2009 was the worst year of the millennium for venture investment within Europe according to the Dow Jones tracking site VentureSource, with IT investments falling below €1 billion for the first time. Venture capitalists invested €3.2 billion in 916 deals last year, a 41 percent drop from the €5.1 billion put into 1,234 deals in 2008.
So what is going on exactly? Venture capitalists are favouring more capital efficient deals and giving companies only what they need to reach the next milestone. According to VentureSource’s Arno Castanet this not only hedges investors’ risk, but also allows them to hang on to more capital at a time when raising funds and finding liquidity are difficult.
The entire sector is under pressure not only from the collapse of interest rates and their governments’ attempts at austerity, but perceives itself under threat from theproposed European Union Alternative Investment Fund Managers Directive (AIFM), which will be an attempt to regulate the industry. But if enacted in its present form, this directive would impose substantial new costs on the sector and would make Europe a profoundly less attractive place in which to conduct private equity business. But it may be more of a problem that it’s causing what the London Daily News has called a damaging and frankly unnecessary reform which could spark a trade war with the United States.
US investors including some of the heavyweight Silicon Valley Venture Capital firms like the Mayfield Fund are keenly interested in the European technology sector and it would be tragic to freeze them out. The US Treasury Secretary Tim Geithner has already rattled his sabre in a letter to the new EU Internal Markets Commissioner Michel Barnier, in which he says: “We are concerned with various proposals that would discriminate against US firms and deny them access to the EU market that they currently have. We strongly hope that the rules that you will put in place will ensure that non-EU fund managers and global custodian banks have the same access as their EU counterparts. You will see that our approach in the US maintains full access for EU fund managers and custodians to our market.”
So European VC operators are under stress, with the largest deals taking the biggest hit. Many venture capital firms in Europe are focused on their portfolio companies and have little appetite for new deals, according to Jean Schmitt, a managing partner at Paris-based Sofinnova Partners. The only people, it seems, who can take any heart from this situation are businesses in the renewable energy and new technology sectors. Most of what activity there was last year came from seed and first round funding, which accounted for 49 percent of the total European deal count. Later stage deals accounted for just 26 percent.
The entrepreneur Steve Kelly, owner of SmartKem based at Optic Technium in Wales has sought funding through both private investors and government-backed investment funds. Being about to enter a second funding round, Steve keeps a very close eye on the capital markets. “We are developing smart materials as an alternative to silicon chip based semiconductors,” he explains. “The UK government is investing into the plastic electronics sector firstly to allow small businesses to work with specialist centres to prototype materials and devices and secondly to set up supply chains and sales channels into Asia in particular.”
Plastic electronics, developing materials and processes tocreate high resolution microelectronic components directly onto thin flexible materials, is very much a technology of the future. While infrastructure, business and financial services have lost their savour for the VCs, they are all keen to take a position in fields that may drive the next ‘bubble’.
This presents an opportunity for small agile investors likeHigh-Tech Gründerfonds based in Bonn, whichinvests in technology-based start-up companies with significant growth potential. In the UK Julie Meyer, CEO of Ariadne Capital recently set up a £20 million fund to invest in internet and mobile internet companies at the seed stage. “Hard times can build the tension necessary to create a great team and product, and go to market; but if a company is under-capitalised it won’t succeed, so that’s the thing you have got to get right. Enough capital to hit the next milestone, but not so much that you don’t have the right discipline,” she says.
Europe shouldn’t be afraid to ship some of its bulkier industries eastwards. Smart investment in the smart technologies that will take over from them have unforeseeable potential, and the banks may never even get a look-in.