Selectively confident

Last year’s $4 billion acquisition of  venture capital-backed free web telecoms business Skype may have only briefly diverted attention away from the club deals and mega fundraisings of the buyout sphere, but investors appear to have renewed their interest in European venture capital, albeit on a modest scale.

European venture capital investment grew to €1.02 billion ($1.31 billion) in the first quarter of 2006, driven by increasingly larger individual round sizes and additional capital directed at early-stage companies, according to the latest figures from Ernst & Young.

However, as an indication of rising deal sizes, the European Venture Capital Report said that deal flow had decreased by almost 25 percent, or 62 deals, to 200.

While venture capital in Europe has largely been in the doldrums since the dotcom bubble of the early 2000s, there has been a gradual increase in interest and optimism over the last year.

Ernst &Young said that seed and first-round deals had largely been the benefactors of renewed attention from investors in European venture capital. In total, there were 71 early-stage deals and €322.4 million invested. Again, as part of a trend showing rising average deal sizes, this was six fewer deals than in 2004, but an increase of 44 percent in value and was the largest amount of capital invested in early-round financing since the first quarter of 2002.

“Although there was a decrease in early-stage deal flow, 36 percent of all the rounds completed in Europe were for seed- and first-round deals,” Gil Forer, global director of Ernst & Young’s venture capital advisory group, says in the report. “Investors also appear to be selecting among the most promising new opportunities as the size of those deals is rising as well, with first rounds reaching a median €2.5 million, the highest point since at least 2000.”

This was particularly the case in the traditionally strong venture capital markets of the UK and France, with the latter seeing seed- and first-round deals making up 40 percent of financing rounds, while 45 percent of the quarter’s completed rounds in the UK were first-round deals.

According to Ernst & Young, the reopening of the IPO window in Europe has bolstered confidence and venture fund performance. This may also have led to institutional investors making allocations to new European venture funds.

In early March, the European Private Equity and Venture Capital Association (EVCA) reported that €12.6 billion had been raised for venture funds during 2005, a 44 percent increase on 2004 figures.

Although the amounts being raised was still seen as “modest”, Javier Echarri, EVCA secretary general, told PEO at the time that “for the first time in a few years, there has been a much higher allocation to early-stage private equity and technology investments in particular, which is extremely good news for the sector”.

While admitting that venture fundraising still needed to increase at least two-fold before reaching levels comparable to 2000 and 2001, Echarri said that “investors not currently considering venture in Europe are probably missing out on opportunities going forward”.

Already this year, there have been a number of successful fund closings across Europe, suggesting that investors are taking note of those opportunities.

Last month, Scottish Equity Partners launched what it believes is the largest current UK-focused venture capital fund, having already raised £120 million of commitments. The same month, Amsterdam-based Life Science Partners launched a biotechnology-focused vehicle with $100 million from cornerstone investor Syngenta and a target of $125 million.

In March, Paris-based biotech and IT investor Ventech launched the marketing for its €150 million target third fund. Other successful fundraisings in France in the last year include Edmond de Rothschild Investment Partners’ closing of its €165 million Winch Capital vehicle ahead of target and Sofinnova Partners and Banexi Ventures closing oversubscribed vehicles on €385 million and €130 million respectively.

In Germany, where the venture capital industry has been hit hard in the last few years, German fund of funds manager VCM closed its sixth venture- and growth capital-focused fund of funds with $100 million of commitments in April. However, the firm is also currently raising its first buyout fund of funds vehicle in an attempt to be more “flexible”.

Uli Fricke, a co-founding partner of Frankfurt-based technology venture capital investor Triangle said in April that there had been some gradual improvement from investors who were more and more willing to look into European venture capital.

Confidence, said Fricke, was largely the result of successful exits, which were still few and far between in the country. The firm recently sold majority stakes in its current portfolio to an unnamed secondaries buyer and Fricke said that it was still on course to reach its target of €50 million for its fourth venture capital fund.

This week, Wellington Partners and Earlybird, both venture capital firms with German bases, saw a 2000 portfolio investment successfully IPO on the Milan Stock Exchange. Matthias Guth, a principal at Wellington Partners, said that the IPO was evidence that the public markets are opening up again for venture-backed firms and that would lead to further investor confidence.

There was, however, a note of caution. “It’s an interesting time and there are interesting opportunities for investors, but you still have to make sure that you only take really high quality companies public, otherwise it’s just a pure fundraising exercise and nothing else.”

If the European venture capital industry is to maintain that interest in its current and future assets, it would do well to be extremely selective.