The economic signals coming from Europe are leading some to predict a big drop in startup investments up ahead, but that’s not the message coming from one of the region’s biggest VC firms. Index Ventures has just announced a new fund of €350 million ($442 million), which it intends to use for early-stage investments in the tech sector covering seed, Series A and Series B investments that will ultimately split between 30 venture startups and 40 seed companies in Europe, or looking to do more in Europe as well as internationally.
A primary reason for the fund is that despite the millions in European tech funding to date, it’s still only a patch on what could be invested. “There is still a huge opportunity for investing in Europe, but there aren’t that many VCs here that focus on early stage,” Index partner Danny Rimer said in an interview with TechCrunch.
The fund forms part of €1 billion raised by Index in the last year, and follows on from a $200 million life sciences fund Index announced this past March, and a €500 million ($631 million) growth fund for later-stage tech investments it closed in November 2011. No announcements today on investments out of this new fund — although Index partner Danny Rimer says that news could be coming in a matter of days.
Rimer adds that investments will focus largely on startups in the six cities where Index has already been active: Berlin, London, NYC, San Francsico, Stockholm and Tel Aviv, with the proportion being 2/3 European and 1/3 U.S..
As with Index’s past activities, the emphasis will be in three areas: promising startups coming out of Europe/Israel with global ambitions; U.S. companies with ambitions to go international; and European startups that could dominate regional markets (eg Ozon, the Amazon of Russia or the ticket exchange Viagogo).
Rimer calls early stage funding Index’s “bread and butter,” and in that sense this new fund will be business as usual: the fund will be looking at first-time investments into new startups. But it will also be putting money into rounds for companies already in Index’s portfolio but still young — startups like etsy, Flipboard, Lookout and Path — and looking to build out more internationally.
The international angle, Rimer says, is becoming an increasingly common early priority: “Companies have to think from day one about international,” says Rimer. He says that this is because the biggest competitive factor among many of them these days is scale: “A lot of tech startups from the last five to seven years have been less about technology innovation and more about the right service or software that has found a good fit. It’s much more replicable, and so they have to make sure that they conquer the international opportunity very early on.”
But if we have been out of a period of technology innovation, what might be the next hot area ripe for change? Bernard Dallé, another partner at Index, likens this to the tech world currently being “in the eye of the storm” and actually relatively calm on the innovation front — but that “the next big leap” will likely be in the area of harnessing big data, and being able to process large volumes of it in real time.
So in addition to big data, what other areas are interesting for Index right now? In one sense, with €350 million to invest, Index can fund widely across a range of categories to see what proves to last. Index’s portfolio so far has spanned many dozens of companies in e-commerce, marketplaces, cloud, mobile and social businesses and financial services, with the list including mobile payments companies Boku and iZettle, games company King.com, ticketing company Viagogo, cloud music startup Soundcloud, and one of the biggest startups in cloud storage today, Dropbox.
One area that is a little problematic, though: media investments. “It’s complicated with TV and video,” admits Rimer, who says on the software side, “there are so many to work with in the ecosystem, and the platforms are controlled in very few hands,” and on the hardware side, it’s hard “to come up with something that will be adopted as a consumer appliance with mass adoption.” There is still more development here to come.
“I think that there is a lot to be rethought in the home when it comes to entertainment. Some believe everyone is migrating to YouTube and other online-only plays, and that no one is interested in traditional TV anymore, but that is not true. However, TV is still proprietary and the companies in charge are still not interested in opening that up. It will take a lot of work to open that up.”
Another challenge Rimer notes is not about a specific category, but the whole process of uncovering the next great startup. He notes that while in Silicon Valley it’s not unusual for startups to approach VCs with their pitches, it is not so in Europe. “You have to find the companies yourself, looking under every rock. You cannot expect the best companies and entrepreneurs to come your way. It’s much more proactive sourcing.” Equally important are references from portfolio companies in the network, but he says proactive sourcing will likely remain the main route to connecting with startups.
Looking ahead, while the IPO climate at the moment may be delaying plans for some tech companies, and some worry about the state of funding for startups in the current economic state of affairs, Index’s position is that funding startups helps stimulate the economy. Index’s current portfolio has some 1,000 openings for jobs.
Still, he points out that when the climate improves, there are Index companies waiting in the wings to go public. “We have 20 European portfolio companies that are at, or nearing, IPO readiness — with combined 2011 revenues exceeding €1.3 billion, and average 75 percent top line growth. We’re asking ourselves: where do we list them?”