Paradigm moves quickly

Financial News, MAR.28, 1999

Paradigm Ventures, the venture capital company set up by Esprit Telecom founder Michael Potter at the end of January, has made its first investment just two weeks after officially starting operations.

Potter believes he has found a gap in the market because most venture capitalists and corporate ventures do not move fast enough for the ever-changing world of telecommunications and the internet. The view stems partly from his own experience when trying to raise venture capital for Esprit in 1992, and comes despite the fact that two of the most respected and nimble firms in the industry, Apax Partners and Warburg Pincus, backed Esprit. "I have a view that the industry changes every 100 days," says Potter.

"A number of venture capital firms have big unwieldy credit committees and it can take them five or six months to approve an investment. The corporate venturing people can add value, particularly in terms of strategic relationships, but their decision-making process can take even longer than the venture capitalists."

Paradigm has certainly got off the blocks quickly. It took Potter just one month to raise $100m, despite officially still being an employee of Esprit. He would not say who the investor were other than that they were prominent North American entrepreneurs from the communications and software industries. The process was no doubt speeded up by a substantial contribution from Potter himself, who made a sizable fortune when GTS bought Esprit for 458m in November 1998.

Potter did not approach institutional investors because of the ease with which he raised the funds, though he envisages taking his begging bowl out late this year or next. The goal is to generate annual returns of 30% to 35%.

Paradigm took a 14% stake in GlobalConnect, Denmark's fifth largest international bypass carrier, for an undisclosed sum. GlobalConnect provides dark fibre and other high bandwidth capacity to carriers and large users, including IBM and the Danish government, and Competitive Local Exchange Connect services, giving users high speed local connections to service provider infrastructure.

Jesper Hart Hansen, GlobalConnect's managing director, declined to give performance figures, but said that the company had always made a profit, though this may not be the case over the next two years as an aggressive expansion programme is pursued. The next phase of expansion will be a link with Hamburg in Germany.

Potter describes the company as being like Fibrenet or Colt Telecom in their early days. Colt, which listed in December 1996, now has a market capitalization of more than 6bn. Potter sees this investment generating year-on-year returns of more than 100% over a five-year period.

It was Potter's operating experience and knowledge of the regulatory environment - he has been a vocal campaigner for the liberalization of Europe's telecommunications industry - more than the money that appealed to GlobalConnect. Hansen says: "Having his business knowledge on our side of the table and his active participation on the board will create value well beyond the actual financial package."

Paradigm is looking for a managing director, though the firm has a number of consultants paid on a contract basis. All have considerable experience in "cyber-related industries", which is what Potter says gives his company the edge over other venture capitalists. Potter says: "We can add more value in terms of what is needed to take a company to the next level."

Venture capitalists are increasingly turning to people with industry experience to give them an edge over the competition and maintain returns in an increasingly competitive environment, but Potter is the highest profile figure on this side of the Atlantic to go it alone.