Editorial: Smart capital drives industry to its future

An argument could be made that the limited liability partnership (LLP), the traditional vehicle for managing venture capital funds, is “dead in Europe”.

This was just one of the thought-provoking insights shared under Chatham House rules at the International Venture Club’s annual Smart Capital conference in Cascais, Portugal, last week.

It could certainly prove awkward for the continent’s main limited partner (LP) in VC funds, the European Investment Fund (EIF), and other state-owned investors, which have proven the dominant historic source of capital to VC funds.

The EIF was viewed by VCs at the conference as being quite restrictive on allowing innovation in their fund structures and limiting to the creation of alternative funds-of-funds, such as the one proposed by trade body Invest Europe.

To counter this concern and to help the ecosystem, the EIF has been supporting angels, non-equity (mezzanine and debt) and other programmes that can benefit entrepreneurs and VCs.

Still, the flotation by Simon Cook of Draper Esprit in Ireland in the summer and the steady growth of other listed and private so-called patient capital funds, such as Woodford, IP Group and Imperial Innovations, as well as disruption caused by the “renewed ownership of private and public stocks by individuals” through crowdfunding and tax-efficient collective investment schemes, has indicated the enthusiasm for backing entrepreneurs.

Given the growth in such innovation capital providers, which has helped boast the overall venture capital market, traditional institutional LPs made up about 15% of funding, one speaker said in a panel run by Stephan Morais, executive director at Caixa Capital.

This was the “third revolution” going on, the panellist added, the others being digitalisation, including the potential for blockchain to impact venture deals, and a rise in entrepreneurship.

The latter has led to increasing numbers of success stories. Chris Wade, an adviser to Octopus, director at Entrepreneur First and co-founder of fund-of-funds Isomer Capital, had been an angel investor in machine learning technology developer Magic Pony, which Twitter acquired for $150m.

Given the total funding for Magic Pony had been $4m, the returns were large and quick – just 14 months for the startup launched by two graduates attending the Entrepreneur First accelerator.

In the cleantech and health deal sessions run by Bernhard Mohr, head of Evonik Ventures, and Janke Dittmer, partner at Gilde Healthcare Partners, respectively, there were impressive companies being pitched for future round syndication, often run by serial and inspiring managers.

With an estimated 4,000 technology companies recording between €10m ($11.2m) and €100m of annual revenues there were no shortage of peers to be inspired by, but one speaker eloquently warned they were being hampered by the lack of later-stage investors and “weak” balance sheets among corporations in general.

The speaker advocated “killing” leveraged buyouts as they were “vampires” for tech companies in favour of growth equity investment and recapitalisation of larger companies, by the state if needed – a notion supported by another speaker lamenting state aid restrictions.

These stronger balance sheets, along with greater opening of public laboratories, will potentially then support the use of intellectual property in developing these tech companies.

The potential departure of the UK from the European Union, the so-called Brexit, is already hampering the continental research base and transfer of tech from universities, attendees said.

However, as Germany-based solar energy company Heliatek, winner at the Global Corporate Venturing awards in Sonoma, California, in January (see GCV’s Big Deal analysis in next month’s issue) showed last week, raising €80m in equity, debt and subsidies from a variety of corporate venturers (CVCs), state agencies and VCs there are plenty of examples of how to build a business using smart, committed investors.

The most disruptive change identified at the conference, therefore, was probably the dawning realisation among some attendees that Europe had its fair share of these “smart, committed investors” but they were not always packaged as independent and managing 10-year LLPs.

Recognising these leaders, however, can remain as much of a challenge as them finding the star entrepreneurs, even if there are only “eight” good later-stage VCs in Europe.

Conversely, in a world where there are 1,600 CVCs but only half are active in any 12-month period. and where there have been so many launches in the past few years, the issue is less about why to start up than how to differentiate yourself as good to the stakeholders to improve dealflow. 

Getting it right means improving visibility to get more dealflow and buy-in by investors to increase your team and funding.

Being positioned as a leader now will help third parties learn best practices to avoid damaging the industry in a downturn and also position yourself with them as a collaborator, which will create deal opportunities both shorter and longer-term. 

As ever, change has come even to the venture industry – for a more illustrative look at the two-day event see Caisse Des Dépôts Et Consignations’ Philippe Dewost’s GoPro video.