Trimming down: Northzone reflects new reality for venture funds

Northzone Ventures has announced that is has secured €90m for its newly launched sixth fund. While this is good news for European venture in so much as the fund made it to market, it is also reflective of the more austere times: the vehicles target is €25m less than its 2006 predecessor at €150m.

Northzone general partner Tellef Thorleifsson is honest in his assessment of the offering: "We're facing a challenging fundraising market these days, and we set our target accordingly."

And it is not just Northzone that has caught the downsizing bug. "Many venture managers on both sides of the Atlantic are targeting slightly smaller fund sizes compared with predecessor funds in the current climate," comments Angela Willetts, investment manager fund-of-funds Capital Dynamics.

Venture funds, like their private equity cousins, have inevitably struggled over the past 18 months due to an LP base that is suffering from denominator effects and over-commitment strategies, but this does not tell the full tale. Venture has, Thorleifsson concedes, been "out of favour" as an asset class for some time.

Willetts concurs: "European venture has historically struggled to produce attractive returns on a consistent basis. Although there have been a number of successful exits on an individual company basis, this has generally not been replicated across funds or managers."

That said, Capital Dynamics sees attractive opportunities in European venture, and continues to invest in approximately ten European venture managers. Willetts highlights the presence in Europe of technology and innovation hotspots, the growing number of successful European serial entrepreneurs, and the more extensive global networks being built by European managers.

In addition, lower entry valuations and better capital efficiency compared with the US are factors that provide platforms for venture funds to build and exit global technology companies. The future could be bright.

Nonetheless, venture allocations are still made on what Willetts describes as "a highly selective basis." Regardless of economic cycle, venture remains high risk. In what seems like an effort to reduce this perceived risk, many venture funds have ‘moved up the value-chain' and are increasingly targeting so-called "later early-stage" expansion deals.

Northzone has traditionally included a combination of the entire spectrum in their portfolios, and does not have any plans of abandoning the early-stage space. Does that make them the saving grace for entrepreneurs? "Maybe," Thorleifsson replies while emphasising that one of the key questions within the industry is who will fund growth companies? So far, Northzone is staying committed.

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