W hen John Bernstein of Advent International Corp. walks into his London office these days, he’s confronted with more than a dozen e-mails and a desk piled high with Internet proposals. An investment manager specializing in telecommunications and the Internet, Bernstein personally closed four of his firm’s 10 European Internet deals in the last year.
While that figure doesn’t seem high by American standards, keep in mind that Advent has backed an average of only four to five European Internet deals each year since 1985.
Meanwhile, Nic Humphries, a partner based in the London office of Geocapital Partners L.L.P., says he gets about 10 Internet plans a day into his e-mail inbox, and the numbers show no sign of slowing down.
“People have just gone bonkers,” says Humphries, who focuses on business-to-business e-commerce Internet deals in the United Kingdom and continental Europe. “It’s absolutely bananas just in terms of the number of people that are sending their business plans. The Internet is taking off in Europe in a major, major way.”
European venture firms began taking a serious look at Internet deals in their own backyard in the mid-1990s and so did a handful of firms in the United States. But there has been a drastic increase in the past few months in the sheer number of Internet funds being raised in Europe and the pace at which those deals are closing. Apart from Advent and Geocapital, there are a mix of old-timers and newcomers such as Apax Partners & Cie, Schroder Ventures, Atlas Venture, Earlybird Venture Capital, 3i Group PLC, Elderstreet Investments Ltd., Technologieholding VC GmbH and Amadeus Capital Partners Ltd., as well as buyout houses like The Carlyle Group and TH Lee, Putnam Capital, that are getting in on the Internet action.
A case in point: First Tuesday, an Internet club based in London that was created as a way for European Internet entrepreneurs and venture capitalists to network, had about 50 members when it was launched in October 1998. The club, which meets on the first Tuesday of every month to discuss financing opportunities and exchange ideas, has since sky rocketed to 6,000 members in the U.K. and some 4,000 in the rest of Europe, from cities such as Stockholm, Oslo, Madrid, Paris, Prague, Vienna, Copenhagen and Frankfurt.
Next in Line After U.S.
European venture capitalists invested $2 billion in 1999 as of October, with $333.9 million of that total going into Internet deals. By comparison, U.S. VCs invested $30 billion this year, with $9.5 billion going into Internet companies, according to Venture Economic Information Services, a sister company to VCJ.
“The market is exploding,” Bernstein says. “There has been a dramatic rise in Internet deals in Europe, particularly over the last six months because everybody sees the enormous wealth that has been created in the United States and thinks that Europe is next, and it probably is next.”
Another contributing factor is that the U.K. telecommunications industry was deregulated in the mid-1980s, paving the way for the Internet to take off there earlier than the rest of Europe, most of which did not liberalize its telecom enterprises until January 1998.
Carl Parker, one of two partners in Schroder Venture’s London office who specialize in technology, says the publicity surrounding European Internet deals has mounted because those companies, such as the hugely successful auction site QXL.com PLC and Internet service provider Freeserve.com, are starting to enter the public market.
When the U.S. Internet craze took off following Netscape Inc.’s enormous initial public offering in 1995, Europeans looked to the West with amazement and envy. Deals were closing faster than ever, valuations were soaring and IPOs were reaching enormous heights. It was surely only a matter of time Europe would follow. And that time has finally arrived.
Overall, Europe lags the U.S. by about a year or two in terms of Internet penetration, with Scandinavia falling behind by about one year, the U.K. by 18 months, Spain and Italy by two years, Germany by 15 to 18 months and France by 21 to 24 months, Humphries says.
Clearly, when searching for portfolio companies, venture firms such as Advent look for strong management teams, a large market to sell in and a product that stands out from the rest. But in some cases, U.S. and European venture firms simply go after Internet deals that resemble American success stories, Geocapital’s Humphries says.
The Fort Lee, N.J.-based Geocapital Partners in March, for example, led a $22 million round of venture capital financing in StepStone.com, a Scandinavian on-line job search company similar to Monster.com in the U.S. The firm co-invested with European venture firms, Investor AB and Index Ventures. At the time, StepStone was the most popular job-listing site in Scandinavia, but now it ranks as the leading recruitment site in all of Europe, making it 10 times the size of Monster.com overseas, Humphries says. The company is on the verge of going public on London Stock Exchange (LSE). In an effort to entice young technology companies to go public locally, the LSE recently unveiled techMARK, a new market for technology companies that will compete with EASDAQ, Nasdaq and Euro.NM (VCJ, November, page 35).
In March, Geocapital invested $10 million in OmniTicket Network, which sells tickets to museums, theaters, amusement parks, sporting events and other cultural activities around the world. The company resembles Ticketmaster Corp. in the U.S.
With a total of $500 million under management, Geocapital Partners has been an Internet and software investor in the U.S. since 1983 and started backing one European company a year in 1991, in either the software or information services sector. The pace began to change, however, when the firm opened its London office in 1998, launching the $150 million Geocapital Euro Fund to take advantage of information technology deals. This year, the firm’s nine-member investment team closed five Internet deals, and with the vehicle already one-third invested, Geocapital plans to raise a $500 million global fund in the first half of 2000.
Differences Abound
But reaching the same level of success with European Internet deals is not that easy. The market for computer owners there is about 70% to 80% the size of the U.S. Unlike the states, which primarily uses English, Europeans speak more than a dozen languages. And cultural differences – only 12% of the population in Italy has credit cards, for example – can have an enormous impact on the success of a company, Parker says.
Alan Patricof, chairman of Patricof & Co. Ventures Inc., adds that different attitudes can raise significant barriers, pointing out that ready-made dinners are popular in the states but are reflective of a lifestyle that is frowned upon by the British and French.
As a traditional technology investor, Schroder focuses on enabling technologies for the Internet rather than on content-related deals because the firm believes it is unclear whether e-commerce sites can reach the same levels of success as in the U.S., Parker says.
Despite the recent creation of the euro as a common European currency, the region remains fragmented with each country having different accounting and tax laws, as well as different import and export legislation. So, while a company like Amazon.com Inc. can succeed in the U.S., different languages and logistical problems across the Atlantic are certain to slow things down and push costs up.
Schroder, an international venture capital and buyouts firm with offices in London, Paris, Frankfurt, Milan, Italy, New York City and Boston, seeks European Internet companies that have an edge over the U.S. in developing certain technologies, Parker says. Mobile telephony is one example because Europe and most of Asia operate their mobile phone system on GSM (Group Standard Mobile).
“If Amazon handles books in English and deals with U.S. sales taxes and laws, then it has the whole U.S. market at its disposal,” Parker says. “But if you can have something that works in conjunction with GSM, then you have the whole European and Asian market at your disposal.”
Schroder, which backs life sciences and technology companies, in April invested $15 million in the Swedish business Across Wireless AB, which allows users to conduct various business transactions and make purchases through their mobile phones.
The firm also co-invested with Cisco Systems Inc. and Reuters Group PLC in ID2 Technologies AB, a Swedish company that makes security products for e-commerce sites. But with so much interest in e-commerce content companies by other venture firms, Schroder already has begun its foray into that area, investing in Silicon.com, an on-line magazine for the information technology industry, Parker says, emphasizing that his firm likely will back an established business-to-consumer company rather than a fledgling Web site. With its $1 billion Schroder Ventures European Fund, which closed in 1996, the firm invests some $5 million or more in an initial round of venture financing, depending on the nature of the business and its stage of development. Schroder, however, will not invest more than $10 million when backing an early-stage company.
Not Quite There Yet
Patricof, who works closely with his European affiliate Apax Partners, says the growing Internet enthusiasm in Europe has not yet hit levels seen in the U.S., although prices there are quickly rising. “They read the papers,” he says. “They know what valuations we’re getting here, and they want to get the same thing.”
While more U.S. venture capitalists turn to European Internet deals as a way to replicate success stories in their own backyards, Patricof cautions that it’s not that easy to do the same elsewhere. His advice is to work with strong domestic partners that understand local business cultures and have strong contacts.
Schroder has won a number of deals without posting the highest bid because entrepreneurs trust they will be well taken care of while in the hands of experienced investors with strong local ties, Parker says.
Advent’s Bernstein says U.S. venture capitalists are now starting to catch on to Europe’s Internet craze. “A year ago, I could have told you pretty much everybody who would even look at a business plan,” he says. “Now I can’t because there are lots and lots of people all wanting to get in.”
Advent, founded in 1984 by VC legend Peter Brooke, has 17 offices around the world and $3.5 billion under management. More than 50% of Advent’s funds are invested in Europe, with most Internet investments being made from the $1 billion Global Private Equity Fund and the Digital Media and Communications Fund.
While many U.S. venture firms have set up small London offices to take advantage of IT deals, Bernstein cautions that it takes years to build local networks, particularly in continental Europe, to recognize solid business plans and to catch those deals early. But Bernstein says he’s not worried about the potential competition that he’s about to face because of the enormous amount of deal flow.
“We’re at the beginning,” Humphries says. “We’re about 10 yards into a 100 yard race, and you can still get in if you’re very fast.”
European Venture Capital Firms that Back European Internet Deals
1999
AVG AVG AVG AVG
NUM NUM NUM NUM SUM PER PER PER PER
Firm OF OF OF OF INV ROUND COMP FUnd FIRM
Name ROUND COMP FUND FIRM ($MIL) ($MIL) ($MIL) ($MIL) ($MIL)
Index Ventures 2 2 1 1 13.08 6.54 6.54 13.08 13.08
NeSBIC Group B.V. 1 1 1 1 5.00 5.00 5.00 5.00 5.00
Amadeus Capital Partners 2 2 1 1 4.86 2.43 2.43 4.86 4.86
Barclay’s Development Cap. 1 1 1 1 4.17 4.17 4.17 4.17 4.17
Deutsche Bank AG 1 1 1 1 2.78 2.78 2.78 2.78 2.78
Kennet Capital Limited 1 1 1 1 2.78 2.78 2.78 2.78 2.78
Reuters Group PLC 1 1 1 1 2.78 2.78 2.78 2.78 2.78
ECI Ventures Ltd. 1 1 1 1 .81 .81 .81 .81 .81
Botts & Co. 1 1 1 1 .39 .39 .39 .39 .39
3i Group plc 1 1 1 1 .00 .00 .00 .00 .00
Bertelsmann Ventures 1 1 1 1 .00 .00 .00 .00 .00
TOTAL 13 13 11 11 36.65 2.82 2.82 3.33 3.33
Source: Venture Economics/National Venture Capital Association
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U.S. Venture Capital Firms that Back European Internet Deals
1999
AVG AVG AVG AVG
NUM NUM NUM NUM SUM PER PER PER PER
Firm OF OF OF OF INV ROUND COMP FUND FIRM
Name ROUND COMP FUND FIRM ($MIL) ($MIL) ($MIL) ($MIL) ($MIL)
Index Ventures 2 2 1 1 13.08 6.54 6.54 13.08 13.08
E.M. Warburg, Pincus & Co. LLC. 1 1 2 1 51.03 51.03 51.03 25.51 51.03
Other VC Firm 15 14 1 1 49.07 3.27 3.50 49.07 49.07
Atlas Venture 14 14 3 1 35.28 2.52 2.52 11.76 35.28
Advent International Corp. 1 1 1 1 18.00 18.00 18.00 18.00 18.00
Other Non VC Firm 5 5 1 1 17.34 3.47 3.47 17.34 17.34
Geocapital Partners L.L.C. 2 2 2 1 15.78 7.89 7.89 7.89 15.78
Patricof & Co. Ventures Inc. 1 1 1 1 12.00 12.00 12.00 12.00 12.00
Spectrum Equity Investors L.P. 1 1 1 1 12.00 12.00 12.00 12.00 12.00
Dresdner Kleinwort Benson PE 2 2 1 1 10.08 5.04 5.04 10.08 10.08
Battery Ventures L.P. 1 1 2 1 10.00 10.00 10.00 5.00 10.00
M/C Venture Partners 1 1 1 1 10.00 10.00 10.00 10.00 10.00
Individuals 3 3 1 1 9.81 3.27 3.27 9.81 9.81
D.D.J. Capital Management 1 1 1 1 7.00 7.00 7.00 7.00 7.00
Partech International 4 4 1 1 5.89 1.47 1.47 5.89 5.89
Bowman Capital 1 1 1 1 4.17 4.17 4.17 4.17 4.17
Chase Capital Partners 1 1 1 1 4.17 4.17 4.17 4.17 4.17
J.H. Whitney & Co. 1 1 1 1 4.12 4.12 4.12 4.12 4.12
Cisco Systems Inc. 1 1 1 1 3.25 3.25 3.25 3.25 3.25
Carlyle Group The 1 1 1 1 2.80 2.80 2.80 2.80 2.80
Quester Management Co. 1 1 1 1 2.78 2.78 2.78 2.78 2.78
3i Capital Corp. (US) 1 1 1 1 2.08 2.08 2.08 2.08 2.08
Fairfield Venture Partners 1 1 1 1 2.00 2.00 2.00 2.00 2.00
Anderson Investment Co. 1 1 1 1 1.50 1.50 1.50 1.50 1.50
Technology Holdings Ltd 1 1 1 1 1.10 1.10 1.10 1.10 1.10
Newbury Ventures 1 1 1 1 1.00 1.00 1.00 1.00 1.00
2M Invest Inc. 1 1 1 1 .60 .60 .60 .60 .60
Corporate Investor 1 1 1 1 .41 .41 .41 .41 .41
Defta Partners 1 1 1 1 .30 .30 .30 .30 .30
Flatiron Partners 1 1 1 1 .30 .30 .30 .30 .30
New Enterprise Associates 1 1 1 1 .09 .09 .09 .09 .09
i-Hatch Ventures(AKA: Soho Ventures) 1 1 1 1 .00 .00 .00 .00 .00
TOTAL 69 68 36 31 293.95 4.26 4.32 8.17 9.48
Source: Venture Economics/National Venture Capital Association
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