London: Champagne, happy young entrepreneurs with a cool technology for sale and relaxed venture capitalists showering them with money.
Sound like a scene from Silicon Valley, circa 1999? Try last Tuesday in a hip restaurant near London's busy Oxford Street. There, a lunchtime gathering marked the launch of IDG Ventures Europe, a new London-based venture capital firm, and the close of its first two investments.
The gathering showed that early-stage venture capital deals, despite having lost their luster, are still getting done. It also demonstrated that cool technology - especially if it's patented and unique - can still attract cash - especially if you're in Europe.
Early-stage investing is growing in Europe, and as the competition for deals and the pool of investable money increases, entrepreneurs now have the chance to get a better deal in Europe than they do on Sand Hill Road, the center for Silicon Valley venture capital.
"The amount of money looking for deals is large, and the amount of prior trouble in portfolios is smaller," said Pat Kenealy, managing partner of IDG Ventures in Palo Alto, Calif., explaining why European venture capitalists may give entrepreneurs a better hearing than their Silicon Valley peers.
Early stage investing is also becoming increasingly common in Europe: Since 1996, the percentage of private equity in Europe allocated to seed and startup investments has more than doubled, to 19% last year, according to the European Venture Capital Association.
International Data Group Inc. (X.IDA) formed IDG Ventures Europe in November, following the model of four similar funds in the U.S. and China. The European venture partners invest independently and have $100 million of initial investment funds available to them.
IDG Ventures Europe closed its first two investments this month, but the fund, like many of its peers, still has a considerable amount of money to play with.
In total, EUR48 billion was raised by European private equity and venture capital firms in 2000, 89% more than the funds raised the previous year. Around a third of that is earmarked for technology early-stage and expansion investments.
In addition to those largely still-uninvested funds, London's Apax Partners has said that EUR1.5 billion of its EUR4 billion fund, closed earlier this year, will be earmarked for early-stage companies, and in April, Atlas Venture also announced the close of a $950 million fund which will be invested in early-stage tech companies in Europe and the U.S. The fund is Atlas's third in as many years.
Many European venture capitalists, investing from "virgin" funds, often don't have to spend as much time nursing failed or failing deals, Kenealy said. They can be more optimistic. Also, the climate for venture capital in Europe right now is much better than in Silicon Valley.
Harder To Attract Money Than Before
The cool technology on display Tuesday was a music identification service for mobile phones. The idea is simple - hear a song you like, hold up your phone and punch a few keys, and the service sends you the name, title and album name of the song you're hearing - and the technology has four patents pending.
The company's CEO, Chris Barton, moved to London last year to found Shazam Entertainment
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Ltd with two friends. They picked London, Barton said, as a gateway into Europe's more developed mobile market.
The company closed a seed round of $1 million last year, from angel investors such as the former chairmen of EMI Group and BMG UK/Ireland and the founder of Amazon UK, and began meeting with venture capitalists in November. They ended up presenting to more than 40 venture capitalists.
"We got a lot of second and third meetings," Barton said. The investors were interested in their technology and pending patents, but many were "in a slower mode of reacting because of the nature of the markets," he said.
They were continuing to assess companies, "but they were still cautious because the market was continuing to dive," he said. "Their highest priority was making sure their portfolio companies could raise further cash, rather than making new investments."
Though the company doesn't have any customers yet, and its technology is still at least six months away from a launch, Shazam was able to secure its first round of funding, of $7.5 million, which closed Monday. The round was led by IDG Ventures Europe. Lynx New Media, a venture fund established by Bear Stearns and Virgin Media, and FLV Fund, a publicly traded European venture fund, also invested in the round.
Ajay Chowdhury, managing partner at IDG Ventures Europe, said that venture capitalists are now looking for technology that is "not just an idea, but is protectable and sustainable."
Closing deals is taking longer, from the due diligence - Chowdhury said he talked to at least 30 people about Shazam before investing - to the negotiation to the syndicate building. But Chowdhury agrees that the situation is better in Europe than in the States.
"We have a clean fund, with cash in the bank and no portfolio dragging us down," he said. In addition to Shazam and another investment in a Paris-based IT company, ClarITeam, Chowdhury anticipates another three deals closing during the next three months.
Other European early-stage venture funds have also been - relatively - active this year. Despite a few tough quarters, 3i Group PLC (U.TIG) is continuing to invest in risky early-stage companies; this week, it said it would put GBP3 million in a young healthcare company, a spin-off from Queen Mary, University of London. Also this week, Apax Partners, another London based private equity fund, said it was leading an GBP8 million Series A round of financing in a startup biotech company based in Cambridge.
Still, follow-on investments are a priority, and many venture capitalists are focused on finding funding for existing portfolio companies, as well as reinvesting themselves.
"A lot of inside rounds are being done because there's not necessarily the plentiful amount of outside capital that there was before," observed Douglas A. Rediker, a managing director of TD Capital Communications Partners, another North American private equity group that opened a London office last year. TD Capital Communications is an investment group that is part of the private equity arm of Toronto Dominion Bank.
"Investors are needing to pony up and follow their money or risk the company going under," he said. "Even a very good company needs a fair amount of capital to realize its dreams" •
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