Venture Capital- why all the
doom and gloom? Its time may just have arrived.
By Shamsa Rana
It
has been clear for some time that European private equity is the favoured
son when it comes to investment into alternative asset classes, while
venture capital is the poor relation. This view was echoed by the
majority of the Limited Partners who attended the Super Investor conference
in Paris, and they openly commented that they would be committing
the majority of their funds into mid-sized to larger buyouts. Their
decision is driven by a combination of ensuring solid returns which
private equity has been delivering while working to minimise risk.
In truth, any rational individual would not refute this logic. If
a magic formula works, why would you wish to fix it? Of course, this
left those of us looking to raise a European focused venture fund
a bit anxious.
That said there were some interesting talks given, and most amusing and yet alarming was Jon Moulton's which compared the demise of the dinosaurs to the current state of private equity. Suffice it to say, Jon made some interesting comments on the larger and larger sized funds being raised, excess capital chasing far too few deals, the threats posed by cheap debt and the preponderance of secondary exits. If Jon's "alarmist" view is in fact an accurate reflection then perhaps I might suggest that Limited Partners review their commitments to European venture capital.
It might just be time for us to openly ask the question that Americans attending the conference privately kept asking each other and their foreign peers - why is Europe so negative about venture capital? If one examines venture capital investment in the US, it is easy to see why the American attendees at the conference were puzzled. According to the National Venture Capital Association in the US, investments into US venture capital firms have jumped 62% in the first three quarters of 2005 over the same period a year ago. Over the nine month period to Sept, VCs raised some $17.3 billion, surpassing the total for all of 2004 in just three quarters and in the third quarter alone, 45 firms raised investment funds worth $5.39 billion, up 11.6 percent from the $4.83 billion that 54 firms raised during the year ago quarter.
European investment into venture capital has always clearly lagged behind the US, but one can argue that this has always been the case. We are all familiar with the ongoing debate on whether Europe can ever be a hotbed of entrepreneurial development and build multi-billion pound businesses. It's an age old debate, and one that I do not wish to enter into. Europe, I believe, has a long history of building great businesses that are notably different from their American counterparts. These businesses fit the needs of their consumers and environments from which they emerge. Enough said.
But is venture capital in Europe dead? Should we at Ariadne pack our bags and move to the US? I think not, as Oscar Wilde said, rumours of my demise have been over-exaggerated. The venture capital situation in Europe is not all doom and gloom. In fact, according to data compiled by VentureOne, European venture capitalists have seen a spike in fundraising in the second quarter, when investors contributed €729.9 million ($886.6 million) to new funds in 2005, up from €457.4 million ($555.6 million) during the same period in 2004. According to VentureOne, the 60 percent jump can be attributed in part to two French funds: Banexi Ventures, which raised €130 million ($157.9 million) for its fourth fund, and Iris Capital, which raised €176.6 million ($214.5 million) for its second fund.
In truth in the first half of the year, European VCs raised more than €200 million ($242.9 million) more than they did in the whole of 2004.
As for the investment of these funds, in the third quarter of 2005, venture capital investing into European companies increased with €798.2 million invested into 224 deals, according to the European Venture Capital Report released by Ernst & Young and Dow Jones VentureOne, the publisher of VentureSource. The amount invested was a slight increase over the €790.3 million invested in the second quarter and as reported by Ernst & Young. One of the bright spots was the higher level of interest in early-stage companies, with seed- and first-round deals in Europe making up 38% of the total deal flow in the third quarter, the largest representational amount since the fourth quarter of 2001.
The facts speak for themselves. General partner firms are successfully raising venture capital fund and investments in early-stage companies have increased and there have been a number of highly profitable exits led by Skype but also a number of buy-outs, especially in the area of new media (refer to my article on new-media, also in this Journal). It is of course important to recognise that it is early days in the recovery of European venture capital. However, it is time that we as an investment community become a bit more realistic about the importance of venture capital.
In a recent report released by the European Private Equity and Venture Capital Association (EVCA), venture capital and private equity financed companies created 1 million high quality jobs in Europe between 2000 and 2004. Although my peers in private equity will argue that the majority of these jobs were in private equity, venture capital-backed companies represented 630,000 new jobs between 2000 and 2004. Further, those firms employing fewer than 20 individuals demonstrated the highest rate of employment growth, averaging about 70 percent per year between 1997 and 2004.
So, what does this tell us? The herd may in fact be following the money into private equity - but maybe the smart money should look into venture, as you never know when the dinosaurs may in fact catch a pandemic flu?
Sources:
Red Herring:
VC Action: Fundraising Up 62%,
VCs pick up more money through the third quarter than all of 2004.
November 7, 2005 Print Issue
RedHerring:
VCs Creating Jobs in Europe
Study shows venture capital and private equity are driving employment
in the European Union.
November 25, 2005
RedHerring:
VC Funds Jump 165% in Q2
Investors show confidence in venture capitalists by plowing more than
$6 billion into VC funds in the period. More VC News:
August 22, 2005
Ernst & Young/VentureOne
Quarterly European Venture Capital Report Finds Half of Invested Capital
Still Directed at Later Stage Rounds:
European venture investing improves along with early stage deal flow
in third quarter of 2005 European venture investing improves along
with early stage deal flow in third quarter of 2005.
London 15 November 2005: In the third