3-15.3-14.8-14.0-14.6-14.6-14.6-16.0 1994 20-34.3-34.3-34.4-34.4-34.3-34.3-34.9-36.9 1995 9-23.1-22.2-21.9-21.9-21.8-22.8-25.7-32.1 1996 15-18.7-18.7-18.6-1-8.5-19.0-20.1-22.0-26.3 1997 25-15.6-14.7-14.9-14.3-14.3-13.7-17.6 n/a 1998 16-12.5-12.2-10.8-10.6-9.3-6.3 n/a n/a 1999 28-15.8-8.8-6.2-1.5 -2.0 n/a n/a n/a 2000 29-16.7-14.9-8.7-4.8 n/a n/a n/a / a 2001 29-29. 1-28.3-23.4 n/a n/a n/a n/a n/a 2002 20-32. 1-23.4* 22.2* n/a n/a n/a n/a n/a Total 336 17.3-16.0-14.4-13.0-13.6-14.6-16.2-16.4 2004 6-41. 1-25.8 -5.8 n/a n/a n/a n/a n/a 2005 21-19. 4-24. 0 -8.0 n/a n/a n/a n/a n/a 2006 34 7.2 100.6 n/a n/a n/a n/a n/a n/a 2007 25-24.7' n/a n/a n/a n/a n/a n/a n/a Subtotal 2004- 2007 86-18.2-27.9-20.7 n/a n/a n/a n/a n/a adapted from PriceWatersHouseCoopers 2008) 3i and Apax Partners

At one point on the financial scene, Fortson (2008) reports, the British Government aimed to establish Britain as an "innovation nation." The determination of 3i, albeit, to abandon the venture capital sector, however, deflated this "dream," as it reportedly embarrassed the Government, a week after "...it published a White Paper singing the praises of the UK's innovative companies and suggesting a wide range of initiatives to foment further start-ups." Along with the negative impact of tightening credit for/to small companies, the exit of 3i, UK's largest listed venture capital investor, appears to present evidence the VC sector critically weakening. One venture capitalist stated: "Entrepreneurs can't rely on the traditional venture capital marketplace to fund their businesses anymore. The model is not working here" (Fortson, 2008).

Andrew Roberts, a partner in the private-equity team at law firm Travers Smith, purports that the fact debt suddenly became more expensive reflects the key problem PE firms face. During 2007, a deal's financing could be developed with approximately 80% debt. In early 2008, the debt ratio decreased 50%. Previously, for a small deal, a private-equity firm might need to only borrow from one bank, however, this changed so that currently, for the same financing, the PE firm would need to deal with two or three banks to secure financing. Similar problems surface when firms sell (Spanier 2008).

3i and Apax, two leading private equity companies in Europe, stimulated surprise in financial realms with their recent investment related announcements. 3i reported it decided to abandon venture capital early-stage investments, an activity private equity strongly supported since the development of this previously profitable asset class. ("Apax Says it Has Nothing to Hide" 2007; "3i pulls out of venture capital" 2007)

In March 2008, 3i, Europe's largest venture capital investor, announced its plan to abandon early-stage investing in start-up companies. On July 15, 2008, 3i unveiled its final venture capital investment in ApaTech, a synthetic bone specialist. Contemporary reports characterize venture capital as 3i's worst performing area since the technology bubble burst. Following its relinquishment of venture capital investments, 3i plans to focus on buy-outs, growth capital, infrastructure and quoted private equity. 3i incorporated its late-stage venture capital investment arm into the company's growth capital division ("3i pulls out of venture capital" 2007; Martin 2008a; Martin 2008b; Martin 2008c; Fortson 2008).

Apax Partners, one of the world's leading private equity investment group, operates across the U.S., Europe and Asia and purports more than 30 years investing experience. Apax provide long-term equity financing to/for companies worldwide and operates with funds which total $40 billion around the world ("TriZetto and Apax Partners" 2008). On March 12, 2007, however, the International Herald Tribune reported that Apax Partners Worldwide announced that after it raised a record €10 billion takeover fund, it planned to stop investing in startup companies and, in turn, would focus exclusively on leveraged buyouts.

Martin Halusa, chief executive of Apax, successor of Ronald Cohen, Apax founder, stated: "Our next fund will be 100% buyouts. Our venture results have been very volatile, and our focus is on the more stable end of the business."

During an interview in Frankfurt on Markch 1, 2007, Cohen stressed: "Apax...made it clear it wants to be a buyout firm. it's not going to do straight venture investments."

Recent decisions by 3i and Apax reportedly underline the European venture capital's unhealthy state. Rationale for decisions such as those by 3i and Apax evolves from the fact VC has underperformed and not returned the same as buy-outs and growth capital companies realized in past years. Consequently, decisions by 3i and Apax to discontinue funding seeds contributed to venture capitals growing concerns.

As noted in this study, Interviewee 1 states that Europe used a model from the 1990's in Ventures in which the GPhad too many investment bankers working for PE firms even though this is presently undergoing a change. Furthermore, in the United States people were hired with operative experience and European funds were too small resulting...

In general, the problem is the GP. Insofar as the future, Interviewee 1 held that VC can develop into a great system in that: (1) the research is top-notch; (2) Europeans quickly adapt to new technologies; (3) Europe has not leverage enough; (4) sourcing deals is very difficult; and (5) angel investors will play an important role. It is stated by Interviewee 1 that venture is not the wrong business to be in however PE and VC are two different and distinct asset classes.
Interviewee 2 states that 3i has a standard business model with a 1.5 to 3.0% management fee with the 80-20 rule applicable. The VC business is to make a high return for the investors and 3i has stated it will continue to invest in it however, it will not continue to invest in early stage ventures. Interviewee 2 states that the materiality in investment size relative to the fund's size. This is stated to be that the materiality is too low in that MUSD 5 investment from a MUSD 100 fund is too low, management still has to put in as much time as they would have to put MUSD 50 investment, as "it is not meaningful to make small investments when you run a large fund." A problem noted by interviewee 2 is that early stage investments has been very volatile and PE firms greatly desire low volatility. Interviewee 2 further notes that angel investors at the rate of 80% are U.S. investors.

Study Focus

This paper, which presents positions 3i and Apax Partners (Apax) possess in the venture capital world in the wake of the contemporary credit crunch, simultaneously examines current critical financial concerns, as private equity houses regularly change their investment focus.

Concern for the Future of Venture Capital in the UK and Europe

The announcements by 3i and Apax, relating decisions to discontinue early-stage investments, this researcher purports, stimulate a number of considerations, including concern for the future of venture capital in the UK and Europe. Relating concerns, consequently contribute to the following research questions this study attempts to answer:

What rationale/s contributed to 3i's and Apax's recent decisions?

Do any (firm) specific or general reasons denote reasons private equity companies benefit from not investing in venture capital?

How do private equity companies, which once stalwartly backed venture capital, impact venture capital when they discontinue investing in this asset class?

Aim and Objectives

Along with addressing this study's research questions, this paper purports simultaneously aims to determine to perform the following objectives:

Objective 1: Investigate reason/s 3i and Apax determined to abandon venture capital (early-stage investments),

Objective 2: Review the venture capital (early-stage investments) industry's performance in the UK and Europe (industry data analysis) to understand the context for these decisions, and Objective 3: Understand the implication/s decisions made by 3i and Apax propose for venture capital.

Hypothesis

Objectives for this study, this researcher contends, will, in turn, determine the validity of following hypothesis: (Need to choose, adapt or eliminate one or both of the following)

When recipients of venture capital repeatedly fail to produce anticipated profits, then private equity companies move away from early-stage venture capital and determine to discontinue early-stage investment.

When private equity companies move away from early-stage venture capital and determine to discontinue early-stage investment, then recipients of venture capital that repeatedly, fail to produce anticipated profits face additional funding challenges.

Study Structure

The first step this researcher initiates in this study effort involves understanding why 3i and Apax decided to leave venture capital, along with categorizing and analyzing the reported reasons. The second step this researcher takes in this study path includes evaluating the venture capital industry's investment performance/s in the UK and Europe. During the third/final step in this study venture, this researcher draws conclusions for the future of venture capital from findings and conclusions retrieved in steps one and two. To arrive at the understanding mandated for the success of this study, this researcher utilizes information and data retrieved from researched literature, along with information this researcher accessed during interviews with five individuals currently "employed" in positions relating to financial management and/or VC.

Significance of this Study This researcher contends this study as significant; due to the impact, venture capital confers on individuals, on society and on relationships. As Ahlstrom and Bruton (2006) point out, this researcher notes that venture capitalists foster positive business relationships as they "...create links to key customers, the government and other important allied firms through personal…