Geoff Naim | 16 Apr 2012
Technology is riding a new wave of popularity with European investors. It was the most overweighted sector among eurozone fund managers in March, according to Bank of America Merrill Lynch’s monthly survey.
But with Apple’s share price approaching record levels and Facebook’s initial public offering tipped to be the biggest internet company flotation, investors may want to seek out less charted waters instead of following the crowd.
Venture capital offers high net worth individuals the chance to get in on the ground floor by investing early in businesses that could become tomorrow’s technology stars. But it is not for the risk-averse or those looking for a quick profit.
Alex van Someren, a serial tech entrepreneur who runs a £10m seed capital fund for Amadeus Capital Partners, a leading UK venture capital firm, said: “It requires a 10-year commitment.”
Venture capital investing has traditionally required deep pockets. An investor who puts ?1m into a conventional VC fund may face a total commitment of ?5m over successive funding rounds. In return, investors expect annual returns of 20% or more, although performances vary considerably.
Van Someren says that because of the lengthy timeframe and poor liquidity, high net worth individuals should view VC investment as an alternative asset class rather than as another form of equity fund.
Indeed, VC funds can help diversify a portfolio as research shows little correlation between early-stage private equity and public equity markets.
Investing early in a company’s life cycle typically leads to greater returns. But Miguel Valdés, chief executive and co-founder of French software company BonitaSoft, says European VC firms are often wary of being too early and many prefer to put bigger sums into more established businesses.
BonitaSoft raised $6m from two French VC firms in July 2009, just one month after starting the business. It raised a further $11m last year.
But many start-ups are not so lucky and face a “funding gap” when the founders’ capital is exhausted but the company is too small to justify a conventional first round of VC financing. B
usiness angels may fill the gap. These are high net worth investors who invest their own money in young businesses. In the past, European tech entrepreneurs complained of the difficulties making connections with tech-savvy angel investors.
This is changing with the growth of angel networks and “crowdfunding” initiatives such as Seedups, a website that helps start-ups raise seed capital from high net worth investors using an auction approach. Indeed, seed funding is now one of the most dynamic investment areas in Europe and the VC industry has woken up to the trend.
Van Someren’s two-year-old Amadeus and Angels Seed fund is one of a new generation of seed-stage VC funds, which usually have lower minimum investments than traditional VC funds making them accessible to a broader investor base.
Fifty investors have committed a total of £3.5m to the £10m Amadeus fund. The remainder comes from the Enterprise Capital Fund, a UK government initiative to back entrepreneurs.
Despite the buzz around social networking, Van Someren prefers businesses with “rich intellectual property” and avoids most internet start-ups. He says: “We are not willing to invest in areas that are oversubscribed. There are a very large number of mediocre businesses in social networking.”
UK-based Passion Capital also sees good opportunities in seed capital. Unlike Amadeus, it has no fear of internet companies as the three founders are key figures in Europe’s internet industry. It has investments in 19 early-stage companies in areas such as social micropayments, academic social networks and website analytics. The average investment is about £200,000.
A third of the £37.5m fund comes from high net worth individuals, with the Enterprise Capital Fund supplying the remainder. Eileen Burbidge, a partner at Passion Capital, says: “The ECF is a very tax-efficient way for high net worth individuals to invest in tech.
She says initiatives similar to the ECF in France and Germany show Europe is finally waking up to the need to do more to encourage business angels to invest in tech start-ups and so close the funding gap.