Nothing ventured, nothing gained
The focus of venture funding in Europe has undergone a radical shift over the past six months, leaving as many winners as losers.
For the last five years, there has been one key networking event for technology CEOs. The by-invitation-only European Technology Roundtable and Exhibition (ETRE) has drawn the crÃ¨me de la crÃ¨me of chief executives, including Microsoft’s Bill Gates, former 3Com CEO Eric Benhamou and former Compaq head Eckhard Pfeiffer.
This year’s event, held in Prague in October, was no different. Milling in the corridors of the Hilton (free of their usual entourages of lawyers, PR people and accountants) were Hasso Plattner of SAP, Keith Krach of Ariba, Carol Bartz of Autodesk, Irwin Jacobs of Qualcomm, and Gil Shwed of Check Point Software.
Alongside these veterans were a different group of CEOs: the young leaders of Internet start-ups, who typically can only point to “meaningful” revenues at some time in the future and to whom talk of profits shows ignorance. This year their presence created a different kind of atmosphere at ETRE. The usual backroom dealing of the major CEOs was overshadowed by their frantic efforts to glean contact with the only non-CEO attendees allowed – venture capitalists, investments bankers and mergers and acquisitions specialists.
After every session, executives from companies like Pricerunner, Ynot.com, FilmFestivals.com, MadOnion.com and LetsBuyIt.com were queuing four deep to make their case for follow-on funding or an earlier initial public offering, perhaps a partnership with a major player, or even an exit strategy through acquisition.
That made transparent the new reality for many of the newcomers to ETRE. Companies which raised substantial first or second round funding in 1998 and 1999 are running out of money – and following the April 2000 crash in Internet company valuations, they are struggling to get further support.
Throughout Europe, early-stage companies that found it relatively easy to raise funds during the Internet frenzy, are now being given the brush off. Venture capitalists are still awash with cash (Initiative Europe says that during 2000, VCs have raised EU10 billion for investment in European tech companies). But while VCs need to find a home for that cash, they are being brutally selective in their choices, sometimes abandoning companies they once backed enthusiastically. What is surprising is how they are turning their attention to start-ups whose business plans they regarded, only a few months ago, as staid and distinctly old economy.
The volte face has been abrupt for some. When Dave Richmond tried to raise money for Striva, the ebusiness integration software company he started with a group of veterans in 1999, European VCs
While [six months ago] companies in infrastructure products had to fight for investment, now the investors are getting into bidding wars.
showed a mix of contempt, disinterest and, in his opinion, sheer ignorance.
Richmond does little to disguise his disdain for two organisations that snubbed Striva – Elderstreet and 3i – who said that his company lacked “dot-com panache”. “Last year when we discussed funding, all they were interested in were dot-coms,” he said. “We’d ask: ‘What have they got that we don’t have’, only to be told, ‘A dot-com brand, first mover advantage and a B2C profile’. The VCs just could not get their heads round the value proposition,” says Richmond. “We have real IP [intellectual property], while the guys they were interested in can be disintermediated overnight.”
To an extent those sentiments have now swung in Striva’s favour. “It’s been a whole attitude change,” says Richmond. Elderstreet came back to see if Striva was still interested in raising capital, but the company has instead sourced an estimated $5 million to $10 million from Leapfrog Ventures, a Silicon Valley-based VC operation with close links to PricewaterhouseCoopers.
In Richmond’s view, Silicon Valley VCs started pulling the plug on companies with shaky dot-com business models early in the second quarter. It took European VCs a few more months to follow suit. The sense of a watershed is also felt at data integration company, Avellino “It has been a complete change,” says CEO Tony Rodriguez. “VCs who we had difficulty getting any time with are now beating a path to our door. Before March or April, if you were not a dot-com they did not want to know. Now all the VCs we talk to are interested in IT infrastructure products only,” says Rodriguez.
Three-year-old Avellino, which is profitable on revenues of around Â£5 million (largely built on consultancy fees), is likely to sign first round funding with Broadview, 3i and possibly Elderstreet. In November, the company released its initial product, Avellino Discovery, a tool for steamlining the integration of multiple data sources – a critical element in data warehousing and B2B exchanges.
VC PORTFOLIO SHUFFLE
- Wireless infrastructure technologies
- eCRM companies
- Corporate content management software
- Security software
- B2B integration software
- E-procurement software
- Web services
- (Examples: MediaSurface, Roxen, Valimo, Zygon, IXEurope)
- Application service provision
- Early WAP applications
- B2B exchanges
- (Examples: SevenMountains, LeatherXchange, Celtipharm, B2Build, Buyingpower)
- Consumers portals
- Comparison shopping
- (Examples: Sharpcards, TravelSelect, Leisurehunt.com)
What is clear is that funding is gravitating towards certain types of Internet venture, having been previously spread widely (see graph, Before the crash). “In the last year the type of companies that VCs find attractive has cycled from B2C to B2B technology and infrastructure,” says Lucy Marcus of Marcus Ventures.
But that switch is very recent. As late as September, European start-ups with pure Internet business models were still picking up substantial cash. UK’s HomePro, which links people working on home renovation to building contractors, raised Â£2.7 million in a third round led by Atlas. Similarly, Germany’s eCircle, a self-styled European community portal, sourced EU12 million from Deutsche Telekom’s T-Telematik Venture Holding.
And while Internet services ventures – such as web hosting – still garner enthusiasm (IXEurope, a web hosting specialist raised $56.5 million in September), since the beginning of the third quarter the flow of cash into pure dot-coms, and especially B2C dot-coms, has all but dried up. That has resulted in a gravitational pull towards corporate ebusiness companies that can put forward experienced management and a solid technological grounding.
Joe Collinwood is CEO of Entuity, a network performance software company. In recent months, he says, he has been taking a constant flow of calls from VCs keen to top up the company’s $12 million second round and from investment bankers pushing to manage an initial public offering. “While companies in infrastructure products had to fight for investment, now the investors are getting into bidding wars,” says Collinwood.
What that says is that there is as much urgency among financial backers as there is among dot-com companies. “Increasingly there is too much capital chasing after too few good, promising deals,” says Marcus. But Europe’s more discriminating, more cautious flow of funds will inevitably result in the end of the ride for many companies – notwithstanding their intense lobbying efforts at conferences like ETRE. “Some companies will just need a longer run-way,” says David Wetherell, CEO of Internet investment vehicle CMGI. “But for others it is going to be hard to raise further money.”
Unfortunately, says Marcus, some quality companies are bound to be dismissed in the process because they are positioned in the wrong part of the industry at the wrong time.
On the other hand the market correction should weed out the weak, says Paul Denninger, CEO of M&A adviser Broadview. “It’s a healthy thing for the industry to go through a value compression. Three quarters of web services companies are trading below their IPO price, and lots simply won’t make it back. Most of these companies can’t raise further cash and there is no safety net – even from an M&A perspective,” he says. Unfortunately, the same goes for many of their pre-IPO counterparts.
Author: Kenny Maciver
Date: 24 November 2000