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European venture capital investment held steady in 2004

European venture capital investment appears to have finally arrested its precipitous decline that followed the implosion of the technology bubble in 2000, according to new figures published by VentureOne and Ernst and Young. The value of investment in 2004 was E3.5bn, just a fraction below the level recorded in 2003, although the number of deals fell 20 per cent to 1,026 rounds.

Stuart Watson, leader of Ernst & Young's Venture Capital Advisory Group, said the steadying of investment activity reflected an improvement in exit conditions, which also provided some grounds for optimism about activity in the year ahead.

'In 2004, Europe saw significantly higher M&A valuations and the most VC-backed IPOs in three years, creating a clearer path to quality exits for investors which were likely an important dynamic in the stabilisation in European funding levels last year,' Watson said.

'Since venture-capital investment in Europe generally lags the US trend by approximately two quarters, there is reason to be cautiously optimistic that European investment will take up the US trend and shift from stabilisation to improvement in 2005,' he continued.

Although the value of deals done in the UK last year showed a modest decline of 2.5 per cent to €1,085m, the strong rise in the fourth quarter - up from €212m to €285m is regarded as an encouraging sign. The number of deals in the UK showed a fall from 336 in 2003 to 286 in 2004.

'The UK venture capital market showed signs of recovery by the end of 2004. Investors are working hard to pick real winners, particularly in the biopharma and other healthcare sectors. As a result we are seeing early stage investment showing strong growth and value per deal increasing as well. The froth has been blown off the market and quality not quantity is showing through,' Watson said.

Positive signals were also set by the early stage deals in 2004. Early stage rounds represented one-third of all deals in Europe in 2004 - compared to 28 per cent in 2003. The amount invested in seed and first rounds increased by 42 per cent over 2003 amounts.

A few European countries represented substantial increases in early stage activity for the year; seed and first rounds represented 28 per cent of all deals in France this year and 37 per cent of the deals there in the fourth quarter; in Ireland, 36 per cent of the deals in 2004 were for seed and first rounds; in the United Kingdom 40 per cent; in Denmark 44 per cent; and in Spain 55 per cent.

Germany posted its highest round median on record, at €2.4m for 2004, although deal flow in Germany dropped 27 per.

The UK's median amount invested rose to €1.7m, on par with 2002 levels. However, the number of deals in the UK declined by 15 per cent in 2004.

France also posted a higher median amount invested, with €2m for 2004. Also, deal flow there was relatively steady - declining by only 11 deals from 2003.

Looking at the sectors that attracted most of the investments, the research showed that investments into European healthcare companies increased 19 per cent to €1.5bn in 2004, even though there were 40 fewer healthcare deals. The largest deal was the €40m first-round investment in Novexel, a developer of treatments for fungal and bacterial infections.

The number of deals and the amount invested into IT companies declined in 2004, with 546 deals and €1.6bn invested - decreases of 19 per cent and 12 per cent, respectively, from 2003. Investment into communications companies increased slightly, with five more deals recorded in 2004 and 3 per cent more money invested. Semiconductor deals also held steady with 49 occurring - the same number as in 2003. However, the amount invested dropped 31 per cent.

Investment into energy-related companies also increased, with four more deals for the year and €33.5m more capital invested in this segment. Stephen Harmston, VentureOne's director of international research, concluded, 'Thanks to more progressive energy policies in Europe, this segment is beginning to garner significant interest among investors.'

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