Q&A: SEP's Paterson on European venture

Kenny Wastell: Have the recent high profile VC exits had the desired effect of boosting fundraising activity?

Calum Paterson: There have been some really exceptional exits and liquidity events for venture-backed companies over the last 12 months. There are also some great companies coming through. That's obviously a good thing for the industry and to the extent that it improves underlying fund performance it probably will have an impact on the fundraising climate.

It also helps to show that the industry can have a strong future. There have been many great European successes over the years, but few companies have achieved significant scale, which is one reason comparisons with the US have not been particularly favourable. That seems to be changing. Successful venture capital funds need a decent number of good companies but also one or two great ones. For the fundraising climate to be positive you need willing investors, but you also need venture firms with the right teams, strategies and track records.

KW: What are the main challenges currently faced by European VCs in terms of increasing LP confidence?

CP: The biggest challenge for the industry historically was in demonstrating the asset class is commercially viable. Venture capital firms need to be able to convince investors that there are companies out there that can create significant value and that they have the skills and expertise to identify these companies and unlock that value. The industry is changing and it needed to change.

In particular, there has been a shift away from companies and sectors with highly capital-intensive business models, towards those that are more capital-efficient, and a greater focus on companies with shorter holding periods from investment through to exit. In addition to favourable market conditions, the underlying investment strategy has to be right and a high level of discipline is required.

As well as SEP, a number of other venture capital firms in Europe are showing this. The latest Performance Management Survey published by the BVCA highlights that venture capital funds have exhibited strong underlying portfolio performance and very good one-year returns in 2013. Although the one-year venture return is a volatile measure of performance, it is the strongest outcome from the asset class using this measure since BVCA performance measurement began.

KW: When it comes to European human resources, how do the continent's entrepreneurs and coders currently relate to their US counterparts?

CP: The picture is improving in this regard too. The historic view was always that European entrepreneurs and developers were not of the same calibre as those in the US. It is self-evident that the pool of entrepreneurial talent there is greater, but things are changing in Europe, particularly in countries such as the UK and Germany. One of our companies, Skyscanner, has recruited more than 200 people in the last 12 months, which suggests there is a utilisable pool out there.

KW: What sort of impact are government-backed initiatives, such as the UK's Tech City, making on the industry?

CP: Government initiatives can help as there are challenges in the market, particularly at the early stage where risks are very high and the economics are not always hugely compelling. Ultimately the role of government should be to facilitate and to help ensure that the right fiscal, environmental and other factors – such as education and training – are in place for entrepreneurial activity to flourish. That helps venture capital succeed because it improves the quality and quantity of underlying opportunities. That is arguably much more important than direct intervention in the industry.

KW: What is your main wish for the coming year?

CP: We would like to see market conditions continue to improve. The last 15 years have been particularly volatile and we could all do with a period of relative stability with no banking crises, no tech bubbles bursting and no global economic downturns. As a venture capital investor you have to make the best of the situation regardless, but some of the external factors in recent times have been quite severe. We are confident in the outlook though and I am sure we will meet whatever challenges lie ahead.

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