Face-to-face: High-tech star

What are the keys to adding value to technology investments?

Adding value to technology investments is not that different from adding value to other high growth companies. A very important element is the recruitment of senior management who can cope with the levels of growth we expect in these businesses. We therefore work very closely with our portfolio companies in the area of management development.

One unique aspect of technology companies is that they are frequently acquired or go public at valuations that are based on their mid-term strategic value rather than short-term economic fundamentals. Technology venture capitalists must assist their portfolio companies in developing strategies that will maximise valuation in these kinds of exits.

Finally, the facilitation of industry contacts and relationships, and the overall experience one brings to the table from involvement with many different technology companies, are additional elements that a good VC brings to his portfolio.

Do you think institutional investors have become more open-minded in investing in technology?

Institutional investors have clearly become more open minded about investing in technology. Two and a half years ago, when we were raising our first fund, the questions posed by most institutional investors were: Is technology going to be an interesting investment area in Europe?’ Are European technology companies really going to be successful in the global IT/telecoms industry?’ These questions simply don’t come up any more. We are seeing an unprecedented level of interest in backing European technology focused venture capital funds.

How has the environment changed as a result of the arrival of incubators, generators et al?

I think it is too early to say what the effect of incubators and generators will be. Most of the incubators we have encountered are only just starting to establish themselves and very few, if any, European incubators have reached the point where they are moving companies from an incubation to second-level funding stage. In general, I think incubators are a fine idea so long as those involved are really bringing experience and expertise to the incubated businesses. We’ve seen some incubators which provide little more than shared office space and internet access.

What would be the impact on technology venture capital companies if the technology bubble’ were to burst?

If the technology bubble were to burst the impact would vary, depending on the profile of technology portfolio one has. I think that the portfolios most at risk are those that are heavily weighted with consumer-facing Internet companies. These businesses have had some of the highest valuations relative to their near-term fundamental economic value. At the other end of the spectrum, technology service businesses which are basically consulting businesses focusing in highly technical areas will continue to be strong businesses. Technology infrastructure companies lie somewhere between these two areas. When we invest in technology businesses, we almost always pose the question: What would this company look like if the technology stock markets had a major downturn?’ We tend to focus our attention on companies with a high level of technology or strategic value.

What is your approach to seeking investment opportunities in Europe?

Our approach to seeking investment opportunities in Europe is to ignore national boundaries within our area of focus (Northern Europe). We decide that we want to back businesses in particular vertical technology segments. We then work hard to identify Europe’s best candidates in these areas. Whether the companies are located in the UK, Sweden or the Netherlands is not an important element in our investment decision. I think that to be a credible technology investor in Europe today, one has to be a specialist. Having a solid understanding of your targeted investment segments is a great advantage.

If I were a potential investor, what would persuade me to invest my money with Kennet?

I would hope that the team we have assembled, our track record to date, and the tremendous market opportunity for technology investing in Europe, would be persuasive arguments.

How has the recent arrival of US technology houses in Europe affected the ability of established players to do deals?

The arrival of US technology houses in Europe has certainly had an effect on the investment climate, though there are fewer US technology VCs here than the media would lead one to believe. I see several effects to date. First, as a result of greater competition, prices have increased and the typical deal cycle has become much shorter. Two or three years ago, it was almost unheard of for a company to go from a first meeting with a VC to a closed investment in a matter of weeks. Today this is fairly typical. The presence of US technology investors has also emphasized the importance of adding value. In the current environment, unless one can demonstrate a clear ability to contribute more than just money, one can’t get through the door to see the top quality companies.