|
BUSINESSWEEK ONLINE: Business Week ebiz | |||||||||||
| |||||||||||
 |  | |
 | |
 |
||||||
What Finally Lit the Venture-Capital Fire in Europe Consumers embraced the Web en masse, and the small-cap bourses took off Until about 15 months ago, venture capital in Europe was a polite fiction. European financiers liked to insist that private equity investment in small high-tech companies was taking off on the Continent, as it had the U.S. But the volumes were tiny. Most of what passed for VC firms were British management-buyout companies such as 3i and Electra. They had little use for Web startups. And the startups had little alternative to friends and family financing -- when they could find that. Three things were missing from the venture equation: Liquid small-cap markets so VCs could recoup their investments; widespread Internet access; and an entrepreneurial culture. Few people would shuck secure jobs to start companies in a new medium like the Web. Bankruptcy's social stigma was a big deterrent, too. "Europe does not have a culture of failure," says professor Stephane Garelli, professor at the IMD business school based in Lausanne, Switzerland, and director of the World Competitiveness Yearbook. "If you look at any successful entrepreneur in the U.S., he's got two or three failures under his belt before he finds the one that makes it." Then, in 1999, a European venture-capital market suddenly emerged, thanks to two big catalysts. The major small-cap markets, the EuroNM and London's Easdaq, finally had enough listings and market capitalization to be convincing. Add to that Nasdaq's plans to start a European exchange, and investors began to feel confident they could sell their young Web wonders. At the same time, European consumers finally embraced the Internet in sufficient numbers to attract entrepreneurs. "A GOLD RUSH." Last year, some $10 billion went into startups, European VCs estimate, more than five times the $1.8 billion invested in 1998, according to European Venture Capital Assn. (EVCA) statistics. That's still only a third of the estimated $30 billion that U.S. VCs spent last year. But it was enough to galvanize high-tech hubs across Europe and get the attention of governments that were desperately trying to find a "European" way to replicate the job-creating U.S. high-tech boom. "It's really a gold rush," says Max Berger, a partner in the Munich office of multinational venture-capital firm Apax Partners & Co that's affiliated with Patricof & Co. in the U.S. "People are suddenly without limits in terms of the risks they're taking." Last year, every key market in Europe -- Germany, Britain, France, Italy, Spain, and the Benelux countries -- had big Net successes. In Britain, it was the initial public offering of the no-fee Internet service provider Freeserve last summer, according to Simon Cook, investment director at Elderstreet Investments Ltd., a London-based investment bank and venture-capital firm with a $100 million fund. Freeserve's market cap is already £4 billion ($6.52 billion). "Successes like these open the eyes of institutional and retail investors across Europe to the attractions of high-growth opportunities," says Cook. In Germany, the twentysomething Samwer brothers, Alexander, Mark, and Oliver, became cultural icons when they sold their five-month-old Net-auction company, Alando, to eBay for a rumored price of $50 million. "It was one of our first real American-style success stories," says Apax' Berger. "Between the Neuer Markt and the Internet, we've seen the growing up of German capitalism, and it has created one hell of an avalanche." A PITCH EVERY QUARTER-HOUR. The high-tech startup-VC symbiosis has brought Silicon Valley-style fund-raising tactics. Networking groups, virtually nonexistent two years ago, now abound in all the major cities of Europe. London's First Tuesday Club, a forum for entrepreneurs, angels, and VCs, now has branches in Paris, Berlin, and elsewhere. Berlin also has a homegrown group, Silicon City, which is all business, says Apax' Berger. He attended a November Silicon City meeting where some 20 VCs listened to entrepreneurs' pitches till 1 a.m. "It was real work. All they gave you was a bottle of water," he recalls. "You had to be ready to listen to a presentation every 15 minutes. We saw 30 companies in six hours." There's no shortage of listeners. New European funds crop up almost daily, say venture capitalists in Britain and on the Continent. "Some of the most interesting new venture-capital funds come from corporations, like Group Arnault's Europe@Web, and Vivendi's VVentures," says Eddie Misrahi, a partner at Apax Paris. Big corporations are important to VCs as potential buyers of young companies, an alternative exit strategy to the stock market. The Freeserve and Samwer brothers' stories have also attracted VCs, corporations, and banks from across the pond. Early last year, "planeloads of investment bankers started coming over from New York with analysis teams" sniffing for opportunities, says Cook. After Freeserve's IPO, several banks took the plunge and launched European funds (Business Week, Feb. 7, 2000, "New World Financiers, Old World Startups"). Several U.S. VCs have followed suit. Now CMGI, the publicly traded U.S. venture group, plans to launch a European fund in the coming months. THE ADVANTAGE OF "NET-LAG." The new money has brought more entrepreneurs with better ideas out of the woodwork. "We see 100 business plans a month," says Apax' Berger, about 20 times the number he was seeing six months ago. A lot of European entrepreneurs are turning the Continent's "Net-lag" to their advantage, adapting ideas that have worked in the U.S. Atlas Venture, which has operated in the U.S. and Europe for over 10 years, took a stake in OneSwoop, a British car-retailing site that looks much like CarsDirect. The site lets British consumers buy cars on the Continent, where they're 20% to 30% cheaper, says Ron Nordin, a senior principal at Atlas Venture's Boston office. Atlas has just raised a $750 million fund, of which 60% will probably go into European companies. One thing that hasn't lagged in Europe's dot.com universe are valuations, which are comparable to those in the U.S. Some VCs say entrepreneurs are able to command inflated prices for their equity because of the surge in Internet stock prices. That doesn't reflect the intrinsic value of the companies, they say. Instead, it's because investor appetite for Net shares is growing faster than number of companies listed, driving prices up. DEEP ENOUGH ROOTS? Entrepreneurs, who are fast becoming accustomed to being awash in cash, may be in for a nasty shock if the market bubble bursts, some warn. "People can get hurt," says Marcus Bicknell, president of CMGI's European operations. That means "entrepreneurs, as well as investors -- like these kids who've raised more capital than they know what to do with, so they're flinging it at the sides of buses and on billboards," he notes, referring to the wild dot.com ad spending. The fledgling European venture-capital world is far more vulnerable to a sustained market downturn -- which could scare entrepreneurs and divert capital back to less risky options -- than its more-established U.S. counterpart. Still, VCs think that their brand of investing now has deep enough roots to survive a bad patch. "People are voting with their keyboards" for a high-tech, entrepreneurial economy, says Bicknell. That takes people who'll finance risky ventures. Looks like VCs will be there to stay. Popper covers the markets and small-business topics for Business Week Online in New York. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
| |
 | |
RELATED ITEMS BW e.biz, Jan. 31, 2000: Table: "Europe's Key Venture-Capital Companies" | ||||||
