VC shakeout

Asked if competition is fierce, it’s quite common for European VCs to respond in the negative, arguing that they are much more likely to enter a syndicate with a rival firm than battle it out against them. More than one VC has expressed a preference for co-operation over competition, deploring, particularly at seed level, the paucity of willing participants.

Unfortunately for them, the situation is unlikely to improve in the near future. Consolidation in the venture capital world is underway at last, a sign not of an industry imploding, but of inevitable maturing. “Consolidation in the VC world is long overdue”, says one VC who wishes to remain anonymous. “It’s been on the cards for a while now, and has always been happening at a low level, but now I think we are seeing a real shakeout taking place.” According to Thomson Financial data, of the 1,548 venture capital firms listed in Europe, 975 have made investments in the last three years and are still actively seeking investment. That figure was 1,083 for the previous three years.

The first wave of VC consolidation came in the aftermath of the crash when independent funds and particularly corporate venture funds cut their losses and shut up shop. More recently, the consolidation has occurred less by attrition and more by acquisition or merger: Quester’s purchase by NewMedia SPARK, and Prelude Ventures merging with Cazenove Private Equity to become Esprit Capital Partners.

Esprit has been at it again over the summer with the news that legendary US VC Draper Fisher Jurvetson (DFJ) has acquired a stake in the firm which will see it become DFJ’s exclusive partner in Europe, with members of DFJ’s team joining Esprit’s investment committee. Explaining the deal, CEO of the renamed DFJ Esprit, Simon Cook, says: “Silicon Valley’s greatest export in the last decade has been its entrepreneurial spirit which is being adopted globally and especially across Europe. DFJ was one of the first US VCs to expand out of its home market and thus has the knowledge and approach to make global venture partnerships a success. We believe our partnership with DFJ will significantly expand our resources to assist European entrepreneurs and their companies in becoming global leaders in their target markets. DFJ’s outstanding track record of success and network of experienced partners across the US, Asia and South America will help us realise our vision of a vibrant and successful Europe within a global venture capital industry.”

Quester’s takeover has been less well publicised. Founded in 1984 by Andrew Holmes and John Spooner, the business was acquired by NewMedia SPARK in May, a little known AIM-listed tech investor. For the £4m paid up front, SPARK got their hands on a VC with over £200m under management, giving the combined group £275m. Andrew Carruthers, chief executive of SPARK, said: “SPARK has demonstrated strong growth in net assets and a number of successful exits recently, after the difficult years. We have co-invested with Quester a number of times over that period and see them as one of only a few high quality participants in our sector.”

However, unlike Esprit’s ownership change, the situation at Quester was not quite so smooth. In September a mysterious emailer, with the unlikely name of Scott Free, dropped a note into the in-boxes of a number of journalists, informing readers that “all the senior members of Quester’s investment team have quit or been fired”, and that the sale was driven through by Holmes and Spooner who are looking to retire and “have been looking for a way to sell their business for several years” but have neglected the issue of succession. Andrew Carruthers, chief executive of SPARK, said of the note: “It is obviously someone with a bit of a grudge, someone who left before we got involved. There was no desire on behalf of any of the founders to cash in. Andrew Holmes is 60 and so he did not really want to raise another 10-year fund, and the others had their own plans.”

Simon Acland, as managing director of Quester, was the obvious choice to take over from Holmes and Spooner, but he has, according to Carruthers, gone off to write a book, whereas most of the other members left prior to SPARK taking over. Penny Attridge, Sergio Levi and Jonathan Gee remain as the investment team.

Scott Free’s main gripe appears to revolve around the lack of succession planning and the behaviour of Homes and Spooner, but his complaints serve as a reminder that a shakeout in the VC world could well be painful, although ultimately beneficial for the industry as a whole. The fact that the consolidation is taking place now is a time scale issue. A number of the funds raised in 1999 to 2001 either have closed or are in the final throes of winding down as their 10-year life span comes to a close. A venture shakeout is not a sign of an industry in distress. Quite the contrary, it’s a chance for the wheat to be separated from the chaff and for more money to end up in the best hands, as evidenced by the recent fundraising successes of firms like Abingworth, Amadeus, Index and SEP to name just a few.