News for the ‘VC’ Category

If you want to be a high-tech entrepreneur in Italy you have to be in Milan or Rome

This is going to sound hard and I’m sure some people will disagree, however I will elaborate on why it will improve everybody’s chance of success to concentrate high-tech entrepreneurship in Italy in Milan and Rome. The 20 VC investments made last year in Italy, are already highly concentrated particular around Milan and Rome, so the reality already matches my suggestion.

What it meant when talking about an ecosystem is that there has to be critical mass of activties to support new high-tech ventures so in turn there will be increasing returns to being in a certain location. Firms do not exist in a vacuum and they rely on advisors, lawyers, accountant, investors, suppliers and of course employees.

While it is true that web startups can be build virtually today face-to-face interaction is still essential and investors are most likely to invest in companies they can visit within a couple of hours. The most respected incubators like Y-combinator and Techstars also bring people together in a specific place and for the few success stories of virtual startups, the rule is still that co-location fosters transfer of tacit knowledge, something that doesn’t happen much via skype.

What is the way forward then?
As I have argued before, Italy needs a larger pool of potential entrepreneurs to select from and an excellent approach that I admire, is that taken by Fabrizio Capobianco and Funambol which has their business development in Silicon Valley and R&D in Italy. This means more technical people who are exposed to the nuts and bolts of a startup.
Two other initiatives I believe should get much more attention is making the startup scene much more international and focus much more on immigration, particularly from Eastern Europe and South America where Italy can offer higher salaries and quality of life.
The important thing though, is that every regional politician does not want Catania or Bologna or etc. to become the hub for high-tech entrepreneurship. Fragmentation is not going to help and both Milan and Rome are great and vibrant cities to live in, so Italian’s must forget their idea that their home town is the only place in the world to live and move to where the action is.

There are a lot of good intentions in Italy and I think that things are slowly moving in the right direction, however instead of each region trying to become high-tech clusters Italy must make an overall decision for the common good and encourage all aspiring entrepreneurs to go to either Milan or Rome the financial and state capital respectively which both have a good mix of institutions already in place.

P.S There are great companies such as Balsamiq and Yoox that have come out of Bologna, however Milan and Rome remain the two most obvious choices as I see it.

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Posted: november 25th, 2010
Categories: Italy, startups, VC
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Comments: 4 Comments.

You don’t need to know anybody – Italy is full of good fellas

I find that a reason for why people in italy stay away from starting things is a misconception that they have to have some super-wealthy family or be very well-connected with a lot of influential people. In my experience this hasn’t been true at all and I would like to share how I have gotten many interesting people to listen to my startup idea because the recipe is very simple.

About a year ago two friends of mine and I got the idea to start an online discount mobile operator in Italy. It’s quite an ambitious idea since you essentially would be competing against Vodafone, Wind, TIM and 3 Italia (also called MNOs), but we had seen it work in Denmark, so we knew it could work. As I have written about here our professor was not very supportive of the idea but we wanted to give it a shot. I followed a guy on twitter who blogged about telecom and who turned out to work for one of the Italian MNOs. From twitter I emailed him more details about our project and he ended up introducing us to the most senior guy at his firm which was relevant for our project. From that point on we have continued negotiations and are still in contact.

In terms of investors and people from the startup environment, I was lucky to meet some investors through our course. Additionally, I really liked what Stefano was doing at www.thestartup.eu so I emailed him an we met a couple of times and through him I have been introduced to some great people and pitched my project to dpixel where he works. Additionally, a guy Stefano and his firm introduced me to has formerly held key management roles at three of Italy’s four MNOs and is now a very helpful advisor.

At conferences like “mifaccioimpresa” and Milan Startup Weekend, I have also met interesting people. Although introductions work best don’t be afraid to approach the people you meet at these kind of events. Most people, and this goes perhaps particularly for successful people are usually very friendly and are glad to help young entrepreneurs if they can. They have been in the situation you are in, and appreciate how much help and advice can mean.

As i said the recipe for this is really simple: Be very well prepared and try to be convincing. You’re selling your idea and you must convince people that you are going after something relevant and feasible. Also be friendly and flexible. Many people are busy and first impressions last a long time so if you haven’t done your homework and don’t know the market or your competitors or your business model you wont be taken seriously.

It’s fair enough to have blind spots (e.g I still don’t know a lot of things related to the technical aspects and telecom regulations) but be upfront about them and how you are going to solve them. In our case a mobile operator is really a lot of marketing and the legal aspect not even lawyers are sure about, but if you are honest about what you don’t know your can avoid unpleasant surprises later on.

Overall it should be clear that we have spent a lot of time seriously putting together convincing reasons for why an online discount mobile operator is a good idea and could be a good investment, we really haven’t done anything extraordinary but that, to meet a lot of interesting people so there is no reason that you shouldn’t be able to do the same, if you have an good idea and a compelling reason for why you are the right people to execute it. Take my word for it, Italy is full of nice and supportive people that are doing what they can to help people start something cool, you just have to be proactive and persistent to find them and get in touch with them.

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Posted: november 19th, 2010
Categories: Italy, startups, telecom, VC
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Comments: 7 Comments.

Why and when employees leave succesful companies like Google and Facebook

Often it can seem strange why people leave very successful technology companies and startups like Google or Facebook. Often they leave to start their own companies and this phenomenon called entrepreneurial spawning has been investigated closer in a big study of US firms which also has relevant implications for European policy makers who want to foster high-tech startups.

You can find the paper in its entirety here, however the paper looks at employees who leave public companies to start their own VC-backed companies and they use data from more than 5.000 firms and 15.000 founders, and I will focus more on their results and the implications.

  • Companies that were either based in Silicon Valley or Massachusetts and that were once VC backed them selves are most likely to spawn new firms (results control for firm size, patent portfolios and industry)
  • Diversified firms spawn less new firms. Employees in diversified firms are less entrepreneurial
  • Spawning is closely related to growth. There seems to be a natural size limit to how big VC-backed companies can get before employees leave to start their own companies. This is what is taking place with the employees leaving from Google to Facebook, and based on this, Facebook might have the same problem in a couple of years when their grow slows down or they go public and employees can cash in their stock options.

The implications of the findings are relevant for a country like Italy that is still a developing country in terms of high-tech entrepreneurship, because they clearly demonstrate that universities are not the only source of founders of innovative companies, but public companies who have themselves received VC might be a great source of new firms. So instead of trying to copy Stanford, Italy would do well to attract existing technology companies and have them setup offices particularly in either Milan or Rome. The study also finds that entrepreneurial activity in a particular area has increasing returns so instead of each region trying to attract innovative entrepreneurs, Italy has to focus on one or two regions which can realistically achieve critical mass of the know-how related to new high-tech firms. This is well-known however, a lot of regional politicians often get in the way of this even though it is completely unrealistic that Italy will have innovative high-tech clusters in Calabria, Sicily, Trieste etc.

So what should Milan do in concrete terms? A visionary plan for e.g. Milan would be to double the number of high-tech employees in Milan by 2015 and attract 3 large foreign technology companies to set up offices in Milan. In the long run, such initiatives might be very good incubators for future entrepreneurs.

PS. A very interesting observation related to entrepreneurial spawning, is that there seems to be consensus (on Quora at least) that no succesful startups have been founded by ex-googlers. For a concrete example of why companies like Facebook play an essential role in spawning new innovative startups take a look at this list of employees that have left the company within the last three years.

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Posted: november 2nd, 2010
Categories: academic papers applied to the real world, startups, VC
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Systemic problems in European VC

Fred Wilson who blogs at AVC has earlier described the venture capital math problem, that there are too many VC funds in the US for them to make good returns. For the record good returns means about returning the fund 3X over 10 years, something that becomes more difficult when there are too many VC firms in the market.

Well as usually with VC, fast forward to Europe for a much bleeker view.

Here the problem is not only that VC is extremely underdeveloped in several parts such as Italy which only saw 20 VC deals close in 2009, but also that returns of VC funds in Europe in general are very bad. Over the past 5 years Europe’s VC firms have returned only 0,7% annually and lost 1,9% annually over 10 years. There are more details in the article here where there is also some more optimistic voices, however if VC funds do not return any money to their institutional investors it’s unlikely they will be able to raise new funds. This is simple natural selection and that funds that lose their investors money have to shut down, however we might have a more serious problem in Europe if there is not only too few VC funds, but the ones that are here are not doing well.

This seems to be a paradox: If entrepreneurs complain that they don’t get funded, a very credible and relevant complaint in e.g. Italy while VC firms might have harder times raising new funds there seems to be a catch-22. More institutional investors and pension funds need to allocate more of their portfolios to the VC asset class and they are not going to to that if they’re not getting any returns.

I think a couple of things are needed to improve this although overall I completely agree with Hussein Kanji’s answer on Quora about what Europe lacks:

  • More early-stage investments
  • Much more interaction. US colleges have the advantage that Computer Science majors can also take classe at the b-school and vice versa. I think more interaction between different disciplines is essential
  • Less bureaucracy and well-meaning states trying to be VCs
  • More of the most successful people from abroad. Just as successful Europeans have become successful in the US and elsewhere, we need some of those to come back to Europe to show how things are done. There’s a lot of pattern recognition in VC and transfer best practices can speed this up
  • More transparency. Of course funds that are not doing well will be against this but then it’ll serve as a way to let the best peformers to share how they are doing
  • More focus on emerging sectors in which Europe may have advantages: sectors like fashion and food come to mind

Another possibility is also that investors are just not very good at their jobs and they have perverse incentives in terms of management fees which reward them hansomely anyway. The few VCs I have met seem genuinely passionate and motivated about creating great companies and I really hope that we will see more VC funds and more successful exits in the near future.

PS. What is considered a disappointing return for a VC might of course be a perfectly acceptable outcome for the entreprenuer (i.e building a sustainable business with a 1-2X return to the VC)

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Posted: oktober 30th, 2010
Categories: Europe, startups, VC
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VC firms should have Anti-Portfolios

VCs get to review hundred of business plans a year and while it should be clear to most people that people are more important than the idea. This is because often the idea will have to change and the original business plan never holds so it is important for VCs to find people they really believe can see their idea through all these changes. At the time most VCs are pitched for investment it is very early and it might often be unclear what the business model of the company is and it is still extremely difficult to predict how people will do. Recently Vinod Khosla told the story of how the Google founders wanted to sell it for a million dollars and this illustrates how extreme the uncertainty can be even for the people who have the idea and vision. When entrepreneurs don’t even realize the potential value of their business it’s of course very hard for investors to foresee which investments will be successful and therefore many VC investments will likely fail. These are the rules of the VC game and most people agree on them.

However  just as VCs celebrate when they exit their good investments, it would be interesting to see more have anti-portifolios of the deals they were pitched and turned down, which have gone on to become successful. An old and also very successful VC fund that does this is Bessemer Venture Partners. You can see their anti-portfolio along with the entertaining background stories here.

It’s also clearly not very easy to be a VC and many of them also don’t do a particularly impressive job in generating returns to their investors so they might prefer opecity over transparency but in general I think entrepreneurs and VCs would be better off knowing more about the mistakes VCs have made in evaluating investment opportunities. This takes investors who has also had successes and is honest about admitting their mistakes and from an entrepreneur’s point of view I think it sends a strong signal.

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Posted: oktober 26th, 2010
Categories: startups, VC
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Comments: 1 Comment.

Yozma and Italy – Why copying Israel’s VC cluster is unlikely to be a good idea

On his blog at il sole 24ore Gianluca Dettori recently pointed to a new proposal for VC in Italy. The gist of the purpose is to create a fund of funds with a mix of public and private money. The proposal is nicely summed up here and the idea is clearly to create an Italian parallel to Yozma, which was fundamental in creating Israel’s thriving VC and high-tech clusters.

VC getting more love and attention from politicians is very nice, however there are in my opinion several reasons why the “let’s make an Italian Yozma” is unlikely to be an ideal approach. (disclaimer: I don’t follow Italian politics, so if you believe my assertions below are wrong, please point it out).

First of all, it is a traditional cause-effect fallcy within public planning to observe a successful effect in one context and trying to replicate it without thinking more about all the underlying causes. This is similar to why many companies have failed in trying to copy the Toyota Production System. They observe that any employee can stop the entire prodution line by pulling a chord and then the problem is traditionally resolved quickly, so the key to lean production must be to install this system. However the system works because of all the tacit knowledge, trust and mutual understanding between the workers and therefore it is extremely difficult to copy and require a change in all the underlying processes that lead up to the “pull the part chord”. The similarity to the VC system is the countless and failed attempts to emulate Silicon Valley and just like I consider it unlikely that Italy can successfully copy Yozma, the people behind this proposal should start somewhere else and study the conditions in Israel when Yozma was launched.

Before Yozma became world famous they had the Inbal program which was a similar approach that suffered from problems such as too much bureaucracy, low upside and difficulty to attract good VCs. If an initiative in Italy is going to work there has to be a compelte minimum of bureaucracy, and the state has to acknowledge that private VC fund managers have to have an upside and might become very wealthy if the fund is successful. Paricularities of Israel, that I doubt are present in Italy:

  • A strong domestic military indusstry. A lot of Israel’s successful startups had a background in the military industry.
  • Office of the Chief Scientist (OCS). Excellent capabilities in applied sciences and a generally the OCS was a very respected and admired  institution.
  • Tech-heavy foreign multinationals such as Intel, IBM and Motorola.
  • Immigration in the form of thousand of highly skilled engineers and scientists.

Another aspect that is critical is that the Yozma program was seen as the third phase of the VC industry lifecycle which began with the background being set in the 1970. You therefore can’t ignore what happened in the 20 something years leading up to the Yozma program and instead Italian policy makers should study this period and find out why conditions in Israel were ripe for a VC cluster. Particularly, the experience from Israel also showed that there needs to be a critical mass of high-tech entrepreneurs before a VC cluster can successfully emerge, and as much as I wish this was the case in Italy, I think we are at least a decade from where Israel where when Yozma was launched. A good start would be to educate more engineers and scientists and make Italy more open to the best immigrants in these disciplines.

If you want to read more in detail about the the co-evolution of Israel’s high-tech and VC clusters, I co-wrote a paper about this two years ago. I couldn’t embed it but you can read it here.

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Posted: oktober 6th, 2010
Categories: Italy, VC
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Comments: 2 Comments.

Entrepreneurship news from the past week

Last week there were a couple of positive entrepreneurship-related events that I think deserve to be mentioned.

The first was the inaugural meeting for Bocconi’s new entrepreneurshup club Young Entrepreneurs at Bocconi. The club has the valiant purpose to encourage more entrepreneurship and to be a place where young entrepreneurs can meet and exchange ideas and help each other out. The idea is also to have guest speakers and work shops with various purposes so its activities are like entrepreneurship clubs at most universities. It’s a great initiative and it seems like Bocconi is also supportive, so I hope it’ll be succesful. However there is also room for improvement:

  • First of all more people have to know about it. Only 6 people showed up and three of us were foreigners so foreigners are perhaps more apt than Italians to have entrepreneurial aspirations?
  • If it’s going to be helpful people have to openly share their ideas and what they need help to! I can’t say this enough but it’s really a banal and unjustified fear to be afraid of having ones idea copied.
  • More technical focus and not being afraid of bold projects. The challenge with an entrepreneurship club just for business students is that the skill sets are very similar and whenever somebody has to built somethng technical, software developers are needed. I think it would be ideal to have the entrepreneurship clubs of Bocconi and the different technical universities meet up and share ideas.

The club doesn’t yet have a website but if you are at Bocconi and interested in joining I really suggest you go check it out, since it is just getting started you have a great opportunity to get a lot of influence from the beginnig! If you want to know more then send me an email and I will get you in touch with the founders.

The second event I attended was “mifaccioimpresa” this weekend at Bocconi. It was a fair dedicated to entrepreneurship and with lots of panel discussions about everything from financing and marketing to legal issues and the role of VC in Italy. The fair lasted all of Friday and Saturday however I only attended on Friday and the most interesting thing for me was a panelk discussion about innovation and financing and SMEs and the role of VC in this.

The panel consisted of Roberto del Giudice head of the Italian Private Equity and Venture Capital association AIFI, Francesco Perrini from Bocconi and an investment manager from the Italian VF fund Quantica sgr. The discussion was about the status of VC in Italy and although this might be already know to some, the state of affairs is pretty bleek. Here are the main takeaways from the discussion:

  • A total of only 20 VC investments were made in Italy in 2009
  • 5 VCs represent 50% of all the deals and out of these, the most active were Innogest, Piemonte High Technology and Quantica
  • Some funds barely average 1 investment per year from 2004-2009
  • Italy is completely divided in North-South in terms of VC and no investments at all in e.g. Calabria, Puglia and Sicily.
  • Overall, Italy is a country of SMEs but not innovative SMS.
  • To put innovativeness in perspective, the 20 VC investments are out of 5000 new firms formed every year.

Overall, the picture is bleek and anyone who has tried to raise seed or venture capital in Italy knows that it is extremely difficult, however one can also look at in a more contrarian and positive way. Since so few innovative companies are founded in Italy you actually have a better shot at being funded if you offer something cool and innovative!  The start-up scene is not exactly Silicon Valley so if you do something original there are plenty of chances to get yourself noticed. One of the reasons I do not worry much about anybody copying our business idea is simply that most people Italians think it’s nuts and that it can’t be done.

So get started and don’t blame the bad economy, now is a great time to start a company!

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Posted: oktober 4th, 2010
Categories: Bocconi, Italy, startups, VC
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Don’t forget the VCs who don’t blog.

Like many people I like blogs written by VCs and entrepreneurs who have successfully raised VC funding. Some of the best information about startups and consumer web trends can be found on blogs by VCs such as Fred Wilson, Mark Suster and entrepreneur and investor Chris Dixon. These blogs provide terrific insights into what some of the savviest people think and are also a great source for budding entrepreneurs on everything from how to pitch VCs to get ideas for your next startup.

Their blogs are a way to make a name for them selves, to clarify which kind of companies they invest in and of cours to ideally make their investments more valuable by giving them access to the best deals and entrepreneurs. While the final results remains to be seen it is worth noticing that some of the most successful VCs in the business do not blog and that clearly does not keep them from spotting the best deals or being approached by the best entrepreneurs.

Take a look at this post with the exits of Sequoia which shows that they are creating huge value. While Michael Moritz doesn’t blog his investments account for $5.5B of exits in the list. This is a good reminder that while VC blogs are a great asset to entrepreneurs some VCs do just fine without them. Another VC firm absent from much blogging is KCPB but clearly that does not prevent them from excellent deal flow and entrepreneurs who love them . While Kleiner Perkins and Michael Moritz do not share their thoughts via blogs they clearly do a great job adding values to the companies they invest in and help them build successful businesses.

p.s In Italy I have not been able to find many examples of VC blogs so if, you know any let me know where to find them.

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Posted: september 27th, 2010
Categories: marketing, VC
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Comments: 2 Comments.