Questioning the Future of European Venture

Atlas Venture’s decision to shutter its London office after 15 years has dealt yet another blow to a battered industry

Is venture capital a failed experiment in Europe, or is it an increasingly powerful engine of innovation and entrepreneurship? Depending on how you read the tea leaves, it might be a bit of both. One prominent firm, Atlas Venture, recently exited the market, while another, Paris-based Sofinnova Partners, just closed a new $366 million fund.

Atlas is shrugging off Europe after investing there for nearly 15 years. The firm is shutting down its London office and retreating stateside to Boston, where it says having all its partners around the same table will facilitate better decision making.

Atlas was once a top venture investor in Europe, so the firm’s departure has raised many eyebrows—and questions. The biggest: What impact does the move have on the European venture and startup communities?

“I think the Atlas news would have been significant in the mid-90s when they were one of the leading firms in Europe, but recently they haven’t been,” says Mark Tluszcz, a managing partner at Luxembourg-based Mangrove Capital Partners. “I don’t think their decision to leave and restructure the partnership has any bearing whatsoever on the health of the European venture market.”

But others aren’t so sure. “The damage is more likely to be psychological for the ecosystem as a whole,” says Mark Littlewood of The Business Leaders Network, a U.K.-based organization that connects entrepreneurs with investors. “For funds raising money at present, they may have to explain the withdrawal of a marquee name from Europe and what that means for the asset class.”

It doesn’t help that the European venture market is coming off one of its worst years on record. Last year, venture capitalists invested $10.2 billion in 1,053 European companies, down from $12.6 billion invested in 1,517 European companies the prior year, according to Thomson Reuters (publisher of VCJ). And while 893 venture firms were active in the market two years ago, just 726 did deals last year, Thomson Reuters reports.

Even Sofinnova, which closed its new fund at the end of January, says the fund-raising environment is Europe is more challenging than ever. The firm raised about $140 million less than it did for its previous fund. “It was difficult, really difficult,” admits Jean Schmitt, a managing partner at Sofinnova. “Lots of meetings, lots of good questions to answer with a crystal ball. And lots of frustration to see large European institutions not investing in VCs, which are building the future, but in LBOs, which are robbing wealth from companies.”

The fact of the matter is that returns on early stage venture capital have been dismally low in Europe, which has made LPs gun shy. “Big exits are very rare in Europe,” says Azeem Azhar, a former tech journalist with The Economist who is now raising money for his new startup, Viewsflow. “The typical exit in Europe is only about $50 million. You almost never see a billion-dollar exit.”

Compounding the problem is that there are only a handful of European LPs who can invest $20 million or more in a single venture fund. By contrast, there are hundreds of such institutional investors in the United States. “We have much fewer people to call on,” explains Charles Grimsdale, a partner at London-based Eden Ventures. “There are not a lot of institutions who are serial venture investors.”

And if finding good investors is hard for European VC firms, locating promising startups can be even harder. Not because they don’t exist, but because they can exist anywhere, even in places like Estonia, Slovenia or the Czech Republic.

Unlike in the U.S., where there is a concentration of entrepreneurial activity in places like Silicon Valley and Boston, no such hub exists in Europe. “There is absolutely no data that suggests the U.K. is better for doing deals than, say, Russia,” says Tluszcz of Mangrove. “You have to get on the plane and hunt for every deal.”

“Gone are the days when you could sit in your office and wait for great opportunities to walk in the door,” echoes Lucy Marcus, founder of London-based Marcus Venture Consulting. “The challenge is finding a way to get closer to the places where the cutting-edge innovation is being done.”

All this adds up to a very problematic venture climate, which is perhaps the real reason Atlas decided to pack it in. Fred Destin, the London-based Atlas partner who is moving to Boston, didn’t respond to an interview request. But in a recent blog post, he noted: “I have been asked a few times whether this reflected a negative view on the Euro venture market. The answer is quite simply no.”

Atlas says it will continue to invest in Europe, though that will be hard to do from an ocean away. Still, no one is shedding tears over the firm’s departure. “The [venture] business is moving back to what it is really—not an industry, but a craftsman business,” says Schmitt of Sofinnova. “We need to make sure that the best craftsmen are funded and the others are not.” The only real impact Schmitt sees is slightly less competition for deals, which is not such a bad thing.

Indeed, Tluszcz sees the European venture market consolidating around a handful of top-tier firms. “In the U.S., there are hundreds of VC firms and maybe 10 to 20 that matter,” he says. “In Europe, there are 50 firms, and the same polarization is happening to maybe five firms. Honestly, I think that is the right size relative to what we have delivered so far.”

Despite the upheaval, there are promising signs of life in the European venture market. Littlewood notes that while the established funds have been moving toward later stage rounds, a new wave of more agile, operationally driven funds have emerged that take a hands-on approach to investing. Launched by some of Europe’s most successful technology entrepreneurs—including Niklas Zennstrom of Skype and Michael Birch of Bebo—these new firms include Atomico, Notion Capital, ProFounders Fund and Seedcamp.

Others see hope in the form of government sponsored initiatives designed to boost innovation and spur startup activity. The United Kingdom’s National Health Service, for instance, has established a £220 million Innovation Fund for the biotech and life sciences industries. “The initiative will be a huge boost for the sector, not only with money, but also in attitude and interest,” says venture consultant Marcus. “It is creating a dynamic environment that encourages research and innovative thinking.”

At the end of the day, some European venture funds will flourish, and others, like Atlas, will fade from the scene. “I can definitely see more firms shutting down and exiting the business,” says Azhar of Viewsflow. “But I can also see some that will tough it out and demonstrate to LPs that they can make their portfolio companies work. I’m sure that when confidence comes into the market, these firms will be able to raise money again.”

By Tom Stein, Contributor


1 March 2010


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