Top of the cycle

Fundraising continues to be difficult for European venture funds. But one French GP hopes to race ahead of the peloton with a novel investment thesis, writes Matthieu Favas

The cycling industry is on a roll. In the last decade, its popularity has exploded: 191 million bikes were sold in 2011, according to market research provider NDP, more than three times the number of cars produced in the same period. And as major cities follow Barcelona, London and Paris in developing bike-sharing schemes, the industry looks well set for further growth. 

Or at least that’s the rationale behind Velo Capital Partners, the first-ever venture fund dedicated to the cycling industry. “It’s a very attractive opportunity for LPs to diversify out of overinvested sectors such as software, biotech, digital media and telecommunications, where returns are now very limited,” says Patrick Keating, team leader at VCP.

As more of the world’s population moves from rural areas to cities, cycling provides an answer to some pressing problems, he argues: it’s cheap, quiet and eco-friendly. Equally, it’s becoming increasingly popular as a leisure activity for the wealthy; as the Economist pithily proclaimed last April: “Cycling is the new golf”.

Crucially, however, the industry needs innovation. “Over the last 20 years cycling has mainly relied on road bikes and mountain bikes,” says Keating. “But now there’s a huge demand for urban bikes. The existing equipment is not ready for this kind of future.” The trouble, he argues, is that access to expansion capital is virtually non-existent: with few trade players able to spend on R&D, cycling start-ups have so far relied on friends and family to raise money.
That’s where VCP comes in, he says. The firm is trying to raise between €50 million and €100 million to provide the early cash start-ups need to bring material, electronic or design innovations to market.

“There’s a lot of excitement around the initiative,” Keating suggests. “Since we spread the news, we’ve had two or three people every week contacting us with new ideas.” These have included chips that tell cyclists when their tyre is losing air, or helmets that naturally rotate during a fall to better protect from brain damage.

Whilst unlikely to produce the sort of returns from a Skype or a Facebook, he thinks the industry has enough momentum to match the 15 to 20 percent IRR sometimes achieved in the automotive sector. Finding exits certainly shouldn’t be a problem, he says: with the bicycle market expected to grow from $50 billion in 2011 to $77.7 billion in 2015, according to research firm Global Industry Analysts, cash-rich trade buyers are already on the look-out for acquisition targets.

Keating is well aware that the road ahead will be bumpy. “We’re a first-time team, in a first-time fund, in a first-time industry. So the odds are against us.” But he still believes signing up LPs won’t be too difficult. “We only need to bring a group of five to 10 investors into the first fund. And many of the LPs we’ve been talking to are passionate about cycling as well.”

If nothing else, his venture is nicely timed: VCP is being launched in the year when the famous Tour de France (the latest edition of which started at the end of June) celebrates its centenary. Keating, an avid fan, says he’s picked both of the previous two winners. LPs will be hoping Velo can have a similar hit rate on the investment front. ?