While some signs are emerging that interest in the beleaguered European venture space is beginning to pick up, the names of some of the firms leading the way back from the funding desert may be less than familiar to observers of private equity. In the hedge fund industry, however, names like Cheyne Partners and GLG Partners are very well known – and it is firms like these that are increasingly teaming up with Europe's new generation of technology entrepreneurs.
Cheyne and GLG led the recent €38.6 million ($52.8 million) fundraising of fabless radio and TV semiconductor company Frontier Silicon. In another, larger, example of the trend, Tudor Ventures and Oak Investment Partners co-led the near €80 million fundraising for semiconductor company Plastic Logic.
Sarah McVittie, chief executive of SMS question and answer service Texperts, recently became the latest recipient of hedge fund money, via a £1.3 million (€1.9 million; $2.6 million) funding round led by Odey Asset Management.
Talking to PEI, McVittie flags one key advantage of securing a hedge fund backer: namely, a greater willingness to process applications for funds quickly, without the cumbersome due diligence carried out by venture capitalists.
She says: “Due diligence is a necessary part of investment but, from our point of view, avoiding the to-ing and fro-ing needed to secure venture capital meant we could get through the process sooner. For venture capitalists due diligence is part of their job, but when you want to move forward quickly the sooner you can get the process done, the better.”
Texperts is considering an IPO in the next 12 to 18 months depending on its results over the next three to five months, and so is not typical of early-stage companies, which often look for venture backing for several years or more. However, McVittie says that another fundraising round is a possible – if less attractive – alternative for her company.
Tom Anthofer of European venture secondaries investor Cipio Partners has a wary view of hedge fund involvement in the venture space. He says: “The market is cyclical, and there are stages in the froth cycle when everyone, from traditional VCs to high net-worth individuals through to hedge funds, is hot to join in on a high-flying company's funding round.”
Adding a cautionary note, he says: “When a business needs more money than projected and the story has lost a bit of its shine, that's when you might see some of the new players pull back.” He says that hedge funds and others have little experience looking after start-ups and less inclination than mainstream VCs to get down into the trenches to fix troubled ones. “Venture investments are often multi-year journeys through one or more cycles, which may severely test these investors' staying power,” says Anthofer.
Anthofer expects that hedge funds, as well as angel investors, university spin-off funds and other non-mainstream VCs that have entered the venture space, may pull back or fully exit the sector when corrections come.
While universities and angel investors are most likely to be forced into doing so because they lack the funds and staying power to maintain their equity position until an eventual exit, hedge funds, despite having big pockets, may face other constraints. Anthofer questions whether it is possible for the funds to achieve the sensible risk management they are accustomed to in their core trading activities.
Yet despite such reservations, venture capitalists should be paying attention to the latest arrivals in the space. Could it be venture firms will lose out on backing tomorrow's winners because their due diligence demands are too overbearing? In some of these cases, hedge funds may be the beneficiaries. By the same token, cynics say that should things go wrong, the victims may end up being the start-ups.