most visible aspects of that partnership, but whilst they command a lot of column inches they are small beer in terms of dollars committed.
The chart above (courtesy of Pitchbook) shows another aspect – direct investment by corporates into startups. Most striking is the rapid growth since 2009, but the dollars involved are also significant. The $26bn so far this year is the total deal value including the contribution from corporates, rather than the contribution itself, but I would guess that the actual corporate contribution will easily top $10bn this year.