Perspectives on VC and the European opportunity

Ben Holmes

Stockholm, March 2008

Selected Investments

About Index Ventures• Over €1.3bn under management,

managing parallel investment vehicles– Ventures Fund €350m doing €0-€20m

investments– Growth Fund €300m doing €10-€40m

investments• Focus on Europe including Eastern Europe

and Israel

• Pan European Venture Fund

• Based London & Geneva

• Life Science, Software, Internet, Semiconductors, Communications, Materials, Energy and Cleantech

Selected Investments from Nordic region

About Index Ventures• Over €1.3bn under management,

managing parallel investment vehicles– Ventures Fund €350m doing €0-€20m

investments– Growth Fund €300m doing €10-€40m

investments• Focus on Europe including Eastern Europe

and Israel

• Pan European Venture Fund

• Based London & Geneva

• Life Science, Software, Internet, Semiconductors, Communications, Materials, Energy and Cleantech

Agenda

Is there an internet/tech investment bubble?

Key investment themes: 2008 – 2012?

What role can Europe play?

Are we in another bubble?Reasons to worry…

• “Social Network for dog-owners”

• Raised financing from VC and well known US angels

• Developer of SuperPoke, Top Friends and Funwall widgets

• Raised $50m at $550m in Jan 2008

• Most popular social network in Tunisia…

• Raised financing from Russian investment firm at $300m valuation

• “Human-powered search engine”• Raised $20m at $100m in Dec 2007

Crazy Ideas! Crazy Names! @ Crazy Prices!

Are we in another bubble?Reasons to be confident…

European Internet Penetration

83%

70% 70% 68% 65% 62%58%

54% 53% 51%46% 44% 42% 39% 36%

11%

Net

herla

nds

Nor

way

Sw

eden

De

nmar

k Fi

nlan

d

U.K.

Sw

itzer

land

Be

lgiu

m

Aust

ria

Fran

ce

Germ

any

Port

ugal

Irela

nd

Spai

n

Italy

Russ

ia

Unlike 2000, we are all online now…

Are we in another bubble?Reasons to be confident

B2C Ecommerce Revenues(2006 $bn)

47.9

23.9

16

5 3.8

U.K.

Germ

any

Fran

ce

Italy

Spai

n

22% 27% 27% 33% 31%‘06-’10

CAGR

…and spending money…

Are we in another bubble?Reasons to be confident

• Untargetted• Expensive• No RoI visibility

Online advertising 2007

Advertising per year per online user(2007 $)

147

103

14 13 9

U.K

.

Fran

ce

Spai

n

Germ

any

Italy

Online advertising circa 1999

• Controlled• Trackable• Effective

Are we in another bubble?Reasons to be confident

• Salaries in tech sector are high – but not as astronomic as in 1999

• “Land-grab” mentality has dissipated– Businesses which monetise effectively are spending to acquire users– Businesses with don’t yet monetise strongly generally aren’t paying to acquire customers

• Cost and capex related to software and web development has shrunk dramatically (<5x)– Use of open source software (Linux, PHP, MySQL, Ruby) vs. Oracle and Intershop– Leverage third party infrastructure (e.g. Mashups, Amazon S3 and EC2)

In short – a healthy investment environment

Agenda

Is there an internet/tech investment bubble?

Key investment themes: 2008 – 2012?

What role can Europe play?

Disparate Sectors – one unifying theme …

Software

Development Tools and Services Database Software

Telecommunications

Wireless Networking Web Telephony Mobile Telephony

Financial Markets

Currency TradingWeather Derivatives Betting

Entertainment

“Fame, Fashion and Friends”

Advertising

Ad server software TV advertising destination

“Democratisation”

• Providing Access at fair terms …– To closed markets (e.g. Weatherbill, Betfair, Oanda)– To closed networks (e.g. Rebtel, Skype, Fon)

• Providing Tools and Services free or affordably …– To build (MySQL, Zend)– To create and share (e.g. Moo, Spreadshirt, Youtube, Stardoll)– To promote (e.g. Google, Spotrunner, Craigslist)– To transact (e.g. eBay, etsy, Paypal)

Consumers

Producers

Price-takers

Price-setters

Shops

Marketplaces

Retail MktParticipants

Wholesale MktParticipants

Biggest venture returns (10-100x+) will still be driven by opening up large closed markets to broader participation

• Relies on fundamental traits of human nature– Creative– Commercial– Communicative

• More can be achieved with less capital driving massive returns for successful ventures– Lower product development and testing costs– Lower sales and marketing costs are lower– Entrenched communities become hard to displace

• The Challenge…– No clear or repeatable formula for success– Building userbase, trust and liquidity can take time– Forming the correct monetisation model is tricky

Agenda

Is there an internet/tech investment bubble?

Key investment themes: 2008 – 2012?

What role can Europe play?

Dozens of multi-billion dollar tech success stories ...

... handful of truly global leaders, but changing fast ...

Contrasting EU and USNumber of leading tech companies

• Many firms• Lengthy track records• Established hierarchy

• Fewer firms• Shorter track records• Leadership up for grabs

Bessemer 1911/1970 Fund VII

Greylock 1965 Fund XI

Kleiner Perkins 1972 Fund XI

Sequoia Capital 1972 Fund XI

NEA 1978 Fund XI

Oak 1978 Fund XI

Accel 1983 Fund IX

Battery Ventures 1983 Fund VI

DFJ 1985 Fund VIII

Benchmark Capital 1995 Fund VI

etc …

Partech 1982 Fund IV

Atlas Venture 1986 Fund VI

Sofinnova 1989 Fund V

Wellington 1991 Fund IV

Northzone

Index Ventures

1994

1996

Fund V

Fund IV

Amadeus Capital 1997 Fund II

Add Partners 1999 Fund I

etc …

Contrasting EU and USMaturity of VC Industry

$0

$2

$4

$6

$8

$10

$12

4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06

Venture Captial Investment ($bn / qtr)

US Venture Capital

European Venture Capital

Contrasting EU and USAmount of VC investment

The “Cinderella” of alternative assets

• European VC has been marginalised far too long by LPs– In favour of buyout and hedge funds– In favour of US Venture Capital

• Last two years have been a genuine turning point– European VC generating more successful exits relative to funds invested

and companies backed (twice as capital efficient based on recent survey*)– Global $bn+ companies built out of Europe

*Simon Cook, DFJ Esprit & EVCA Research, 2007.

Summary European VC

• Tremendous pool of engineering and scientific talent

• Easy access to Eastern Europe and Russian Markets

• Dominance in certain sectors Wireless ERP Open source software

• Growing pool of entrepreneurial and managerial talent• Returning Europeans from US• Early serial entrepreneurs

Encouraging prospects for European VC

Summary European VCPerspectives on Swedish Startups

Europe’s most socially cohesive country

Calm, productive and unpoliticised work culture

• High technical awareness from non-technical staff; &

• Reasonable business awareness from technical staff

No chasm between “business” and “technical” staff exist

• High levels of social security

• High direct and indirect taxes and tough tax regime around options

• High levels of confidence to become entrepreneurs

• Weak incentives and rewards to grow and exit a business

Summary European VCSwedish startups: Challenges and Opportunities

• “Europe’s Korea”– Highly tech savvy population– High density of programmers, scientists and technicians– Early investors in infrastructure (e.g. mobile, broadband)– Early and eager adopters of new devices, technologies and services

• Future seems to arrive quicker in Sweden. Challenges are…– As a society, to remain on the leading edge of innovation and adoption– Capitalise on early insights and access you have to export technology and develop global leaders…

• Win foreign customers early

• Expand abroad early

• Take on international investors early…

Thank you

Ben Holmes

Email: benh@indexventures.com

Skype: ben_holmes

Image Credits. Vorm, nshepard, Hamed Saber, charles chan * all from Flickr, licensed under Creative Commons