Venture capital is following high-tech startups in their quest for global markets. In New York, Alan Patricof saw it coming years ago.

Apax deals all
Move Fast..
Failures breed caution

None of the early moves was as prescient as Patricof's 1977 setup of a partnership with two young European corporate financiers from Harvard Business School, Ronald Cohen and Maurice Tchénio. The trio dubbed their new firm Apax Partners (in classical Greek, apax means "unique") and pursued early-money opportunities on an international scale: Cohen from London, and Tchénio in Paris.

A risky move at a time when the marketplace for upstarts and funding was barely defined in the U.S., let alone overseas. "When I went to Europe, everyone thought I was crazy," Patricof laughs.
He can afford to laugh. While the new VC darlings are just starting to chase overseas opportunities, Apax now manages $5.6 billion in institutional money. It will add Milan and Stockholm this year to the nine offices it has abroad (as well as three in the U.S.). The company's American arm still operates as Patricof & Co. Ventures.

Consider some of the biggest recent international IPOs: British online auctioneer QXLwent public in October and is now worth $3.7 billion. The Spanish telco Jazztel floated in December and is currently valued at $6.2 billion. The British Internet company Autonomy was listed in July 1998; its market capitalization is now $7.5 billion, (see

Apax deals all.

Apax's $3 million (cost) stake in Autonomy is now worth $1.2 billion, 393 times its original value. The multiples for Apax's investment returns for Jazztel and QXL are 34 and 55, respectively.
Spectacular profits from winners like these have enabled Apax Partners' European funds to return 45% a year to its investors, net of all costs and fees, between 1990 and 1999. Total sum invested: $1.2 billion. "Not bad," smiles Allan Bufferd, treasurer of the Massachusetts Institute of Technology, which has $8 billion in combined endowment and pension assets;MIT has been an Apax fund investor since the late 1980s.

American venture capital outfits are taking notice of Apax's big European scores. VCfirms such as Menlo Park, Calif.-based Benchmark Capital and the Carlyle Group, based in Washington, D.C., have recently set up funds to invest in European high-tech companies. And buyout firms Kohlberg Kravis Roberts & Co. and Hicks, Muse, Tate & Furst have opened offices in London to look for deals.

"Venture capital is no longer a national or regional challenge," says cofounder Cohen. "U.S. firms that for decades said that Silicon Valley was the only place to be are now beginning to see that high-tech entrepreneurs exist in the remotest corners of the remotest countries."

Entrepreneurs are tapping global markets, too--for more than just funding. One international startup financed by Apax is I-Scraper.com, an Internet service for property developers run from Germany, Israel, Britain and the U.S. Another is ENBA, a European financial services Web site based in Ireland that is run by French and German managers and has just merged with a Spanish offline bank.

NetDoktor.com, a Danish Internet health portal, received offers from ten venture capital firms before choosing Apax. "We wanted an international company," says cofounder Rune Bech. "If we were to be successful with our European rollout, it was extremely important to have a venture capital company that was well connected in Europe and had the muscle to back us--not just the money but the credibility." NetDoktor is now operating in six European countries. The Scandinavian press has speculated that the upstart could be worth $400 million to $800 million on the public markets.

Move Fast..

Despite its complicated organizational structure, Apax can move rapidly when it has to--and with everybody getting into the VC business these days, moving quickly is vital. Investments of up to $25 million are decided by the investment committee in each country. The decision to invest $23 million in a management buyout of Dialog Semiconductor, an Anglo-German chipmaker, was made in two days by forerunners of Apax Europe, the same fund that took ten hours to decide to back NetDoktor.com. Patricof & Co. in the U.S., meanwhile, has made its own investments, like $6.5 million in consumer site Garden.com, $12 million in CML Technologies, a maker of emergency dispatch equipment, and $9 million in Rita Medical Systems, which makes laser needles used to remove cancerous tumors.

The looseness of Apax's corporate structure, however, makes it difficult to build a global brand. Apax Europe, with $2 billion in assets, is its largest fund; next is Patricof & Co.'s $1.4 billion assets under management in the U.S., where the name "Apax" is virtually unknown.

Apax is diversified not only geographically but also by industry. It divides its 130 investment professionals into teams. Each group brings together people recruited from the industry itself (the head of the telecom group, for example, is John McMonigall, a former management board member of British Telecommunications), as well as finance specialists and consultants.

"The thing Apax brought, which is absolutely vital, is that old-fashioned quantity known as wisdom," says Autonomy's founder, Mike R. Lynch. "They are probably the single most significant funding source in the U.K. for high-tech growth startups. They are in the same league as John Doerr and Ann Winblad in Silicon Valley."

But unlike some newer venture capitalists, Apax's founders know firsthand that it's a cyclical business. Apax struggled in the 1980s when there was virtually no public market in Europe for startups. This made it hard for Apax to exit from its investments.
Apax closed a fund in 1987 that invested in companies that later suffered in the 1991 recession in Britain. To hedge its bets, Apax now puts only 30% to 40% of a fund in early-stage finance and the rest in later stages, such as management buyouts.

Failures breed caution

Failures breed caution, of course. "They [Apax] are too conservative at times," says Martín Varsavsky, founder of Jazztel of Spain, backed by Apax in February 1999. "With us they were frequently surprised at our ambitions. They sometimes seem to prefer a small success to a big failure--forgetting that there is also the possibility of a big success." But Varsavsky says he'd use Apax again.

After opening Apax offices in Italy and Sweden, Cohen has his eye on Korea and India. "And after that, China," he says. If the right kind of markets can be established in these countries, then entrepreneurs can create businesses and jobs anywhere.
 

Source: Nigel Holloway , Forbes, April 17, 2000