Five lessons from London’s hardest working VCs

Since closing its first investment fund of £37 million ($60 million) a year ago, London’s Passion Capital has been on a tear. Based in their White Bear Yard co-working space in Clerkenwell, where they have surrounded themselves with many of the teams they invest in, the three-person operation has pumped seed or first-round money into 20 businesses over the course of 12 months.

Those businesses include academic software company Mendeley, social betting service Smarkets and the female-only social network Luluvise, as well as some we’ve covered recently such as Flattr and Pusher.

I met up with the trio — Stefan Glaenzer (previously of and, Eileen Burbidge (Ambient Sound, Yahoo (s YHOO), Skype) and Robert Dighero (QXL (s QXL), AOL (s AOL)) — to discuss what they’ve learned over the past 12 months.

Over an hour or so they told me about the good and the not-so-good moments they’ve shared… and I thought the best way to share what they told me was to list five practical lessons they said they’ve learned in the time Passion has been operating.

You can’t always plan opportunities in advance

One of the big changes over year one for Passion has been the sort of company that it invests in. It’s ended up with a substantially different spread of investments than any of the founders first believed.

“Prior to the year starting, we thought we were probably going to specialize in consumer internet, marketplaces and e-commerce, the communications space — where friction is coming out of how people can socialize — and databases, implicit data plays like Mendeley,” says Burbidge. “Now, we always look at those things but actually we’ve done more software as a service, more B2B. We’re really happy about those.”

This isn’t because of a lack of opportunity (they looked at more than 1,500 companies to find the 20 they ended up making deals with) but because other factors became important.

Seed investing is almost entirely about talent spotting

The most significant element in that shift appears to have been the fact that backing good teams has become even more central to Passion’s philosophy. What started as a factory for backing ideas quickly became a talent agency: aimed at getting people who have ability and chutzpah together, in a way that almost trumps the quality of the ideas they have — because the ideas will inevitably morph.

“What we’ve done is back founders. Look back on the year, and we have really made our decisions based on the founders,” says Burbidge.

One founder, they say, has surprised them all by proving far more adept at fundraising than they imagined — something that buys the company a lot of time to build its product. Others may have to kill their ideas or change them, but if they have talent they can change direction if needed.

“We expect them to have to pivot at some point, to a degree,” says Dighero. “So it’s more about assessing that ability than it is about the core idea — although it’s not unimportant.”

Proximity means everything

“I think it’s important to understand the physical space to our whole attempt,” says Glaenzer, talking of White Bear Yard, where around 13 of the 20 companies are based. “It’s all about the entrepreneur, and we wanted to find the idea solution for supporting them. One way is providing seed money, the other is providing a physical space where they can easily scale from, so this becomes a kind of circle.”

And hosting the startups isn’t just about having them on hand for the investors, either. Being among their peers has been valuable too.

“To be honest, we thought our advice was going to be the most valuable part because we are parked here, but in reality it’s the meeting among the founders,” says Glaenzer. “It’s a lonely job, being an entrepreneur, and they are sharing all sorts of stuff.”

‘East London has won’

There’s also the office’s proximity to the burgeoning East London scene.

London's Tech City Map -- a list of technology businesses in east LondonThe truth is, they suggest, that East London has now become the de facto hub of activity for the U.K., and the involvement of the government — which has proven controversial — should be seen as something to take advantage of. Of course, they have closely aligned themselves with the UK government (and the royal links that I’ve been critical of) so this is not unexpected.

Being just minutes away from the capital’s most active young technology companies has given them a sense of bustle that makes them feel more like a startup than a venture business — unlike most of the investment community, which remains reluctant to give up on posh offices in swanky London districts like Mayfair… even if it leaves them disconnected from the day to day business of starting up.

There’s still not enough real seed investing in Europe

This is a real bugbear for the Passion team. While Europe has a number of active angels, they say most of what purports to be “early stage” investing is actually not focused on seed money: which means end up building companies for other “early” investors, who actually only jump in once a product’s value has been proven.

The market may talk about seed a lot, but Burbidge suggests that reality is not quite the same.

“Perception-wise [seed investing] is better than it was, but really there’s Index Seed and there’s us and — genuinely speaking — there is almost nothing else.”

Seedcamp plays a role,” points out Dighero. “But it’s different.”

Of course, while many of Passion’s investments have gone on to raise more money they are still young — and a long way from a major exit. So the question of whether their approach to risk is working has yet to really produce a conclusion. However, Glaenzer is adamant that Europe needs many, many more investors ready to take risks very early on. “We’d love 10 or 20 more seed investors in East London,” he says. And while Europe has the talent, it does not necessarily have the commitment. “We have created five to 10 billion dollar companies in the last 10 years here in Europe. Let’s not lose out further.”

Photograph of White Bear Yard used under Creative Commons license courtesy of Picklive