DN highlights venture revival

Downturns and the depressed pricing they usually catalyse are renowned as great times to buy businesses. The flip side is that it is a difficult time to achieve lucrative exits - a possible reason for the delay is the long-awaited swathe of fund launches expected last year and this.

One firm stands out for achieving six exits in 18 months with a total enterprise value of $1.4bn, most recently the stellar sale of data management business Endeca to Oracle for a reported $1.1bn at the end of last year. The firm also stands out for embracing stages and sectors oft-shunned by the bulk of Europe's deal-doers - namely early stage and digital media. The firm is DN Capital.

Six months prior to the Endeca sale, DN sold Datanomic to Oracle, acting as the only institutional investor in the deal. Despite being just the third exit for DN's Fund II, the deal allowed the VC to announce it had paid back the vast majority of invested capital in the vehicle, a 2008 vintage. In doing so, it established itself as a top quartile VC for investors, reporting a 30% gross IRR. There is more to come, with another 12-15 firms in the portfolio. Fund I, DN's debut fund from 2001, has already sold eight of its 14 companies and has fully realised the entire fund with a further six companies in the portfolio - including Shazam, widely considered a blockbuster business.

DN was founded as Digital Networks in 2000 by Harvard Business School classmates Nenad Marovac (pictured) and Steve Schlenker. A third co-founder, Francesco Di Valmarana, had worked at Advent International prior to setting up DN, like Marovac, though Di Valmarana went on to set up Unigestion's secondaries business and is now at fund of funds Pantheon. DN backs early-stage business and growth opportunities in the software, e-commerce and digital media sectors, currently from its €47.5m second fund. It has abandoned the later-stage venture focus of its debut €47.5m fund, with the exception of providing follow-on funding for its portfolio businesses as well as seeking other bootstrapped growth companies.

"We believe investing in later-stage is the most risky thing we can do as a small fund," says DN founder Marovac. "The companies are still not proven, they often have high burn rates and lots of VCs at the table, which is a recipe for disaster in our minds. We tried it in Fund I and those were our worst investments. We like to be the first institutional investor."

Despite half a dozen exits in the past 18 months, the firm has indeed seen some difficult times. "Our biggest mistake was putting more money into a few companies that were just not performing where we thought we could save things. This is the problem with later-stage VC - the cheques are large and it is much harder to walk away when the investments can leave a big hole in your fund. It is also really difficult to have influence when there are four or five VCs on the board."

An example of too many chefs spoiling the broth is mobile messaging business Empower Interactive. It was founded in 2000, and in 2002, DN led a £8m third round of funding for it. The timing seemed great: shortly thereafter, in 2003, it ranked 6th in the Sunday Times ARM Tech Track 100 of the UK's fastest-growing technology companies. In 2006 DN supported a sale of the business but the syndicate, including Argo Global, Cazenove Private Equity and IDG Ventures, decided instead to pursue an $18m round to fund expansion into the Americas. That round was led by Scottish Equity Partners, and saw DN invest at just a minimum. Less than a year later, Grant Thornton were called in as administrators to the business. With over £31m raised in total it was one of the best capitalised European VC-backed companies ever.

The Empower experience may have taught DN that the herd is often wrong, and underpinned DN's unorthodox approach. In addition to shunning later-stage opportunities - typically the favoured preserve of European VCs - DN is also one of the only European firms with a Silicon Valley office, putting it in the company of Index.

"A State-side presence means we can better help our companies expand into the US market. This is really important for us. Out of the six recent exits, five were to US buyers. Like it or not, the US market is still the main event in our sectors and we believe that a US presence is vital for market knowledge, business development and exit. We've helped at least half our portfolio companies in this way so far," Marovac explains, citing examples such as Shazam, Datanomic and Lagan. "The value increases exponentially if you can get traction in the US market," he adds, illustrating with Shazam, where the US is the clear dominant market for the firm. DN installed the company's first US employee out of its network, Kathy McMahon. She closed Verizon, AT&T and then Apple, which changed the game for the company. Adds Marovac: "Our US presence also enabled us to attract Kleiner Perkins as a co-investor. KP has added tremendous value via their network and experience and working with them has been a pleasure. They have a world-class reputation for a reason; European VCs can learn a lot from them."

While good news is rare these days, unquote" has noticed it is something of a golden age for venture: last year alone saw one of the largest ever exits for a venture-backed biotechnology company (Scottish Equity Partners' sale of BioVex); a pharma business sold to a trade buyer for a staggering €9.6bn (Nordic Capital's sale of Nycomed) and Advent Venture Partners achieve four strong exits - even as global stock markets languished.

In a nutshell, VC Darwinism is bearing fruit. Says Marovac: "When we founded DN in 2000, there were 300-400 VCs operating in Europe. Now there are 25-40 in Europe that are active in our space." And the pickings for the last few standing are good. "There are higher quality entrepreneurs now than we've ever had before. Successful ones such as Niklas Zennstrom, Stefan Glaenzer, Lukasz Gadowski and Brent Hoberman have gone back to mentor up-and-coming talent. Some of this knowledge sharing is institutionalised in the form of Passion Capital, Profounders and Team Europe as well as super entrepreneur networks such as SeedCamp, Silicon Roundabout, Spice and Silicon Allee in Berlin. But more crucially, it seems to be that the entrepreneurial spirit is at long last catching on in Europe. Says Marovac: "We have never seen it better!"

While VCs usually bring their wallets to the table and leave the innovation to the entrepreneurs, some investors just cannot help but get involved. Marovac approached Rahul Powar, creator of the iPhone app for music software business Shazam, with an idea for a mobile innovation company back in 2009. The two worked to build up their skills and a team and is now developing a product due to launch in Q1 2012 under the MPME brand. Duncan Lewis has been installed as Chairman - as a former senior advisory to Carlyle in the TMT space, he brings a wealth of knowledge to the table.

While that story showcased the importance of great ideas and rolodexes, sometimes it's about your family connections. Shazam was deemed a ‘punt' by some VCs. Founder Chris Barton, who also hails from La Jolla, California, demoed the product to Marovac in the back of a taxi without realising they grew up just streets away from each other. Once DN bought into the idea, the two realised that Barton's and Marovac's mothers are in fact best friends.

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