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ARM Holdings PLC
Unlike in the U.S., venture capital on the other side of the Atlantic is a relatively young industry. It had an inglorious and stuttering start in the 1980s, often as an extension of the activities of conventional banks or as a limited part of fund managers’ remits. The first Gulf War and 1990 recession were among several setbacks, even before the promise of the first Internet boom culminated in the dot-com bust. This left many investors bruised—and venture capital out of favor in Europe.
As we approach the end of 2011, it’s clear that European venture capital has finally come into its own. There are now a number of well-established firms based in London and elsewhere that invest across the region and have helped entrepreneurs build significant businesses during the past 15 years. The early big wins of ARM (ARMH), Cambridge Silicon Radio (CSR), and Autonomy (AUTNY) have been followed by ASOS, Betfair, Lovefilm, Playfish, Skype, Spotify, Wonga, and Vente-Privé in recent times, to name just a few.
The culture of early-stage investment also has shifted. Most investors now understand that forensic examination of business forecasts isn’t very productive or predictive: Thorough assessment of the management team, the product, and the relevant market are better indicators of a business’s likelihood of success.
More critically, a new breed of smaller funds mixed with high-caliber angel investors is emerging in Europe. Angels are people whose understanding of the needs of early-stage businesses is borne from firsthand experience as entrepreneurs. In the U.K., for instance, firms such as Atomico, Eden, Notion, Passion, PRO Founders, and Octopus (where I work) are combining with seasoned businesspeople such as Sherry Coutu, Alex Hoye, Simon Murdoch, Jon Moulton, Robin Klein, and Hermann Hauser to foster a new wave of fast-growing young companies. Empathy, resilience, and network are brought to bear alongside financial investment.
A culture of partnership between entrepreneur and investment partner is taking hold, borne of better communication between stakeholders and more transparency around investment terms. The view that building significant businesses takes patience and flexibility—as well as fortitude and ambition—is well-established. There is also more willingness to learn best practices from the West Coast, such as inward migration of skills and a greater risk appetite. Technology and expertise is now accessible online and only a tweet away from those wishing to improve.
Significant challenges remain, nonetheless. Clusters and density of domain expertise take decades to build, and the venture capital community is no different. The U.K. lacks the depth of capital to support startups through the cycle from seed through growth to exit. The U.K. also struggles in the absence of established technology companies that could provide sources of both liquidity and highly skilled human capital. Finally, we also see the hallmarks of brain drain: All too often successful entrepreneurs, having honed their skills in the U.K., choose to build their second business in the U.S., having tasted the raw energy and ambition on those shores.
These are not challenges that can be met overnight. But the trend is favorable. Entrepreneurs and venture capitalists are working together more productively and efficiently than ever before, increasing numbers of startup businesses are succeeding, and the foundations for a promising future have now been laid.