The Impact of the Euro Zone on Risk-Aversion

Such is the volatility convulsing Europe’s financial and political bodies that the Financial Times has introduced a “live blog” section to its website, recording expert thoughts in real time, as one country after another enters a critical condition. First Greece, and now Italy, are suffering the wrath of the international bond markets.

Some venture capital players just shrug at the news. For many, the Euro-zone crisis is not their problem and, in any case, some of the effects of the crisis are actually positive, from their perspective.

“Some venture capital investors are aware that, when the herd is looking elsewhere, there are opportunities to seize,” says David Mott, investment director and co-founder of Oxford Capital Partners (OCP).

Mott’s firm recently carried out research into correlations between macro-economic shifts and returns for VCs and private equity firms.

The study concluded that VC returns broadly follow macro-economic cycles, but since they outperform the public markets, they “should play an important role in achieving an optimized portfolio.”

Within these parameters, “expansion and later stage venture funding, focused on growth capital, appear to [outperform] under bear market conditions,” according to OCP’s research.

So it’s not just a brave strategy to continue investing in VC market during a downturn, but a good one.

“Any dislocation, good or bad, becomes an opportunity,” says Mike Southern, a U.K. investment consultant.

“Entrepreneurs have no concept of risk; they have boundless optimism,” says Southern, who notes that the biggest change he has seen lately is the absence of the banks as lenders to risky enterprises.

“The banks have been sitting on their hands for longer than in past recessions,” he says. “They’re building up their balance sheets. And this has driven entrepreneurs to all kinds of other lenders: to Mum and Dad, to credit cards, to their own customers.”

As a result, he says there lately is a more chaotic, adventurous tinge to the European VC sector.

Southern argues that some venture firms grew lazy in the boom times between 2003 and 2008.

“They thought things would be the same as ever, and turned down opportunities that they thought looked a bit difficult. They had become complacent, but now they think the sky is falling in,” he says.

Many politicians and business leaders across Europe agree that the sky is falling in. By the time you read this article, one or more countries may have exited the single European currency, triggering a wave of panic in world markets and unraveling the biggest European economic project of the past 20 years.

Surely, this will have a massive impact on venture activity, as well as on the rest of the continent’s business sectors, causing them to take further flight from risk.

“Where you have uncertainty, you have reduced activity,” says Haakon Overli, managing partner at Dawn Capital in London. “But so far, 2011 has been quite an active year in Europe, with some big deals. Big business is doing fine, and if your customers are global and your product is globally competitive, you’ll continue to grow.”

Like other VCs, he has benefited from the withdrawal of some large businesses from risk capital. For instance, Dawn Capital is an investor in a company called Wonga, an online short-term lender, which is filling a gap as banks withdraw from personal lending.

It’s almost as if [European] VCs think of themselves as giving you loans, rather than being risk takers.

Nick HalsteadCEODataSift

Indeed, European VCs are busy attempting to find companies with the right products and services to sell into new markets, or to capitalize on high-growth markets in social media, for example. Their closest competitors are American VCs, hoping to do exactly the same, but with a far larger pool of money and expertise upon which to draw.

The failure (if we can yet call it that) of the Euro-zone project puts this rivalry into sharp focus. Its principle ambition was to create a critical mass of wealth, enterprise, trade and industry, so as to challenge the hegemony of American global commercial influence.

It was meant to replicate the confederation of American states, the introduction of the dollar, the way that U.S. firms can grow beyond their founders’ wildest dreams within a generation.

The Euro zone’s fatal flaw was to allow individual states to keep issuing national bonds. When the interest rates payable on these bonds crept over 7%, the national debt of Greece and Italy became unsustainable, causing the crisis.

Some European startups now argue that they are now better off seeking investment in the United State, rather than banging against a series of risk-averse closed doors at home.

In describing his experience of seeking funding from European VCs, DataSift CEO Nick Halstead says, “It’s almost as if [European] VCs think of themselves as giving you loans, rather than being risk takers.”

Reading, U.K.-based DataSift has raised more than $7 million in funding. Halstead says that VCs in Europe are still looking to generate revenue for a Series A investment, whereas in the United States, startups “don’t have to have revenue, but what they will have is a lot of traction.”

DataSift managed to raise its $6 million Series A round in July from two U.S.VCs—GRP Partners and IA Ventures. He says that people “got it” in Europe, but the valuation difference with the U.S. investor was not even close.

“It comes down to price,” says Halstead, who previously founded U.K.-based Tweetmeme. In the U.S. you will get a higher valuation. It is changing here, but VCs are still risk averse at the Series A level. I’d like to see European VCs moving forward on risk.”

Halstead’s comments generated a scathing response from some European VCs, although they admit that there is a problem raising capital in Europe.

“European investors are risk averse and see themselves more as spotting current winners and providing growth capital rather than intuitively spotting future winners and taking the risk to help them create success,” says Chipper Boulas, owner of Paris-based Boulas Ventures. “[VCs] spend too much time on current and future financials, and not enough time on user engagement and market potential.”

America is, of course, not only the land of opportunity, but the land of the second chance, the comeback, the reinvention.

In comparison, Europeans see themselves in more fatalistic terms. Once they have made a mess of something, there’s no way back. So they’re innately more cautious and risk averse.

Because there is no proper European Union, with a single currency and common language, it’s harder to go bust in Berlin, and then re-emerge with a thriving company in Cadiz.

Some would argue that this is not a bad thing. Less promises and hearts are broken. But the boundless optimism that characterizes the true entrepreneur, that childlike fascination with risk and reward, with the high wire act of venture capital, has always been found more easily in the Land of the Free and Home of the Brave than in Europe, where Euro-zone jitters are spurring risk aversion.

David Nicholson is a London-based contributor. He can be reached at