Women are more social than men. There’s research to prove it. And there’s the anecdotal evidence. (How many men chat to the guy in the bathroom stall next door?) So women should do well in the pursuit of venture capital, which is at heart a networking game. But they don’t. Why?
A 2009 study by Dow Jones VentureSource found only 11% of companies that received venture funding had a woman CEO or founder. You’re likely familiar with the old-school explanations for this: girls aren’t as good at math and science, women aren’t as interested in starting businesses, women who do start a business are happier with a beauty parlor than a fast-track high-tech company, etc.
None of that is true. In fact, recent research by Cindy Padnos, managing director at Illuminate Ventures, shows that high-tech companies built by women are more capital-efficient than average, venture-backed companies led by women have 12% higher annual revenues and women-run high-tech startups fail less often than those run by men.
So why do women entrepreneurs in the high-tech field get funded less often than men?
Lakshmi Balachandra, an assistant professor of entrepreneurship at Babson College who researches women and venture capital, says the problem is that despite their innate social prowess, women are not engaged in the networks where venture funding circulates.
The Wrong Networks
“The women who are out there who need capital, they aren’t in the same networks as men. Men go to technology events and are aware of tech investors. Women are just not as connected as their male peers. What happens with women is, even if they are interested in starting a company, they may not be in the right circles to have access to capital.”
Another standby explanation for the shortage of money flowing to women is the essential chauvinism of the old-boy venture network. The thinking goes that VCs invest in entrepreneurs who are like them. And that’s true to some extent.
At the National Venture Capital Association’s annual meeting in 2008, legendary VC John Doerr said he’d always been attracted to startups run by geeky guys with no sex life. “That correlates more with any other success factor that I’ve seen in the world’s greatest entrepreneurs. If you look at Bezos or Andreessen, David Filo, the founders of Google, they all seem to be white male nerds who’ve dropped out of Harvard or Stanford and they absolutely have no social life. So when I see that pattern coming in – which was true of Google – it was very easy to decide to invest.”
Balachandra has also spent time as a VC but says that in her venture career and in her current research, she has not seen rampant sexism in the venture community. “Women who do go for capital are pretty successful at raising money. There is no bias there in terms of investors not giving money because a woman is leading a company, as long as that woman has the qualities investors look for: education, experience, the business metrics.”
But she adds that VCs do discriminate against entrepreneurs without a track record of success – something a lot of women don’t have. “Investors love investing in entrepreneurs who have come back after making a lot of money and have a new idea. For someone like Meg Whitman, that’s not a problem. But for the unknown quantity, not having the initial introduction, not having the same background makes it hard.”
Toys for Boys
Another reason VCs don’t invest in women-led startups is that the companies are often targeted at the women’s market, which is something most male VCs simply don’t understand. They like to fund companies that make toys for boys.
“The male view of what is venture-backable and high-growth tends to be technology, hardware or software,” Balachandra says. “If they don’t immediately see the market potential, they will pass. VCs always want to be the experts. They never want to admit they don’t know something.”
A lot of them obviously don’t know women. Maybe they should get out more.
The emergence of accelerators has been vital to spurring innovation and entrepreneurship over the last several years, and their continued expansion is essential to creating companies, jobs and market competitiveness. In evaluating the “success” of accelerators, it’s important to consider a range of variables and not focus solely on the number of exits or whether their graduates raise money.
As the capital markets have evolved in the last several years, accelerators have taken on an important role in attracting, qualifying and supporting innovative startups that may otherwise have a difficult time getting noticed by potential users, partners and investors. One can readily make the argument that the rapid expansion of these programs has been appropriate, as market disruptions caused by technology are creating real opportunities to better serve businesses and consumers.
Startup Exits Are Great, but There Are Other Positive Outcomes
Many ventures that work their way through accelerator programs create value in other ways. They can serve as a stepping stone to the next venture, they can lead to finding jobs at other organizations that can exploit the same product knowledge or expertise, or they can remain bootstrapped until they get the value proposition or business model right (what, no funding?). Furthermore, most accelerators have cropped up in the last couple of years, which makes exits a questionable metric, given that it takes four to six years for the average M&A exit, and eight to 10 years for the average IPO.
Is the “Quality Gap” of Accelerators Reality or Perception?
Top-tier accelerator programs such as YCombinator, TechStars and DreamIt (disclaimer: I’m a venture partner) have done an incredible job of building an impressive group of portfolio companies. They have been great role models for the industry at large, but a bit more perspective is required to fully appreciate how broadly value creation is, and will be, playing out. Older programs have the benefit of having more companies in their portfolio as well as greater maturation for these companies. Since the majority of programs have surfaced in the last 24 months, it’s a bit like comparing apples to oranges. In addition, as accelerators build their brands and market themselves more effectively, they will be able to attract their share of the talent pool. How awesome is it that we’ve seen programs like the Ark Challenge pop up, where the focus is to retain the local talent and leverage competence in areas such as logistics and retail?
Given the Objectives of Accelerators, How Do We Measure ROI?
While achieving ROI is certainly an objective for accelerators and is important in assuring sustainability, there are other objectives that drive their formation as well. Typically, local entrepreneurs are catalysts in funding and operating a program, in large part because of their community ties, as well as their interest in “giving back.” So the ROI is not purely economic. That said, there’s increased interest on the part of institutions – including corporations, venture firms and hedge funds – to explore how they can get more involved with these startups on the ground floor.
The next several years will be very exciting for accelerator programs, and they are likely to be standard fare across many more geographies and industries. Like the gold rush of the 1800s, the early settlers have seen early returns. But make no mistake about it, there’s lots more gold in them hills.
After funding a boom in sketchy startups targeting heavily hyped consumer categories such as social media and mobile, smart venture capitalists are returning to their senses and investing in companies that emphasize solid fundamentals, like paying customers and profits. That’s why enterprise software companies are finally getting the attention – and dollars – they deserve.
Venture capitalists are armed to the teeth with analytical tools. And they should be. Their careers depend on making intelligent investment decisions. And yet, against reason, VCs often behave like teenagers, throwing their money at companies simply because they’re in fashion.
Lately the trend has been toward consumer internet companies: “Hey, that venture firm has a social media play in its portfolio, we should have one, too.” For too long, that’s been the thinking at a lot of VC outfits.
Not any more.
Venture capitalists placed $2 billion with IT startups in the first quarter of this year, according to a survey by Dow Jones VentureSource, a 14% increase from the first quarter of 2011. Meanwhile, investors put 76% less investment in consumer internet companies. Software companies attracted the most funding, $1.3 billion, which is a 61% bump from 2011.
Social Is Overcapitalized
“I see some people looking at the enterprise space again, probably as a reaction to areas like social being overcapitalized,” says Bob Ackerman, managing director at Palo Alto-based Allegis Capital. “The logic in the venture herd seems to be, ‘If five companies in an area are gaining traction, let’s create 500.’ But at some point reason prevails and people say, ‘Hang on, that’s not going to work out. What are other areas that are not as excessively capitalized?’ There’s some of this phenomenon from a venture perspective as it relates to the enterprise.”
Allegis Capital has long invested in enterprise startups, whether they’re trendy or not, targeting companies aimed at business problems that require high-value, technology-based solutions. These companies may not be sexy but they pay the bills, because enterprises have problems and they will spend money for solutions.
Avoiding the Herd Mentality
“Part of the challenge in the venture world is that people want to hitch their wagon to the fastest-moving star,” Ackerman says. “The problem with that approach is that when you see the herd moving in a given direction, it’s probably too late. So we tend to be counter-cyclical at Allegis. We don’t want to be running with the herd because it tends to pull down returns.”
It’s not only VCs who travel in herds, he adds, but entrepreneurs as well. Ackerman has watched a lot of talented engineers shift their focus to social media and other consumer internet startups in the past few years. Enterprise software is hard, and a lot of entrepreneurs these days are impatient.
Fighting Immediate Gratification
“This is a change,” he says. “Go back 15 years – people were more studied about identifying an opportunity and building a company for the long term. But when you get into these boom-and-bust cycles, with people trying to capture the boom, it’s driven by a desire for immediate gratification. That has sucked some of the air out of the enterprise space.”
There is innovation going on in the enterprise arena. One of the most-talked-about business-software startups right now is Asana, which was founded by two guys from Facebook. The company makes task management for teams.
Building Real Businesses
Another reason Enterprise startups don’t get as much attention is because “they’re not flashy,” Ackerman says. “But they are building real businesses and what we’ll see at the end of day is that many of these enterprise companies that have been slowly building their companies and succeeding, you will see a tortoise-and-hare scenario. In many cases they will prove to be more sustainable.”
Look, for example, at the $60 billion IT security market. It’s a real problem with real customers looking for real solutions. And as they find solutions, ROI-driven startups are already grabbing a significant piece of company tech budgets.
The Laws of Physics Still Apply
As the investment data indicates, VCs are once again recognizing the fundamental strength of enterprise startups – and putting more money into them.
“Some investors left the enterprise for the promise of faster returns,” Ackerman says. “But you will see more people waking up to the realization that the streets aren’t paved with gold, the laws of physics still apply, and let’s go back to doing things the old-fashioned hard way.”
Source: Startup Applies For 307 GTLDs
Venture capitalists have been getting a black eye to go with their blue shirts. A recent report from the Kauffman Foundation slammed VCs for “shortchanging” investors, pointing out that public markets deliver better returns. The next day, Fred Wilson, general partner at Union Square Ventures and prominent VC blogger, suggested that a flood of crowdfunding money unleashed by the JOBS Act could sweep away venture capitalists altogether.
It could happen.
“The game has changed,” says Paul Kedrosky, a senior fellow at the Kauffman Foundation who’s focused on entrepreneurship, innovation and the future of risk capital. “It’s obvious to everyone in the industry that crowdfunding is no longer just a toy.”
For startups, it’s now a realistic option to traditional sources like first-tier VCs. And that could spell trouble for the guys on Sand Hill Road. “For the most part, VCs add very little value, so it’s not surprising that if you can get a high-liquidity, low-maintenance form of early-stage funding for your startup, that will pretty quickly push aside more traditional capital providers like bad VCs,” Kedrosky says.
Fred Wilson pointed out that if every American decided to allocate one percent of his or her liquid net worth to crowdfunding, that’d add up to $300 billion – 10 times the amount now sloshing around in the venture sector. And while the chance of that happening has been pooh-poohed by some observers, Kedrosky calls $300 billion “a credible number.”
Crowdfunding has yet to hit the mainstream, but it’s getting there. There are vehicles on the way that will help casual investors allocate a piece of their paycheck to startup ventures the same way they deduct now for a 401(k). “Then,” Kedrosky says, “this becomes a tsunami.”
But Kedrosky thinks it’d be “a disaster” if it happened. “It could end up destroying the marketplace. I love vandalism as much as the next punk, but I’m very leery of embracing the idea of even more money flowing into the venture industry. The problem fundamentally is subpar returns – and the reason for that is there’s already too much money in the industry.”
Back to Wilson’s point. What will happen if and when the crowdfunding fire hose gets turned to full blast? Will VCs be crowded out?
Some of them will.
If the market is made more liquid, bid-ask spreads will contract. Deals will be priced higher, returns will drop and the market will be an option for only the top players. Big-brand VC firms will survive but others will go the way of Palm – or be forced to become Series B and C investors.
Who Is This Good For?
So, more freewheeling crowdfunders and fewer meddlesome VCs. For startups, that might seem a positive trend.
Not so fast.
Crowdfunders are fickle. They may crawl all over you on a first date but not take your calls when it’s time for follow-on rounds. “Crowdfunding is great for the shiny new thing,” Kedrosky says. “But the acid test is, if you hit a speed wobble with your company, can you raise a subsequent round of funding? The early record on multiround financing is not good.”
VCs have noted this and tuned their pitches accordingly, telling startups that only they will be there in sickness and in health. “While VCs are not as good about sticking around in bad times as they claim they are,“ Kedrosky says, “they are still much better than crowdfunding seems to be.”
VCs – at least the good ones – won’t be going away. But Kedrovsky finds it entertaining to watch the industry confront the creative destruction that so many of its evangelists preach:
“The amusing part for me is that if you go back to orthodox disruptive-innovation thinking, which VCs love – the old Clay Christensen stuff – the hallmark of innovation is that incumbents dismiss it initially as a toy… Look how VCs have responded to crowdfunding. They call it a toy. They say, ‘Sure, it’s good for little lifestyle companies, but it’s not good for venture-type companies.’ It’s lovely how disruptive thinking has come back to bite them in the ass.”
I am sure you have seen numerous books about how one Silicon Valley mogul or another has started his or her venture, but there are few books reporting from the scene across the pond. A new book, edited by Pedro Santos, attempts to remedy that situation with European Founders At Work. It has interviews with 20 different entrepreneurs, and as Santos says in his introduction, of course “there are many successful start-ups spread throughout Europe and there is no single large pocket of innovation.”
Santos has found some major differences other than the Euro currency that these guys make their money in. “Entrepreneurs looked to capitalize on international markets very early because their home markets were usually too small. Some decided to expand using white labeling, others by changing the platform or raising more capital, but all with the vision that the only way to succeed was to grow internationally.”
For example, there is Shazam, which started out as a white-labeling company before the iPhone thrust it into prominence that was started by two UC Berkeley MBA students before moving back to the UK. It made sense to startup the company there because the mobile marketplace was further along than in the US (and one could argue, still is ahead of we Yanks).
MessageLabs, which has since been acquired by Symantec, and TweetDeck, which has since been acquired by Twitter, both began in the UK and then raised money from US-based venture capitalists. You are looking back in the past for many of these companies, in the early days when there were few if any European VCs.
The founder of Xing, Lars Hinrichs, says pointedly, “Admitting failure, I think for entrepreneurs, it’s always tough, but it’s really important that you do.” There are interviews with founders of Prezi, the presentation software, music sites SoundCloud and Last.fm, the video sharing site Dailymotion.com and others that have become powerhouses and commonly known companies.
The chapters are arranged as serial interviews, sometimes with the multiple founders talking together. I wish there could have been more conclusions and lessons learned that were taken from these interviews, and a bit more judicious editing too. But if you are looking to get some wisdom from the European startup scene, it is an interesting read.
It is pitch black and freezing and I am in an old, abandoned ice factory in East Berlin. The view from the roof is grand – the iconic, Socialist-era TV tower nicely defines Berlin’s skyline from across the Spree River. But we are here to see the art, our guide tells us, as we snake up and down staircases and through huge, empty rooms, walls full of graffiti, lit by our phones’ flashlight apps.
This is the second to last stop on the “Twilight Berlin Underground Tour.” I am here, ostensibly, to see art and potentially meet “people living on the fringes of society,” according to the listing. We have already visited an abandoned brewery where street artists used to squat, and an old rail yard area now home to studios. Our last stop is some sort of “hacker’s lair.”
But really, I am here because of Berlin’s exciting and exploding Internet startup scene: Gidsy, one of the better-known startups in town, helped me find and book this tour, and this is how I’m spending my last night in the city.
Berlin, no stranger to change, is having a moment right now – similar to the one that the New York tech scene experienced a few years ago and the Bay Area must have felt starting around 2004. The Berlin Wall has been down for more than 20 years, but the tech renaissance in town is fresh.
“When we arrived, there was a startup scene but it wasn’t very interesting to us,” says Alexander Ljung, co-founder and CEO of SoundCloud, a sort of “YouTube for audio” and one of Berlin’s most successful startups to date. “It was mostly about cloning things into German versions.”
“From then to now, it’s just been this massive explosion of new startups that think globally and that really want to do innovative products that haven’t been done before,” says Ljung, 30, who has been in town since 2007 and has helped lead the change. “It’s just a much more fun environment for startups now.”
Why Berlin? It is famously inexpensive, for one, at least compared to other Western European cities and Silicon Valley. The average salary is about 35% lower than in London, according to a slide deck shown by angel investor Klaus Hommels at the excellent DLD conference in Munich last month. Young people are moving here. Twitter is (maybe) opening an office! The infrastructure is solid. There is plenty of office and residential space, and it’s a good deal. People are creative. And they’re from all over the place.
“If you look at the founding teams here, there are so many Americans, English people, Italians, whatever,” says Ciaran O’Leary, a venture capitalist with Earlybird. (Earlybird is so excited about Berlin that it’s moving the firm here, and plans to bet at least half of its next fund on Berlin startups.) The new crop of companies, he says, are “globally relevant on the first day, not just for the German market. That’s the biggest shift that we’re seeing — that teams are way more ambitious in what they’re working on from day one.”
And money is following. “Whereas venture capital funds sank €48 million into 64 Berlin-based high-tech companies in 2009, the first three quarters of 2011 saw €136 million invested in 81 businesses,” Spiegel’s Charles Hawley reported last November, citing statistics compiled by the German Private Equity and Venture Capital Association. Of the capital raised in Germany last year, Berlin received one third of it, Informilo’s Valerie Thompson writes.
Like many of the entrepreneurs I met in Berlin, Alexander Ljung isn’t actually from Berlin, or even German. He is Swedish, has lived in San Francisco – he is wearing a Giants baseball cap during our meeting – and was back in Europe when the startup bug bit. Five years ago, with his co-founder Eric Wahlforss, Alexander went on a quick tour of the continent, trying to figure out where to start their company: London, Barcelona, Vienna?
“I think we were here for one day, only. We got back to Stockholm in the evening and just immediately decided that we were going to move to Berlin the next week. To be completely honest, it wasn’t a strategic, thought-through thing. It was really a spontaneous move. We really liked the vibe in the city here — you could feel that it was this intersection of technology and art. That’s very much how Eric and I are as people and what we wanted SoundCloud to be as well. We knew that we were going to be building technology for creative people, and the whole vibe of Berlin as a city resonated with that.”
And that’s the thing that sticks out most about Berlin to a visitor: The creativity. Especially in East Berlin, where the startup scene is based. Practically everywhere you look, there’s something interesting or silly going on. A stencil graffiti painting of Facebook founder Mark Zuckerberg, titled “1984.” Bold and funny looking posters, plastered everywhere, announcing the week’s music performances or special events. Stickers – thousands of stickers – on sign posts, trash cans, everywhere – each a little piece of art, some a little obscene. In most cities, this would all feel like disgusting graffiti. But in Berlin, for whatever reason, it fits.
That creative and design element has bled fully over to the tech boom, and many of the entrepreneurs I met had been web and graphic designers before they found enough money to build their startup. That helps the scene flourish, partly because creative people are fun. But it also means the startups have nice looking, well-designed websites – a big plus.
Edial Dekker, the 27-year-old CEO of Gidsy, is one of those designers who graduated to “founder” last year, and recently raised his first round of outside financing, with investors including the well-known firm Index Ventures and the American movie star Ashton Kutcher.
I met Dekker one morning at his office, a sunny space that Gidsy is still settling into in Kreuzberg, a historically Jewish and Turkish neighborhood that is rapidly gentrifying. (Even in the three years since I visited, it feels totally different.) We took the freight elevator upstairs, he made a fresh coffee in a mini-French press, and we settled down into a conference room where Kutcher had visited to talk shop just a few weeks prior.
Dekker – also not a German, from Amsterdam – moved here 2.5 years ago with his brother Floris, who is Gidsy’s chief product officer. They wanted to get out of Holland for some adventure and risk, and landed in Berlin. They couch surfed, did design work for clients to pay the bills, and eventually started working on Gidsy, a marketplace for activities and experiences. If you load up Gidsy in New York, you can take a Chinatown dumpling tour. In London, chutney-making lessons. In Amsterdam, a wild oyster workshop. And in Berlin, my “Underground” tour exploring in the frigid cold.
“Basically you come here, you have no friends, you probably have very little money. What’s there to do? There’s nothing much to do than just work and try to set up a business. Or you could go party… right? [Laughs.] We’re way more interested in building something sustainable than partying.” (They got Ashton Kutcher to invest, Dekker says, by e-mailing him a username and password to their prototype for Gidsy. “He called us the next day.”)
“Things are going very very fast,” Dekker says. “It’s become very meaningful. People are really here to stay. There’s big ideas and people are actually making them happen.”
St. Oberholz: Relatively spacious and well-known, in Mitte, expect a sea of MacBooks.
CK cafe at Voo: Hidden off an alley courtyard, this cool boutique has an incredible espresso bar and a few seats and tables. Right around the corner from Gidsy and other Kreuzberg startups.
And then there are the clones: The infamous German companies that look for U.S. Internet startups that are showing promise, and then quickly (and perfectly) copy them for the German or European market. (Check out the newish Pinspire, “inspired” by Pinterest.)
The Rocket Internet brothers, Alexander, Marc, and Oliver Samwer, have been making local dupes of U.S. concepts for more than 10 years, and have gotten rich selling them to their U.S. counterparts when they’re ready to go global – such as selling their “CityDeal” Groupon clone to Groupon in 2010. The amazing thing is that it really works. But it has also kept the new crop of startups an arm’s length away.
“I think the clone stuff gets too much attention because it just is not a key part of the scene,” says O’Leary, the venture capitalist. “You just don’t see them. You don’t meet them. I have no idea where they live, what they look like.”
But they’re not harmful, per se. “The thing that the clone factories have going for them,” O’Leary says, “is that they educate a lot of people and they create entrepreneurs who then say, ‘you know what, I want to do my own stuff now’. But I think their share in media is way higher than their share in the entrepreneurial scene.”
Now, a few weeks since my trip to Berlin, what I remember the most is the energy and excitement. The people who were showing up from Amsterdam just for the Twitter-hosted developer meetup I attended. The Groupon-clone employee I met who now really wants to start his own thing. The sea of MacBooks at many of the cafes. The buzzing offices, with the same conversations as you’d hear in New York, San Francisco, or London.
Not everything is perfect here, obviously. It’s lacking the maturity of the Valley tech scene, a wide crop of angel investors, and it’s still a plane trip away from most biz-dev meetings. But in the cloud-powered, lean-startup era, it’s a hotspot worth watching.
Says O’Leary, “If you look at the trajectory Berlin is on, give it one or two more cycles, four or five more years, I think it could be — besides the Valley, I don’t think it’s going to replace the Valley, I think that’s a ridiculous notion — but it could be one of the other really cool places to found a company.”