Colin Barry

inge watertech (EF, Friday, Week 8)


Entrepreneurship in Germany (or, why Facebook didn't start in Munich):
Cultural reasons:
-- Stigma about failure in business (deters smart people from attempting high-risk ventures)
-- No iconic role-models (Who is the German Steve Jobs?)
-- Conservative mindset

Institutional reasons:
-- Bankruptcy laws that favor creditors (Can't just leave the keys to your startup with your creditors and walk away)
-- Smaller, fragmented public markets => strategic sale is the only exit option => strategic buyers drive down valuations
-- Fewer large institutional investors => hard to raise VC funds; hard to syndicate investment with fewer investors
-- More rigid labor markets => hard to fire non-performers

Room for debate about whether the fundamental difference is institutional or cultural; obviously the two are connected.

Compare to Silicon Valley. Some huge differences:
-- California courts have basically invalidated the non-compete clause. Easy to leave Google and start a new venture...
-- Self-perpetuating system => smart people cluster around previous successes; infrastructure develops.

Upshot => European VC investors make stable, predictably profitable investments. Euro VC returns are mean-distributed.
American VC investors shoot for the moon. Top quartile of American VCs exhibit incredible returns; the rest of the industry performs poorly.

Impact on inge/What does this mean for entrepreneurs?
-- Lots of corporate VC (with accompanying benefits and drawbacks) => large firms using their balance sheets to invest in startups; basically viewed as a substitute for R&D spend
-- Large disparity between firm's valuation on a discounted cash-flow basis and valuation from transaction comparables; challenges for entrepreneurs around gaining liquidity
-- Hard to start capital-intensive businesses => ventures that might be viable in US have trouble when they need cash to scale up

Valuation with three-factor FCF model
-- EBITDA margins => look at implied fixed vs. variable cost % as reflected in historical financials
-- Asset intensity => look at length of sales cycle => drives OWC needs