The news from across the Atlantic is not good for venture capitalists. US investment activity in the first quarter of 2001 came to about half as much as in the comparable period last year. It also recorded the lowest level of investment since the third quarter of 1999 in what is America's biggest decline in private investment for 13 years.
According to VentureWire, a website, private companies raised $14bn over 1,050 deals in the first quarter. A year ago, they had raised $27.7bn in 1,855 deals. The figures show an increase in average deal size to $14,932 from $13,333, or 12 per cent.
The last time the industry experienced a downturn lasting three quarters followed the stock market crash of 1987. But in Europe, venture capitalists (VCs) are putting a brave face on things, even going so far as to say that there has never been a better time to invest.
At the Capital IT conference in Paris, Benedict Tompkins, managing director at Broadview, which has venture capital funds on both sides of the Atlantic, said: “We think 2001 and 2002 will be vintage years for investors. Prices are attractive now and for the right company, the exit in three to four years will also be attractive.” And in Germany, John Fisher, managing director with Draper Fisher Jurvetson, is reported to have told investors and entrepreneurs it is a wonderful time to be investing.
Staffan Helgesson is another such confident investor. He is managing partner at Startupfactory, an early-stage investor in wireless technology firms based in Sweden and Finland. “I fully agree. There are still great tech opportunities. The world is moving faster and faster and there are still problems to solve. The timing is great.”
He says that dealflow in Europe has fallen by between 20 and 30 per cent, about half the decline experienced by the US. One explanation for this is that venture capital activity is still some way off saturation point in Europe, so more worthwhile companies remain available for investment.
Helgesson feels that the market slump has made his job easier. “As a result of the downturn, a lot of the opportunists have gone, both on the VC side and on the entrepreneur side. This means we spend more time on fewer deals.
“Valuations are also more reasonable now,” he continues, “although many entrepreneurs still have high expectations.”
But Helgesson has more to be pleased about. Dealflow in the wireless sector, he says, has only fallen by between five and 10 per cent. “And although dealflow may have gone down, deal quality has gone up,” he says, adding that this varies from VC to VC.
Ironically, wireless technology was the one US sector in which investment sped up over the last quarter. It experienced 16 per cent growth thanks to several large deals, including $290m invested into wireless scanning firm Airclic. The cash came from Symbol Technologies, Motorola, Ericsson Business Innovation and a private group led by investment bank Goldman Sachs produced the cash.
Although the wirelss sector is doing well relative to the industry average on both sides of the Atlantic, Helgesson says that American investment opportunities are very different to that of Europe. “We must divide it up,” he says. “Europe – I prefer to call it the Global System for Mobile communication (GSM) world – is definitely ahead on penetration, agreed-on standards and understanding of the technology.
“But the Americans are better on consumer applications and services people use,” he continues. “Take the Palm VII (a handheld wireless device) – the technology has been around for 25 years. The Americans are world class at getting things out there on existing technology.
He is also envious of the US market's size. “They have the advantage that the market is so much bigger,” he says. “If you are successful in the US market then you can do an IPO. In Europe, a Swedish company would have to crack four or five other markets before it can float.”
Helgesson says that the fragmented nature of the European market can affect consumer companies' ability to attract investment. “European VCs can be slightly more hesitant about investing in end-user companies for this reason,” he says.