AMSTERDAM/LONDON – Atlas Venture Fund IV, which closed in late February on $400 million, is the largest venture fund raised to date by a European group and this year is likely to rank among the top five technology venture funds worldwide in size.
Atlas Venture anticipates its latest fund will invest an average of $5 million to $10 million in 60 to 70 companies in Europe and the United States in the next three years.
Founded in the Netherlands in 1980, Atlas Venture is one of Europe’s oldest venture groups and has a long-standing U.S. presence, as well as offices in the United Kingdom, France and Germany. Atlas was an early example of the virtues of transatlantic company building and, while its investment activities are now evenly divided between Europe and the U.S., this strategy continues to be one of the group’s core strengths in the European market.
The new fund is nearly double the size of its $230 million predecessor, which began investing in 1997 and is already fully deployed in 46 investments. That vehicle’s rapid investment pace was mirrored in fund raising for the fourth fund, which was formally launched in December with existing Atlas investors, who contributed approximately two-thirds of the total. Atlas also encountered strong demand from new investors, particularly those in the U.S. who “knew Atlas already and were waiting to come in,” London-based principal Christopher Spray said. He added that Atlas could potentially raise substantially more than $400 million, but, given the group’s hands-on approach to early-stage deals, the original target set for the fund reflected the amount of capital Atlas’ 27-strong team could realistically invest during the next two to three years.
The largest commitments to Venture Fund IV from new investors came from the state pensions of Pennsylvania and Virginia. Other new investors were AXA Investment Managers, Colby College, The Kresge Foundation, Interpolis, LGT, Michigan State University, funds advised by VenCap International and the William S. Dietrich II Trust.
Repeat investors include The Church Pension Fund, FLAG Venture Partners, Greenoak Capital Management, funds advised by HarbourVest Partners, Oxford University colleges, Pacific Corporate Group Private Equity Fund, the APB and PGGM pension funds, Rabobank Pension Fund, Private Equity Holding, SITRA and Sofinov, the Caisse de depot et placement du Quebec subsidiary.
Mr. Spray attributed the sector’s overall improved track record to an increasing appetite for European technology venture investments by U.S. groups and cited the development of Europe’s growth stock markets as a crucial factor in increasing investor confidence and in promoting the formation of technology companies.
The returns on Atlas’ European and U.S. investments correspond very closely, and Atlas has consistently achieved upper quartile performance from its mixed European and U.S. portfolio when benchmarked against U.S. technology venture funds, Mr. Spray stated, but he declined to specify precise figures.
Since 1990, Atlas funds have backed 61 U.S. and 78 European companies, with U.S. companies absorbing 52% of invested capital. Information technology investments account for 56% of the portfolio and life sciences ventures the balance. Atlas’ portfolio is biased toward first-round investments: The firm has completed 84 such deals since 1990, representing 56% of investment at cost, compared with 55 later-round investments. Atlas’ preference for getting in at the ground floor recently has become more pronounced. Mr. Spray said that 30 of the 46 deals in Atlas Venture Fund III were first-round investments, of which 17 are classified as seed capital. “It is our perception that later-stage fundings – particularly in Europe – are becoming very expensive,” he said. “We are determined to avoid valuation inflation, and neither the seed nor the early-stage market in Europe is overcrowded.”
Atlas Venture Fund IV might well make a higher proportion of seed investments than its predecessor. “The loss rate within the portfolio is actually too low – possibly a sign that we are being a little too conservative,” Mr. Spray revealed. Atlas may therefore look at more high-risk early-stage situations and make a greater number of small bets on promising technologies, with a view to scaling up investment in the successful companies once they have reached appropriate milestones.
The speed at which Atlas’ third fund was deployed bears witness to the increased buoyancy of the high-technology investment environment within Europe.
As well as the viable exit routes offered by Europe’s new markets, Atlas cites the strong governmental support for venture-backed technology companies in some markets (notably the Technologie-Beteiligungsgesellschaft in Germany), the formation of industry segment clusters, e.g., around Cambridge and Munich, and the increasing trend toward university spin-outs as factors that have improved the climate for venture capital in Europe.
Atlas invests in all sectors of the information technology industry, with a particular emphasis on e-commerce, data and mobile communications, enterprise software and the semiconductor industry. In the life sciences arena, the firm targets biopharmaceuticals, medical devices, health-care information systems and health-care services.
Mr. Spray said, “We are now enjoying the early fruits of the emerging digital economy in information technology and the early impact of accelerated drug discovery technology on the pharmaceutical industry.”