July another good month for the European equity financing market

In its monthly report the Go4Venture research team describes the European equity financing market as “healthy”. Interesting are the highlights mentioned in the report:

• Sources of financing have become much more diverse – If existing venture funds are suffering - resulting in fewer, larger funds - a range of new funds are entering the market (primarily sponsored by former entrepreneurs). Beyond VC funds themselves a broad range of corporate investors are now leveraging their sector expertise, and family offices as well as High Net Worth Individuals (HNWIs) are chasing investment opportunities. And at the late-stage end of the market, cross-sector lower mid-market funds are jumping in, filling in the gap left by cross-stage tech funds which have migrated to bigger deals (General Atlantic, TA Associates, Warburg Pincus, etc).
• The innovation gospel is spreading – What has been the hallmark of Silicon Valley - an unquestioned and innate belief in the value of entrepreneurial endeavours regardless of failures and excesses - is now spreading to various corners of Europe. And what was initially driven top-down by self-serving political figures has now been hijacked by an ever growing range of cities and regions, in turn feeding a grassroot entrepreneurial movement which is increasingly taking a life of its own.
• US funds are moving in – As commented in our previous issues, US funds are becoming more prevalent in Europe. Not only those with permanent offices but an increasing number flying in for the right opportunities. With them comes expertise, access to the US market (and US acquirers!), ambition and of course self-confidence, i.e. many of the ingredients which European venture has traditionally lacked.

 
But like in the report for June the team sees also some risks: The main indicator (just as in 1999) is a growing number of me-too investments which investors are trying to pull off by outgunning (read outspending) competition, in turn driving up valuations for hot companies in hot areas. This primarily concerns the internet world. Segments which spring to mind include (in no particular order): private sales, coupon offers, restaurant bookings, take-away ordering, flat sharing, furniture to order, smartphone-based payments, music apps. Wise investors will aim to find investment plays which have a defensible positioning rather than relying on investment to get ahead of the pack. Recent examples of publicly listed debacles (Groupon, Facebook, Zynga) are rather illuminating from that point of view. At least this investment bubble is not Europe-specific and hopefully Europe’s tradition of capital efficiency will help in reigning in this somewhat worrying trend.