Something Ventured, Something Gained: A European View of Venture Capital

by James E. Aisner

Venture capital is a tale of two continents, HBS professor Josh Lerner (coauthor of the book The Venture Capital Cycle) explained in his opening remarks at a Global Alumni Conference panel titled "European Private Equity: Can the Venture Capital Boom Continue?" It was born in the USA in 1946, when the late Georges Doriot, a long-time and legendary member of the HBS faculty, founded American Research and Development as a willing and able source of financing for the new ventures that were coming to life just after World War II.

"Banks simply weren't doing a very good job with young firms, given the uncertainties that were a natural part of the entrepreneurial process," Lerner explained. "General Doriot's idea was to create a new kind of organization that established a selection process, supplied funded companies with management expertise and advice, and provided a stamp of approval in the marketplace."

U.S. venture funds didn't put on much muscle, however, until 1978, when pension funds got the green light to pour greenbacks into the coffers of venture capital and private equity firms. Some missteps and retrenchment followed in the '80s, but the new economy of the '90s brought a golden age and aura to VC firms in the United States. In 1999, venture capitalists controlled more than $46 billion, with skyrocketing returns to match the risks of their early-stage investments.

Europe, however, was a different story, Lerner pointed out. Levels of fundraising there were traditionally far more modest, with the bulk of it in Great Britain; buyouts and later-stage investment opportunities were the prevailing mindset; and the requirements of the established stock exchanges made going public a much longer and more difficult process than in the United States.

But that was then; this is now. Just in the past few years, said Lerner, "we've seen a lot more syndication transactions across the United States and Europe and more early-stage involvement by firms in England and the continent." In addition, with the coming of the Nasdaq-like Neuer Markt in 1997 (a creation of the Frankfurt Stock Exchange, or Deutsche Börse), there is a new and receptive home for initial public offerings.

To learn the practitioner's point of view, Lerner assembled a panel of three distinguished experts representing some of Europe's top firms: Ronald Cohen (HBS MBA '69), cofounder and chairman of Apax Partners & Co. Ltd., and vice chairman of EASDAQ—the pan-European stock market for growth companies which he helped establish in 1996; Gerard Montanus, a general partner in Atlas Venture, a global concern that first opened for business in Amsterdam in 1980; and Alberto Tazartes (HBS MBA '84), a senior partner in the Milan office of BC Partners, a private equity firm that focuses on acquiring and developing large businesses throughout Europe in partnership with management.

Founded in 1972 under the name Multinational Management Group, Apax established its initial offices in London, Paris, and Chicago, concentrating on placements for entrepreneurial ventures for almost a decade before setting up its first fund in Great Britain in 1981 to invest in early-stage high-tech concerns. Trouble was, the companies that got into the firm's portfolio couldn't get out. "Without access to stock exchanges at that time, we had to hold on to these enterprises for nine or ten years," Cohen recalled. The result was a drag on Apax's rate of return. To compensate for that, he said, the firm shifted to a balanced portfolio strategy, with investments such as Apple Computer and America Online in the United States and British auction Internet site QXL. "We aimed to be the most active investor from early stage to buyouts within several chosen sectors," said Cohen, especially in technology, media, and telecommunications.

Atlas Venture, which specializes in technology, life science, and information technology, also chose the global route in the mid-'80s so that it could help its client entrepreneurs compete successfully in the world economy. Forget about the traditional European approach, they said. Slowly building and defending market share in the home country before repeating the process in a neighboring market won't work anymore. Instead, they declared, start-ups have to grow big by expanding beyond their borders as quickly as possible. In keeping with that counsel, "we opened our first overseas office in Boston in the mid-'80s to assist European high-tech firms that wanted to enter the U.S. market," Gerard Montanus observed. "And since most VCs in the States weren't thinking about Europe at that time, we could also help American companies interested in going abroad."

According to Alberto Tazartes, BC Partners prefers to stick to its private-equity niche in Europe, looking for large, robust companies in strong competitive positions across a wide range of sectors. With 24 partners in offices in Milan, London, Paris, and Hamburg, Tazartes noted that the firm had made some 46 investments in Europe since its founding in 1986, exiting from about 30 of them. Rather than spread its wings too far, he added, BC Partners intends to continue to rely on the strength of its local presence and expertise. The growing number of U.S. as well as European competitors notwithstanding, he commented, "that's where we have a distinct advantage." For Tazartes and his colleagues, in fact, the demand for the services they render has never been greater, as governments privatize state-run operations and companies consolidate in a heady period of mergers and acquisitions.

Amidst all this activity, Atlas Venture's Montanus cautioned that "providing money alone is no longer enough." From business development and marketing to human resource management, firms today have to be able to supply their clients with a full range of services.

U.S. venture capitalists have gone from anonymity to the spotlight, providing American entrepreneurs with the resources they need to act on their ideas and dreams. In Apax chairman Ron Cohen's view, the European VC and private equity community is headed in the same direction, with added competition from leveraged buyout firms and well-known investment banks that have recently become players as well. "New technology has raised the bar on our returns," he said. "Capital markets here have become more receptive to money-losing startups that show a potential for growth. And Europeans are eager to raise venture capital to pursue new opportunities around the globe."

What used to be a unique part of the American experience has clearly found many admirers abroad.