In Europe, Putting the Adventure Into Venture Capital

The life of a European venture capitalist is usually pretty civilized, punctuated by trips to the converted warehouses of London’s trendy Silicon Roundabout neighborhood or Berlin’s stately Prenzlauer Berg district, where entrepreneurs swap ideas in Vietnamese restaurants and faux-dive coffee shops. Dmitry Chikhachev of Moscow-based Runa Capital lives a less posh existence. Visiting cloud-computing software provider Jelastic, one of his investments, means a flight to Kiev, Ukraine’s dusty capital, followed by a 100-mile drive on post-Soviet roads to the provincial town of Zhytomyr—a city best known for its museum of Cosmonaut memorabilia. There, Chikhachev subsists on Ukrainian staples like potato dumplings and cabbage rolls as he helps Jelastic, founded in 2010 by a Russian-Ukrainian programmer duo, expand its business. “There are hundreds of hidden gems far from big cities,” says Chikhachev. “The regional market of startups is only starting to be tapped.”

His journey shows the lengths to which European venture investors are going to find tech’s Next Big Thing. Despite the region’s debt turmoil and economic slowdown, European venture firms raised €4.85 billion ($6.2 billion) last year, an increase of 50 percent over 2010, according to the European Private Equity & Venture Capital Association. That money is helping drive up valuations of companies in traditional tech hubs such as London, Berlin, and Stockholm, spurring venture firms to search from Tallinn to Istanbul for promising firms at reasonable prices. “In London and Berlin, there are more angel investors than startups,” says Lars Hinrichs, a Hamburg-based venture capitalist who is backing five new companies in Latvia, Poland, and Lithuania through his investment company HackFwd. “We have too much money in seed and late-stage investing.” One example of how that abundance is driving up prices for venture firms: Investment Kinnevik, the investment arm of the Swedish-American Stenbeck family, said on Oct. 19 that it had bought a 10 percent stake in the four-year-old German online fashion retailer Zalando for €287 million, valuing the unprofitable Zappos. com knockoff founded by Berlin’s Samwer brothers at about €2.87 billion.