“Venture Capital in Europe - The Highs and Lows and Why Now?”

Charlotte, NC - Aug 23 2013

angelfund.vc - confidential

‣ Internet Entrepreneur since 1998 - launched first business at age of 17

‣ Lecturer at various European universities about entrepreneurship

‣ Former Advisor to Deutsche Telekom AG

‣ VC fund Partner and Business Angel

History ofVenture Capital

‘94 amazon‘95 yahoo!’83 AOL

‘94 netscape

80‘s and 90’s delivered primarily great results for US VCs only

‘84 cisco

predominant over-performing investments

predominant under-performing investments

2012: also 4,4b in 1074 deals

The “old model” of venture (driven by investment bankers) is stagnating

Eight large studies have examined the IRR of Angel & Early-stage Investments

Year Study Total Inv. Exited Inv. IRR 2009 UK Wiltbank: “Siding with the

Angels“ 1.080 406 25%

2009 US Band of Angels Website 200 Unknown 18% 2009 US Sohl: “The Angel Investor

Market in 2008“ Unknown Unknown 22%

2009 US DeGenarro & Dwyer: “Expected returns to Angel investors“

603 434 33%

2008 US Sohl: “The Angel Investor Market in 2007“

Unknown Unknown 28%

2007 US Wiltbank: “Returns to Angel Investor in Groups“

3.097 1.137 30%

2007 US Villalobos & Payne:“Startup Pre-Money Valuation“

117 117 24%

2002 UK Mason & Harrison: “The rates of return from informal venture capital investments“

372 128 37%

The model works in the US (IRRs of 25+%)

8 studies examined the IRR of angel & early-stage InvestmentsEight large studies have examined the IRR of Angel & Early-stage Investments

Year Study Total Inv. Exited Inv. IRR 2009 UK Wiltbank: “Siding with the

Angels“ 1.080 406 25%

2009 US Band of Angels Website 200 Unknown 18% 2009 US Sohl: “The Angel Investor

Market in 2008“ Unknown Unknown 22%

2009 US DeGenarro & Dwyer: “Expected returns to Angel investors“

603 434 33%

2008 US Sohl: “The Angel Investor Market in 2007“

Unknown Unknown 28%

2007 US Wiltbank: “Returns to Angel Investor in Groups“

3.097 1.137 30%

2007 US Villalobos & Payne:“Startup Pre-Money Valuation“

117 117 24%

2002 UK Mason & Harrison: “The rates of return from informal venture capital investments“

372 128 37%

And startups are responsible for 30% of all US jobs in the last 10 years

Calculations by Venture Economics indicate that from the beginning of the VC industry in Europe until 2007, the average European VC fund had an annual return of minus 4 percent versus 16 percent for the average U. S. VC fund

Many Venture Funds ended 3-6 years ago!

Lerner, op. cit., p. 123.

Early VC vintages had terrible performance in Europe due to dot-com bubble

Crisis delayed fundraising and decreased LPs confidence for “2nd generation” funds

By contrast, the story for European venture funds was one of struggle: European fund-raising further declined to US$3 billion (amount closed)for 41 funds, due to Europe’s sovereign debt crisis and its muted medium-term growth potential.

In 2000, European Venture Funds raised US$60b+!

source: European Private Equity & VC Association

To boost confidence: EIF is supporting the Venture Capital industry

EIF commitments: about EUR 3 bn in VC

up to 50% commitments can be committed by EIF(no management fee butcarried interest)

50 % 50 %

Limited Partners EIF

EUROPEAN INVESTMENT FUND

Venture business is independent from IPOs; 90% of exits are M&A transactions

the main exit route for VC-backed companies is acquisitions (M&A), representing more than 90% of all exits.

Furthermore, VC firms are also selling companies to private equity firms as a third path to liquidity.

Pace of adoption is accelerating, impact of recessions is minimal

Overcoming the “bad memories” is the key issue in Europe

‣ Huge job-creation factor‣ IPO independent ‣ Industry is backed by European Investment Fund‣ Recession “proofed” ‣ IRRs of 25+%

BUT:

‣ Bad experiences from 1st generations of VC funds‣ Current model is stagnating

Snapshot:Germany

‣ has a hand full independent venture funds € >100m+ ‣ and only a few professional venture funds € <100m‣ while the US has, in each category, >200! VCs active

Germany, an economy that is 25% of US GDP....

25% of US GDP, <10 (Germany) vs. >200 (US) Venture Funds €>100m

*European Venture Capital: Myths and Facts: British Private Equity & Venture Capital Association 2011

Equal success rates of European and US IPO exits

there is no difference in the success rates of European and US deals from the same vintage year with respect to IPO exits

in a economical environment that is not exactly underperforming....

Exits in the same order of magnitude, need only half the amount of Venture Capital in Europe vs. US

Capital efficiency in the US is not increasing - talent is more expensive - hence lower returns, higher prices.

Souece: Dow Jones VentureSource, 2008 exchange rates

... and in a time where Europe is today where the US was in 1997-2001

The average in US from 1997-2001 was $41m per company at $417m average exit=> just like in Europe right now!

Software/Internet companies dominate the European VC market

European Venture Capital Financings by Industry

In 2011, the software sector again accounted for the largest portion ofthe European venture capital market, representing >20% of all financings.

Amount raised, by region, 2011 (US$m)*

*Global venture capital insights and trends report 2011 by Ernst & Young

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Germany: head-to-head with Canada and Israel while NY companies raised 4,5x more

As one prominent fund of funds manager with investments in more than 50 VC funds across Europe put it to us: The UK is far ahead of the rest. Holland and Scandinavian countries are next. There is not so much VC activity in Germany and Switzerland. France has some, but its law requiring pension funds to invest a certain percent in VC firms is controversial and perhaps counter-productive. There is very little VC activity in Italy, Spain and Portugal.

Ivey Busines Journal March/April 2011

UKs GDP is 1/3 lower then Germany but VC market is 2x of Germany

Germany has a unique model where, in a different twist to the hugely successful VC-funded start-up ecosystem of Silicon Valley, the industry is not as much reliant on a handful of blockbusters or even a closely networked startup environment, but rather one where a high number of regionally diversified quality opportunities correspond to increasing levels of entrepreneurial activity.

- Andreas Ritter, ARICO Private Investments Advisory and former Head of Private Equity Duke University's endowment

“Germanys Mittelstand is also a great Venture Capital opportunity

Building global hubs (London/Berlin) organically

Silicon Valley took 40+ years to build New York 15+ yearsLondon 10+ yearsAs a international hub, Berlin is around for 5+years

More then 2.000 new startups since 2008!

Berlin alone: 2.000 new startups in 5 years!

To compare: 1.000 companies receive Series A funding in silicon valley a year!

But it’s still very small compared to Silicon Valley!

Players of global magnitude emerged

But, noteworthy, some global category leaders with international investors

Berlin’s Network Effect Will Make It A Global Startup Center

: Matt Cohler is a General Partner at Benchmark and was the lead investor in Asana, Instagram and Quora among others.

Creators. Any creative ecosystem needs a meaningful group of creators to germinate new work. A fashion ecosystem, for example, needs designers; a film ecosystem needs writers. In a technology startup ecosystem, these people are the founders and entrepreneurs.

Builders. These are the skilled creative people who shape vision into reality. In a technology ecosystem they’re people like engineers and organizational leaders.

The right kind of capital. Different types of ecosystems need different types (and amounts) of capital to fuel growth. In a tech startup ecosystem the right kind of capital is venture capital: simple equity funding that’s aligned with creators and builders, takes a long-term view, and sometimes works shoulder-to-shoulder with the creators and builders themselves.

Rule of law. I mean a developed and reliable legal system, along with a culture and society that values that system. This one may seem obvious, but it’s still not a given in many parts of the world.

The center stage. To attract the best, most talented, most capable and most committed people, a creative ecosystem needs to command the local center stage. Finance holds the center stage in London, while in Hollywood it’s entertainment and it’s fashion in Milan. Each of these creative ecosystems has its own unique culture, expertise, and way of expressing social and financial credit. Each has grown through a network effect that attracts people to join and to stay, making it incredibly difficult to siphon a place’s best and brightest away from an established ecosystem onto something new. That’s why Milan is not a capital for technology startups any more than Palo Alto and San Francisco are for fashion.

JUNE 2013: Matt Cohler (GP @ Benchmark) highlights Berlin as a global startup center

Tuesday, June 4th, 2013

Berlin’s Network Effect Will Make It A Global Startup Center

Even corporates get involved

Snapshot:The future

The fact that repeat or ‘serial’ entrepreneurs are less common in Europe and that European VCs lag US VCs in terms of experience explains the remaining difference in performance.

*European Venture Capital: Myths and Facts: British Private Equity & Venture Capital Association 2011

NOW is the time with great potential for serial entrepreneurs

Continental Europe is in danger of dropping below a critical size, which could threaten the entire industry.

2005 2006 2007 2008 2009 2010 2011

Rebound time: Venture will grow and early funds will take the lead

*Global venture capital insights and trends report 2011 by Ernst & Young

Next generation VC funds: more entrepreneurial (run by Entrepreneurs)

Next generation VC funds: global

FAST: “make a decision [...] within 24 hours would attract every good startup”

Next generation VC funds: stage-agnostic

and hands-on!

angelfund.vc - confidential

Benjamin Rohé

br @ angelfund.vc

+49 173 975 1021Thank you!