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The Netherlands: The new El Dorado for venture capital funds?

Real Deals 9 January 2020

  • Data shows an upswing in the Dutch private equity and venture capital market. This can be largely explained by the fact that the Netherlands offers a 'light' regime for smaller funds, which is encouraging a lot of start-ups and tech firms.
  • According to the Dutch Private Equity and Venture Capital Association (NVP), €1.3 billion of new funds were raised by Dutch venture capitalists in 2018, which is believed to be the highest amount ever.
  • €387 million worth of venture capital was extended to 298 young and fast-growing companies, setting a new record. Of this, €43.79 million was invested as seed capital in 71 firms, €290.05 million went into 196 early-stage ventures, while €53.56 million sup

By Juan Dagniaux, Commercial Director, IQ-EQ Netherlands

According to the Dutch Private Equity and Venture Capital Association (NVP), €1.3 billion of new funds were raised by Dutch venture capitalists in 2018, which is believed to be the highest amount ever. To provide a broad frame of reference, under the venture capital route, about 98% of all investments have an equity value of less than €5 million – and this includes very early stage investments. 

The same research also noted that €387 million worth of venture capital was extended to 298 young and fast-growing companies, setting a new record. Of this, €43.79 million was invested as seed capital in 71 firms, €290.05 million went into 196 early-stage ventures, while €53.56 million supported 31 mature ventures. This compares favourably with €349.28 million across 244 firms in 2017, showing an increase of 11% by value and 22% by volume in 2018. 

On sectoral distribution, it can be seen that the most popular categories were tech and life science funds, with €135.87 million raised for investment in the former and €134.48 million raised for the latter. Together this comprises two-thirds of the total sectoral investment into young and fast-growing Dutch firms taking the venture capital route.

All the above point towards an undeniable upswing in the Dutch private equity (PE) and venture capital (VC) market. This can be largely explained by the fact that the Netherlands offers a 'light' regime for smaller funds, which is encouraging a lot of start-ups and tech firms to set up in the country, with the NVP report affirming the jurisdiction’s broad-based appeal to investors across different geographies. 

Brushing up on basics

A report by Thompson Reuters (Venture capital investment in The Netherlands: market and regulatory overview) observes that VC and PE are both used to finance unlisted private companies and the terms are sometimes used interchangeably. However, VC usually has the following unique characteristics: 

VC is invested in start-ups and young companies seen as having high growth potential

VC firms take a relatively small, non-controlling interest in a company

VC firms favour equity instruments to make investments

Venture capitalists generally invest in innovative sectors such as technology and life sciences

VC investments tend to be higher risk, as the risk of failure in early-stage companies is more

Entrepreneurs of investee companies usually need expert help in growing their companies. 

Given the above, companies that attract venture capital investments are those seen as scalable with high growth potential. Venture capital investors are most active in the sectors of technology (including clean-tech and med-tech) and life sciences/biotech. Energy is also emerging as an area of focus, with clean energy and environmentally friendly companies being prioritised for investments.

Spotlight on the ‘light’ regime 

The Thompson Reuters report goes on to note that VC funds and fund managers are regulated under the Dutch Financial Supervision Act (FSA). Further, for alternative investment fund managers (AIFM), the EU Directive 2011/61/EC (also called the AIFM Directive) was implemented by the FSA in 2013. 

For VC funds falling under the AIFM regime, delegated regulation under the AIFM Directive is directly applicable and the Authority for the Financial Markets (AFM) typically adheres to relevant guidelines and recommendations of the European Securities and Market Authority (ESMA) and the International Organization of Securities Commissions (IOSCO).

However, the majority of AIFM Directive requirements do not apply if a VC firm manages alternative investment funds (AIFs) with assets under management that do not exceed one of the following limits:

€500 million, provided the AIFs are not leveraged and investors have no redemption rights for the first five years

€100 million, including assets acquired through leverage.

The light regime is what typically applies to VC fund managers domiciled in the Netherlands, provided the shares or units in the fund managed are only offered to professional investors or to fewer than 150 persons, with a minimum investment equivalent to €100,000 per participant or with a nominal denomination of at least €100,000 per share or unit.

For VCs falling under the exemption route, registration with the AFM and limited reporting requirements to the AFM apply, including with respect to the identity of the VC firm, the funds managed by it and the funds' investment strategies. The VC firm must also report information on instruments held, exposures and significant concentrations to the Dutch central bank.

The light regime does not grant passporting rights to the ‘light’ VC firm. If cross-border marketing is desired, the VC firm concerned may voluntarily opt in and be fully licensed under the FSA, EuVECA Regulation or mark its funds under a national private placement regime. Further, a VC fund manager wishing to offer units or shares to retail investors in the Netherlands must also be fully licensed. 

Finally, if shares or units in the VC fund are offered only to non-professional investors, the manager will have to use a written or oral exemption notice, in a prescribed form. The notice makes clear to any potential investor that the activities are exempt from supervision by the AFM. 

It may be noted that no exemption is available for ‘light’ VC firms under the Dutch money laundering regulation, which is also based on a European directive. 

VC funds in the Netherlands

Based on data compiled by the Pitchbook Platform, the following is a list of the 10 most active investors in Dutch start-ups since the start of 2009, excluding economic development agencies:

Inkef Capital (Deal count: 30) 

StartGreen Capital (Deal count: 29) 

Joint place:

InnovationQuarter (Deal count: 26)

BioGeneration Ventures (Deal count: 26)

Health Innovations (Deal count: 24) 

Utrecht Holdings (Deal count: 23) 

SanomaVentures (Deal count: 22) 

Joint place: 

Newion Investment (Deal count: 21)

HenQ (Deal count: 21) 

Thuja Capital Management (Deal count: 20) 

Pitchbook data also shows that financing rounds in the Netherlands tend to be limited in size, with more than half of the deals in the last five years having been early stage start-ups. However, the capital raised has been significant, with some well-known names raising large amounts of cash – such as payments business Adyen (which secured US$250 million in 2014), online grocery supermarket Picnic (raised US$109 million in 2017) and proptech start-up GeoPhy – which raised US$33 million just this year.  

The dawn of a new era

For those who thought that the Netherlands’ only claims to fame are its windmills, bicycles, cheese and tulips, it might now be clear that the small country is fast establishing itself as a hub for start-ups as well. The venture capital space is booming, alongside numerous accelerators and tech giants that are also contributing to its robust and burgeoning ecosystem for entrepreneurs.

Equally importantly, in both the early and mature phases, Dutch companies are attracting local and foreign venture capital firms alike. Foreign VC firms are known to help start-ups grow in a specific new market, with innovation-heavy sectors such as tech and life sciences funds growing in popularity.

Ultimately, with so many conducive factors coming together, it might well be the dawn of a new era for start-ups seeking investment in the Netherlands, positioning the economy as the new El Dorado for VC funds.

Categories: Insights Expert Commentaries Geographies Central & Eastern Europe

TAGS: Investments Private Equity The Netherlands

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