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Venture capital: The European way to success

Attractive deals, high-growth portfolios and successful trade sales: the European VC industry clearly has the wind in its sails, say Wellington Partners. It is emerging from the recession even stronger, and is now specifically leveraging the strengths of its home market.

The German pioneer in transaction television, 1-2-3.TV, is receiving up to EUR 20 million, Swiss-based biotech player Arpida EUR 33 million. In the United Kingdom, silicon-based microdisplay specialist CLRO has been funded with some EUR 15 million. VeriSign acquired German-based Jamba! for EUR 228 million. In France, Yahoo! acquired shopping search engine operator Kelkoo for EUR 475 million; in the United Kingdom, Veritas bought Reading-based KVault Software Ltd. for EUR 180 million. All these deals and exits in recent months clearly show: the European VC industry is back on track.

For Europe's venture capital industry, the signs are now pointing to recovery following a three-year drought. In Germany, for example, the highly regarded Mackewicz Panel noted that the investments had risen by 27 percent even during the traditionally weak third quarter in a year-to-year comparison. On a European-wide scale, total investments were up 32 percent to EUR 817 million during the third quarter 2004. And fourth quarter numbers are expected to be as high again. So it was with good reason that optimism prevailed at the EVCA Conference in Barcelona last October; EVCA Chairman Herman Daems summed it up this way: "... today we see signs of a better future for technology investments in Europe."

Europe is becoming more mature

There was a fundamental change in the structure of the European VC industry during the recession. It is estimated that two-thirds of all players left the market, with the remaining firms gaining in professionalism and experience during the crisis. "Europe is becoming more mature," praises Silicon Valley-based Crescendo Ventures General Partner John Borchers. And both he as well as other market observers see virtually no difference between the Old and New Worlds when it comes to processes and teams. Borchers concludes: "Venture Capital is becoming more and more a globalized business." Warren Packard, Managing Director at Draper Fisher Jurvetson, supports this position: "Today, there are very entrepreneurial, very aggressive early-stage VCs in Europe as well as in the U.S."

During the shakeout, some unique aspects of the European VC industry have emerged: Believe in Europe's strengths! European VCs are increasingly investing in segments in which Europe has traditionally played a pioneering role. These include wireless telecommunication as well as medical technology or software and hardware components for the automotive and mechanical engineering industries. In making their investments, they have a particular focus on the technology clusters that have formed across the entire Continent - from Munich and Cambridge to the Rhône valley. "We see Europe as a series of clusters," explains Olivier Protard from Sofinnova Partners, Paris. "There we find strong research, strong management teams and strong local partners."

Act like a European! A pan-European VC industry has taken shape in recent years. Building upon a strong position in their respective home markets, the leading players are now participating in interesting rounds of funding throughout the entire European Union. U.S.-based VCs like Accel Partners or Benchmark Capital are fueling the industry's pan- Europeanism with their European funds, which view the Continent as a single entity - after all, with its 25 countries, the EU is now the world's largest single market.

Think globally! Nevertheless, the United States remains the benchmark for the entire IT industry: Over 40 percent of all IT sales revenues were generated between New York and San Francisco in 2004. A growing number of young European technology companies are now establishing footholds in the U.S. early on. This enables them, based on their strong technology base in Europe, to achieve leading market positions in the world's premier IT market - like Israeli companies have done for many years. Likewise, European companies are looking East, and many of them have already gained footholds in Asia.

Early internationalization in Europe

Some U.S. investors view early-stage internationalization as an advantage enjoyed by the Europeans. "A lot of West Coast companies are locally concentrated," observes Crescendo Partner Borchers. European companies, on the other hand, operate across national borders right from the very beginning, and are used to dealing with differing cultures, tax and legal systems, as well as different languages. Benchmark Capital Partner George Coelho cites the other side of this diversity coin: "It is much easier to sell a product in the U.S. than in the UK, France, Germany and Italy with all their different cultures and languages."

Only seasoned management teams are capable of coping with the complexity of internationalization and the necessary early-stage expansion. Both European as well as U.S. VCs agree in stressing the qualities of European management teams. What they are all observing: The teams are now more senior and better networked. "Today, top talents go to start-ups," observes Sofinnova Manager Protard, "and even managers with 10 or 15 years of experience are ready to join a VC-backed company." But what's proving to be even more important for investors is the fact that more and more founders are launching their second or third business - in Europe, too, serial entrepreneurs are proving to be crucial drivers of the entrepreneurial culture.

Mature ecosystems at hotspots in Europe

Senior management teams and serial entrepreneurs are making it considerably easier for VCs to do business. And they are now receiving professional support. Service providers such as accountants, attorneys, investment bankers, M & A specialists or marketing experts have now learned to cater to the needs of venture capitalists. The kinds of ecosystems that investors, entrepreneurs and opinion leaders have long valued in U.S. hotspots are now also maturing in Europe's major technology clusters.

However, there are still no signs on the horizon of a European NASDAQ; the weakness of the capital markets and the lack of demand, especially for technology issues, continue to remain a sticking point in the European ecosystem. "There is too much fragmentation," analyzes Benchmark Partner Coelho, and goes on to cite a second reason for the persistent weakness: "The blow-up of the German Neuer Markt shattered the confidence of many investors long term." He's convinced that NASDAQ is therefore likely to dominate technology IPO business in the coming years, as well. That's one more reason why many European technology start-ups are looking to gain a foothold in the U.S. market early on.

In the eyes of many observers, there is a second weakness of the Old World with regard to the VC-business. The lack of that kind of entrepreneurial culture which makes hotspots in the U.S. or Israel so successful. DFJ Director Packard explains: "Europe needs more entrepreneurial success stories, especially entrepreneurial role models, to encourage new entrepreneurs to follow them."

Returning to its entrepreneurial roots

Yet the recession in recent years has also led to a reassessment in Europe: The elimination of quasi-lifelong job guarantees at major corporates and research institutions, coupled with the scaling down of social security systems, has shed new light on the issue of entrepreneurship. At the beginning of the 21st century, it appears that Europe is returning to its grand entrepreneurial tradition. The understandable need for security after two continental wars and several bouts of inflation is giving way to new confidence. The number of entrepreneurs in Germany, for example, has been steadily rising for a number of years.

Good vintage years in Europe

The perceptible change is increasingly attracting interested Anglo-Saxons to the Old Continent, both VCs as well as investors. London-based fund manager Guy Fraser-Sampson has just formed a new fund, Mowbray Capital, which intends to invest specifically in European VCs. For those VCs that are able to raise money, Fraser-Samson expects that their investments within the coming years "could well be the best performing venture investments ever." His opinion is supported by EVCA Chairman Daems: "It is likely that some good vintage years are coming."

Wellington Partners is a Munich-based venture capital firm that manages funds totalling €350m. Founded in 1991, Wellington Partners invests in technology companies in the areas of infrastructure technologies, communication solutions, enterprise software, applied materials and life science.