New Europe VCs Vow Valley-Size Returns With Small, Targeted Bets

With venture capital flooding into European startups, some local VCs have hit on a formula to maximize profits: break off from older firms and go it alone.

In the past eight months, three VCs have set up shop, each with backing from U.S. investors looking for a piece of the Continent’s startup action. Berlin’s BlueYard Capital, formed by two veterans who left Earlybird Venture Capital last year, has raised $120 million. Mosaic Ventures, formed by three London-based venture capitalists who’ve worked at firms including Accel Partners and Yahoo Inc., have started a $140 million fund. Felix Capital, founded by Frenchman Frederic Court, formerly of Advent Venture Partners, has raised $120 million to invest in “creative” Web companies in food and fashion.

While larger VCs with $500 million or more to play with remain the go-to firms in Europe, the new-guard VCs are betting being smaller is better in a market that isn’t as vast as Silicon Valley. The upstarts’ argument is that more focused funds have a better chance at yielding the five-times or more return on investment financial backers are looking for.

“There’s a new wave of fresh, American-like firms being created in Europe,” said Ciaran O’Leary, who co-founded BlueYard with ex-Earlybird partner Jason Whitmire. “Two to three years ago the data became overwhelming that Europe is happening. More and more U.S. money is rolling in.”

Growth Challenges

For years, Europe wasn’t especially fertile ground for technology startups. A patchwork of regulations and an official aversion to collecting the data startups thrive on means it’s still harder for fledgling firms to grow than it is in the U.S. But times are changing. Berlin, London, Stockholm, Paris and Helsinki are all drawing software developers. Apple Inc.’s App Store and Google Play let startups launch in dozens of countries virtually overnight. Amazon.com Inc.’s Web Services offerings means small companies can tap computing power to serve U.S. customers without opening a data center there.

In Germany a historically conservative attitude toward entrepreneurship is giving way as the travails of Siemens AG, Volkswagen AG and Deutsche Bank AG strip some of the luster off the country’s manufacturing, automotive and banking sectors.

VCs invested $13.3 billion in European startups last year, an increase of 38 percent from 2014, outpacing everywhere in the world except greater China and India, according to market researcher Preqin.

Connections Matter

The established VCs still have advantages for startups looking for the credibility, connections and infrastructure a larger firm can provide. Accel Partners, which backed Facebook, Etsy and Spotify, raised a $475 million Europe fund in 2013. Two other established VCs, Index Ventures and Balderton Capital, have raised a combined $1 billion over the past two years for early-stage investments in Europe. The big funds say that despite their size they’re still nimble enough to compete in Series A rounds for a few million dollars, the sweet spot of Mosaic, BlueYard and Felix.

“People say we are late-stage and I think that’s wrong,” said Philippe Botteri, an Accel partner, who notes that his company can put anywhere from $1 million to $100 million in a round.

The upstart VCs say because their partners come from established firms they bring networking and credibility but also can lavish more attention on startup founders.

‘Patronizing Approach’

“We’ve all been someplace bigger and decided to do smaller funds,” said Felix’s Court. “What we all share is this Silicon Valley culture of being a friend to the entrepreneur. The old-school approach in the U.S. and Europe has been to be more patronizing.”

The university endowments, investment funds and wealthy families that put money into venture capital are taking notice. BlueYard raised almost all its backing capital from limited partners in the U.S., Whitmire said. Mosaic’s LPs are all American. Felix also claims some U.S. investors, though most come from Europe, according to Court.

That means the new firms need to generate returns on par with U.S. venture capital since investors can also back U.S. VCs with better access to California’s tech landscape.

“If you want their money, they have the option of investing in the top firms on Sand Hill Road,” said Mosaic co-founder Toby Coppel. He reasons that a $500 million venture fund seeking a “great” five-times return on its investments needs to have its whole portfolio of startups valued at $25 billion, assuming it owns 10 percent of each company.

“In Europe that’s almost impossible,” he said. “In the U.S. you can do that because all you need is a Facebook, Twitter, Workday, LinkedIn or Salesforce.com. Europe’s not there yet. It’s just very hard for that math to work.”

With Mosaic’s $140 million fund, “the math can work” with a total portfolio value of $7 billion, Coppel said. “You can do it if you have one great company in there.”

The new VCs each have their own investment focus. Felix backs startups in fashion and food, including Farfetch, a Portuguese e-tailer of high-end clothes, and Food Assembly, a French online farmers market. Mosaic focuses on financial software and cloud-computing services for small and midsized companies. BlueYard hasn’t announced any investments yet, but Whitmire said it’s aiming for companies that let consumers and businesses cut out middlemen and those that give users more control over data.

“There’s a big chance in Europe for entrepreneurship, a big chance to build amazing global companies that will be successful,” he said. “As a next-generation venture capital firm we’re hoping we’ll be able to seize on that.”