Zong, a company originally from Switzerland specializing in mobile payments. For the London-based VC fund Advent Venture Partners, this constitutes the third successful exit of the year. Frederic Court, who has been a General Partner at Advent Ventures for the last ten years, shares his opinion regarding the exit environment in Europe. Are M&A opportunities increasing for local startups?
Hello Frederic. First, could you specify the three companies in which you had invested that were acquired this year?
Yes, of course. First was The Foundry, a British company sold to private equity fund Carlyle Group (the firm could not disclose the exit valuation for The Foundry but it is believed to be in the £75-100m range) in March. Then, 49% of DailyMotion was bought by Orange for €60 million in April (and the acquisition of the rest will follow in the near future). And finally, the acquisition of Zong by Ebay for $240 million that we just announced 2 weeks ago.
For us, it is particularly interesting to be able to demonstrate that our investment strategy does not rely solely on exits to strategic U.S. buyers. These are the deals most difficult to execute because they rely on the strategy of large players in the U.S. – which are very difficult to influence. Selling to another private equity fund is very interesting for two reasons: 1) once the transaction has started, the negotiations tend to focus on price and not on strategic considerations of the buyer, giving greater certainty to the achievement of a deal; and 2) management has the opportunity to continue building its business independently and achieve its vision rather than having to lose operational and strategic control. The other alternative is to sell a European player with the advantage of being closer geographically and culturally, which usually greatly facilitates communication.
With three exits in less than five months, do you consider this to be an exceptional year for M&A? Is this proof of the bubble that everyone is talking about?
This year has been good in terms of M&A – but not exceptional for the time being. There are a few notable exceptions (Microsoft/Skype for example). In many respects the year is exceptional given the reopening of the tech IPO market (U.S. only) and the very rapid growth of valuations of private technology companies. This is especially the case for “star” companies or category-leaders – and more generally start-ups in Silicon Valley.
If there is a bubble right now, it remains confined to fast-growing consumer web start-ups and to those started by well-known serial entrepreneurs, especially in the US. It is too early to talk of a bubble in public markets because the bar to move the stock market is still very high (few transactions, mainly profitable companies leaders in their fields, nothing to do with what we experienced in 99/2000). But there is clearly a gap between the appetite of funds – particularly large US venture and growth equity funds that are currently paying premiums well above the levels that strategic acquirers and investors are willing to pay. This gap will have to be reduced one way or another, and this may partly depends on macroeconomic conditions.
The European market remains more disciplined in part because there are fewer global leaders (Skype, Spotify or Zong being notable exceptions). But also because there is less capital available and thus less competition between funds. We have a lower risk to see valuations reach “irrational exuberance” levels and that is good for everyone (entrepreneurs / investors / acquirers) because at one time or another reality reasserts itself – and that’s painful for both investors and entrepreneurs. In this environment, we believe that there are very good opportunities in Europe and we will continue to see funds show good performances (such as those Advent Ventures has announced here). We favour an investment strategy that can make money in good and bad times, without having to rely on bubbles to generate returns.
What are the sectors in which we may see even more exits in the near future? Is there a particular area of the tech industry that is particularly active right now?
At the moment, there are three key areas in tech that are driving change and opportunities faster than ever before – and they are key themes in Advent’s investment strategy: Social, Cloud and Mobile. We believe that we will see many transactions, big and small, that are related to these themes and players of all sizes (including the key players with market capitalisations of $2 billion to $200 billion) will have to position themselves aggressively on these fundamental technological areas.
The other area where we expect to continue to see many transactions is e-commerce, where there will be both consolidation and strategic transactions. EBay has been particularly active in this area recently, making several smart moves with small, medium and large acquisitions in rapid succession.
Is this a new trend for European companies? Many people believe that the exit opportunities in Europe are normally quite limited. The situation, is it changing?
The opportunities for exits beyond €150m ($200-250m) in Europe remains limited, mainly due to the limited number of European players who have the means for such transactions or the market backing to execute them. This greatly impacts the types of investments that venture and growth equity investors can make in Europe as only exceptional companies get taken over at high strategic prices by US buyers (and increasingly Asian as was the case with Rakuten/Priceminister).
The fact that there is over $200bn available to the top 10 US Tech companies may start to have an impact in Europe, especially as a lot of this cash is currently sitting outside the US and repatriating it will generate heavy taxes. We believe that could have an impact for European companies that have managed to establish a US presence succesfully (like Zong) or for companies with deep presence in their respective local markets (like PriceMinister in France or Brands4friends in Germany) and which can be run independently.
Unfortunately, apart from rare exceptions such as Axel Springer (recent acquirer of Seloger.com), there are very few aggressive Tech and Media groups in Europe, with the ambition to expand through large acquisition across the continent. It is a shame that the new European leaders (Vente-Privee, Asos, Betfair, Iliad, etc..) are not more aggressive with an M&A strategy that includes small and large deals. They have the opportunity to do what Facebook, Google, Amazon or eBay do in the U.S., who buy and integrate young innovative start-ups, providing them with capital, an infrastructure and an ability to grow within a very entrepreneurial culture.
These new “European champions” are typically companies run by exceptional entrepreneurs who have a strong culture of organic growth and expansion. I respect this strategy – which has been successful to date – but U.S. companies are much more aggressive: thus they reduce their risk of missing a fundamental technological shift (see what happened at Nokia, for example).
So in summary, in Europe we suffer from a lack of large strategic deals and a lack of smaller deals – either opportunistic or strategic – but usually much earlier in the lifecycle of companies and in the investment cycle. Both are hugely important for early-stage investors; the former provide large “home-run” type returns (which are rare but can return a whole fund) and the latter provide decent but faster returns early on (which LPs love). <
We adapted our investment strategy at Advent to this reality and have focused on small growth equity investments in tech, targeting companies that do not need a lot of capital (so capping ultimate post money) and have many possible buyers, whether local or US/Asian within a 3-5 years horizon. This enables us to produce much more “reliable returns” and to be much more aligned with the entrepreneurs.
You mentioned the more aggressive acquisition culture we see in corporate America. I published an article last year after a conversation with Olivier Sichel of Sofinnova, where I said we should encourage French/European corporations to adopt a similar approach to acquisitions as Google & Co do (now eBay too) in the States. So given that Zong was bought by an American company, what was it that really facilitated this acquisition?
One element that really set Zong apart from the rest was an observation in 2008 – almost a year after our initial investment. We realized that there was a strong opportunity for Zong to expand into the U.S. market to offer a mobile payment solution based on “carrier-billing.” Therefore, Zong went ahead and set up an office in Palo Alto – a key for winning many local clients, such as Facebook, as well as numerous web and online gaming start-ups. The Zong and Paypal teams have got to know each other over the past year or so, and having a presence in both Silicon Valley and Europe was a key to the success of this investment. But central to this success was the fact that we had the chance to work with an exceptional Swiss entrepreneur, David Marcus, who settled in Silicon Valley amazingly well and built a very strong team locally, in addition to the great team he had built in Europe already. Other European companies such as Netsize or Allopass in France had identified the same business opportunity in the US but failed to execute well and eventually had to return to Europe.
Thank you Frederic.