Entrepreneurs take centre stage at funds

5 Jun, 2012

As a serial entrepreneur, Jos White is no stranger to pitching to investors and raising millions of pounds for a new technology or disruptive idea. But when he was seeking investment the MessageLabs co-founder had a new start-up idea – his own venture capital fund.

Notion Capital was cofounded in 2009 by Mr White and four former colleagues from MessageLabs, the online security firm that was acquired by Symantec for £400m ($695m). After a couple of years of investing largely their own money in cloud computing businesses, Notion closed its first round of a new $150m fund (£100m) in April, three times the size of its predecessor, from wealthy individuals and family investment groups.

Notion is one of a new breed of UK venture capital firms that are run by former internet entrepreneurs, who believe that experience and empathy can offer more to start-ups and investors. As Mr White puts it: "Being the investors we wish we had had when we were entrepreneurs."

Others include Atomico, led by Skype co-founder Niklas Zennström; Passion Capital, run by a trio of veterans from the likes of Skype, Last.fm and QXL Ricardo; Augmentum Capital, the Rothschild-backed fund run by Betfair's Tim Levene; and Profounders Capital, whose team includes Lastminute.com's Brent Hoberman and Bebo's Michael Birch.

"One thing that has changed . . . since I was trying to raise money for my company, is that the very good companies today can pick and choose their investors," says Mr Zennström. "I think it helps if, like myself, you have an entrepreneurial background to at least get in front of the company."

These VCs argue they can provide invaluable experience to first-time entrepreneurs, many of whom are likely to be experts in technology, rather than management.

Passion Capital, for example, makes investment decisions much more quickly – often in little more than a week – and with standardised "founder friendly" terms, such as not taking too many preference shares or disproportionate voting rights.

"The reason we operate the way we do is because we used to be on that side of the table," says Eileen Burbidge, partner at Passion Capital and former product director at Skype and Yahoo. "From the entrepreneur's perspective, time is the biggest cost."

These investor pitches – apart from stating their record as entrepreneurs and as angels – are that they are investing their own wealth alongside others.

The phenomenon of founders selling their company and putting their new-found wealth back into the tech market through angel investing is nothing new. But Mr Zennström says much of this kind of activity has been about having "something to talk about at the country club".

While US firms such as Founders Fund and Andreessen Horowitz are familiar fixtures of Silicon Valley, few London-based angels have gone on to raise larger funds from other investors.

The fact that more have done so in the last couple of years, when many traditional investors have been looking to move away from risky, illiquid and long-term investments such as VC, makes their emergence all the more noteworthy.

"Clearly for the tech ecosystem it's a very positive development," says Lastminute.com's Mr Hoberman. "It's what people say Europe for years has lacked." British founder funds remain smaller, and tend to be at an earlier stage than their US counterparts. Few have been around long enough to demonstrate substantial returns. But Mr Hoberman, whose ProFounders backed TweetDeck before it was sold to Twitter, says entrepreneurs' involvement has helped to rebrand "vulture capitalists" and attracted more interest from start-ups.

"A huge amount of our deal flow comes because we have entrepreneurs in our group who have seen the rollercoaster before," he says. Many of London's more traditional venture capital firms also count former entrepreneurs among their partners. But the founder-led firms believe they can do better than these larger giants.

Mr Zennström says that without his Skype background, Atomico would not have been able to invest in two of Europe's hottest tech companies, online payment provider Klarna and Angry Birds developer Rovio. "Capital has become a commodity," he says. "You need to be able to help companies." As investors, former entrepreneurs are also less controlling than traditional VCs, says Mr Zennström.

"Sometimes people need to make their own mistakes," he says. "When we decide which companies to invest in, if the entrepreneur is listening too much to investors, that would be a warning sign: we want to invest in entrepreneurs who are confident and have their own point of view." But few of these new-wave VCs are reliant solely on entrepreneurs, bringing in accounting or dealmaking experts to ensure that investment decisions make sense on more than just an emotional level.

"Entrepreneurs tend to look for the good in things," says Mr White. "We love big ideas, we are very positive – we are probably too easy to be sold to . . . Having a team of just entrepreneurs would be a bit dangerous!"

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