From Computer Business Review, a sister publication
Three years ago the outlook for most young technology companies in Europe was bleak. Start-ups in search of venture capital found the doors of investment banks and venture funding organizations closed – both in Europe and in the US. Venture backers were put off by the lack of a clear ‘exit strategy’ that would give them a chance to reap the rewards of their investment. With no European equivalent to the US NASDAQ market – the focus for most US high-tech start-ups – the venture capitalists (VCs) preferred exit strategy was blocked. No exit strategy, no money. But in the last 18 month the cycle has been broken, and the European venture capital flood gates have been thrown open. A series of highly-successful flotations on NASDAQ by European IT companies has broken the log jam, and US VCs are on the search for the next Business Objects (of France), Baan (of Holland) and Planning Sciences (of the UK), all European software companies whose shares have risen high since they listed on NASDAQ. Those flotations have created a tremendous sucking effect. VC money in Europe has never been as obtainable, says Pierre Haren, chief executive of ILOG, the $21 million French application development tools company which is aiming to list on NASDAQ in the fourth quarter of 1996. All of a sudden, the VCs can see a way out – it’s like a gold rush. The lack of venture capital in Europe has left a pool of under-funded companies which are viewed as potentially rich pickings for VCs. It’s a virgin market, says Kurt Nybroe-Nielsen, president of New Edge, a venture capital company recently set up with Texan money specifically to tap the European seam. Until recently, Nybroe-Nielsen was chief operating officer at Olicom, a Danish PC networking products company, which along with competitor Madge NV was one of the first European companies to make it to NASDAQ three years ago. By Nybroe-Nielsen’s assessment, only 20 European investment companies could accurately be described as VCs, mostly in the UK and France. That compares to the 1,500 VCs servicing the US. Jochen Witte, chief financial officer at Poet Software, a $4.5 million desktop object database company which is shooting for a 1998 IPO, estimates that there are only 3 or 4 VCs active in Germany. The rush of VCs was much in evidence in London last month as US investment companies descended on Venture Market Europe, a shop-window for young companies in search of funding. VCs were spoilt for choice with around 60 hopefuls pitching to several hundred VCs, investment bankers, IPO lawyers and consultants. Unlike the US venture market, where VCs are fighting each other for the chance to be part of the next hot Internet or data warehousing company, in Europe there is little competition for their services. But more importantly, European companies are seeking venture capital at a more mature stage in their growth. The companies fishing for funds at Venture Europe were a mixed bag – plenty of entertainment and online information companies; a couple of networking start-ups with high-speed ATM products; a handful of application development software companies – but only a couple of Internet product vendors. This included established companies such as ARM, the ú10.3 million ($15.8 million), low-power RISC chip maker which is shooting for an IPO late next year; Micromuse from the UK, a $30 million systems management software company; Prolin, a $20 million help desk software company from Holland which is aiming its IPO for March 1997; and UK Online a ú26 million ($40 million) online information service supplier.
Many are not necessarily young – but that is hardly a disadvantage. There is a pool of very high quality companies queuing up to be taken public. They are more mature, more stable than the likes of Yahoo! and the other unproven Internet sensations, says Haren.The transatlantic flow has even woken up some European VCs to the potential. Typically they have only been interested in more mature companies when they are in search of expansion funding. Only a sixth of European VC money goes to companies in the seed or start-up phase. That is changing – Haren cites a French bank which has just put $80 million into a VC pot. Another inspiration for the VC rush is EASDAQ – a further acceptable exit strategy in the minds of most VCs. Starting up in September, this will create a European-wide stock market on the model of NASDAQ.
Nevertheless, the majority of companies hoping for an IPO are happier with the idea of a flotation on NASDAQ. Not only do they think they can get a higher valuation on NASDAQ, but part of the reason many European companies float is to raise their profile in the US market – something that would be missing in an EASDAQ listing. Outside of EASDAQ, two initiatives from the UK and France offer yet another channel to market. The Alternative Investment Market (AIM) in London and the Nouveau March in Paris have attracted only a few computer industry companies, such as application development software company Intelligent Environment Group Plc which has opted for an AIM listing. But many executives still have reservations about these smaller markets – even EASDAQ. It takes a lot of actors to make an IPO work. Very good analysts, investor sales people, interested investment banks, and heavy-duty institutional investors, says Haren. It will take many years before any alternative to NASDAQ achieves that kind of complex infrastructure, he says. Nevertheless, EASDAQ is featuring in such company’s thoughts. A company like ILOG sees its initial IPO on NASDAQ being followed by a secondary offering on EASDAQ, thereby increasingly its scope for liquidity and offering European investors a shot at the hottest stocks. But the venture capital industry is fickle. The current rush of IPOs on NASDAQ is likely to slacken, with the result that funds will become tighter, and there will be less competition for funds among US technology start-ups. That may mean US VCs become more circumspect about rushing into Europe. But the pattern is set – European technology companies can be a hit on NASDAQ – and the flow of early-stage investment funds from US VCs to Europe’s technology start-ups is now well established.
