I don’t want to be the nitpicker but I think two investments over the last week really emphasize the difference between the UK and the US investment environment.
In the US, the $41 million investment in Color has rocked the media airwaves. The best of VCs, Sequoia, Bain, SVB, have invested in a picture sharing mobile app? However, as the CEO Bill Nguyen has emphasized, they are far from being just another pic sharing app. On the contrary, he claims, they are a research centric company with multiple patents looking to merge location, proximity, pictures and social. ‘An elastic social graph.’
The jury is divided:
Is this another example of the potential bubble we are seeing in early stage investments?
Or
Is this another example of the vision of US VCs investing in great technology, not to address current needs and markets, but to address needs and desires that we didn’t know we had and thus generate new markets from scratch?
In the UK, at the other end of the scale, is a £50 million investment by Lyceum Capital in Access, a business management and accounting software firm. They have £28 million in turnover with EBITDA of £5.5 million and provide ERP software, financial management systems and HR solutions to a mid-market clientele. A safe, stable, reliable investment. No cutting edge research or technology. Not even a mention of current or potential SAAS based delivery of services. Another one of tens of little shops dotted across the landscape, it’s a wonder they are still surviving in spite of the onslaught of Eastern European and South Asian software houses.
The firm has various awards for best place to work and for their financial software. Let’s hope the investment helps move them from a staid product profile to a more futuristic delivery of services.
So, in summary, what is the difference? The visionary risk taking nature versus the risk averse, past performance based approach.
But, I shouldn’t be too harsh.....it is changing......hopefully......
Most news articles these days are talking about the demise of the VC industry. From the entrepreneurs perspective, they are struggling to get seed and early stage funding for firms where there is still an element of risk because of in-process validation, growth of customer base etc. Talk has shifted to crowd-funding and bootstrapping. Intermittently of course there is talk of an early stage valuation bubble whenever the focus shifts to Facebook, Groupon and their ilk.
Looking at the world from the VC’s perspective brings us to the huge pipeline we see of VC funds which are out trying to raise new money. It’s taking longer, fund sizes are smaller, fees are lower – not a very pretty picture.
In this darkness, there was news this morning of a new €117 million fund raised by Holtzbrinck Ventures with investment from the parent Holtzbrinck and Harbourvest. Techcrunch, Twitter are all full of the news on how European venture capital is back.
And yet, if we delve just a little bit, it’s not exactly a fund being raised which will focus on new investments. It’s more of a secondaries transaction. We have seen quite a few of these over the past year and these are more a sign of the times than the raising of new money for new investments.
In detail, the parent Holtzbrinck has transferred their existing investments in new media to a new fund HV Ventures Fund IV. Harbourvest has invested money in the fund which will, along with the old investments, continue to be managed by the current Holtzbrinck team.
Typically an older fund may look at exiting their investments via secondaries when they need to return capital to their LPs, capital which is locked up in non-dilute investments. It could also be the option when further capital is required to maintain a relevant holding in existing investments but the fund doesn’t have the wherewithal any more.
In this case, I would tend towards the latter option.
In summary, the fund is new money and is testament to the successful investment record at Holtzbrinck. However entrepreneurs may want to take a look at the existing portfolio companies and their capital requirements in order to get an idea of how much of the new funds will actually be deployable for fresh investments.
I will have an eye out for further details on the structure of the transaction.
A blog post by Fred Wilson from Union Square Ventures this morning spoke about their investments in Europe. ‘We have sourced investments in London, Berlin, Holland, Israel, and Slovenia. I know that Israel is not technically in Europe but I put it there anyway. Of the six investments we have sourced in Europe, three are now headquarted in NYC and one other has significant operations in NYC. We like finding great teams in Europe and helping them set up the headquarters in NYC. I expect we will do more of that as well as more investments headquartered in Europe.’
My initial reaction was huge surprise – I’d hardly thought of USV as having that kind of geographical range in their investments. The second reaction was to focus on the companies that have opened offices in the US. It does seem like a pre-requisite for US investments – not that I blame them at all. The key benefits of US investment (other than the money) is to piggy-back on the VC’s network and also learn from their experience on setting up camp across the pond. Curiosity made me go over their portfolio and check out the European investments:
AMEE– A very interesting investment along with Aquarius Capital, Amadeus and O’Reilly Alpha Tech Ventures who together have ploughed in over $5.5 million. AMEE’s aim is to map, track and connect all the carbon data on the planet. They provide a SAAS based platform which aggregates and maintains carbon accounting mechanisms allowing users to understand and calculate their carbon footprint.
On a side note, one of the firms I am currently working with has expanded their solution along similar lines. They currently provide prediction and performance monitoring solutions for active components at solar and wind power stations. One of the advantages of the predictive element is that the model also enables provisioning of data for insurers, accountants and other service agencies in the clean-tech space – a growing market.
Shapeways – These are the Dutch guys mentioned by Fred – providers of high quality, 3D printing and manufacturing with a range of materials and goods with the final aim of becoming a custom manufacturing juggernaut. They were incubated within Philips but have gone on to raise $5.5 million from USV and Index Ventures. Upload a 3D image of any product and they will manufacture and ship it for you. They’ve moved HQ to NY – logical move me says – bigger market.
Zemanta – USV invested in 2008 along with Eden Ventures and The Accelerator Group – a total of $2.2 million. I like these guys – the pictures they provide are quite useless to be honest but the article links are invariably spot on – thumbs up for their semantic search model. They are currently catering to almost 30% of the blogosphere and this in two years. But then we come to the business model – revenue for highlighting links with increased priority, affiliate links, tie-ups with Amazon for product recommendations and sales – wait and watch.
Soundcloud – At first glance they seemed like another web based music streaming website. They raised $3.3 million from Doughty Hanson Technology Ventures in 2009 and as of last week have USV and Index Ventures breaking down their door cheque books in hand. So what’s the rush? Well, for starters, the company doesn’t need to sign deals with the music majors. The holy grail! Professional and amateur musicians can load their music on Soundcloud’s cloud based servers and share them with each other and the public. As a next step they are also in discussions with fingerprinting expert Audible Magic to enable copyright owners to pull their content when they so desire. Business model – freemium with charge for storage and other additionals.
All in all a very diverse range of European investments! What are the elements which stand out:
- They have an existing market in the US. This applies more for the push based services and products. For example, in the case of Shapeways while manufacturing is still based in Europe, a much larger part of their customer base was American.
- They have a ubiquitous addressable market. Both Zemanta and AMEE are solving a problem which creates a viral pickup. Ditto for Soundcloud
- Recognition from local VCs – be it Amadeus, Index, Doughty Hanson, Eden
- Highly experienced teams – AMEE has an ex-Virgin founder with multiple start-ups under his belt, for Zemanta the proving point was Seedcamp....
In recent times we’ve had Huddle and Skimlinks as two of the high profile names moving across the ocean for larger markets and deeper pockets. Would be nice to see the reverse flow get stronger.
If we didn’t know it already, here’s some researched data confirming the views:
Exit activity is rising for VC backed companies
Fund raising activity has significantly slowed down since its heydays of 2006-2008
It’s taking way longer to close a fund as compared to the heydays
EXIT ACTIVITY
On exit activity, in Q3 2010:
There were 102 M&A exits worth $5.7B compared to 97 exits worth $3.3B last year
9 companies raised $723 million through IPOs ($451 million last year)
A snapshot of the change in the trend of exits over the last three years. Trade sales and secondary buy-outs are leading the pack as amply demonstrated in the news of the last few months.
FUND RAISING ACTIVITY
On the new funds front, globally the PE industry raised $57 billion in Q3 ’10 up 16% from $49 billion of the previous quarter (Source: Preqin)
China, India and Brazil may be the flavour of the season but US focused funds have seen maximum inflows with 37 funds totalling $41B. Europe, surprisingly enough, was second at 21 funds worth $8.3B. Asia and the rest of the world saw 23 funds aggregating $7.8B. This can perhaps be explained by the fact that of all the new funds approximately five were distressed PE funds worth $9B and another 19 were real estate focused funds with commitments of $8.8B. Three infrastructure funds raised $8.3B.
Venture capital funds have been trailing a long way behind at 20 funds worth $3.7B. Buyout funds were stronger with 11 funds raising $20.4B.
TIME TAKEN FOR NEW FUND
As for the patience required for the raising of a new fund – there are currently 1550 funds seeking to raise $573B wordwide! And it’s taking almost 20 months to raise a fund, double the average time of 2004.
In conclusion, if market sentiment is to be believed I think we are finally past the trough and 2011 should bring happier tidings in terms of new money in the buyout as well as the venture capital industry. However I don't think market up-tick is the only reason for an optimistic opinion. I would tend to think it's more the first point of our discussion i.e. exits. As investments are exited and the money is returned back to investment managers, it does need to be reinvested to maintain allocations.
The question which will then arise is – which are the funds that will see higher inflows. Just a sample of fund returns based on size:
The small and mid-size funds seem clear winners.
Afterthought - Venture capital has taken a huge hit in IRR over the last decade and is of course seeing a bit of redefinition with angels raising $50-100 million funds focused on the seed stage and traditional VCs aiming for more risk-averse validated investments. However that data can be cut as much by stage of investment as by industry i.e. angels focused on internet and digital media and traditional VCs investing in software, semicon and such like. In any case that perhaps is one industry which is seeing a more fundamental restructuring - multiple types of funds under one VC umbrella.
It’s the age of the secondaries. There’s been a lot of activity behind the scenes but now after the high profile 3i, Coller and DFJ transaction it’s the turn of French fund Seventure. The VC fund has transferred the currently illiquid assets from their funds vintage 2000/2001/2002 to a newly formed vehicle Chopin Invest sponsored by London based Greenpark Capital. These funds come under the French FCPI/ FCPR regulation which is essentially retail funds with associated tax benefits for the investee. This of course implied that the funds HAD to be liquidated and returned to the investees in 2010 making the secondary transaction a must for the VCs if they didn’t want to sell the firms at rock bottom prices.
Greenpark acquires single LP positions as well as portfolios of direct investments with/without incumbent managers. In this case, management of the investments continues with Seventure which will continue to act as a General Partner.
As for the investments they would fall into two categories – the success stories which can be developed further before an eventual IPO or a trade sale when markets improve or else the also-rans who are waiting for market improvement only to be able to garner a relatively decent price.
So which are the investments we are talking about and what future can we anticipate for them:
Quescom: The firm manufactures GSM gateways which connect an IP-PBX or rather an IP network to a GSM network i.e. a call from a land-line to a mobile will appear as a local mobile-to-mobile call. It implies great savings for corporate and is currently legal for an organization’s internal use. Positives - they are certified compatible with a range of IP-PBX vendors, have an established distributor network and customers across 40 countries. Negatives – a very fragmented, low-end market. In addition thanks to regulation the technology cannot be offered as a cloud based service for small and medium enterprises.
Small bolt-on acquisitions are part and parcel of the unified communications market but I don’t see a very high multiple exit for the investors (Amount invested - $13million between 2000 and 2002). I’m wont to put it in the second category.
Netasq: They provide UTM security appliances. It’s a growing market with players like Fortinet, SonicWall and Watchguard leading the market. Netasq, Cyberoam and Astaro are grouped together as being visionaries in the market but with a mediocre ability to execute projects i.e. customer experience, pricing, market responsiveness etc. Netasq is of course strong in France with a developing presence in the rest of EMEA. A good growth story – the first category for sure – we should be seeing it as a bolt on acquisition for one of the big guys soon (Amount invested: €18mil over 2000 to 2004). The only restriction here can be the complexity its cap structure – the firm had close to 12 investors on last count. Interestingly enough, sometime in 2008 another one of the early stage investors in Netasq – Innovaco Gestion – had also sold their stake to a secondaries fund, Saints Capital.
Opti-time: They provide a route planning solution for cost optimization. The firm has been listed on the Paris Euronext stock exchange since March 2008 so the stake must be for regulation purposes and can be diluted smoothly as markets improve.
Scaleo Chip: A fables semiconductor company focused on automotive electronics for body control, driver information and in-car infotainment entertainment. They’ve worked with several Indian firms like Tata Elxsi and Wipro to develop an automotive platform integrating the hardware as well as microcontroller abstraction layer modules and with Atmel as the other end of the chain. A very small part of a long value chain.
W4: Provider of BPM solutions. The claim is that they are the only independent vendor in the market and they have over 500 customers. I’m not very sure how relevant and important both the claims are.
All in all a very mediocre portfolio transfer. It would be interesting to know the valuation and I’ll have an eye out or rather ear out for it.
