Fresh from an initial public offering of LinkedIn Corp. that valued its stake at $1.3 billion, the Menlo Park, California-based venture firm last month raised its first fund focusing on Europe and Israel. Greylock and Insight Venture Partners, an early backer of Lovefilm and Flipboard, are among American investors considering opening offices in London to take advantage of a burgeoning number of technology startups.
U.S. venture capitalists, later-stage technology investors and software companies are paying more attention to targets in London, Paris, and Munich, upping investments in and exposure to a region some had all but written off. For them, Europe offers a chance at finding hidden gems in unlikely places -- and perhaps billion-dollar success stories such as Skype Technologies SA, Spotify Ltd., and Yandex NV.
“The quality of entrepreneurs in Europe is exponentially higher than a decade ago,” said Jeff Horing, a co-founder of New York-based Insight. “We are over there because we think we’re getting better deals.”
European technology startups are cheap relative to the U.S., where valuations have soared in the wake of Facebook, Twitter, and Zynga Inc. Last year, deal values in Europe stood at a pre-investment average of $5 million, compared with $15 million in the U.S., according to Ernst & Young LLP. In the first quarter, valuations in Europe rose 20 percent to $6 million while the U.S. saw a 40 percent surge to $21 million.
High-profile deals and investment rounds involving U.S. companies and venture funds this year included Amazon Inc.’s $320 million purchase of the rest of Lovefilm, Twitter Inc.’s takeover of London-based TweetDeck, and a 73 million-pound funding round for U.K. online loan-provider Wonga, led by U.S.-based Oak Investment Partners.
In March, takeaway-ordering service Just-Eat closed a $48 million investment round led by Greylock, just days after “Angry Birds” developer Rovio Mobile Ltd. raised $42 million from investors including Palo Alto-based Accel Partners.
“Five or six years ago, American VCs would have been more hesitant to do an investment in Europe,” said Barry Maloney, founder and partner at London-based Balderton Capital, which took part last month in a $24 million funding around for Berlin- based social games developer Wooga GmbH. “I think that hesitancy has gone away now as we’ve had more high-profile technology and Internet exits.”
Meanwhile, European governments are stepping up their rhetorical support of young technology companies and, in some cases, trying to shed an image of hostility to high-tech.
In Paris last month, French President Nicolas Sarkozy and Finance Minister Christine Lagarde appeared alongside Google Inc. (GOOG) Chairman Eric Schmidt to pledge their support for technology investment. In the U.K., Prime Minister David Cameron’s government is promoting Tech City U.K., an effort to create a Silicon Valley-style cluster of startups in east London stretching from Shoreditch, near the City financial center, to Stratford, where the Olympic Stadium is being built.
With the advantages of a multinational population, the English language, and an existing cluster of venture-capital firms, London is leading European technology growth.
The city is “the beachhead for investments in Europe overall,” said Gil Forer, Ernst & Young’s former global director for venture capital. Investors have focused in particular on the so-called Silicon Roundabout, a cluster of converted warehouses around the Old Street junction just north of London’s traditional financial district, which has hosted startups including Last.fm and Tweetdeck.
Greylock may hire a second partner in London after it closed a $160 million fund, more than initially targeted, Bowden said. “We expect the pace of investments to increase.”
London-based Index Ventures said in March it would open a satellite office in the neighborhood, while one of its investments, social gaming developer Mind Candy, is hosting weekly “drinkabout” networking sessions.
While investors agree the continent has no shortage of talented would-be entrepreneurs, none of the startups have come close to achieving the global scale of Google Inc. or Facebook, both less than a decade-and-a-half old.
“Europe excels at product engineering and at producing good developers,” said Christian Lucas, a managing director at Silver Lake Partners, a later-stage technology investor that backed Skype, the Luxembourg-based Internet-call provider that Microsoft Corp. (MSFT) last month agreed to buy for $8.5 billion. “Globalizing remains a challenge.”
‘Afraid of Failure’
Working in multiple languages and small national markets, along with tougher regulations on startups than in the U.S., all hold back European technology companies, said Lucas, who was added as the firm’s second managing director in London last year.
On a continent with a tradition of long-term employment in big, industrial companies like Ericsson AB or France Telecom SA (FTE), the biggest challenges for European startups may run deeper.
Niklas Zennstrom would know. The founder of Skype left mobile-phone operator Tele2 AB (TEL2B) to become an entrepreneur.
“The biggest obstacle we have is cultural,” said Zennstrom, whose career also included founding music-sharing service Kazaa. “People are afraid of failure.”
Still, entrepreneurs in places like London have a ready role-model in a city that until recently had little history of success in the Internet world: New York. The biggest U.S. city has launched successful startups including Gilt Groupe and Foursquare after years in Silicon Valley’s shadow.
“There’s a lot of similarities between London and New York,” Foursquare founder Dennis Crowley said in an interview. “When we started, people said: ‘Look, a start-up in New York. How cute. Now there’s a huge scene.”