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No deep exit market in Europe? No problem!

The internationalization of venture capital is an important trend for Christian Jepsen and his firm, Sunstone Capital, as it should be for a VC with limited deal-flow at its headquarters in Copenhagen.

Jepsen, who focuses on early-stage Internet and media opportunities, explained to VCJ how disparate venture ecosystems are becoming increasingly enmeshed. He also provided a discerning perspective on the growing pains of startups in Central and Eastern Europe (CEE).

Q: How important is the exit market in Europe for the long-term viability of the venture sector?

A: In my professional lifetime, I don’t think we’ll have a really deep exit market within Europe, and I don’t think it’s really required.

There are a lot of trade sales in Europe for the smaller exits, which are also important for funds. But for the foreseeable future, the bulk of proceeds from the large exits will still come from the U.S.

It’s just the way it is and I don’t see anything really changing that right now. However, the world is getting smaller so the problem is actually diminishing. People are travelling so much today and every company we invest in wants to be global. Selling to an American or an Asian or a European doesn’t really make a huge difference.

Q: Are you seeing more competition from U.S.-based firms at earlier stages than you did in the past?

A: Maybe slightly more, but not a lot.

When the market really heats up in the U.S., the firms expand beyond their shores, and when it cools down, they retract. Maybe they are here, but not in a really big way. At least not for Series A rounds.

However, a big trend is that entrepreneurs are travelling more to seek out capital. So if there is more U.S. interest in Europe, it’s not necessarily because VCs are coming over here, but because there are a lot more Europeans that go to Silicon Valley and seek out capital. It’s healthy. It’s a global market.

Q: Will that force European VCs to abandon the philosophy of investing close to home?

A: If you sit on Sand Hill Road, you can still have that mentality because you have the depth of deal-flow around you. And maybe you can have it in London, too.

But anywhere else in Europe you can’t have a successful venture fund just on local deal-flow. If I see a local deal and it isn’t quite right, then I fly an hour away and see a deal in the same space with a better team that’s better prepared to go to market.

Once you move outside your cultural comfort zone it changes, though. If I go the Middle East or China, there would probably be things that I wouldn’t interpret correctly, but if I go to Budapest or to Zurich, I don’t find it difficult to interpret the deals I see in front of me.

Q: As an investor in CEE, what changes have you seen in the teams you visit?

A: In general, Eastern Europe has very good technical and design talent, but it lacks management and commercial talent.

Once companies reach a certain size in Eastern Europe it’s tough for them to find adequate candidates for leadership positions and that’s partly for historical reasons. In the Cold War this was something that wasn’t well developed so there’s some catching up there with regards to business schools and stuff like that.

Sometimes, you feel like you need to transplant people in from Western Europe. But there are more young, first-time entrepreneurs who are better prepared today.

Q: What’s the investor appetite for the CEE region?

A: Five years ago when we invested in Prezi [a Budapest-based developer of presentation software], the region was considered quite exotic, but today there are a lot more local seed funds with money to spend and a lot more people flying in willing to do deals.

Back then, the investment framework in terms of things like warrants and options was crude. It hadn’t been tried and tested. Today, it’s a lot easier. European initiatives stimulating seed funds, led by the European Investment Fund, have helped in that regard.

Q: Do you think there’s a Series A crunch in Europe?

A: I don’t think there’s a Series A crunch. I was an entrepreneur in the 1990s and there have been some periods where there was ‘crunchiness.” In general, a good company gets funded. You may have to work harder and see more funds but you can manage.

For it to be a real crunch there must be viable companies that can’t get funding. The market is a good place now for the entrepreneurs and the VCs. There is money to be had, but not so much that we’re really driving up prices and silly things are getting funded.

The bigger discussion is around what actually constitutes a seed or A round now, as some of these Series A deals are getting really big.

Q: Which tech trends in Europe excite you?

A: We have a lot of good engineers in Europe that could create very compelling products in the wearables segment. You could take a bunch of ex-Nokia engineers and instead of making a mobile phone you could make some other device.

There’s a foundation for us to do well there. That’s an area where I’m looking, but I don’t know if we can say we are much better than the Americans.

Q: Finally, what keeps a European VC like you awake at night?

A: You always worry about what you miss. I always try to think about we can become a better VC. Better at identifying winners and at better at managing our portfolio