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European venture investment slightly weaker in Q2 03 but rate of decline slows

European venture capital investment suffered a further decline in the second quarter of this year but there were faint signs that the long-running downtrend is flattening. Both the number of transactions and the amount invested dipped slightly but the average financing size edged upwards, according to figures published by Ernst & Young and VentureOne.

European venture capitalists invested a total of E709m in Q2, a decline of 1.5 per cent from the previous quarter. The volume of investments fell by three per cent. But the average size of financing actually increased from E1.7m in the first quarter to E2m in the second, its highest level since 2001.

While Europe's overall quarterly results appear largely unchanged, trends within specific sectors point to many of the same phenomena seen recently in the US. There has been some growth in healthcare and software sectors and a sharp decline in communications and networking investment.

Commenting on the similarity between European and US investment trends, Dave Cabral, Pan-European leader of Ernst & Young's Venture Capital Advisory Group said: ‘The fact that we can see such a clear correlation in industry trends, even in a quarter when US investment rose significantly and European investment was flat, points to the truly global nature of venture capital.'

‘Investors share similar views when it comes to the potential of the healthcare and software industries, and that potential stems from the shared problems society is looking to solve today.'

Cabral went on to point out that the emphasis on healthcare is a trend that is gaining momentum and overshadowing all areas of information technology except software, which has maintained strength throughout the economic downturn. ‘Together, biopharmaceuticals and medical devices deals constitute 27 per cent of European deal flow in the second quarter. This is unprecedented.'

Steve Harmston, VentureOne's director of European research believes that Europe may finally have hit the bottom and anticipates some improvement in the second half of the year. ‘After a long period of decline, the European market stabilised in the second quarter. Historically, the European venture market has lagged the US slightly in its reaction to favourable news in the general economic and financial environment.'

‘Given this, I expect the European venture market to build on its second quarter stability and follow the lead of the US with an upturn in activity in the second half of the year,' Harmston concluded.

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