Prior to 2016, Luxembourg digital tech entrepreneurs faced limited fundraising opportunities--a discouraging conversation with a bank manager unwilling to lend against unpatented technology and unproven business cases, or a begging trail around friends and family to stump up the cash.
All this changed with the launch of the Digital Tech Fund in 2016, a public-private partnership to fuel the growth of valuable tech and entrepreneurship in Luxembourg.
“It’s the only local-focused venture capital fund in Luxembourg,” says Alain Rodermann, whose fund Expon Capital manages the Digital Tech Fund on behalf of its investors. “We take minority stakes of maximum €1m in seed-stage businesses.” In six years, the Digital Tech Fund has raised €20m over two vintages, with strong investor appetite for a third vintage in Q2 of this year.
“The appetite has absolutely grown from investors. The performance of the fund has helped, as well as the de-risking presence of the public investors.” The fund, which boasts the Luxembourg government, national investment outfit Société Nationale de Crédit et d’Investissement and the University of Luxembourg among its public investors, has taken stakes in 13 companies since inception--with zero bankruptcies. “Not one,” says Rodermann. “I put this down to the entrepreneur profile in Luxembourg.”
Those starting their businesses in Luxembourg tend to be senior, with 15 years’ experience behind them, keen to solve problems that they encountered in the corporate world. “The average quality of the deals [we encounter in Luxembourg] is higher than those in the big cities.”
What has improved in Luxembourg is the company structure. “The structure of companies we see now is far more suitable for venture capital investment than the structure five years ago,” says Rodermann. He explains that for successful equity investment, a company’s corporate governance and articles of association need to support growth, not the servicing heavy existing bank debt packages, and its exit clauses need to allow investors to exit all together. “It needs to be clean, and for subsequent rounds of financing it needs to be ready to accept money at a higher price per share.”
Rodermann credits the first few deals done by the Digital Tech Fund for propagating good standard practices in Luxembourg. “Like all VC funds we work closely with companies at the board level”, but also the accelerators and incubators in Luxembourg that help prepare businesses for an eventual VC investment.
“The ecosystem in Luxembourg has changed completely in six years. There are now at least 10 incubators--including the Luxembourg House of Financial Technology and the House of Startups--all helping founders build something compelling.”
Rodermann estimates that there are around 70 companies per year in Luxembourg looking to raise VC money and around 200 incorporated elsewhere but hoping to develop activities in the grand duchy. “It’s a small number,” he says. “However, our portfolio companies are already growing and we expect the Digital Tech Fund to be in the top decile of European seed funds in terms of performance.”