Do you want to hear a dirty little secret? Sure you do…

Investments are easy to make. Even exits are doable. It is good exits that are the hard part in the venture capital game.

During the ten years Nexit Ventures has been around, we have made several exits. Some of them could even be characterized as very good exits. The common denominator in the best ones has been the fact that the buyers have been US-based companies (with the exception of one Japanese buyer).

Of the roughly ten or so companies we have exited, only one has been so far sold to a European acquirerer. And, if we are being brutally honest, it would be charitable to call that exit anything but a firesale.

The Lack Thereof

Finland is a good case study of the Pan-European situation.

The reasons for the very limited exit market (bear in mind that we are talking about the IT sector) within Finland are easy to see. There are only a handful of listed IT companies and most of those are system integrators which have little incentive to buy technology-driven companies at valuations that are attractive to the companies and their investors.

In fact, several CEOs of listed firms have told us, that they really cannot make acquisitions at multiples on par with or lower than their own. And when those multiples are generally around P/S=1 (Price per sales or market cap per sales) or so, it is easy to see why deals are not being done.

There is, of course, Nokia which has the resources and does not really have to worry about multiples in doing acquisitions. But for one reason or another, Nokia historically has tended not to acquire companies from Finland (even Dopplr was technically a UK-based company).

The few other listed product-based companies are rather specialized and the likelihood of them finding suitable targets from Finnish startups is quite low.

While it could be argued that using Finland as a case study is disingenious, statistics show otherwise. According to a study by Morgan Stanley, Europe is really lagging badly behind in technology company market value:

The data is from 2006 and currency exchange changes may have changed the picture somewhat favorably for Europeans but the fundamentals have not shifted — at least not for the better. The money and, therefore, exit market is elsewhere.

Brussels, Do We Have a Problem?

Another indicator of the exit market not being in Europe is the obvious disparity in the number of significant M&A deals between Europe and the US — for every European deal with P/S >3 and value of over USD 50 M, there are more than three in the US.

So do we have a serious problem?

We actually don’t think so. It would be great to have two dozen potential buyers for our portfolio companies just down the street, but the past ten years have also shown that high caliber companies from the Nordics are being acquired by global players more regularly and at good valuations.

Or what do you think of MySQL (sold to Sun with USD 1 Billion), Hybrid Graphics (one of our investments, I am happy to say, which was sold to nVidia), Jaiku (sold to Google), Solid (sold to IBM), Hantro (also one of ours, sold to ON2 and subsequently to Google), BitBoys (sold to ATI), Mr. Goodliving (sold to Real Networks) etc.

And mind you, we aren’t saying that there are no acquisitions made within Europe, a good example is the mobile authentication firm Valimo Wireless which was sold just this week to the Dutch-based authentication powerhouse Gemalto.

So there is an exit market — it is just not a domestic nor next-door one. Well, the same really applies to the companies themselves: they have promising markets and opportunities but they are not necessarily here in Europe.

In fact, our way of looking at the numbers is this: for every good M&A deal in Europe, there are more than four done in Europe and the US combined.

So What Does This All Mean?

The ramifications of this realization are fairly clear (we are taking a Nordic view here; substitute Europe if you wish).

• If you are a Nordic (or European) entrepreneur looking for funding, by all means still look for a local investor. Getting at least your A round is going to be much easier than trying to raise it in California or London. Just try to choose a VC that has a track record of successful international exits. That way you will have a partner that can help you get the best possible valuation at exit time.

• If you are an international VC looking for arbitrage opportunities, the Nordics are actually a fairly exciting place to look at. There is an increasing supply of good startups that are happy to take money at a lower valuation than a comparable company in Silicon Valley, for instance. Finding them is the trick and we would strongly suggest you try to work with a player with their ear on the ground and a team in place in the Nordics. Just look at the following comparison:

• If you are an LP looking for funds to invest in, you might want to reconsider the Nordics. The arbitrage opportunities are at least as good as in the previous years and with growing expertise and experience in making good international exits, the Nordic funds are well positioned to provide very good returns.

In other words, we think the Nordics is a good place to be for a globally-minded startup company and a VC. Give us a call, we’d love to talk more about this.