Thursday, November 08, 2012

(BN) European Investors Put Adventure Back in Venture Capital

The life of a European venture capitalist is usually pretty civilized, punctuated by trips to the converted warehouses of London's trendy Silicon Roundabout neighborhood or Berlin's stately Prenzlauer Berg district, where entrepreneurs swap ideas in Vietnamese restaurants and faux-dive coffee shops.

Not so for Dmitry Chikhachev of Moscow-based Runa Capital, who lives a less posh existence. Visiting cloud-computing software provider Jelastic, one of his investments, means a flight to Kiev, Ukraine's dusty capital, followed by a 100-mile drive on post-Soviet roads to the provincial town of Zhytomyr -- a city perhaps best known for its museum of Cosmonaut memorabilia.

There, Chikhachev subsists on Ukrainian staples like potato dumplings and cabbage rolls as he helps Jelastic Inc., founded in 2010 by a Russian-Ukrainian programmer duo, expand its business. "There are hundreds of hidden gems far from big cities," says Chikhachev. "The regional market of startups is only starting to be tapped."

His journey shows the lengths to which European venture investors are going to find tech's Next Big Thing. Despite the region's debt turmoil and economic slowdown, European venture firms raised 4.85 billion euros ($6.2 billion) last year, an increase of 50 percent over 2010, according to the European Private Equity & Venture Capital Association.

Traditional Hubs

That money is helping drive up valuations of companies in traditional tech hubs like London, Berlin, and Stockholm, spurring venture firms to search from Tallinn to Istanbul for promising firms at reasonable prices.

"In London and Berlin, there are more angel investors than startups," says Lars Hinrichs, a Hamburg-based venture capitalist who is backing five new companies in Latvia, Poland, and Lithuania through his investment company HackFwd GmbH. "We have too much money in seed and late-stage investing."

One example of how that abundance of money is driving up prices for venture firms: Investment AB Kinnevik (KINVA), the investment arm of the Swedish-American Stenbeck family, said on Oct. 19 that it had bought a 10 percent stake in the four-year-old German online fashion retailer Zalando GmbH for 287 million euros, valuing the unprofitable knockoff founded by Berlin's Samwer brothers at about 2.87 billion euros.

Former Soviet republics such as Ukraine, populated with lots of young people with math and engineering expertise, are becoming especially hot destinations for VCs.

Kiev Growth

"I have been involved in the startup space in Kiev since 2003, and every year it multiplies by five," says Yegor Anchishkin, who co-founded facial-recognition software maker Viewdle with the investor Yuri Frayman shortly after Ukraine's 2005 Orange Revolution. "There's no lack of capital if you have an idea." Viewdle was recently bought for about $45 million by Google Inc. (GOOG)'s Motorola Mobility.

Eastern European entrepreneurs "come from a legacy of highly technical academic institutions," says Carlos Eduardo Espinal, a partner at London-based early-stage investor Seedcamp Ltd. "The quality of engineering talent is extremely high." Seedcamp's investments include TRData, a Kiev-based online trading platform, and Codility Ltd., a firm with Polish roots that offers technology companies testing services for prospective programmers.

This month, Moldova, the poorest country in Europe, will hold a "StartupWeekend" seminar for aspiring tech moguls --its second this year. Young entrepreneurs will pitch their ideas to a team of more experienced "coaches" from firms small and large. This in a country where medical care is so poor the U.S. State Department recommends travelers "try to go to Western Europe for treatment."

Investor Scramble

The scramble for startups is also taking venture investors to Turkey, a country of more than 80 million whose economy will grow by 5.5 percent next year, according to Goldman Sachs Group. (GS) "We did five rounds of financing, raised $20 million within 10 months, and haven't had to since," says Rina Onur, 26, chief strategy officer and co-founder of Peak Games.

The company was born in 2010 in the back room of an air- conditioning shop in Istanbul. Antwerp-based Hummingbird Ventures invested $1 million in Peak in early 2011 and was followed by German venture capital firm Earlybird Venture Capital GmbH, which invested $5 million later the same year. Since then, Peak's revenues have multiplied 20 times, a growth rate rarely seen in Germany, says Ciaran O'Leary, a partner at Earlybird. Earlybird has put at least another $5 million into Peak.

Remote Countries

Venture firms face challenges investing in remote countries, including unfamiliar local laws, stock exchanges with little experience in technology listings, varying accounting standards -- plus different negotiating styles. In Turkey, Earlybird learned that the very moment when people call off talks can be when negotiations start for real.

"In Berlin, we would think the conversation hadn't gone very well," says O'Leary. In Turkey, after talks reach an impasse, "half an hour later they'll call back and say, 'Let's work it out.' "

To be sure, Europe's reigning tech hubs aren't about to lose their importance -- especially since companies founded in unlikely locales don't always stay there. In the case of startups for which "there's some value in being close to certain ecosystems," a relocation to a big center like London or Berlin, or even the U.S., is often an important step, said Roberto Benzinga, a partner at London venture firm Balderton Capital.

Moving Headquarters

That was the path taken by Farmeron, a Croatian startup whose software helps manage farms and analyze data on their output, moved its headquarters to Silicon Valley last year to be closer to capital and talented staff.

And what bargains exist are likely to disappear as venture firms fan out to discover obscure companies, says Giuseppe Zocco, a partner at Index Ventures in Geneva. "There aren't a lot of secrets," he says. Still, the search for new ideas will keep driving investors to places where the street signs are incomprehensible.

"It would be very difficult in the U.S. to find the caliber of talent we have in Kiev, at any price point," says Jason Mitura, who was CEO of Viewdle when Google bought it. "We realized we were on the map when Google and Facebook started showing up trying to hire our guys at the math competitions." 

No comments: