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Venture capital investment in Europe remains steady at €1.07bn in Q1 2007
01/08/2007. Source:Ernst & Young, VentureOne.
 Coming off the strong growth made in 2006, venture capital investment into European companies flattened in the first quarter, with €1.07bn invested in 207 financings, according to the quarterly European Venture Capital Report from VentureOne and Ernst & Young. Compared year-on-year, both capital and deal flow decreased 11 per cent from the first quarter of 2006.
The first quarter found investors renewing their interest in information technology, which showed signs of a significant comeback; there were 9% more deals and 6% more capital invested in this industry than in the same quarter a year ago. In addition, later-round financings were at their highest point in a year and second round financings also showed significant growth. Another positive sign, according to the report, was that median round sizes across all industries improved upon last year’s increases to reach the highest point on record at €2.7 million overall.
“The continued growth in round size, especially in second and later rounds, indicates that investors are providing the most promising portfolio companies with the resources needed to progress along the path to exit," said John de Yonge, Global Research Director of Ernst & Young's Venture Capital Advisory Group. "Last year saw the most venture-backed initial public offerings in Europe in six years and steady acquisition activity. Investors are focusing greater capital and attention on the subset of companies with the most potential to take advantage of the supportive exit climate in the near term."
Later Rounds Dominate Activity
Forty percent of the rounds in the first quarter were later-stage rounds, the largest percentage since 1999. In addition, the €606.7 million directed to the 83 later rounds was the most capital invested in this round class in a year and represented more than half of all capital invested in Europe in the first quarter. Capital investment into second rounds also showed a significant quarter-on-quarter increase, growing 21% to €257.1 million. The median size of second and later rounds is now €3 million and €3.5 million, respectively. Seed- and first-round financings, meanwhile, made up 37% of the deal flow in the first quarter but only 19% of the total investment.
Round allocations varied by industry. Healthcare financings in the first quarter were particularly dominated by later rounds, which made up 55% of the deal flow activity to this industry. Conversely, information technology saw more early-stage activity with seed- and first-round deals representing 41% of financings.
Information Technology Posts Significant Growth
Information technology had the most significant upturn of any industry in the first quarter, according to the report. In total, €550.2 million was invested in 133 technology deals, representing €30.1 million more in capital and 11 more deals from the first quarter of a year ago. The software and information services segments showed the most activity for the sector. Software deals increased by 20% over the same period a year ago to 73, and investment increased11% to €222.5 million. More dramatically, deal flow in the information services segment increased 131% to 30 deals, and capital increased more than two-fold to €114.7 million.
“The emerging interest in Web 2.0 technology—which is mostly focused in the information services segment—seems to be fueling this growth in European technology investments,” said Jessica Canning, Director of Global Research for VentureOne. “In addition, the number of IPOs for information services companies doubled over the past year and this is likely a factor in investors’ preference for the segment this quarter.”
European venture capital investors also invested more in energy companies, according to the report. There were 10 energy deals in the first quarter, only slightly more than the nine that occurred in the same quarter of 2006; however the capital invested in this segment more than doubled to €58.6 million.
The healthcare industry in Europe was more constrained in the first quarter, the report found. The 38 healthcare deals and €387.8 million invested here represented declines of 42% and 19%, respectively, from the first quarter of 2006. Nevertheless, the €50 million second-round investment in antibacterial company Novexel of France was among the largest deals of the first quarter.
European Activity by Country
France surpassed the United Kingdom to post the most deal flow activity in Europe in the first quarter, with 60 deals and €297.8 million invested. This represents an increase of 36% over the same quarter of 2006.
There were 58 deals and €317.6 million invested in the United Kingdom, representing declines of 11% and 28% respectively.
Investment also declined in Germany, where there were only 16 financing rounds completed, down from 29 in the same quarter last year. Capital investment did not fall as far, down only 13% to €122.0 million.
Switzerland showed significant increases with twice as many deals (12) as the first quarter of 2006, and €69.1 million invested, an increase of 170%.
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Dow Jones VentureOne (www.ventureone.com), a unit of Dow Jones Financial Information Services, has been the leading provider of finance and investment data to the venture capital industry for almost 20 years. Dow Jones VentureSource, a sophisticated electronic database on the venture capital industry, is published by VentureOne.
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