Venturing Forth

Being an entrepreneur in Europe has never been easy. Nowadays, it's tougher than ever.

Even before the IT boom hit Europe, No Wires Needed (NWN), a Dutch start-up specializing in wireless communications, was a darling of venture capitalists. The fledgling firm, a brainchild of five students at the University of Twente in the Netherlands, survived for its first five years on small cash investments by friends and family.

But as the commercial possibilities of wireless became apparent, venture capital (VC) firms started to beat a path to its doors. Between late 1998 and 2000, VC firms invested E7.6m in NWM, reaping big returns when the start-up was later sold for E158m in a share swap.

That was then. Today, the landscape facing budding entrepreneurs couldn’t be more different. “In the past year, venture capital managers have become very, very risk averse,” says Hans van der Hoek, NWN’s former CEO and current head of a wireless venture called Gemtek Systems.

Unlike their predecessors, today’s start-ups face a long process of “pre-due diligence,” which includes much fuller disclosure of strategic information and the development of business plans with frequent (often monthly) milestones and targets. This means investment funds can be drip-fed as each milestone is met, rather than paid in a lump sum at the outset.

This is not all bad. “In the present environment, it becomes clear who the real entrepreneurs are,” says Anton Arts, a director and partner of Gilde IT Fund, a Dutch VC firm. “Our deal flow has slightly decreased, but the quality of the proposals has gone up. A lot of the less attractive deals have gone away.”


The tougher environment has caught out many promising ventures that received their first round of financing in the boom times and now need a second round. Consider Spirea, a Swedish start-up that makes radio chips for Wi-Fi (wireless fidelity) products. It began life during the internet boom as a specialist supplier to Bluetooth, a short-range, low-speed radio technology pioneered by Ericsson. But as time wore on and the technology failed to show a profit, VC firms began to back away.

About a year ago, with future VC backing in doubt, Spirea changed its focus to Wi-Fi, a broadband wireless radio technology. But having spent half of its initial round of funding on Bluetooth-related products, Spirea has been hard-pressed to prove to backers that its change in direction will succeed.

“We are talking with established and new VC firms, and I am seeing a very careful, ‘OK let’s check, then let’s check again’ approach,” says van der Hoek, who is a non-executive director of the Swedish firm.

Spirea is hardly alone. According to the European Private Equity and Venture Capital Association (EVCA), total funds invested in seed, start-up and expansion phases in Europe fell 27.5 percent between 2001 and 2002 to E8.9 billion, and the number of deals fell by about 18 percent to 7,622. Seed-stage funding specifically experienced the steepest drop as investment fell 42.6 percent, to E305m, and the number of deals fell by 33.5 percent, to 494.


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