Fred Destin is one of Europe’s biggest venture capitalists. He recently left London-headquartered Accel to focus on seed and earlier-stage investing. Tugce Ergul is co-founder of Angel Labs, a global investor accelerator based in Silicon Valley. In an interview by Stanley Borg they highlight how, while Malta is positioning itself uniquely on the European start-up map, the lack of a strong venture capital community remains a big challenge.

Fred Destin

Given your experience at Atlas Ventures and Accel, how would you compare the current state of the venture capital ecosystem in Europe and the US?

The European ecosystem is now very mature and over the last decade the quality has improved tremendously. That said, no tech hub in the world compares to Silicon Valley and it’s not even worth trying – however, London is certainly on par with Boston or New York, and hubs like Paris, Berlin or Stockholm are strong in their chosen space.

What was the reason you stepped down from Accel to start your own fund?

Those who have worked with me over the years know that I have always had a passion for early stage, and in particular the formative stages of companies, as well as a tenacious entrepreneurial itch. I have decided to put this into action and am building a new franchise with a focus on very early stage financing. Given my track record, interest is strong.

Is thematic investing the future of venture capital?

I think thematic thinking is powerful when doing growth investing and is a great way to sharpen your thesis. As Louis Pasteur once said: “Chance favours the prepared mind.” But you have to be ready to be surprised by where entrepreneurs take you – thematic investing can lead to rigid thinking or a herd mentality in some investors.

You need guts of steel to run a start-up and take failure as an experience to learn from, and move on

Having said that, there are some powerful enablers of innovation that the market is currently focused on, including AI, blockchain, microservices, cheap sensors and APIs, which in turn create some powerful new opportunities, either for new platform plays or new vertical apps.

For start-ups, failure could be part of the journey. But do angel investors and venture capitalists also accept this failure element?

Start-ups fail for all kinds of reasons, and frankly, that’s just part of the game. You need guts of steel to run a start-up and take failure as an experience to learn from, and move on. It’s important that we let companies fail since the returns in our business are always based on the outliers. If we start to focus too much on failure there is no way we will ever back game-changing companies, as these are riskier by their very nature.

Family businesses are Malta’s backbone. What benefits would they stand to gain if they invest in venture capital funds and start-ups?

The most sophisticated long-term investors in the world, such as US endowments, have significant allocations to venture capital. The difficulty though is that the returns are highly skewed towards a few venture capital firms and so it’s not like the asset class isn’t attractive but it becomes a problem of access to the best managers. Manager selection and access is the key.

Are family offices dynamic enough – and outward looking – to provide the right investment?

I don’t think the question can be answered in generic terms – it’s all about getting into the right funds, which I appreciate can be tough to assess coming from outside the market. I think venture has a part to play in a high-quality, long-term, diversified portfolio. It’s also fun.

Tugce Ergul

While Malta seems to be nurturing and launching an encouraging number of successful start-ups, angel investment and venture capitalists seem to be thin on the ground. What could be the reason for this?

Malta has an intriguing opportunity to position itself uniquely on the European start-up map. Until now, Malta has had the reputation of being a hub of both the gaming and gambling sectors, but a strong financial sector, an increasingly technical workforce, an enthusiastic start-up community and growing government support is redefining the Maltese start-up scene and putting it on the map as a promising hub for many areas, including fintech.

Another attractive element is that entrepreneurs can get more bang for their buck by operating in Malta. The lower operating costs also mean that they will probably need less venture capital and give up less equity early on.

On the negative side, Malta is hindered by people’s tendency to settle down at an early age and get a stable job – young people also have an aversion to taking risks.

Unfortunately, when it comes to finding venture capital, Malta is not the best place to be in – at least not yet. Although there are a few business angels and groups interested in investing in start-ups, access to finance and lack of a strong venture capital community is one of the major challenges for the local ecosystem.

With Maltese start-ups beginning to think big and take on the global market, it is inevitable that not only will they start attracting interest from abroad but they will also push local investors to think about venture capital as an asset class.

Is there still a divide between Europe and the US in terms of start-up and venture capital activity?

On the negative side, Malta is hindered by people’s tendency to settle down at an early age and get a stable job

Be it fintech in London, e-commerce in Berlin or adtech in Paris, over the last decade Europe has really caught up with Silicon Valley in terms of talented entrepreneurs and promising start-ups.

Unfortunately Europe still sits behind the US in terms of venture capital – although this is changing for better at a very fast pace. There is still a lack of growth and late-stage funds. As more funds focus on getting involved in a business early, this results in a lack of capital for growth-stage companies.

Due to limited late-stage funding, European companies are forced to cut growth, reduce expense, and become profitable. Meanwhile, well-funded US counterparts continue to invest significant funds into product and sales, allowing them to dominate their markets.

European start-ups continue to find it harder to raise late-stage financing from investors in the region than their peers in the US. This funding gap amounts to about $25 billion annually. One of the biggest reasons is that European universities don’t have billion-dollar endowments like the ones in the US. The entire late-stage funding gap could be closed if European pension funds, which traditionally shy away from investing in start-ups, could be persuaded to place a very small percentage of their assets under management into venture capital.

Currently, US venture funds are still the ones helping fill some of this later-stage funding hole. This year, about 30 per cent of all venture capital funding in Europe came from US venture capital firms.

What are your suggestions for those who would like to become a venture capitalist or start a fund?

Unfortunately, there are so few venture capital jobs available in any given year it makes the prospect unlikely for most.

If you want to be a venture capitalist, my advice is to just get started. You do not need a specific degree, a list of specific credentials on your CV, or family money to do the job of a venture capitalist – you can do the job without a dollar to your name.

The job of a venture capitalist can be broken down into four distinct tasks: sourcing deals, diligence, negotiation and financing. This sounds hard, but money will chase opportunity. If you can find compelling start-ups, explain why the market is attractive, why this team is equipped to dominate that market and present a framework for a deal – there will be plenty of angels or venture capital funds willing to cut a check or, at least, take a meeting. You’ll want to be on the radar of these folks before asking them to look at any of your deals, but after a couple of high-quality intros, they’ll be eager to hear from you and probably hire you.

As an aspiring investor or a new investor, there are a few things you can do to build strong deal flow. Start by getting involved in the local entrepreneurial community – speak at related events, become a mentor at your local incubator, and judge at start-up weekends. Starting a blog or getting a writing gig for a major tech publication also helps build a strong personal brand and reputation. Create a meet-up group for an emerging tech and business sector. Basically, you want to build up a social profile and become a connector with great relationships at all levels of the start-up community.

How can founders increase their fundraising chances?

Fundraising is a game where you need to understand the dynamics. Investors compete against other investors to get into the hottest deals. Start-ups compete with other start-ups to get funding from big name venture capitalists. If founders want to increase their chances of getting funded by the top players in this field they need to create a competitive process between investors.

And how would you do that? Start with setting a target date by which the fundraising must be complete. This gives the team an actionable timeline and puts pressure on the investors to involve themselves in a round before it closes. It is key to know that not every investor brings the same value to the table. Founders should have a specific list of investors they would like to have on board. Usually 25 to 30 names is the optimal number to go.

Last but not least, in fundraising, momentum is everything. Founders should plan their investor pitch to correlate with meaningful moments that show traction.

Not all businesses are meant for venture capital. What are some of the required traits that make start-ups successful in the eyes of the investors?

As an investor, one of the first things I’d look at would be the unique edge that allows a company to overcome competition – their secret sauce. This secret sauce can be the team behind the idea, their proprie­tary intellectual property, having access to scarce supply or leveraging network effects. Product-market fit is also very important. Founders should be focusing on building a product or service that attaches to a growing market rich with customers.

More specifically, this product must solve a visceral need. Alternatively, such product power can be achieved with the creation of a transformative product that creates the market.

Despite these powers, the most important of all is always the founders.

Family businesses are Malta’s backbone. What benefits would they stand to gain if they invest in venture capital funds and start-ups?

All around the world, we see a great appetite from family offices for private investments and, specifically, for early-stage investments.

The role of family offices has changed a lot in the last decade and there has also been a surge in the number of family offices and more sophisticated and educated investors. This new breed of ultra-high-net-worth families differs from the old money of the past. They want to be more involved with their investments and want to be in the know when it comes to technological trends around the world. Their accumulation of wealth is typically more rapid and driven by savvy investment management or entrepreneurship.

Investing in start-ups and venture capital funds is a great way for them to acquire the talent and technology they need to stay ahead of the game when it comes to competitiveness. Family offices are also very mission oriented. If your start-up is science based and solving real problems globally, family offices aligned with solving that problem will invest based on the opportunity to change the world. They view the financial benefit as a method for the business to be sustainable and to scale.

On Thursday, Fred Destin and Tugce Ergul will be participating in an event for family businesses and high-net-worth individuals who want to learn more about venture capital as an asset class. The event is being organised by the Malta Communications Authority and Finance Malta and is by invitation only. For more information one may call 2133 6840.