International -- Int'l Business: EUROPE
GOVERNMENT HELP FOR EUROPE'S STARTUPS (int'l edition)
Governments are matching venture capitalists' stakes
Continental European governments have vowed for years to help high-tech entrepreneurs develop growth companies and make up for the region's dearth of venture capital. Yet their aid programs often strangled startups in red tape before they ever received loans. Other times, bureaucrats afraid of taking a risk on a small company handed out subsidies instead to "safer" large companies, leaving startups starving for funds.
Policymakers are now trying to learn from past mistakes. New government aid programs increasingly take bureaucrats out of the investment process and coordinate with the few private venture capitalists that flourish. To the Americans and British, such aid may seem like another welfare-state payout that will hinder the markets. Yet on the Continent, where venture capital is still struggling to attain critical mass, this cooperation is a positive step that is already showing signs of a payoff. If the success stories multiply, Europe may finally seed the information-technology industry it has been trying to nurture for 15 years. And eventually, local venture funds may be so plentiful that government loans will no longer be needed.
Germany has developed the most innovative twist. Scrapping a program run by the Research & Technology Ministry, the government has launched an agency called TBG (Technologie-Beteiligungs-Gesellschaft, or Technology Investment Co.). The new agency co-invests in companies whose technology and prospects venture capitalists have already scrutinized. "The government learned that money alone doesn't help. You have to combine it with private investors," says Waldemar Jantz, managing partner at Munich-based venture capitalist TVM Techno Venture Management. In 1995, TBG lent $37 million, a sum that likely triggered $100 million in total venture investments, Jantz says. The TBG will match private-sector investments of up to $2 million per company, and the money is repaid after 10 years.
At six-year-old SCM Microsystems in Pfaffenhofen, the $2 million in matching funds from TBG meant a speedy entry into the all-important U.S. market in 1994. Within a year of setting up an office in San Jose, Calif., the maker of smart-card readers was generating 51% of its sales in the U.S. Without TBG's cash, says SCM founder Robert Schneider, "we wouldn't have been able to move as quickly." SCM had $18 million in sales in 1995 and expects $40 million by 1997, when it plans to go public on NASDAQ. Peter Heinrich and Horst Domdey, founders of MediGene, have received two rounds of financing from TBG. They are close to signing alliances for gene-therapy work with a German drugmaker and a U.S. company.
"THEY HOUNDED US." The Luxembourg-based European Investment Fund is embarking on a similar co-investment approach Europewide. Set up by the European Commission, the European Investment Bank, and several other banks, the fund aims to invest $84 million over the next three years in high-growth sectors. "The idea is to limit the paperwork. The [partner] funds do the due diligence," says Pe Verhoeven, assistant to the secretary general at the European Investment Fund.
Belgium's long-running Investment Company for Flanders (GIMV) pioneered the concept of handing government funding for technology companies over to private management. A private company set up in 1980 with government funds, GIMV hired technology experts to analyze investments and manage them like any venture-capital company with an equity stake. "We had meetings every month," recalls Joe Lernout, co-founder and president of Lernout & Hauspie Speech Products, a maker of speech-recognition software founded in 1987. "They hounded us about everything." Lernout & Hauspie had a successful offering on NASDAQ in 1995. GIMV, which last year earned a return of 24%, sold 15% of its shares to institutional investors in 1995 for $65 million.
Other countries are trying programs. Finland now has state-backed venture funds, while Norway, Holland, and Austria are designing co-investment programs. Government funds alone obviously cannot bring critical mass to Continental Europe's thinly funded venture-capital industry. But the state-funded programs will help if they raise the investment pool for new winners. Once those bets start paying off, Europe may finally create a virtuous circle, attracting more private funding to fuel a vibrant high-tech sector.By Gail Edmondson in Paris