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European venture capital investment off to a sluggish start in 2004

The European venture capital industry has experienced a sluggish start to 2004, with a decline in investment activity in the first quarter of the year. Just E619m was invested in 172 deals during the first quarter, a significant drop from the increases experienced at the end of 2003, according to the latest figures from Ernst & Young and VentureOne.

France faced the largest decline with deal flow dropping by 58 per cent and Germany also saw deals drop, by 43 per cent, this quarter. But deal flow in the UK did not fall as steeply and Ireland reported a slight increase in the volume of completed deals and a significant increase in the value of venture investing, with a rise of 60 per cent.

Dwindling funds may have contributed to the decline in investment activity, as European venture firms have less capital to deploy than was the case a few years ago. In addition, many investors may be focused on raising new funds in a difficult fundraising environment, VentureOne said.

'There was a breakdown of venture investing in Europe in the first quarter. Only a handful of existing venture-backed firms received funding with only 108 follow-on later-stage rounds completed,' said Steve Harmston, VentureOne's director of European research. 'Also, only a handful of the more than 1,200 active European investors listed on VentureSource showed an appetite for backing technology businesses with only 67 investing in more than one European company.'

'Whether this is caused by a reluctance of entrepreneurs to accept venture financing with harsher terms attached or a reluctance of venture firms to invest money, if this market breakdown continues it poses a substantial risk to the long-term future of technology business in Europe,' Harmston concluded.

There are however signs of optimism for early-stage companies. Six venture-backed IPOs occurred in the first quarter in Europe, raising a total of E266.34m. This is more than twice the amount raised in European IPOs in the whole of 2003.

'After two years of dormant capital markets in Europe, the improvement in exits may finally provide relief to investors who have been required to sustain existing portfolio companies for some time now,' said Gil Forer, global leader of Ernst & Young Venture Capital Advisory Group. 'This activity should pave the way for more financings later in the year.'

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