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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip FINANCE Investing: Europe Annual Reports Bloomberg BW50 SCOREBOARDS Hot Growth Companies: 2008 Mutual Funds Info Tech 100 B-SCHOOLS Undergrad Programs Rankings & Profiles | | JANUARY 22, 2001 FROM LE MONDE INTERACTIF In a Warm Clime, Talk of the VC Chill In the South of France, venture capitalists pondered the loss of confidence in tech startups -- and where to place the blame
And this mood swing changed as suddenly as the markets did. Until recently, the number of investments venture capitalists were making in Internet startups in France, for example, was steadily rising. These investments rose 143% in the first half of 2000, compared with the second half of 1999, and 435% in relation to '99's first half, according to French capital-markets research group Chausson Finance. Since the beginning of last year, 263 French startups received financing from venture capitalists. Today, however, many of these startups are filing for bankruptcy, and the markets are showing no signs of a tech upswing. The explanations given for this downturn vary, but one thing is sure: Investors have become more cautious and conservative in their approach. Venture capitalists are suddenly eyeing startups that have already gained experience in their sector and that are, therefore, less likely to sink. Many young startups blame this new trend on the previous carelessness of investors who in the nineties saw the arrival of high-tech exchanges as a guarantee for a quick and easy return on investment. Others just see it as something cyclical. "Like many other markets, such as oil or coffee, venture capital has its periods of increased speculation," says Thomas Gubler of Britain's 3i venture-capital fund. AKAMAI'S SUCCESS. And speculation hit its peak in Europe in the nineties. Alain Azan at Sofinnova Ventures says that venture capitalists could expect a 50% return on investment when startups they had financed went on newly created exchanges such as Germany's Neuer Markt and France's Nouveau Marcheé -- all modeled after the Nasdaq. In addition, says Jean-Baptiste Hugot, author of the Venture Capitalist Guide: "Low interest rates over the years made stock market investments and investments in nonindexed companies very interesting for pension funds and banks, especially for Americans, who invested in European venture capital given that their own market was saturated." Of course, the success of certain startups added to the speculation. This was the case with Nasdaq-quoted Akamai, a company that helps optimize Web-site performance. The company, which went public in October, 1999, reached a market capitalization of $30 billion in February, 2000 -- roughly 9.000 times its sales at the time -- only one year after the company's creation. Stories like that obviously galvanized investors to buy dot-com stakes, turning the entire process of raising capital into an auction bid among investors. Since last spring, however, initial public offerings in Europe have been on the decline, and investors have lost a great deal of their enthusiasm even though money is, surprisingly, not lacking. France's Galileo Partners has just raised $220 million; France Télécom's VC unit, Innovacom, has $176 million; and Britain's Apax Ventures has pulled in $634 million, according to the November edition of Capital-Finance. So venture capitalists that went to Sophia-Antipolis were, despite the odds, there to invest. "And quickly. Capital has to be spent within three years, and FCPI's [common investment funds for innovation] have to be invested in 12 to 18 months," says Philippe Herbert, associate manager at global venture-capital firm Partech International. RANCOR. Nonetheless, the atmosphere at Sophia-Antipolis this year was more filled with distress than excitement. Investors today are choosing cautiously and consolidating their portfolios. They are also following startups for longer periods of time and investing in companies that are already in their second or third round of financing. This is why most startups that came to Sophia-Antipolis this year were ones that already have both clients and posted sales figures and that were looking to raise at least $1.3 million. The turnaround is generating rancor among venture capitalists in France, many of whom only began operating in the nineties. Other older and more experienced venture capitalists, therefore, tend to point their finger at new arrivals and blame the current crisis on their lack of professionalism. "Experienced teams are rare. Many have a hard time recruiting specialists in the technology sector that are capable of analyzing files on startups in detail," says Hugot. New startups that are short on funding blame these VCs for past carelessness and present conservatism. These same startups know, however, that the only thing that can really save them is a rise in the Nasdaq. Unfortunately, they aren't the only ones to realize it.  By Cécile Ducourtieux Translated by Inka Resch  | | [an error occurred while processing this directive] |
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