<aside> 💡 European venture isn’t real. Government money and diversity initiatives are both fundamentally flawed and paint a distorted picture of the realities of the health and maturity of the European market. We’re set to implode, and the Americans are once again going to come in and eat our lunch. The thing is, we’ve had the means to fix this for as long as they have. But, entrenched stakeholders are making so much money and ‘diversity points’ off our broken system that they don’t want to change it. They’d rather keep selling us the lie than fixing it and performing at an elite level, lest it blinks them out of existence.
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If you know of me at all, you probably recognise me from either a ‘black VC breakfast’ or Atomico’s 2020 angel programme and thought that I ‘broke into VC’ then. Far fewer of you will know that I started in venture a decade ago at Doughty Hanson straight out of secondary school. The breakfast was about congregation so I didn’t mind it going to the press, but I found it frustrating that this is where most people in venture knew me from. By comparison, I was required to sign up to have my photo in the press before signing my contract with Atomico to enter the programme which was deeply problematic and indicative of many of the structural problems behind the programme, some of which I will address here. This is the first time I’ve engaged with Sifted entirely on my terms.
The ‘venture diversity’ machine is out of control. It relies on revisionist history to justify itself, essentially claiming that before this initiative or this fund came into being, there was no one ‘diverse’ building anything in the space. For instance, many people in Europe will recognise the latest crop of ‘diversity leaders’ (many now blessed with MBEs), but few today will recognise Bernard Dallé, who spent 24 years at Index starting in 1997 - or myself for that matter. Before I go on, allow me to mention the funds that found me post-’Doughty Hanson’ and before the diversity machine started turning in earnest: Apollo, Backed, Balderton, BlueYard, Playfair, Signals, Stockhorn - and I’m sure there are more.
There is a core counterfactual in the machine: “Did they back me because I’m great, or because I’m Black?” If you’ve received funding or other support from any of these racialised programmes, you simply can’t go back in time and prove that you would have got the support without the initiative from elsewhere.
Let’s straighten something out. Diversity gaps are not problems in of themselves, they are merely indicators of structural problems. The reason why the diversity figures haven’t moved in a decade is that there has been no attempt to identify problems in venture infrastructure and solve them since the global financial crisis and the emergence of Seed (especially Seedcamp and Entrepreneur First in Europe). Let’s straighten something else out too - socio-economic status is a greater ‘venture access’ factor than race. The Sewell Report told us this in 2020, and although a lot of you didn’t like it, none of you disproved it.
https://drive.google.com/file/d/1yaoC5V8AqLfaw87VYwNNDgocPjpwxlM1/view?pli=1
Current ‘solutions’ are problematic. Diversity funds, fund-of-funds, angel and scout programmes suffer from the ‘multiplicativity fallacy’ - they can’t consistently decide who’s black and who’s not. They ultimately, although not necessarily intentionally, use truncated forms of colourism and mongrelism to make investment decisions. We’ve been down this road before, the Germans learned this from the Brits and the Americans in the run up to World War II. ‘Venture apartheid’ is not a solution to perceived demographic gaps in the system. Furthermore, angels in angel programmes categorically can’t prove they got into the deals they got into because they’re great investors, and often say that the firm’s brand helped them get into deals - this is the opposite of building a direct, attributable track record.
Now I should say one thing unequivocally. I was on Atomico’s angel programme in 2020 (Cohort 2) - this particular cohort was not racialised. They brought in their diversity quota for Cohort 3 and beyond. If I knew they were going to do this - I would not have joined their programme. With all that said, if you put all the ‘diversity in vc’ to one side, you’ll find minorities developing very smart solutions to the ‘diversity problem’ - mine’s called Simplify.
The main problem in the venture capital space is the personal capital requirements and the fact that most people simply don’t have the access to LPs (especially single-family offices) required to set one up. If you can remove those requirements, then you make the industry as open as possible - and that, coupled with a very high bar (10X+ Net DPI) makes for a truly meritocratic system. The majority of the establishment has known this for years but elected to plaster Twitter with black squares, #blackouttuesday, and pithy, condescending quotes like ‘I hear you, I see you, I grow’.
The US has known this for a long time and killed off affirmative action at a federal level earlier this year. They’ve had infrastructural programmes like Spearhead running for several years now (for about the same amount of time as Simplify’s been out there). They’ll kill off corporate diversity programmes next, and this will include corporate venture diversity like diversity funds and quotas. We’ve played second fiddle to the US for decades, can we please get ahead of them this time?
As a London-born product of two second-generation citizens with parents from former British colonies, I’ve found myself outside the ‘European dream’ - until the Russian aggression against Ukraine. To be clear, I understand it completely, but it has not been a direct part of my story until now. It was not (directly) my family’s war to fight, yet we were made to fight in it anyway. My grandparents specifically chose to come to London, the capital of the motherland was the dream, a dream of individual betterment and impact. Couple that with a fundamental (and fully justified) lack of trust in institutions and a strong maths and economics (i.e. crypto) background, and you wind up with a nihilist and metamodernist who questions just about everything. I question the ‘European venture dream’, and think that state aid has made us blind to the realities of our situation.
The core counterfactual in the European venture state aid machine is simple: “Did they back me because I’m great, or because I’m European?” If you receive funding or other support from any of these programmes, you simply can’t go back in time and prove that you would have got the support without the initiative from elsewhere.
Before all that, let’s take a step back and get a sense of how venture capital varies by region. Asia operates a family-office-centric model which is very opaque, very centralised, and whose quality varies. In Europe, our major funding source is the government, which is more transparent and decentralised by the number of funds, but is very centralised in the LP base (50-75%+ of the base sometimes), highly restricts GPs and backs funds of often questionable quality. The US operates a much more institutional model, more decentralised by the number of funds and LPs in the base, mostly unrestricted GPs, and a very high bar for quality (some fund-of-funds are looking for 10x+ Net DPI).
Europe is an LP aberration. Our government money is fundamentally defensive, they’re investing to bolster against China and the US - and they don’t care about returns as nearly as much as private investors do. This means they invest in bad funds which in turn invest in bad startups, and the ecosystem rots. Furthermore, the British Business Bank gives its private co-investors some of its returns. Traditionally speaking, private investors require a fund to return 3x Net DPI to its investors. It has been 5x+ since 2012 which fellow FoF investor Ertan Can has reiterated, but that’s another story. But with the government’s ‘free leverage’, private investors might only see that 3x return if the government tops up the returns - meaning the fund itself can return less than 3x and continue operating. This only spins the negative flywheel faster.
If you put all the government-funded GPs (and LPs) to one side, you’ll find that the highest-performing managers usually don’t take government money (Hummingbird, Backed, Mosaic, BlueYard, Possible etc). If we’re honest, without the government, most of the others wouldn’t even exist - there is no way they would have been able to raise, and handle global competition. Further, governments are fundamentally risk-averse (the Crypto VCs would know!), so can’t back the innovations on the venture model that we need (like Simplify and Spearhead).
To that point, the real problem is that Europe has a fundamentally undeveloped fund-of-funds ecosystem. There are few to no fund-of-funds in the private markets who actively and consistently back emerging fund managers. It is harder to raise for a fund than a startup, and harder to raise a fund-of-funds than a fund. If you want to create a new type of fund-of-funds to solve all these problems? Good luck with that.