Micro-funds are thriving in America. Now they are coming to Europe
By L.S.
SINCE the collapse of the dotcom bubble, European venture capital has had a bad reputation. Institutional investors do not want to touch it with a ten foot pole, meaning that most European venture capital comes from government sources. Raising money for a new VC fund on the old continent can take years and often fails. As a result, Europe has spawned only a few new venture firms in recent years.
That may be about to change. A new group of European VC firms is emerging. They include Lifeline Ventures in Helsinki, Point Nine Capital in Berlin as well as Connect Ventures, Passion Capital and PROfounders Capital in London. On December 4th the group added another member in London: Hoxton Ventures. It announced that it had raised a $40m fund which it wants to invest in startups in Europe.
These firms bring an approach to venture investing that is already thriving in America and goes by the name of “micro-fund”. The idea is not to raise billions of dollars and invest in more mature firms, as most leading VC firms do these days. Instead, micro-funds typically raise less than $100m and put the money in more risky, early-stage startups. Micro-funds are mostly run by former entrepreneurs and are much more hands-on with their portfolio companies.
Pioneered by First Round Capital and Floodgate, American micro-funds are growing rapidly and now include firms such as Felicis Ventures, Baseline and Founders Collective. There is now even a fund of funds, Cendana Capital, that only invests in micro-funds, which have generated most VC returns in America in the past ten years.
Hoxton hopes to follow in their footsteps. The two founding partners, Hussein Kanji and Rob Kniaz, worked for Microsoft and Google, and left their respective VC firms, Accel Partners and Fidelity Ventures, to set up Hoxton. "In the past couple of years, we've seen a gap emerge in the early stage European market. It is difficult for entrepreneurs to raise their first £1-2m. Too many European investors prefer to wait for businesses to mature," says Mr Kanji.
It certainly seems a good time to start investing in European startups. There have been some notable success stories recently. In November, for instance, Criteo, a French advertising technology company, went public on NASDAQ. King.com, a social gaming company, may soon follow suit. Messrs Kanji and Kniaz have already been investing in the past 18 months. One of their first investments, Llustre, was acquired by online retailer Fab.com last summer, only twelve weeks after its launch.
