European VC sees 3bn in investment

VC investment in Europe has already exceeded the amount invested in the same period of 2005 as Q3 2006 figures show the industries assets at nearly €3bn. If growth in investment in the VC sector continues as it has, it poised to surpass last year’s annual total, according to the quarterly European Venture Capital Report released by Ernst & Young. Despite the upward tick in investment, completed deals remain 26% off the pace of last year, with 631 financings. This statistic indicates that investors favor fewer deals but are supporting them with larger amounts. Rolf Mathies, co-founder of Hamburg-based Earlybird Capital said: “This statistic also supports the view that European VCs are favoring later stage deals, which, in turn, are more expensive.”

However, the Ernst & Young figures show that venture capital activity in Europe is increasingly focused on early-stage investing. Some 39% of the deals completed through the first three quarters of the year were seed- and first-round deals, compared to 32% last year. In the third quarter alone, 43% of the deals completed were seed- and first-round deals, up from 35% in the third quarter of 2005. Jim Feuille, general partner at Crosslink Capital told EVCJ that statistics should be viewed alongside the fact that investment cycles are shortening and IPOs can happen as soon as 18 months after the company’s formation. So what looks like an early stage investment may already have an exit strategy so he would consider it later stage.

So far this year, there have been 234 first round deals and 336 deals in the second round or later. The amount of capital directed to these financings has already surpassed the amount invested in the first three quarters of 2005 by 40%. Despite the positive figures, Q3 06 VC investment in Europe was down, with a total of €811.3m invested into 181 deals, declines of 15% and 35%, respectively, from the same quarter a year ago.

The overall median size of investment in Europe so far this year is €2.5m, and is the highest annual median since at least 1999. By country, France and Germany also are posting the highest year-to-date annual medians on record at €3m each; the U.K. is posting the highest annual median since 2000 with €2.6m.

On a geographic basis, capital investment in France after the first three quarters is up 36% over last year, to €624.7 m, although the 130 completed deals were 19% fewer than in the same period of 2005. Deal flow in the U.K. reached 179 deals after the first three quarters, down 31% from the period a year ago, but capital was up 5% over the same period to €967.2m. Germany posted 72 deals, a decline of 18% and investment was down as well, 22%, to €308.9m. In Sweden, capital investment was steady with a year ago at €206.1m but deal flow was off 21% with only 65 deals completed so far this year. In the Netherlands, deal flow was down by one deal to 15, but capital investment increased 72% to €65.2m. On a bright note, both Spain and Belgium posted three more deals than a year ago, bringing the total through the third quarter to 22 deals for each country. Capital investment increased even more. In Spain, investment was up 179% to €72.7m. In Belgium, investment was up 257%, to €121.8m.

By industry, investment levels in information technology (IT) moved in a positive direction with €1.50bn directed to the industry after the first three quarters of the year, an increase of 13% over the same period of last year. But corresponding deal flow was down 26% for IT companies. Within the technology category, the communications and networking segment has attracted significant interest. Deal flow to this segment increased by 16 deals this year and capital investment more than doubled to €329.6m. With €263.4m invested after the first three quarters, the information services segment, home to many of the Web 2.0 innovations, was up 48% from a year ago and deal flow was up by six deals.

Emerging segments, such as energy, have become solid investment areas in 2006. For example, the energy segment had 16 deals through the first three quarters, one more than a year ago and €66.6m invested.

The health care category has faltered somewhat this year, with deal flow declining 30% compared to the first three quarters of 2005 at 170 deals, and capital declining 12% over the same period to €1.07bn. However, the level of investment in health care companies in the third quarter is relatively steady with the same quarter a year ago, boosted in particular by a strong quarter for biopharmaceutical investing which saw €279.3 million directed to 28 deals. The largest deal of the third quarter was a biopharmaceutical deal—the €40m later-stage investment in Ablynx of Ghent, Belgium, a developer of therapeutic nanobodies used in drug targeting and validation.

The business, consumer and retail category has shown signs of growth this year, with 72 deals and €269.4m invested after the first three quarters, an increase of 54% over last year in capital. The media, content and information segment has been particularly robust with nine deals and €51.5m, almost five times more than was invested in all of 2005.