"It is critical to understand the nuances of Silicon Valley inspired venture financing"

Adam Sterling is the Executive Director of the Berkeley Center for Law and Business at the University of California, Berkeley (UC Berkeley) and co-founder of Startup@BerkeleyLaw. Previously he was a startup and venture capital attorney at Gunderson Dettmer in Silicon Valley and the co-founder and director of the Conflict Risk Network.  In this interview, he gives us insights on the topics of Venture capital funding, Silicon Valley vs Swiss startup ecosystem and the Venture Capital Academy workshop.

Venture capital Funding

What are the current trends of VC financing in the Silicon Valley and are they different from the trends in Europe?

This is a topic that we’ll explore in great detail at the Berkeley Venture Capital Academy in Zurich, but we have witnessed a strong convergence of financing trends in Silicon Valley and the rest of the world in recent years. While valuations may still be higher in Silicon Valley (and probably too high), common trends like convertible securities, cryptocurrencies, growing accelerator and incubator programs, active academic innovation ecosystems, and corporate venture capital have shrunk the distance between Silicon Valley and other global markets.

What can Switzerland learn from Silicon Valley? Should the Silicon Valley learn something from Switzerland, too?

For investors, entrepreneurs, and attorneys in Switzerland, it is critical to understand the nuances of Silicon Valley inspired venture financing, including concepts like liquidation preferences, anti-dilution, and preemptive rights, in order to effectively engage in the space. On the other side, Silicon Valley can also learn a lot from Switzerland. In my opinion, both the Swiss government and established corporations in Switzerland have been uniquely innovative in supporting entrepreneurship locally and beyond. For example, not a week goes by in Silicon Valley that you do not hear about a startup event involving a Swiss organization!

Have you observed any growth in the number of Silicon Valley investors investing in European startups? If yes, what attracts US-based investors to Europe?

Absolutely and we’ve seen global investors, from 500 Startups to Index Ventures, become quite active in Europe. An effective, and well-funded, venture ecosystem requires talent, culture, and a supportive government. Europe certainly does not lack for technical talent and it is my opinion that the rise of Europe’s startup culture and increasingly supportive governments has begun to attract global capital. According to PitchBook, European startup companies raised over 18 billion Euros in 2017 (compared to under 9 billion in 2013).

Negotiations with VCs is sometimes very tough: What should/can startup founders do to conclude the negotiation with a good deal?

First and foremost, startup founders (and investors) need to understand what they are negotiating for. I’m constantly shocked by founders (and investors) who can close million dollar deals without understanding the basic economic and legal aspects of the deal. For example, we’ve seen a remarkable increase in the number of early stage startups funded through convertible securities (debt or equity instruments that eventually convert to preferred equity). A major deal aspect of those convertible securities is the valuation cap, which helps determine the maximum price at which the security will later convert to preferred equity. It is critical to understand that this does not constitute a present value for the company, however, many in the space fail to grasp this.

What tips can you give to startups that are still struggling to find VC funds?

First, reconsider whether venture capital is right for you. While VC is certainly trendy, when you factor in the control and ownership a startup has to give up, it represents one of the most expensive forms of capital a company can take. Explore other options for growth like government financing or your company’s own revenue!
Second, work your network. For better or worse, many VCs won’t fund companies unless they’ve been introduced to that company by someone in their own professional network. One of the best sources for this are companies and founders that the VC has previously funded.
Third, explore partnerships with established companies in your space. Established corporates are arguably the most important part of the venture ecosystem as they provide funding, serve as customers, and eventually acquire startups. Furthermore, while a traditional VC may be targeting a return they don’t believe your startup is capable of achieving, a corporate VC may see non-financial strategic benefits to investing.

Silicon Valley vs Swiss startup ecosystem

What are some of the trending topics in the startup scene in Silicon Valley?

Like in Switzerland, and the rest of the world, Silicon Valley is seeing a strong interest in funding projects through digital or cryptocurrencies. According to recent data from CoinDesk and PitchBook, it appears that more capital was actually raised in 2017 through digital tokens for early stage startups than traditional venture capital. However, much of this was due to the increased liquidity and expanded investor base that stems from the uncertain regulatory environment surrounding cryptocurrencies. I do think we’ll see global regulators start to crack down on this market, but at the same time, we’ll see increased interest from mainstream investors and companies. For example, Andreessen Horowitz, one of Silicon Valley’s most successful venture capital firms, just launched a $300 million fund focused on blockchain and cryptocurrencies.

How would you evaluate the Swiss startup ecosystem? 

The SparkLabs Global Ventures Report provides seven characteristics of successful startup ecosystems – (1) engineering talent, (2) network of entrepreneurs/mentors, (3) technical infrastructure, (4) funding ecosystem & exists, (5) startup culture, (6) legal & policy infrastructure, (7) economic foundation, and (8) government policies and programs. While my experience in Switzerland is limited (this will be my second year teaching at the Berkeley Venture Capital Academy in the country), I would say that the Swiss ecosystem is especially strong when it comes to technical/engineering talent but relatively weak when it comes to funding ecosystem & exits (like much of the world outside of Silicon Valley). There is certainly interested capital in the region, but I do feel that it needs to be educated on the nuances, risks, and rewards of venture finance in order to be effectively deployed. Hopefully, the Berkeley Venture Capital Academy can help address this!

Workshops

You have been leading several workshops in different countries: what makes your workshops unique?

We’ve now held the Berkeley Venture Capital Academy in Silicon Valley for over two years and have hosted international versions in Switzerland, South Korea, and Spain. The Berkeley Venture Capital Academy is unique in that it is one of the only venture capital programs that brings together instructors from Silicon Valley and the local ecosystem to focus on the mechanics of venture finance deals (while providing participants with a certification from a leading global academic institution). Whereas similar programs often only consist of panel discussions on high-level trends, the Berkeley Venture Capital Academy provides hand-on and interactive training on the practical aspects of venture deal mechanics. This includes sessions on venture terms, cap tables, and much more.

Further information about Adam Sterling is available at BerkeleyLaw.

Further information about the VC Academy can be found in our calendar.

(RAN)