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RESCUE SQUAD: SecondWind co-partners hope to keep funds afloat
Paul Heise knows a thing or two about companies.
After one of his employers — a text-retrieval Internet firm called Verity —
went public, the Dutchman successfully invested his windfall in creating two
new firms, and in all he has worked for seven others.
Make that eight. Heise and two partners, all veterans of the tech industry,
see a new opportunity in bailing out the European venture capital firms that
found their investment portfolios floundering when the Internet bubble
burst. Venture capitalism needs their help. As dotcom companies wrote down
their assets, went bankrupt or held fire sales, their VC backers found
themselves with little to return to their own investors. As many as 80% of
Europe's incubators and independent early-stage venture firms are expected
to disappear by next year. Jean-Bernard Schmidt, founder of Paris' Sofinnova
venture capital firm and chairman-elect of the European Venture Capital
Association, points out that since the venture market in Europe is far less
mature than in the U.S., the Continent has a far greater share of these
young funds in trouble. Meanwhile, captive funds — those that are owned by a
single, usually financial, institution — are being pressured by their
investors to avoid putting money in high-risk ventures and to cut back their
staffs.
Not surprisingly, given all this, VCs are finding it almost impossible to
raise new money. And that means "a lot of new companies are having trouble
getting funded," says Dick Rempt, who, with Heise co-founded SecondWind
Venture Capital Recovery in Amsterdam. "Venture capital is really crucial to
innovation, so it is in the interest not only of the venture capitalists and
their investors but also of the tech sector as a whole that this be
resolved."
Unlike vulture funds, which buy entire portfolios for a fraction of their
worth, Heise, Rempt and partner Hans van Bennekom want to use their business
acumen and contacts to save the companies in venture firms' portfolios. "The
idea is to look at companies on a case-by-case basis and see if we can get
them to perform," says Rempt. If a business cannot be turned around,
SecondWind will use its contacts to try to find a buyer for the assets.
SecondWind this month attracted its first customer — one of the largest
Dutch captive funds, and one that preferred to remain anonymous. SecondWind
charges a flat consulting fee to VC firms and an additional "results" fee if
it is successful in orchestrating an exit, such as an initial public
offering or trade sale.
While SecondWind is among the first to form a company and create a brand
around the business of salvaging portfolios, venture capital firms in Europe
are increasingly relying on outside business people to help manage their
portfolios. That's a change from the Internet heyday, when many venture
capital firms hired young people with consulting or banking backgrounds who
knew little about technology and had neither operating experience nor profit
responsibility. "Now they are realizing that they need people with industry
backgrounds to sort out their problems," says Düsseldorf-based Georg
Kulenkampff, 51, a former board member of the large German utility firm Veba,
now called E.on. At the request of investors, Kulenkampff has served over
the last two years on the boards of seven European companies, including
several high-tech firms.
Wim Borgdorff, managing partner of fund investments at Amsterdam's NIB
Capital Private Equity, which has j11.5 billion to invest in private equity
partnerships, says bringing in outside business people to salvage portfolios
is part of a general restructuring of the VC industry in Europe. "Venture
capital needs to rethink its business model," Borgdorff says. Smaller VC
firms are already testing new models. London's Ariadne Capital, for example,
acts as a sales agent for its companies, taking a slice of the revenues as
they are created, rather than waiting for an exit strategy — like an initial
public offering — to get a return on investment. In addition to sourcing
capital, Ariadne views its job as putting technology buyers together with
sellers and finding experienced executives and board members for companies.
While there is a short-term need for firms like SecondWind or Ariadne
Capital, Borgdorff says the companies they aim to help will have to prove to
the markets that they can sort themselves out.
As will more traditional venture capitalists. "The willingness of investors
to back venture capital funds and firms going forward in Europe has
decreased quite dramatically," Borgdorff says. When the dust from the
shakeout settles, some may get a second wind — but most will probably not
get a second chance.
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