European Venture Market Kicking Into Gear

Every month Go4Venture Advisers publish the ‟European Venture & Growth Equity Market Bulletin” featuring a proprietary Headline Transaction Index (HTI) of investment activity. The bulletin includes a comment on the recent developments in the European venture market.

In the bulleting published last week the authors report that signs are accumulating that we are moving into the upper part of the investment cycle: as venture market insiders actually temper their enthusiasm for venture investments, public market outsiders are piling in. It is only a question of time before retail investors join.

Behind those vagaries of the investment cycle the authors of the reports see a hidden genuine improvement in the functioning of the European venture funding market. Entrepreneurs are better educated about VC demands and therefore better able to deliver on them (global ambition, large exit and all that); the investor landscape has become much richer (if more complicated to navigate), resulting from a burgeoning enthusiasm for innovation and entrepreneurship across the board; the eco-system is getting denser, across Europe. And we are starting to see meaningful exits and valuations for European tech companies, e.g. Spotify on the funding side, or DeepMind, NaturalMotion and Supercell on the M&A side.

The authors comment: “we side with the optimists and believe that European venture is kicking into gear, i.e. will start being a genuine valuation driver – even if we will not avoid the boom and bust inherent to any market. In the case of technology investing, the fads are simply faster and bigger than in other, more steady verticals.”

In 2013 Go4Venture’s Headline Transaction Index finished well ahead of 2012 (+32% by value and +15% by number of transactions).

A few comments:

• The trend data is pretty robust: these numbers are in line with figures reported by market research companies such as Preqin, even if their data gathering methodology is quite different from ours.
• The average transaction size is going up, reflecting a drive for bigger outcomes (actually a mix of both riskier bets and less risky growth equity assets)
• The acceleration we saw from summer 2012 has now reversed, with a slower pace of growth since summer 2013. Is it a pause? Or are we going to see a sudden interest from big public market players (hedge funds, institutional investors, family offices, etc.) put the market into overdrive as in the late 1990s? As an asset class only worth c. €5bn a year, the European venture market is easily moved by a few hundreds of millions of asset reallocation from a handful of large asset managers.