Europe is discovering that venture capital can produce high returns for investors and new, high-paying jobs

By CHARLES WALLACE /MUNICH

early a decade ago, Professor Werner Lubitz had an insight about how to prevent diseases ranging from cholera to tuberculosis. In his laboratory at the University of Vienna, he figured out how to create a bacterial "ghost" that stimulated the body's immune system against disease, by removing the part of the microbe that caused illness. The result was a promising breakthrough in the field of immunization.

The trouble was, Lubitz didn't know how to make his vision a reality, and it might never have gone beyond arcane medical journals without a fateful encounter three years ago. At an Austrian scientific symposium, Lubitz bumped into Falk F. Strascheg, chairman of Munich-based venture capital fund Technologieholding, and asked for advice. "I realized that if there was to be any progress, I would have to form my own company," Lubitz recalls. "But I didn't know how to do it." The venture capitalist urged Lubitz to figure out a commercial use for his idea and to write a business plan. Lubitz called former student Martin Steiner, who had a master's degree in business administration and was working for a large U.S. drug company.

Together, they formed EVAX Technologies, raised $1.6 million from Technologieholding and set up an office in the Martinsreid suburb of Munich, which is fast becoming one of the centers of European biotechnology research. Backed by a $3 million investment from the Bavarian government, EVAX's labs opened in February with 11 employees. "We couldn't go to the bank for money," says Steiner. "This company and all the others springing up around here would not exist if it wasn't for the availability of venture capital."

Such investment--from pension funds, insurance companies and, increasingly, individuals willing to take large risks in exchange for big returns--is challenging the image of Europe as the home of overstaffed, rust-belt industries. The new breed of venture capitalists is creating a wave of start-up companies in high-tech sectors like computer software and biotechnology.

While Europe still trails the U.S. by a wide margin, European governments--persuaded that new ventures mean new jobs--are playing catch-up with matching funds and promises of tax breaks. With unemployment in Germany and France above 11%, venture capital is a song on every politician's lips."Europe is awakening to the trends in the U.S. economy," says Bruno Rossignol, a spokesman for the French stock exchange Nouveau Marche. "The reality is that jobs are created in small-sized companies."

Overall, venture capital investing in Europe rose to $8.8 billion in 1997, an increase of 42%, according to the European Venture Capital Association. Most of the money went to finance such deals as management buyouts--which Europeans consider venture capital, although they are regarded simply as private equity investments in the U.S. While still only a relatively minuscule amount compared to Europe's economy, start-up investments in 1997 totalled $646 million, up from $407 million in 1995. Says Oliver Novick, a partner in Pino Venture Partners, a Milan-based venture capital firm which is raising $50 million to invest in Italian high-tech companies, "Real high-tech venture capital as in the United States is just getting started here. People are willing to look at new opportunities."

One of the most frequently heard explanations for the recent venture capital boom is that investors have found it increasingly easy to cash in by taking maturing companies to the stock market. Until quite recently, it was almost impossible for a company without a solid profit history to get a listing on a main stock exchange. Since most start-ups don't turn a profit for years, venture capitalists didn't have an easy way to recover their money. But now there are several attractive alternatives, ranging from the EASDAQ, a European version of the popular small-stock NASDAQ exchange in the U.S., to second-tier markets in places like France and Germany. Launched in 1996 by a group of venture capitalists, EASDAQ has become the first pan-European stock exchange with 26 listed companies and a market capitalization of $12 billion, up 99% so far this year. Compared to its American cousin, which lists 5,412 companies with a market cap of $2.1 trillion, EASDAQ still has a long way to go.

In addition to EASDAQ, national small-company stock markets are also providing a push. The Nouveau Marche was created in France and the Neuer Markt was set up in Germany to cater especially to small companies, and they are being linked with Amsterdam's NMAX to form a network called the EURO.NM. Results so far have been encouraging: the 50-stock Nouveau Marche is up 85% this year, compared with a 34% rise in the Paris Bourse's main index of large companies, the CAC 40.

So far, venture capital sources have shied away from start-ups because of low returns--putting their money instead into management buyouts. "Early stage investing is still low value in Europe," says Ronald Cohen, chairman of British venture capital firm Apax Partners. The ability to cash out through listing on second-tier exchanges has begun to change the attitude of pension funds and other institutional investors, but venture capitalist funds are also increasingly turning to rich individuals. "A missing ingredient in Europe has been cultural reluctance to take risks, a fear of failure, the fact the entrepreneurs who do succeed, unlike their American counterparts, do not recycle their money into further investments," says Stanislas M. Yassukovich, chairman of EASDAQ. "The European makes a lot of money and retires."

While Europe has yet to produce any stock market titans to rival America's Bill Gates, there have been some impressive company offerings in recent months. Computacenter, a specialist computer supplier, started with $475,000 of venture capital and just went public in London with a market capitalization of $1.65 billion. Innogenetics, a biotech start-up based near Ghent, Belgium, went public on the EASDAQ in November, 1996. The stock has risen from $12 a share to $65, and company chairman Rudi Marian has seen his original $6 million investment grow to more than $500 million. "When the company was founded in 1985 there was no venture capital available at all," he says.

Jos Peeters, who runs Capricorn, a Belgian venture capital fund that helped finance Innogenetics, notes that investors are now flocking to his firm to offer money. "For the first time, investors are calling us and saying, 'Can we put money into your fund?'" So much new money is flowing into venture capital, in fact, that investors are driving up prices in some markets, such as Germany. "Money is coming in faster than deals," says Technologieholding's Strascheg. "In 1990 we could really choose the companies and there were few venture capital companies. Today, anyone who can spell venture capital starts his own investment company three months later."

Growth in start-up investing in Germany has been prodigious. Whereas start-ups represented only 7% of venture capital investing in Europe last year, in Germany they were closer to 15%. In 1995, Strascheg's company invested around $138 million. Last year it placed $417 million. Strascheg credits the German government with helping to push venture capital by offering matching funds to start-up companies and providing investors with guarantees that if a company goes broke, their investments will be protected. "In some ways," he says, "they are doing too much, building up competition to private equity."

Munich has prospered as a biotech center in the same way that Silicon Valley made its bundle from computers. In Martinsreid, half a dozen office buildings are under construction to house new technology companies. The offices are only a few hundred meters from the Max Planck Institute, a renowned center for the study of biology, and the University of Munich's new life sciences campus.

Although the U.S. leads in computer technology, a number of small software houses have found successful niches in Europe. Dr. Solomon's, a British firm that specializes in antivirus software, began as a husband-and-wife start-up, went public on nasdaq and EASDAQ simultaneously and was bought in early June for $642 million by Network Associates of the U.S.

Venture capitalists have also started backing companies that utilize high tech in service businesses. Milan's Pino Capital hopes to finance call centers, a blend of computers and telephones that companies use for sales, marketing and customer service. Alphaform, a Munich start-up founded by five college students, uses lasers linked to powerful computers to transform blueprints into instant sculptures of parts for the auto industry. "If we had gone to a bank instead of getting venture capital, we'd still be in a garage," says Alphaform CEO Andreas Daunderer.

With the market changes in the past two years, the three key ingredients of venture capital are now in place: young, risk-taking entrepreneurs with bright ideas, venture capitalists who know how to spot a commercial business plan, and nascent stock markets that allow founders of the companies to cash out. There's no doubt that the U.S. is still ahead of Europe when it comes to financing start-up companies, but if the current trend continues, the next killer computer app or medical breakthrough is likely to be produced by a start-up in an academic suburb of Britain, Germany or France. Look out, California.