The decreasing importance of local VC?

We’ve had this discussion before. You could easily say that Berlin doesn’t have much going for it as a tech hub. Very limited local venture capital, no world-class computer sciences school, no real local economy, no real structural / regulatory support, no – err – proper airport,… the list goes on.

Yet, despite it still being a very young ecosystem with a ton of homework left to do (as the silly “next Silicon Valley” discussion is still going on in the media I should really update the “Will The Real Berlin Please Stand Up?” post), it clearly has become one of the most active entrepreneurial hubs in the world. Why? One reason is of course that we live in a wold where you can build and scale great companies from anywhere. Anywhere you can attract and retain the best talent that is. And if you believe that talent likes living in urban, inspiring and english-speaking environments – well Berlin is very good at that. It’s also probably the only large-scale urban inspiring environment where entrepreneurship has the center stage, not just another / smaller part of the economy that dominates the city. We like to say that startups should be doing one thing 10x better – this is what Berlin does 10x better; while still doing many other things 10x worse that we need to fix over time. So we could conclude by saying that Berlin’s entrepreneurial surge is driven by its ability to attract an increasingly hyper mobile group of talented people from around the world.

But then this raised a few eyebrows (including mine) recently “According to Dow Jones VentureSource in the second quarter last year Germany received $375.8m in new VC for 67 deals, mainly in Berlin, while the UK won $290m for 77 deals”. More VC invested in Berlin, where there is very limited local capital, than in London where there is several orders of magnitude more VC available? (please note – this is not London vs Berlin debate – I view Europe as an ecosystem of connected dots) The data is old and there doesn’t seem to be anything newer available. But if you look at some of the rounds that have happened in since then in Berlin (e.g. Souncloud / IVP, 6Wunderkinder / Sequoia, Onefootball / Union Square, DeliveryHero / Insight, Zlando / TH Lee etc) the picture is still going to look very healthy.

But yet we constantly hear that the lack of local VC is somehow keeping Berlin (and other tech hubs) back.

I am thinking we are going to have to start questioning that. We live in a world where not only talent has become hyper mobile, but also capital.

The implications are profound and will keep European VCs on their toes. The best entrepreneurs will not want to work with a ‘local’ VC if that is also where their mindset and network ends. Entrepreneurs can now raise from anywhere. We are seeing many European venture firms adapt to this: most formerly locally focused funds are now also investing across Europe, are beefing up their US ties, etc. This is good for entrepreneurs.

We may need to rethink what ‘local’ really is and how much it even matters. What do you think?


19 Comments on “The decreasing importance of local VC?”

  1. It’s also a matter of perception: No world class computer science school? For sure not the number one schools, but the TU Berlin ranks within the top 50, FU in the top 80, and HU in the top 100:

    Given their size, you can’t really argue that due to the lack of top schools there is a lack of talent, also all German schools seem to be perceived as being similarly unremarkable and mid tier.

    • berlinvc says:

      Hi Chris. Yes they are definitely doing a good job and are an important part of the ecosystem. My point is rather that they are not playing the role say a Stanford has in the Valley. Of course I hope they will get there

      • i don’t think that has anything to do with the world-class-iness of the school (research and teaching, as measured in rankings) but rather the slowness and inertness of the German university system in general: universities couldn’t care less about their graduates and have even less resources to expend. Likewise, there is very little alumni activities or any desire to be associated with the “alma mater”.
        They have their own infrastructure issues within their ecosystem that keeps them from participating in the start-up system. That’s at least my impression as a rather recent graduate.

  2. Pawel Chudzinski says:

    I think it is hard to give a general answer here. I guess the earlier stage you go, the more local the VC business gets. For example, US firms are very active here in Berlin in B and later rounds, but seed and A, not so much.

    • berlinvc says:

      Agree – definitely correlated to stage. Although even at seed we are seeing people investing from US / UK and elsewhere. But I agree with the general observation.

  3. Thomas says:

    Great subject, and this topic hits close to home. As a startup in Berlin that has only raised from German investors and as an entrepreneur with VC experiences in the Valley, Los Angeles and New York, I’ve had the discussion about German, UK, and US VCs many times with many different perspectives. For my company and our latest round we have talked with a lot of foreign investors who were very optimistic about our case, but nearly always asked for a European partner to invest with, other simply said “We don’t invest outside the US”. That’s obviously a huge improvement from the days of the “30 minutes rule”. But since large investments (>2m) in Europe are still very few and far between, this creates a bit of a catch 22.

    Sure it’s not a locals only kind of thing for all, but what if you’re not Zalando/ SoundCloud/ 6Wunderkinder? What if you’re in Europe where valuations are smaller, and rounds are smaller, but you are at a stage where the appropriate investments for your company really only happen across the pond? In the US series A, B, C, even D are all fairly normal, but if you are looking at a series B or C, you probably need more than a European investor will offer. Non-local investors will need to see local support unless your company is doing very well. But if your company is doing very well, why are you even taking in outside funds??

    In my opinion. Local VC may not be soooo important anymore, but for the vast majority of startups, you still need local to get the not-so-local.

    • berlinvc says:

      Great points. I agree it is still important, but maybe less than in the past. I am thinking – very roughly – that local = same town / country at seed, same continent in series a and the planet for series b+

  4. […] The decreasing importance of local VC? […]

  5. […] So basically this confirms what we are seeing more and more: European entrepreneurs can raise from anywhere, US funds are filling the capital void in Europe and local capital is becoming less relevant. […]

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  14. We have this discussion almost every week at Innovation Nest. Are there any advantages of being a local VC? What we are seeing in Poland is that the better the founding team, the less it is interested in working with local VCs. This might be the outcome of startups becoming “global” from day 1, especially in the SaaS space. This global approach attracts interest from VCs all over the place – even at seed and A round stages.

    What is really interesting is how this will play out across Europe in the long term. If we would view the EU as a single tech hub, than it makes no sense to be focused only on sourcing local deals. This means that if you are a VC in Europe you operate across all the cities with entrepreneurial activity – and there are plenty of those. I believe that talent, skills and ideas are distributed evenly – so the “next big thing” might come from a tiny tech hub somewhere in Europe. If you are only focused on you local market – you might miss the party.

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