Italian Venture Capital: Dragging its feet or biding its time?

The Italian private equity industry has been enjoying something of a renaissance in recent months, with strong dealflow and a string of mega-deals stimulating international investors’ confidence. However, compared to many of its European neighbours, the country’s venture capital industry is still relatively immature. Historically, Italy has seen limited interest from foreign venture capital funds, and did not even register high-tech venture capital activities until 1998. However, many of the high-tech VC firms who started up at this time subsequently went bust when the technology bubble burst. In this editorial, Southern Europe…unquote†examines the reasons behind the tardy evolution of the Italian venture landscape and the indicators for its future shape.

The Italian venture capital market is frequently branded ‘non-existent’, this could not be further from the truth. Contrary to popular – and incorrect – opinion, there are, in fact, many venture capital firms operating in Italy. One of the most prominent players is Pino Ventures, which operates the Kiwi I and II funds, and is currently focussing on portfolio management. Other active firms include CIR Ventures, Quantica, Alice Ventures, Net Partners and myQube, as well as 3i’s Italian branch, which has recently started to invest in biotech. In addition, foreign firms currently investing or exploring investment opportunities within Italy are TLcom, Index Ventures, Vision Capital, ETF and Accel Europe.

Given the plethora of decent firms, what then is stunting the growth of the Italian venture market? Stefano Peroncini of Quantica, which manages the Principia fund, attributes this situation to the experiences of Italian VCs during the industry’s formative years: ‘The more traditional venture capital initiatives undertaken to date in Italy are characterised principally by the considerable scope of the funds available and a search for economies of scale in investments. Furthermore, they have been focussed mainly on the information and communication technology sectors, consistent with the specific background of the managers involved.’ Peroncini points out that whilst Italy’s first wave of venture capitalists invested mainly in internet and telecommunications-related start-ups, market demand was dramatically overestimated by both venture capital and target companies. The result was that the vast majority of venture-backed companies became write-offs and venture capital focussed exclusively on the cash-burn rate of the portfolio company, neglecting managerial expertise and know-how. A further factor which influenced the market was a marked lack of confidence in Italian high-tech businesses on the part of banking investors; a situation exacerbated by negative IRR figures stemming from their previous venture investments. In addition, says Peroncini, even some of the most advanced Italian companies have realised negative returns on the corporate venture capital investments. On the fundraising side, Italy is hampered by a lack of professional placing agents, and low confidence of foreign investors, especially when dealing with a first-time fund team. The situation with regard to exiting venture investments is also complicated by the nature of the Italian stock exchange; there are relatively few quoted companies and the process to secure admission is more protracted and expensive than in other countries.

According to Giacomo Marini of CIR Ventures, some of the challenges currently being faced by the Italian venture capital industry are common to the rest of Europe: lack of technology clusters, limited exit potential – both on the IPO and the M&A side, reluctance to accept the terms and structures of the ‘California model’ for VC‘. However, he points out that some elements are more particular to Italy: ‘Some of the these elements are a corporate culture that can favour control over growth, and the unrealistic expectation that one can enjoy all the upside of an equity play and at the same time be fully protected under a social welfare system’.

As with other European countries, the role of the government is key in determining the development of the venture capital industry. Stefano Peroncini holds the view that the Italian government has some considerable ground to cover before it can claim to be supporting the industry as it should. ‘The pension funds market is still not liberalised, with no fiscal incentive for pension funds themselves to invest in VC funds, contrary to the situation in the US, where there is a VC fund explosion. IPR regulations are under development, and as such are still not encouraging universities and companies to invest in their own researchers’ activities. However, on the positive side, tax relief measures have recently been implemented to help funds who invest mainly in SMEs quoted on the stock market.’ This is key point, given that the Italian economy is supported by a backbone of SMEs, which are typically organised in industrial districts, and focus on their own business rather than considering financial investments. To compound the situation, there are relatively few large Italian corporates, and very few of the existing ones have a positive attitude to investing in financial products that are not directly related to their business.

Giacomo Marini sees the the Italian economy as a fertile ground for VC investments in principle, given that entrepreneurial spirit is strong and the ability to innovate in small enterprises is very good. However, one significant obstacle to progress is a certain cultural. With respect to the government’s role, he comments: ‘I don’t believe the Italian government has understood the elements that can help new enterprise creation. While on paper Italy has one of the most interesting industrial incentives programs in the world, in practice it does not favour new enterprise creation in highly competitive sectors. The incentives are subject to bureaucratic discretion, and are linked too much on hard assets guarantees. Fiscal incentives do not take into account the profile of losses and profits of a start-up and tend to kick in at the wrong time in the life of a company. It is all a matter of ‘important’ details, but that is an area where the Italian government may not excel.’

So with the government failing to live up to expectations, is the picture more positive on the future for the technologies being backed by the VCs themselves? Investors in technology in Italy will need to look beyond the traditional information technology sector, according to Marini, who highlights the fact that IT companies in Italy, and in Europe in general, tend to have a relatively local target market and do not scale to world-class companies. On the other hand, he points to the textile industry as a positive example of a market that has developed innovations at a very rapid pace, keeping competitors at bay and maintaining margins over the year. This suggests, says Marini, that technology innovation in Italy must be sought in areas outside of the core IT sector, with industrial automation, materials science, medical devices, biotechnology all being areas where the knowledge basis in Italy is both competitive and world-class.

For Stefano Peroncini, the future for technology is connected with the new and strong stimulus from the University and Research Ministry (MIUR) in promoting regional technology districts: nanotechnology in Veneto, ICT in Piedmont, new materials in Campania, biotech/ICT/new materials in Lombardy, and micro-electronics in Liguria. The objective of these districts is the development of technology transfer activities and the exploitation of the results of research activities made by university and research centres. These districts are financed by MIUR on the condition that they involve both institutional, regional and public institutions and investors, and that they are based on a specific and well-recognised know-how and technology. Further to this point, Elserino Piol believes that Italy has a plethora of high-tech initiatives that are just waiting for capital and managerial and entrepreneurial support.

The universities themselves will also play a pivotal role in generating venture capital dealflow, with a steady stream of innovative technologies stemming from Italy’s university research departments. Quantica is currently working on two such deals, and is to carry out its first due diligence on a new kind of polymer developed by a research centre of excellence, protected by international patents, that has industrial applications in different sectors and business ideas. The firm will also be backing a start-up that produces electronic equipment for optical inspection in industrial processes, security applications and industrial automation, exploiting all technologies related to monitoring and control. However, as Elserino Piol points out, although the technologies are abundant, it is incumbent upon the venture capitalist to explain which ideas can, and cannot, be viable. Furthermore, whilst the universities churn out important research and good scientists and researchers, they are not generally entrepreneurs, so the venture capital firm has to find them rather than vice versa. For Peroncini, business creation in the academic world has now become an international phenomenon: ‘It has achieved peaks of excellency in countries such as the United States, Israel, Great Britain and Holland, and has now reached considerable proportions in Italy, with a level of development that can no longer be ignored. Many organizations and institutions operating in the field of research and technology transfer have taken steps to set up spin-off businesses on the basis of specific programs intended to reinforce co-operation between research and companies in order to promote the technological innovation of the industrial fabric. For Italian venture capital, a phenomenon of this type generates a market that can not be neglected and which is not addressed at the moment in Italy, with the exception of Quantica SGR’.

So what does the future hold for the Italian venture market? Stefano Peroncini believes that the high number of SMEs facing generational change, coupled with the number of companies that are heavily in debt to banks and so at risk of insolvency and bankruptcy, means that he next five years at least will be dominated by buyout and turnaround funds. However, on the positive side, he feels that the industry will receive some decent support from new regional and national facilities under development, which are specifically designed to support seed capital and early-stage financing. Elserino Piol highlights the dearth of co-investors on an otherwise bright horizon, with Pino Ventures about to launch its new fund, Pino Innovation, which will focus on Italian high-tech businesses. He sees the next few years as critical, with VCs having to put the technology bubble behind them and concentrate instead on showing success.

Giacomo Marini thinks that the venture industry in Italy will follow the evolutionary pattern that the VC industry in continental Europe needs to follow to establish the strong roots that will ensure its long-term survival. In order to achieve this, it must continue to adapt the model by adopting the ‘California model’ of venture capital, including the preference share structure, stock options plans and a balanced governance structure. Marini believes that a further step would be for the industry to consider more openly the ‘Israeli model’, where a technology and product innovation can originate in Europe, but the financing and marketing structures are devised to be more US-centric, or at least until Europe can offer an much more compelling exit market. In particular, he underlines ‘hybrid funds that will do both early stage VC-type investing and later stage, mid-market, buyout private equity investments’ as a potentially appropriate model for Italy. ‘CIR Ventures itself intends to consolidate the leadership role that the De Benedetti Group has played in venture capital; first, with the successful Olivetti Venture Capital operation in the Eighties and early Nineties, then more recently, with the investments that CDB Web Tech has made in a significant portfolio of venture capital funds, including some leading European funds, such as Amadeus and Nexit.’ Marini succintly sums up the outlook for the industry: ‘Venture capital is a business that requires long-term vision and the ability to be extremely patient with long-term investments, whilst being ruthless with taking short-term losses, when appropriate. Over time, the success of Italian companies will be the engine that will continue to fuel the entrepreneurial spirit and the venture capital investment industry in Italy’.

Southern Europe…unquote†thanks Stefano Peroncini of Quantica, Elserino Piol of Pino Ventures and Giacomo Marini of CIR Ventures for their kind co-operation.

If you would like to contribute to an industry analysis article in Southern Europe…unquoteâ€, please contact the Editor on +44 1737 784214 or email her at hannah.malone@initiative-europe.com

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