Still a long way to go

With a year of fund raising ahead, 2004 was always going to be known as the year of the exit, and even European venture capital wasn’t immune from the charge. The year saw trade buyers return to the fold in greater numbers, accompanied by a stock market that was willing to take venture-backed companies. Tom Allchorne looks back at the year, finding that despite some impressive returns, European venture still has a steep hill to climb.

The real test of a market’s recovery is the number of exits it has, and from the almost complete dearth of realisations in 2003, the last 12 months have become much more successful for venture funds. In 2003, the chances of being able to float a company were slim, but signs emerged towards the end of the year, such as Pi Capital’s and Matrix’s IPO of Flightstore on AIM, that indicated better times may be ahead and that maybe 2004 would see the reopening of the public markets as a viable exit route.

And it largely proved to be the case. Following the traditional early year lull, a number of venture-backed companies hit the market. March saw a raft of venture-backed IPOs across Europe, from Cambridge Silicon Radio (CSR) and Ark Therapeutics on the London Stock Exchange, and Moneybox on AIM, to NextGenTel, a Norwegian broadband company supported by a number of local VCs, on the Oslo Stock Exchange, and Basilea Pharmaceutica on the Frankfurt Stock Exchange.

The re-opening of the IPO window should be welcomed, it’s important for funds to be able to look at exit routes other than just a trade sale; but it shouldn’t mask the fact that many of these IPOs have not been particularly successful.

Ark and biotech

Let’s take Ark Therapeutics. Its IPO represented an exit for Merlin Biosciences, Nomura and TVM, and was the first biotech float for almost three years. The launch raised about £55m. Its share price at launch was 133 pence, in the middle of the indicative price range of 120-146 pence, and gave it a market capitalisation of £168m. It was between two and a half and three times oversubscribed and reached a high of 143 pence the day after launching. The share price ended the year at around 85 pence, which despite being 48 pence less than the initial price, is actually an improvement on its summer performance which saw the price slump to 68 pence.

Reports prior to the float mentioned numerous different market caps Merlin et al were aiming for, with some suggesting as much as £200m was being hoped for and others predicting a valuation of between £160m and £190m. The eventual value of £168m, despite being at the lower end of the range, was still thought to be too high by some investors. The problem, it seemed, with Ark was one that affects a lot of venture IPOs, especially in the biotech field, namely that it lacked a decent range of products. Ark’s only product in the market was, and still is, a plastic cover used to treat foot and leg ulcers. Other then this it has a wide range of treatments at various stages of development, from a cancer-related muscle wasting medicine in phase III to some genomic drugs in pre-clinical trial.

To be fair to Ark, only three of the venture-backed biotech IPOs did especially well, with just Zentiva, Biomerieux and Vectura Group emerging from 2004 with an increased share price. Zentiva, a partial exit for Warburg Pincus, saw its share price rise from around €16 at launch in June to about €48 by the end of the year. Biomerieux, owned by Wendel Investissement, launched in July offering €30, a price which quickly fell eventually reaching €26 in November before a surge in December saw it hit €32.4.

Vectura (ISIS Equity Partners, Merlin Biosciences, Northern Venture Managers and Sitka) which launched on 60 pence in July, found itself drop to 47 pence per share in October before recovering to end December on 63.5 pence.

But in the world of the venture-backed biotech IPO, these success stories were few and far between in a year of floats which either performed poorly or were postponed altogether. IDM’s (Immuno-Designed Molecules), Microscience and Cyclacel were all much-hyped companies who were hoping to float but ultimately decided against it.

Some companies still decided to float after the March to July window. Inion (investors included Bio Fund, Bank von Ernst, CapMan AB Sweden, and HealthCap), which specialises in biodegradable implants in orthopaedics, became the first Finnish company to list on the London Stock Exchange at the end of November, and the issue price was 130 pence per share, at the top end of the indicative range of 113 pence to 136 pence and at the time of writing is 176 pence. 3i’s Immunodiagnostic Systems, which produces hospital tests for bone disease, launched on AIM on 24 December.

Despite the disappointments, this was a good year for biotech, the best in terms of floats since the bubble burst in 2001. A number of those who postponed floating still intend to do so, possibly this year, with market conditions improving as the economy settles back down. Among the biotech companies considering an IPO in 2005 are Arakis, Ardana, Arrow Therapeutics, Arpdia, Cyclacel, Intercell and Microscience (see table for details).

The UK has had a particularly good year, with biotech IPOs raising £207m and venture-backed ones contributing £120m to this. Germany, France, Switzerland and the Czech Republic saw just one float each, raising, in total, almost €550m, although over €300m came from the float of BioMerieux.

Success story

The IPO of CSR was one of the highlights of 2004 for the venture industry. The launch of the Cambridge-based semiconductor developer on the LSE in March was the UK’s biggest technology float for almost three years, raising £78.7m. The share price of the IPO was put at 200 pence, the very top of the 160 pence to 200 pence indicative range, giving the company a market cap at the time of £240m. Overall the company has performed very well. It started well with strong demand from investors pushing the price up between 220 pence and 250 pence until May when it began a steep climb up to 450 pence in early July before dropping and eventually levelling out, finishing the year with a share value of 388.5 pence, a respectable figure.

Cambridge Silicon Radio was spun out of Cambridge Consultants in 1998 when Amadeus Capital Partners helped the founders set up their own business. The original investors in CSR were 3i, Amadeus Capital and Gilde Investments and were joined in the second round in November 2000 by Intel, Siemens, Virata and ARM. Scottish Equity Partners led the third round in September 2002.

Despite the return on the investment not being disclosed, the IPO of CSR has been rightly greeted as a positive sign for European venture in what has generally been a better year for the industry. While there are obviously some severe problems remaining, like lack of commercial nous at companies, GPs reluctance to release capital for portfolio companies and LPs continuing wariness of European venture, the success of CSR has shown that European technology companies can do well.

The reasons for CSR’s success are based on some simple facts. For starters it was already generating cash before it floated. Secondly, the Bluetooth handset market, of which CSR has a 42% share, is expected to grow by 48% before 2006. Importantly it also had products in the market and had customers like Nokia, Sony and Motorola, and its BlueCore technology is in 60% of Bluetooth products. It also had more products close to coming to market and in November launched a wireless LAN chip, the company’s first non-Bluetooth product and one which will help it get a foothold in non-mobile applications.

Trade Sales

As usual, despite 2004 being a comparatively good year for venture IPOs, it was trade sales which presented the best route of exit, and there were a handful of good ones. One highlight was Jamba!. Jamba! is a Berlin-based wireless content services provider. Like CSR, it had products in the market. The company serves millions of wireless subscribers in nine European countries through distribution and billing relationships with carriers, including Vodafone, T-Mobile and KPN. Jamba! has also worked with leading content publishers to build a downloadable library of over 50,000 individual products including popular music, graphics, games and applications.

Summit Partners invested US$40m for a 56% stake in Jamba! in September 2003 when it was the only investor in a recapitalisation of the company. In June 2004 it sold Jamba! to Verisign, a Nasdaq-listed technology company specialising in providing infrastructure services for the Internet and telecommunications networks At a price of US$273m, the sale generated a 3.8x return and 300% IRR. In those nine months Jamba! increased its subscriber numbers from several hundred thousand to several million.

Staying in Germany, 3i, Earlybird and IKB Private Equity sold their stakes in element 5, a software distributor, to US competitor Digital River for €101m in April. The sale generated a combined return of 4.9x with an IRR of 60.2%. The original investment in element 5 was made in December 1999 by Earlybird and 3i, which together invested €3.1m. The two again invested in September 2000, this time a combined total of €3.6m. At both times the two companies invested half each. In the second round of financing in December 2001, IKB Private Equity joined as a third investor.

Rounding off a good year for German venture (see Rising from the ashes?, EVCJ Germany Supplement, December/January 2005 issue), was the sale of, a classified ads website for German vehicles, to Ebay in a €121m deal, generating a 4x return for Granville Baird Capital Partners. The firm has invested €8.8m in the company since its original funding in 1999 and supported the business during a period of significant growth. Between 1999 and 2003 the number of vehicles advertised at any one time has risen 14 times to around 800,000 from 55,000; the average number of visits to the site per month has increased 32 times to 22 million and the number of associated car dealers has increased by 10 times to around 8,000.

One of the high-profile deals of the year was Yahoo’s purchase of Kelkoo, the French-headquartered shopping website, for an aggregate cash purchase price of around €475m. The sale in April generated a 4x return for Banexi, which had invested in the company since 1999. Sgam (Societe Generale) and Innovacom from France, Netjuice and BBVA from Spain and Kistefos of Norway had also invested.

Also in April came MTI’s sale of Advanced Composites Group, a UK-based supplier of carbon fibre composite components, to UMECO plc for £44.25m. While this may not be a particularly large sum of money, the work that MTI, alongside fellow investors VCF Partners, put into the company makes it an exit of note. MTI led the March 1999 investment of the loss-making company, taking a 41% stake, with VCF acquiring a 20.5% interest. Over the next five years the company became profitable, its revenues increased 175%, and opened up a US subsidiary. The sale to UMECO, a UK aerospace components supplier, saw MTI gain a 6x return on its investment with an IRR of 45%; VCF made 6.25x.


Early indications, from various data sources suggest that 2004 was similar to the previous year in terms of the sum invested, but down in the number of companies which received capital. According to figures released by the EVCA in December, investment in Q3 of 2004 by number of deal in early stage companies is down 52% on Q3 and is in fact at the lowest level since before 2002. In terms of activity by amount Q3 witnessed a 60% drop on Q2 and was again the lowest since prior to Q1 2002.

The reasons for such a dramatic drop can be put down to two things. Firstly, an unusually exaggerated drop-off in activity because of the summer months, brought about in part by unusually high activity in Q2. Secondly, a number of firms were preoccupied with preparing for fund raising and trying to get some exits. After four years of cleaning shop (i.e. portfolio restructuring) venture firms must now dust themselves off and start investing again.

The age-old problem still exists, and there is little point rehashing the well-known arguments about Europe’s lack of managers with commercial expertise, funds’ drip-drip attitude to supplying capital, the paucity of good VCs in Europe and absence of some kind of European version of NASDAQ. The ability to produce top technology is there, everyone knows that, but venture capital’s inability to produce good returns (bar a few notable exceptions) makes this a moot point for investors.

But it’s too easy to be a doom merchant about European venture capital, and there are legitimate reasons other than saying ‘it’s a bad asset class’ as to why the final figures for 2004 with regards to investments will not be much different, and possibly worse, than 2003.

First, there was the continuing uncertainty over the economy. Iraq is still an issue, oil prices are still an issue, and the market only knew who would be in charge of the world’s largest economy cum November. As the year ended these concerns either eased or were resolved, hinting that 2005 may be a better year for those institutional investors with money to spend.

Second, the restructuring of portfolios continued. While it is thought, although yet to be confirmed by any data, that write-offs made up a lower proportion of venture exits in 2004, GPs were still concerned with the state of their portfolios, and in particular wanted to increase liquidity.

Third is the fund raising expected to take place this year. Firms needed to shift companies off their books, hopefully make some money from them, so they could then go back to existing investors, and approach potential new investors, showing them some nice IRR graphs and regaling them with a few recent success stories. With this in mind, attention was more on exits and less on investments.

Fund raising

Last year was also a quiet year for fund raising, with a few notable exceptions. Benchmark Capital closed Benchmark Europe II on US€375m in September, a follow on from the firm’s first European fund which closed over four years ago. The problems which beset Benchmark Europe I were well-documented. It originally closed on US$750m in May 2000, exceeding its US$500m target. Then, in June 2002, the firm cut back the fund size to US$500m, citing lower capital requirements of investee companies. LPs were refunded fees based on the reduction.

Regardless, it still remained one of the largest tech funds in Europe, and is now almost fully invested, although no exits have yet been made. The second fund was oversubscribed and achieved in a single close. In a possible sign that venture tech is becoming popular again, the new fund was raised almost entirely from existing investors.

Barry Maloney, general partner of Benchmark based in Europe, certainly feels this is an exciting time for venture capital: “The average life of the investments in our first fund is less than two years. That fund invested heavily at the back end of 2002 and 2003 and Benchmark competitively didn’t want to be in a position to have run out of funds and not have any funds to invest in what we view as a good time for investment opportunities.”

In other big fund news, Advent Venture Partners reached a first closing in December for APEF IV with total commitments of £128m, of which £110m has been accepted so far. It has a target of £200m. Most, 75%, of the investors in the fund are returning from previous funds, including Access Capital Partners, the European Investment Fund, clients of Pantheon, and funds advised by Westport Private Equity. New investors who have committed to the fund include Alpinvest Partners and Swiss Re.

Other fund raisings of note in 2004 included Iris Capital reaching a second close on Iris Capital Fund II on €144m in July; European Venture Partners launched a venture leasing fund EVP II in March looking for €105m; Nokia Venture Partners formed the US$100m Nokia Growth Partners in December; Wellington Partners III Technology Fund held a first close in December on €85m; and Herald Ventures managed to close their second fund in December on €22.5m in November. An important addition to the market was the launch of Mowbray Capital, the first fund-of-funds dedicated purely to European venture. It launched in February seeking €300m.

Hard times ahead

The coming 12 months, and probably a large part of the year after that, will be defined by fund raising, and all sorts of questions will be answered come December, like has the venture market really recovered and are LPs becoming less wary of it? The LPs themselves remain unconvinced, but the fund managers feel the situation is improving, and argue that now is the ideal time to invest in European venture because company valuations are still low.

Investors naturally are after investments that will make them the most money and they are not going to invest in European venture just because they feel they ought to in case its turns out really well. While there may well be some LPs who feel this way, the majority are quite conservative and are going to put their dough into the oven which can promise to make the most bread, and that is US venture and European buyouts. But there is a school of thought which argues it is precisely because of the popularity of these two classes which could mean good things for VCs. A lot of investors cannot get access to the top performing US venture funds; the European buyouts market appears to be at its peak and with everyone rushing in to get a piece of the action, prices are being pushed up and hence returns will come down. This, argue the optimists, opens the door for European venture to come out from underneath the stairs and stop being treated like a ginger-haired stepson.

If only things were that simple. A large portion of those first time funds that were raised in the bubble days will not be returning. There will also be firms with more than one fund, but unable to raise another, or who are finding it very difficult. Even some of the more well-established names out there are reportedly having trouble. The coming 12 to 18 months will be the true test but it is safe to say that unless you have a good track record, which is not true of many, there are tough times ahead.

Add to this the emergence of Asia as the next venture hotspot. While some have contended that this sudden fascination with Asia is just a fad, a number of institutional investors now regard Asian venture as a more attractive proposition than European venture. The rising interest in Asia makes it all the harder for European venture funds to compete, and one of the main jobs of the fund raising VC is to try and make their fund noticed.

The situation has improved for European venture capital, and 2004 did see some pretty good exits, but many more will be needed before LP confidence improves.