Another good month for European venture financing thanks to US investors

Every month the Go4Venture research team writes about the developments in the European VC market. A huge number of large investments and the challenges of European VCs are in the focus of the latest edition of the Go4Venture Bulletin.

On the investment front October proved to be a record month, with investment figures nearly double that of the same month last year by value. This follows a similar achievement, with September and August 2012 60% ahead compared to the year before. As a result, 2012 through to October is nearly 25% higher by comparison to the same period the year before.
 
Interestingly the October performance is driven by an unusually high number of Landmark deals (> €20mn). In fact we have 7 such transactions (if we include a couple just shy of the €20mn mark) out of a total of 13 Large Headline Transactions (> £5mn, €7.5mn or $10mn - depending on the reporting currency), the largest proportion ever.
 
This is yet another demonstration point of European venture landscape’s growing maturity: venture investors have realised that large absolute returns are required to attract Limited Partners. In short VCs are trying to remain relevant to their own investors, who are reducing their exposure to private equity and venture capital under regulatory and financial performance pressures. However as we have mentioned in previous issues of our Bulletin it is intriguing to note that most of these large European venture transactions are led by US VCs (Accel Partners, Canaan Partners, Redpoint Ventures, Stripes Group), and the rest by non-European investors from private equity (Access Industries), investment management (Sofina) or industry (Sasol Energy).
 
Clearly indigenous players are lacking the financial firepower even if it is heartening to see that all these companies were initially funded by some of Europe’s best early-stage players (for example in October: A Plus Finance, Balderton, CM-CIC, Creathor Venture, Eden Ventures, Idinvest and Index Ventures).
 
As in previous months the majority of Large HTI transactions meet the following, rather narrow criteria:
C or Late Stage companies (11 out of 13 – 85%!)
Internet services and digital media (8 out of 13 – 60%), with the rest in cleantech (3) or software (2)
UK-based (7 out of 13 – 55%), with Germany (3), France (2) and rest of Europe (Denmark this month) trailing well behind
 
Against this rather specialised investment focus existing European VCs, even those with a decent track record, are struggling to raise funds, and much of the action is with new funds. New Funds – In October four of the six funds making announcement were either new funds (e.g.: €45mn Kibo Ventures for Spain) or funds focusing on new economies such as Russia (e.g.: Elberus, and Baring Vostok) or Turkey (e.g.: Maditerra Capital).
 
Existing Funds – Creathor Venture, an early-stage specialist focusing on German-speaking Europe finally raised its third fund, after nearly two years effort, even though management provided over 20% of the €80mn fund. Atomico Ventures did a first close on its second fund at $280mn (€215mn), but with a more resolute focus on larger transactions and investments outside Europe (including Brazil). Iris Capital, an established Paris-based player with a 20+ year track record, completed its total transformation (started in March 2012 with a major €150mn investment by telecom operator France Telecom and advertising agency Publicis) by opening up a series of offices spanning North America (Canada, California), Asia (Beijing, Tokyo) and the Middle East (Dubai, Riyadh) in addition to its traditional presence in Europe (Paris, Dusseldorf). Even mighty Index Ventures is not standing still, and is probably becoming the first European VC to cross over to the US to become one of the Valley_s insiders. This is the effort required to remain relevant. This is how significantly the VC game has changed.
 
Hence the complete disconnect between dejected European VCs struggling to raise new funds, and record venture investment levels in Europe, except much of the action is growth equity rather than strictly venture, and much of it is led by new players moving into Europe targeting late-stage in the rather specific niche of internet companies (including ecommerce, disintermediation plays, digital media and SaaS) and accessorily cleantech. In practice this also means that the bar for truly new startups has gone up tremendously in terms of expected levels of ambition and demonstration points before venture investors are prepared to get involved, and some sectors have become near-no-go areas (e.g. semiconductors). Future entrepreneurs should take notice.