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Testing times for veteran tech investor

Like any venture capitalist, Hermann Hauser is more often wrong than right, but when he's been right he's done very well.

The engineers developing polymer organic semiconductors at Plastic Logic have yet to bring to market an "e-paper" product resembling anything like the self-renewing newspapers featured in the Tom Cruise blockbuster movie "Minority Report."

But the engineers' first prototype of their plastic does boast the image of their own special hero--veteran British technology investor Hermann Hauser. Cambridge, England-based Plastic Logic's marketing material features a 60-by-80-millimeter screen bearing the black-and-white picture of Hauser gazing out of the flexible pane prototype he paid to develop. Hauser, 56, hints the company could roll out its first product before year's end, signaling a critical technology success for his venture capital firm, Amadeus Capital Partners, as he goes about raising its third venture fund.

"The market for e-paper is one of the largest market opportunities there are," Hauser claims, arguing that Plastic Logic's flexible display technology will one day be as successful as another long-nurtured, Hauser-backed start-up, Cambridge Display Technologies, which went public on the Nasdaq last year to great fanfare. "The reason CDT took such a long time was because a lot of the materials took a long time to develop," Hauser explains. "The materials for Plastic Logic, thanks in part to CDT, exist already, and progress has been nothing short of spectacular."

Yet CDT, an angel investment Hauser made more than a decade ago, is working on thin-display technology that, while exciting, has proven to be a train wreck for investors. The company raised $240 million over 13 years before listing last December at $13 a share, but now its stock trades at half that price. Its major investors have yet to exit their investment; profitability at CDT is nowhere in sight.

CDT's next-generation technologies--the company was spun out of Cambridge University in 1992 based on the research of Professor Richard Friend--are typical of what Hauser thrives on. Like any venture capitalist, Hauser is more often wrong than right about his technology picks, but when he's been right he's done very well, which explains why he's considered the doyen of technology investing in Britain. He's had a hand in some of the country's biggest high-tech successes, specifically those based in Silicon Fen, the area surrounding Cambridge that is one of Europe's most vibrant tech clusters.

Before he founded Cambridge-based Amadeus in 1997 with Anne Glover, then a director at Apax Partners, the Austrian-born physicist had already struck gold with his first company, Acorn Computing, the venerable, one-time rival to Apple Computer. He also flourished as an angel investor in two of the U.K.'s most successful chip companies: Arm Holdings, a spinoff from Acorn and today one of the world's leading chip design companies, and DSL chip designer Virata (today part of Conexant Systems), which listed on the Nasdaq in a wildly successful November 1999 IPO.

Amadeus' first fund of 50 million pounds ($88 million), raised in 1997, registered additional successes, including the sale in 2000 of fabless chip designer Element 14 to Broadcom for $642 million in November 2000, and the listing that same year of travel Web site Hauser's first postbubble triumph came last year via an investment in Cambridge Silicon Radio, whose stock market listing became the tech finance success story of 2004 in Europe.

Yet eight years into his career as a professional venture capitalist, and five years after raising Amadeus' second fund, at 235 million pounds ($426.57 million)--nearly five times larger than its first--Hauser now faces a task that will test just how far his esteem within the industry will take him. Amadeus hopes to close its third fund, with the goal of raising 160 million pounds ($290.46 million) and a firm cap of 200 million pounds ($363.08 million), by the end of the year. That may not be easy, since Amadeus' second, vintage 2000 fund, which comprises 25 start-up investments, including Plastic Logic, boasts exactly zero exits.

Amadeus' second fund is worth 68 pence for every pound it's invested ($1.23 for every $1.82), according to Private Equity Intelligence. Despite that ugly figure, it approaches the 67 percent median for vintage 2000 European venture funds, according to PEI. Still, Amadeus' lack of exits makes for a difficult fundraising story, especially when Amadeus is just one of several European firms that have burned through most of the money it raised around the time of the bubble and that are looking for financing for their next fund.

PEI counts at least 292 venture funds globally that are on the road looking for money, 72 of which are in Europe. And unfortunately for Amadeus, other European venture firms have exits to brag about. Cases in point: paid $161 million last September for Internet hotel reservation firm Active Hotels; Inca Digital Printers sold that same month for $55 million to Dainippon Screen Manufacturing; chip designer Alphamosaic went for $123 million to Broadcom; Trigenix fetched $36 million from Qualcomm; and Aeroflex paid $81 million for the testing unit of Ubinetics Holdings.

A brand unto himself
The challenge for Amadeus, then, is to differentiate itself in some other way. On the face of it, that seems easy enough, mainly because of its well-known chairman. "Hermann has had massive impact on Cambridge," says Laurence Garrett, director at 3i Group's Cambridge office. "He's a brand in himself, and he's difficult to compete against for that reason."

Indeed, unlike most of their more reticent European peers, Hauser and Glover, who until last month was the chairman of the British Venture Capital Association, are adept at marketing the "Hauser" and "Amadeus" brands. They regularly grant interviews and show up in the press; he and the firm are among the most recognizable names in a European industry that still struggles to market itself.

"But like any brand, between the truth and reality there is always a gap," Garrett says. Amadeus has already returned all the money from its first fund, though neither Glover nor Hauser would reveal what they expect the final return to be. Industry peers quietly question whether Amadeus' bets on deep, ambitious technology, which some derisively call "science projects," will produce real returns. "They've made some very bold bets," says another Cambridge-based venture investor, requesting anonymity. "In terms of what they can do for the world, they are some great technologies. But from investors' perspective, who knows?"

Few question Hauser's nose for, and deep understanding of, groundbreaking technology, but world-changing innovations don't always translate to good business or astounding returns. That's why portfolio companies such as Plastic Logic will be so important to Hauser in the coming months. Plastic Logic has already raised $25 million and built a plant to make its plastic chips. Amadeus was a seed investor and participated in its two subsequent venture rounds.

Or consider Solexa, a maker of superfast DNA-sequencing machines, which Amadeus first funded in 2001. The company claims that when it finally produces its first bench-top box later this year, it will at a stroke be 100 times faster than any other current technology. It is the first radical step, the company says, toward the day when parents will be able to bring home a DVD containing the complete genetic makeup of their newborn.

To sequence one person's genome today would cost at least $20 million and require a laboratory full of the most advanced machines working round the clock for months. Solexa wants to cut the cost to a few thousand dollars, and the sequencing time to days. It has raised $72 million over six years, including a $14.4 million financing in September led by Amadeus, and four months ago listed on the Nasdaq via a reverse merger with Lynx Therapeutics, a genetic analysis toolmaker that was running short of cash.

The fortunes of Solexa and Plastic Logic, two of the firm's biggest bets, will largely determine the performance of the second fund, and perhaps of Amadeus itself.

The firm, however, is no stranger to skepticism. Cambridge Silicon Radio, a designer of Bluetooth wireless chips, was written off more than once even as Amadeus stuck with it. Like so many other technologies, Bluetooth, which allows laptops, phones and other devices to talk to one another, was vastly overhyped only to be later ruthlessly, and repeatedly, discredited as an inferior technology without a market. "When they were in CSR, Bluetooth was relatively unfashionable," Charles Cotton, the former CEO of Virata and an investor in Amadeus' second fund, says of Hauser and Glover. "They were able to seize on opportunities at an unfashionably early stage of development of a market."

Today, Bluetooth has found its groove in devices such as hands-free wireless earpieces for mobile phones, and the market is growing. CSR chips are in nearly half of all Bluetooth-enabled devices, and since floating at 2 pounds ($3.63) per share in February 2004, the company's shares have nearly doubled to 3.90 pounds ($7.08), giving it a market cap of about 469 million pounds.

"It takes more money"
Amadeus' first fund had several bright spots besides CSR, Element 14 and, but Amadeus did not draw as large a return from these and other first-fund investments as it could have. With only 50 million pounds ($90.71 million) at its disposal, the firm ended up seeing many of its stakes diluted in later financing rounds because it lacked the money to continue investing. That meant the rewards Amadeus reaped from even its biggest winners, such as CSR and Element 14, were limited. The firm's average ownership stake from its first fund was a meager 4.2 percent.

Not so for Amadeus' second fund, which during the past 18 months has concentrated less on new investments and instead has doubled down on its current portfolio. The average company stake for its second fund is 22 percent. "With the first fund, we did all the work for an average of about 5 percent stake," Hauser explains. "Now we're doing the same amount of work, but for four times the stake. We're getting much more bang for our buck."

In the last year, Amadeus made several follow-on investments in its portfolio companies. Aside from Solexa, Amadeus pitched in on the $8.2 million second round for insurance industry software start-up Riskclick; as well as a $20 million financing of AePona, an Irish maker of telecommunications software; a $15 million injection for Transmode Systems, a Swedish maker of optical-networking equipment; and a $15 million third round led by Accel Partners in telecommunications-gear concern Cambridge Broadband.

The idea is to give companies enough cash to grow to a point where they can be more than acquisition bait for American buyers. "Ever wonder why European companies don't evolve into market leaders?" Glover asks rhetorically. "When the company is beginning to win, (European VCs) starve it of cash and then sell it to a U.S. competitor with weaker technology."

To correct this weakness, Amadeus and its syndicate partners have averaged an investment of $28 million per start-up, slightly above the American average and four times the Europe standard. "Why should we be any less ambitious than our entrepreneurs?" Glover says. "The reality is that technology is now a mainstream industry. You are funding against large incumbent competitors, so it takes more money than when tech was a niche business."

That's why Amadeus has set it sights higher and made its bets bigger, staking its future to companies that aim to bring important innovations to the world, from electronic newspapers to DNA on a DVD. "This is a hits business," Hauser says. "You're not going to make a fund successful with a two times or three times exit now and then. You're going to need one or two exits at 10 times or 20 times. If you have three, it's a blowout fund."

The firm must now rely on the promise of outsized returns as Hauser and Glover talk with investors who entrusted their cash to Amadeus the last time around--investors whose cash five years on is still wrapped up in a whole lot of potential rather than profits.

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