New regional VC funds target CEE's smaller high-tech businesses

By bne IntelliNews December 10, 2007

Robert Smyth in Budapest -

By partnering CEE venture-capital veterans 3TS Capital Partners in a new fund that could grow up to €50m, the networking giant Cisco Systems has become one of several international firms that are backing the rise of Central and Eastern Europe's high-technology sector.

"When we begin venture investment activity in a new region, it is our strategy to start via an indirect investment in a partnership with a strong local investor," Yoav Samet, Cisco's head of Corporate Business Development for Emerging Europe, Israel, Russia & CIS, tells bne. "Such indirect investment is then typically followed by direct Cisco investments into companies later on as our familiarity with the region grows."

Yoav Samet

By partnering with 3TS, Cisco is more likely to avoid the fate that beset fellow US technology company Motorola. While it may boast an impressive portfolio of upcoming tech firms globally, Motorola Ventures' investment into the now defunct Budapest-based Asylum Telecom in 2005 has hardly acted as Motorola's springboard into what it dubbed "broader Europe."

While €30m is the initial closing amount of the 3TS-Cisco Growth Fund III, the value could potentially grow by an additional €10m-20m. Cisco is acting as the anchor investor, with 3TS contributing just 1% of the fund value but acting as the fund management company and, as such, will make the decisions on where the money will be invested. 3TS' third fund will bring the venture capital firm's total funds under management to over €200m. To date, Cisco has deployed more than $2bn in venture-capital investments and also started investing in Russia with local partners earlier this year.

In addition to the core countries of Estonia, Latvia, Lithuania, Poland, Czech Republic, Slovakia, Austria, Hungary, Slovenia, Romania and Bulgaria, this new fund will consider investment opportunities in Croatia, Serbia, Ukraine and Turkey. The target companies will be exceptional high-growth, small and medium-sized enterprises (SMEs), which are, or could become, regional market leaders or global challengers. The fund will seek investments of about $2m-4m on average into small technology, media, and telecommunications (TMT) companies in the region, says Samet. The first investment came mid-November in the form of €2m injected into Romanian email server specialist GECAD-Axigen for an 11.76% stake.

Managing Director Pekka Santeri Mäki says the fund will seek to leverage Cisco's technology expertise and worldwide presence to the benefit of 3TS and the portfolio companies. Even so, Cisco's involvement is not just aimed at encouraging the spread of Cisco technology, at least not yet, and companies sought do not necessarily need to be directly related to Cisco's business, either.

"Through an early indirect investment into the TMT sectors via a strong local fund, Cisco gains visibility into the local technology arena," says Samet. "At the same time, we help to accelerate technology development, innovation, and Internet adoption in the region. The more the local technology and innovation economies thrive, the more we thrive with them."

New funds, new arrivals

The venture fund initiative is a new form of investment in the CEE region for Cisco, one which complements the already existing engagements with local partners and will be followed by direct investments on Cisco's behalf. "In due time, we expect to start making direct Cisco investments into local companies as well. When we make direct investments, we do look for a more direct strategic link between the companies and Cisco," says Samet.

On November 28, Cisco announced the launch of the Cisco Entrepreneur Institute in Hungary with Budapest's Central European University (CEU) Business School which combines state-of-the-art e-learning with live lectures to teach the skills needed for running an SME successfully. "The entrepreneur institute also helps to increase entrepreneurial capacity in the region, and generally contribute to the development of local innovation and technology adoption," says Samet.

Cisco's chief technology officer, Charlie Giancarlo, also hinted at further commitments to the region, when he told the press earlier this year that Cisco plans to set up a "significant" development centre in either Central Europe or Turkey within the next couple of years.

Cisco is not alone in seeking out opportunities in the region's nascent high-tech businesses. Swiss SoftCon Informatik, a former tech firm-turned-investment vehicle, said on November 19 it has made what will be the first of many investments in the region by buying a 25%-plus-one share stake in Hungary's leading online electronics retailer, Extreme Digital. The cash injection will be used to fuel Extreme Digital's expansion into Romania and Bulgaria, as well as consolidate its position in Hungary.

"We believe internet-based sales will increase dramatically in CEE and we were attracted by Extreme Digital's strong track record and growth potential as well as its innovative approach and strong management," says Claudio Cocca, SoftCon's CFO.

Extreme Digital claims to have 35% of Hungary's online electronic goods sales and 15% of Hungary's total online sales, and expects revenue of €27.6m - a 27% increase on 2006. Cocca wouldn't disclose the size of the investment, but says that SoftCon's investments are in the €1m-5m range.

"Our long-term strategy is to take minority stakes in companies," he says. "Management will only remain motivated if they hold the majority."

Extreme Digital's strategy is unique in Hungary in that it sells electronic goods both in four shops and online, catering to both those who need to see and be shown the products before they buy them, as well as the technology savvier shopper. A similar approach will be followed in Romania and Bulgaria.

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