Venture Capitalists in Luxembourg and the greater region

On the occasion of First Tuesday Luxembourg's first birthday and the issue of paperJam 03/2001, a round-table discussion on the subject of "Venture Capitalists in Luxembourg and the greater region' was organised, on February 14th, at the Cercle Municipal in Luxembourg. The guests: Julie Meyer, co-founder of First Tuesday Central and Ariadne Capital. Danny Lein, co-founder of First Tuesday Brussels and founder of Venture Bay. Philippe Netter, director of the Technopôle Metz. Carlo Rock, Luxembour-gish business angel. Vincenzo Rau, co-founder of the start-up euSign, financed with venture capital. The panel was moderated by Carlo Schneider, who is financial analyst at Le Foyer Asset Management and freelance writer for many national and international media.

Carlo Schneider: Venture capital is money provided by professional investors who invest money in young, fast-growing and high-potential compa-nies. Obviously, when I look around, First Tuesday Lux-embourg is the place where a growing number of high-potential people with good ideas meet, so we are right at the heart of the matter. Venture capital is actually not new; there have always been people who invest in the ideas and the dreams of others. Maybe one of the most famous venture capitalists was the King of Spain. The idea he invested in was brought to him by Christopher Columbus, who had a very nice business plan, based on a very simple concept: to find the shortest seaway to India. Today we know that he had to change his business plan afterwards. I'm not sure that this is the reason why it took so long before venture capital arrived back in continental Europe. Obviously, though, things have been changing in the last couple of years.

So, my first question is: What has really changed since 1998/1999? Why has there been a growing number of venture capitalists arriving on the scene? A question for Carlo Rock.

Carlo Rock: I can obviously not talk for other people, other venture capitalists, but I would like to remind you that Lux-embourg has nevertheless had a long tradition of investing in risky projects. One of those projects is today a very famous company called Société Européenne des Satellites. When they started business 15 years ago it was considered a very highly risky business. Another example in Luxem-bourg that is worth mentioning is Utopolis. Utopolis grew out of the minds of some people who were just interested in movies, who managed to make a very successful business out of what had been just a hobby. So I would say venture capital in Luxembourg has always existed, but it has existed in a different way ? a more, let's say, traditional investment way, and the risk has always been on the side of the investors, in my view.

Carlo Schneider: Julie Meyer? Is venture capital a trend, or is it more?

Julie Meyer: Certainly there is more money then ever being invested. 18 months ago, when First Tuesday was founded, the question in London was: "Where is the venture capital'" That's not the case today, despite the market correction. There's more money being invested than ever. It's really a question of matching, I think, that kind of deep wealth of talent and finding the teams that are backable.

It's more than a trend, I would say. The large funds throughout Europe which are sitting on a half billion dollars and more have to make a return to their capital providers, and clearly, it's getting very competitive in the venture capital space too. Which means it's an opportunity for great teams, for great start-ups, to play venture capitalists off each other.

Carlo Schneider: Thank you. Danny Lein' Why should founders go to a venture capitalist rather than go to a bank?

Danny Lein: Good question. I think this is a question that you can't answer in black and white. It depends very much on the kind of business you want to set up. If you want to set up a business where you have a stable cash flow, predictable revenue streams, predictable growth patterns, I would encourage you not to talk to a venture capitalist. If you are setting up a business in a new market that is uncertain, where you need the support of investment professionals that are willing to support the ups and the downs, that can provide you deep expertise ? because they have the experience across multiple companies ? if you want to have a partner, if you need address books, then I would say go to a venture capitalist and he will definitely be your best partner.

Carlo Schneider: Thank you. Philippe Netter? Maybe the most important question tonight is to find out what founders have to do, firstly, to get into contact with a venture capitalist and, secondly, how they must proceed to get the money they need. What's your opinion on this?

Philippe Netter: That's something that entrepreneurs have problems with because they seek money and they don't understand very well that they have to cut their money needs into pieces. You are not going to need the same people for the initial funding as for the subsequent funding. The initial funding you're going to get from people you already know; which makes networking before you decide to start a company so important. You'll get it from people you already know, mostly business angels. That's to say, from people who have already started successful businesses and who want to help others to start their businesses? and make money, of course. So, if you're looking for just 10 million or 20 million, and you're not cutting your finance plan into slices, you're not going to find the money. The people who are really giving the big money ? the people in Paris, London, Munich ? are not going to give you the money if you don't have the initial investors, because they want to see that you have a sufficient network of people behind you, to give them confidence.

Carlo Schneider: Does this mean that it might be easier to finance big projects, rather than to finance smaller projects?

Philippe Netter: No. Well, it's true in a way that it's easier to find 100 million Euro than to find 1 million Euro, but it's a problem of which door you're going to knock on. If you want to raise half a million Euro, you're wasting your time if you go to a venture capitalist. You have to go to people that you know already, and that know you. They'll give you the money, partly because they like your project, partly because they like you. So, as we say in French, the "intuité personné" is very, very important. Also, you must choose the people who are going to finance you initially very carefully, because they must have a network with venture capitalists. That's going to be really important, because if you have a successful businessman in your shareholder circle, it's going to make you trustworthy in the eyes of venture capitalists. It's a small world.

Carlo Schneider: So, obviously, it's very important to find the right people at the right moment and in the right place. Julie Meyer? How to find the right venture capitalist?

Julie Meyer: A couple of reactions to that. I think it's like anything else; you have to speak to a lot of people. You wouldn't get married to someone without knowing them for a long time, and I think what happens with start-ups and venture capitalists is that they're essentially entering into a relationship. So you need to know as much as possible about that person, do the due diligence, speak to the portfolio companies. I could give many examples of companies and start-ups that almost took investment money from venture capitalists until they started talking to their portfolio companies about how much real, hands-on or networking help the investor was giving, and decided to go with maybe a lesser brand name and a lower valuation, with someone that had a much better track record vis-à-vis the people that they had actually invested in. So, I think it comes down to due diligence. Essentially, it's trying to get to know someone very quickly, which means that you have to look at the track record very carefully.. And that's one of the reasons why we are all here tonight; because it's a question of sharing information and pointing out that nobody's network can extend throughout the entire sector of people that they need to know. Opportunities like this evening provide shortcuts, in terms of the market intelligence and information on who's doing what and what investments have just happened.

Carlo Schneider: It's always good to have a real-life example and Vincenzo is one of those real-life examples. How did it work with your company, how did you get your first money, or even the first contact before getting any money?

Vincenzo Rau: Well, actually, I must say that for euSign it has been quite a smooth ride obtaining early stage funding; for many different reasons, including the fact that we are in a business that is only now emerging in Europe: the Internet Security Technologies industry. But I would also say that there are a lot of angel investors in Luxembourg and elsewhere in Europe; it's just a question of knowing where to knock and when to make your initiative publicly known. I personally consider the Grand Duchy a perfect platform for doing e-business throughout Europe, but the real issue is finding the right 'infrastructure', in the sense of basic elements needed to start up a company. I mean, for instance, finding office space of hundreds of square metres. In Luxembourg, space is really a rare commodity, and so are qualified human resources. So far, raising early stage money has not been the main issue when taking risks in Luxembourg.

Carlo Schneider: Carlo? How can business angels, who look for very personal contact of course, provide this infrastructure? Can they?

Carlo Rock: Well, I think business angels, on one hand, invest their money because they want to have a higher return, and on the other hand, business angels are supposed to help young start-ups with issues such as finding office space, and those I know are willing, and are doing it. So, I'm sorry, but I do not think that office space is a major issue for a start-up in Luxembourg. What I would like maybe to add to this discussion is that I have been looking into something like 20 projects over the last couple of months, and what I've found is basically two things. One is the lack of experience and the lack of well-prepared dossiers, as we call them in French, and the other is that a lot of people have major difficulties in evaluating their ideas, and based on the evaluation that they do of their project, they then have problems finding the money, the capital. But I would fully agree with Vincenzo, I think for a good idea there's always money that can be found.

Carlo Schneider: Do these problems differ from one country to the other, Danny Lein'

Danny Lein: It's hard to judge because our main focus of activity is Belgium. If I hear that one of the problems here in Luxembourg is office space, for instance, it's not at all in the Brussels region. I mean, there is plenty of cheap, start-up office space available and it's not so much an issue. I do believe that, in general, investors have followed the same trends across countries. I think if you have a plan, a good idea, and if you want to meet the best venture capitalists in Luxembourg, or France, or the Netherlands, or the UK, you will be asked the same questions, and you have to prepare yourself. Maybe there's a difference in, let's say, first-rate and other firms, and it's more difficult to get in touch with the top-rate firms, but still, the amount of preparation, what you need to do to get in touch with them is about the same, and I'm really talking about top VCs here. So, I don't see any difference, or major difference, between countries on that level.

Carlo Schneider: Incubators help with more than just getting money. Are the types of companies that come to you, Philippe Netter, different, or are they maybe less mature than the average'

Philippe Netter: We have some people come to us with very good projects, very elaborated projects, and we also have people who are exchanging ideas with us to make their ideas more precise... I must tell you that the most difficult thing with the initial business plan is to torture the entrepreneur until he tells you very precisely which clients he's going to sell his product to. Because it's very easy to get the general idea of the product, but when it comes to clients, then we hear very vague answers like, "Well, my product could fill a lot of needs...", and we really don't like that, because we know that the people who are financing know the broader the client base you will address, the more expensive it's going to be, and the more money you will have to raise. So, this is really the major issue that we try to address with the people who come to us with a project ? to make them tell us very precisely which clients they are going to sell the products to first, where they are going to get the money from. Especially with Internet projects. This is a very frustrating process. I sometimes have to raise the question about twenty times until the people realise they don't have the answer. Then we make a second appointment and they come back with different answers.

Carlo Schneider: Thank you. Julie, your opinion on this'

Julie Meyer: I very much agree with that. It's difficult to get your first customer, your first week of having the product ready, and you're willing to kind of be everything to everybody and to just remain focused on that beach hut, that place that you want to own. And if you look at some of the greatest companies in the world, they suffered too. They started from a beach hut, owned it, moved out from a niche? but they've had that singleness of purpose to say, this is the space we're going to occupy and we're going to do it better than anyone else. To create a critical mass, it takes really understanding a customer. People always underestimate the time, energy and effort to acquire customers. It sounds so basic, but it's so true.

Carlo Schneider: This means that, when you have a project, you need to already have a well-developed business plan, before you even contact the venture capitalists. So, Danny Lein, do young people who don't know how to write a business plan even have a chance of raising money'

Danny Lein: I think if you focus on seed venture capitalists ? and there are very few in Belgium' very few across Europe even ? then you might get started with a rough idea and a proven track record. The proven track record becomes important. If you go to the later-round ? first-round, second-round ? VCs, then you'd better have a well-thought-through business plan, a good customer understanding and also, preferably, a complementary management team. Those are the ingredients that venture capitalists like.

Carlo Schneider: I think a very practical question is, "How much money do I need'" ? What's the average amount of money people are asking for, and do they correctly estimate the money they need'

Julie Meyer: I think the answer is there's a shortage of financial skills. One of the things that we do at Ariadne Capital is to loan out finance directors, because even though there are very few start-ups that get funded today that don't have a finance director on board,

eighteen months ago that wasn't the case. So, there are a lot of people who have not been managing their cash flow, they don't really know how much money they're going to raise and which milestones they need to achieve to raise more money. So, I think, the answer is it's a problem. It's not done very well, and having that person in the founding team that understands the basics of financial control, and can help project revenues and plan for multiple scenarios, is just fundamental.

Carlo Schneider: Carlo Rock? Can business angels play that role'

Carlo Rock: It's not necessarily a role that business angels should play. We have to send the ball back to the start-up and see if the start-up wants the business angel to play that role. I think, at the end of the day, it's a matter of people again: on the side of the start-up, who came up with the idea, who is planning to run this business or who is in charge of the start-up? And on the other hand, it's a matter of who the investors are and, obviously, their skills, but also their relationship must work. So, at the end of the day, it's a matter of human beings, and at an early stage I think that's even more important ? can they even work together or not'

Carlo Schneider: Philippe Netter? Obviously there's a strong relationship between dotcom companies and venture capitalism. Do projects that are not in the area of the new economy have the same chances of raising venture capital'

Philippe Netter: Right now, I think a non-dotcom project has more chance than a dotcom project, because investors went crazy a year and a half ago over dotcoms, and with the collapse of the market, everybody's been running away from these projects. But basically, I think that dotcoms are just like other projects. You have to estimate the focus of clients and you have to estimate the barrier to entry. But it was clear to me, when I was hearing presentations in Paris from young people with no experience, no precise experience in the business sector they were entering, just coming along, saying they would sell noodles on the Web and get two million dollars from that, it was clear to me that things could not continue that way? and they have not continued that way. So, to get the money, you now really have to show expertise in the job and have a solid team, otherwise you don't get it.

Carlo Schneider: Luxembourg is a small market. When somebody's seeking money, they shouldn't limit their efforts to the Luxembourg area. How far must a founder go to find the money?

Vincenzo Rau: Angel investors are more or less the same throughout Europe, so it's just a question of rarity, or where to find the right ones. Luxembourg is a good place to start out, but of course every e-business initiative for the European market should be funded at least at continental level. The main problem, rather, is finding business angels that understand your new technology and the high-tech engine behind it. It's very, very difficult to explain to seed investors how this kind of venture really works and, strategically, it could be better to prepare a pretty-looking business plan, quite formal and traditional, rather than focusing on the impact of the technology on the market. It is indeed very difficult to find business angels that are prepared to understand Internet technology trends in Europe.

Carlo Schneider: Philippe, please.

Philippe Netter: Well, I think it's a bad idea to seek initial funding far from your base. The real successes that I've seen at the Technopôle Metz were initially funded by local people. Of course it's difficult to find angels for technology-based projects, but you can find them ? It's also difficult in the United States. So I think it's really a question of networking. Where do you network best? You network best where you live.

Carlo Schneider: As I said before, the Luxembourgish market is a very small one. Would you, Danny, as a Belgian investor, or you, Julie, a British venture capitalist, be interested in Luxem-bourgish projects? Or would you consider yourselves to be, as Philippe just put it, too far off base?

Danny Lein: First of all, I don't think one could easily claim that we're too far away. But I think the criteria for a project to be interesting are always, What is your target market, how big is that market, what are some of the profit margins typically in that market? And so, if someone had a multimillion-Euro investment opportunity focusing only on the Luxembourg market with new technology, I think the chances that we might be interested would be very small. But if you had an entrepreneurial team with a very good track record and a very good idea, based out of Luxembourg, I think it wouldn't make a difference to us.

Julie Meyer: First Tuesday was very much based on the idea that, if you're creating a luxury goods start-up, smart money may not be next door and you may have to go halfway across Europe to find it, and that there should be a mechanism to find that ? the smart people, the right people, the right capital and so forth ? to make a company come alive, and a market place should work in Europe, and it should be efficient to find these resources for an entrepreneur. I very much believe that, in principle, it should happen, but I think what has happened over the past couple of years is that we're seeing a kind of mobile-international-professional movement in Europe. Three years ago I didn't know any people who lived in one country and worked in another. And today, not that I'm saying it's healthy, but I do know about a dozen people who do that, and I think that kind of mobility is adding to the connectivity, and in fact it's making less and less of a difference where your venture capital, your angel investor, comes from. Ultimately, you're looking for people who can help you get to the next level. I think, also ? just a general reaction to the discussion that we're having ? it's a pretty difficult market to raise money in right now. I don't know what the situation is in Luxembourg, but certainly in London it's very hard, and I think what is happening on a European scale is consolidation. And a lot of the companies and people in the audience who are running start-ups today are not going to make it long term independently. They are going to have to look for other companies which are targeting the same space, look for merger opportunities, trade sales, and so forth ? perhaps much earlier than they're anticipating, and not when there is a real arbitrage moment. There's a real opportunity now through networks, to find people that you can kind of bulk up with and get to critical mass sooner, because it's difficult to raise money in general and it's even more difficult today. I think it's not so much first-mover advantage, but it's the first to critical mass: who's going to own a space. And to do that, I think, you really have to play on the European stage.

Carlo Schneider: Carlo? What do venture capitalists expect from entrepreneurs in the medium term' Only higher returns, or something more?

Carlo Rock: I think venture capitalists, business angels and investment companies expect higher returns. So I guess, when a venture capitalist invests in a company, he wants to find and to see a realistic possibility to make, on a medium term, more money than he would make if he invested here on the traditional stock exchange. So, one of the major issues when it comes to investing in a company, obviously, is how can I find a way out of this company afterwards, and how can I make the money? And entrepreneurs often don't have any clue about that side of things, it's not really their business, which again is understandable, but which makes it even more difficult to match the two sides.

Carlo Schneider: Danny? If somebody comes to you with a well-developed business plan that claims on page 49 or somewhere, After the eighteenth month I will be listed on stock exchange, what do you think about it? Do you really see it as an opportunity to get your money back?

Danny Lein: Basically, if today somebody claims they'll be listed on the stock exchange after eighteen months? it would be would be very rare indeed. I'd want to meet with the guy. I mean if the business plan was very good. If you look at the public markets, they changed a lot, let's say, during the year 2000. It used to be more common in the kind of second-round venture-capital market but, basically, what was shown throughout 2000 is that the public market is not suited for venture funding. Public markets want much more predictability, they want proven growth records and after 18 months, most ventures cannot prove that. There are very few of them that can. So, if that were to happen, my first question would be, What makes the guy think he can do it? To me, it's unbelievable these days. It will be like that for the next couple of years, I guess, after the 2000 experience.

Carlo Schneider: Philippe? What is the medium-term relationship like between venture capitalists and the founder? How does it work in everyday life?

Philippe Netter: Well, it has its ups and downs. Of course, the venture capitalist's final goal is to get out, either by selling the business to somebody else or by floating the stock on the market. Of course, this can create tension between the entrepreneur and the venture capitalist. I must admit that there is a rule of the game at the beginning, which the entrepreneur needs to know: don't get frustrated. He has to admit that, at a certain time, the venture capitalist has to step out, and he has to prepare for that situation.

So, the traditional European mentality of treating the business like it's 'your baby' is very dangerous. One must also realise that venture capitalists have a talent for recognising such behavi- our, and do not finance them.

Carlo Schneider: Vincenzo? As an entrepreneur, do you still have the liberty to do what you want, or do the people that finance you control you very closely?

Vincenzo Rau: It is normal for any kind of investor to keep a close eye on their money, not least because they are taking a good part of the risk. Anyway, if they get involved, I think it's much better for the venture itself, because they become part of the market initiative and in some way they help its development. So I don't see this point as a threat.

To better clarify what I said before with reference to business angels in Europe and their capacity to understand technology, I was not referring to the venture-capital industry, but just to angel investors. Of course, VCs have a completely different approach; they are institutional investors and do it on a professional basis.

Philippe Netter: I think we overestimate the American VCs' understanding of technology. When you scratch them and you squeeze them, like I did in Boston, you discover that there is a great deal of personal knowledge and of networking in their business; they are much more likely to invest in a business where they know people, because their technical knowledge is quite limited.

Carlo Schneider: I think the main point here is to talk about European venture capitalists. Julie? When is an investment no longer successful' At what moment does it become apparent?

Julie Meyer: That's an interesting question. I think there are certainly a lot of investments or start-ups that are not going to make it. You know, some people estimate, just in the Internet dotcom sector, one out of ten will be successful. I think what's more interesting is to look at what can be done to help start-ups get to the next level. And that is a variety of training for entrepreneurs, but also, I think, an 'out'-making exercise, where there is a pro-active identification. And a lot of venture-capital firms right now are hiring people internally to manage their portfolio, to actively look for consolidation opportunities, to basically help them look for assets. Mostly they train' but not always. It's not happening early enough. The number of phone calls they get from companies that are saying, We have three months of cash left!, when somebody who sits on their board should have been telling them, You know, six to nine months out, the plan needs to be focusing on finding a strategic partner? rather than leaving it until it's just a waiting game for running out of cash. And there are just hundreds of companies that are facing that right now. So, you know, clearly there are a lot of companies that are in quite desperate straits right now, and so there are investments that will not make it to the next level. There is this balance? what do you expect of your VC' I think that you need to go into the relationship with your eyes wide open and understand exactly what you're getting. Because big brand name and high valuation don't necessarily correlate to the kind of help and ongoing assistance that you expect, and that you need, to get to the next level. And so, I've seen some very smart entrepreneurs, smart in one out of the ten skill sets that you need to be successful, give away, basically, the terms of control of their business early on, because they so wanted to tie their ship to a big brand name in terms of VC, and essentially their VC started calling the shots in such a way that they were no longer in control. It's a question of, I think, understanding how to negotiate a shareholder's agreement. Get that assistance if you don't know, and get as much information to understand the deal that you're cutting at the beginning.

Carlo Schneider: Thank you. Maybe one last question to everybody: how will the venture capital market develop in the next months and years?

Danny Lein: I think this year, 2001, will definitely be a year of transition. I think a lot of VCs, who during 2000 made early stage, first-round investments, will keep a lot of their money available for other financing, and will now enjoy the pleasure of picking the best of the best. I think that will be the trend in 2001.

Philippe Netter: I also think it's going to be a tough time for early-stage financing in 2001, and that entrepreneurs had better look for their first round among business angels, because venture capitalists are going to be very, very hard to find for financing the first round.

Julie Meyer: I see the real focus on talent, and I think that the best venture capitalists will be literally pulling entrepreneurs that have done one or two start-ups into their orbit? call them entrepreneurs in residence, call them whatever you will. The necessity is the people that have learned something in terms of running one or two or three companies, and those people are the scarce factor. And so, how venture capital will evolve is, it will be increasingly all about backing people and pulling those talented managers and entrepreneurs into your orbit, and making sure that you have first dibs on getting them to do the next one, investing in them the second and third time.

Carlo Rock: I think that venture capitalists and entrepreneurs will probably come together more easily; find their way, a way of collaboration, a way of working together. Why? Because both sides will become a little bit more down to earth, a little bit more realistic in their approach. On one hand, venture capitalists sometimes ask things from the entrepreneur that he is not ready to concede. On the other hand, the entrepreneur, who is having more difficulties in finding business angels or venture capitalists, will probably make a more down-to-earth evaluation of his business. So I think the small crisis we're in today will, at the end of the day, help both sides.

Vincenzo Rau: I fully share what Julie said before about the new European cross-mobility of talented professionals. Times are tough for dotcom funding, but good ideas are always good ideas. So, evolution over the next months will be in the direction of an increasingly mature European VC industry, and I'm quite optimistic about upcoming opportunities; above all for emerging sectors like the one in which euSign is active: Internet security that enables e-business to become trusted.

Carlo Schneider: Thank you very much, Julie, gentlemen. I think there have been two keywords tonight: the first one is the business plan, the second is profitability. So, thank you for joining us.