Book review: Raising Venture Capital in Europe
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Keith Arundale’s book gives an overview of the entrepreneurial finance-situtation in Europe, by looking at both the historical origins, the boom and bust in 2000 with it’s causes and consequences, differences between European investors and elsewhere, how investors operate in Europe today, why, and how entrepreneurs can interact with them. It is aimed at three types of people: entrepreneurs trying to raise capital in Europe (or elsewhere), investors, and intermediaries (consultants, incubators, policy-makers, etc).
Private equity investing has been around in one form or the other since the 18th century, where wealthy individuals would back talented entrepreneurs. After the second world war, the Bank of England set up the Industrial Financial Corporation (or ICFC) to address what was perceived as an equity gap at that time,. This was then known as the MacMillan Gap and concerned funds between 5,000 and 200,000 UK pounds. Later on in the 60s, the ICFC also set up more technical-orientated funds to compete with the heavy spin-off activity from MIT at that time. Private Equity became an industry in the 70s and 80s with large numbers of private Equity firms being set up as well as professional associations such as the European Private Euqity and Venture Capital Association (EVCA) and the British Venture Capital Association (BVCA).
The period of 1995-2005 saw some of the heaviest growth in the industry, with raised funds increasing from 5 billion euros to 47 billion per year. The peak of this was reached in 2000, where a number of new private equity firms were started, and the large competition, inexperience, and other issues lead to a lot of write-offs, the fall-off of a number of these firms just a year later, and ultimately the recession. The private equity market has largely recovered since then, with roughly the same amount of investment happening in Europe as in the US (39% vs. 41% in 2005), though there are some underlying differences in how these funds are being invested.
The book is organised as follows. The first part provides some general background to private equity, where the author looks at things like the sources of funding, different structures of VC-firms, country-by-country differences, the EU’s Lisbon agenda, as well as introducing the EVCA and BVCA. Arundale is himself is heavily involved with both these organisations and much of the data in his book derives from them. The author then takes a look at some of the issues facing the European industry, such as a general risk-averseness of European investors following the 2000-recession towards unproven technology, a predominance towards management buy-outs, the lack of transparency of deals, incompatibility in valuation methods between the US and Europe, the lack of a single market for private equity investments, and the lack of a pan-European stock-(read exit-)market (The EU counts more than 20). He also highlight some of the differences between European and US VCs of which some major ones include the lack of risk-taking for technology-investments, which in part manifests itself in investing much smaller amounts per deal (the average deal-size for technology in 2004 was 6.1 million euros in the US vs. 0.9 million in the EU) and/or “drip-feeding” small investments into ventures only after certain criteria have been met.
The book also provides a small list of VC-firms involved in technology-investments on a per-country basis and takes a look at hot-technology interests for venture capitalists, which is a long and broad list and half are sure to disappear or change in a few years. What’s interesting is that while in the US there are roughly 8 silicon-valley-like technology centres, there are around 26 in Europe, many of which are at the forefront of their technological focus. He points out some key-characteristics of theses centres, which include a portfolio of breakthrough companies, proximity to top technology and science universities, a good supporting infrastructure, and excellent links to the commercial world.
Arundale also dedicates a number of chapters towards alternative sources of funding, such as business angel-financing, corporate investors, and government sources, as well as give tips on how to interact with these people. The tips are fairly straightforward and mainly consist of boosting the proposition in the areas of people, the market, and the technology. But he also identifies several types of business angels out there, which is interesting, making some of them seem a lot less angelic (which they are), and gives tips on where to find them (which is notoriously hard).
The book concludes with taxation and legal issues of which there are a large number, improving and understanding the hands-on vs. hands-off relationships with investors, and finally the various options to exit.
In conclusion, this book provides, as far as I know, the broadest overview of the European situation for finding capital today. Not only does Arundale discuss a number of private and public initiatives in-depth, but he also supplements these with interesting case-studies (which often end in practitioner’s tips to the reader). He provides believable explanations of current investor-behaviour and some good (though straight-forward) tips on how to deal with them. The book has a large technology-component, which is certainly a very interesting read. The author’s words are carefully chosen and while not painting a rosy picture it is far from pessimistic.
Some negative points about the book include a predominant focus on the British situation and taking an Anglo-saxon perspective. In addition many of the statistics mentioned are easily found elsewhere (both the EVCA and BVCA publish public reports), though the book is a good starting-point. As the focus is fairly broad, it is hard to say who the target-audience really is for this book. It could be policy-makers, trying to learn more from other countries, investors that want to expand beyond their borders, and entrepreneurs that would like to get greater insight. Readers will be presented with both a hopeful picture as well as perhaps the suggestion to move their business to the UK or the US. Also this book is more geared towards high-tech-entrepreneurship, which means it’s not for everyone, though certainly the readership of Techiteasy.
My final score is an 8 for historical perspective (with an Anglo-Saxon taint). And a 7 for practitioner’s advice as many of the tips given, though sound, can also be found elsewhere, and, well, entrepreneurs will still have to write a differentiating business-plan themselves.
My cellphone is down: I can hear perfectly people who talk to me, but they often (>50%) can’t, and as you can imagine, it can get pretty annoying…
