The necessity for a Private reputable Lead Investor for Dutch Deep Tech companies
There is currently an urgent need for a Dutch Private reputable Lead Investor that is hands-on and has the ability to invest equity tickets of at least €30 million per company to scale up these green companies towards an IPO. At the moment, there is no such Dutch Private Lead Investor.
What has changed in the Netherlands over the last years. How does the infrastructure for financing industrial growth companies (scale-ups) look like?
- Banks started their corporate banking departments 20-25 years ago. This is/was the “new way” for large companies to meet the requirements of the increasingly complex financing needs through structured finance. This coincided with the time when the NIB (Dutch public investment bank for the Industry) started to become an “ordinary” commercial bank.
- At that time, SMEs were still sufficiently served with financing. There were many local bank offices/branches and growth capital for SMEs was often provided by the banks. The local banks didn’t need the head office or other institutions to cherry pick the winners.
- Over the last 10-15 years growth capital funding has gradually declined. Banks withdrew from the growth financing market (too much risk…, further away from the customer due to the closure of local branches which resulted that they no longer knew (sufficiently) their customers). This role was partly taken up by family offices, family & friends and sometimes by private equity (“PE”). This often involved considerably smaller investment amounts.
- PE has gained relatively little foothold in the Netherlands. On the one hand because our national banks were increasingly oriented abroad (the grass was greener there), and on the other hand because of the movement of the pension funds that positioned their asset managers in the US. The result of both movements was/is that the financing infrastructure within the Netherlands has become smaller.
- Due to the gradual nature of the change, this was not clear from the first moment. It only became clear with the outcome of a working group (initiated by Ministry of Economic Affairs in 2019) which showed that we lacked €1 billion in growth equity for scale-ups.
- In the past two decades, PE’s interest has increasingly shifted towards software, which requires relatively less capital (no factories or expensive materials, equipment etc.), less development time and where more money can be made in a short period of time (more exits, coupled with greater/faster growth because products can be sold sooner, a minimum viable product is often sufficient to generate recurring revenue). This is different from investing in hardware (Deep Tech). Within software, the financing gap in the growth phase is often smaller in the early phase, but you also see there that the Mollies, Bunqs, Picnics, MessageBirds had to seek abroad for large growth financing (> €100 million).
- In the US, but also elsewhere, growth capital was provided and, just like with the banks, there was a demand for a ‘leader’. This is no different with corporate lending deals in the banking world.
- With PE this is the Lead Investor. Without a Lead Investor, the rest of the financing market does not move. The problem in Europe/the Netherlands is that parties have gradually all become co-investors (ie ROMs (Dutch regional public investment funds), Invest-NL (public investment fund), corporates, PE funds, European Investment Bank) who are only allowed to move when a reputable Lead Investor is involved. In the early stage there are some private Lead Investors (ie Cottonwood), while in the growth stage no private Lead Investor exists. In short, none of the parties mentioned here wants/is able to take on the lead role. The lack of this Lead Investor in the Netherlands was also one of the conclusions of the working group’s report.
Requirements for this Lead Investor
- Large equity tickets of more than €30 million per company. With this equity ticket, €60-70 million in green, public and/or subordinated loans (co-financing) can be unlocked per company
- Hands-on approach and experience in scaling up production Factories in the Netherlands but global sales and marketing activities
- Focus on shift from project-related revenue (€10 million) to recurring revenue (€100 million)
- Focus on strengthening the organization by fully focusing on an IPO from Day 1
- Hiring a team that makes this possible CEO, CFO and Chair of the Supervisory Board with IPO experience
- Management support from industry experts
- HPE Growth (Amsterdam based PE fund) has partly fulfilled this role in the recent past, but they have increasingly concentrated on software investments and no longer on Deep Tech.
- We lack a Lead Investor for Deep Tech companies in the Netherlands. We started with that background. With a Dutch Lead Investor we can keep these green companies here. This is also a wish of the companies. We (the Netherlands) have invested heavily in these companies from seed to scale-up phase:
- With Dutch money, universities have been able to bring key technologies to maturity (often 20-30 years) so that the technology can finally be commercially tested by means of a prototype;
- Through the many (Dutch & European) subsidies that the companies have gradually received;
- Through equity and/or (convertible) debt financing from the ROMs. Do not forget the indirect investments of ROMs (fund-in-fund);
- Through private financing of funds such as Forward.One, Cottonwood and Innovation Industries (money from Dutch high net worth individuals, family offices, pension funds, banks, etc.).
After this long investment period, the technical risks are limited as the technology has been validated through pilots in the industry. The focus could be finally shifted towards large-scale industrialization and commercialization. However, this requires growth equity, which is not available in the Netherlands.
- It would be nice if the Dutch pension funds would take on this role, such as currently happening abroad. In our view, despite the fact that they have to pay attention to returns, they also have a “limited, social” contribution to make to employment and new innovations. After all, they receive premiums of €15-20 billion per year from employees and employers.
- That is not happening till date.
- Without a Lead Investor, growth companies will not receive financing from the Netherlands while they are necessary for the industry to go green and digital. North American, Asian and/or a UAE Lead Investors are ready to take on this role. That is exactly what we said (in the working group, and in the Netherlands) that we wanted to solve this issue.
- The Lead Investor is actually no more than the syndicate leader. However, they are critical for the other financiers (co-investors). A good example is one of the potential growth companies in the Netherlands, company xxx. They have been promised financing from various parties, but here too it is necessary that a Lead Investor comes forward who can structure this large necessary financing round, who can carry out the due diligence on behalf of all investors, conducts the negotiations, prepares the transaction documentation, takes the lead in the value creation phase and prepares eventually the company for an IPO.
In other words, a Lead Investor not only takes care of the equity financing, but also co-financing and debt. This enables the companies to still be able to receive funding compared to current situation of only receiving growth financing from banks with a lot of difficulties or no financing at all. The multiplier is immense!!!
- If this Lead Investor is Dutch, the company will (almost certainly) also stay in the Netherlands. That is a plus for the invested capital and for the current and future employment, know-how, etc. Foreign Lead Investors will always try to move factories, branches, technology and talent to their own country. That is a pity, especially when it comes to key technologies that we so desperately need here in the Netherlands, but also within Europe, for the necessary transitions (energy, food, health) and for a self-sufficient Netherlands/Europe.
By: Deeptech Equity NL , 2022