The Shift To Late Stage Investing In Europe
Showroomprive.com, a four-year-old private online sales company that competes with France's Vente-privee.com, managed to attract 3 million members and 75 million euros in revenue without any outside help. But to meet its goal of becoming a pan-European player the Paris-based company needed "smart money", connections to a venture capital firm that understands how to scale and the ins and outs of on-line businesses with a social component.
The company, which now has over five million members and is projecting 2010 revenues of 140 million euros, had no trouble finding suitors. It raised 37.8 million euros from Accel Partners at the end of August. Most of the money came from Accel's London fund but the Silicon Valley fund, the first investor in Facebook, also participated in the round.
"These days when a European company matures and goes out for money immediately the ten US investors that can do these deals start to compete fiercely," says Morgann Lesne, a partner in the Paris office of Financière Cambon, the advisory firm that brokered the showroomprive.com deal.
The deal underscores how venture capital firms are flocking to fund late stage European companies. US venture companies are now willing to pony up large sums to finance European Internet growth companies that are focused on Europe and plan to remain headquartered here. European companies like showroomprive.com revel in the cache that comes with raising money from venerable Valley firms.
European funds are also stepping up on late stage rounds. Many have become risk adverse, preferring to back horses that are already well out of the gate rather than place bets on untested new entrants. That spells bad news for companies in between the seed and late stage. But the good news is that the shift to big funding rounds for later stage companies will delay exits, which in turn should lead to larger IPOs and trade sales and potentially better returns for some European funds. That could help win the respect of limited partners who have soured on Europe, making it easier for existing venture firms to raise new funds, says Financière Cambon's Lesne.
It is no accident that showroomprive.com attracted so much interest from venture capitalists. It is just one of a number of European private online sales clubs that have raised late stage capital by using a model first introduced by France's Vente- privee.com. The French firm is currently racking up 70,000 orders per day and expects sales of around 710 million euros this year.
Vente-privee.com organizes online inventory clearance sales - for members only. Items for sale include luxury apparel and accessories, wine, household linens, baby clothes, and small household appliances. All are sold, during a limited time period, at fixed prices 50% to 70% below retail.
The business model has sparked copycats in the US, the first time in recent memory that American companies are copying an Internet economic model that was first created in Europe. And the model is rapidly spreading to the rest of the world.
For instance, Spain's largest online sales club, Privalia Venta Directa, is expanding across Latin America, thanks to a 70 million euro infusion of financing announced in October from European VC firm Index Ventures , global growth investor General Atlantic and existing shareholder Highland Capital Partners, a U.S. venture firm. Other existing shareholders include Barcelona-based Nauta Capital and Caixa Capital Risc. Privalia already has more than five million members worldwide and, in addition to Spain has established a strong presence in Italy, Brazil and Mexico. The company says it intends to use the funding to tackle new markets.
Within days of Privalia raising its huge October round Spanish rival BuyViP was sold to US ecommerce giant Amazon. Amazon didn't disclose the price but Dow Jones Newswires' estimated it to be around 70 million euros. BuyVIP operates in Spain, Italy, Germany, Austria, Portugal, Poland and the Netherlands; it has six million members and is planning to grow 2009 sales of 60 million euros to 130 million euros in 2010. The company's backers include Cipio Partners, Kennet Partners, Spanish venture firm Debaeque and the venture capital arm of German media conglomerate Bertelsmann AG.
The private online sales business is also thriving in Russia. In January KupiVIP.ru, Russia's largest online fashion shopping club, raised a 13.5 million euro round led by Accel Partners, with participation of prior investors, which include Europe's Mangrove Capital Partners. The company has more than 3.3 million members and hosts more than 450 sales events per month.
And, German on-line buying club brands4friends has expanded into the UK, Austria and Japan. The Japanese site, which is backed by brands4friends.de, Partech International and Holtzbrinck Ventures, aims to become a market leader in Japan by applying the same buying club model that is all the rage in Europe.
For its part showroomprive.com, which entered the Spanish market this year, plans to use the 37.8 million euros raised in August to expand into the UK and Italy in 2011, says co-founder Thierry Petit. The company's goal is to become a powerful pan-European player.
There are striking similarities in
the backgrounds of the two French rivals. Seven of Vente-privee.com's founders came from the apparel wholesaling business in France, while one had an Internet background.
Showroomprive.com founder Petit is an Internet entrepreneur, co-founder David Dayan has a background in stock clearance and private offline sales. Dayan previously ran a group of companies involved in the close-out business, including Showroom 30, a three-floor physical showroom outlet in Paris, which is now part of showroomprive.com.
Showroomprive.com is smaller than Vente-privee.com, which has already expanded into Germany, Italy, Spain and the UK, but both companies are showing extraordinary rates of growth.
Like Vente-privee.com, showroomprive.com says it has no intention of moving into the US market. The European market is lucrative enough.
"As advisors we take top class entrepreneurs and help them to have bigger ambitions," says Lesne. "That is what we did with showroomprive.com: we started working with a French company but ended up working with a European-class company."
The most successful of the European on-line buying clubs, including variants involving shoes, furniture, coupons and eyeglasses, are expected to have lucrative exits. BuyVIP sold to Amazon but online private sales clubs that expand outside of their home markets are more likely to IPO or sell to private equity, says Simon Carmichael, the director in charge of the private placement and venture sell side practice at London-based advisors Torch Partners.
Indeed, the stampede to fund later stage companies in Europe is not limited to venture capitalists. Late stage activity in Europe is driving some of the private equity players to take a closer look at VC-backed companies. Already Europe is starting to see deals in which buyout players acquire stakes from existing VCS. For example, Belgium's Gimv recently mixed VC and buyout activities to purchase existing VC positions in Onedirect, a Paris-based company specializing in the sale of professional telephony products in Europe.
"Great successes like Vente-privee.com, Pixmania, showroomprive.com, Qliktech, Voyage Prive, Gameforge and Spotify show that Europe can deliver world-class companies," says Lesne. But Europe needs a lot more money to build more companies that scale. "The private equity market in Europe is gaining in maturity and shows a tremendous and sustainable appetite for companies at every stage of development," he says. "These private equity firms will supplement the activity of the super angels and VC funds to help Europe create the same alchemy that allowed the US to build world leaders."
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.
Firms that work with late-stage start-ups in Europe
Bryan Garner & Co.
Jefferies & Company
Accel Partners (UK/US)
Acton Capital Partners (Germany)
Advent Venture Partners (UK)
Axa Private Equity (France)
Balderton Capital (UK)
Battery Ventures (US)
DN Capital (UK)
Doughty Hanson & Co. (UK)
Edmond de Rothschild Investment Partners (France)
Fidelity Ventures (UK/US)
Highland Capital Partners (US)
IDInvest Partners (ex-AGF Private Equity, France)
Index Ventures (UK and Switzerland)
Insight Venture Partners (US)
Kennet Capital (US/UK)
Rothschild Group/R Capital Management (France)
Scottish Equity Partners (UK)
Summit Partners (UK/US)
TA Associates (US)
The Carlyle Group (UK/US)
Time Equity Partners (France)
xAnge Private Equity (France)