Financing The Future

A group of France's most successful entrepreneurs-turned-investors agreed in November to a one million euro investment in Restopolitan, an early-stage Paris- start-up, an example of how the state of Europe's venture capital industry is changing. Read on to discover the on-line version of Informilo's first print publication, created in partnership with Raconteur Media, and distributed at Le Web in Paris December 8 and 9. Informilo and Raconteur plan to launch four quarterly print reports about innovation, entrepreneurship and venture capital in The Times in 2011.


Stephanie Pelaprat, a 27-year- old Frenchwoman returned to France after a year in New York with one goal in mind: start a company similar to the U.S.'s OpenTable that would take local customs into account while making it easy to make on-line dinner reservations.

Pelaprat and her co-founders formed a company called Restopolitan which won a start-up prize in France and secured a 70,000 euro bank loan. Microsoft BizSpark, a program geared to start-ups, helped with technology and gave Restopolitan exposure at a pan-European conference last spring. Pelaprat's pitch? As someone whose family has been in the restaurant business for generations she has the connections and the savvy to build a service to cater not just to restaurants in France but in other parts of Europe. The company has developed the technology and has some traction. But to scale she needed to raise a series A round of venture capital funding.

Thanks to relentless networking  Pelaprat connected with two French serial entrepreneurs who have formed a new seed fund called Kima Ventures: Jeremie Berrebi, founder of Net2One and Zlio and Iliad Group founder Xavier Niel (pictured on Informilo's home page.) Kima Ventures not only decided to invest, the partners picked up the phone and began contacting a roster of France's most successful entrepreneurs.

Everyone wanted in on the deal, including Meetic founder Marc Simoncini's new seed fund Jaina Capital and co-founder Jacques-Antoine Granjon. Pelaprat raised a total of one million euros from the group in early November and they all gathered to celebrate over lunch at BON, a trendy restaurant in Paris' chic 16th arrondissement. (see group photo ).

Such stories are more common in Silicon Valley than in Europe, until now. The Restopolitan example underscores how a swelling crop of serial entrepreneurs are stepping up to fund the next generation. This new breed of seed, along with angel investors, family offices and new early stage funds, are helping fill the early stage funding gap in Europe.

Serial entrepreneurs are not just launching investment vehicles, they are continuing to launch new companies, ensuring Europe's future economic prosperity and creating jobs at a time when large companies are losing market cap and announcing massive layoffs. For example, a recent report from the UK's National Endowment for Science, Technology and the Arts (NESTA)  found that start-ups – which represent just 6 % of companies in the UK – added more than 50 % of the jobs created in the past seven years.

 Hermann Hauser, who co-founded Amadeus Capital Partners in 1997, helping pioneer venture capital in Europe, says he has seen "remarkable change" in the last thirteen years. Only 17 % of the start-ups in the Cambridge-based venture firm's first fund were led by serial entrepreneurs. In the third fund the number has shot up to 70 %.

That said, for Europe the measuring stick is still Silicon Valley.  Brain drain is an issue. (see story "The Ones That Got Away, page 5) Reid Hoffman, an active angel investor, co-founder and chairman at LinkedIn and a partner at Greylock Partners, acknowledges that Europe has its strong points. He invested in European start-up Lastfm (sold to CBS in 2007 for $280 million) and is co-organizer along with British super angel Sherry Coutu of Silicon Valley Comes to Cambridge (SVC2C) an annual conference in England. But he is quick to point out that the top five global Internet companies all came from the Valley and he figures the center of gravity is likely to stay there.

There is no shortage of European investors and entrepreneurs who would like to prove him wrong. So why is Europe seen as lagging?

 It is no longer a question of ambition. "It is different from 10 years ago, the smart people who want to build companies in Europe today are guys who have already tasted equity returns," says Nenad Marovac, a managing partner at London-based DN Capital, a seed and early stage investor.

And innovation is not the problem. Detractors love to dismiss Europe as the Old World, a continent of copycats which spawns national versions of eBay, Groupon and Zappos and then sells them to the U.S. companies who invented the business model. The people who have proven the most adept at founding this category of companies, such as Germany's Samwer Brothers, have built successful businesses, creating value that they are now reinvesting  in Europe.

But the European tech scene is also about disruptive business models and technology. Skype is not the only reference: France's, a private online sales club, is being copied around the world – the first time in recent memory that the U.S. is following Europe's lead on an Internet model. And, the number of European companies with valuations of one billion dollars or more at exit is growing, says Fausto Zanetton, a vice-president in charge of European media/Internet at Morgan Stanley. (see chart)

It is easy to forget that Europe has a given the world  Linux (invented by Finn Linus Torvalds), GSM and the Web (first created by Britain's Tim Berners-Lee), because it got little of the fortune and less of the glory.

Unlocking Europe's Potential

Still, to unlock its full potential Europe needs to strengthen links in the innovation funding chain to unlock its full potential and make Europe a better place for start-ups to thrive.

For starters, it is now relatively easy to raise seed in Europe but not the follow-on funding that allows companies to reach a late stage.  That spells trouble for the young companies participating in the "Poles de Competitivite" in France and elsewhere in Europe, says Candace Johnson, a serial entrepreneur and active angel investor in Europe. Governments have funded these projects to get them to a stage where the resulting project is supposed to be commercialized. "The market in Europe is now flooded with projects and products in which millions have been invested but will all die because there is no funding to take to them to the next stage of venture capital or even corporate capital," she says.

The numbers of deals and investment in Europe have consistently decreased for the venture capital industry since the third quarter of 2007 as VCs focus on bigger, later stage deals, says Arno Castanet, a senior research manager at Dow Jones.

The move away from early stage by traditional venture firms in Europe impacts their returns. The statistics for early stage venture capital are one in ten, say industry experts. In Europe, venture capitalists will make a success of about 10 to 20 times the investment on the best bets. "In the U.S. the statistics are the same but the ROI for the one successful company is not ten or twenty times but rather 100 to 1000 times," says angel investor Johnson. "This is because usually in the U.S. VCs are more prone to taking risk and the earlier in the venture you take the risk the more reward you get," she says.

The lack of big home runs means that European venture funds are dying too. In 2000 there were 400 active funds in Europe making four investments a year, says Amadeus' Hauser. "Now we have 40 – a 90% reduction in VCs in Europe – this a spectacular drop."

Limited partners have soured so much on Europe that many of those that remain are also finding it difficult to raise new funds. Hussein Kanji, a former investor at Accel Partners in London plans to form a new early stage fund in Europe, has several theories about why European venture funds have not fared as well as they might. Many European funds started ten years ago weren't founded by tech entrepreneurs or professionals and are too far outside the information flow of Silicon Valley, he says. And, there are less institutional investors in Europe who care about venture and have the vision to back the next generation of funds.

That said, European VC remains more capital efficient than US venture, says Sven Lingjaerde, founder of the Geneva-based European Tech Tour Association. Europe matches the US for successful exit values at around $350 million while investing only half the capital to build winners, according to Dow Jones VentureSource.

Some 32 % of $100 million dollar exits in Europe during 2009/2010 were IPOS, compared to 34%  in the US and 99 % in China. But very few actual IPOS by number in Europe spread across various exchanges and 40% of European VC IPOS were on Nasdaq, creating wealth in Europe rather than the U.S., according to a presentation  at the European Private Equity and Venture Capital Association's annual VC Forum. That is because despite years of efforts to consolidate Europe is still stuck with a patchwork of small and medium-sized exchanges.

That's not all that needs to be fixed, says Michael Azencot, a partner at Financiere Cambon, an advisory firm with offices in Paris and London. "Europe has to create a powerful ecosystem with large corporates that can partner with small innovative companies, as it is the case in the US with Microsoft, Google, Qualcomm or Intel," he says.

The U.S. has had a Small Business Act for 10 years but despite lobbying efforts by tech industry players Europe does not mandate governments to buy a certain percentage of their products from small companies. So not only are European start-ups more likely to sell to American companies that are more likely to be purchased by big American tech players, taking a part of Europe's future with them.

Governments are waking up to the importance of supporting innovation. For example, British Prime Minster David Cameron has announced plans to create a hi-tech rival to Silicon Valley in London's east end and create a new entrepreneurial visa to make it easier for innovators that want to work and invest in the area to move to the UK.

And earlier this year the UK government announced that it will adopt recommendations from Cambridge venture capitalist Hauser to set up a network of  national technology and innovation centres as part of a program to modernize the UK's industrial base and invest in  technological strengths.

But many times in Europe it seems like for every step forward there is a step backwards.

France, for example, was applauded for initiating the so-called TEPA laws which gave investors tax breaks for investing in innovative young companies. But the government has since removed the "innovative" stipulation, a move decried by many in the tech industry.

The efficiency of the marketplace can be enhanced if the European ecosystem would come together to support young innovative companies, says a November report from the European Trade Association of Business Angels and Seed Funds (EBAN).

The report recommends that the EU create co-investment funds through public-private partnerships at European level, encourage members states to create or increase special fiscal incentives for investments in young innovative companies and remove obstacles to cross-border investments by venture capital funds.

If Europe wants to ensure its economic prosperity everyone is going to have to do their part to keep young entrepreneurs like Pelaprat here, say tech industry executives.

"The OECD says that the financial crisis will only deepen if western economies do not understand that innovation and early-stage entrepreneurial initiatives are the only way out of the crisis and that stimulus packages must be given to encourage that," says angel investor Johnson. "Just as a remarkable change has occurred in how entrepreneurs are perceived in society, compared with only a few decades ago, citizens must now learn that being early stage investors and doing early stage investing is like wearing a badge of honor, that there are risks, that there will be failures and successes and that without that investment there will be no future."

This story appeared in a print publication Informilo produced in partnership with Raconteur Media, which was distributed at Le Web in Paris December 8 and 9. The print publication is a beta version of a quarterly  on innovation, entrepreneurship and venture capital that Informilo and Raconteur Media plan to produce in the Times in 2011.





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