European venture capitalists appear fundamentally disinclined to invest beyond the earliest stage in the continent's hot young technology prospects. As a result, entrepreneurs are being forced to pack their laptops and head stateside to California and beyond to hunt out the funding they need to grow.
To the European entrepreneur trying to raise start-up funding the grass, or perhaps more accurately the dollar, has long seemed greener and easier to find on the other side of the Atlantic. The figures bear this out.
According to the European Private Equity and Venture Capital Association and Dow Jones VentureSource, a chasm exists between the amount of later stage deals signed in Europe compared to the amount signed in the U.S.
While there was relatively little difference between Europe and the U.S. in terms of the number of lower value venture capital deals signed annually between 2003 and 2010, according to figures from EVCA and Dow Jones, for those deals over $5 million the difference is startling. The U.S. averaged over 1300 deals annually between 2003 and 2010, which was about six times more than in Europe over the same time period.
Partly this reflects the enormous difference in size and maturity of the venture capital industries on each side of the Atlantic. "In many ways we're where the U.S. was in the 1980s," says Davor Hebel, principal of Fidelity Growth Partners, which in January announced a £100 million ($160 million) fund dedicated to investing in fast growing technology companies across Europe.
He acknowledges there is a problem which partly arises from the age difference in the two industries. U.S. venture capitalists over the last 50 years, he says, have perhaps learned to be a little more patient in waiting for returns on investment compared with their European counterparts.
"I think that a lot of entrepreneurs in Europe sell out too early. And we, as venture capitalists, are partly guilty of that as well because maybe we don't encourage them to really go for that billion dollar exit, which is really what this business is about, building billion dollar companies," he says.
Go it alone or sell out?
As an example, he points to two companies: London-based, Playfish, and Zynga from San Francisco. They both operate in the same business, creating online games which can be played with others - most commonly through the social networking site Facebook.
In November 2009 Playfish, the European based company, announced it had been acquired by
giant San Francisco-based video games company Electronic Arts for an initial $275 million with up to $125 million to come in addition if performance targets were met. A few weeks later, Zynga, the U.S. company, revealed it had managed to complete a $180 million funding round - assuring its independence.
"It's not really a question of the European venture capital industry and 'do we have enough capital?', it's really a question of entrepreneurs and what kind of aspirations they have," says Mr. Hebel. He adds, as an example of the type of entrepreneur who perhaps could only come from America, Mark Zuckerberg, the founder of Facebook who has turned down numerous and ever-increasing offers for his company which guesstimates now value at anything up to $30 billion.
Nonetheless Mr. Hebel remains resolutely upbeat. "We are very excited and bullish about the environment and we think venture capitalists and entrepreneurs can do more to build a European success story. People with aspirations for greatness, entrepreneurs who are really trying to build transformative technologies rarely go unfunded. For every deal that I compete for there seems to be plenty of bidders."
There are, however, other problems with the European venture capital industry. Its fragmented nature is one such difficulty, according to Frederic Court, general partner at Advent Venture Partners. "A lot of the venture capital expertise is concentrated in London funds, which have global ambitions and a much wider visibility in the market versus French funds, which are focused on France, German funds which are focused on Germany and so on."
This creates an additional incentive to look for funding Stateside. But, he says: "Silicon Valley investors hate investing outside the Valley, even in the U.S. Europe feels like it's too far and it's also an environment they don't necessarily understand. Now they look at France and the social unrest there and it reduces their appetite even further."
The answer may be to move. A route followed by one of Mr. Court's success stories, Zong, a business based on enabling users to bill services directly to their mobile phones. It was based in Geneva, Switzerland, but is now in Paolo Alto, California.
"We decided consciously to raise funds from a local Silicon Valley fund called Matrix Partners and they're very complementary to us. The deal wasn't done out of frustration that there wasn't European capital available, but with that specific company in mind," says Mr. Court.
It was as a result of that move, he believes, that Zong was able to make what is probably its most important deal. In April it became the mobile payment provider for Facebook Credits. Facebook is also headquartered in Paolo Alto.
Other European companies have also found it worthwhile to work with venture capitalists on America's west coast. "We didn't even look at U.K.-based investors. We went straight to the top tier private equity companies in the San Francisco Bay Area." says John Lazar, chairman of London-based telecommunications specialist Metaswitch Networks.
In 2008, the company received investment from Francisco Partners and Sequoia Capital. Before that it had grown organically for 25 years.
The company is very much British with engineering staff drawn from top U.K. universities, but most of its revenue comes from abroad.
"The decision to take on investors from Silicon Valley was very much driven by it being our natural home in terms of our customer base. And, as we begin to think about an initial public offering, we would almost certainly do that on Nasdaq because our revenue is there, our customer base is there, our market is there."
The other common complaint by businesses is that venture capitalists aren't interested until a company's success is assured. Guy Mucklow, managing director of fast-growing customer optimization specialist PostcodeAnywhere, says he now regularly receives approaches from potential investors, but in the business's early days he was constantly told it had no chance of success against a powerful incumbent.
In the end he gave up pursuing venture capital investment. "It was the best thing that never happened to us." he says.
Nick Clayton is a writer based in Ibiza, Spain, and can be reached at reports@wsj.com
