Computer games in the 1980s introduced a new breed of geek to the world: the adolescent male who could stare for endless hours at a monitor, transfixed by continuously shifting blocks and dots. All to the background of tinny, high-pitched music.

These daylight-fearing creatures were surpassed only in outsider status by the programmers who made the games. Simon Cook, now the CEO of venture capital firm DFJ Esprit, was one of those frontier über-geeks. Using both a trusty Atari ST and Commodore Amiga, he started his own computer gaming company aged 19.

‘We sold a few thousand copies,’ Cook recalls. The real lesson he learned from that time, however, lay not in programming, but entrepreneurship. ‘When I started the company, I didn’t understand equity and what it meant to build a business and sell it on to other people. I ran it for cash as a small business.’

It’s a realisation that still needs to be made by many owner-managers today. ‘In Silicon Valley, people understand the dilution of equity. In Europe, most entrepreneurs are confused by venture capital. It’s not a bad thing to release equity and allow people to come in and help grow your business.’

Fast companies

DFJ Esprit currently has around $550 million under management. Cook describes the firm’s approach as ‘US-style venture capital’, typically taking a 25 per cent stake and then putting in the expertise, contacts and infrastructure to scale a company globally. ‘On average, our investments are at least $10 million and sometimes up to $25 million – that’s from us alone.’

There are around 35 companies in the firm’s portfolio, such as Lovefilm, Oxford Immunotech and XMOS Semiconductor (the latter two raised $40 million and $16 million respectively earlier this year). The online marketing company Buy.at was sold not so long ago to AOL for $125 million. ‘That made a great return on the $15 million originally invested,’ comments Cook.

There are three main areas where Cook believes tomorrow’s great businesses are likely to emerge. ‘Television will change radically,’ he says. ‘More audio and visual content can be delivered by the internet and therefore millions of channels can be delivered to the home.’

That these viewing habits can be tracked opens up a world of opportunity in relation to marketing and advertising. ‘I think you will see the whole television and advertising industry turned on its head in the next few years,’ he states.

The emergence of software and services on the web is also an area to watch. ‘There is a major shift in the way IT is built using cloud computing. The way software licenses are sold and servers are run will change as you can buy more services over the internet with the continuing increase in bandwidth.’

After that, it’s the wide-ranging “cleantech” sector. It’s a catch-all term but Cook talks enthusiastically about a portfolio company Green Peak, which makes radio chips that don’t require batteries, and ZBD, which makes screen technology with “digital ink” that doesn’t require any power to keep an image on the screen.

A graduate of UMIST, Cook set up professional services firm KPMG’s internet consulting practice in 1994 – where he was told the web would never catch on – before moving to investment giant 3i.

It was here that he shed that geek image and made a name for himself as someone who could spot a groundbreaking venture.

He led the first £6 million round of investment in Cambridge Silicon Radio, maker of the Bluetooth chip. Seven years later, the company was worth $4 billion and had 70 per cent of the world’s Bluetooth market. Other successes include Virata, nCipher and KVS.

Pieces in place

Cook and his team have led a number of reforms at the firm over the past couple of years. The buy-out of Cazenove Private Equity and Prelude Ventures increased the firm’s firepower to the tune of £285 million, and this led to Esprit joining the US venture capital network DFJ, which has offices in 30 cities around the world, and the new name.

It’s a partnership run on a national basis but with an international network, much like a PricewaterhouseCoopers or Deloitte.

The current set-up means the business should have the financial firepower and infrastructure to scale fast-growth companies. Although acknowledging the seriousness of the economic situation, Cook believes the firm is well positioned to pick and groom early stage ventures. ‘Our businesses are loss making or break even at best. We’ve never been able to borrow money – we couldn’t do it five years ago and that holds true today,’ he says.

‘We make our returns through growth. At the macro-economic level, the world is slowing down, but within the entire economy, there are always pockets of growth. Take Lovefilm, for example – it’s a four-year old business and in that time we’ve grown the business to one million subscribers. We now rent one out of every two DVDs rented in the UK and this has happened as many video shops on the high street have gone bust.’

Fertile minds

For Cook, returns can always be made from new ideas and innovation. ‘The best way to protect your money today is to invest in a fund that is going to look for the highest-growth opportunities, where those companies are going to be much bigger than they are today because of shifts in the market and new inventions. We have to grow our way out of a recession by inventing things.’

In fact, he goes as far as to suggest that the current environment will force entrepreneurs to focus on the bottom line. ‘The mentality of people is now right for starting a company. Cash becomes much more important when it is a scarce commodity, rather than being easy to raise. You have to make the money go further.’

Cook is quick to add that European VCs choose how to invest their money carefully. ‘The average capital invested in a major success in Europe is $40 million. That is half the average amount invested by US firms. We can create as much wealth with half as much money as the US puts into its companies. We’re very capital efficient, although that’s not to say that $40 million isn’t a lot of money.’

The ambition of the portfolio companies at DFJ Esprit has to be international so as to reach the largest number of customers. ‘Post 2002, the world is a very flat place. The companies we invest in today target not just the US, but Europe and Asia from day one and aim to become a global leader in their sectors. What used to be called the “Israeli model” – because the Israelis had no home market and needed to go international – is now the model of venture capital everywhere, including California.’

Cook says that four-fifths of the $35 billion generated annually by venture capital comes from the US, but notes that 80 per cent of the exits aren’t coming from North America. ‘Lots of great companies are coming out of China, India and Europe,’ he comments. ‘What you will see is a significant amount of that $35 billion starting to shift out of the US, coming instead from these other countries and regions.’

It’s no secret that VCs are seen as ruthless by many entrepreneurs. Cook is pragmatic about this image problem, observing that backing a company is a high stakes game where the odds are very much against you.

‘We look at several thousand businesses a year and we invest in ten. Of the ten we invest in, a third go on to be hugely successful. A third go on to do pretty well and, as for the others, the market doesn’t take off so they don’t work out.’

The upshot is there will be more disgruntled entrepreneurs who didn’t realise their dream than successes. ‘There are many ways to finance a business and the VC model is only one of them,’ he says. ‘Venture capital only works for the businesses that have real ambition. The difficulty is not when a business goes bust or fails, it’s if it doesn’t go on to be a $100 million plus business and doesn’t scale. Our investors are looking for a high level of performance.’

Fit for sale

As for exits in the near future for DFJ Esprit, Cook notes that while ‘the IPO window is not really open, the important thing is to have companies ready for when IPOs do start again’. If there are going to be big-ticket exits for portfolio companies, it’ll come from the Microsofts, AOLs and Googles.

‘Large companies, which have their quarterly earnings targets to meet, are having to buy more growth, so we are very bullish on the M&A front. The corporate tech companies are hunting out new product lines.’

No matter what the circumstances, great ideas with a commercial application invariably make it to the market. Cook remains bowled over by the power of unearthing a gem of a business. ‘If you take the combined movie receipts for every Star Wars film released globally over the past 20 years, that comes to $4 billion. One start up can create that
much wealth.’