European technology companies are trapped in a funding bottleneck as venture capital firms refuse to reinvest in the sector until they see a return from earlier investments, such as music service Spotify, via successful stock market flotations.
As US companies such as Twitter gear up for multibillion-dollar flotations, European venture capitalists say that they need to see share issues that will recoup their initial forays into the technology sector before seeking out the next Google.
One senior investment banker said success on the London Stock Exchange (LSE) was essential for companies such as Spotify, property website Zoopla and Klarna, a mobile payment service.
Funds raised by a wave of initial public offerings in technology companies can then be returned to venture capitalists, who typically invest small sums in startup businesses and then reap the reward when they float or become a commercial success.
Facebook's earliest venture capital investors included Accel Partners, which also invested in payday lender Wonga. "We need some good visible success stories, floating on major European markets – really the LSE," the banker said.
"These companies need to perform well in the after-market and make money for the institutional investors who buy in the IPO [initial public offering] – that way we will start to build a sustainable environment for financing, building and exiting [selling stakes in] tech companies in Europe."
The banker said once investors saw a return from technology investments in the wake of flotations, more funds would become available.
"This will eventually lead top-tier venture capital firms to be able to sell down their stake so they can return money to their investors. If the flotations go well there is an expectation that the UK market will become more receptive to venture-backed tech companies."
He added: "We believe that for the LSE you need to focus on demonstrating that the companies are great companies in their own right, not 'tech companies' – for instance Asos and Rightmove."
Asos, an online clothing retailer, joined the Alternative Investment Market (AIM) in October 2001, just over a year after setting up, and is now valued at £4bn, while property website Rightmove floated in 2006 and is now valued at £2.4bn.
Although technology startups in the UK are benefiting from a growing pool of "angel" investors, who put in small amounts, typically a few thousand pounds, to kickstart a company, many are struggling to secure their first institutional investment rounds, known as Series A and B.
Industry sources say this is because many venture capital funds that have seen low returns from past Series A and B investments are turning to late-stage investment when companies are bigger, depriving funds for medium-sized firms.
Spotify raised $100m (£64.2m) from investors in September 2012, in a move that valued the business at $3bn. But the Swedish music-streaming company has not given an indication that it intends to float on the stock market before 2015. UK-based Zoopla is seen as a rival to Rightmove, and is expected to generate interest from institutional investors.
Klarna, based in Sweden, provides payment systems for online retailers, and is believed by some analysts to be worth more than $1bn.
Manish Madhvani, managing partner for investment bank GP Bullhound, said the environment for venture capital funds and companies had changed significantly, adding that there was an opportunity for new funds from the private equity industry.
"Traditional private equity is helping grow the technology sector and is providing liquidity for the VCs, plus there has been strong and welcome demand from later stage private equity for tech, given the growth the sector has shown compared with traditional sectors."
He suggested that institutional investors were still wary of investing in the relatively immature and volatile technology sector. "Education is still required for the institutional investors.
Tech is a speciality sector with explosive growth potential over a short period of time. But the investment characteristics are very different to traditional sectors."
theguardian.com
As US companies such as Twitter gear up for multibillion-dollar flotations, European venture capitalists say that they need to see share issues that will recoup their initial forays into the technology sector before seeking out the next Google.
One senior investment banker said success on the London Stock Exchange (LSE) was essential for companies such as Spotify, property website Zoopla and Klarna, a mobile payment service.
Funds raised by a wave of initial public offerings in technology companies can then be returned to venture capitalists, who typically invest small sums in startup businesses and then reap the reward when they float or become a commercial success.
Facebook's earliest venture capital investors included Accel Partners, which also invested in payday lender Wonga. "We need some good visible success stories, floating on major European markets – really the LSE," the banker said.
"These companies need to perform well in the after-market and make money for the institutional investors who buy in the IPO [initial public offering] – that way we will start to build a sustainable environment for financing, building and exiting [selling stakes in] tech companies in Europe."
The banker said once investors saw a return from technology investments in the wake of flotations, more funds would become available.
"This will eventually lead top-tier venture capital firms to be able to sell down their stake so they can return money to their investors. If the flotations go well there is an expectation that the UK market will become more receptive to venture-backed tech companies."
He added: "We believe that for the LSE you need to focus on demonstrating that the companies are great companies in their own right, not 'tech companies' – for instance Asos and Rightmove."
Asos, an online clothing retailer, joined the Alternative Investment Market (AIM) in October 2001, just over a year after setting up, and is now valued at £4bn, while property website Rightmove floated in 2006 and is now valued at £2.4bn.
Although technology startups in the UK are benefiting from a growing pool of "angel" investors, who put in small amounts, typically a few thousand pounds, to kickstart a company, many are struggling to secure their first institutional investment rounds, known as Series A and B.
Industry sources say this is because many venture capital funds that have seen low returns from past Series A and B investments are turning to late-stage investment when companies are bigger, depriving funds for medium-sized firms.
Spotify raised $100m (£64.2m) from investors in September 2012, in a move that valued the business at $3bn. But the Swedish music-streaming company has not given an indication that it intends to float on the stock market before 2015. UK-based Zoopla is seen as a rival to Rightmove, and is expected to generate interest from institutional investors.
Klarna, based in Sweden, provides payment systems for online retailers, and is believed by some analysts to be worth more than $1bn.
Manish Madhvani, managing partner for investment bank GP Bullhound, said the environment for venture capital funds and companies had changed significantly, adding that there was an opportunity for new funds from the private equity industry.
"Traditional private equity is helping grow the technology sector and is providing liquidity for the VCs, plus there has been strong and welcome demand from later stage private equity for tech, given the growth the sector has shown compared with traditional sectors."
He suggested that institutional investors were still wary of investing in the relatively immature and volatile technology sector. "Education is still required for the institutional investors.
Tech is a speciality sector with explosive growth potential over a short period of time. But the investment characteristics are very different to traditional sectors."
theguardian.com
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