We’ve seen the rise of new kinds of VC funds in Europe recently, mostly notably Passion Capital’s $60M last year and the new fund just raised by Earlybird in Berlin, among others. These new kinds of funds are more fleet of foot, reaching into the hot early stage sector right now, largely in the consumer space.
What has not appeared as often are brand new funds aimed at disrupting the enterprise. That changes today with the announcement today that London-based Notion Capital has closed the first $100M of its ‘Fund 2′. This fund will focus on emerging cloud computing and Software-as-a-Service companies in the UK and across Europe. The total fund size will end up being $150m at its final close, expected in the next few months. But already, this is one of the largest closes for an early stage VC in Europe to date. With this fund closed, Notion plans to look at 4 or 5 deals closely and will do one or two deals in the next couple of months.
Partner Jos White tells me they will have in the region of 10%, so $15M, allocated to seed/early stage deals. “We will do seed deals when we think there is an exceptional opportunity that is growing quickly and it gives us a seat round the table. But it won’t be ‘film script’ type seed deal but a bit more established especially in terms of the product and business model,” he says.
So our focus remains very much ‘Series A’ but we will also do some seed deals along the way.
Notion Capital has invested almost $50M in 10 companies to date including Brightpearl, eSellerPro, NewVoiceMedia, Star and Tradeshift. Star now has $80M in revenues and is profitable, while Tradeshift recently completed a new funding round valuing the business at $137M after two years.
That’s not altogether surprising. Notion’s team – consisting of Stephen Chandler, Ian Milbourn, Chris Tottman and brothers, Jos and Ben White – has been behind numerous other success, most significantly MessageLabs, the sale of which to Symantec for $700M provided the basis of Fund 1.
However, this is Notion Capital’s first properly ‘external’ fund, raised largely from outside LPs. The new fund is backed by the UK government, under its Enterprise Capital Fund programme, and the European Investment Fund. This is an unusual move not pulled off previously and this is the first time these two organisations have been involved in one fund together – something of a stamp of approval for Notion.
Gartner estimates that Cloud Computing will be a $148B business by 2014.
Chandler admitted this was not the easiest fund raise, however, he says the main reason they got the backing they did was because “Firstly, people recognise our track record as business builders, building in the Enterprise space. Secondly, this is a continuation of strategy and our focus on SaaS and cloud computing.” And lastly, because they secured two public sector anchor investors early on, in a similar vein to two other European funds, MMC Ventures and Dawn Capital.
As a result they went on to secure backing from a number of High Net Worths, and Family offices.
“This is a tremendous opportunity, a generational shift,” Chandler told us via phone interview, referring to the opportunities in SaaS right now.
However, he says the “Fund of Funds” on the institutional side were less receptive.
Jos White says: “European VC has under-performed so funds have been de-allocated into VCs. They move slowly and in herds, whereas if you talk to individuals they can be more contrarian.
“Europe is continuing to grow, with the startup scene coalescing around London and Berlin. Even though the investment market has reduced, so there is an undersupply, but if you can raise money then there is a lot of opportunity.”
Chandler adds: “We are doing 10% of the fund ourselves so we are putting our money where our mouth is. We’re not getting fat on management fees. We could have raised without public sector support but probably not up to this scale.”
The focus on enterprise is deliberate.
“Enterprises are prepared to pay, though of course there is plenty to be done in the consumer space. The trouble is it’s more fad and hype driven. Enterprise takes longer but is a proper business with revenues and cash and less dependent on timing,” says Chandler. “We like the less sexy workload of the enterprise, based on revenues and a market we’ve come from.”
The areas the fund will focus on will be areas such as mobile advertising, ‘Fintech’, marketing automation and social networking applied to businesses. Also consumer tech within the enterprise.
Chandler says Europe is ripe right now: “We like Europe because of the scarcity of capital. Over here, compared to the U.S., we can stand out from the crowd, so London is the right place to be, especially with a B2B strategy. The advantage now is that we have more money and more track record and relationships. Fund1 is looking very good though.”
“One thing different is we have a healthy appetite for risk,” ads White. “We’re happy to take risk and accept some companies won’t make it. All too often European funds are not risky enough and protect their money rather than funding the businesses to build them out. So we are not afraid to do that. And that normally means entering the U.S.”
As a result White will maintain his presence in New York while the fund is run out of London and Europe.
It looks like good times ahead for SaaS, a traditional strength for European tech startups.
Notion Capital is a venture fund and advisory business that focuses on early to mid-stage growth businesses in the Internet based services sector. They create value by helping companies to accelerate their growth through financial injection combined with strategic and operational participation.