If European venture is a hard sell, Italian venture is even tougher. But that didn't stop two former executives of large private equity groups from plunging into the space with a debut fund.

It's no exaggeration to say that Claudio Giuliano and Marco Pinciroli caused something of a stir in 2005 when they set up Torino-based Innogest Capital. It was surprising enough that they had quit their positions as senior associate at Carlyle Group and director at BC Partners respectively – that they had done so in order to launch an Italy-focused venture capital start-up was jaw-dropping.

After all, in Giuliano's own words: “There's not as long a tradition of early-stage investing in Italy as there is in most of Western Europe. I'd say it's much harder to raise such a fund here than in the UK, France or Germany.”

Italy was no exception to the global trend that saw a sudden surge in venture capital activity during the internet boom. According to AIFI, the Italian private equity and venture capital association, Italy saw 339 early-stage investments worth a total of €540 million ($792 million) in 2000. Since then, however, the number of funds active in the space has dwindled to a handful. By 2003, the country was home to 65 such investments worth €59 million. In the first half of 2007, early-stage funds accounted for just eight percent of all funds based in the country.

Evidencing the kind of entrepreneurial spirit that he now expects from managers of portfolio companies, Giuliano says he and Pinciroli saw the moribund state of Italian venture three years ago as a compelling opportunity. “The buyout space was crowded,” he says. “In Italian venture, we saw the chance to gain an almost monopolistic position.”

In order to do so, however, the small matter of raising a debut fund lay in wait. By Giuliano's admission, it proved “very tough”. Nonetheless, after 18 months of fundraising, Innogest managed to close on €80 million in the summer of 2006. The fund had beaten its target of €60 million by a third and become the largest early-stage fund focused on Italy, according to Giuliano.

He adds that the fundraising gathered momentum after a slow start – once the first investors had been persuaded in, others more readily followed. Furthermore, by the time the process reached its latter stages, investor sentiment towards European venture was beginning to improve.

Innogest seeks to invest between €1 million and €1.5 million in target companies initially and a total of €4 million to €5 million over the life-cycle of an investment. The firm has so far completed six investments.

Giuliano says the biggest handicap for venture investors in Italy is a lack of good, experienced management. “We need managers who have played on the global stage and are willing to come into start-ups. But that's not an easy profile to find in Italy. There's no lack of people with business ideas – we see about 500 new opportunities a year – but there's not a big tradition of serial managers who start up businesses, grow them and sell them.”

In terms of how conducive is the tax and legislative environment for entrepreneurs, Giuliano says Italy presents a mixed picture. Although the country has something of a reputation for high tax and red tape, Giuliano says his experience of investing on a pan-European basis at Carlyle Group led him to the conclusion that the Italian market was no more challenging than any other “non-Anglo Saxon” market. It's a view supported by the European Private Equity and Venture Capital Association (EVCA), which, in its latest survey of tax and legal regimes in December 2006, scored Italy comfortably above the European average.

Giuliano says state-led initiatives, of the type which have given such a boost to young businesses in France, are generally lacking in Italy. One scheme he does highlight as “working well” is a co-investment fund that was launched in December 2000 as a result of Italian Law 388/2000, and which is managed by Rome-based bank Mediocredito Centrale. The fund will equal the amount of equity committed by a venture capital firm providing the target company meets certain specified criteria.

In an effort to do its own bit for the future of Italian venture, Innogest recently launched the Italian Venture Capital Hub, a place where private investors in Italy can meet and exchange ideas. “In the venture space it's good to collaborate and share risks, and we're trying to foster that collaboration,” says Giuliano. With 14 members signed up to the Hub to date, it appears that Italian venture is showing some welcome signs of life.