A letter to a depressed VC

13 May 2010

Dear Eddie,

First of all, thank for you for coming to Engage Invest Exploit/TechCrunch Edinburgh and being so open in your thoughts on the Scottish startup space. This letter would not be possible, nor could any progress ever be made without you first being so honest about your feelings - so please accept my appreciation. Those that know me will know I’m not a moaner - I write this letter with the sole purpose of resolving this problem and with your assistance, will commit time and effort to achieving the desired result.

You made a statement during your panel that you’re a depressed VC, and depressed for the reason that there is no innovation happening in the startup scene in Scotland. It is my opinion that we need to discuss this matter to understand the reality of the situation. I invite you to openly discuss the matter, if not to relieve you of your grey cloud, then to amend your lack of suitable investments which will eventually drive you out of business, or force you to relocate.

Firstly, let me state that I detest the general argument of “we need funding to make stuff”, usually presented by companies who have failed to raise funding and don’t want to take much risk themselves. I am not in this bracket of people - having founded and grown TechMeetup off my own back and now self-funding my new startup, Bloop. I am not rich in any way - I have just graduated from university and taken a personal loan to make my vision for Bloop happen. And I’m terrified.

Secondly, I am only speaking of the consumer web space here. I don’t know about the world of life sciences or energy and make no relation to it.

I strongly disagree with you when you declare that there is no innovation happening in the startup space in Scotland. I have grown TechMeetup for the very purpose of uncovering what’s happening, who’s building what, and to bring everyone together in a startup and tech community so we can learn together, test on a local community and get feedback, introductions and support. In the last two years, the community has come together and I have seen an incredible amount of amazing developers building very cool features, products and companies. I have been to both Seedcamp and Y-combinator and I can vouch, that while the average standard at these world-class accelerators is higher, we have a number of companies that meets and surpasses these standards. From a global context, there are companies here that are worthy of attention and support. I am happy to introduce you to them but I won’t name them here.

I need not explain to you in depth how the industry and ecosystem we, as entrepreneurs and VC’s, live in. We (the entrepreneurs) have visions or ideas which we develop to a point that they are suitably de-risked and require capital for growth at which point we seek you. Between the concept and VC stage, there is funding required and this can come from friends and family, angels, private investors, and product revenues.

There are very few individuals in Scotland who have made money from web and this means there are very few angels who can invest money and experience back into early stage web companies here. As the local funds, including yours, mature - your minimum spend on an investment increases - and this only increases the funding gap for us at the start of a cycle. We have VC, we have startups but we have no early stage funding.

There are innovative products, bright people and great ideas here. But the lack of seed-funding means most of these can never be fully tested in the market. Furthermore, the out-dated advice uniformly handed out in Scotland is that startups should be revenue generating from day one and funding their own growth. This is possible for some companies, but by no means a rule for all. This Scottish rule means almost every company with an innovative idea turns into a consultancy or a service company. We now have far more service companies and consultancies that our local market can support, and new startups companies advised to do this, don’t get very far at all.

Last year, a Scottish investor mentioned to me about their lack of “investable opportunities” in Scotland and my response then is still valid now: “So tell me, could Facebook, Twitter, LinkedIn, Last.fm, Google, or any other world-class companies have grown up in Scotland? Because by your criteria, you wouldn’t have funded any of them.” Was Facebook innovative when you first heard of it? Was Google?

Gone are the days when a startup knocks on your door with a patent, and a need for £500,000 to bring a dying necessity to a whole untapped market. We now live in a world where we thrive on user adoption, inventing new web applications that never before existed. We don’t know how the market will respond and we don’t know what our product will look like in three years. We give people something they want, something they love, and we figure out how to monetize it when we know what people are doing with it. We now enter the era of big-data, mobile web, digital societies, where we can release a whole array of web applications that make our lives easier, nicer and more fun to live. There will be no patents. An enjoyable user experience is essential. Most of our tools are open source and we can build, release, test, and iterate in days and weeks, not months and years. For your £500,000 minimum spend, we can prove traction with ten companies.

Without any ability to seed fund our prototypes through to traction, none of us will be able be able to come knocking for venture capital. You run a venture capital firm, and I understand the management costs and efforts required with supporting a portfolio company - I know your model will not work when you invest £50,000 in twenty companies each year. Then I call for a new model.

Please note, that I am not commenting on your VC model or practice. I am referring to the absence of angels and seed-funding in this area and the need for you to step in with a model that can support our ecosystem and your future investments.

We can practice more lean startup methodologies, release faster, iterate quicker, focus on more international markets, refine our ideas, improve our abilities to execute, but we cannot create new angels. We cannot create more seed funding. We need your help with that - you are the ones with the money here. It will only be through working together to solve this problem that we can temporarily replace the lack of angel funding in the area. After some successes, the entrepreneurs can and should start re-investing, as angels, back into the ecosystem and you can move back to your VC model. But for now, we need your help or both you and us will either wither away or relocate.

Sam