3i, one of the UK’s oldest and best-known VCs, said today that it plans to stop investing in early-stage companies to focus on its later-stage growth capital and buyout activity – its main profit driver for years now. Apparently the venerable British firm has decided that it’s just not worth getting out of bed for early-stage businesses any more.
The move isn’t exactly a surprise. Ever since it got its fingers badly burned in the dotcom crash at the start of the decade, 3i has been cutting down on the early-stage stuff, selling off the smaller companies in its portfolio and focusing on making a smaller number of bigger bets. And with the private equity boom in full swing in recent years, its buyout division has been going great guns - which has only served to highlight the miserable returns being made by its venture arm.
Still, its decision to get out completely isn’t exactly a great sign for the European venture industry, which has been lagging behind our North American cousins for years. Whereas Silicon Valley VCs have been coining big sums from the likes of Google and MySpace, across the Atlantic our successes have been a little more modest (the recent case of Bebo being one exception).
And call us sentimental, but we can’t help feeling that it’s a sad day for UK venture capital. After all, 3i has been investing in small British businesses even before MT made it into short trousers: its original incarnation, Investors In Industry, was set up by the Government after the Second World War to invest risk capital in growing British businesses. Re-branded as 3i in 1983, it was listed on the London Stock Exchange 11 years later as it transformed itself into a fully-fledged commercial enterprise. And like many VCs, it’s since been moving away from its early-stage, UK-centred focus to target bigger, more profitable deals elsewhere.
Then again, buyouts aren’t exactly a licence to print money at the moment. Elsewhere in today’s FT, Quadrangle Group MD Steve Rattner bemoans the demise of big private equity, pointing out that there hasn’t been a single big buyout deal signed since the credit crunch bit in July. What’s more, he says, there has only been $49bn of deals worth between $1bn and $4bn – the area where 3i’s buyout division normally operates.
So, you might argue that it’s a bad time for 3i to be abandoning venture. After all, with its buyout division likely to see returns plummet now that cheap debt is off the menu, venture capital might actually turn out to be a better bet in 2008...