Is the market for European venture capital improving?
Extracts from comments I made at the Intertrade Ireland Private Equity Conference in Belfast earlier this week in my presentation on Early Stage and Technology Venture Capital Investing and whether 2008 will see some major changes in the sector – see www.equityconference.org
Investments by European VCs are on the increase. The latest data for 2007 from Dow Jones Venture Source shows that European venture rose again in 2007 although the number of deals fell, reflecting a focus on later-stage deals. VCs now prefer to back companies which have progressed through the early, difficult stages, removing an element of risk. Indeed we have seen some notable VCs announce that they are pulling out of early-stage tech investing recently – 3i most recently following on from Apax some time ago. Meanwhile data for 2007 from the US PwC/NVCA MoneyTree report shows that venture investments are running at around the $7 billion per quarter level with VC investments up 10% on 2006 as a whole. This means that US VCs at least have a positive outlook on their investing opportunities.
The current high debt levels and the worsening credit crisis means that there is far less money going into European mega-buyouts from institutional investors, with more of a focus on mid-market funds and fund of funds. Maybe we will even see some of this investor money flowing into the VC asset class with the shift in investor focus away from mega-funds as a result of the turmoil in the credit markets. Things can only improve (one hopes!) in this area with just 4½% of European funds allocated to high-tech venture capital in 2006 (EVCA data). At least the VC industry is finally shaking off the high-tech boom and bust period and returns are starting to improve. But if the economy worsens and we get into full recession as consumer spending declines, corporate IT budgets are slashed, corporate revenues, profits and values decline, the commercial property market melts down, leverage buyouts suffer huge losses (as some in the industry predict), there are increasing corporate defaults and forced liquidations then there will be less money for M&A deals and less money available from the banks and other institutions for alternative asset investing – so it’s a mixed call.
There is evidence of funds of around euro 200 million each being raised by Europe’s top-tier VC firms. The focus will be on the established, proven players, those that survived the fall-out of the tech bubble, ie a relative “handful” of firms. VCs firms will be divided into those who have raised new funds and those who have not.
VCs are looking at Eastern Europe for opportunities (especially Russia where there is a fast-growing consumer base and high level of technical competence) and to India and China, although with some exceptions European VCs are mainly making introductions there on behalf of their portfolio companies.
Strong exits are forecast for 2008 (despite the credit crunch affecting the M&A and IPO markets). PwC IPO Watch data shows a much improving IPO market in Europe after the market bottomed in 2003 although it slowed down in Q4 2007 and, according to Regent Associates, technology M&A continued to perform strongly in 2007 with over 3,200 acquisitions in the European tech sector compared to 3,300 in 2006. Only recently VC backed MYSQL (the world’s largest open sourced database company from Sweden) was sold to Sun Microsystems for $1 billion.
European VC returns are likely to improve, not only because of the strong exits forecast for 2008, but also due to the improving capabilities of (and fewer number of) VCs in Europe and an increasing number of serial entrepreneurs leading first-class management teams. Also VCs are more sector focused with better value-add for their portfolio companies. The VC firm’s people model is changing to VC fund executives with sector-specific technology and sales & marketing backgrounds rather than the financial and accounting focused backgrounds of the past (though this expertise is still essential of course).
There is a much improving attitude to risk and entrepreneurship in Europe, as evidenced by the increasing number of serial entrepreneurs, but “fear of failure” still persists and a “drip feed” approach to financing ventures by VCs in Europe to help further minimise risk. It’s time to really celebrate and showcase our entrepreneurial successes in Europe with positive successful entrepreneur role models who can help enthuse our young people about entrepreneurship, encourage more children to study science at school and university, provide seminars in business, finance and marketing for aspiring entrepreneurs, share best practices and lobby for more incentives, initiatives and recognition for enterprise.
Just as the big players on the large private equity side of the industry are addressing their image, the venture capital industry in Europe needs to develop positive and proactive relations with the press to get its messages out about how it is helping to encourage innovation and generate wealth.
In conclusion, though fund-raising remains tough, the VC industry in Europe should be optimistic about its future now it is becoming more streamlined, consolidated and sector focused and as returns improve.
Tags: Venture Capital
