Quotes of the Day

Paul Heise knows a thing or two about companies. After one of his employers — a text-retrieval Internet firm called Verity — went public, the Dutchman successfully invested his windfall in creating two new firms, and in all he has worked for seven others.

Make that eight. Heise and two partners, all veterans of the tech industry, see a new opportunity in bailing out the European venture capital firms that found their investment portfolios floundering when the Internet bubble burst. Venture capitalism needs their help. As dotcom companies wrote down their assets, went bankrupt or held fire sales, their VC backers found themselves with little to return to their own investors. As many as 80% of Europe's incubators and independent early-stage venture firms are expected to disappear by next year. Jean-Bernard Schmidt, founder of Paris' Sofinnova venture capital firm and chairman-elect of the European Venture Capital Association, points out that since the venture market in Europe is far less mature than in the U.S., the Continent has a far greater share of these young funds in trouble. Meanwhile, captive funds — those that are owned by a single, usually financial, institution — are being pressured by their investors to avoid putting money in high-risk ventures and to cut back their staffs.

Not surprisingly, given all this, VCs are finding it almost impossible to raise new money. And that means "a lot of new companies are having trouble getting funded," says Dick Rempt, who, with Heise co-founded SecondWind Venture Capital Recovery in Amsterdam. "Venture capital is really crucial to innovation, so it is in the interest not only of the venture capitalists and their investors but also of the tech sector as a whole that this be resolved."

Unlike vulture funds, which buy entire portfolios for a fraction of their worth, Heise, Rempt and partner Hans van Bennekom want to use their business acumen and contacts to save the companies in venture firms' portfolios. "The idea is to look at companies on a case-by-case basis and see if we can get them to perform," says Rempt. If a business cannot be turned around, SecondWind will use its contacts to try to find a buyer for the assets. SecondWind this month attracted its first customer — one of the largest Dutch captive funds, and one that preferred to remain anonymous. SecondWind charges a flat consulting fee to VC firms and an additional "results" fee if it is successful in orchestrating an exit, such as an initial public offering or trade sale.

While SecondWind is among the first to form a company and create a brand around the business of salvaging portfolios, venture capital firms in Europe are increasingly relying on outside business people to help manage their portfolios. That's a change from the Internet heyday, when many venture capital firms hired young people with consulting or banking backgrounds who knew little about technology and had neither operating experience nor profit responsibility. "Now they are realizing that they need people with industry backgrounds to sort out their problems," says Düsseldorf-based Georg Kulenkampff, 51, a former board member of the large German utility firm Veba, now called E.on. At the request of investors, Kulenkampff has served over the last two years on the boards of seven European companies, including several high-tech firms.

Wim Borgdorff, managing partner of fund investments at Amsterdam's NIB Capital Private Equity, which has j11.5 billion to invest in private equity partnerships, says bringing in outside business people to salvage portfolios is part of a general restructuring of the VC industry in Europe. "Venture capital needs to rethink its business model," Borgdorff says. Smaller VC firms are already testing new models. London's Ariadne Capital, for example, acts as a sales agent for its companies, taking a slice of the revenues as they are created, rather than waiting for an exit strategy — like an initial public offering — to get a return on investment. In addition to sourcing capital, Ariadne views its job as putting technology buyers together with sellers and finding experienced executives and board members for companies. While there is a short-term need for firms like SecondWind or Ariadne Capital, Borgdorff says the companies they aim to help will have to prove to the markets that they can sort themselves out.

As will more traditional venture capitalists. "The willingness of investors to back venture capital funds and firms going forward in Europe has decreased quite dramatically," Borgdorff says. When the dust from the shakeout settles, some may get a second wind — but most will probably not get a second chance.

• JENNIFER L. SCHENKER/Amsterdam
• Dutch VC's aid struggling techs