PRINT THIS PAGE European early stage venture capital investment: an AltAssets interview with Yoav Andrew Leitersdorf, managing partner at YL Ventures
06/02/2008. Source:AltAssets.
Yoav Andrew Leitersdorf is investing in European and Israeli early stage businesses operating in the internet technology space. AltAssets asked him about his views on the industry and about what he thinks could make venture capital investment in Europe and Israel more successful. Where do you see the future for European venture?
'Unlike most of the US venture landscape, Europe is not going to make a name for itself on the back of repeat mega exits valued at billions of dollars - at least not initially. Europe lacks the concentration of talent and infrastructure found in Silicon Valley, and Europe should not try to imitate the Silicon Valley model. Since European venture activity is so sporadically located, hiring hundreds of talented engineers in a short period of time is nearly impossible, and therefore Europe needs to capitalise on its rising stars early, while they are still in their early growth phase. This involves rapid consolidation - the early integration of European start-ups into global corporations that can lend those start-ups a hand in achieving scale.'
Are there elements where European venture actually has an advantage over US venture?
'European venture valuations are more reasonable and less prone to hype than their US counterparts. More often than not valuations more accurately reflect the strength of the team and the assets in the companies rather than "what's hot". European venture capitalists that are willing to travel far and wide in search for deals, in conjunction with innovative web-enabled deal-sourcing strategies will benefit from the opacity of the European venture industry and from the fact that in order to find the gems, one has to search hard. This represents an opportunity that is not as common in the US due to the transparency of that market and the concentration of start-ups in a few major hubs.'
What are the trends in the venture market in Israel?
'While Israel has seen many more exits-per-capita than Europe, Israel still has many more entrepreneurs that fail than those that succeed. Failure is not always the result of bad ideas or bad execution, but oftentimes the issue is simply bad financing. The typical (US-originated) venture capital model prohibits early, smaller exits - a limitation that contrasts the exit realities faced by most Israeli entrepreneurs. Most of these entrepreneurs have realised there will only be a handful of CheckPoints and ICQs, and the aspiratory goalpost has moved away from becoming billionaires to becoming single-digit millionaires (a life-changing event nevertheless). Many Israeli entrepreneurs do not even approach venture as a source of funding because they think they will not be permitted to exit when opportunity knocks.'
What influence does the capital gains tax issue in the UK have on UK venture/European venture? Is it bad news for serial entrepreneurs?
'Despite a high cost base, the UK has been attractive to entrepreneurs and investors due to the fact that it has one of the lowest capital gains tax rates in the world (ten per cent on equities held for two years or more). Raising that rate to 18 per cent, even with the special provision that stipulates nine per cent up to £750,000, is harmful to the UK's position as a preferred European domicile for entrepreneurs and investors. The net impact of such a rate hike will be emigration of some entrepreneurs and their businesses, as well as some investors and their funds, to European jurisdictions such as Switzerland, Luxembourg and Cypress, many of which offer competitive tax rates and an "on-shore", European status. The tax increase may also mean less entrepreneurship in Europe as a whole because some "would-be" British entrepreneurs may then find entrepreneurship less appealing and would not move solely on the basis of tax.'
What needs to change in Europe and Israel to make venture more successful?
'Venture funds need to have shorter time horizons and more pragmatic exit strategies. Entrepreneurs that have assembled a good team and have built a great product do not need to face another six years of hope before reaching a liquidity event. The portfolio theory adopted by venture funds, which stipulate one home run success for every nine failures is wrong for entrepreneurs for whom ending up one of the nine means nearly a decade of wasted energy and lost income. Instead, venture funds must align themselves with entrepreneurs by employing investment models that are profitable even at small to medium size exits. Moreover, venture funds need to find capital-efficient businesses that do not require significant capital to reach scale, thereby broadening the exit window to a range of valuation possibilities. Increasing flexibility at the exit will result in more liquidity events and therefore more successful entrepreneurs who then become serial entrepreneurs and business angels that continue to seed the ecosystem. Europe and Israel must get off the billion-dollar-exit high ground of Silicon Valley and realise that the region needs to walk before it can run.'
What do you say to LPs who do not invest in venture outside the US?
'First, the argument to invest in venture outside the US is similar to the argument to diversify LP portfolios outside the US in general. In other words, just like LPs own non-US public equities, they should own non-US venture interests, especially now that we may enter a US-led recession: firstly, non-US assets are poised to offset at least some of the losses expected in the US. Secondly, many regions outside the US are experiencing healthy growth in the venture industry, usually led by investment strategies that are specifically tailored to these regions, as opposed to those that have been simply copied from the US with hopes that they could work well elsewhere.'
YL Ventures invests in internet, telecommunications and digital media software companies and helps them accelerate their evolution via value-added governance and business development, and arranges their 'medium size' (not home run) acquisitions within six to 24 months, mainly by US-based corporations. It is intended that exit strategies are conceived (and acquirers identified) prior to making investments. For more information: www.ylventures.com.
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