Partech and the fate of the transatlantic investor

There was some blog buzz in recent days about the announcement that the European partners of transatlantic VC firm Partech International are splitting from their US partners.  This follows last year's creation of Balderton Capital by Benchmark Europe's partners, and has precipitated a debate on whether it makes sense for VCs to invest in both the US and Europe from a single partnership.

It started with a French press release, followed by Mike Butcher's comment on TechCrunch UK here, picked up on the HEC blog here.  According to an anonymous VC who contacted Butcher, the split proves that the idea of a US/European VC "does not work" due to lack of synergies between companies and potentially mismatched returns cycles.  He does acknowledge that more synergies are possible in later-stage investing. 

This is an important debate, and one where I have a strong view, since our investment model owes part of its success to exploiting the benefits of a single fund investing across the US and Europe.  Thanks to continuing globalisation and -- in particular -- the advance of SaaS and cloud computing, national boundaries matter less and less for tech companies.  As a result, the need for effective cross-border investing will continue to grow.

A lot of funds have failed to make this model work.  In my view, the most common reasons are: (a) separate funds for Europe and the US (with different partners owning the economics of each fund), which makes true cooperation difficult; and (b) insufficient focus on exploiting synergy and arbitrage opportunities between the US and Europe.  Let me explain. 

Based on our eight years' experience investing across Europe and the US, the key factors to make this model successful are (in no particular order):

1. Invest from a single fund, in which all the investment professionals have equivalent economic interest.  This ensures everyone has the same incentive to support portfolio companies from either region, and everyone has a keen interest in making the right investment decisions in either region.
2. Make every effort to run a single, unified team with strong agreement on the investment strategy (allowing for some regional differences).  This is hard to do, but not impossible.  It requires weekly meetings ideally by video-conference, frequent inter-office visits, regular strategy offsites, a communicative and transparent culture built around collaboration and information-sharing, and a strong investment discipline throughout the team.
3. Exploit arbitrage opportunities between regions.  The development of new technologies and business models can occur anywhere first, for example, wireless technologies in Europe, or SaaS business models in the US.  By gaining early experience of these innovations wherever they occur, you can gain a first-mover advantage as an investor in the other territory.
4. Hold regular reviews of portfolio company needs and how to help them with operational issues in either territory.  Make sure that whichever investment professional is best placed to help (with executive recruitment, biz dev introductions, market entry strategy, etc) makes time to do so.

For entrepreneurs that have global ambition and a global market opportunity, a transatlantic investor can prove invaluable.  An ability to combine US best practices in business models (eg, sales tactics) with European cultural sensitivities is often the best way to make European companies a global success without breaking the business.   And in a weak dollar environment with the US in recession, an ability to get help expanding into Europe can be a life-saver for a US growth company.

At Kennet we have applied this approach with some success, supporting European companies like Kapow, Cramer (now part of Amdocs), Volantis, TradingPartners, Clearswift, Consul (now part of IBM), FRSGlobal and Exony as they crack the US market, and US companies like Daptiv, MedeFinance and NetPro as they expand their international presence including Europe.

As for the potential cyclical divergence of returns between US and European investments, these might be a welcome diversification for both the managers and investors in transatlantic funds.  Alas, the health of the exit markets for VC-backed companies (IPO venues, trade acquirers) are increasingly correlated, so returns cycles are likely to keep converging.

Image source: www.radicalcartography.net, with thanks.

Comments

[Nic Brisbourne]

Hi Max - the other option of course is a loose federation (like ours) - that way you have much less of the co-ordination overhead you describe, but hopefully the same trend spotting and global network benefits. The difficult piece for us of course is making sure there is enough incentive to co-operate and be part of the network. Our solution is to have a slice of shared economics across all the funds and two partners dedicated full time to making sure the network adds value to its members.

[Anthony Kuhn]

Max:

Great tips on how to capitalize on the shrinking US economy/dollars. I hope you didn't shoot yourself in the veritable foot by revealing some of your secret mothods for transatlantic investing! Thanks for your thoughts and I've linked to this post today at the blog for the Innovators-Network. Best wishes for continues success and I'll be watching for your future ideas.