WITH
technology media business
Europe ventures seeking capital
INNOVATE, FROM PAGE 1
successful ‘‘Angry Birds’’ game for mo-
bile phones; Spotify, the streaming mu-
sic service; and Soundcloud, a music
storage and sharing site. Over the past
year or so, start-up activity has heated
up in Berlin, which has joined London as
a European capital of digital innovation.
But most European Internet ventures
struggle to break out of national mar-
kets. Going global usually means selling
out to an Internet giant from the United
States, Japan or elsewhere — still the
preferred end game for European start-
ups, including promising ones like
TweetDeck, LastFM and PriceMinister.
Why has Europe not managed to cre-
ate a Facebook or a Google? The rea-
sons are complicated, according to en-
trepreneurs, investors and analysts.
Some say European start-ups have
been too focused on copying Silicon Val-
ley ideas. Others say Europe lacks the
necessary entrepreneurial get-go. Still
others say the fragmentation of Euro-
pean markets, with dozens of languages
and legal systems, stymies even the
most energetic.
Researchers at Bruegel, a think tank
based in Brussels, have identified one
overriding problem: a shortage of fi-
nancing, especially private capital, for
the risky business of starting and grow-
ing high-technology companies.
‘‘A deficient V.C. market may thus
hamper the development of young,
highly innovative companies into
world-leaders,’’ they wrote in a recent
study, referring to venture capital.
Compared with the United States,
there is not as much money to draw
from in Europe because of a lesser reli-
ance on private pension funds. Many
European investors also grew wary of
venture capital after they were burned
in the dot-com bust, heightening a Con-
tinental aversion to risk-taking.
Commitments to European venture
capital funds fell further in the financial
crisis that began in 2007 — plunging
from ¤8.2 billion, or $10.4 billion, in that
year to ¤3.2 billion in 2010, according to
the European Private Equity and Ven-
ture Capital Association in Brussels.
Last year, that total recovered slightly,
to ¤4.8 billion.
Among private investors, the drop-off
has been greater; 34 percent of venture
capital funds raised in Europe stemmed
from government agencies in 2011, up
from 10 percent in 2007. Despite talk of
austerity, the taxpayer has become the
biggest venture capitalist in Europe —
even before casual financing sources
like French unemployment benefits are
taken into account.
‘‘Public money is trying to fill a need,
but it would be a disaster for these econ-
omies if private venture capital disap-
peared entirely,’’ said Artturi Tarjanne,
general partner at Nexit Ventures, a
Helsinki-based firm that is active in the
Nordic region.
While the U.S. government also
provides support for start-ups and
small businesses, Silicon Valley venture
capital funds are more likely to be over-
subscribed than looking for money.
In some cases, European public
money is being used not just to bolster
venture funds, but to invest directly in
start-ups. The sovereign wealth fund of
France, for example, has acquired
equity stakes in Viadeo, a Paris-based
social network for professionals, and
Dailymotion, a video-sharing site.
History advises ‘Caveat emptor’ as shares of Facebook begin trading
SHARES, FROM PAGE 1
for Internet offerings. At either level,
Facebook’s price is likely to assume a
growth rate that few companies have
managed to sustain.
New investors are buying their shares
from current owners who are taking
some of their money off the table, a sign
that the easy profits may have been
made. Goldman Sachs, the PayPal co-
founder Peter Thiel, and the venture cap-
ital firms DST Global and Accel Partners
are all selling shares in the offering.
‘‘It is a popular company, but it is still
a highly speculative stock,’’ said Paul
Brigandi, a senior vice president with
the fund manager Direxion. ‘‘Outside
investors should be cautious. It doesn’t
fit into everyone’s risk profile.’’
For the far-sighted and deep-pock-
eted investors who got in early, Face-
book is turning out to be a blockbuster.
But by the time the first shares are pub-
licly traded, new investors will be start-
ing at a significant disadvantage.
Following the traditional Wall Street
model, Facebook shares were to be
parceled out to a select group of in-
vestors at an offering run by the com-
pany’s bankers on Thursday evening,
potentially at $38 a share. But public
trading was to begin with an auction on
the Nasdaq exchange on Friday morn-
ing that was likely to push the stock far
above the initial offering price.
That is what happened to Groupon
last autumn. Shares of the daily deals
site started trading at $28, above its of-
fering price of $20. It eventually closed
the day at $26.11.
Over the past year, newly public tech-
nology stocks, on average, have jumped
26 percent in their first day of trading, ac-
cording to data collected by Jay R. Ritter,
a professor of finance and an I.P.O. ex-
pert at the University of Florida.
In many of the hottest technology
stocks, the rise has been more dramatic.
LinkedIn, another social networking
site, surged 109 percent on its first day in
Entrepreneurs working in Neuilly Lab, an incubator for French start-ups. It resembles Silicon Valley, but one thing is missing: the money.
European policy makers are also
stepping up efforts to develop
‘‘clusters’’ of high-technology innova-
tion from the ground up. The idea is to
replicate the Silicon Valley ecosystem,
where entrepreneurs, researchers fin-
anciers and large pools of employable
talent are all in close proximity.
In Britain, the government of Prime
Minister David Cameron wants to turn
‘‘It’s a vicious cycle. You need
money to develop your
project, but if you haven’t
developed your project, you
can’t get the money.’’
the site of the 2012 London Olympics in-
to a hub for high-technology employ-
ment after the Games are finished,
building on the presence of hundreds of
start-ups that have set up shop nearby,
in the eastern part of the city.
In Russia, the government is spear-
heading the development of an ambi-
tious high-technology city at Skolkovo,
outside Moscow, including a new uni-
versity and sites for multinational high-
technology companies and start-ups
alike. Skolkovo has already drawn com-
mitments from 400 companies, ranging
from international giants like Cisco Sys-
tems to Russian start-ups.
Russia is something of an exception,
in that it has produced a handful of big
Internet players, at least in the domes-
tic market. The sale of shares in the
search engine Yandex last year was the
second-biggest I.P.O. of an Internet
company to date, trailing only Google’s
in 2004.
After the I.P.O., the long haul
Since 1980, there have been about 2,400 technology, Internet and telecom initial public offerings. On the first day of trading, the average share price rose 32 percent
above its offer price. However, according to statistics compiled by Jay Ritter, a professor of finance at the University of Florida, most companies had negative returns
after three years, and many companies had a checkered performance beyond that. Yahoo skyrocketed only to plummet, while Apple took decades to rise.
A look at how Facebook’s current market value and revenue compare with five other prominent technology I.P.O.’s.
Yahoo (1996 I.P.O.) eBay (1998)
Valued above $125 In 2004, eBay had
billion in early 2000, sales and value similar
Yahoo was worth to Facebook now.
one-tenth that amount Sales have nearly
two years later. quadrupled since, but
its value has fallen.
Market value,
in billions
$500
400
300
200
100 Facebook
0 no profits and dubious business models.
0 25 0 25
Annual revenue, in billions
Sources: Jay Ritter, University of Florida; Compustat; Bloomberg
May 2011, and analysts say it is not hard
to imagine a similar outcome with Face-
book, given the enormous interest.
Unfortunately for investors, the first-
day frenzy is not often sustained.
At the height of the bubble in 2000, the
average technology stock rose 87 per-
cent on its first day. Three years later,
In France, the government has ear-
marked more than ¤1 billion for a proj-
ect taking shape in and around the Paris
suburb of Saclay, in an area that cur-
rently houses several of the country’s
grandes écoles. Under the plan, cham-
pioned by former President Nicolas
Sarkozy, the surrounding wheat fields
are supposed to be transformed into a
giant university, along with offices for
high-technology corporations and start-
ups.
Yet projects like these offer little hope
of an immediate solution to the current
economic crisis. The Paris-Saclay uni-
versity is not scheduled to open until
2014. Completion of all the work on what
is envisioned as a bustling city of more
than 50,000 residents is not foreseen un-
til 2030.
In the near term, there are some
promising signs. Experts say U.S. ven-
ture investors are stepping up their ac-
tivity in Europe, attracted by lower
company valuations than the some-
times sky-high levels in Silicon Valley.
‘‘We’re starting to see U.S. investors
say, ‘I think my money might go further
in someplace like Latvia,’’’ said Eliza-
beth Varley, project leader at TechHub
London, a working space for start-ups
that also has a site in Riga.
But U.S. investors tend to be more in-
terested in European ventures that are
already up and running, like Rovio,
which attracted $42 million recently
from a group of firms led by a big player
in Silicon Valley, Accel Partners. At
earlier stages, the talk among European
start-ups is of a growing ‘‘equity gap.’’
‘‘There are real difficulties with seed
capital,’’ said Hervé Solus, the Neuilly-
based founder of a localized employ-
Google (2004) Microsoft (1986)
Google currently has a Although Microsoft's revenue
price-to-sales ratio of has increased in most years,
around 5. But in June its share price has been
2005, it had values relatively flat since it fell in
similar to Facebook’s 2000.
current levels.
Q4 2007
Q2 2005
0 25 50 0 25
after the bubble burst, those stocks
were down 59 percent from their first-
day closing prices and 38 percent from
their offering prices, according to Mr.
Ritter’s data.
The more recent crop of technology
start-ups has not been much more suc-
cessful in maintaining the early excite-
A model for success
from Finnish start-up
PARIS
Maker of ‘Angry Birds’
gives Europe a category
leader in mobile games
BY ERIC PFANNER
As Silicon Valley prepares for its latest
blockbuster initial public offering, a sale
of stock that is expected to value Face-
book at more than $100 billion, Europe
can counter with the David and Goliath
tale of Rovio Entertainment.
The company, developer of the
‘‘Angry Birds’’ games, in which players
use a digital slingshot to attack egg-
stealing pigs, has said it plans its own of-
fering next year. Analysts have said the
sale could value Rovio, which is based in
Finland, at up to $9 billion — a small
fraction of Facebook’s valuation, but
huge for a European technology I.P.O.
The recent success of Rovio and a
handful of other emerging European In-
ternet companies, including Spotify, the
online music streaming service, and
SoundCloud, an audio sharing platform,
shows that Europe can deliver innova-
tion on a global scale. No longer are
European Internet companies merely
copying Silicon Valley business models,
something for which they were long
criticized, especially during the dot-com
bubble years.
JOHANN ROUSSELOT FOR THE INTERNATIONAL HERALD TRIBUNE ‘‘Now you’ve got European entrepre-
neurs that have figured out how to build
category leaders, not just clones,’’ said
Jason Whitmire, a partner at Earlybird
ment Web site called Jobaproximite. Venture Capital, which is active in Ger-
‘‘It’s a vicious cycle. You need money to many and elsewhere in Europe. ‘‘That
develop your project, but if you haven’t wasn’t happening 10 years ago.’’
developed your project, you can’t get Analysts say Rovio’s success may
the money. To get ¤200,000 in your pock- also offer policy makers useful lessons
et, you need a good network.’’ in how to stimulate the Internet and
Although national governments, the technology scene. In general, however,
European Commission and other public start-ups in Europe often struggle to get
bodies have already poured billions of off the ground, finding it harder to raise
euros into venture investments, they money at the critical early stages than
are trying to fill the equity gap with a their American counterparts.
range of new incentives. Finland has lagged behind other
In France, for example, the newly European countries in putting in place
elected president, François Hollande, financial incentives, like tax breaks, for
wants to cut taxes for start-ups and oth- start-ups. Other factors, analysts say,
er small firms, while raising them have been more important in fostering
slightly for big companies. In Britain, the growth of high-technology ventures
Mr. Cameron’s government recently in- like Rovio.
troduced a ‘‘seed enterprise invest- One is creative destruction of a kind
ment’’ plan, providing generous tax celebrated by the economist Joseph
breaks for investments in start-ups. Schumpeter. Rovio is based in the same
The European Investment Fund, city, Espoo, as Nokia, the struggling mo-
which pumps money into venture funds bile phone maker that used to be the
on behalf of the European Commission pride of the Finnish high-technology
and other public and private sources — sector. As the company loses market
its underlying investments include Spo- share, it has responded by shedding
tify and Rovio — has set up a new arm to thousands of jobs — a ready pool of en-
make early ‘‘angel’’ investments. gineering talent for entrepreneurs to
In the meantime, hopes still run high tap.
in start-up incubators like the one in ‘‘The important thing is that the way
Neuilly, called Neuilly Lab. The city set people think has changed, especially
up Neuilly Lab with no state funding. A young people,’’ said Artturi Tarjanne,
parallel project links promising Internet general partner at Nexit Ventures in
start-ups with French companies that Helsinki. ‘‘They used to dream about
have offices in Neuilly, which serve as going to work for Nokia or McKinsey or
hosts and mentors. something like that. Now they are much
Will the European Google or Face- more willing to take entrepreneurial
book emerge from here? risk.’’
‘‘I think it’s not impossible, but there Another vibrant European startup
is a lot of competition,’’ said Jean-Gabri- center, Berlin, also shows it is some-
el Bliek, director of economic develop- times the things that policy makers do
ment for the city. ‘‘In any case, there is a not do that can be most effective in lur-
lot of energy and innovation.’’ ing Internet entrepreneurs. While
Apple (1980)
Three years after its I.P.O., investors in Apple had lost 25
percent. But nearly three decades later in May 2010, it
surpassed Microsoft in market capitalization and is now
the largest company by market capitalization.
Q4 1999
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AMANDA COX AND SETH W. FEASTER/NYT
ment. A Morningstar analysis of the from its offering price.
seven most prominent technology ‘‘It’s usually best to wait a few weeks
I.P.O.’s of the past year showed that to let the excitement wear off,’’ said
after their stock prices jumped an aver- James Krapfel, an I.P.O. analyst at
age of 47 percent on the first day of trad- Morningstar who conducted the anal-
ing, they were down 11 percent from ysis. ‘‘Buying in the first day is not gen-
their offering prices a month later. erally a good strategy for making
Groupon is now down about 40 percent money.’’
France and Britain, for example, have
put in place tax breaks to support ven-
ture investments, Germany has not fol-
lowed suit.
Over the past year, however, U.S. ven-
ture capital commitments to Berlin
firms have roughly tripled, Mr. Whit-
mire at Earlybird estimated. Big play-
ers in Silicon Valley, like Sequoia Capit-
al, Tiger Global Management and
Kleiner Perkins Caufield & Byers have
all made Berlin investments.
Instead of financial incentives, Berlin
has benefited from other factors, like an
influx of engineers from Eastern
Europe. Low rents have helped cash-
strapped company founders eke out an
existence. Meanwhile, analysts say
Berlin has also benefited from tougher
immigration rules in Britain, which
have made it more difficult for start-ups
and technology giants alike to add jobs
in London, Berlin’s biggest rival on the
European Internet scene.
‘‘While there are certain things that
government can do, to a large extent it
should stand out of the way,’’ said Paul
Zwillenberg, a partner at Boston Con-
sulting Group.
As for Rovio, it plays down the chal-
lenges facing start-ups in Europe, com-
pared with their counterparts in the
United States. The company recently at-
tracted a $42 million investment from a
group of firms led by a big player in Sil-
icon Valley, Accel Partners.
‘‘You might say that the culture is
somewhat different,’’ said Mikael Hed,
chief executive of Rovio, via e-mail.
‘‘But at the end of the day dynamic busi-
nesses have the ability to attract ven-
ture capital no matter where they’re lo-
cated.’’
JUHO KUVA/BLOOMBERG
Angry Birds Land at a theme park in Fin-
land. A planned I.P.O. next year may value
the game’s maker, Rovio, at up to $9 billion.
There are, of course, a number of ma-
jor exceptions to this larger trend that
would seem to provide hope for Face-
book. Google, for instance, started
rising on its first day and almost never
looked back.
Even among the success stories,
though, investors often have had to go
through roller coaster rides. Amazon,
for instance, surged when it went public
in 1997 at $18 a share. But the stock soon
sputtered, and it did not reach its early
highs again until over a decade later.
The shares now trade near $225. More
recently, LinkedIn has been trading 146
percent above its offering price of $45,
enough to provide positive returns even
for investors who bought in the initial
euphoria. But those investors had to
Q1 2012
sweat out months during which Linked-
In stock was significantly down.
Apple is perhaps the clearest example
of the patience that can be required to
two decades after its I.P.O. in 1980, it was
still occasionally trading below its first-
day closing price, and it was only in the
middle of the last decade — when the
company began revolutionizing the mu-
sic business — that it began its swift
climb toward $600.
Facebook’s prospects will ultimately
depend on the company’s ability to ful-
fill its early promise. It has a leg up on
the start-ups of the late 1990s, which had
100 125 Last year, in the seventh year since its
founding, Facebook posted $3.7 billion in
revenue and $1 billion in profit.
But even at the offering price, in-
vestors buying the stock are assuming
enormous future growth. With the com-
pany revealing recently that its growth
rate had slowed significantly in the first
quarter, the number of doubters is
growing.
‘‘Facebook, by just about any mea-
sure, is a great company,’’ Mr. Ritter
said. ‘‘That doesn’t mean that Facebook
will be a great investment.’’