Southern Italian VCs shaping the industry's future

As all locals will tell you, there is a north-south divide in Italy politically and economically. Seeking to redress the economic imbalance, the government launched the Cassa del Mezzogiorno in the 1950s, a fund to stimulate economic growth and development in the south with a particular focus on infrastructure and fiscal incentives to promote investment. Despite its success, the project was dissolved in 1984, but it appears its sentiment has lingered.

In 2009, the Italian Department of Innovation and Technology concluded an auction to provide capital commitments to venture capital funds targeting companies based in southern Italy. The initiative stated that while the government would act as a cornerstone investor in each fund, capital committed by the state had to be matched in size by private investment, echoing the Israeli government's early Yozma programme, widely acclaimed as the seed to the nation's flourishing venture scene.

Of the five who competed, four won the state funding: Vertis Ventures, Principia, Atlante Ventures and Vegagest. While the latter has not been active with its commitment, the former three have injected some much-needed dynamism into what has been an extremely stagnant region, according to Marco Agostini, deputy chairman and president of the investment team at Vertis Ventures. "The southern Italian market has been underserved for years. Before we got there, there was just one transaction recorded."

VC is alive and well in Southern Italy and is shaping the nation's venture landscape

A critical boost
The impact has been enormous, according to industry players. "It was very helpful as a step towards building an ecosystem in southern Italy," says Davide Turco, director of Atlante, the venture capital arm of Intesa SanPaolo and manager of Atlante Ventures Mezzogiorno, a €25m fund dedicated to the south of Italy. "When we started out there, we found a lot of good ideas, but without the right structures in place and good advisers there was a weak ecosystem. We have seen a strong improvement in this, which is a consequence of the demand for good business plans that was stimulated by this measure," he adds. "I also think the way the state structured the measure was correct, because the public side shared the downside risk together with private investors, but there was a cap on the upside. It was a good way to align all the interests involved."

And what a difference these funds have made, particularly in the last year as they near the end of their investment period. According to a study conducted by AIFI in conjunction with PricewaterhouseCoopers, which compared H1 2012 with the same period last year, activity in southern Italy has increased almost threefold. In H1 last year, 81% of deals took place in the north of Italy, with 14% occurring in central Italy, leaving just 5% in the south. This year though, activity has almost tripled, reaching 13%. Continuing that trend, unquote" data has recorded five investments completed by Vertis alone in this half of 2012 to date; more than a third of the 14 investments realised since the fund launched in 2009. And this trend looks set to continue: "We aim to invest the remaining 20% of our fund in the next few months as our investment period elapses in June 2013, and will begin fundraising early next year," Agostini adds.

Why though has this flurry of activity taken so long to begin? "I think it is part of a wider problem in Italy, whereby after the internet bubble there was a strong withdrawal of institutional investors in venture capital, so the VC industry suffered heavily from a lack of capital. And the impact was even stronger in southern Italy, which is the less developed part of the country," explains Turco. "But that is only part of the answer, because I believe that an ecosystem of innovation develops when key players are mature enough. It is also an issue that regards technology transfer, policies in academia and universities and a question of the attitude of private investors backing start-ups," he adds. The recent opening of 56CUBE, a replica of Milanese incubator Digital Magics with a focus on southern Italy, could be an important sign of the developing ecosystem.

No stone uncovered
What's more, these incubators are an important source of dealflow in a less developed VC market. "There are so many opportunities in southern Italy, but you have to discover them because they are hidden," says Agostini. "So working with a network of universities and research centres, as well as incubators is important and the main route of sourcing our funding targets," he adds. "The VC industry is so small that if a guy from the south wants to interact with a venture capitalist, he knows who to contact. We see a fair amount of self-candidacy, which shows that the southern Italian market is active and alive, not dead at all. In fact, it is more active on the start-up side than the north." Gennaro Tesone, the founder and CEO of 56CUBE, a recently-launched venture incubator in the south of Italy, agrees: "There are so many opportunities and so few VCs to take them!"

When it comes to venture capital, southern Italy then is not as underserved as people may think. "It is not true that the southern Italian venture capital market is underdeveloped compared to the north," says Tesone. "In fact, if we consider the venture capital segment, not the private equity one, it turns out that nowadays at least 50% of investments are focused on the south, due to the national policy to promote investments in the specific area launched some years ago."

A driving force
In fact, far from lagging behind, regional players seem to be propelling the development of the nation's venture capital industry. Principia has recently been in talks with the Italian minister for economic development Corrado Passera, who proposed fresh legislation based upon the recommendations of the VC player just a few weeks ago. "Italy has been behind in terms of venture capital for a long time. But we will start to see results of the changes introduced by the Ministry of Economic Development as soon as 2013," says Andrea di Camillo, managing partner at Principia.

The report established by the Task Force on Start-ups and managed by Principia highlighted the intrinsic value of start-ups to the nation's economic development and its role in reducing youth unemployment. "Innovative companies are not a passing trend, but rather a key resource in which to invest in coming years in order to sustain growth, generate good jobs and opportunities for young people and make people aware of what can be achieved in our country," says the report. Calling for direct and targeted change to boost start-ups, the report suggests a dedicated fund-of-funds for venture capital with the government acting as an anchor investor and the Fondo Italiano di Investimento as manager. Of particular interest to the start-up scene is the report's proposal for a seed capital fund, capitalised by the state and institutional investors, to provide liquidity at the most critical time in a company's lifespan.

This report has already shaped governmental policy. "The measures include some fiscal incentives for private individuals and corporates if they invest in start-ups directly, or in VC funds mainly focused on innovative start-ups," explains Turco. "Another important area of attention for this decree was helping start-ups to get labour and consulting in exchange for equity during their first four years. This was an important step, as the previous administration's fiscal and labour law did not encourage stock options or equity," he adds.

Following in the footsteps of Israel's Yozma programme in the 1990s, the UK government's development of Silicon Roundabout, measures introduced by the Austrian government to support young entrepreneurs and, of course, the catalogue of incentives at the heart of the venture scene in the US, it seems that the Italian government has recognised the power of venture capital to drive economic growth. And southern Italian players are sitting at the wheel.

For more on the Italian market, see our round-up of important news, key appointments and analysis from the region published ahead of next week's annual Italia PE Congress.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• Benelux
• CEE
• DACH
• France
• Nordics
• Southern Europe
• UK / Ireland
• PricewaterhouseCoopers
• Italy
• Vertis
• AIFI
• Principia
• Atlante Ventures
• Top story