Even for Skype Co-Founder, Raising a Post-Brexit Fund is Hard

(Bloomberg) -- European startups have no bigger advocate than Niklas Zennstrom. In the decade-plus since he sold Skype to eBay Inc. for $2.6 billion he’s espoused the region’s potential as a counterpoint to Silicon Valley and poured parts of his fortune into promising companies. But as he tried to convince investors last year to join his latest venture capital fund to back European entrepreneurs, Zennstrom found he still has to do some convincing.

The U.K.’s vote to exit the European Union, along with lingering questions about Europe’s ability to generate Silicon Valley-like financial returns, complicated Zennstrom’s fundraising efforts for a new $765 million fund announced today by his London-based venture capital firm Atomico.

“It made it harder, for sure,” Zennstrom said in an interview. Investors from outside Europe were particularly spooked by Brexit, he said. “It was a validation that Europe is not an area they wanted to particularly invest in.”

The global fundraising effort took more than a year, but Zennstrom’s team was able to overcome the doubts to raise what is one of Europe’s largest-ever venture capital funds. He called it a vote of confidence for the region’s startups. Atomico, which last raised a $476 million fund in 2013, will use the proceeds of its new fund to invest in startups raising their first significant round of money. It will then provide follow-up funds if the company shows promise.

Valley Envy

A challenge for Europe-centric venture capital firms is most of world’s most-valuable technology startups are located in the U.S. or Asia. Of the 20 most valuable startups ranked by the research firm CB Insights, only Spotify Ltd. is ranked in the top 20. European funds also aren’t as large as in the U.S., meaning many promising companies in the region look stateside when they need a larger influx of investment.

European venture capital investment fell to 11.2 billion euros ($11.9 billion) over 2016, down from 15.2 billion euros in 2015. The U.K. accounted for 4 billion euros worth of deals, down 32 percent year-on-year, according to analysis from Pitchbook Data Inc.

Atomico’s most successful investments to date include the Finish game-company Supercell Oy. The venture firm’s stake was acquired by SoftBank Group Corp in 2015, according to PitchBook. The company also backed Climate Corp., a data-science company bought by Monsanto Co., Last.fm, the online-radio service bought by CBS Corp., and 6Wunderkinder, the task-management app bought by Microsoft Corp. It’s also an investor in Rovio Entertainment Oy, the maker of “Angry Birds.” 

Some of Atomico’s investments haven’t panned out, including unsuccessful forays in the U.S. Jawbone, the beleaguered wearable company, raised more than $500 million from investors including Atomico. Fab, an e-commerce company that raised $325 million, sold last year for a reported amount of $15 million.

Zennstrom wouldn’t disclose the firm’s returns, but said “we’ve had very good performance.”

Skype Foundations

The sale of Skype to eBay in 2005 was a watershed moment for the region’s tech sector. After the sale, Zennstrom turned to funding other promising European startups, helping foster a venture capital community that had largely been absent in the region. At Atomico, he’s brought in former executives from Uber Technologies Inc., Google, Facebook Inc., Supercell and elsewhere to help scout and build companies to fund.

With the latest fund, Zennstrom said his biggest challenge was convincing investors to join who hadn’t previously put money into venture capital. While a common investment in the U.S. for endowments, pension funds and wealthy families, it’s less established in Europe. Zennstrom said that’s beginning to change as technology’s impact on the global economy becomes more pronounced, affecting sectors from transportation, to finance, to oil and gas.

Atomico says a third of the 60 investors in its latest fund had never previously invested in European venture capital. Maurizio Arrigo, head of private equity at the Swiss asset management firm Pictet that invested $40 million in Atomico, said Europe’s tech sector is mature enough to justify the risk of investing in venture capital. "The ecosystem has matured a lot and has produced a number of successes," Arrigo said. "It’s higher risk and higher return, but with a bumpy ride."

To contact the reporter on this story: Adam Satariano in London at asatariano1@bloomberg.net.

To contact the editors responsible for this story: Nate Lanxon at nlanxon@bloomberg.net, Giles Turner