European venture investors enjoy wallowing in nostalgia as much as anyone. Give the more experienced among them the opportunity to reminisce on the past, and they will invariably transport you back to the era of the ‘club deal’ when a small coterie of VCs regularly banded together to share information, deals and golfing tips.
What is perhaps less acknowledged now is that it was not just the general partner groups presenting a united front: limited partners had an exclusive club all of their own. Reflecting on raising venture funds in the UK ten years ago, MTI Partners CEO Ernie Richardson says: “It was a much simpler and more personal process. You went along to the likes of John McCrory at Westport Private Equity, Roddy Swire at Pantheon and Peter Gale at Gartmore, you did your pitch and you got funded – or not.”
There are other signs of the times. Funds of funds are now a more significant contributor to venture funds than they were in the past. Pitching to the likes of AlpInvest Partners and HarbourVest Partners, says Richardson, means having to confront the new realities of ruthless professionalism, committee decisions and global benchmarks. “European GPs have been slow to understand the significance of this,” he opines.
But while the environment is different, different does not mean worse. As in the old days, there are still individuals prepared to adopt the mantle of cheerleaders for venture. It would be erroneous to conclude that the emergence of the “committee decision” cited by Richardson has coincided with the extinction of individuals within LP organisations prepared to stand out from the crowd and proclaim the virtues of early-stage investment. One could argue that over the last few years, to do so has taken more courage than ever before in the wake of the tech slump and flatlining returns.
So let’s salute this brave band with a quick roll call. Take a bow: David Gamble (former CEO, British Airways Pension Investment Management); John Holloway (director of operations, European Investment Fund); Vincenzo Narciso (vice president, Swiss Re Private Equity Advisers); Joost Holleman (senior investment manager, AlpInvest Partners); and Urs Wietlisbach (chairman, Partners Group). This is just a selection the names proffered to PEO when GPs were asked who they felt have earned most gratitude from the VC community for unstinting support through the hard times.
European venture, doing its best to try and justify the faith of these flag wavers, is just beginning to show signs of a revival. For example, the recent British Venture Capital Association (BVCA) Performance Measurement Survey showed early-stage and technology funds demonstrating a positive return in 2004 for the first time in four years. While that doesn’t compensate for the fact that these funds are still in negative territory over three, five and ten-year timeframes, it’s undoubtedly a step in the right direction.
What’s more, the whisper on the street is that buyout funds will struggle to prolong their halcyon days beyond the next couple of years. By that time, many in the industry now say, a combination of capital over-allocation, aggressive leverage and high entry multiples will be seen to be taking their toll on returns. If so, venture may benefit from what Richardson describes as “a small shift in allocation strategy on the part of investors that could nonetheless have a profound impact on [venture] fundraising prospects”.
To revisit the earlier point about institutionalisation of the investor base, it is clear that raising venture funds will never again be as easy, or as intimate, as it once was. That is not to say that today’s limited partners have unrealistic expectations of what can be achieved. The argument that European venture funds don’t match the returns of the much-vaunted elite groups in the US is irrelevant. The best European VCs are expected to be on a par with the “second-tier” US funds, not the best of breed.
Arguably a more important aspect of LP due diligence these days is ability to provide evidence of a coherent global strategy. Europe doesn’t lack great young businesses – what it perhaps lacks is the ability to execute strategies on a global rather than national or regional basis. VCs need to be able to provide a compelling answer when asked how they intend to deal not just with the competitive threat of the US but also that of countries such as Australia, China, India and Israel.
If they can do so, they will win friends in the limited partner community. The bottom line is that investors may look and sound different these days, but that doesn’t mean they’re any more hostile. The cheerleaders for European venture have not been silenced.