Alta Partners is looking for a shake up in the Internet space.
Bryan Wood and his Alta Berkeley partners were early into European venture financing. Watch out, he warned, before Nasdaq's mid-March plunge, for a shakeout among Internet startups.

Bryan Wood, one of Europe's pioneering venture capitalists, is in the midst of launching his sixth Alta Berkeley Venture Partners fund. His target: 150 million euros ($145 million). Minimum investment from institutional investors: $5 million.

Yet more money to stoke dot-com frenzy? Don't bet on it.

"One of the things we think is going to happen in a very short period of time," says Wood, relaxing with his partner Tim Brown in the modestly appointed board room of Alta Berkeley's offices on London's Savile Row, "is that you're not going to have pure Internet companies as an investment category. The Internet isn't going to disappear. But it will just be ubiquitous across many business sectors. It will be applied everywhere. You'll have a medical services company, say, or a health care services company that has an interesting Internet strategy. But pure Internet companies won't be very interesting. The Internet will just be an integral part of many businesses' strategies."
Wood, 54, a Harvard Business School alumnus, started Alta Berkeley in 1982 when venture capital was still a rarity in Britain, let alone in continental Europe. At the time American venture backers were developing regional U.S. funds. Some American friends of his suggested that he extend that idea and create a pan-European fund. "We didn't, and still don't, think that all good business ideas emanate from America," says Wood.

For his first fund he raised $18 million--big money for European venture financing back then--and backed enough winners to rank its returns in the top quartile of funds launched that year (as compiled by Cambridge Associates). Among the hits were a Belgian biotech company called Christiaens International (sold in 1992 to Norway's Hafslund Nycomed) and a Norwegian television station that became part of Scandinavia Broadcasting System. Return on the original $2 million TV investment: more than $17 million in five years.

As European capital markets have developed, the returns have grown. In 1997 Alta Berkeley and two other funds put up $6.6 million for a majority stake in Cenes Pharmaceuticals, a health care firm started by Daniel Roach and Alan Goodman. Last year Cenes did a reverse takeover of a lagging health care company also backed by Alta Berkeley. Publicly traded since last December, the business is now valued in excess of $150 million. With around $6 million invested, Alta Berkeley holds a 10% stake worth $15 million. (Roach and Goodman still own 8.5% of the company.)

The U.K.'s Freepages Group Plc., an innovative telephone-listings company now known as Scoot and created by Robert Bonnier, did better still. On this deal Alta Berkeley's payoff was 13-to-1, in 22 months.

In reading about all the money being made backing startups these days, it's easy to forget that backing new businesses is like financing Hollywood films. The trick is to pick enough hits to compensate for the inevitable flops. Wood estimates that over the years, one in five of the ventures Alta Berkeley backs has failed to recoup its capital investment.
Example: in 1994 Alta Berkeley invested $560,000 in a German telecom company called Infocall. Deregulation was in the air; Infocall was going to take local calling business away from the then-state-owned Deutsche Telekom monopoly. But the politicians dithered. Infocall's management proved unable to adjust to delays in implementing deregulation. Alta Berkeley put in new management, to no avail. In 1996, the venture capitalists pulled the plug.

During the inevitable stormy days of any young venture's life, things can get tense between the entrepreneurs, whose stock in trade is optimism, and their backers, who have their investors' capital to consider.

For an example, listen to Mark Goble. He's the founder of the Cardiff, Wales-based Gyrus Group, which develops medical and diagnostic devices based on radio frequency technologies derived from the telecom industry. In 1990 Alta Berkeley and another VC firm, Charterhouse Venture Fund, backed Goble, a surgeon, with $1.7 million. The business got off to a slow start. By 1995 it needed more money. The original backers were reluctant to reinvest. But neither did they want to see their stakes diluted by bringing in another venture firm. "It was a no-win situation," Goble recalls.
Solution: the financiers and the entrepreneurs brought in a corporate investor, Johnson & Johnson, which was willing to put in new capital on less dilutive terms that the original backers could accept. That and a Johnson & Johnson licensing agreement tided Gyrus over until it was in shape to go public, in 1997. Last year Alta Berkeley and Charterhouse Venture Fund sold their combined 20% stake in a secondary offering that netted them $17.8 million.
Today Gyrus' market cap is $165 million; Mark Goble still owns 10%. "There was definitely tension [in the mid-1990s] between us and the VCs--there's always the danger they'll pull the plug too early," he says. "But at the end of the day Alta Berkeley has to be congratulated for seeing that we were worth financing. In 1990 it was hard to find venture capital, and we didn't have much in the way of business experience."

Between them, Wood and his five partners (they are David Needham, Hugh Smith, Guus Keder, Tim Brown and Barun Dutta) sift through roughly 2,000 venture financing proposals a year. Around 10% make it to full discussion by all the partners; fewer than 10% of those ideas get funded. Wood says that one key to maximizing the number of sound bets is Alta Berkeley's information-gathering network. With offices in London and Geneva, Alta Berkeley has long-standing affiliations with other venture funds in the U.S., Germany, Italy and Scandinavia that pool information, make introductions and act as sounding boards. A very successful investment in Flamel Technologies SA, a $91 million (current market cap) French biotech outfit, was made after Jean Deleage, a French venture capitalist who lives in San Francisco and runs Alta Partners, a venture capital firm, introduced Flamel's founder, Gérard Soula, to Alta Berkeley.

Alta Berkeley also runs so-called side-by-side funds, which invest alongside the main Alta Berkeley partnerships. The side-by-sides are offered to the entrepreneurs behind successful companies Alta Berkeley has backed in the past. They give the entrepreneurs a strong incentive to channel the best deals and other valuable information to Alta Berkeley. Of the 22 companies financed by the partners' last fund, 20 came to Alta Berkeley through its own network.

The Alta Berkeley partners collect an annual management fee of 2.5% of a fund's committed capital, plus 20% of profits generated. They have a somewhat ambivalent view of all the new money that's been pouring into venture financings of late.
On the plus side: More money means higher valuations for later-stage startup financings, good for early-stage investors like Alta Berkeley.
The negative: More money means more competition for the best projects. "With competition increasing," says Brown, "the key is to own your own deal flow."
 

What kinds of deals do the Alta Berkeley partners like now?

In the communications and information technology sector, Alta Berkeley has been funding a Finnish company called Iobox. It provides value-added services, such as e-mail for cellular phones, and has more than 350,000 subscribers. Likely IPO date: later this year.
In the media sector Alta Berkeley late last year backed Metropol, of Oslo, a new commercial TV venture started by two of the entrepreneurs Wood financed as part of the Scandinavia Broadcasting System deal in 1990.
In health care Alta Berkeley has high hopes for Morphochem AG, a Munich-based company that has developed a superfast screening system to develop new drug compounds.

Last January Wood was warning of imminent shakeups and consolidation among dot-com companies. Wood: "If you're a toy company selling on the Internet, and there are six other toy companies doing the same thing, and two are already public, and you can't go public yourself--how do you fund the business? That's where the consolidation starts."

If some venture funds and their investors take a beating, they'll have only themselves to blame. "Everybody and their uncle is getting into venture capital these days," warns Wood. "But it's a cyclical business. It has shaken out before in the U.S. and Europe. As Warren Buffett says, when the tide goes out, you find out who's been swimming without a swimming suit."
 

Source:  Lawrence Minard, Forbes, April 3, 2000