Credibility crunch hits European VC industry

By Paul Mackintosh - 26/11/12

European venture capital circles must still be reeling from the news that much-diminished IT giant Hewlett Packard is facing an US$8.8 billion writedown on the value of its software business, much of it consequent on the $11 billion purchase of British software firm Autonomy, product of the UK’s much-lauded Silicon Fen entrepreneurial cluster. HP blames Autonomy management for accounting irregularities and misrepresentation that led to over $5 billion of losses. For an industry supposed to create value, this is value destruction on an epic scale.

Doubly ironic, because as recently as the October 2011 European Private Equity and Venture Capital Association (EVCA) conference, Autonomy was being held up as an example to show that European venture capital was still viable and could still deliver major exits and big returns. Apax Partners, investing around $3 million in Autonomy precursor Neurodynamics Ltd., saw that investment converted into $900 million later, in what is allegedly one of European VC’s best ever results. In 2008, Autonomy was boasting its admission to the EVCA Hall of Fame, “for being one of the rare European technology companies to grow from a start-up to a $1 billion dollar company in ten years or less.” Dr Mike Lynch, founder of Autonomy, has since become an angel investor in his own right and launched Invoke Capital, his own VC platform, with other former Autonomy managers.

Dr. Lynch and his team have, needless to say, strongly denied HP’s allegations. But current and prior comment has it that Autonomy stayed too close to its start-up roots, especially in the matter of internal controls. Management and investors, it seems, were not up to the critical VC task of helping an enterprise scale, and making sure that its systems and procedures grew robust enough to withstand the stresses and temptations of its new size. There are also signs, though, that Autonomy was not sufficiently scrutinized by the City or by HP’s advisors during the M&A process – partly because of its status as a European VC icon.

Reports from Reuters indicate that some at least of Autonomy’s financial advisors were brought in just before the deal closed, to give tombstone credits and fees in return for past favours, while the presence of dotcom-era tech banker Frank Quattrone, subject of several abortive prosecutions post the dotcom bust, on Autonomy’s advisory bench could also have rung alarm bells. Nor is Dr. Lynch’s new endeavour likely to have an easy ride.

Sadly, the outcome can hardly strengthen confidence in the quality of European venture capital, among potential M&A acquirers or institutional investors. Eagerness to emulate Silicon Valley and foster entrepreneurial vigour is understandable, but when this becomes a politically-driven game of catch-up, accidents can happen. On HP’s side, the lesson is: don’t expect acquisitions to rescue you from terminal problems in your own business, especially when you pay way over the odds.