Inside Technologies, a French developer of semiconductor chips, this autumn completed a third funding round, securing slightly more than $5 million (ecu 4.2 billion) of additional resources. The deal, on the face of it an unremarkable follow-on funding, is notable as the first recorded application of venture leasing in the European market.
European Venture Partners (EVP), a joint venture between US venture leasing specialist Dominion Ventures and Dresdner Kleinwort Benson (DKB), provided a $1.7 million leasing package for Inside Technologies alongside an equity syndicate led by Alta Berkeley Associates.
Although still virtually unheard of in Europe, venture leasing is an established form of financing in the US, where it is used by the majority of venture-backed start-up and early-stage companies. Such companies generally cannot access traditional bank leasing facilities because of the large cash deposits or collateral demanded by mainstream lease providers.
By contrast, EVP’s venture leases require no deposits or collateral. In return for the lease package, the firm receives monthly repayments, the residual value of the equipment and warrants into the investee company’s equity, calculated in proportion to the lease line. Maurizio PetitBon of EVP said the firm has set three preconditions for the provision of venture leases, in addition to the usual venture capital criteria of a strong management team, credible business plan and strong technology base. EVP will only act as a co-financier with venture capital groups, never as a sole source of funding; it will only provide leases for general purpose, rather than customised, equipment; and its venture leases cannot be used for “leasehold” improvements, such as alterations to a building’s fabric.
Although EVP will normally require board observation rights, it does not seek to play a hands-on role in the companies it helps fund, preferring to leave that to the venture capitalists. However, Maurizio PetitBon emphasised that the four-strong EVP team will be willing to help and advise portfolio companies, if they so desire.
The advantages of venture leasing as a funding source are clear: it is not an alternative to traditional leasing, which is not an option for start-up companies, but provides a less dilutive complement to conventional venture equity. Venture-backed companies can use venture leasing to stretch the time interval between financing rounds, and the instrument also provides an alternative to bridge or mezzanine funding for firms that need to postpone planned IPOs.
Dominion Ventures, which was founded in 1985 by Geoff Woolley, pioneered the venture leasing concept in the US and has built a portfolio of more than 350 companies. Its joint venture partner in EVP, Dresdner Kleinwort Benson, is one of Europe’s leading lease finance providers. EVP is owned by its management team, comprising Geoff Woolley, Maurizio PetitBon, Ross Ahlgren and Mark Taylor; DKB, the largest shareholder; and Dominion Ventures.
EVP’s geographic focus is pan-European and therefore its total addressable market – effectively all venture-backed start-up and early-stage companies in Europe – is immense. Maurizio PetitBon reports that EVP has so far been warmly received by the venture capital community, which will necessarily constitute EVP’s principal source of deal flow; however, educating the wider market about the concept of venture leasing will be a huge task.