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Favorable returns drawing LPs back in

With the IPO market heating up and tech companies no longer strangers to billion-dollar valuations, Nenad Marovac believes that European venture capital is shifting through the gears.

This should draw institutional investors back to the sector. He expects to see an increasing number of foreign investors inflate the size of later-stage rounds in promising companies.

In an interview with VCJ, Marovac, founder and managing partner of DN Capital, looks over the opportunities in Europe and reminisces ruefully about the one that got away.

Q: What tech trends and countries in Europe are you particularly excited by?

A: Europe’s done a phenomenal job in music. Companies like Shazam, Soundcloud and Spotify, are probably three of the most progressive digital music businesses in the world.

Europe is also very strong in apps. German e-commerce is performing very well at the moment. This may be as a result of it being behind the United States and now is starting to catch up, but nevertheless the VC ecosystem in Berlin has transformed in the past five years and we are very excited by what’s to come.

However, the U.K. is the most advanced e-commerce market in the world. If you look at the percentage of retail spend online versus offline, the U.K. is higher than the U.S. The U.K. is still the most advanced VC market in Europe but it’s also the most competitive.

Q: Are you in favour of the large amounts of taxpayer money involved in European venture?

A: The public money is extremely important for the infrastructure. What the European Investment Fund has done is very important for the ecosystem, but some of the things that are happening in France are probably not good for the environment.

What is becoming increasingly important is the difference between public money alone versus public money combined with private money. The latter is extremely important to prime the pumps and to get the whole market up and running.

Q: As an investor in Europe and the United States, how would you contrast the quality of entrepreneurs on each side of the Atlantic Ocean?

A: In general I don’t think it’s fair to compare Europe with the U.S. because Silicon Valley’s ecosystem is unique.

But the Europe markets of London, Berlin, Paris, Stockholm and Helsinki have transformed dramatically in the past five years. People that might have gone to McKinsey or Goldman Sachs before are now much more motivated to do a startup. We’re seeing that the quality of the people is really high. We’re also seeing a lot of serial entrepreneurs come back and do new companies.

Q: How important is the creation of a deep exit market within Europe to the long-term viability of its venture capital sector?

A: It’s important and it’s starting to happen. We’re seeing good IPOs in the U.K., and there are some lined up in Germany.

The shake-out of the last five to 10 years has taken a lot of players out of the market and the guys that are left are really experienced teams like Holtzbrinck Ventures, Index Ventures and Accel Partners. These firms are posting favorable returns, so you’re going to see a lot of LPs come back into the market. They are getting quite bullish about European venture.

The IPOs of Rocket Internet and Zalando in Germany could be massive and if they trade up then it will be the start of something very interesting.

The trade sale route to U.S. buyers remains the primary exit route for European tech companies. We’ve sold nine companies and eight have been to U.S. buyers, which is why we think having a Silicon Valley office is important.

Q: What keeps you awake at night?

A: Delivery Hero’s latest round valued the company at $1 billion so I feel like an idiot for turning it down previously.

It’s just as bad to turn down a winner as it is to make a bad investment. It’s an equal sin, but, then again, you can’t get them all.