New Breed of Seed

Eight years ago Niklas Zennstrom famously tried to pitch Skype, the London-based Internet voice communications firm which he co-founded and eventually sold for 3.1 billion dollars,  to 26 European venture capitalists.  No one wanted to invest. Now he is doing his part to ensure that the European entrepreneurs  who come up with the next Big Thing will not meet with similar frustrations. Zennstrom is the most public face of the new breed of seed, super-angels and early stage venture firms that are emerging to fill the early stage funding gap in Europe.

Zennstrom and Janus Friis, the entrepreneur he teamed with to launch KaZaA and Skype, are  behind Atomico, a London-based investment firm that is ready to make bets on fast growing very young tech companies with the ability to transform their respective industries.   New funds like Atomico are leveraging groups of serial entrepreneurs to not just finance but mentor the next generation.

For instance, Lars Hinrichs, the founder of social networking platform Xing, is behind HackFwd, a  pre-seed fund that focuses on funding "passioniate geeks." Fastfwd says it is not just closing a funding gap but "an advice gap" by assembling a team of super experienced tech entrepreneurs and  smart tech investors.In exchange for a 27% in the company Hackfwd offers a year-long program that includes a salary package for one to three person geek teams and other perks.

Like Zennstrom and Hinrichs, Brent Hoberman, who co-founded mydeco.com and Lastminute.com, a popular European travel site that went public in 2000 and was bought five years later by Travelocity for $1.1 billion, is a role model for young European entrepreneurs.  Hoberman (pictured on Informilo's home page) is a co-founder of PROfounders Capital, a fund that, like Atomico and Hackfwd, focuses on trying to close the equity gap. PROfounder Capital's partners include Michael Birch, the founder of Bebo;  Peter Dubens, the founder of Oakley Capital and Freedom4 Group; and Jonathan Goodwin, the founder of LongAcre Partners.

"These are early days but all of us have risk appetite," says Hoberman. "We have ambition and we value new and unique products coming from Europe that have the potential to go global." What does PROfounders
Capital preach to the start-ups it invests in? "Double your revenues every month, think about international even faster – you have got this moment so go for it,"  he says.

Lucasz Gadowski, another European super-angel, could not agree more.  Gadowski, who founded an Internet company called Spreadshirt in 2001 became a business angel in 2007 and within two years had made 60 angel investments and co-founded 10 companies, mostly in Europe. Now he has launched a seed fund called Team Europe which only funds two start-ups per year. What makes him to decide to invest in a company? "Can these companies be 100 million euro companies within two or three years?" says Gadowski, who is based in Berlin. "If we think we can do this we kick off a new company."

Serial entrepreneur Martin Varsavsky, who founded a number of European companies, including Spain's Jazztel and FON, has been investing in European companies since moving to Madrid in 1995. Having started businesses on both sides  of the Atlantic, he says he prefers Europe. "The European market is bigger than the U.S., broadband penetration rates are higher, Europeans are better educated on average, there is a better distribution of income and people have more leisure time," says Varsavsky.

Russia is a lucrative market as well. Mail.ru had one of the most successful initial public offerings of 2010. Russian technologies get high marks for superior technology but have struggled to succeed commercially and expand internationally. Enter Sasha Galitsky, who founded and led four successful companies, including Elvees, Elvis+ and TrustWork Systems (now Synarta, a member of the Hamsard Group) and Serguei  Beloussov, the entrepreneur behind Parallels and Acronis. They recently launched a Moscow-based seed fund called Runa Capital. "Russian guys know how to turn programming into product but it is more important to know how to turn product into businesses and we will help them with that," says Galitsky.

Siding With Angels

That kind of mentoring can not always be obtained  from venture capitalists. "The value of business angels is experience, expertise and the ability to call anyone," says serial entrepreneur and angle investor Candace Johnson. She should know. Johnson is a founding president of Europe Online, an Internet-based online service and satellite broadband network, and founder of Loral Cyberstar-Teleport Europe, Europe's first independent private trans-border satellite communications network. She is president of Johnson Paradigm Ventures (JPV) which is a principal founding shareholder with AXA, Caisse des Depots, Bayerische Landesbank, and the SPEF of Sophia Euro Lab, Europe's first trans-border early-stage investment company based in Sophia Antipolis.

Johnson is also principal founding shareholder in London-based Ariadne Capital, a member of the supervisory boards of Paris-based Iris Capital  and Turkey's Inovent, and a  founding member and  president of the board of the Sophia Business Angels in Sophia Antipolis, France. And, she is founding president of  three multi-million Euro investment vehicles, Succès Europe, Croissance Europe and Innovation Europe, together with Meeschaert Gestion Prive as well as a founding member on the advisory board of the Luxembourg Business Angels Network.

Ten years ago business angels were a small community scattered across Europe and the focus was firmly on venture capital. Today, European business angels are organized in over 350 groups  and it is widely accepted that together with seed funds they are the main providers of venture capital for  high-growth companies at their early stages. That is because VC Funds have migrated to less risky investments in later stages, according to an October report issued by EBAN, the European Trade Association of Business Angels and Seed Funds.

With the recent economic and financial crisis debt funding through the banks and traditional venture funds has slowed down further, according to the EBAN report.  EBAN, which actively plays a role in the growth of the early stage investing sector, is trying to aid its transformation  from an informal sector to an asset class, says EBAN president Brigitte Baumann.

The industry association estimates that between three and four billion euros are invested a year by early stage investors in innovative young companies, up from one billion five years ago. And, it estimates that the amount could grow to 10 billion euro a year in the next five years.

Business angels, working together in syndicates, invest on average €200,000  per deal in Europe, often with two or more angels involved. The amount invested can vary greatly depending on the country and region, with individual angel investments ranging from €15,000  to €400,000.

At the same time seed funds are bridging promising businesses to later stages, investing in enterprises on average anywhere from €200,000 to €1 million, filling the role of traditional venture capital funds. VC funds are now retreating to later stages of investment, typically investing from €3 million euros to €5 million in a first round to reduce the risk for their shareholders.

Of course not all venture capitalists are ignoring early stage deals. Take the case of London-based DN Capital. It has invested in four deals in 2010 and three were early stage.

"We are seeing a lot of very interesting opportunities with impressive entrepreneurs," says Nenad Marovac, a partner at DN Capital.  "There are ex-Skype guys, guys from lastminute.com, Espotting and Bebo – a whole wave of entrepreneurs who have been successful in start-ups that  are now entering into the ecosystem in the early stage."

But traditional players like Index Venture, Mangrove Capital Partners and Nothzone are only funding a small number of early stage companies.  The rest are being funded by new players like Jaina Capital, Kima Ventures, Triangle Ventures and Xange, says industry observers. (see chart)

Building Bridges

The trick for start-ups will be raising second and third rounds of venture capital. There is a big gap between early stage and later stage funding in Europe. One of the keys to ensuring that funded early stage companies succeed is to help them secure follow-on funding and the right connections internationally.

Britain's Amadeus & Angels Seed Fund, for example, specializes in providing expertise, finance and networks to enable early-stage technology businesses to grow into much larger businesses and fulfill their potential, says serial entrepreneur Alex Van Someren,  a partner in that fund.

Syndicating additional investment for later-stage expansion is a time-consuming distraction for management teams, says Van Someren. The Amadeus seed fund has a co-investment model in which other funds managed within Amadeus Capital Partners can be brought in alongside a seed investment. In addition, Amadeus helps to recruit other investment sources.

"It is about ensuring that fortunes get recycled in the European sphere and specifically here in the UK,"  he says.

Sherry Coutu, another Cambridge-based serial entrepreneur (pictured on Informilo's home page) has done just that. She has made 35 investments in Europe and is also helping young European companies to build bridges internationally. Coutu has teamed with LinkedIn's Reid Hoffman on a not-for-profit annual Silicon Valley Meets Cambridge conference, an invitation -only series of events that bring together investors, serial entrepreneurs and professors, students and successful angels from the UK and Silicon Valley.

The conference includes master classes to inspire students to be entrepreneurs, CEO mentoring sessions and CEO workshops aimed at enabling first time CEOs to transform into industry titans and a competition celebrating entrepreneurship that includes a prize that sends the winner to the U.S.

Offering international connections to start-ups is also an important element of Seed Camp, a global organization  founded by veteran European investor Saul Klein which is dedicated to helping European entrepreneurs grow successful businesses. Seedcamp announced the closing of a three million euro second fund in November, with a stated goal of strengthening the breadth and depth of its international platform.

It already has an impressive reach. In its first fund Seedcamp says it invested in 22 companies from 12 countries, including start-ups from Estonia, Romania and Slovenia. Some 19 of the 22 companies received more than an aggregate of €15 million  in follow-on funding, creating over 100 jobs.  Two of the companies, Jordan's Talasim and Palo Alto's Mobclix, had successful exits. To date, the organization has invested in 33 companies in 17 geographies.

While Seedcamp's mainstream events are in London, Paris, Berlin and Tel Aviv it now also hosts meetings in the Nordics, the Balkans, Central Europe and in Singapore, Johannesburg and Mumbai."We want to deepen and expand Europe's footprint in the US and Asia," says Reshma Sohoni, who runs Seedcamp's day-to-day operations.

With these kind of connections provided by a whole new ecosystem of early stage players the next Big Thing is less likely to be rejected by European investors and — just like London-based Skype — end up going global from Europe.

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.

 

Active European seed and early stage funds

Amadeus and Angels Seed Fund (UK)

Amadeus Capital Partners (UK)

Ariadne Capital (UK)

Cambridge Angels (UK)

Cambridge Capital Group (UK)

Dawn Capital (UK)

Eden Ventures (UK)

Notion Capital (UK)

White Bear Yard  (UK)

Atomico (UK)

Earlybird Venture Capital (Germany)

Index Venture Seed Fund (UK/Switzerland)

The Accelerator Group (TAG)  (UK)

Oxford Capital Partners (UK)

Archangels Informal Investment (Scotland)

DN Capital (UK)

Springboard (Cambridge, UK)

HackFwd (Germany)

Team Europe Ventures (Germany)

Rocket Internet (Germany)

Hasso Plattner Ventures (Germany and South Africa)

Hommels Holding (Switzerland)

Enterprise Ireland (Ireland)

Sophia Business Angels (France)

Cabiedes & Partners (Spain)

SeedRocket (Spain)

Northzone Ventures (Scandinavia)

SeedMoney (Romania)

Conor Venture Partners (Finland)

Hanse Ventures BSJ (Germany)

Runa Capital (Russia)

PROfounders Capital (UK)

Kima Ventures (France)

Jaina Capital (France)

Piton Capital (UK)

Balderton Capital (UK)

Accel Partners (UK)

Credo Ventures (Czech Republic)

GP Bullhound (UK)

KFW Bankengruppe (Germany)

High-Tech Gründerfonds (Germany)

Bayern Kapital (UK)

London Venture Partners (UK)

Octopus Ventures (UK)

dpixel (Italy)

OCP Finance (France)


*location indicates headquarters, not geographical scope of investment

 

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