VC misconceptions and market trends from the 8th International Venture Capital Summit

The eighth International Venture Capital Summit took place in Sophia Antipolis near Nice, France, in early December and attracted over 30 startup companies ranging from software, wireless, telecoms, microelectronics to biotech, all looking to attract venture funding. The investor audience consisted of angels, angel networks, VCs from Europe and the US, as well as intermediaries like corporate finance houses, lawyers and accountants.

The Chilli took in the many interesting views of the investors during the two-day event, and presents here viewpoints from some of the participants – one on VC misconceptions, by Jacques Vallee, who is a French national, working in silicon valley as the general manager of SBV Venture Partners, a venture capital firm which invests in both European and US tech startups; another on market trends by Robert Jelski, sector head, electronics and semiconductors at 3i; and finally we provide a link to a survey carried out by the Cambridge Entrepreneurship Centre.

VC misconceptions – Jacques Vallee
Jacques Vallee has an interesting perspective on some popular misconceptions surrounding venture capital and what some European entrepreneurs think about VCs.

VCs are a good source of finance
This is true, but a good VC will add more than money to its investee company in terms of strategic advice, leverage from its contacts and know-how.

The role of VCs is to take risks
This is true but the risks are shared by all. In France there is a risk averse culture, where people are brought up to minimise risks and remain in safe harbour. In California it is OK to get on a horse and fall off, as far as you have learnt something from it, you can get back on it and try again. People there will generally help you to get back on the horse. In Europe, especially France, you are afraid that people are going to laugh at you when you fall off the horse. This culture will take time to change. Some of the French returnees who have had international experience are coming back to France and realising the massive potential of French know-how, talent and the hidden entrepreneurial spirit.

VCs invest in small companies
This is true at the start, but the VC expects the small companies to get big very quickly.

VCs are successful in the US
True, but there are a lot of places in the US where VCs have not been successful – places like New York and Chicago. VCs have been successful in a handful of tech clusters like Silicon Valley, the Boston corridor and maybe Texas. VCs can only succeed where there is a network effect and an ecosystem.

VCs are an important part of the financial sector
True, but the size of the VC market is a drop in the ocean when compared to the overall stock market.

VCs like to control companies
This is the perception, but VCs invest other people’s money [Limited Partner, LPs] and have fiduciary duties to their shareholders. When the founders quit or when things go wrong, the VCs are left to carry the baby until the exit, whether by success or outright failure. In France, there is an obsession with who controls the company – the investors or the management. Due diligence is very important for VCs, where they can check to see if the right management chemistry, philosophy and culture is there.

VCs require fiscal incentives
VCs invests risk capital to get a higher return. This return can only materialise via exits, either IPO or mergers and acquisitions.

Business plans should emphasise technology and unique features
All VCs start by looking at the management team positioning and competition and see if they can complement or strengthen it. In other words, the technology idea may be crazy, but if they have done it before, they know how to get there, or they know where they are going. Technology by itself doesn’t go anywhere unless it is driven. Competition is good, as it validates the market. No competition usually means no markets.

The VC business is a financial institution
This is true, but until they get some successful exits, they are just sitting on some worthless piece of paper.

VCs are a tool for technology transfer
True, but only as a by product, VCs sometimes end up having to re-engineer the whole company. One of their most successful companies, Mercury Interactive, ditched its original plan of a black box for testing software fired all its hardware designers and restarted as a pure software solution vendor.

Market trends - Robert Jelski
As we go into the next year, the investment and business environment is going through a massive change, providing both uncertainties and opportunities. Firstly, most people by now have come to realise the massive new potential coming from the BRIC countries [Brazil, Russia, India and China], where there are more than two billion new consumers requiring day to day household appliances, and everything from cellphones to DVD players. This creates massive opportunities in terms of consumer markets and new supply chain solutions.

Existing North American and European markets will be driven by security and government agencies, ranging from educations to transportations, as well as one billion sophisticated consumers.

On the one hand, you will see niche markets ranging from a few hundred dollars to a billion dollars, where niches can co-exist; returns multiples in this sector are expected to be high in the 10 to 20 range, while very large markets measured in terms of billions of dollars will result in low multiple valuation companies in the range of 2 to 3, but at a far higher revenue base.

Startups providing solutions in the new marketplace who can steer through the new shifting battle ground will command a lot of attention from the investor community, especially those who can nurture effective partnerships to reduce costs of operations.

New opportunities created by sub 100nm geometries in semiconductors will create more startups, especially platform IP (intellectual property), reconfigurable SoC (system-on-a-chip), systems packaging and testing, analogue and RF solutions, as well as the middleware market addressing existing platforms.

The best opportunities will be where the supply chain solution crosses new technology barriers and meets the new customers demands in BRIC markets.

VC survey - Peter Hiscock, director, Cambridge University Entrepreneurship Centre

Peter Hiscock provided an overview of a survey that was carried out amongst VCs to see what they expect to see from entrepreneurs. The study was carried out as a cross border European project TEEEInn (The European Extended Enterprise for Innovation). The study found that the majority of the business plans received by VCs are very poor, and of the 120 plans, only 35 could be considered investor ready. More information is available from the website www.teee-inn.org.

© Chilli Publishing Ltd 2004

16DEC2004