MSc students ask VCs questions – Part III

I always enjoy my guest lectures more when students just keep asking random questions. At the Universiteit van Amsterdam (UvA) I regularly lecture on venture capital in Vladimir Vladimirov’s class of last year MSc students and I receive great questions. This time I’d like to answer the following:

How is venture capital different in various geographies, specifically Europe/The Netherlands versus US?

A lot of the students in the class come from international backgrounds and therefore this questions pops up almost every time. Its a fun question because it allows me to explain a lot about the venture capital industry.

VC is different in a lot of ways in the US vs. The Netherlands / Europe. To me the most notable difference is that these markets are in various stages of development — the US and for example the UK being very professionalised — and the fact that a lot of the partners who manage funds in NL and some EU countries have a banking, corporate finance or similar background.

The private equity (buy out) industry is older and more professionalised in Europe than venturing is. Many professionals who start working in VC base their views and work methods on the PE industry. In the US this is different as a lot of partners have operational backgrounds, its the 4th or 5th US generation of VC’s versus the 1st or 2nd in mainland Europe.

This difference in experience translates in my view to different approaches. In NL / and some regions in EU mainland it is still common to use extensive transaction documentation (term sheets for example) whereas US investors use SAFE (Simple agreement for future equity) or convertible note / equity documentation which is short in comparison.

It is also noticeable in the approaches to target companies. Europe is in comparison more metrics and cash driven versus ambition and growth driven. Of course this is not true for the funds operating on a global level were investing is becoming more and more institutionalised.

Then there is the average investment size, investing in series and valuations. The amount of capital in the market and dynamics impact these variables. Ticket sizes are a lot bigger, in the Netherlands a ticket size of 2m euro is common, in the US 10–20m is common. Investing in rounds in rapidly becoming the standard in NL but of course round sizes differ from 5m vs 50m. The result is that valuations also differ a lot, US based companies are valued higher.

The US and e.g. the UK can also be a lot more competitive to create access to the most interesting deals. This off course has a major impact on almost all aspects of the work from sourcing to what market standard terms are to working with founders. Overall the principles are the same but it can feel like time travelling working in various geo’s in venture capital.