The beginning of a boom in European venture investments?

The recovery of the venture funding market was driven by three key factors:

• The venture funding market now includes a healthy dose of growth equity as well as venture investments (break-even or profitable vs. cash-burning companies). Expansion capital is now approximately a third or more of the venture funding market by value.
• Internet is encouraging a growing number of “Landmark investments” (€20mn or more) which are internet-related momentum investing bets (now representing probably a third of the market by value).
• New types of investors (corporates, private equity funds, etc.) are replacing venture funds as the main source of venture funding. For the first time, in 2012 VCs’ market share went below 50% (by value) according to the data of Go4Venture.

Nearly a year ago, in summer 2012 Go4Venture showed an acceleration of the funding going to European venture and growth equity. This acceleration has now tapered off but the gains have remained. Nine months later, May 2013 is seemingly another turning point, this time showing signs of overheating. The authors of the bulletin comment: “In our view, this is the beginning of the upper part of the investment cycle, i.e. if history repeats itself (1996-2000), we can expect c. 3-5 years of great returns until the next bubble bursts (if we use the Facebook IPO as the starting point for the upper part of this investment cycle).”

One sign for this development is a large number of very ambitious Series A investments including the €10mn financing round of Urturn. In all cases, these are investments in hot spots with gifted (and often high profile) entrepreneurs, and typically on the back of a few years of tuning the business model before turning to institutional money. But the authors of the bulletin think that we’ve seen the movie before, it is just a matter of time before investors relax their criteria and we will soon see awesome Series A fundings with first-time entrepreneurs, for companies started last year, with little traction, around some hot theme like “big data” or “cloud”.

Even though the authors admit that “in a way it may be a good thing to push for a more aggressive style of investing in the European venture market” they say: “on balance we prefer to warn against over enthusiasm”.

The Go4Venture Advisers’ European Venture & Growth Equity Market Monthly Bulletin provides a summary of corporate finance activity among emerging European TMT companies:

• Investments, i.e. Venture Capital (VC) and Private Equity (PE) financings, including growth equity, financing rounds with single secondaries components (recapitalisations); and
• M&A Transactions where the sellers are VC and PE-backed European companies, including all majority transactions with no new investment going into the business (e.g. acquisitions, MBOs and other buyouts).

Investment activity is measured using Go4Venture’s European Tech Headline Transactions Index (HTI), which is based on the number and value of transactions reported in professional publications.