New Funds, U.S. Money Targeting Europe’s Start-Ups

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When Trevor Parsons, who for years worked on developing cloud-based log management technology at University College Dublin, decided to spin out a company in 2010 he got a helping hand from LaunchPad, an Irish accelerator, and prize money from the university. Next, he netted $50,000 from Enterprise Ireland’s Competitive Start fund to take the technology to market and moved the company’s offices into Polaris Ventures’ newly-opened Dogpatch Labs in Dublin.

In June of this year the company scored a $1.1 million series A round from two U.S. venture firms — Polaris Ventures and RRE — plus a new European early-stage VC fund called FrontLine Partners, and Enterprise Ireland.

Logentries’ experience neatly demonstrates how the European landscape for young companies is radically changing. Countries like Ireland are awash with seed money; governments are playing a greater role in supporting entrepreneurs; an increasing number of labs/accelerators/incubators are housing and helping young companies; new European funds are stepping up to close the $500,000 to $2 million series A funding gap; and U.S. venture firms are investing in European companies at a far earlier stage.

Over the past five years there has been a surge of entrepreneurial activity in Europe spawned by dozens of seed funds, accelerator programs and a deep angel network of successful entrepreneurs who are recycling their wealth and know-how back into the ecosystem, resulting in the birth of hundreds of start-ups each quarter.

Seedcamp, the London-based micro-seed investment fund and mentoring programwhich has been operating in Europe for the past five years, is playing a key role, providing among other things, high-level access in the U.S., making it less tempting for young companies to enroll in Y Combinator and not come back. During its red carpet four-week U.S. road shows it introduces Seedcamp companies to high-profile investors such as Andreessen Horowitz and Greylock and arranges visits with companies such as LinkedIn, Twitter, Foursquare, Microsoft and Qualcomm. Over 50% of Seedcamp’s 2012 class has raised further capital, including some from U.S. investors such as 500 Startups and SV Angel.

European venture firms, such as Accel Partners, Atomico, Balderton Capital and Index Ventures, are also playing a key role in building bridges to the U.S. for Europe’s young companies.

It is all part of a massive effort to make Europe a more attractive place to raise seed money through to initial public offerings and beyond, says Saul Klein, a partner at Index Ventures, a founding partner of The Accelerator Group and founder and chairman of Seedcamp,.

It is paying off. “There is significant value creation taking place in Europe across the start-up scene, i.e., hundreds of venture-backed companies are growing at attractive rates and many of these companies are cash-flow positive with good visibility on sustainable double-digit revenue and earning growth,” says Jason Whitmire, a partner at Early Bird Venture Capital. These developments mean that Europe is – for the first time – “producing venture-backed category leaders across the digital space,” says Whitmire. Europe, which has long had strengths in B2B (think Business Objects, SAP, ARM, Autonomy and Dassault Systems), is now the primary source of next-generation Internet audio and music discovery and distribution platforms such as Spotify, SoundCloud and Shazam and churning out top gaming developers such as Supercell, Mind Candy, Rovio, Wooga, Gameforge, King.com, Big Point and Peak Games.

“I have never been as much of a cheerleader of Europe as I am right now,” says Max Niederhofer, a vice president in the London office of Accel Partners. “There is a backlog of companies with 500 million euros plus enterprise value ready to exit over the next three years and the founders of these companies are going to come back onto the market as entrepreneurs and as angels.”

That said, there has been a ongoing contraction of available capital at the early stage in Europe, whereby companies today can raise seed but experience a higher hurdle for Series A funding. That is why it is important hat new funds are stepping up to fill that gap.

London-based DN Capital recently announced a new  early-stage fund (its third). The target is EU100 million. But brand new players are also emerging.

Created by veteran venture capitalists Shay Garvey, a former partner at Ireland’s Delta Partners; Will Prendergast, a former partner at NCB Ventures; and entrepreneur William McQuillan, FrontLine Ventures is another of a number of new European funds that aim to close the Series A funding gap. Backers of FrontLine Ventures, which aims to become the first institutional investor in young companies and then help them scale with follow-on A-round funding, include Declan Ryan, son of the late Tony Ryan, the founder of Ryanair. Enterprise Ireland is also expected to lend support to the new fund. Garvey made 12 seed investments last year in his previous fund and expects to make an equal number in the coming year through FrontLine.

Connect Ventures, another new early-stage fund launched in January of this year by veteran venture capitalists Sitar Teli (ex-Doughty Hanson Technology Ventures) and Bill Earner (ex-Amadeus Partners) and digital media entrepreneur Pietro Bezza, has also been busy. This London-based fund, which is targeting early-stage Internet and mobile companies across Europe, has done four seed and two A rounds, in its first nine months of operation. It aims to do six to eight deals per year, says Teli, who says she will be searching for interesting start-ups at the Web Summit, which takes place Oct. 17-20.

Then there is Hoxton Ventures. Created by angel investor Hussein Kanji and Xoogler Rob Kniaz, Hoxton Ventures focuses on the $500,000 to $2 million funding gap in Europe and aims to build bridges between start-ups and the U.S. It prefers writing checks to young, technical first-time founders. It’s made four investments so far. One, Llustre, was sold to Fab only ten weeks after launch, one of the fastest exits in recent U.K. history; another, Campanja, attracted co-investment from K. Ram Shriram, a founder investor and board member at Google; the third, GoCardless, also scored money from SV Angel, Start Fund, and Y Combinator plus European funds Accel Partners and Passion Capital;and the fourth, Tizaro, recruited Sam Kim, vice-president of e-commerce for Grainger, a company with $8 billion sales, as a co-investor and board member.

As Hoxton Ventures’ deals demonstrate, syndication with U.S. investors on early-stage deals is becoming more frequent in Europe.

“It used to be linear and the U.S. guys would come in at a later stage but you can’t do that anymore,” says FrontLine’s Garvey. Since successful companies can demonstrate traction quickly, they are increasingly able to attract investors early on that will see them through to an exit. That’s important because if they don't get a boost at the beginning, European start-ups often end up being sold too early and rolled up into American companies. To create global giants here in Europe, “what you need is funding that creates a quick ramp but comes from funds that can support a company for the long road, “says Garvey.

Syndicated deals involving savvy local investors with deep pockets and U.S investors will help companies like Logentries progress quickly with their roadmap. It is not just the money but the mentoring and the contacts that the right investors bring to the table. “Our customer base is in the U.S. and Polaris and RRE are really strong there,” says Logentries’ Parsons. “It makes it so much easier when you have guys on your side with tons of connections.”

New European Early Stage Funds

Frontline  Ventures—  Created by veteran venture capitalists Shay Garvey, a former partner at Ireland’s Delta Partners, and Will Prendergast, a former partner at  NCB Ventures and William McQuillan, an investment banker,  Frontline aims to close the Series A funding gap.  Although it does not even have a web site up and running yet it made 12 investments last year and expects to make an equal number in 2012. Among is most recent investments is Logentries, which also attracted investments from U.S. VC firms Polaris Ventures and RRE. Garvey will be attending Dublin Web Summit.

 

Connect Ventures-Launched in January of this year by veteran venture capitalists Sitar Tel (ex-Doughty Hanson Technology Ventures) and Bill Earner (ex-Amadeus Partners) and digital media entrepreneur Pietro Bezza, this London-based fund is targeting early stage Internet and mobile companies across Europe. In just nine months it has done four seed and two A rounds. Its focus is on closing the funding gap in the $200,000 to $2 million range.  It aims to do six to eight deals per year. It is still fund-raising and hopes to raise 30 million to 40 million pounds. Teli will be searching for interesting start-ups at  Dublin Web Summit.

 

Hoxton Ventures– Created by angel investor Hussein Kanji and Xoogler Rob Kniaz, Hoxton focuses on the $500,000 to $2 million funding gap in Europe and building bridges between start-ups and the U.S.   It prefers writing checks to young, technical first-time founders. It’s made four investments so far. One Llustre, was sold to Fab only ten weeks after launch one of the fastest exits in recent U.K. history; another, Campanja, attracted co-investment from K. Ram Shriram, a founder investor and board member at Google; the third GoCardless, also scored money from SV Angel, Start Fund, and Y Combinator plus European funds Accel Partners and Passion Capital,and the fourth Tizaro, recruited Sam Kim, vice-president of e-commerce for Grainger, a company with $8 billion sales, as a co-investor and board member.

 

Examples of U.S. VCs and angels investing in early stage European companies

 

Logentries, an Irish company which offers a cloud-based system that manages log files, raised $1.1 million this summer in a round that included U.S. venture firms Polaris Venture Partners and RRE Ventures plus Dublin firm Frontline Ventures and Enterprise Ireland.

Campanja, a Swedish start-up, which specializes in real time advertising optimization, attracted investment from Ram Shiriram, a founding investor and board member of Google, in a round led by the U.K.’s Hoxton Ventures.

Farmeron, a Croatian  company which helps farmers manage their livestock and crops by producing performance analysis, attracted investment from Dave McClure’s 500 Start-ups and U.S. venture firms NextView Ventures and SoftTechVC.

Gidsy, a Berlin-based company which bills itself as “a marketplace for authentic experiences” has raised $1.2 million from backers which include Amazon Chief Technology Officer Werner Vogels and U.S. actor Ashton Kutcher, along with European venture firms Sunstone Capital and Index Ventures.

Datahug, a Dublin-based start-up specializing in enterprise relationship management, scored investment from Silicon Valley super angel investor Ron Conway, in a $1.5 million round led by Ireland’s Oyster Technology Investments. 

Fantasyshopper, a British social shopping game and fashion discovery platform, attracted investment from te U.S.’s  New Enterprise Associates( NEA) and Europe’s Accel Partners.

BalconyTV, a Dublin-based company behind a web site and YouTube channel that features performances of up and coming acts performing on balconies, received its first institutional funding from the U.S.’s Greycroft Partners, Lerer Ventures and Polaris Ventures.

Tizaro, a London-based start-up aiming to disrupt the industrial supplies space, includes among its backers   Sam Kim, VP of ecommerce for Grainger, a U.S. company with $ 8 billion in sales

Intercom, an Irish company which provides a CRM dashboard for web apps with Google Analytics-like integration, has raised seed funding of $1 million from U.S. web heavyweights like Twitter’s Biz Stone, Huddle’s Andy McLoughlin and 500 Start-ups.

Amen, a Berlin-based company which offers an iOS and web app that allows users to voice strong opinions, has attracted funding from actor Ashton Kutcher as well as Path CEO Dave Morin, formerly of Apple and Facebook, a high- profile member of the U.S. digerati.

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