Venture capital hotspots

Two years ago it seemed as though virtually every geographical feature in Europe, and throughout the world, was laying claim to the adjective silicon. Silicon Fen, Silicon Bog, Silicon Ditch and Silicon Glen could be found in the UK and Ireland alone. Silicon Valley, which at that time had nothing but positive connotations, was the original hotspot and Europe was keen to emulate its success. Today, with the appeal of high tech investing diminished in some sectors, which of the innovative business clusters that were touted as venture capital hotspots are still generating enough heat to keep venture capitalists interested?

None of Europe’s venture capital centres can now be seen as one-dimensional, sector specific hotspots. Across the board, regions with a thriving venture capital industry are diversifying, generally away from Internet-based technology and telecoms and towards life science and biotechnology. Europe is still seen to trail the US when it comes to commercialising technology, particularly from academic sources, with relations between industry, academia and VCs in need of improvement.

The formation of start-ups is also inhibited by the lack of a fully developed entrepreneurial culture in Europe. “Governments need to recognise and support entrepreneurs, to help streamline the start-up process and make it easier to grow companies,” says Neil Rimmer, general partner at Swiss-based Index Ventures. Beyond this Europe’s hotspots have the right combination of academic and corporate research, access to advisors and capital (not just venture funding but other investors) and a suitable quality of life necessary to attract and retain successful, ambitious people.

The final crucial element is less concrete: “Hotspots need a certain atmosphere, a feeling of optimism, ambition and inter-nationality, ” says Bernd Seibel, CFO of Techno Venture Management’s (TVM) European operations.


The first cluster or hotspot mentioned by many European investors is Cambridge, a region with a strong historical precedent for innovation and an increasing association with venture capital. Anne Glover, managing director of London and Cambridge-based technology investor, Amadeus Capital Partners, believes that anywhere with a major academic institution is potentially of interest to venture capitalists. Attracted by opportunities arising from Cambridge’s academic excellence, numerous VCs have sprung up around the town, with other firms establishing offices there. Local firms include The Prelude Trust, Cambridge Research and Innovation Ltd (CRIL), The Cambridge Gateway Fund, Avlar BioVentures, TTP Ventures and Katalyst Ventures. Glover says: “We’re more followers than leaders, it’s important for investors to be present somewhere like Cambridge. We support companies at large and encourage the other advisors young companies need to set up as well.” As investors pursue start-ups, advisors (lawyers, accountants, research and technology consultancies) will also follow.

While Glover stresses that financial infrastructure is important, she adds that the local environment is crucial. If there’s no incentive for the management of new businesses to stay close to the university the idea was spun-out of, it’s unlikely that the area will establish a reputation as a hotspot. People obviously like living in Cambridge, as it has succeeded in retaining its entrepreneurs and recruiting new staff. It now has a significant pool of high tech talent, in both manufacturing and research, to draw on. Not all spin-outs come directly from the university: technology consultants and R&D facilities are also fertile hunting grounds for local VCs. Toshiba’s Cambridge Research Laboratory spun-out TeraView, which has developed a range of commercial imaging applications for terahertz waves, and Cambridge Consultants has produced many opportunities, including Inca Digital, a manufacturer of industrial and commercial inkjet printers using the emerging technologies.

Companies coming out of Cambridge now cover a wide range of sectors. It has a good reputation for IT, particularly infrastructure and the human-computer, while the US continues to dominate PC-orientated technology. In recent years it has also diversified into wireless, 3G and communications-based companies, such as Cambridge Broadband, Commtag and Cambridge Silicon Radio, all backed by Amadeus. There is also strong evidence of the global trend towards life science, a sector more traditionally associated with Oxford. Biotech companies, especially genomics-based ideas, have succeeded in attracting funding recently, for example SpiroGen and De Novo Pharmaceuticals. While happy to describe the area as an investment hotspot, Glover is wary about determining Cambridge’s hot sectors as she feels it dissuades entrepreneurs and investors from looking at other innovative areas, which are not yet hot, but warming up.

Cambridge is far from being the only place in the UK to have been described as a hotspot. Oxford’s medical research facilities have helped it emerge as a centre for life science and biotechnology. Like Cambridge, the town also has a number of native VCs, such as Quester, Isis Innovation and Seed Capital Ltd, which is responsible for the Oxford Technology VCTs. While the population centres of London and the south east of England have always attracted a high proportion of funding other more peripheral areas are now seeing more of the action. Southampton and Bath have established a reputation for optical electronics, on the back of companies such as Blaze Photonics backed by Quester in Bath, and Southampton Photonics, spun-out of the Optoelectronics Research Centre there. Although hubs are generally centred on a university, the M4 corridor is more industry orientated and has proved to be fertile territory, especially for information, communication and technology companies.

Simon Acland, of Quester, agrees the UK’s universities play an important role in developing new industries in this country but historically the UK has not been very good at commercialising academic technology. There are a number of initiatives working to change this, including the government sponsored-University Challenge Funds. Quester runs funds belonging to this scheme for the universities of Oxford, Bath, Bristol, Southampton, Birmingham and Warwick. He says: “There’s a big difference between the way academics and industry think and talk in this country. Historically, they’ve been a bit suspicious of each other and we need to bridge the gap. Our role is to inject the commercial viewpoint into academic research, to make great technology successful.”


Ireland’s credentials as a venture capital hotspot date back to a 1987 initiative aimed at attracting multi-national corporations to the country to bolster its economy. By offering low taxes and low employment costs Ireland became the European base for many US companies. Today, Ireland is the destination of 27 per cent of American greenfield investment in Europe. According to Niall Carol, managing director of ACT Venture Capital, this policy began to show results in the early 1990s and by 1994, as the initiative came to fruition, had given a new lease of life to venture capitalists.

Given the presence of companies such as Intel, Hewlett-Packard, Microsoft and IBM, and the fact that Ireland is the world’s largest exporter of software, the country’s high tech industry is understandably software orientated. However, the Industrial Development Committee tried to ensure the industries attracted were diverse (appealing to any product that could be exported cheaply i.e. pharmaceuticals and financial services), a policy which stood the country in good stead when some companies were effected by problems in the IT industry. The fact that these companies have fundamental operations such as their European headquarters and research facilities in Ireland also reduces the risk that they will pack-up and return home in difficult times.

Ireland has always offered access to European markets but now, unlike the UK, it has the advantage of being in the Eurozone and an English speaking country. Carol believes the global marketing perspective of the US corporations, which have made Ireland their home, has rubbed off on the country’s start-ups.

The success of a hotspot is not guaranteed simply by the presence of multinational corporations. In the knowledge that the country’s most significant natural resource is a young (40 per cent are aged under 25), well-educated population, the Irish government also invested in the education system and universities. The government also committed to investing in the country’s infrastructure.

Within Ireland, Dublin is the main area of interest to venture capitalists. Not only is it Ireland’s main population centre and an industrial centre, but it’s also home to four universities: Trinity College, Dublin City University, Dublin Institute of Technology and University College. According to Carol, areas such as Limerick, Shannon, Galway and Cork are also attracting investment into start-ups. Active sectors include software, XML, middleware, pharmaceuticals, medical devices and opto-electronics. “There’s a vast range of indigenous companies staffed with management and technology skills from the corporations based here.” These start-ups are not necessarily spin-outs from a single corporation but are often the result of cross-fertilisation between them.

Ireland continues to reap the results of a successful social policy, made possible by the country’s modest size. Other key VC players each managing multi-million funds include Cross Atlantic Capital Partners, Delta Partners, ICC Venture Capital and Trinity Venture Capital. However, last year private equity represented just 0.221 per cent of Ireland’s GDP and as yet no foreign VC has established itself there permanently (although 3i has recently returned.) Like elsewhere, the emphasis is shifting to biotech now and the rate of growth expected from IT companies has slowed.

Continental Europe

On the continent certain parts of France and Germany still occupy the limelight, although Switzerland and the Benelux region are also developing. However, Rimmer at Index Ventures says: “It is still too early to talk about high tech clusters in Europe. There’s a long way to go before they reach the critical mass of Silicon Valley in the US, which is much more concentrated.” He’s not alone in thinking that no single place will emerge as a centre of gravity, and this belief also applies to individual countries as well as Europe as a whole.


Munich is often cited as the high tech hub of Germany but other centres also contend for this title. Including Heidelberg (which produced functional proteomics company, Cellzome), Berlin (where the Science Park Berlin-Adlershof and the Max Planck Institute for Molecular Genetics at Berlin-Dahlem have nurtured companies such as Scienion) Leipzig (home to billing software company, vectriz international) and Dresden (spin-outs from the Dresden University of Technology include Systemonic). Seibel, at TVM, says: “The weight of the centres is still there but generally the deals are more spread out.” However, Munich, and the surrounding area, is home to around 50 per cent of Neuer Markt-listed companies. The city gained an edge over other German locations as early as the 1970s when, seeking to attract non-polluting, modern industries, it first became a high tech centre. Siemens, a company which is active in corporate venturing itself, is headquartered in Munich, as well as companies such as Apple, Compaq, Fujitsu, Intel, Lotus Development, Microsoft, Motorola Semiconductor and Oracle, which all have their German headquarters there.

Germany is an interesting prospect for Index Ventures as well. Home to many large companies, Rimmer expects German industry restructuring to result in the spin-out of small innovative companies, which will have the benefit of management who have gained much of their experience in a large corporate environment. Start-ups throughout Germany have also benefited from government grants, such as the soft money schemes, which operate locally and nationally. For example, the Federal Ministry for Education and Research launched the DM100 million BioChance Programme in 1999 to support industrial research and development projects in biotechnology.

Munich is also a centre for venture capitalists, first attracted by the prospect of IT spin-outs. There are plenty of local investors; BVK (the German Venture Capital Association) includes 50 members in Bavaria (where Munich is located), second only to Hessen, which includes Frankfurt. As with many hotspots, once it had established a reputation in one sector, Munich’s VCs started to look for other promising investments, mainly in biotech. The city has a good financial and advisory network, which is promoted by the Munich Financial Centre Initiative. It was launched by financial service companies and other businesses to intensify communications between academic institutions and the financial services sector.

According to Seibel one problem the area faces, despite being Germany’s second university city (after Berlin), is a lack of skilled employees. Academic sources are not bearing sufficient fruit and in the current uncertain climate people with secure jobs in large companies are not willing to leave them to take a chance in a start-up. “The markets are empty of people you can hire right now.”


Paris, as the business and VC hub of France, is inevitably a good bet if you’re looking for French start-ups. However, the concentration of high tech companies around Sophia-Antipolis, in Southern France is of also of interest. The area’s development is the result of a government-sponsored initiative in the late 1960s to diversify the region’s industry, which relied on tourism. It is now home to companies including Alcatel, IBM, Infineon, Lucent, Nortel and Texas Instruments, staffed by some 20,000 engineers. Academic input is provided by Institut Eurecom, which was established by EPFL (Swiss Federal Institute of Technology) of Lausanne and ENST (Ecole Nationale Superieure des Telecommunications) and specialises in communications and network engineering. Close to Nice, France’s second airport, the infrastructure is in place, as are the consulting firms and outsourcing needs of young companies. UK-based investor, nCoTec ventures is keen to establish a presence there. Pierre Nadeau, a partner at nCoTec, says: “It’s underdeveloped and certainly not crowded as far as venture capital goes. All the signs are there for it to really bloom.”

Possibly the main attraction of Sophia-Antipolis though is the life style and climate of the French Riviera. According to Nadeau, the area’s residents are multinational, having left Scandinavia, Germany and the US in favour of Sophia-Antipolis’ balmy location. However, so far Sophia-Antipolis has failed to permanently lure venture capitalists away from other European centres. The French science park is attracting an array of international investors though, as Castify Networks’ round in March 2001, which included Alta Berkeley Venture Partners (UK), Kiwi II Ventura (Italy) and Invision (Switzerland), proves. Some French investors are active there but they still operate from Paris, rather than a local office. The area certainly has many of the magic ingredients which suggest it is can produce quality companies in sectors such as components and software. For VCs with a long-term view, it may be worth the gamble.

Also in France, Grenoble is emerging as a centre for technology investments, particularly microelectronics companies, such as PHS-MEMS (Micro-Electro-Mechanical-Systems) and Memscap. Sun and Hewlett-Packard have research labs there and the French Atomic Energy Commission (CEA) also has a facilities there known as LETI (Laboratory for Electronics, Technology and Instrumentation), which has spun-off optical device company, OpsiTech.


Across the Alps, Switzerland is also tipped for great things by some VCs, as several Swiss cities are home to recent venture funding successes. Being located near to an important financial centre may mean Swiss start-ups benefit from increased exposure to sources of funding. International investors, from France, Germany and the UK, are present there, as are pharmaceutical companies, Roche and Novartis, and medical device manufacturer, Medtronic, which has stimulated the growth of the life science sector. The Centre Suisse d’Electronique et de Microtechnique in Neuchtel already has several spin-offs to its credit, including Xemics and Colibrys. And universities such as The Swiss Federal Institute of Technology Zurich (ETH Zurich) and University of St Gallen business school are also positive influences. Rimmer, based in Geneva, believes applied research is the

most fruitful deal source: “Research from an academic setting is less likely to be relevant than that which is sponsored, or at least inspired, by industry.”


Scandinavia has witnessed enormous growth in the number of local VC players in recent years and the market continues to develop. With English commonly used as the business language it has also attracted outside investors, initially pursuing opportunities in IT and telecom related start-ups. This trend has primarily focused around Stockholm, Sweden, where Ericsson is based and Espoo (near Helsinki, Finland), the home of Nokia. Rimmer believes, as well as the research carried out there by vendors, consumers in these countries also helped to drive innovation, being experienced mobile users and early adopters of new equipment and technology. Previously, seed funding was readily available as rising company valuations meant the region’s early stage investors, not wanting to miss out on the action, were forced to invest much earlier in the life cycle of companies. Interest in information and communications technology peaked about a year-and-a-half ago and as valuations fell and companies failed, its reputation has become rather tarnished. Stefan Ingeborn, managing director of InnovationsKapital, says: “Many people are leaving the market now and it’s getting back to a more normal situation. Investors realised they were making riskier investments and that the companies would need a lot more money after the seed stage.”

European VCs agree Scandinavia is still producing interesting propositions in this sector but lower, more realistic, valuations mean they can buy into much more mature companies now, than they could get for the same money two years ago. Rimmer says: “A lot of companies have disappeared and investors are sceptical, they’ve seen that some of the ideas did not have a lot of substance.”

As well as moving upstream some investors have also shifted their focus from ICT to life science and healthcare, a sector in which the region also has an established pedigree. A wider geographic area has become involved, with the Scandinavian biotech corridor stretching across to Denmark and Norway. Index’s investments in the region include 7TM Pharma and Genmab, both drug development companies, in Copenhagen, Denmark. Pharmaceutical groups like GlaxoSmithKline and AstraZeneca in Sweden, and Neurosearch in Denmark, are a source of management and technical skills for new companies. For example, Neurosearch has already generated spin-offs Sophion Bioscience and NsGene. The Karolinska Institutet in Stockholm is Sweden’s only university of medicine and ensures that the Kista Science Park, previously considered a hub for IT and telecoms companies, continues as a VC centre for new biotech projects.

Earlier this year in Sweden, an early stage venture fund dedicated to bioscience investments was launched. Uppsala University and the Swedish University of Agriculture both have an interest in the Innoventus Uppsala Life Science fund. Other clusters are developing around Oulu, Finland (driven by the Technopolis science park and technology-focused university), on the west coast of Sweden, centred around Universiteit Goteborgs and Lund (where surveillance equipment manufacturer, WeSpot, situated on the Ideon Science Park and Anoto, digital pen and paper company, both originated.)


Rimmer also predicts investors will also begin turning further south for inspiration. The firm has strong connections with Northern Italy and expects to see deal flow from universities in Milan, Florence, Rome and Padua pick up in the future. He says: “The problem is once a hotspot has been identified you get a lot of interest and a lot of money is invested in companies that aren’t necessarily great. In areas investors are less familiar with you often see teams really committed to making a business plan work.” Seibel thinks Spain and Italy remain at a disadvantage as English is not as widely accepted as the business language there.


Considering its recent origins Israel’s venture capital industry has done a lot to develop the country’s high tech sectors. Having witnessed the economic implications private equity can have, the Israeli government launched an initiative in the early 1990s to encourage the establishment of early stage venture capital funds. It provided grants of up to 30 per cent of the size of new funds. This capital was repayable if the fund was profitable, and most were. Yossi Sela, managing partner of Gemini Capital, Advent International’s Israeli affiliate, and one of the first funds to be set up as a result of this scheme, described it as a turning point. Around 15 funds were set up at this time and there are now around 40 early stage venture funds in the country. “It was the most successful government initiative in the history of the State.”

Unlike the majority of other hotspots, where investors followed innovation, Israel’s accession through the ranks of technology clusters was initiated, to a large extent, by an abundance of venture capital. According to Sela between 1990 and 2000 approximately 3,000 new companies were created in the high tech sector and Israel now has more companies listed on Nasdaq than any other country, after the US and Canada. Cash alone cannot create companies and the country’s industry and academic institutions proved to be fertile ground for start-ups. Another source of spin-outs specific to Israel is the military, developing sectors such as radar and security related technology, which may now grow further as a result of global fears about terrorism. Other successful industries are semi-conductors, telecom, wireless, and also healthcare including medical devices. Sela believes Israel is too small to have separate clusters but centres such as Tel Aviv and Jerusalem have emerged. Academic centres include The Weizmann Institute of Science, located in Rehovot and The Technion Israel Institute of Technology, in Haifa.

Israel’s links to the US, which plays an important role investing in funds and companies, have helped both the VC and high tech industries to develop. However, Israeli companies relied heavily on the US market and those that specialised in Internet-based technology suffered the knock-on effect of US failures. Political instability in Israel has contributed to the difficulties, experienced by everyone, in attracting limited partners to invest in venture capital funds. Although funding levels have fallen (see venture capital news this issue) and due to uncertain economic conditions people are reluctant to risk taking jobs outside large corporations, Sela is confident this is not permanent and that Israel’s high tech industry will pick up. As the rate at which new companies are created has slowed, large companies will become more innovative, start-ups need to be more proven and the weaker ones won’t get funding. Sela says: “It’s back to a much more normal environment. We are seeing a lot of activity, but without the craziness of the last two years.”