Creathor Venture is a 25-year-old venture capital firm based in Germany and Switzerland. That makes it unusual. In 1984, when it started, not a lot of VC funds were in Europe. So, we decided to speak with Cédric Köhler in Creathor's Zurich office. As innovation accelerates and globalizes, we wanted to find out how a smaller regional fund like Creathor can compete with much larger Valley-based firms that have a global footprint. And of course, we wanted to find out what's hot on the European tech scene. Read on to find out.
Aka Aki: European Play in the Web's Golden Triangle
First, what's hot? In short: mobile + social + real time. That sounds like it was created by a random buzzword generator. But the combination can be very powerful. This is what Fred Wilson calls the Web's golden triangle.
This area is hot for a reason. Mobile devices reach more people and occupy more of their time than desktops or laptops could ever do. But to reach people effectively on mobile, you need mobile-native services, built for the limitations and advantages of the small screen. (Standard HTML apps retro-fitted to mobile are like the talking heads in early television.)
Mobile is inherently social: you use it to communicate with people. It has to be real time (or "just in time" if we want to be accurate), because the small screen demands a filter that shows only what is relevant right now. (Yes, that does pre-suppose great filtering capabilities.)
When Cédric talks about mobile + social + real time, he is thinking about Aka Aki, in which Creathor has invested.
The way Cedric puts it, Aka Aki "adds the dimension of time" to location-based services. This addresses the question, "Which of my friends is within shouting distance right now."
FourSquare is from New York, and Aka Aki is from Berlin. With location-based services, location matters. Specifically, density matters. People will use the service if it connects them to people they know locally. If I am in Rhinebeck, New York, discovering that I have friends in Manhattan, Zurich and San Francisco who are online right now does not help me. I am only interested in the friends in Rhinebeck.
This is an argument for a territory-based expansion model. You become dominant in one area, and then expand to neighboring areas. This is the way business worked for centuries before the Internet. Then the Internet heralded the death of distance. You could create a site and get readers from all over the world.
With mobile location-based services that connect you to people in the real world, the old territory-based expansion is returning - with a twist, of course.
German, Then French, Then English?
Aka Aki started in Berlin. As this blog from March 2007 shows, it was early to the game of mobile + social + real time. It got its first round of funding from Creathor in December 2007.
Then, in October of this year, it got a second round from INNOVACOM, the leading French VC (with Creathor joining in that round as well).
That is a natural expansion model. Aka Aki did well enough in Germany to raise a second round and then uses that to grow geographically. In this context, bringing on a French VC made a lot of sense.
Insta-Site: The No-Barrier-to-Copying World
Cédric gave us a good perspective on the early-stage investing scene in Europe. Like other European VCs, he pointed to the rash of copy-cat ventures in the Web 2.0 era. These have been referred to, more politely, as "concept arbitrage": someone sees a service doing well in one location and creates a version for their location.
While "copy cat" is a derogatory term, Cedric was keen to point out that it has been a valid strategy in the past. As he puts it, "If I have a successful pizza shop in one location, I could probably create a successful one in another location". In the Internet business, many successful exits have been based on this model.
But VCs around the world who we have spoken with tell us that this game is pretty well over. The reason? Well, it's all our fault. Bloggers and tweeters spread ideas so fast that the time needed to exploit a concept arbitrage has shrunk to nothing. The tools for building and deploying a website have also dramatically shrunk the time and cost to market. 1. Get idea on Monday, 2. Launch on Friday, 3. Move out of dorm room on Sunday.
In the world of close-to-$0 insta-sites, the copy-cat model is being challenged. This is just like the arbitrage strategies on Wall Street. When friction goes, profits eventually wither as well.
But Don't Underestimate Local Nuance
We can still see big wealthy countries where the US Internet giants have not become dominance for one reason or another. For example, Google does not dominate search in Korea or China.
What looks like a tiny bump from 30,000 foot can be a massive obstacle when you are in the war on the ground.
This is even more true in the world of social media. By definition, social involves cultural norms, and they differ around the world (thank goodness for that, homogeneity is terribly boring). When social + mobile + real time connects people in the real world, the differences can be even more striking. We are all humans with similar basic needs, but the cultural differences between, say, Germans, the French, Americans, Brits, Chinese, Indians and Koreans (to name just a few) are significant.
The Globalization Challenge for VCs
The top-tier VCs on Sand Hill Road know that innovation is going global and that the biggest markets and best ventures may no longer reside within a few miles of their office.
So, the big VC funds are setting up branch offices around the world. This is the traditional multi-national model. The problem is that it might not work as well in the VC world, where personal relationships matter so much and yet you have to make decisions very fast. The multi-national model does not easily square that circle. Venture capital is not a naturally scalable business.
VC funds have to decide between staying local (i.e. being a small firm of partners who can meet face to face every Monday in their office) and going global. The business does not scale well. If you bring in more partners, you won't be able to maintain the situation in which all partners agree on every deal. That would create way too much overhead and friction. Fast decision-making overrides the standard layers of corporate management approval.
On the other hand, if local partners are making the investment decisions, what value would they get from being part of a big global fund (one in which the folks way over at head office take a big chunk of their profit)? Is branding really that important? Smart entrepreneurs know that a fund's name (i.e. its brand) is much less important than the individual partner who they deal with.
This is a strategic dilemma for big funds.
Federated Best-of-Breed VC
Creathor, along with other smaller regional funds, is moving towards a federated model.
As Cedric puts it, "We are partnering more with other funds." In one sense, this is nothing new. VCs have always worked together on deals. But in the past, this usually meant two VCs on Sand Hill Road meeting at a Palo Alto coffee shop. Now, it means a Swiss fund working with a French fund (or a New York or Indian or Chinese fund).
European VCs have to innovate in this way. They cannot win on the multi-national model: their funds are not big enough for that.
As the markets move East - to China and India, for example - VCs have to "be there." Similarly, a VC in Asia needs to work with VCs in Europe and America.
It will be interesting to see how the globalization of innovation plays out and what new models emerge.