Notion Capital raises $100m for new fund

Notion Capital Partners has raised an impressive amount of money in a hostile environment for their second fund, to be deployed in enterprise software businesses throughout Europe. But are there enough of them around, asks Milo Yiannopoulos.

As we reported was about to happen a few weeks ago, Notion Capital Partners, the cloud computing-focused venture capital firm, today announced a $100 million first close for its second fund. The money will be used to invest in emerging cloud computing and Software as a Service (SaaS) companies across Europe, broadening the net from Notion’s first fund, which was concentrated in the UK.

Their second fund wasn’t raised as quickly as the firm’s partners would have liked, for two reasons. Firstly, as Jos White admits, it’s something they’ve never done before: Notion’s first fund was entirely their own money; they never raised external financing. Secondly, it is very challenging for venture capitalist’s to raise money in Europe at present, thanks to over-capitalisation in the 90s that led to too many people administering too much money with too few results.

Traditional, institutional limited partners have grown sceptical of European venture, and since their investment decisions tend to be made slowly and strategically, they have understandably been reluctant to take punts on new enterprises. Remarkably, governments – even at the European level – have recognised this, and have moved to plug the gaps.

Thus, the two lead investors in Notion Capital Partners Fund II, the only investors to be made public besides the partners themselves, who have committed to contribute 10 per cent of the overall amount raised, are the UK Government via the Enterprise Capital Fund (ECF) vehicle and the European Investment Fund (EIF).

The ECF structure has traditionally been used for smaller funds, such as the £37.5 million Passion Capital raised in March 2011. This is also the first time the Department for Business, Innovation and Skills, which administers the ECF scheme, has collaborated with the EIF.

“We’re yet to find out how they are to work with,” says White. “But certainly EIF behaves like any other private sector investor in many ways. A lot of people take comfort from seeing their name in there. They take their time, they can be sticklers on terms and when people see that EIF have been through the process, they’re more confident.”

Other participants in the fund, whom White declined to name, he described as “a number of well-known names… people who are prepared to be a bit more contrarian in the market. While other people are shying away from venture, these are the people who think that it’s the perfect time to give it a shot.”

They may be right to. There are reasons to be confident about Europe’s ability to build further exciting enterprise businesses, and about Notion’s ability to act as value-add investors. “While businesses are prepared to pay for technological advances, consumers still struggle with the concept of paying for digital services,” says White.

“Furthermore, the metrics in B2B are more readily available. It can take longer to build businesses, but they can be more predictable. You can build valuable, profitable assets – unlike in the consumer space, which is more like alchemy, with so much of your success dependent on precise timing.”

Notion’s second fund will be one of the largest European early stage funds announced this year. But if the fund size is impressive, that is perhaps because cloud computing is now being taken very seriously. Notion will be the only fund in Europe with cloud software as its exclusive focus, and it has the experience of its partners as entrepreneurs and investors to work with.

At a time when a healthy contraction of capital around the better-performing players in Europe is happening, Stephen Chandler, co-founder and managing partner of the firm, should take his and his colleague’s success at raising such an amount as a compliment to their own track records.

Indeed, the arrival of a fund of Notion’s size represents further acceleration of the trend towards entrepreneur-operated funds in Europe, such as Atomico and PROfounders Capital. These funds are seen as a good thing because they not only represent successful entrepreneurs reinvesting in the ecosystem but they promise more experienced and useful investors to their portfolios.

Notion intends to raise $150 million altogether, a target White is “quietly confident” of meeting. Notion’s first fund capitalised on its partners’ extensive cloud experience to deploy cash in Brightpearl, Star, Tradeshift and others. Tradeshift recently completed a funding round valuing the business at $137 million after two years in operation.

Not everyone is convinced that this large fund size is the right way to go. “Why can’t people resist raising these big funds?” asked one seed stage venture capitalist this morning. “I’ll tell you: they can’t resist the fees and the fat salaries. The problem is, in general, the bigger the fund, the fewer the number of seed and early-stage deals that actually happen.”

Another question hovering around Notion II is whether there are enough large SaaS companies in Europe. If not, Chandler and his colleagues may be chasing a dream. “We have a strong appetite for risk,” says White. “We’re trying to back companies we think can make it big. All too often in Europe, there’s a tendency not to think big, when actually those companies have the opportunity to do much better than that.”

“Our strategy is to only invest in what we know,” adds Chandler. “We think this gives us a strong advantage in the market for both evaluating and supporting companies.”