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PARIS, Feb. 26, 2004 — It sometimes seems like small tech entrepreneurs aren’t always on the same plane as investors. Some say that this disconnect comes from the fact that many small tech startups are launched by academics without much experience in the business world.
“The scarcity of professional skills, or rather the combination of technical and financial skills, is one of the missing elements in the development of this kind of activity” said Orlando Arango, of the European Investment Bank.
But a German venture capital firm is trying to bridge this culture and knowledge gap.
Technostart, a venture capital firm operating near Stuttgart in southwestern Germany, focuses on seed- and early-stage technology companies. It boasts more than $100 million under management in three different funds: Beteiligungsfonds, Ventures I and Ventures II. The company’s strategy has been to hire scientists as investment managers. Who better to evaluate sophisticated technologies?
Bettina Schrick is one of four technology analysts at Technostart. Her previous job involved developing nanoparticles to be used for environmental cleanup in a lab at Pennsylvania State University. Schrick was looking for a new challenge, so she came aboard as the resident chemistry expert of the group. “We also have a biotechnologist, a physicist and a biochemist at the firm, so that we can cover all the specialties,” she said.
That expertise on hand makes it possible to have much more frank discussion with entrepreneurs on their projects, particularly when the business area is at the vanguard of science. This is often the case with small tech, which represents about a third to half of Technostart’s investments.
“The entrepreneurs work with other VCs and they are impressed that we actually understand the technology,” Schrick said. “We can ask the tough technical questions.”
That was certainly true in the case of ItN Nanovation, a company that makes nanoparticles for ceramic products to be used in ovens or in water purification installations, among other applications.
The Saarbruecken-based firm raised $3.8 million in financing thanks to Technostart. Ralph Nonninger, one of the company’s managing partners, recalled that his firm had been in contact with about 25 venture capital firms in the year they spent trying to raise the initial round of funding.
“Technostart was the only one to take some of our nanoparticles with them and examine them under an electron microscope,” he said, sounding still amazed that no one else went to the trouble. “The impression you get when you talk with VCs is that the only thing they are interested in is money. Technostart looked more deeply into things.”
Technostart’s other defining characteristic is that it offers money and guidance — essential during a company’s early stage. Scientists don’t necessarily have the training “to manage people, to write patents, to find markets or to find other applications for their technology,” Schrick said.
In the case of the ItN Nanovation investment, managerial help wasn’t really needed. Chief Financial Officer Romeo Volz and Dirk Busse, who is in charge of sales and marketing, both have extensive management experience. But Technostart’s strategic expertise did come in handy in the area of patents. ItN Nanovation now has 35 of them.
“Technostart set up different workshops with patent lawyers for us, to help us see what the most appropriate patent might be,” Nonninger said, “so that we could patent not just the product, but the technology.”
Technostart invests a minimum of $630,000 in the seed phase, keeping money aside for future investment rounds. Over time, the total investment generally reaches just more than $6 million. About 70 percent comes from institutional investors like Switzerland’s Partners Group, technology venture capital group 3i (News, Web) and the European Investment Fund (EIF). Business angels, individual investors and Dow Chemical Co. (NYSE: DOW, News, Web) contribute the rest.
From an investor’s point of view, letting a specialized venture capital group like Technostart do the pre-selection, makes sense — particularly for a funds investor like the EIF, a European Union investment body. The EIF has more than $3 billion invested in nearly 200 venture capital funds, with plans to invest substantially more over the next three years.
“The main job we have isn’t to focus on a too specific level,” said spokesman Arango. “We prefer to work with people who know the area, because it isn’t wise to throw money at activities that need to be thought through, and thought through again.”
Technostart’s formula doesn’t always work. The company has had its share of insolvencies, two of which occurred in 2003.
“In the VC business, you always have investments that don’t go that well,” Schrick admits.
The company aims for a success rate of 6 out of 10. The present success rate of the Ventures I is more like three out of 10. But there are success stories, like biopharmaceutical firm MorphoSys AG, on which Technostart recouped its investment 55 times over, when it was sold on the German stock market in 2000.