Venture capital is like basketball

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“Thanks for reaching out Tom. [Client name] looks very interesting, but we don’t invest in companies outside of the US.”

I’m disappointed and surprised by the number of US clean-tech CVC, VC and family office investors that simply do not invest in European companies. Why not? The EU is a large market close to other large markets where the need for clean tech and resource innovation is as strong if not stronger than it is other parts of the world. There is great technology here.

What makes it worse is that by contrast, many European investors are desperate to invest in US companies, but sometimes struggle to get deals. We Europeans (I’m a Brit, just in case you were wondering) want to invest in the US, but we’re not let in. It doesn’t seem fair.

I’m realising that venture capital is like basketball; invented in the US, done in Europe (and done very well in a few countries), but to participate at the highest levels, you have to go to the US.

This would appear to be the strategy behind German energy company E.ON becoming a limited partner in the The Westly Group, a successful Californian clean tech venture capital firm. E.ON is an attractive partner to US technology companies for the simple reason that it has tens of millions of customers in the EU. This makes E.ON a very attractive limited partner to The Westly Group.

Those European investors that have a smaller European footprint can’t offer this so struggle to get US deals. This leaves them looking exclusively at European investment opportunities, which is harder work for the simple reason that European innovators are typically less ‘VC-ready’ than their US counterparts. In my experience, many European entrepreneurs do not understand how venture capital works. This matters because Europe won’t recover from its era of low or no growth without a stronger venture culture.

What is the best European VC response to US exclusion? If you can’t beat them, copy them. In February 2014, Yellow and Blue exited from Entelios, a German demand response company, when it was bought by EnerNOC, one of the US pioneers in demand response whose US venture investors exited via a successful Nasdaq quotation in 2007. Demand response, which involves switching some customers’ electricity off so that other customers can use it at peak times, is a new industry pioneered in the US ten years ago by EnerNOC. Its business model has been copied successfully by Entelios, which was then acquired EnerNOC.

It sounds like a perfectly executed business plan. Yellow and Blue, Entelios’s VC backer, was no doubt happy that US VC investors were not involved, so that they didn’t have to share the returns.

I can’t think of a US company returning the complement by importing an EU-invented clean tech industry (please let me know if you can), but I can think of North American companies innovating in response to new European regulations. This is not the same thing. But it’s interesting.

In 2011, the EU’s Plant Protection Products Regulation made 74% of all commercial pesticides illegal. Up popped companies like Vestaron and New Leaf, two US companies in the portfolio of the Vancouver-based investor Pangaea. Vestaron’s biopesticides are derived from spider venom. New Leaf’s are derived from naturally occurring bacteria called Pink Pigmented Facultative Methylotrophs (PPFMs).  Both companies are aiming to take the ‘dirty’ pesticides out of Europeans’ food. The regulations were made in Europe. The wealth will be created in the US.

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