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Accountancy firms slam brakes on early stage

Accountancy firms seem to be taking a break from early stage ventures with most putting their incubator models launched at the height of the tech boom on hold. Ernst & Young for example, which like counterparts Deloitte & Touche and KPMG had set up a division operating as an accelerator rather than an incubator, offering services for a fee and in certain cases taking equity in lieu of a fee, has ceased activity indefinitely.

Dominic Searle, who was formerly part of the ten-strong team at Ernst & Young’s e-Business Accelerator, which was headed by Jo Enefer, said most of the team have taken on different positions within Ernst & Young. The accelerator was launched in 2000 and kept going for about 18 months focusing mainly on technology ventures. Searle said: “The crash in tech funding in the marketplace meant that we took the decision to put the venture on ice and as and when conditions improve, we would decide whether to restart.”

He added: “At the moment there is no activity specifically focused on acceleration, but we are still working on some early stage transactions. I suspect if we were to go back, it would go under a different model there is not much appetite for incubators at the moment.”

It’s a similar situation at Deloitte & Touche, which never defined its department as an incubator as such, but did have a strong focus on providing services to early stage technology investments.

John Gilligan, part of the technology group at Deloitte & Touche, says it’s a tough sector, but it’s nevertheless business as usual for the firm. “A lot of our business in the technology group at the moment is focused on companies which may not be capital raising, but are restructuring. It is generally tough in the technology market. It is quite bloody.”

Following the deal to acquire the UK division of Andersen, the accountancy firm implicated in the collapse of Enron, Deloitte & Touche has effectively doubled the size of its corporate finance business. The same can be said of its technology group, which has been merged with Andersen’s similar group to form a 12-strong team headed by Christopher Williams. At the time of the incubator boom Andersen had jumped on the bandwagon setting aside $500 million globally for investments.

Similarly PricewaterhouseCoopers structured its PricewaterhouseCoopers Incubator operation to enable it to carry out a fee for equity exchange for which it too set aside $500 million. Last year, the group had a change of strategy and with high hopes changed its name to PricewaterhouseCoopers Venture Partners in an effort to dissociate itself from the bad press incubators had been experiencing.

The venture also expanded its investment team pressing on with investments in spite of shaky market conditions. There was even talk of launching a venture capital fund. The team made five investments in its first year of existence and is waiting for the market to recover. Gerry Devlin, managing director of PricewaterhouseCoopers Venture Partners, asks: “What’s going on at the moment? It’s quite a strange market we’re not active at the moment and haven’t seen anything of particular interest. As far as the portfolio is concerned some of the ventures we have at the moment are doing fine, but as a general comment on the market it’s a difficult market for early stage ventures.”

He adds that there are a lot of early stage companies that need to ensure they are sufficiently funded in order to get themselves into the position where they can break even and generate revenues themselves. That early stage period, he says, is quite difficult at the moment.