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In Europe, A Sudden Shower Of Seed Money (Int'l Edition)

International -- European Business: STARTUPS


Investors are pouring money into European startups

When Kay Iversen presented a prototype of his software at a U.S. technology conference last year, the German entrepreneur didn't even know what venture capital was. But that didn't matter to the five venture groups eventually drawn to BNeD, the software business Iversen and four friends launched in Berlin in 1996. Nor did it matter that BNeD, which focuses on software to design fiber-optic networks, had yet to market a product. By last September, the 32-year-old chief executive had quit his academic research position and was sitting on $3 million in venture capital, a global business plan, and a distribution deal with Hewlett-Packard Co. "The venture capital came to us," says Iversen with a shrug.

BNeD's transformation into a global high-tech challenger would have been unthinkable just a few years ago, when seed money and startup capital were scarce in Europe. Even those who actively searched out funds often came up empty-handed. Risk was not yet accepted, entrepreneurial management underdeveloped, and many of the investments that were made turned out badly. But Europe is suddenly flush with money for risky, fast-growth, technology startups. Even loss-making biotech ventures--once an impossible sell to Continental investors--are finding funds in record numbers.

The payoff could be big for Europe--especially given that its traditional industries are not creating jobs. A steady flow of fast-growth startups could help ease chronic unemployment levels. Indeed, if last year's 33% rise in early-stage investing continues, it will bring Europe closer to realizing its own world-class technology industry. "It will help better companies make more of an impact on the global market," says Jos B. Peeters, founder and managing director of Capricorn Venture Partners in Leuven, Belgium."VIRTUOUS CIRCLE." While numbers for 1997 won't be released until June, the European Venture Capital Assn. (EVCA) in Brussels confirms that early-stage investing--seed and startup capital--will rise sharply from the $441 million invested in 1996. In Germany, early-stage investments were up 45% last year. Britain's rose 21%. As competition to invest in the best companies grows, promising startups in Europe may now have a choice of up to 10 companies to partner with, says Falk Strascheg, who chairs the EVCA and founded Technologieholding, which manages $250 million of venture capital.

Europe still invests considerably less than the $4 billion-plus U.S. investors pump into high-growth startups every year. But the numbers are likely to continue rising. In France, the Netherlands, Ireland, and elsewhere, recent legislation allows insurance companies and pension funds to invest more in equities. In some countries, new tax incentives have boosted the flow of fresh venture capital. But the real attraction is high returns amid low interest rates. Institutional investors, pension funds, banks, industry, and private investors are channeling increasing sums into startups, following a series of blockbuster initial public offerings over the past 18 months. That has prompted new seed funds from Helsinki to Zurich.

New stock markets in London, Paris, Frankfurt, Belgium, and Amsterdam now provide the missing link that long dogged European entrepreneurs--an efficient, reliable exit route for venture investors. Before such markets--and before European growth companies found NASDAQ--it was difficult to turn around. "Five years ago, it was virtually impossible to take a loss-making company public," says Ronald Cohen, chairman of Apax Partners & Co., a London venture investor.

What a difference a few years make. France's Nouveau Marche has risen 61% over the past five months--twice the gain of the blue-chip CAC-40. A total of 77 IPOs on the two-year-old Nouveau Marche, Germany's Neuer Markt, and the Europewide EASDAQ--plus 16 European issues on NASDAQ--have made paper millionaires out of entrepreneurs and investors alike. Siparex, a Paris venture group, expects to quadruple its $900,000 investment when Floriane, a French biomedical company, goes public this summer.

Such successes build both supply and demand. The new environment is spurring more graduate students and researchers to launch technology companies--and more investors to bet on them. With $2.7 million in sales and no profit expected before 2000, Philip Debbas still needed only nine months to raise $4.5 million last year for TPS Labs, his fast-growing software startup in Munich. CEO Debbas and his six co-founders, who started in 1991 with a contract for in-house software for Compaq Computer Corp., expect to top $30 million in sales next year.

Technologieholdings' Strascheg, who reviewed 217 business plans in 1995, saw 741 last year and expects substantially more than 1,000 this year. Investors say business plans are now more polished and management teams have more depth. "We've created a virtuous circle," says Dominique Nouvallet, a partner at Siparex, which is raising a $50 million fund for early-stage investments.

At Capricorn Venture Partners, Peeters had trouble raising a $7 million startup fund in 1995. Last year he was bombarded: Investors oversubscribed by several times a second fund he closed at $24 million. Companies such as Ireland's Iona and Belgium's Xeikon, a maker of digital printing systems, which are now traded on NASDAQ, are models for European entrepreneurs, says Peeters. "They've shown that what's possible in Silicon Valley is now possible in Europe."

Venture capital on the Continent has had another big boost in recent years, as countries such as Germany, Holland, and Belgium began providing entrepreneurs with government matching funds--either loans or equity investments made alongside private investments. TBG, a German program, has invested more than $80 million since 1995."SHAKEOUT." Germany and Switzerland have seen an especially strong rush of new startups. McKinsey & Co. has accelerated the entrepreneurial boomlet in these countries with a business plan competition in 1996 that it launched with three technical universities in Berlin and Munich. The competition prompted Kay Iversen to submit his business plan. BNeD was one of the finalists--and now has two former McKinseyites in top management. The contest, which generated 300 entries, led to 40 startups that have already raised $56 million. McKinsey is now running a similar competition in Zurich and plans others. "We have venture capital, we have stock markets--we have all the ingredients," says Lothar Stein, a director at McKinsey's Munich office. "This will spark a chain reaction."

The bad news is that all the competition among an increasing number of investors has forced up prices for private equity stakes by 30% to 100% over the past 18 months. New venture capitalists may also fail to attain the 50% returns seasoned companies are now reaping. For some, today's enthusiasm brings to mind a boom-and-bust in venture capital that Europe went through a decade ago. "We will have a shakeout," warns Falk Strascheg, "but it won't be as bad as in the 1980s." That may be. But for once, Europe looks like it has a venture-capital industry that won't evaporate in hard times.By Gail Edmondson in ParisReturn to top

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