Starting To Bloom: UK Venture Capital Invests in Internet

It used to be an oxymoron to mention the words United Kingdom, Internet and
venture capital in the same breath and keep a straight face. There simply
wasn’t any venture capital to mention. That’s changing as the Internet
becomes a global opportunity and the UK begins to marry capital and
creativity into the Internet.

Internet World UK’s finance day sessions on May 14 in London brought
together some great speakers who highlighted the emerging opportunity and
increasingly fertile soil to plant new ideas in the Internet space in the
United Kingdom. Among the soundbytes and summaries:

In the big picture more than 700 million pounds (UK Sterling) was invested
in high technology by venture capitalists in the UK last year. In 1998 we
estimate that number could surpass one billion pounds with perhaps 125
million pounds focused on Internet start ups and seed-stage firms. Many
Internet firms fit this bill because the Internet, especially in Europe, is
itself a startup industry of sorts.

Increased household adoption of the Internet drives the capital flow. For
example, the UK has about 7% of households online, which we think could
easily surpass 11% next year. Compare that to the U.S. market place which
is at about 30% this year and could be more than 35% in 1999.

There doesn’t seem to be any real dominating U.S. Internet effort here,
except perhaps AOL (NYSE:AOL), which many people know of but may or may not
be a subscriber to. All the hoopla over public companies in the U.S. is
noted in the UK but those firms don’t seem to be Main Street or High Street
names or services people in the UK drool over.

Translation from British to American: the opportunity is wide open and just
because a brand works in the States doesn’t mean it works in Europe.

The venture capital landscape in the UK looks for many of the same hot U.S.
areas with professional services, Web-based services, and some etail
starting to make inroads. The big twist is that UK firms looking for
funding must have a clear means of tapping into the more developed and
lucrative U.S. Internet user base, which we estimate is about 50 million.

In other words, for those UK firms currently engaged in commerce, the
market for their goods and services lies across the ocean with Americans
who want to buy British via the Web–expatriates who long for “real” tea or
some other item not easily found Stateside.

Web-based or Web-enabled back-office, accounting, and consulting are also
hot areas in the UK, although to varying degrees with the venture
community. Entertainment, community, and communications don’t seem to be
current investment windows here but may emerge in 1999 and 2000 as the
Internet usage grows and telecom rates drop.

Other tidbits worth noting: cultural differences and socio-economic factors
often get overlooked as U.S.-led efforts try to establish beach heads in
the UK and Europe with thinly clad U.S. versions of their services posing
as “national” or “regional” when in truth they are little more than that in
name only. The real legwork has yet to be done here by U.S. firms.

>From the simple choice of a word to the spelling of it, context and
presentation all must adhere to regional ways of relating to be successful
in our view. This is like trying to sell The Los Angeles Times as
the London Times by simply changing the mast head and a few
headlines. The content must be familiar to its audience or there is no real
communication, just Web links.

Several factors remain that impede a Silicon Valley venture capital-like
experience from erupting in the UK: High telecom costs that prevent rapid
use adoption; investor focus on reaching profit quickly rather than
investing in “brand” or potential; unfamiliarity by investors with
technology; size of the investment tends to be under 1 million pounds;
investors don’t often think globally; and the lack of an established exit
pipeline via public market or private sale as well-oiled as it is in the U.S.

There are inklings of possible greatness in the UK venture-meets-Internet
landscape. But more of a financial industry awareness of the opportunity
must occur.

At least the words United Kingdom, venture capital, and Internet are all
now being mentioned in the same breath. Real capital is being deployed,
something unheard of little more than a year ago. Next year we expect that
chatter will be louder.

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