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6 Special Edition June 2007 / 5.00 Euro

Das Magazin für Investoren und Entrepreneure

VentureCapitalMagazin

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inPrivate Equity • Buyouts • M&A

FranceFrancePrivate Equity Market sails ahead

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SPECIAL EDITION

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Fund Closings – Top Buyout Deals – Tax & Legal Environment for PrivateEquity – Investment Strategies – Web 2.0 Investments – Interviews –Convergence of Telecommunication, Internet and TV – Case Study

Special Edition “France – Private Equity Market sails ahead“ 3

Editorial

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Editorial

Leading the Way

ContentsEditorial 3Imprint 3

Overview

Convergence of interests 4Private equity has made its way inFrance – and will no longer stay hiddenawayEline Cremieux, Avida Advisers

“We will see a huge and increasing 6demand for bandwidth”Interview with Gerd Eickers, Co-Founder of QSC AG, and AntoineGarrigues, Managing Partner of Iris Capital

The French have caught up 8Tax and legal environments for private equityJavier Echarri, EVCA

Investment

“French and German founders are 10not that different from each other”Interview with Jude S. Ngu'Ewodo, General Partner, BayTech Venture Capital

Web 2.0 investments on the rise 12France greatest attraction in Europe

Case Study

Well ahead of France Telecom 14Erenis: strengthening Neuf Cegetel’s position in the fibre optics market

Supplement of VentureCapitalMagazin, issue 6/2007:“France – Private Equity Mar-ket sails ahead“

Publisher: GoingPublic Media AG,Bahnhofstr. 26, 82515 WolfratshausenTel.: 08171-419650, Fax: 08171-419656e-Mail: [email protected]: www.vc-magazin.de, www.goingpublic.de, www.unternehmeredition.de

Editors: Andreas Uhde (Editor-in-Chief),Torsten Paßmann, Mathias Renz, SilkeSchneider

Contributers: Ananyo Battacharya, ElineCremieux, Javier Echarri, Marc Kley

Design: Silke Schneider

Printing: Joh. Walch GmbH & Co. KG,Augsburg

VentureCapitalMagazin

France is home to a population ofmore than 64 million people(incl. overseas departments) andproduces a gross domestic pro-duct of almost 2 billion euro,which makes it the seventh lar-gest economy in the world.Counting about 75 million visi-tors per year it is by far the mostpopular international touristdestination on this planet. Land-marks of global recognition include Western Europe’s highestmountain, Mont Blanc, as well asthe Eiffel Tower. The unitarysemi-presidential republic is alsothe domicile of one of the world’slargest oil conglomerates, Parisbased Total S.A.

In terms of private equity activityin Continental Europe, the coun-try ranks second to none: In2005, French private equity firmsinvested more than 10 billioneuro, almost triple as much astheir German counterparts. Evenpublic investors can relativelyeasy access Leveraged Buyoutsas an asset class, since WendelInvestissement and Eurazeo, twoof the three biggest publiclylisted private equity firms world-wide, are French companies. Inone of its latest studies (seearticle on pages 8-9) the Euro-pean Private Equity & VentureCapital Association (EVCA) con-

cluded that “France is one of thefew European countries thathave made remarkable improve-ments to their tax and legal envi-ronment for private equity andventure capital over the past fouryears.” In this framework, con-fidence seems to be justified,that the buyout market will con-tinue to soar.

However, as holds true for manyEuropean countries, the venturecapital segment offers evenfurther room for growth. Newtechnologies are on the rise, con-vergence between the internet,telephony and TV finally hap-pens and corporate buyerssearch desperately for ways tospend their money. Many of themneed to look no further thanFrance.

[email protected]

Andreas Uhde, Editor-in-Chief

www.vc-magazin.deSpecial Edition “France – Private Equity Market sails ahead“4

It may be a French paradox that France has managed tobecome the second largest private equity market in Europeeven though critics of buyout investors have increasinglyspread bad publicity among trade unions, the press andpolitical parties. The French private equity organization,AFIC, has had to face growing discontent over LeveragedBuyouts (LBOs) and their negative effects on employ-ment in some companies which were believed to be pro-fitable. As a result, it had to accompany its announce-ment of two very successful years in a row with measuresto increase transparency within the profession and pro-posals for employees’ participation in the operations. Inthis context, we review here the strong growth of the mar-ket in 2006, the most noteworthy deals and closings, aswell as our reasons for believing that this level of activitycan be sustained over the next years.

Domination of the LBOs – good perspectives forexpansion capitalIn 2006, French private equity firms invested 10.2 bn.euro in 1,376 companies, 26% more than in 2005 (8.0 bn.euro). Thus, France was the most active private equitymarket in continental Europe in terms of the volumeand value of deals in 2006. With 8.0 bn. euro invested,transmission and LBO deals represented the largestshare of the market and, together with turnaround deals,experienced the strongest growth in terms of valuesamong the different segments of activity. Mega dealslike Pages Jaunes, TDF, Europcar or Lafarge have re-ceived a great deal of attention over the last 18months.

Medium-sized businesses represented 78% of thetargets in 2006 but not the biggest share of the inve-sted volumes. Nevertheless, that should increase inthe next few years as the French government has re-cently launched a new programme, called “France In-vestissement”, to promote investments in innovativeand growing medium-sized businesses. The FrenchCaisse des depôts et consignations will team up withprivate investors (banks and buyout funds) to invest atotal of 3.0 bn. euro over the next six years. We conse-quently expect a growth of expansion capital in thecoming years, even if the number of LBO investmentsdoes not fall during this period.

Enough resources for existing funds and newcomersAnother interesting trend is the increasing attractive-ness of foreign deals for French funds. French compa-nies still represented 84% of the targets in 2006 (com-pared to 87% in 2005) but more and more funds areprepared to source deals in other European countriesand even overseas, as evidenced by Wendel buyingthe US company Deutsch in June 2006.

Conversely, some newcomers, including foreignones, entered the French market in 2006, adding somepressure on an already very competitive market. TheNordic firm Industri Kapital opened an office in Parislast year, and Bernard Arnault, LVMH’s CEO, and hisBelgian partner, Albert Frère, endowed their new in-vestment company, Financière Agache Private Equitywith 1.0 bn. euro. To secure their first 281 mn. euro dealon the travel agency Go Voyage, they beat competitorslike CDC Private Equity, Duke Capital, or the Britishcompany First Choice (Marmara). On a lower scale,

Convergence of interests

Private equity has made its way in France – and will no longer stayhidden away

Selection of top buyout deals over the last 18 monthsCompany Value Year Investors

mn. euro

Pages Jaunes Group 5,700 2006 KKR, Goldman Sachs

TDF 5,000 2006 CDC, Texas Pacific Group,

Axa, Charterhouse

Europcar Intern. 3,300 2006 Eurazeo

Taittinger 2,900 2005 Starwood Capital

Lafarge Roofing 2,400 2007 PAI Partners

Materis Peintures 2,000 2006 Wendel Investment

(secondary)

Rexel 1,900 2005 Clayton, Dubilier & Rice,

Eurazeo, Merrill Lynch

Orangina 1,850 2005 Blackstone, Lion Capital

Elior SA 1,752 2006 Charterhouse Capital,

Chequers

Cegelec (secondary) 1,100 2006 LBO France

FCI connectors 1,100 2005 Bain Capital

(Areva)

Amec Spie 1,040 2006 PAI PartnersSource : Avida Advisers

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www.vc-magazin.de Special Edition “France – Private Equity Market sails ahead“ 5

Weinberg Capital Partners, a new team, has raised420 mn. euro for its first fund.

For existing funds, 2006 was also a fruitful year,even if the amount raised (10.3 bn. euro) was slightlylower than in 2005 (12.0 bn. euro) – an exceptional fundraising year in many European countries. Buyoutfunds like Chequers Capital XV, 21 Développement IIIor White Knight VII (LBO France) have successfullyclosed in 2006. But venture funds have had tougher times needing often more than 18 months to raise theirfunds. Auriga Partners can be seen as an exception asit raised 150 mn. euro for its third fund in just a fewmonths. We expect fundraising activities to stabilise atthis high level in 2007, with about 20 funds being activeduring the year.

Good performances – supportive limited partnersThe good performance of French private equity is thebest argument for capital-seeking funds to acquire investors. According to EVCA, the net IRR since incep-tion at year end 2005 for French funds is above the netIRR of Europe (see table below). Yet this success ismainly due to buyout funds, as French venture fundssuffered slightly worse results than their Europeancounterparts. But performance varies enormously inthis sector and investors know that they have no rea-son to avoid French venture, provided they pick thebest funds on the market.

These results are certainly good news for the FrenchInsurers, who have committed themselves in 2004 toincrease the share of private equity investments to 2%of their total assets before the end of 2007. On top ofthat, foreign limited partners are all the more confi-dent that the French fund structure FCPR is usually sa-tisfactory for their investments. If not, the generalpartners are usually able and willing to offer alternativesolutions.

Sustainability of the model in question The burning question is whether the funds will be ableto sustain this level of activity and performance in ahighly competitive market. Most of the market playersagree that the prices can not rise further and shouldnow consolidate at the current level. But they also ex-pect there to be enough deal opportunities to satisfytheir appetite, provided that the teams can adapt toevolving market conditions. Sourcing deals will requiremore resources than before. Following the British mo-del, the market will become highly specialised. The teams will have to enhance their profiles in order towin the confidence of increasingly experienced inves-tors. But the cake that they want to share is still a bigone, as there are 31,000 corporate entities in Francewith a turnover of over 10 mn. euro. This ranks Francethird in Europe in terms of the size of potential invest-ment opportunities in the buyout market.

Moreover, the AFIC’s proposal that employeesshould invest alongside the management and the buy-ers through a special fund (FCPE) should increase thepublic understanding and acceptance of private equi-ty in France and reduce the resistance from tradeunions, presently embodied by the “Collectif LBO”.And with Sarkozy as the newly-elected president, it isvery unlikely that the results of the upcoming legislativeelections will completely overthrow the position of public authorities regarding private equity. The indus-try can count on a bright future.

The author

Eline Cremieux is an In-vestment Adviser withAvida Advisers GmbH,part of the Avida Group.Avida Group is an inde-pendent private equitymanagement group head-quartered in Düsseldorf,Germany.

[email protected]

Selection of fund closings over the last 18 monthsFund (closing year) Volume ( mn. euro) Segment

Apax France VII (2006) > 700 Buyout

Euromezzanine V (2006) 660 Mezzanine

Chequers Capital XV (2006) 600 Buyout

LBO France White Knight VII (2006) 470 Buyout

Weinberg Capital Partners I (2006) 420 Buyout

21 Développement III (2006) 330 Buyout

L Capital 2 FCPR (2005) 325 Buyout

AtriA Private Equity III (2006) 300 Buyout

Butler France Private Equity III (2005) 320 Buyout

ABN Amro Fund II (2005) 250 Buyout

4D Global Energy II (2007) 180 Energy

Auriga Ventures III (2006) 150 Venture

Perfectis II (2005) 122 Buyout

Ciclad 4 (2005) 120 Growth, BuyoutSource : Avida Advisers

French PE performance is higher than European Average Net IRR since inception at 31/12/2005 Europe France

Venture 6,3 % 5,3 %

Buyout 13,7 % 15,5%

All 10,3 % 10,7 %Source : EVCA –TVE/AFIC –Ernst & Young

Overview

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Special Edition “France – Private Equity Market sails ahead“6

Business plans featuring buzzwords like “triple play” or“convergence” have been in vogue before. But now, withlots of money lost after the burst of the hi-tech bubble, theconvergence between internet, telephony and televisionis finally happening. Gerd Eickers, founder of the nation-wide operating German telecom provider QSC, and An-toine Garrigues, Managing Partner of the French venturecapital firm Iris Capital, share their views on the future ofbroadband in Europe.

VC-Magazin: Iris Capital has led a 26.5 mn. euro finan-cing round for Erenis, an innovative provider of fibreto the home-technologies in France. Deutsche Tele-kom plans to invest 4 bn. euro in new fibre optic net-works. Both are trying to take broadband to the nextlevel. What advantages do fibre optic networks haveover conventional DSL-technology?Garrigues: The currently established ADSL2+ techno-logy offers a theoretical speed of 20 MBits per second,so at first glance there should be no application requi-rement for higher broadband. But the practical band-width depends on the distance to the central officeand other factors, which results in an actual speed ofmaybe only 4 Mbits per second. The main drivers forhigher bandwidth are video applications via the inter-net and the evolvement of high definition TV. High defi-nition TV with MPEG4 compression needs at least 8MBit per channel, or better 10 to 12 MBits, which can-not be conveyed through an ADSL2+ connection. Faster connections will also be required for new andsimultaneous uses in the household like the connec-tion of digital devices, TV, PC, phone, cameras, PDAs,video recorders etc. A third area is personal publica-tions like videos or music as well as the storage of largefiles via platforms, which require a lot of uploading capacity and can be done much more convenientlythrough a two-way broadband connection.Eickers: First, I would like to add that conventionalDSL also uses a fibre optic network. The difference inspeeds relates to the distance between the end userand the point where the fibre optic network ends. DSLnetworks today are usually based on fibre up to a cen-

tral office, which is somewhere between 200 m and 2 km from the end user. An improved technologywould be fibre up to the curb, which is closer to theend user, while the fastest connection runs fibre upthe building. This is what Iris Capital is doing with Erenis. The closer the fibre cable comes to the enduser – before switching to copper – the higher thebandwidth. Looking at the future: I fully agree with Antoine that we will see a huge and increasing demandfor bandwidth.

VC-Magazin: What went wrong around the year 2000and what are the lessons learnt?Eickers: At the highpoint of the so-called new econo-my, the network we were talking about was a backbonenetwork, which means it was connecting different ci-ties via fibre optic. This is something that could be donequite quickly, because it is easier than to extend thenetwork to the end user. Many companies started toinvest in these backbone networks simultaneouslyand build huge overcapacities within as little as a year.The second mistake at that time was the belief that fi-nancing was unlimited. Everybody tried to be fasterthan everybody else and did not sufficiently consider financing restrictions. The main lesson learnt shouldbe: spend your money carefully!

“We will see a huge and increasingdemand for bandwidth”

Interview with Gerd Eickers, Co-Founder of QSC AG, and Antoine Garrigues, Managing Partner of Iris Capital

www.vc-magazin.de

Vis-à-vis

Gerd Eickers Antoine Garrigues

Overview


Garrigues: Some people definitely overlooked the is-sue of the last mile, so this is where the bottleneckwas. And Gerd is right: In order to be successful youneed to spend your money very carefully and achieveat least some returns before you keep on spending ca-pital.

VC-Magazin: Looking at France and Germany as thelargest single markets in continental Europe. Howwould you compare them in terms of “broadbandawareness”?Garrigues: The most advanced broadband economiesin Europe today are Norway, Sweden, Denmark, Italyand the Netherlands. All other European countries arelagging behind. I do not think there are any differencesin this regard between France and Germany. However,the competitive landscape is different because thecable operators are more powerful in Germany.Eickers: Broadband awareness is the same in bothcountries. The difference is the TV landscape: in Ger-many we do have numerous free TV channels as wellas a huge coverage of cable TV while in France IPTV ismuch more popular. This results in broadband usagein France being very closely linked to IPTV. In GermanyIPTV has not yet taken off.

VC-Magazin: Large telecom operators start to compe-te with TV stations by offering content while cable net-work providers are selling broadband access via theircable network. Who is going to win this race inEurope?Eickers: For a very long time different types of opera-tors will be working on different infrastructures. In thelong run, I would expect maintenance costs to be thelowest on fibre optic networks, which could be a hintthat fibre optics will eventually become the dominanttechnology.Garrigues: At some point in time we will not really seea difference any more between telecoms and cableoperators. Both are implementing very high band-width broadband networks so, at the end of the day,their service will be similar. The fibre optic network is,however, more powerful in the sense that it enablesoperators to provide a larger range of services than acable operator.

VC-Magazin: Mobile operators are offering more band-width as well, which already makes things like mobileTV possible. Could mobile technologies substitute for fi-xed cable connections in the near future?

Garrigues: TV via mobile phones today is not a verypleasant experience. Over time the evolution of thetechnology will allow for very high bandwidth overmobile but this will not happen in the next few years.My vision is that a substitution will not occur in theforeseeable future except for solutions, which reallyrequire mobility.Eickers: By the time mobile technology will be ready,most households in densely populated areas will al-ready be connected to fibre optic networks. Mobiletechnology will then be used to interconnect all de-vices in an apartment or building while fibre optics areused as the outgoing connection…Garrigues: …the only exception might be in ruralareas, where wireless technology could cost effective-ly provide the broadband connection. But this marketwill be very limited.

VC-Magazin: Which applications that require broad-band technologies (both fixed and mobile) do havethe potential to become a blockbuster like “SMS”?Eickers: I think it will be peer-to-peer communication,which is also labelled Web 2.0. People sharing daily in-formation: text, photos, videos and, in the future, may-be video in high definition. This will use a hugeamount of bandwidth and fill up the network veryquickly.Garrigues: Today it is music sharing and download-ing, tomorrow it will be movie-sharing and videodownloading on demand.

VC-Magazin: Thank you for sharing your views on thefuture of broadband!

[email protected]

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The dialogue partners

Gerd Eickers is founder of QSC AG, Cologne. From2001 until the end of 2003, Eickers served the com-pany as Chief Operating Officer. Since May 2004,Eickers has been a member of the company’s super-visory board. Antoine Garrigues is Managing Part-ner of Iris Capital, a pan-European venture capitalfirm, specialising in media, communications andIT, with over 400 mn. euro under management. Hejoined the firm in 1993 and is responsible for itsinvestments in the communications and IT indus-tries.

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Although private equity took longer to develop in Francethan in the US or UK, it is now clear that the French havecaught up. According to the study “Benchmarking Euro-pean Tax and Legal Environments” – December 2006conducted by the EVCA, France ranks second only to Ire-land – and before the UK. The study shows that Francehas improved its overall environment for investors,investee companies and fund managers once again, justas it did in the 2004 study. At the same time, other big European countries such as Germany still lag behind onimproving their environment for private equity. For thethird time, Germany remains at the bottom of the ran-king, due largely to its burden of high taxes. Still lackingin Germany are tax breaks for starting or building younghi-tech companies or as a way to promote research anddevelopment.

Tax benefits for R&D spendingThe EVCA study is a comparative guide for govern-ments to use in improving their individual privateequity environments and to fight the fragmentation of

the European markets. EVCA supports the EuropeanCommission’s decision not to regulate the industry,but to highlight best practices. In this regard, France iswell placed.

What is the explanation for France’s excellent perfor-mance? And what must the countries bringing up therear do in order to perform better in the future? Oneaspect that is becoming increasingly important due tothe recent evolution of market conditions and moreaggressive policies, at the European as well as nationallevels, is research and development among investeecompanies. This is an area in which France has takenthe lead, especially with the introduction in 2004 of aspecific scheme for supporting the creation andgrowth of innovative high potential start-ups. Smalland medium-sized enterprises fulfilling certain requi-rements in research & development (R&D) spendingbenefit from lower company tax rates for eight years.This kind of tax model does not exist in Germany – alt-hough the structure of public promotion of young Ger-man companies is exemplary: Government aid for ven-ture capital was adapted early on, the most notewor-thy initiatives being the ERP/EIF-Dachfonds, ERP-Start-fonds and the High-Tech Gründerfonds. But followinga round of venture capital investment, it is still hardfor these companies to attract talent or to increasetheir R&D, because the tax incentives do not exist.

Competitive fund structuresSecond observation: in terms of fund structures,France offers a number of investment vehicles – in-cluding the FCPR (Fonds Communs de Placement àRisque), FCPI (Fonds Communs de Placement dans l’Innovation) that attract capital from domestic inves-tors and non-domestic investors alike. Comparatively,most Eastern European countries and some significantWestern European economies cannot provide favoura-ble domestic fund structures: In Austria for examplethe common fund structure “Mittelstands-finanzierungsgesellschaft” (MFAG) is not tax transpa-rent for domestic or non-domestic investors. In Italy,the situation of the fund structure “Fondo Chiuso” is

The French have caught up

Tax and legal environments for private equity

www.vc-magazin.de

How to attain a private equity friendly environment

In order to achieve optimal conditions for a natio-nal fund structure, the following areas should beaddressed:• tax transparency for domestic and non-domestic

investors• the ability for international investors to avoid

permanent establishment (removing risk of dou-ble taxation)

• avoiding VAT on management fees and carried in-terest

• avoiding undue restrictions on the type of invest-ments carried out by the fund (this is essential foran optimal allocation of the fund and a better re-turn)

Source: Benchmarking European Tax and Legal Environments, December 2006

Overview

the same. In Germany, non-domestic investors in parti-cular are scared off by the ambiguous tax treatment ofGerman private equity funds. Hence, many Germanprivate equity companies have now switched to foreignforms of organisation regarding the structure of theirfunds.

High income tax – but improvements expected There is one area in which France falls short. At 48%,the maximum level of personal income tax is consider-ably above the European average of 42% and compa-res to 40% in the UK, 43% in Italy and 44% in Germany.Furthermore, in France capital gains are taxed at 27%,including social charges, compared with a Europeanaverage of 15%. This is a problem in terms of attractingfund managers or corporate talent. Also, Germany pro-vides quite an unfavourable environment for retainingtalent. Capital gains realised by private individuals onholdings of more than 1% are taxed at half the incometax rate (i. e. 25%). Holdings of less than 1% and heldby private individuals for more than one year are taxexempt. However, recent fiscal developments in Franceare encouraging and could serve as an example forcountries that are behind like Germany, Italy or

Austria. Of particular note is that stock options of ma-nagers and employees of the investee company are taxed only when the underlying shares are sold andcarried interest is taxed as a capital gain. We can ex-pect to see other improvements in the area of capital-gains taxation.

The author

Javier Echarri is Secre-tary General of the Euro-pean Private Equity &Venture Capital Associa-tion (EVCA). EVCA repre-sents the European pri-vate equity sector andaims to promote the as-set class both withinEurope and throughoutthe world.

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To date, Munich based BayTech Venture Capital has in-vested in 21 portfolio companies, six of which are head-quartered in France. The venture capital firm prefers toact as lead investor but also participates in syndications,particularly to fund larger financing rounds during ex-pansion and later stage deals. With an investment teamconsisting of ten professionals BayTech Venture Capitalis one of the larger German venture capital firms to pur-sue an active investment strategy in France. Jude S. Ngu’Ewodo, General Partner of BayTech Venture Capi-tal, spoke to Mathias Renz, Editor of VentureCapital Ma-gazin, about the firm’s investment strategy and its focuson France.

VC-Magazin: What are the characteristics of compa-nies you are normally interested in?Ngu’Ewodo: We at BayTech strive to invest venture ca-pital in tomorrow’s leaders. We collaborate with com-panies and outstanding entrepreneurial talent with thepotential to become a dominant force in their respectivemarket segment. The focus is on companies in the areas of communications, software, internet-enabledbusinesses, semiconductors, medical technology andbiotechnology. When considering an investment, wespecifically look for outstanding entrepreneurial and

managerial skills in the management team. It is regar-ded very positively if the management team was re-commended to us by other portfolio companies or bypeople in our extensive network. Additionally, the in-vestments must offer clear, valuable and sustainablemarket or technological advantages and should gene-rate high growth opportunities in a large and interna-tional market, usually with a size of more than 250 mn.euro. They should also offer attractive exit options eit-her via trade sale or IPO within five years.

VC-Magazin: If a company or entrepreneur choosesBayTech as investor, what are the main benefits for thecompany or the entrepreneur?Ngu’Ewodo: Our contribution to success in thegrowth phase of these companies is not limited to ca-pital. We speak the language of the entrepreneurs andunderstand their difficulties and needs. The money weprovide goes hand-in-hand with our experience incompany building and our industry expertise, accessto our world-wide network and our respect for the values and the contribution of the entrepreneurs wework with. All our investment professionals have astrong operational background and have encounteredand solved many entrepreneurs’ problems both intheir respective industrial careers and in comparablesituations in other portfolio companies. Furthermore,we serve as door openers to an international and reputable network of industry veterans, leading re-searchers and scientists, professional law and ac-counting firms and recruiters as well as to the financialworld. We have also convincingly showed that we veryeffectively handle different exit channels. And last butnot least, we are the only venture capitalist with acompelling and continuous French-German focussince inception. This enables us to effectively supportFrench entrepreneurs during their market entry inGermany and German entrepreneurs during their mar-ket entry in France.

VC-Magazin: BayTech is an investor located in Mu-nich. Why do you invest in French companies?

“French and German founders arenot that different from each other”

Interview with Jude S. Ngu'Ewodo, General Partner, BayTech Venture Capital

www.vc-magazin.de

Jude S. Ngu'Ewodo

Investment


Ngu’Ewodo: As I said before, we have always concen-trated on France and Germany. Actually, the first in-vestment we made was in a French company. Germanyand France are the two largest economies within theEuropean community and combined contribute aboutone third of the aggregate GDP of the European Union.With over 350 transactions and a transaction volumeof more than 1.2 bn. euro, these two core areas have inrecent years consistently contributed about one thirdof the European venture capital deals in terms of num-ber of deals as well transaction volume. Due to the le-vel of corporate expenses channelled into informationtechnology, Germany and France together make up alarge and attractive market for high tech innovations.Germany and France rank in third and fifth position in

the world in terms of their IT spending. Furthermore,in term of approved patents France ranks in fourth pla-ce, behind the US, Germany and Japan.

VC-Magazin: How do you get to know interesting in-vestment opportunities in France and what skills areyou looking for?Ngu’Ewodo: Due to its established network across theFrench Venture Capital and entrepreneurial communi-ty, BayTech capitalises on attractive technology dealspro-actively sourced and systematically increasing innumbers, among others in French technology clusterssuch as Sophia Antipolis. As mentioned before, whenconsidering an investment, we focus on the manage-ment team and entrepreneurial skills. French and German founders are not that different from eachother; especially when compared with other Europeanentrepreneurs. Many possess extraordinary technicalskills and have excellent engineering backgrounds.And from a portfolio point of view, it is appreciatedthat both economies tend to move in different cycles,thus reducing the overall risk exposure of our invest-ments.

[email protected]

www.vc-magazin.de

The dialogue partner

Jude S. Ngu'Ewodo isGeneral Partner of Bay-Tech Venture CapitalGmbH. The Munich-based firm currently in-vests from its secondfund, typically in tran-ches of up to 6 mn. euro.Their investment strate-gy focuses on innovati-

ve, high-growth companies in the technology andlife sciences sectors in Western Europe, with anemphasis on Germany and France.

According to data released by Dow Jones VentureOneand Ernst & Young in March 2007, substantial sums weredeployed in web 2.0 companies by venture capitalistslast year. With almost 845 mn. USD allocated worldwide,venture capital investments have seen an enormous in-crease in 2006, continuing a trend that started in 2002.Since then, the amount of worldwide venture capital in-vested in the web 2.0 industry has practically doubled insize every year. In Europe, France is the leading countryregarding the overall number and amount of web 2.0 in-vestments in 2006. About 39.3 mn. USD have been givento seven companies, putting France ahead of Germanyor the UK, the latter ranking second in Europe with fivedeals and 23.4 mn. USD raised. Because special seedfunds, such as the High-Tech Gründerfonds in Germanyonly started to fund web 2.0 companies in 2005, these activities might not have been considered in the Venture-One survey.

Web 2.0 – and what it means Yet, what is behind the web 2.0 business models? Em-ploying the methodology used by VentureOne to cate-gorize web 2.0 companies, the term would refer tocompanies “having a business model that revolvesaround a dynamic interface facilitating participationthrough such methods asuser-generated content,networking, and collabora-tion.” Spoken from theventure capitalists’ per-spective, Don Plaisted, Se-nior Associate at the SanFrancisco-based DraperInvestment Company, de-fines web 2.0 “as the inves-tor’s way of trying to cate-gorize trends or have agrouping that is con-venient; when, in reality,this is just an evolution ofthe internet and its pro-gression to dynamic ver-

sus static”. Andreas Schlenker, Principal in the Parisoffice of Partech International, which closed threeWeb 2.0 deals in 2006, regards “business to consumer-Internet” as the most appropriate term to describewhat is behind Web 2.0.

Web 2.0 – and why it rocks Asked for the reason why business concepts in theweb 2.0 realm are attractive investment opportunities,Plaisted says: “There are unique opportunities in thetechnology sector to do things in new ways, be crea-tive, have users generate meaningful content and pro-vide new platforms not only for advertisers but fornew applications, services and communities.” Thosecompanies that are built with solid teams, solid ideasand solid expectations will deliver and those that donot have those characteristics will not make it, he con-tinues.

For Schlenker, an attractive business model yieldsrecurring revenue streams. The business concept hasto be innovative with a promising growth potential.“The investor can read from various metrics, includinguser traction and number of page impressions, how acompany performs and what the potential might be”.This is what makes Facebook or MySpace so success-

Inve

stm

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Web 2.0 investments on the rise

France greatest attraction in Europe

www.vc-magazin.de

Technology Peak of Trough of Slope of Plateau ofTrigger Inflated Disillusionment Enlightenment Productivity

Expectations

Time

Hype Cycle

Source: Gartner

As of July 2006

Visibility

Years to mainstream adoption:less than 2 years 2 to 5 years 5 to 10 years more than 10 years

Quantum Computing

DNA Logic

Prediction MarketsAugmented Reality

Offline AjaxSpeech-to-speech Translation

TelepresenceEvent-Driven Architecture

Collective IntelligenceModel-Driven Architectures

RSS EnterpriseCorporate Semantic Web

Speech Recognition for Mobile Devices

IPv6Mashup

Web 2.0Folksonomies

Digital Paper/E-PaperSocial Network Analysis

RFID (Item)

RFID (Case/Pallet)

Grid Computing

Ajax

Biometric Payments

Corporate Blogging

Mesh Networks:Sensor

Tablet PC

Mobile Phone Payments

Location-Aware Technology

Enterprise Instant MessagingSmartphone

Internal Web ServicesVoIP

Wikis

Tera-architectures

Investment


ful. In France, Dailymotion is a prominent example of awell performing web 2.0 company, to which Partechand Atlas Venture have jointly allocated just under 7mn. euro venture capital in August 2006. Allowingusers to publish, tag, organize and share video clips,Dailymotion has 35 million unique visitors per month,which makes it second among the world’s video shar-ing-platforms only outmatched by YouTube.

Moreover, low capital requirements, potential highreturn and the faster time from development to reve-nue are primary drivers of the web 2.0 success storyfrom the investor’s perspective. Says Schlenker: “It isevident whether a business concept in that industrywill be successful or not relatively quickly. Importantmilestones can be achieved with the help of smallerseed investments. Once the proof of concept isadduced, web 2.0 concepts become highly scalable.”

France: favourable environment for web 2.0 start-upsSchlenker sees a lot of sustainable business models inthe French web 2.0 industry as well as many serial entrepreneurs with great track records in the internetand media field. Also, the economic environment inFrance is start-up friendly, he explains: “There are about20 to 25 venture capitalists investing into web 2.0start-ups.” This includes the “fonds communs de placement dans l'innovation” (FCPI). With the help ofthis investment vehicle, French retail banks such asBNP and Credit Lyonnaise and insurance companies like Axa raise money from retail customers willing tobecome shareholders of venture capital funds. FCPIsare usually closed at a volume of 30 to 40 mn. euro andallocate their money to seed companies that thereforegain much easier access to growth capital than start-ups in other countries, e.g. Germany.

Cultural issues play an important role as well, ErkanKilicaslan, Partner at Iris Capital Management, explains:“French people are more open-minded in sharing videosand experiences with other users.” Thus private and so-cial networking platforms can easily thrive in Francewhen a business concept is adapted from the United

States. In this regard, France is at least one year ahead ofcountries such as Germany in commercialising the web2.0 model. However, with the so called professional net-working business, the situation is reversed, says Klicas-lan. For example, Viaduc, the French counterpart to Ger-many’s Xing (former OpenBC), has been implementedabout 12 to 18 months later.

Cultural aspects also apply to the online gaming in-dustry, which shares certain interfaces with web 2.0technology. French entrepreneurs setting up an onlinegaming company will gain tax credit and benefits topersonal expenditures, explains Andreas Itzrodt, Ope-rations Manager Central Europe for the industry sec-tors Technology, Media & Entertainment and Telecom-munication at Ernst & Young.

Conclusion:

Web 2.0 is a very fast-growing segment of the overallventure capital market. Yet pre-money valuations forthese companies at 6 mn. USD on average are still consi-dered conservative and the scope of the deals remainsmodest at 5 mn. USD on global average. Indeed, medianvaluation and volume of web 2.0 deals is lower than the overall average for all venture capital transactions implemented in 2006 worldwide. This data should givesufficient indication that the industry is not entering abubble scenario right now. Rather, further increase in activity is to be expected by venture capitalists as busi-ness concepts gain greater sustainability. Also, the un-derlying technology, such as Ajax (Asynchronous Javascript and XML) and Social Network Analysis(SNA), will become market-ready within the next twoyears, claims Gartner’s “Hype-Cycle for Emerging Tech-nologies”. France can expect further benefits from itsstart-up friendly environment and open-mindedness re-garding new businesses in the web 2.0 and contiguoussectors. In 2007, France should see investors’ activity inthese areas remaining high. However, countries such asGermany might catch up.

Marc [email protected]

www.vc-magazin.de

Cas

e St

udy


Erenis has become the first French telecom operator tosignificantly offer very high broadband connections toresidential users. Erenis subscribers benefit from the de-ployment of a new local loop network, which providesbandwidth rates of up to 100 Mbps. In addition to tele-phony and Internet access services, the Erenis infrastruc-ture enables the development of new services exploitingvery high bandwidth networks. Since its inception, Ere-nis has constantly widened its share of the market.

More than 30 million in Venture CapitalThe company’s development was fuelled by tworounds of venture capital funding, allocating slightlymore than 30 mn. euro to Erenis. In the first quarter of2007, Neuf Cegetel, the leading alternative telecommu-nications operator in France and an already well estab-lished broadband networks and service provider, ac-quired 100% of the shares from the investors. Erenis isplanned to become Neuf Cegetel’s platform for fibreoptic deployment on the residential market in Parisand surrounding areas. This step should help Neuf Ce-getel to increase its total broadband market share.With its skills in the negotiation with property owners,the deployment of infrastructure inside buildings andthe expertise on marketing and operation of high-speed services to residential customers, Erenis there-fore perfectly fits into Neuf Cegetel’s growth strategy.

The Erenis story in brief The origin of the company dates back to October 2002,when Yan Tamalet, a former manager at corporatebank NetsCapital, and Frédéric Boutissou, a sales-spe-cialist formerly working with Dell and ADSL-providerMangoosta, officially set up Erenis in order to developbroadband access services in Paris based on fibre-to-the-building (FTTB) technology. In 2003, the validationof the technology was implemented and the roll-outprocess started. The following year, former BouyguesTélécom Manager Fausto Geromel joined the companyas CTO; also, the network roll out and provisioningwas implemented. The commercial deployment of ser-vices finally took place in 2005. Following the develop-

ment of Erenis since 2003, Iris Capital stepped in as alead investor to Round B when the company soughtgrowth capital in 2006. The investment totalled 26,5mn. euro, with Crédit Agricole Private Equity, AGF Pri-vate Equity, Caisse des Dépôts et Consignations andNet Partners, one of the founding shareholders of Ere-nis, joining Iris Capital. The investment allowed Erenisto accelerate the deployment of its very high speednetwork in Paris and close suburbs – with the objecti-ve of reaching one million residences connectable by2010. In addition, Daniel Caclin, formerly CEOof Equant, was nominated as the new CEO of Erenis.

Today Erenis is the first very high broadband tripleplay-provider, enabling telephone, Internet and TV, inthe French capital. Turning sewers into conduits, thefibre can be laid at much lower cost than usual tele-com equipment, the deployment of which would re-quire major road works. As a local exchange carrier,Erenis offers telephony and high speed Internet servi-ces to residential customers as well as Small and Me-dium Enterprises (SMEs) and so-called “SoHos” (SmallOffice, Home Offices). The company has already de-monstrated its ability to obtain significant local mar-ket share through an end-user-friendly pricing policy,lying 30 to 35% beneath regular providers. Subscribersto Erenis also benefit from a unique offering of 50Mbps download speed – which can go to 100 Mbps –and 25 Mbps upload speed. Moreover, Erenis’ own in-frastructure will in the future help to enable the deve-lopment of services requiring very high-speed connec-tivity, such as high definition television (HDTV) broad-casting or video file uploading.

What investors like “Investors were convinced by the promising businessmodel of Erenis and its growth potential”, explains Er-kan Kilicaslan, Partner at Iris Capital Management:“We believed that Erenis was positioning itself strate-gically in the very high-speed internet services sectorto build an optical fibre network access closer to thesubscriber.” Investors expected an extremely increa-sing demand for high transfer rates that will enable

Well ahead of France Telecom

Erenis: strengthening Neuf Cegetel’s position in the fibre optics market

www.vc-magazin.de

Case Study


peer-to-peer applications and HDTV, according to Kili-caslan: “These issues will gain vast popularity amongthe target groups of Erenis”. The business model is ba-sed on infrastructure investments only in targeted cityclusters that ensure controlled and scalable capital ex-penditure as well as an effective marketing and salesstrategy. Signing its first customer in 2003, the Erenisservice is today available in 12 districts in Paris. In No-vember 2006 it accounted for a market share of morethan 25% in clusters that had been connected for morethan a year. Every month Erenis adds 5,000 new homesto its FTTx network and provides connectivity tothem. Another reason for an investment is mentionedby Kilicaslan: “The company had very experiencedfounders who have been involved in the competitiveaccess market for many years and have a very soundvision of the market and what it takes to succeed.”This, together with the fact that Erenis has been a firstmover in the FTTx and triple play business and at thesame time is highly cost-efficient, is a clear USP to Erenis.

Conclusion:

On top of providing attractive returns for its investors,the integration of Erenis into Neuf Cegetel by the be-ginning of this year was a reasonable strategic move,as competition is heating up in the field of fibre optics.It allows Erenis to further strengthen its key compe-tences and accelerate its development as a leadingprovider of FTTH- and FTTB-services in the Paris area.It will benefit from the increasing importance of veryhigh bandwidth access services such as video down-loads, HDTV broadcasting, video blogs and P2P, multi-player games and multiple users within one home.Having lost its independence, Erenis nevertheless faces a promising future as part of the Neuf Cegetelgroup.

Marc [email protected]

www.vc-magazin.de

Business Model of Erenis

VDSL or Ethernet15 to 100 Mbps

At Iris Capital, we have a lot to invest.

Not just the necessary funds. But also the

expertise we’ve built up over almost 20 years,

teaming with 200 partner companies in 20

different countries, specializing in three dynamic

E x p e r i e n c e . F o c u s . E t h i c s .

sectors : Media, Communications and IT.

Competencies developed working shoulder to

shoulder with a broad spectrum of businesses in

order to provide our entrepreneur partners with

total strategic support matched by strong ethics.

When we invest in you,

we invest everything we’ve got.

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