SECTION E: WHOSE CASH IS KING? - Don't take cash from just any investor. Only backing from a select band of venture capitalists confers the sacrament of success on a start-up. The catch is that they're in California, reports Andrew Saunders

SECTION E: WHOSE CASH IS KING? - Don't take cash from just any investor. Only backing from a select band of venture capitalists confers the sacrament of success on a start-up. The catch is that they're in California, reports Andrew Saunders - In the heart

by ANDREW SAUNDERS
Last Updated: 31 Aug 2010

In the heart of the strip of prime northern Californian real estate that is Silicon Valley lies Menlo Park. It's an affluent little town (even by the extraordinary standards of the area) that can take much of the credit for the 63 new dollar millionaires who, it is claimed, are created in the valley each day. For it is home to a handful of the world's biggest and most successful technology venture capital companies, financial powerhouses such as Benchmark Capital, Kleiner Perkins Caufield & Byers and Sequoia Capital, whose investments have shaped the world of e-commerce.

Yahoo!, 3COM, AOL, Informix and etoys all owe at least some of their success to money from Menlo Park. In a country regarded by jealous European e-trepreneurs as being awash with cash, these A-list venture capitalists have risen to the top by concentrating on the brightest and the best new ideas, creating a virtuous circle of success and a distinct pecking order in their industry. 'There is a real hierarchy among venture capitalists in California, because backing from someone like Benchmark or Kleiner Perkins is almost a guarantee of success,' says James Dobree, founder of e-commerce support business Zygon.

Their influence does not stop at the eastern or western seaboards. There are real advantages attached to having a big-name American backer wherever you are. 'For technology businesses, US funds are at the forefront, not least because they can offer access to the US market,' says Dobree.

And if you want your e-business to go global, the American market is still where it all starts. 'It's very important in e-business to have US money. The scene over there is so much more advanced. You need a direct line into that kind of thinking,' says Nic Boles, chief executive of ClassicForum (a British-based rare books and collectables web site). He is on the money trail, looking for dollars 13 million to fund a pan-European roll-out.

'The US VCs thought we were barmy trying to keep our product development in-house. They made me realise that we had to outsource as much as possible in order to achieve speed to market.'

A backer with its finger on the pulse is more likely to deliver this kind of insight. Says Amory Hall, European managing director of US e-consultants Xceed: 'The big US venture capitalists know the markets and the technology because it all comes from the US.'

Technical know-how aside, the muscle of the big American VCs derives from their impeccable contacts and influence on the markets. The Japanese call this the Keiretsu effect and if you are starting a net business you need a piece of it. 'If someone who is perceived as a clever investor invests in your company, it automatically becomes a clever investment for others,' says Boles. And their contacts provide access to top-flight lawyers, accountants and staff in the process - companies and individuals that lie beyond the reach of fledgling e-businesses whose backers are further down the hierarchy.

'Big names open doors in the industry and with potential clients,' says Marcus Bicknell, European head of US technology business network CMGI, which owns or has invested in 60 net companies, including the e-commerce software providers Silknet and CriticalPath.

But despite the impact of e-mail and video conferencing, finding funding remains a hands-on job that swallows huge amounts of management time.

The need for so much flesh time can become prohibitive when your investors are 5,000 miles away, and most Euro start-ups opt for backers that are closer to home. 'We had meetings with several US venture capital firms, but it didn't work out - they just wanted to see too much of me,' says British entrepreneur Chris Upton, founder of web site quality certification start-up Clicksure. He opted for European funding in the end.

Geography notwithstanding, there are other disadvantages to approaching a top-tier US venture capitalist, as Xceed's Hall points out. 'Those guys lend money against a patent. You can't even get an appointment unless you have the intellectual property nailed down tight.' Consequently, business in Europe's own substantial VC community is booming. In the past 12 months, a plethora of new funds and business incubators have sprung up, all hungry to invest in the next big thing - even if they don't know what that is.

'There is a lot of dumb money out there at the moment, hyperventilating,' says Hall.

In a climate where everybody wants to be a venture capitalist (even Channel 4 is getting into e-funding via a new gameshow that offers pounds 1 million to the contestant with the best dot.com idea), conditions are ripe for the formation of our own VC hierarchy. 'A year ago, all the funds were in the same boat - none had any experience in e-business. Now a handful of companies are emerging that do,' says Dobree.

Companies such as the so-called 3As - Atlas Ventures, Amadeus Capital Partners and Apax Partners - which operate out of London and together form Europe's holy trinity, a Premier League to rival the US firms' World Series. And they are big enough to offer that sought-after gateway to the US, either through their own overseas offices or in partnership with other firms. 'The Apax name is great for us, it helps to attract high calibre people and our corporate clients love to see it,' says Upton of the lead VC in the dollars 12 million Clicksure deal.

Such is the appeal of this branded money that those with offers from lesser backers already on the table are ready to hand over large chunks of equity to secure the patronage of one of these heavyweights. Says Atlas Ventures partner Vic Morris: 'Start-ups, which already have a term sheet, come to us prepared to take an offer at a lower valuation because they really want us on board. We have a brand name, and if we invest the brand rubs off.'

For a start-up team eager to get on with running a business all dollar bills looks green, but the consequences of grabbing the first offer that comes along can be serious. Small or inexperienced backers may become twitchy when faced with the cold financial reality of e-business burn rates, and nervous investors can wreak havoc with your company, as many e-businesses will discover to their cost over the coming months. 'Big venture capitalists are much less stressful,' says Apax partner Paul Fitzsimons.

The reason that start-ups are prepared to pay for a name is because they know they will get more than just cash. 'Big-name VCs give instant credibility to a deal. Other investors don't have time to do all the due diligence they would like to, so they look for a brand that tells them it has already been done,' says Samer Salty of the European VC zouk Ventures (one of the backers behind peoplesound.com, featured in our e25 list).

And when, all being well, it's time to float a few years down the line, that big name will come in handy again. 'We were involved in 15 IPOs last year and six so far this year. When we ring up the investment banks, they take us seriously,' says Fitzsimons.

And although the US heavyweights do back European companies, they haven't actively been seeking investments here, leaving the floor open for the local talent to pick up the best deals. 'The US VCs in Europe at the moment are only really interested in bringing their American clients over here,' says Morris.

But the natives won't have Europe to themselves for much longer - the American funds have woken up and they are on their way over. Benchmark Capital (the money behind spectacularly successful online auction site eBay) has already declared its intention to open a London office and is seeking a chief executive to head up the operation. Several other transatlantic names are expected to follow suit, including CMGI's @ventures arm. 'We are already seeing 50 business plans a week here and we haven't even opened the office yet,' says Bicknell.

It won't be long before the aggressive style of the Americans is pitted against the more cooperative approach of the Europeans. 'Competition with US venture capital firms will increase,' says Morris at Atlas.

The question that remains is whether the Americans will be able to emulate their Stateside successes over here. 'I don't know if they can. Europe is a very different market and they lack knowledge on the ground,' says zouk Venture's Salty, who believes that the real battle with the transatlantic funders will be over individuals rather than business plans. 'The US VCs will need European talent to staff them and there isn't enough to go round. If they just ship over US people and US methods, they will struggle.'

But despite these confident noises, the historical precedents don't look good. If Benchmark, CMGI@ventures et al are half as good at dealing with their local competition as banks such as Goldman Sachs and Morgan Stanley were before them, then Menlo Park could soon become the undisputed capital of the global technology VC business.

< BIG VC START-UPS THAT WENT PUBLIC VC INVESTED IN FLOTATION RAISED Benchmark eBay (dollars 4.5m) dollars 66m (May '98) Kleiner Perkins Amazon.com (dollars 8m) dollars 50m (May '97) Sequoia Capital MP3.com (dollars 10m) dollars 361m (Jul '99) Amadeus Lastminute.com (n/a) dollars 175m (Mar '00) Apax QXL (dollars 11m) dollars 397m (Oct '99) Atlas Update.com (n/a) dollars 64m (Apr '00)

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