News February 12 2019

Looking back, looking forward

Mårten Vading looks back on the last 20 years of Kreos within the European and Israeli growth ecosystem.

We have reached the 20-year anniversary of Kreos Capital – what a fantastic journey we have been fortunate to experience together with the European Growth ecosystem! When we launched in 1998 (the same year as Google was incorporated) there weren’t any debt solutions for life science and technology oriented growth businesses in Europe. In fact, the whole growth capital industry was still in its early phases. We were pioneering, educating and building the growth debt market as entrepreneurs ourselves. There were many lessons learnt and slowly the entire ecosystem of growth companies and investors has reached significant scale. Today, innovation, technology and growth is not only a niche segment. It is a reality for all industries as we are transforming business models and the society we live in.

We funded our first company, Inside Secure in France, in Q4 1998. It was a €1m asset backed lease/loan structure and the company had hardly any revenues. Today, Inside is publicly listed. Similarly, Kreos has grown as a fund and currently deploys some €250-300m per annum, addressing growth companies in all stages, industries and geographies in Europe and Israel with a suite of products. Most of our capital is addressing mid and late stage growth where we provide €10-50m+ facilities to companies with double and triple digit revenues but we also help companies in earlier phases, where we provide smaller facilities to businesses with single digit million revenues. We did our first healthcare deal in early 2000 and today we invest significant amounts into this sector and it currently totals almost one third of our portfolio.

It has not been an uninterrupted journey for the European and Israeli growth industry over 20 years even though the overall direction has been strong and consistent. It started with the Telecoms, IT and Internet revolution in the second half of the 90’s, which cumulated in the early 00’s market frenzy, where almost every business with a “.com” name has its valuation was raised to the skies, companies such as Ericsson and Nokia dominated their respective markets, internet consultants were valued at €3-4m per head (yes, the number of employees was the valuation metric!) and electro-optical component companies were priceless. It all burst in the IT and telecoms dot.com crash and 2001-2003 were very “cold” years for the industry. This short cycle was the “early adoption” learning phase of the European growth ecosystem. It was an isolated event, specific to IT and telecoms. At Kreos, we continued to support and finance growth companies during these challenging years, accumulating experience and iterating our model to evolve into the next phase and in 2004 (the same year as Google IPO’d and Facebook was founded) we raised Kreos II.

In the next stage, we experienced more solid business models and technologies that better matched the underlying demand. Still, the average company we funded had only single digit million revenues. Many models were hardware oriented and growth financing was required not only for product development but also for capex investments in IT server parks, labs and fabs. Over time, the businesses we financed evolved into more software and consumer oriented as well as fabless and labless models.

Kreos III started investing in 2007. Apple introduced the iPhone, and Netflix launched streaming media the same year (Kreos had already financed the “Netflix of Europe”, the merger between Video Island and LoveFilm, in 2005 and 2006, which are today part of Amazon). The European growth industry had by now matured into a significant and established market. Kreos’s “average” portfolio company had meaningful double digit million revenues and we were addressing growth companies in all industries – software, services, hardware, semiconductor, retail, media, fintech, communications, mobile, healthcare, B2B, B2C etc. At the same time, we had to manage through an unprecedented, broad financial crisis, initiated by the Lehman crash in 2008.

The years 2009-2010 were characterised by paralysed financial markets, when liquidity, financings and M&A as well as IPO activity dried up. We continued to work very hard with our existing portfolio companies as well as financing strong businesses with the right models. By now, we had gained more than 10 years of experience through different market cycles and given that we are a partner-led business with an agile organisation, have a dedicated focus on growth businesses, and are 100% equity backed with no leverage, we could act as a stable financial partner in the market and at the same time generate attractive returns for our investors. One of several good examples of our long-term portfolio support, and persistent work during this time period, is the 10-year journey with Heptagon and its eventual billion $ exit in 2017, which generated substantial returns for the equity investors and for Kreos III.

Kreos IV was launched in 2012 (the same year as Facebook IPO’ed). The asset class “Private Debt” had by now started to establish itself in a more mainstream way in Europe. Growth financings were no longer linked to product development or large capex investments but rather focused on market expansion and working capital investments. Software licensing models had switched to subscription and services models. Kreos financed its first triple digit million revenue company, SolarEdge, that listed and exited as another $ billion+ company. Kreos financed several mature and strongly growing digital consumer and e-commerce models such as Bookatable, Treatwell, Gett, Smava, Westwing and Mister Spex, and helped generate an additional $ billion exit from Delivery Hero.

With the launch of Kreos V in 2016, Kreos continued its mission of providing flexible growth debt solutions for high growth companies in all sectors throughout Europe and Israel. The model has evolved from early stage to late stage growth, as well as a broadening of use cases, addressing working capital, growth capital, acquisition financing, roll-ups, pre-IPO financings, and now also helping publicly listed growth companies with an alternative financing solution. One illustrative transaction is Pharming, when we led a €40m acquisition financing (with a combination of amortising loan, bullet loan and convertible) for the listed company to enable it to buy-back its US rights from licensee Valeant. It serves as a good example of the variety of situations we support and the breadth of solutions we offer today, but it also highlights the network effect of having executed more than 500 growth transactions over the last 20 years as the management team was well known to Kreos from a former company we had already funded in 2005. Today, the average revenue of our portfolio companies at time of financing is around €50m, illustrating the evolution of our model as well as the maturity of the growth industry in Europe and Israel – quite a change over the last 20 years. We are humbly excited to be part of this value-creating ecosystem and look forward to next 20 years – the main growth is yet to come!