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January 11, 2007
Esprit Won't Buy Dinner But Cook Serves Up More On Europe's VC Market
Why the US venture market could shrink by 35 percent in the coming years and what it takes to create a 10X return in Europe, are just some of the the opinions Simon Cook of Esprit Capital revealed in a Q&A by email with the a:c euro.
Every VC has his or her opinions, so why did we want to get Cook's? The main reason is that he was responsible for one of our most read posts and one of the most clicked links in the last quarter of 2006.
The post in question was a summary and analysis of Euro VC exits since the bubble burst. Readers from well beyond Europe hit the outlink on that one, suggesting that money-in (investments), which has been our focus at the a:c euro, is only half as interesting to our readers as money-out (exits).
That should not have surprised us, but it did, and has us thinking about our future focus. But that is another story. Below the jump, you'll find the results of our email exchanges: more details on European IPOs in 2006, how to read the tea leaves in trade sales statistics, insight into the way that Esprit works with other VCs and with founders, and, um, how the firm doesn’t pay for celebratory dinners...
a:c euro questions in bold text. In square brackets the a:c editor's notes.
Is it the coffee machine (Euro style) or water cooler (US style) that is networking central at Esprit?
We are big believers in an open plan office so we overhear what we are all working on every day – that's how we can put ideas and people together. For example, when two of the team were discussing buy.at [an affiliate marketing startup], Nic Brisbourne overheard and mentioned he had worked with the perfect chairman, Bruce McClaren of advertising.com fame. These days we have to read Nic's blog to find out what he's thinking!
VCs spend a lot of time in airports. Which is your favourite airport in Europe ?
Not sure of my favourite airport, but my favourite place to meet travellers is WAYN [an Esprit portfolio firm].
When Esprit has a reason to celebrate, like when Alphamosaic was acquired by Broadcom, or when Fillfactory was acquired by Cypress Semiconductor - where do you book a table?
Wherever the bankers and lawyers wish to take us - they usually pick up the bill.
Esprit's recent investment in Web 2.0 startup WAYN has been getting some positive reviews from blogging VCs, such as Fred Destin of Atlas and Brad Feld over in the US. Isn't that kind of unusual? Where is that notorious rivalry between VC firms?
Whilst we are competitive on deals with our European VC partners, we also work very closely with them, much in the same way the founding firms of US VCs have done. If we don't get involved in the first round then there is always the chance that another round might come up that we want to be part of. It therefore, makes good sense to respect each other over the long term. For example, Esprit led the series B for an Atlas company, Displaylink [formerly known as Newnham Research].
We haven't seen too many venture-backed IPOs in Europe and the UK in the past few months. What is the problem?
We have seen some very successful businesses float this year in Europe: 22 with market caps of greater than $100m including Parrot, Optos, Modelabs, Magix, Trolltech but these are spread across many local exchanges.
Too many exchanges in fact. We need to have a single platform for growth capital companies in Europe so that we create a robust investor and analyst base. We also need to ensure that the right type of companies float and, at the right time. This will ensure that IPO investors will see some positive results over time.
Too many companies IPO before they are ready and this will put investors off especially if the companies disappoint and are too immature to have floated.
When it comes to M&A, the activity has been somewhat subdued, especially if you look at the chip sector. In a recent interview with this reporter, Stuart Paterson of Scottish Equity Partners said that "relative to the number of [chip] companies being financed, we should see 5 to 10 exits a year, for the ecosystem to be self-sustaining..." Do you agree?
It's not really measured by the number of exits but by cash returns. CSR may have returned over a billion dollars to its investors who stayed in and sold at the peak.
Those profits can be reinvested in dozens of start-ups and still leave good profits for LPs. There have been about 100 semiconductor exits in last three years with about 25% in Europe vs around 300-400 investments (again 25% in Europe), so it looks pretty healthy.
The iPod has proven that the PC form factor isn't the way forward and we believe more technology will be packaged as chips in future rather than sold as software.
US venture capital firms are under the impression that European tech ventures are "underserved" - ie. the amount of capital and resources available to support innovative companies is not yet at a critical mass. What do you think?
It is true that the European market is much smaller than the $24b US VC market. But a $4b market [the amount recently raised by European venture funds] isn't subscale; we are in the growth phase as the market comes into its own like US venture did in the 90s.
The fact is, we are now building global businesses in Europe and as Europe has generated about one-third of the best exits in the last few years with one-sixteenth of the capital, we are doing something right.
The average $100m+ exit in Europe and US in 2004/2005 was $251m, but only took $40m [of VC money] in Europe versus $70m in the US, so we are capital efficient.
Based on exit statistics and capital invested, I hypothesize that Europe can grow 35% and US should shrink 35%.
Your investment in Fillfactory was one of two greater-than-10X semiconductor VC exits for Europe since the bubble burst. Tell us a bit about it?
Fillfactory was a spin out of about ten engineers and scientists from IMEC, a leading micro electronics research centre in Belgium. The team's expertise was in the then fast growing CMOS sensor arena, and at Fillfactory they applied this to image sensors in applications ranging from producing the world's first high resolution professional digital camera, wafer-scale sensors for mammography, and space qualified image sensors.
This high-end business was profitable from the outset, unusual for a high tech start-up. CEO Luc de Mey was a very strong leader of Fillfactory and Esprit's contribution as one of the two VC board members was as a sounding board and mentor as well as facilitating the sale process.
And how's your portfolio right now?
We are very excited by a number of the next generation semiconductor businesses we have backed this past year including Siconnect, Displaylink [formerly known as Newnham Research], Lime, Xanadu and XMOS. It takes a number of years to build great companies though, so it's too early to say yet how successful they will be.
How do you source investments?
We spend a lot of time researching growth sectors and looking for successful companies in Europe who we then approach and explain the merits of taking on board an equity partner to. We also build a lot of new companies through seed investments with key institutions such as Cambridge Consultants, Qinetic, Universities etc.
What kind of companies are you looking for?
Esprit can invest at any stage but we want to back global companies which will require a minimum of about $10m of funding over time. We cover all areas of IT, semiconductors, software, new media and telecoms, plus a focus on healthcare such as medtech and diagnostics. We invest across Europe. We always take a board seat and work closely with our portfolio companies, often with a syndicate partner.
Esprit's Bob Hook (left to right) Sanjeev Sakar, Nic Brisbourne, Catrina Holme
You just won a tender put out by Cambridge Consultants (CCL) to manage its spinout activity after a four year gap. Its two biggest spinoff success stories are Cambridge Silicon Radio (CSR) and Alphamosaic. Is there a historical connection between the two organizations?
CCL has created many successful spin-offs in the past, but did this on an ad hoc basis with various investors. After a few years of inactivity, CCL are now focused on a more formal process of start-up creation and we are proud to be their exclusive partner.
The Esprit team has many connections to CCL spinoffs: Bob Hook was involved in the spin-out of Xaar; Alan Duncan with Alphamosaic and myself with CSR. CCL was also an original investor with Bob Hook when he started his first VC fund in 1985.
What should an entrepreneur do if he wants to meet one of Esprit Capital's partners to discuss a new venture?
Send an email; pick up the phone. We love to meet entrepreneurs of all ages but they must be ambitious!
Do you have a certain process that you undertake before and after making an investment in a technology venture?
We carry out a comprehensive due diligence process before we invest, as we have a duty to do so. Its other peoples' money that we are investing and therefore, we have to be careful and make solid investments. However, if it's a sector we have researched before and have great knowledge of we can move very quickly. We use a network of industry execs to help us and speed the process up.
Do you organize events or workshops for all your portfolio firms executives to get together?
We do hold regular workshops for our portfolio and other companies. Recently, we held an event that looked at new ways to monetize web traffic through performance based models.
The Equity Kicker Nic Brisbourne’s blog
Relevant a:c euro Links
Cook Shows The a :c euro The Exit
Newnham Connects With VCs
Hot Betas: NAVX, WAYN And…
Posted on January 11, 2007 10:43 AM | Posted to Being European | Venture Capital | Permalink
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