Europe’s digital technology sector is currently offering a number of compelling opportunities for venture capitalists, with cities such as Berlin and London fast becoming hot beds of entrepreneurial activity.
One private equity group paying close attention to this is Paris-based Idinvest Partners, which manages more than EUR8 billion and specialises in investing in European SMEs at various stages of growth. Benoist Grossmann, Managing Partner, oversees Idinvest’s Venture and Growth Capital business, which currently manages EUR2.1 billion.
Idinvest, who will be featuring on a European VC panel at the forthcoming IPEM event (https://www.ipem-market.com) in Cannes, 24th to 26th January, has played a part in major breakthroughs in the growth and development of information technology and the internet in Europe, funding more than 130 start-ups over the past 10 years.
“We invest only in European venture capital,” explains Grossmann; “50 per cent in France, 50 per cent in the rest of Europe including the UK. We have quite a strong presence in the Nordics as well as in Spain.
“We invest approximately EUR150 million per year in approximately 10 companies per year. We were a lead investor in two NASDAQ-listed companies, the first of which was Criteo, which is dedicated to online retargeting, the second being Talend, which listed on NASDAQ 18 months ago.”
Other portfolio companies that Idinvest has invested in include: Curse, Viadeo, Cast, Scality and Synthesio, all of whom are now based in the US.
Grossmann confirms that the group is currently raising capital for its third venture and growth capital fund to focus on the digital sector. It will have an investment capacity of over EUR400 million.
“We launched the first fund 12 years ago and the second fund in 2013. We are aiming to do a first close on the third fund in a few weeks’ time,” says Grossmann.
Usually, when Idinvest makes a Series A investment the typical investment ticket is EUR5 million to EUR8 million, increasing to EUR10 million to EUR15 million for a Series B funding round. This differs to Idinvest’s private funds group, which manages EUR3.3 billion in assets and takes a more traditional PE approach to investing in established companies; and therefore involves deploying much higher amounts of capital.
In respect to VC and growth capital investing, the average investment will typically be between EUR20 million and EUR40 million, depending on the company.
“Regarding the opportunity set for early stage investing in this space across Europe, obviously London is a key digital hub,” says Grossmann. “The Nordics are quite active as well where small markets such as Denmark and Finland have lower competition, and we like to invest in these countries. Germany is also an important market, especially Berlin. The VC community in Europe is quite small – approximately 10 funds and we speak to all of them. So we all know what each other is doing. Sometimes we compete on the same deals but we also co-invest together.”
Having invested in early stage companies for over a decade, Idinvest has developed acute judgement and expertise when screening and evaluating companies whose business models are linked to the internet, not only in the B2C segment (investments have included Dailymotion, Deezer, Meetic and Withings) but also in the B2B sector (such as Criteo referred to above).
Unlike private equity, the investment risk is tied for more to the entrepreneur than the actual company when doing VC investing.
As Grossmann states: “When you invest in small companies, 90 per cent of their value is tied up in the entrepreneur. Our job is to detect the best entrepreneurs; it’s far better to invest in a good entrepreneur with a bad project than vice-versa.
“More specifically, what we look for are ‘serial entrepreneurs’, i.e. those who have launched companies in the past. We have a good network in Europe and much like European VC managers, a lot of European digital entrepreneurs know one another.”
Seeking out the next Elon Musk, for example, is a tall order for any investment manager. Where Idinvest benefits, from a networking perspective, is that companies it has backed will often recommend Idinvest to their peers. This helps to source talent, after which Grossmann and his team will engage in lengthy technical due diligence and IP due diligence to see if the prospect might be a good fit for the portfolio.
Last year, Grossmann says they invested approximately EUR150 million and that the target for 2018 is to invest between EUR200 million to EUR250 million “because the market is quite active”.
“The funding rounds are getting larger and larger. Five years ago, a typical Series B investment was EUR5 million and today it is more like EUR10 to EUR15 million, which is why we want to increase by 40 per cent the amount of capital we put to work in 2018,” confirms Grossmann.
There are a lot of very good entrepreneurs in Europe, which is encouraging for European VC firms.
“We are very optimistic on future investment opportunities, especially in respect to digital investments. Digital technology companies are growing fast and the size of the market continues to grow,” says Grossmann.
He says that sectors such as artificial intelligence are just at the beginning of their growth trajectory:
“We did some investments in this sector last year. In my view, artificial intelligence will keep Europe’s VC community busy for the next five years. Europe is a good place to do this kind of investing because there are many highly skilled engineers and scientists. There is plenty of capacity, from a talent perspective.”
In the wider Fintech space, prices are higher and competition is quite fierce but in AI there are still good opportunities.
Grossmann talks about VC investing and compares it to hunting “but our preferred weapon is the cheque book rather than the rifle”.
When Idinvest finances early stage companies, if, after a couple of years they are struggling, it will not seek to unplug the company. It views itself as a strong supporter of entrepreneurs and a responsible investor; this has helped build Idinvest’s reputation over the years.
US investors will not typically look to invest in European early stage companies because one needs to be local to do so; it’s no different to European investors attempting to invest in Silicon Valley start-ups.
That said, Grossmann confirms he is starting to see more US funds investing in Series B and Series C rounds and that the largest US investors are getting increasingly active in Europe, which is widely seen as a bargain compared to prices in the US.
“Big US players have started to buy European start-ups, which wasn’t the case 10 years ago. For example, we sold one of our start-up companies, Zenly, to Snapchat maker Snap Inc. for USD300 million. For me, that signals a new era. The acquisition was completed in two weeks, it was extremely fast,” concludes Grossmann.
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