Where the Money Resides
Investing in Europe can feel impossible for those not born to wealth. It shouldn’t.
As an American, I know that money makes the world go round. As an EU immigrant and former scholarship kid, I’ve learned that the most amazing experiences can seem so far away you doubt the wisdom of pursuing them. But if my exposure to financial investing has taught me anything, it’s that the “Jack and the Beanstalk” story reflects the path to investment for many of us who weren’t born to wealth.
The Gap Table
Parachuting into the elite worlds of Manhattan private schools, Ivy League universities and Fortune 500 companies showed me that no one navigates those enclaves without support. Having a financial safety net and access to information lends you confidence — and that can make a world of difference. Having access to a network fuelled by generational wealth, however, is where many people, particularly BlPOC, women and ethnic minorities in Europe can find themselves shut out.
Now that the venture-capital-chasing-stock-market-IPO phenomenon is worldwide, so is data that shows the paltry percentage of women and BIPoC angel and venture investors. Across Europe, less than 8% of business angel and venture investors are women, and few venture-funded companies have women or BlPoC founders who hold ownership equity. Financial ownership of a company is reflected on capitalization tables or “cap table” documents. This is why, when it comes to BlPoC, women and ethnic minorities in the investment community, people usually end up talking about #TheGapTable.
Where The Money Resides
In Berlin, angel investment groups always seem to be pictured near boat houses or lounging on yachts. In Paris, business angel investors separate like oil and water, with men in one group and women (frequently over-fifty and always white) in the other. An investor in Estonia referred to their local angel network as “primarily a wine club.” Yet, EU investments can be made (and pooled) with as little as €500 via European digital crowdfunding platforms.
It’s hard to know how this asset class connects with wine, yachts and ladies who lunch — but, somehow, here we are.
These “frontier” financial sectors of angel and venture investment might seem too risky for regular people and their money, but take it from the child of a professional gambler: they aren’t. When I was a kid, my parents judged the risks of both of them working full-time versus one parent working in an employee job while the other gambled full-time. As it turned out, their tax-burden looked a whole lot better in the latter case. So they halved their taxes and did monthly risk assessments (e.g., in 17 years, to my knowledge, only twice did my father wager more than he could afford to lose in a single day).
Retail Investing 101
My own journey with investing began decades ago, when dwindling company pensions in the United States prompted that government to give huge tax-deductions to regular employees to get them to invest in the stock market. These investment vehicles, known in the US as 401k accounts, allow anyone employed by many medium-to-large-sized companies to invest up to 17% (and 25% for self-employed people) of your annual income tax-free.
Nobody I knew had ever held a brokerage account. When I began investing, I used only a tiny portion of my monthly pay. Worried I would do it wrong, I relied on common sense to (as Warren Buffett advises) “invest in what you know.” For me, that meant investing in the tech, biomedical, renewable energy and pharmaceutical sector funds I read about in the Wall Street Journal. I never invested in less than four investment vehicles, never in single company stocks, and always in a mix of stock funds and boring, less-profitable bond funds. I watched stock market values go up and down and resolutely avoided the worst investment error (of buying high and selling low). I built up my risk tolerance and a diversified portfolio that eventually included single-company stocks. As a bonus, I became expert at deflecting the bossy investment sales bros — who would regularly call to offer “help” while insinuating that I couldn’t possibly be comfortable investing money all by my female self.
I achieved a 3x return in a 10-year timeframe.
For someone who grew up hearing how hard it is to “make a dollar out of 15¢” earning a 300% return wasn’t bad. Growing up with zero safety net makes it easier than you’d expect to take risks and re-adjust your strategies. Even so, it took me a minute in Berlin to see that most of the European start-ups fuelling the local economy weren’t publicly-traded companies anyone could invest in. Most were built with a “new” investment type: some mixture of angel and venture capital.
The World of Stupid Money
From 2019 to 2020, I was part of a program to diversify European venture capital by diversifying the people investing in it. That program, Included.VC, taught me to deconstruct investment strategies and vehicles, and allowed me to learn from business angels and venture investors who took plenty of losses while learning to invest in businesses and in entrepreneurs. I met a number of people who stumbled onto or “lucked into” careers in venture finance. I also met women and BlPoC ethnic-minority entrepreneurs forced to bang on every kind of door in search of funding from yacht-club banker types and venture capital elites. An intense angel investment bootcamp I did with the Baltic Sandbox connected me with women in Europe who wanted to invest, but were unsure of how to start. Person after person and founder after founder told me how elitist, white, male and impenetrable Europe’s investment scene is.
The way it works today, it’s no wonder that venture capital is an under-performing asset class.
With only 2.3% percent of all 2020 European venture capital funding going to all-woman entrepreneurial teams, and a total of one Black woman in the UK receiving Series A venture investment over a ten-year period, diversification of this asset class is not happening fast enough. Just think: if every funded entrepreneur tried to sell similar products, developed by similar people, pitched in similar ways within the closed network of venture capital, these types of investment start to look awfully high-risk.
Diversification Matters
Investing 101 explains diversification as investment across a range of different companies to lessen the likelihood of one bad pick sinking you financially. You can (and should) diversify the industries, level of financial capitalization, and the geography of companies you invest in. On retail investment sites, it’s almost comical how often you will see reminders and disclaimers shouting:
“Past performance is not a guarantee of future returns.”
This is a legal CYA disclaimer because — duh — no one can predict the future and because a bet is a bet is a bet. Imagine my surprise at entering Europe’s angel and venture universe, only to learn that having a “track record” or a prestigious employment or educational “pedigree” is literally all that matters to “earn your place” in the EU investment scene. I am pretty certain that the worst gamble you can make is to put your money in the hands of clone-like all-male investment “elites” who only know and fund each other. Let’s face it: Europe’s traditional investors are unlikely to invest in (or with) diverse entrepreneurs because they lack strong business ties to women, to ethnic minorities, and to people who didn’t attend elite universities.
This type of gatekeeping harms everyone. It harms investors searching fruitlessly for “unicorn” companies that can grow to $100 million valuations, and it harms diverse entrepreneurs (like Calendly’s CEO, Tope Awotona) who see that “other people who fit a different ‘profile’ get money thrown at them for shitty ideas.”
I’ve met emerging investors and entrepreneurs in Germany, France, Belgium, the Netherlands, the Nordics and beyond who, put together, look like a promotional ad for ‘We Are the World.’ They aren’t all men, they aren’t all white, and they didn’t all get credentialed at a handful of elitist universities. Europe’s multi-cultural communities are a good thing. While the U.S. is stuck scrubbing off the stink of Trump, Europe has become a bona-fide global talent hub. But it can’t succeed in the unicorn races if its traditional investors write off whole segments of society based on antiquated “pedigree” and gender prejudices.
Betting on Outliers
How do we fix it for all sides — for new entrepreneurs who struggle to get funded, for emerging investors looking for opportunities to invest, and for policymakers who seek to implement fairer EU investment vehicles?
Since business angel investing can start with relatively small checks, we need tax deductions and angel investment syndicate information to be advertised everywhere — not just to those with expensive tax-accountants.
Since venture investing looks and feels like a well-groomed fraternity (even at the pan-European level), why not advance new EU incentives to support women and ethnic minority emerging managers who want to lead funds but can’t make massive GP capital outlays (e.g., 2% of a fund) alone.
Since incentives to get people from under-represented communities in Europe investing are generally lacking, maybe we should keep up with the example of Islamic banks (!) which already have diversity-focused criteria to boost investment in women that go beyond what exists in Europe today.
Bullish on Europe
What options exist across Europe for the many people who want to invest but don’t want to face down a wall of white men to do it? Why not lower tax and raise financial incentives for angel investing from the €10.000 minimum threshold in Germany (which took me years to feel comfortable investing)? Why not set a lower figure, like €5.000, to trigger rebates and get more people to invest in pan-European start-up ventures?
We won’t change European attitudes about what’s possible financially and for whom, if we fail to engage a diverse range of investors to build the products and services that different communities need. Take it from someone who knows a good bet from a bad one: the upside is there, and we have every reason to raise all boats by growing a vibrant community of European business angel investors. As another investor has famously said, “it’s about damn time.”
To learn more about how I’m investing in diverse entrepreneurs in Europe, follow me on Twitter at doc stefflbauer, check out my other venture activities or use the contact button below to get in touch.