Venture Capital Investment in Europe Increases 13% in Second Quarter Comparison, Led by Increased Early-Stage Deal Sizes

05/09/2006 - 10:41

Ernst & Young/Dow Jones VentureOne European Venture Capital Report
Finds Significant Activity for Seed and First Round Deals and Most
Technology Investment in Four Years

For the second quarter in a row, renewed interest in early-stage
investments boosted overall venture capital investment in European
companies. In the second quarter of 2006, a total of EUR 962.4 million
was invested in 213 deals, according to the quarterly European Venture
Capital Report released by Ernst & Young and Dow Jones VentureOne, the
publisher of VentureSource. This is 13% more capital invested than in
the second quarter of 2005. Deal flow was down by 30% from a year ago,
but steady with the first quarter of the year.
Among the trends in the second quarter were the significant size
of first- and second-round deals, the dominance of early-stage
activity in overall deal flow and the rekindled interest in select
technology and services segments.
"A very strong initial public offering market in Europe in the
second quarter is providing investors with the exits needed to enable
them to support the next wave of start-up companies," said Steve
Harmston, director of global research for VentureOne. "Despite a
tightening of the reins around deal flow, we are seeing the most
interest in initial financings, in proportion to the total activity,
since 2001."
As a percentage of total rounds, seed- and first-round deals
accounted for 43% of all rounds, and the actual number of rounds, 92,
was steady with the total count of early-stage deals from a year ago.
The capital raised was also up for seed and first rounds combined, by
37%, to EUR 282.8 million. But the gains in early-stage activity came
at the expense of other rounds. Deal count for second rounds dropped
by 41%, from 66 to 39, and later-stage rounds fell 39%, from 115 to 70
deals. Capital investment directed to second rounds displayed a 29%
increase, to EUR 266.5 million. Conversely, the amount raised in later
rounds declined 16% to EUR 362.5 million.
"With increased globalization as well as the emergence of new
innovation centers and markets around the world, it is vital for
early-stage companies to be properly equipped to compete in this new
landscape. The fact that the median size of early-stage financing
rounds is the largest it's been in at least seven years is clear
evidence that European start-ups are receiving the recognition and
resources that they need from their investors" said Gil Forer, global
director of Ernst & Young's Venture Capital Advisory Group. "These
larger early stage investments enable European start-ups to compete on
the global stage much sooner in their life cycle. In addition, the
predominance of early stage deals this quarter is a sign of a healthy
innovation pipeline in Europe that will generate potential market
leaders in the years to come."
Overall, the first round median reached EUR 2.5 million in the
second quarter, more than twice the size of a year ago when it was EUR
1 million. The median size of a second round was EUR 3.9 million, up
from EUR 1.4 million a year earlier. Later rounds were up only
slightly to EUR 2.3 million.
The favourable climate for early-stage companies was also
evidenced in the round distribution for the two most active countries
in Europe--the United Kingdom and France. In the United Kingdom,
early-stage deals represented 53% of deal flow and U.K. first rounds
raised 52% more this quarter than in the second quarter of last year,
registering EUR 90.5 million. First rounds in France accounted for 43%
of the deal flow, a much greater portion than the 29% they posted in
the second quarter of 2005. The capital directed to first rounds in
France also was up, by 120% from a year earlier.
As occurred in the U.S. in the second quarter, interest in
emerging areas such as energy as well as key technology segments are
drawing the attention of venture capital investors in Europe.
For example, the energy segment grew by one deal over a year ago,
but experienced a five-fold increase in the amount of capital directed
here to EUR 46.2 million. The largest deal in this segment was
alternative energy producer Ocean Power Delivery (U.K.) which received
a EUR 19.1 million second round.
The information technology segment as a whole had capital
investment increase 45% to EUR 583.6 million in the second quarter;
although deal flow was down by 50 financings. Still, this was the most
capital investment to the IT category since the second quarter of
2002, boosted in particular by increased activity for the
Internet-heavy information services segment. The overall IT median
round size was also up to EUR 3.1 million, from EUR 1.2 million in the
same quarter of last year.
Capital investment in information services companies increased
600% over the second quarter of 2005, to EUR 189.4 million, while deal
flow nearly doubled to 30 deals. The segment was also home to the
quarter's largest deal: EUR 66.1 million investment in Betfair (United
Kingdom), an online betting provider.
Deal flow to communications companies grew 80% over last year to
27 deals, and the capital investment here increased to its highest
level in two years: EUR 135.7 million. Among the largest deals here
was a EUR 23.3 million later round for CoreOptics (Germany), a
fiberoptic equipment provider. Meanwhile, software deals were off by
more than half, with only 47 posted in the second quarter, and capital
was down by 29% to EUR 160.5 million.
Total venture capital investment in the business, consumer and
retail category doubled to EUR 80.1 million; although deal flow was
relatively flat across all the segments. As a result, the median deal
size for the category more than doubled to EUR 2 million. Of note,
seed- and first-round financings accounted for 71% of the deal flow in
this category.
Unlike in the U.S., where health care brought in record-breaking
investment levels in the second quarter, venture capital activity for
the European health care category slowed from a year ago, with 50
deals and EUR 238.3 million invested there, decreases of 40% and 38%,
respectively. But the category was home to some of the largest
financings in Europe this quarter including the EUR 27 million
later-round in U3 Pharma (Germany), a developer of new cancer
therapeutics.
On a geographic basis, deal flow in France declined with 40 deals,
down 19 from the same quarter a year ago, but capital investment was
up slightly to EUR 157.5 million. Activity in Germany, which faltered
for several quarters, was relatively stable with 24 deals, bolstered
by a steady level of information technology financings. Capital also
remained steady at EUR 117.1 million. The United Kingdom remains the
most active country in Europe but deals were down 31% from a year ago,
to 64. Capital investment, however, was up 27% to EUR 326.6 million.
Deal flow in the Netherlands increased by three deals to eight, and
capital investment rose 29% to EUR 21 million.
The investment figures included in this release are based on
aggregate findings of VentureOne's proprietary European research and
are contained in VentureSource. This data was collected by surveying
professional venture capital firms, through in-depth interviews with
company CEOs and CFOs, and from secondary sources. These venture
capital statistics are for equity investments into early-stage,
innovative companies and do not include companies receiving funding
solely from corporate, individual, and/or government investors. No
statement herein is to be construed as a recommendation to buy or sell
securities or to provide investment advice.

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