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May 30, 2006
Doughty Hanson: European VC Interview Series
Which tech entrepreneurs in Europe are having the largest impact on the most people, India's emergence as a source for exit-oriented M&A in the software sector, and why European VCs are feeling a bit more positive again, are some of the things revealed in our latest in the European VC series of interviews.
This time Nigel Grierson, Managing Director of Doughty Hanson Technology Ventures, gets the treatment.
Q. Your firm just sold Azure Solutions to an Indian company, Subex. Do you think that we will see more Indian and Chinese tech companies making acquisitions in Europe?
A - It was the largest software company acquisition by a listed company in India. It was the right deal at the right time.
Asia is figuring out how to engage with the western world. Actually, I should rephrase that and say the western world is figuring out how to engage with many countries in Asia, including China.
Either way, the chasm [between the regions] is narrowing.
So with funds available and a new found excitement to become global, I think it is inevitable companies from these economies will look to buy.
Big deals such as Huawei buying Marconi and Lenovo buying the IBM PC division demonstrated this and I think an upward trend is inevitable over the long term.
For the VC-backed company, my advice is – get a strategy early which figures out how your business model captures value from this trend.
Q. One more question on M&A trends. We've seen Alcatel and Lucent merge, Cisco has not done an acquisition over here for quite some time, and Intel is about to undergo a restructuring. This does not look for very good for VCs looking to sell firms to those buyers. What do you think?
A – There have been quite a lot of acquisitions in the last two years, so I am not sure I would agree with this view.
As we experienced with the acquisition of our portfolio company Alphamosaic by Broadcom, acquirers are increasingly able and willing to execute deals internationally. If there is a high quality asset that fits the need to add capability, there will always be a willingness to make an acquisition.
The revival of the stock markets across Europe enabling IPOs again is a catalyst for a healthy M&A market, as capital from a public listing is a competitive alternative to M&A, with the result that you get improved pricing of assets.
Q. How are you generating dealflow, anything new or innovative to attract founders in Prague, Porto, or even Geneva.
A - Most of deals come from our proprietary network of contacts. In fact 80% of the investments we have made were sourced through this network. We are also currently sitting on some ideas for which we are seeking outstanding entrepreneurs to take and run with.
Q. Can you be a bit more specific on that?
A. Our areas of focus for investment are semiconductor, cleantech, web software and telecommunications. So, you can guess the areas in which our ideas-in-waiting reside.
Q. Which companies/entrepreneurs in Europe do you think are having the biggest impact on the most people right now, and why?
A - You can't ignore the immense success of Skype of course. Free telecommunications has to be a very disruptive business thesis, as voted for by over 50 million people to date. And of course there are icons such as Trevor Baylis [inventor], James Dyson [inventor] and Hasso Plattner [SAP].
Then there are people who intend to have an impact in the future, three examples:
Mike Harris and Tom Ilube have a history of changing people's lives. They developed First Direct Banking and Egg Internet Bank to change the way millions of people use banks.
Now they are challenging the status quo once again with their new venture, garlic [Doughty Hanson portfolio company]. garlik will allow individuals to get control over the information that exists about them on the web and in the digital domain generally.
garlik enables the consumer to fight back against abuse of personal information.
Peter Malcolm of Orchestria [Doughty Hanson portfolio company] is developing software that stops you sending e-mails that, with hindsight you wish you hadn't.
Orchestria is a massive aid to hundreds of thousands of people in the financial services industry where e-mail mistakes have cost money and careers.
Q. Skype, or the “Skype exit”, and the high valuations given to Internet companies in recent M&A deals are the main reasons for VCs interest in the sector again. What is your take on the opportunities?
A - Consumer media consumption is shifting towards the Internet and mobile. This is to the detriment of traditional TV and print - hence the shift in the economics and potential creation of wealth.
When markets are in transition there are new winners and losers. Being positioned to capture a market in change is effectively how Skype captured so much value.
There is a new world of wide open Internet audiences, with massive bandwidth and available technologies. And the old world seems to be ill-prepared for the changes ahead.
At the same time, the development of a second generation Internet economy based on some really exciting technologies and business models (generically referred to as Web 2.0) has the ability to make this transition happen quickly.
So, it seems like the mantra for a while is ‘Be quick or be dead’.
Q - Doughty stopped making new investments during the downturn. Do you think that it was the right thing to do? Couldn’t you have bought in at more favourable valuations back then than now?
A - When it is hard to predict the timing of the upswing, it is hard to be sure that it’s the right to time to put your investors’ money to work. I believe we made the right decision to restrain our investments then.
In my thirty years in the technology industry, the arctic winter at the beginning of the 21st century was probably the longest and deepest downturn I have experienced.
Q. If I look at your portfolio, I see software-as-a-service, next-generation mobile content, SDR wireless chips, as being in favour. Will you continue to invest along these lines?
A – If you take semiconductors as a specific example, there is constant innovation and new ideas. So as micro-sectors emerge and become saturated (WiFi silicon for example), new ones emerge.
The trick is to visualise what will be big in four years’ time and get ahead of the curve.
So, I do not see our macro focus changing but the micro areas typically have a window of about 18 months - after which you might be too late to catch the winner.
Even though there are a number of major obstacles to overcome, the television experience over the Internet presents an opportunity to be a winner or a loser.
Or is it the Internet experience in the television environment? Either way you can visualise the recreation of the massive wealth created by the development of the Internet in the last 10 years being created all over again.
And there will be entrepreneurs who can monetise the opportunity in new ways and incumbents who will lose out. I guarantee it. Interview me again in 10 years and let’s review the new winners and losers scorecard. I know who my money is on!
Posted on May 30, 2006 07:48 AM | Posted to Venture Capital | Permalink
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