Index moves up the value chain with new €400 million fund

Index Ventures closed a €400 million fund to invest in maturing start-ups, which it claims is the first fund of its type in Europe.

The Growth I Fund will invest 60:40 in information technology and life sciences, and will be led by Index cofounder Giuseppe Zocco, with Dominique Vidal, previously CEO of Yahoo Europe and cofounder of Kelkoo, and Guido Magni, who is joining Index from Roche, where he was global head of Medical Science in the Pharmaceutical Division.

Zocco believes there is now a critical mass of companies in Europe with the potential to be market leaders and have a global impact. “Index has been investing in European start-ups since 1996 so we’ve had front row seats to watch the industry expand and mature,” he said. “With the growth fund, we have the ability to find and support these companies, helping them get to the next level.”

The new fund will make investments of €20 million to €50 million in companies in western Europe, but will consider companies in eastern Europe and the US also.

“We want to be focusing on more advanced companies than classical venture capital funds, which already have some scale, and on the IT side, are likely to have revenues,” Magni told Science|Business.

In biotechnology and medical technology, Magni is interested in companies that are public already, or close to being public. “The assets will be more advanced in development compared to classic venture capital, and the investments will be larger.” Index is prepared to be sole investor, but is also open to forming syndicates.

The move to establish the fund, to be run in conjunction with Index’s venture capital fund € 350 million Index Ventures IV, is a response to the way the start-up market has evolved. “Ten years ago it was not possible to do this because companies were too small. Now there are some that are quite successful and are ready for more capital,” Magni said.

Golden eggs and maximum value

Among drug development companies Magni will be looking for those that have compounds in phase II (smaller, dose-finding and efficacy-determining) clinical trials, to add the finance needed to get to phase III (large-scale trials in people).

“This is an important inflection point in terms of risk. We need to find those companies with the golden eggs and identify when we will get the maximum value out of those eggs.”

Index would expect to exit when an investee company goes public or does a high ticket licensing deal with a pharmaceutical partner. In some cases, for example, where a drug is being developed for a niche indication, and would be marketed directly to a small group of hospital-based specialists, the fund could support a company through to commercialisation.

There is a tendency currently for European companies reaching the stage of development Index is interested in, to become acquisition fodder for big pharma or larger IT companies. Index would offer entrepreneurs who are being seduced by the siren call of a merger or acquisition offer, the opportunity to stay in control. “In many of these cases, investing additional capital and time in the business will result in a much greater long-term payoff and allow the entrepreneur to continue growing his, or her own company into a market leader,” said Vidal.

Private equity or venture capital?

Despite the size of the proposed investments and the relative maturity of the companies in which it intends to invest, Magni believes venture capital is a more appropriate label than private equity.

“I think the distinction between the two depends on how much you are involved: it’s clear for example in life sciences when you move from phase II to phase III the development risk decreases, but the complexity of the organisation increases.”

Typically phase II trials involve 200 – 300 patients, while phase III is more likely to involve 2,000 to 3000 patients. “This really is a challenge for smaller biotechs; so we will play a role and help them with this,” said Magni.

He added, “Index has a track record of finding and investing in industry-changing businesses. The new fund gives us the ability to continue working with early-stage companies that have become growth opportunities, leveraging the knowledge, methodology and network across both the venture and growth teams.”