Joe Petillon, of Banner Ventures, answered questions I posed to him (via email) about venture capital and the Italian situation. Joe raises some very interesting points and puts it in the context of emerging trends in Italy. (As usual questions have been edited to delete those that were not answered.)
Your Experience
I understand that you have a venture fund? What is its name and what does it do?
Banner Ventures LLC is a newly formed venture capital firm that is currently scouting for early/mid-stage investment opportunities in Europe, USA and Asia. Our initial investors are from the U.S. We also refer high potential start-ups to angel groups and seed capital investors.
How did you get started in the venture capital and startup community?
All of the Banner Ventures members are either directly involved in supporting emerging growth companies, whether that be from a legal, business or portfolio management perspective. Some of us came from the investment and banking world, others as legal counsel to emerging growth companies and venture capitalists.
Like me, you are another “transplant” from the US to Milan. Can you give me a few of your impressions of this “dual life?”
I am actually a dual Italian-American citizen. As you become a dual citizen, you enter into a global reality: neither are you at home in the U.S., nor in Italy. As an American living in Italy, I can say that I have been given great respect and been welcomed into the community at all levels. Ho trovato l’america in italia….Most wish me the best of luck in losing my American accent, but given that I am American, most people forgive me!
Tell me about your best experience and you worst experience with your startups:
Best experience with start-ups has been overall the high level of education and intelligence amongst all the start-ups I have met. Smart people, great ideas. Italians in general have charisma and are strong verbal communicators thus they can sell themselves quite well. This mixture makes them extremely dynamic. As a result, Italians have an incredible ability to adapt to any situation which is a key quality for entrepreneurs.
The worst experience has been the when the entrepreneur lacks experience and humility to bring in the right talent. They can sell themselves well, but not necessarily a scalable business concept. Often leaders become leaders in Italy because they don’t delegate and they don’t empower. They usually are extremely talented people, but with extremely weak followers. This is a recipe for disaster if a company is looking to grow fast and become a global player.
What are you doing now in or with startups?
We are networking with the angel groups and other venture capitalists in Italy and Europe to present ourselves and seek quality deal flow. Given that we are fairly new, and looking for companies that have successfully proved their business model works, our deal flow comes we are helping high potential entrepreneurs get a simple business plan together to
Are you investing outside of Italy and how? Why?
We are also scouting for opportunity in the US and Asia. We believe that it’s not necessarily about the geography and where the company is headquartered, but instead it’s about the total addressable global market opportunity. As you look in other markets, you not only find companies to invest in, but more importantly, you find strategic alliances and existing market players which you might not have known about had to laser focused on one market only.
Where do you think it is all going?
In the right direction! Italy and Europe overall have a very dynamic and fast-growing start-up scene. The start-up ecosystem is destined to generate many more super-stars like ARM, Skype and Spotify in the near future. Two sectors that are positioned well for success are: (1) the new ICT/web 2.0 based businesses, and; (2) the high technology companies developed from university technology transfer programs. Regarding technology transfer, the European universities can no longer offer the same funding and services as they once did to the best and brightest researchers. Also the industries traditionally linked to university research (e.g. pharmaceutical, chemical companies) are now more challenged to leverage the universities’ collective brain power. As a result, many smart scientists are finding that a start-up is the best way to capitalize on a life’s worth of research and patents. The universities are also ramping up their spin-off technology transfer support which is a great recipe for generating sustainable competitive advantage for EU technology start-ups for years to come.
The Italian Startup Scene:
There is a lot of talk about the rise in activity in the Italian startup scene. Let me ask you some questions about it.
Do you think the Italian Startup Scene is genuine?
It’s small, but definitely growing fast. The numbers are all growing: there is a marked increase in the number of active investor groups (Italian and foreign), incubators, business parks (PSTs), and “Italian start-ups” (both in Italy and offshore). Thus the foundation is being set and the ecosystem is developing. I think it is fair to say we are witnessing the end of the beginning of the venture capital asset class. Unfortunately you cannot judge from the amount of new funding invested in start-ups, as this number is lagging behind other EU countries which developed this industry earlier.
Do you think that it will continue to grow and how long will it last?
I think the growth of the start-up scene in Italy will continue for the foreseeable future and will parallel the industry’s growth in Europe overall. It will become, as it has become in the US, a fundamental pillar of Europe’s GDP growth and sustained industrial competitiveness for decades to come.
What are the underlying strengths of what is going on?
I strongly believe in the EU’s Competitiveness and Innovation Framework Programme (CIP). Thanks to the public sector focus on developing key industries such as ICT and cleantech / sustainable energy, EU businesses in these areas are receiving global recognition and funding. However the current legislation is not enough for the smallest and most fragile start-ups. I truly hope that the recent proposed actions of the EU Action Plan to improve access to finance for all SMEs are approved and quickly rolled out.
What do you think are the structural issues that are limiting startups?
If a start-up wins a grant for €100k, they often have to first spend the money to then be reimbursed. Banks won’t lend to a company that has won a grant but doesn’t have assets. Hence the company cannot take advantage of the grant funding. Sounds absurd but I know many companies that fall into this category.
What can be done to improve the availability of venture capital for startups?
I strongly believe that private investors here need to take more risk like we see in the US, and I think that the shift is slowly but surely beginning to happen in Italy and Europe. This doesn’t mean that US investors are necessarily riskier investors, but the cultural difference is in how business opportunities and forecasts are analyzed. The pragmatic approach to start-up investment analysis (and company valuation) in the US is focused increasingly on the quality and communication within a management team, the product and the relevant global market versus a more traditional pure quantitative approach reconciling industry multiples and comparables to derive a valuation based on a multitude of valuation methodologies. This may be par for the course in the private equity world, but private equity analysts also have a great number of actual data points available to understand if a company actually did what they said they would do over the past years!
From an EU policy perspective, I believe that now more than ever the EU needs to act aggressively to help supply financing facilities to early stage companies. With the Eurozone financial crisis taking hold, local governments will find it increasingly difficult to fiscally stimulate their economies. I believe many of the VC firms and angel investors will begin to jump in and more aggressively invest if concrete actions are taken at the EU level to accompany private investment. The regional matching funds are a great start, but the EU will need to also help banks, angels and venture capitalists back riskier, early stage companies.
It’s great news that between 2008-2011, the European Investment Bank (EIB) provided almost €40 billion of lending to more than 200,000 “small companies”. However these are more mid-sized small companies that have successfully past the critical start-up phase. EU’s Seventh Framework Programme for Research (FP7) Risk-Sharing Finance Facility is expected to unlock a further €6 billion of loans in 2012 which would also help spur private investment.
What about the “support ecosystem?” What strengths and weaknesses do you see?
Strengths: foundations and organisations fostering entrepreneurship are beginning not only to emerge but to connect. For example, there are now great synergies between MindTheBridge Venture Camp, Intesa SanPaolo’s Start-Up Initiative and the Premio Gaetano Marzotto. Not to mention how all of the science and technology parks are beginning to not only speak to each other but also to organize around a common group (APSTI, Associazione nazionale parchi scientifici italiani).
Weaknesses: I would mention two cultural challenges to the support ecosystem in Italy:
(1) Risk-taking – Americans are pushed to try hard, and if you not succeed, you learn from failure. Italians do not share this characteristic, and it becomes difficult to justify a business failure in Italy to friends, family, and relatives.
(2) Employment Contracts – Successful businesspeople or public university researchers often find themselves in a well-protected role of responsibility with benefits and advantages as an employee of a larger institution. If these talented brains leave their current role and jump into the start-up world, they risk not being able to launch the start-up and also not being able to reenter the workforce. This is a big risk on all fronts and limits the brightest minds from starting the smartest new businesses.
Do you think that Italian startups should expand their markets into western, central and eastern Europe first or should they go to the US?
It just depends on where the market is and where the start-up can get strong market validation quicker.
What do you think are the main differences between the startup “scene” here and in the US?
I have already said a lot to help draw a distinction between the two start-up worlds, however I would add another key point: employee mobility. In the US, people move to a new state, city, country, to be close to the opportunity or ecosystem of their specific industry. In Italy people are much more static and move much less than in the US.
Italian Startups
Are there any characteristics that successful startups share?
They are all mostly formed by young, smart people with world-class technical expertise. They almost all lack enough business experience to be able to create a business plan / pitch deck to quickly and effectively sell their business.
How do Italian startups need to improve? What sort of training do they need?
As stated above they need coaching and help in creating a business plan / pitch deck to quickly and effectively sell their business. In order to attract investors and strategic partners, there has to be a compelling story along with a unique brand promise.
What are some areas (i.e., types of technology or services) that will be “hot” in the next 6 to 9 months?
Cloud computing and related infrastructure
EV public-private infrastructure build out
Next-generation analytics / SaaS-PaaS / data warehousing & self-service data marts
Clean tech / Renewable Energy
Nanotech / Polymertech
ICT / Web 2.01
High End / Luxury Goods for the Russian-Asian-UAE super-wealthy market
Biotech / Biologics
Do you think that most startups need more help with financials—like a CFO—or some other area?
Yes
Where do you think that Italian startups are strongest—e.g., technical, engineering, marketing, etc.?
Technical
What is it about Silicon Valley that makes startups want to go there? Do you think they are right?
Many people coming from different places but they all share the same goals/dreams. Extremely young, extremely bright, driven looking to make a mark, and have a good idea of how to get there. NYC is a natural hub as well because it also has much of the same characteristics.
Venture Capital:
I have heard a lot of people say that Italian venture capital funds are trying to invest too much money in companies that don’t need that much. In other words, they are following a model for VC investment that went out of date three or four years ago?
I actually think that the US VC trend is to invest more money in fewer deals and try to improve the success rate / portfolio IRR. I don’t think that is happening enough in Italy in the sense that if a company is not going well, the incumbent investors struggle to make second rounds. I have seen that the VC tries to bring in new partners to help de-risk their investment or micromanages the portfolio company to the point the company loses energy and focus. It’s like there was a great first round thesis but not a longer term strategic approach to managing a company through exit.
I have also heard that one of the constraints is that many of the funds are actually run by former private equity bankers and that they run their funds—and make investment decisions—like private equity bankers? Do you think this is so and do you think that this is a problem?
Yes I believe this is the case, although more exceptions are arising. I don’t know how much it is a problem in that if there were also enough aggressive angel investors who would invest beforehand, then the PE funds could fund successive rounds and actually help the companies towards exit or becoming cash positive.
What are the exit strategies?
Trade sale abroad. Only a few think about getting debt on the balance sheet and then trying to carry the business to the point it becomes cash positive.
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