Friday Letter: Reasons to be cheerful

At long last Europe has a venture capital industry worth the name. PEO attended EVCA’s 2006 Venture Capital Forum this week in Barcelona and found delegates walking tall having finally cleared the wreckage of the dotcom years. It is truly remarkable the effect a few home-runs can have on a venture executive’s confidence, let alone his portfolio’s performance.  

One or two of their US peers were still sceptical about the existence of a fully formed (aka united states of…) Europe, beyond a single currency and a risk capital action plan. But even they conceded some of the changes sweeping the globe might play to the strengths of the continent’s heterogeneous venture teams and entrepreneurs.

Paul Deninger, chairman of boutique investment bank Jefferies Broadview, said it was in the DNA of Europe to be multicultural. This is an essential quality in a “flat world”, a buzz phrase much in use at the forum, describing the globalisation of markets, and the free flow of labour and capital between them.

In Europe, entrepreneurs with ambitions to grow their companies to their full potential have to think outside their domestic market from day one. Or they consign themselves to bit parts in a world dominated by genuinely borderless businesses.

Worse, they consign their venture backers to second-rate returns.

Deninger believes Europe’s venture firms may yet be able to steal a march on their US rivals who have grown used to winning on their own turf alone. The cultural flexibility at the heart of a European venture success, he believes, will suit a world where the two largest initial public offerings in the last twelve months were Chinese and Russian.

And why stop at the opportunities of a flat world? William Weiss, chairman and chief executive of US consultancy The Promar Group, urged delegates to think bigger and of a flat universe. He cited one client that was looking at the possibility of taking one of its products into space by 2013.

This perhaps is the inevitable hubris of an industry buoyed by Google, one of its home runs, reporting revenues of $8.2 billion for the last 12 months and whose advertising sales after just a decade are only eclipsed by those of the world’s three largest media firms.

But such hubris is forgivable when Google’s success means even Rupert Murdoch, the founder of News Corp and a great naysayer to the dotcom revolution, has finally capitulated. Deninger said at the peak of the bubble in 2000, Murdoch thought it was nuts. He said new media investing was crazy. He decried the multiples as insane.

He put his money where his wallet was and kept it there. And was saluted as a sage when the bubble burst.

Now in the same year that Bill Gates, another titan of yesterday’s technological revolution, has announced his retirement, Murdoch has bought MySpace, a social networking site, for an eye-watering multiple. The industry lost too much money in the bubble to risk suggesting this was Murdoch’s nemesis.

Deninger called it a sea-change year. And a quiet sense of vindication was palpable in the room.

But the real work has only just begun. Venture firms now have to persuade a broad and deep group of investors to commit meaningfully to the asset class at a time when buyout funds seem to sweep all before them.

There has never been a better time to be bullish on European venture. That is reason enough to be cheerful. But it takes more than a group of managers and their advisers to validate the proposition. The sight of a host of new European funds closed – and a diverse group of old and new firms managing them – will be time really to pop the cork on the Cava in Barcelona.