Startup VC Firms Join the Funding Fray


By David Aspinal

As interest in the European technology grows to a fever pitch, a number of new independent venture capital companies have recently hit the scene. These home- grown ventures-startups themselves- aim not only to carve out a valuable investing niche, but also to bring a more visionary, tech-savvy face to the European venture capital community.

Small-scale, specialist VC companies are already very active in the US, but the idea of startup VC firms is just beginning to land here. The trend towards more specialized VC activity, especially the increase in early-stage investment and the growing interest in the IT sector, is reflected in figures from the European Private Equity and Venture Capital Association ( EVCA). The number of startup investments in Europe increased from 1.160 in 1997 to 2.071 in 1998, with the number of startup companies financed almost doubling from 956 to 1.793. Meanwhile, technology sector investment accounted for 28 percent of the total amount invested last year, up from 24 percent in 1997.

TORNADO–INSIDER. COM combed through a long list of startup VC firms to come up a with eight promising players. Almost without exception, the new VC companies profiled here are specialists. Few stray outside the field of information and communications technology and life sciences. This certainly shows a common view that these sectors hold great investment potential and future returns, but it also reflects a believe that venture capitalists can add most value to their portfolio companies through a deeper understanding of, and active participation in, their business.

In defining these VC firms as startups, the companies we profile here are all under two years old – which meant leaving out some interesting players. A number are much younger, some having started only this year. Though we think these firms hold promise, evaluating their performance over such a short period is a difficult, if not impossible, task. Some are still in the process of raising funds, while others have yet to exit from any of their investments.

Like Pino Venture, the founders of Munich- and Hamburg- based Earlybird Venture Capital see a window opportunity for new VC investments, albeit in country further north. Hendrik Brandis, one of Earlybird’s founding partners, estimates this window will last around five years. The new entrepreneurial spirit emerging in Germany, especially in the e-commerce field, is unmatched by a venture capital community that remains underdeveloped, he says. Brandis cites the low penetration of early-stage VC firms in Germany in comparison with the US and the UK- a situation which presents a strong deal flow for those venture capital investors already active, but limits the volume of funds due to the small number of VC professionals.

Founded in June 1997, Earlybird is rare in Germany due to its specialization in seed, startup and early-stage investments. “We invest in excellent people with good ideas even if they have not yet founded a company,” explains Earlybird co-founder Christian Nagel. Earlybird also concentrates on technological innovation an rapid growth sectors such as ICT, industrial technologies and life sciences.

Earlybird closed its first two pre-seed funds in May 1999, raising a total of 85 million marks from private and investors. With additional investments from government support programs designed to foster high-growth startups in Germany, these funds will provide more than 150 million marks for financing new ventures over the next three years. Earlybird’s first investment was made in August 1998. Since then it has made a further 10 investments, including abaXX Technology, Cortologic an IXEC.

Reflecting its founders’ entrepreneurial experience and backgrounds with consultancy firms such as McKinsey & Company and Bain & Company, Earlybird is constituted as an open partnership, where each partner is equal. Like many recently created VC companies, Earlybird’ core team is supported by an Advisory Board of appointed experts who assist not only in initial investment appraisal, but also in subsequent business development.

Earlybird seeks to differentiate itself from its competitors by adding more value to its portfolio companies. This can only be achieved, according to Brandis, by allocating sufficient time and resources to portfolio companies. The firm believes fund performance is the ultimate yardstick by which success is measured, so Earlybird heavily weights remuneration for its team on the performance of portfolio companies. The company has yet to bring any of its investments to the exit stage, but expects its first IPO in the coming months, from an investment made as recently as March 1999.

For Brandis, the biggest challenge facing Earlybird has not been fundraising or deal flow, but hiring the right people. This is likely to be critical for the company as it strives to double in size an grow along with its portfolio. A further challenge facing a relative newcomer such as Earlybird the company recognizes, is building a brand this is especially true if Earlybird wants to attract the best companies to its portfolio. The firm’s strategy is to orientate marketing efforts toward the companies in which Earlybird seeks to invest, rather than toward investors, says Brandis. Above all, an entrepreneurial spirit and a commitment to bring value, rather than just money, is key.


TORNADO-INSIDER.COM, September 1999