It’s not about the billion dollar home runs

Europe’s venture capital community should trumpet its achievements but re-adjust expectations as to what constitutes success, writes Alliott Cole, principal at Octopus Investments.

Following the merger of Zoopla  with Digital Property Group (owner of Primelocation & Findaproperty) last week, it was pleasing to read the headlines that ensued along with the (significantly premature) talk of one of the UK’s biggest ever start-up exits.

There are many challenges ahead before such an exit can become a reality, but it is a big milestone for Alex Chesterman and his team at Zoopla. It is also a milestone for the angel and venture capital investors Atlas Ventures and (my firm) Octopus Investments, who partnered the business from an early stage, and for the wider entrepreneurial community in Europe.

It is also right for commentators to mark this event with exuberance and excitement. The European entrepreneurial ecosystem must learn to celebrate its businesses with greater verve and volume: let’s take a leaf out of the book of our fellow investors on the West Coast of the US. Creating a business on this scale in this timeline is a Herculean task and worth shouting about.

The paucity of billion dollar exits for venture backed businesses in Europe is often used as a yard stick to compare the relative proficiency of the European entrepreneurial ecosystem to that of the US. Many commentators have invested time exploring why this remains the case today. Some point to the quantum of capital available; others to the lack of an initial public offering market or the scarcity of established technology companies to serve as both acquirers and source of highly skilled human capital; and some recognise the European venture market is still young and it will take time to create the density of energy and skills required to regularly create such successes.

For me, this last point resonates the most. Holding the bold ambition for numerous billion dollar exits should be encouraged, but it should not be the only goal at this time.

Entrepreneurs and investors must define success for themselves. Unrealistic expectations can hurt a business as much as benefit it: the vast majority of businesses in the UK, Europe and the US sell for less than £25 million.

Appreciating this brutal reality is critical for all stakeholders in a young business. The stories of XYZ Ltd’s latest pre-money valuation of £350 million or the most recent conference speaker’s “How my business grew revenue by 1000 percent” are rarely informative and often misleading.  

As London and Berlin emerge as the leading lights for European entrepreneurs and early stage investors, I sense it is more important that increasing numbers of entrepreneurs and angels alike discover their first taste of success.

This should be measured on a return on capital basis: seeing increasing numbers of startups build and return anything approaching 10x (whether that be at £25 million, £50 million or £100 million exit valuation) will have the greatest positive impact on the entrepreneurial community.

If this occurs, confidence in creating, joining and backing startups will grow significantly. In time, joining and leading startups will afford entrepreneurial types multiple occasions to hone their skills – and ultimately, one hopes, be lucky enough to enjoy the good fortune and coincidence of numerous events that leads to the creation of billion dollar companies.

Alliott Cole is a principal at Octopus Investments.