For most areas of the private equity industry, 2006 was a bumper fundraising year. But despite the record amounts of money flowing into the industry, many European venture capital firms looking to raise funds have met with a lukewarm response from investors.
Or at least some of them have. This week Index Ventures, one of Europe’s most successful venture groups, closed a €350 million fund that was “many times oversubscribed”, according to Index partner David Rimer. The firm could have hit its hard cap purely from its existing investors, but chose to take advantage of the demand to extend and diversify its investor base, particularly in the US. And all this without any help from a placement agent.
Rimer said investors were still keen to back firms like Index that have a proven track record. “Venture is the area of private equity with the biggest spread between the top and bottom quartiles,” he said. “It’s not a myth in this part of the market: you really must invest in the top quartile.”
However, it also plans to spend more of its time on investing life sciences, an area where it has been building up its team “slowly but surely” in recent years. Rimer said: “We’re seeing a lot of dealflow in life sciences, mostly in therapeutics.” This stems for the need of large pharmaceutical firms to outsource functions to smaller biotech companies – there is now a “mutual co-existence” between the two, he said.
Rimer said Index would probably spend about half the fund on IT and half on life sciences, “but we don’t force a specific target on ourselves”.
The firm is also taking a cautious look at cleantech – an area that is steadily becoming more popular. “Hopefully that’s an area we may get involved in. It’s tough, but it’s very interesting. Some areas have become crowded but it’s a large sector with a lot of opportunities.”
Rimer is keen to stress the operational value that Index can add to its companies. The firm has invested further in this by recruiting two former entrepreneurs as “venture partners”, who will work with the management of firms in the portfolio. Both have previously worked for companies backed by Index, so they have experience of both sides of the venture capital relationship. Saul Klein used to run Video Island, an online film company, while Mark De Boer is the founder of PanGenetics, an antibody development company. “We always seek to work as closely as possible with the entrepreneurs we back,” said Rimer.
So will Index be able to put this new pool of capital to work? Rimer said the firm was still bullish about the European market. “It used to be the case that you had to explain Europe. Now there is an acceptance that there is enough deal flow coming out of Europe. It’s just a matter of backing the funds that can find the best deals.”
However, Index expects its portfolio companies to look beyond Europe. Bernard Dallé, Index general partner, said: “Everything we do is about helping entrepreneurs move quickly to become global market leaders. Success for European companies has depended on their ability to extend their geographical reach quickly and cost-effectively.”
With its latest fund, Index now has more than €1 billion under management. And if its new fund is able to unearth another generation of high-profile successes like Betfair and Skype, other European venture firms may also be able to benefit from improved investor sentiment.