European VC Market Ploughing Ahead

September was another solid month, but with fewer landmark transactions (deals of more than €20 million), resulting in a slightly lower overall investment value. We are still up by close to 40% this year though. Two Swiss Investments are mentioned in the bulletin: the Series B round of CeQur and the Late Stage financing round of Wisekey. M&A exits were also very active, particularly at the global level (fed by three large transactions involving BlackBerry, Nokia and Tokyo Electron) with European VC & Growth Equity exits showing also a good month with 5 transactions above $50 million reported.

Investment
Activity remains centred around internet investments (1/3 of the number of transactions, and 60% including SaaS related businesses) and growth equity-like transactions (2/3 of investments). In internet, the Go4Venture team sees the beginning of a move towards a more conservative stance, with fewer e-commerce plays making room for:

• More information platform plays minimising offline transaction friction.
• A continuing SaaS trend, which is disrupting one software segment after another.
• Tools to support the internet data flow, in particular security (WISeKey) and mobile internet.

Medtech and cleantech are still under-represented (1 and 2 transactions, respectively), with IT services making a surprising showing, reflecting the growing influence of private equity style investing in the venture world based on recurring revenues (in this case via managed services) and accelerated growth via acquisitions and superior management execution.

Fund-raising for funds is continuing its upward trend, with most GPs reporting more optimism - providing their exit track record stands up to scrutiny. New funds which were announced included: Paris-based Idinvest and Partech International:

• Idinvest continues to line up thematic funds in partnership with established corporates, this time the Idinvest Digital Fund II together with French media group Lagardere.
• Partech International has taken advantage of a €600 million French State-backed early-stage fund of funds called FNA to launch a €30 million seed fund together with various business angels (the FNA scheme is similar to the UK’s Enterprise Capital Funds).

As commented before, renewed interest in European venture is partly driven by the search for growth in the context of a moribund macro environment, low interest rates and the lack of exciting newly publicly-quoted tech companies (with only a few exceptions). There is also a growing realisation that, with this new investment cycle, Europe might finally produce substantial exits with more predictability. What is for sure is that the European venture mindset has changed, with everybody’s sights set on larger exits. Interestingly, at a recent Tech Tour Growth Equity conference the Go4Venture team spoke at, one of the panels was specifically on: “Reset Ambition: From 100M to 1B”.

However the authors of the bulletin stress: "Of course, we all have to be careful not to get too carried away." Insiders themselves are starting to notice, with people like Elon Musk (founder and CEO of both Tesla and SpaceX; not a shy man!) pointing out that “the stock price that [Tesla has] is more than we deserve”, and Reed Hastings (CEO of Netflix) warning of “momentum-investor-fuelled euphoria”.

The Go4Venture Advisers team sees the real danger in a sense of excitement filtering down to Series A and seed investments – and setting unrealistic expectations among early-stage entrepreneurs (already fuelled by the widespread availability of tax-incentivised – and therefore risk-anesthetised – seed funding). One of the illusions is the speed at which one can build substantial, lasting innovation in the context of an immature, border-ridden and culturally diverse European market. Of course, one answer might be to take the company somewhere else. Another is to keep the balance right between the level of ambition and the true level of execution capabilities, while improving the team over time to raise the aim.

Exits
The global tech M&A market was rather lively in September, with four multi-billion (>€3 billion) transactions involving well-known names. In all cases, these were large transactions reflecting the never-ending consolidation in various tech segments, be it semiconductor manufacturing equipment (Applied Materials/Tokyo Electron), electronic components manufacturing (Koch Industries/Molex) or mobile handsets (Microsoft/Nokia Device and Services).

Among European VC and PE-backed companies, this month saw five disposals above our self-imposed $50 million threshold, three of which have a long-standing VC heritage: OB10, Tirendo and Grapple Mobile.

What is not covered in the Go4Venture bulletin are the smaller transactions. The authors expect more of these transactions, where a corporate acquires a company it has invested in. This is part of the big pharma/biotech open innovation model spreading to the rest of the tech industry. While many will be concerned that start-up investors don’t see the optimal return in such transactions, Go4Venture’s view is that this brings more predictability to the outcome, something European venture has sorely lacked to date. And the price paid will also depend on how well the investment transaction was structured in the first place. In fact, the authors of the bulletin see corporate investment as a durable trend in venture funding, and one which needs to be harnessed by entrepreneurs and their backers.

The monthly Go4Venture bulletin can be downloaded at the website of Go4Venture Advisers.