Next gen EU Fund-of-Funds must ‘market’ a new ecosystem into being
Ecosystems aren't just built on capital; information is just as important
Two weeks ago, I published a piece arguing that the existing European venture capital model must be expanded on. The gist is that without investing in productivity-enhancing innovation, Europe will continue to become less competitive with China and the US, thus making it prohibitively expensive to afford the socio-economic status quo.
The European social order, so loved, is facing an existential threat.
The existing class of venture capitalists have their incentives misaligned; they have become wealthy without financing genuine innovation. Thus, we need an alternative system in which European Fund-of-Funds (FoFs) play a significant role as conduits of capital and information.
These FoFs will draw on foreign capital to back emerging VCs whose wealth will only grow as they fulfill their mandates to Make Europe Dynamic Again.
Last time, I focused on capital, explaining how American money is uniquely suited to help fund this push. For this article, I’ll look at the information (aka marketing) side.
We must communicate the system we need into being; one that rewards those delivering genuine innovation, rather than those skilled at gaming the system.
Luckily, Silicon Valley has already blessed us with a blueprint.
In general, ‘tech’ has an uneasy, if not a dishonest, relationship to marketing.
Both nerdy builders and biz school operator types alike dream of the product that, in its greatness as a solution to an important problem, simply sells itself. The tech industry in California even invented the ideas of “product-market fit” and “flywheel” to emphasize how a business can go gangbusters by simply identifying the perfect market or developing a product so transformative that it invents a new one.
"In a great market—a market with lots of real potential customers—the market pulls product out of the startup. The market needs to be fulfilled and the market will be fulfilled, by the first viable product that comes along."
"And of course, in this scenario [creating a new market], it also doesn’t really matter how good your team is, as long as the team is good enough to develop the product to the baseline level of quality the market requires and get it fundamentally to market."
- Marc Andreesen, The only thing that matters (2007)
I’m not here to say Mr. Andreessen is wrong. In fact, there is a lot of wisdom in what he says and, most importantly, how he says it.
This notion that opportunities in tech are so abundant that it’s not necessary to think about marketing or competing with others (see Thiel on monopolies) is itself a brilliant bit of subtle marketing. It makes founding companies that might pursue venture financing more attractive.
Andreesen is in the business of selling money. By writing his articles and proselytizing his ideas, he expands the market for the product he is selling. More founders = more demand for capital = more business for a16z. Très simple.
The numbers back up the observation. The amount of VC invested in the United States exploded from ~$35 billion in 2010 to over $150 billion in a decade.
Venture capital, once an innovation itself, had been commercialized. Assuming the standard 2 & 20, VC ‘revenue’ grew from a respectable $700 million annually to something closer to $5 billion in a bit more than ten years (this, of course, excluding investment returns). A perfect example of an expanding pie.
Fund-of-Funds have a unique set of incentives that make focusing on ecosystem development an attractive proposition. Compared to VCs, who operate in a viciously competitive environment where finding the outlier company is everything, the flatter structure of FoFs means that a healthy (and competitive) ecosystem is good for business.
Non-zero sum thinking and behavior, like the covert marketing I identified, is a cornerstone of the Silicon Valley Method. But, perhaps unsurprisingly, it has not been embraced with the same enthusiasm in Europe.
We need to rid ourselves of zero-sum thinking if we in Europe want to build a brighter future for our children. Here’s how it might be done.
In my previous post, I focused mainly on how Fund-of-Funds can serve as a delivery mechanism for American financial capital to bona fide technologists investing in European innovation.
But there is an equally important task to take on. The next gen Fund-of-Funds must put itself firmly in the information business. It needs to build, in real-time, the ecosystem it believes can best deliver the innovation to turn Europe’s economy around.
Its marketing must be bold and expansive. There is no space for trying to capture and retain a slice of a pie that is not growing. Every action should be non-zero sum, focused on growing the constellation of markets that make up its ecosystem.
The next gen FoF must focus on creating more entrepreneurs. Content & comms should appeal to talented Europeans who have good ideas but might fear taking the plunge because no one they know has raised venture capital or built a digital business. The key result here is simple: more founders who are committed to solving the hard problems.
Ideas include content demystifying the idea that starting a company and having a family are incompatible, perhaps unreasonably aggressive cultivation of mafias (big tech R&D hubs, anyone?), and resources to help first time entrepreneurs learn how to sell (themselves, equity in their company, their product; in that order).
The next gen FoF must focus on creating more investors. Content & comms should appeal to folks who have successfully built useful products in the past and who have the expertise and commitment to back promising founders. The key result: an explosion of thesis-driven funds led by emerging managers targeting specific problem areas.
Ideas include workshops about the logistics of fund creation, mentorship from other emerging managers with a successful fund raise behind them, and research deep dives into theses that could support a VC investing full-time in.
The next gen FoF must focus on creating more enthusiastic European limited partners. Content & comms should appeal to high net-worth individuals who are interested in backing deep tech VCs yet might not have the experience to determine which managers are a good fit for their goals and interests. The key result: wider recognition that skipping FoFs (in favor of direct investment in VC) leads to weaker returns and worse outcomes for the ecosystem writ large.
Ideas include (anonymized) reporting of FoF performance, podcast interviews with happy foreign FoF LPs, and targeted ads to European entities explaining the FoF value proposition.
The next gen FoF must focus on creating more interest from foreign LPs. Content & comms should appeal to those who believe the American market is saturated with capital and who are Euro-curious. The key result: foreign investors use their deeper pockets to anchor European FoFs who are still in the process of convincing domestic LPs of their value proposition.
Ideas include big reports about the state of micro VC in Europe, building in public posts (like this one) to encourage transparency into the project, and building a leading brand of EU FoF that can serve as the flag bearer and entry point for foreigners.
You can think about the role of FoFs in this ecosystem like Stripe, whose motto is “increasing the GDP of the internet”. The next gen FoF should see itself as a multiplier, collecting capital and information and then channelling it to those who can transform it into productivity and competitiveness.
I genuinely believe we have a chance here to reshape the ecosystem into one that launch another European renaissance. It’s crucial to recognize that levelling up how we communicate is central to this effort. Folks need to buy in to the mission, even if they are not aware there is a mission in the first place.
Who’s with me?