European start-ups struggle to attract VC

Venture capital investment in young European companies declined in Q1 2007 – down to €1.4 billion. What are some of the challenges that young European businesses face when attracting VCs?

European businesses attracted just €1.4 billion of venture capital in Q1 2007 – down from €1.6 billion in Q4 2006. Several big exits have created a €627 million net outflow of equity capital from venture-backed companies during Q1 2007, according to data business Library House. Such exits include the €200 million sale in April of DocMorris, a Dutch-based pharmacy business, by 3i and Hg Capital.

The UK dominates the market for venture deals, representing nearly 33 percent of European venture deals in Q1 2007. However, this is down from 37 percent in Q1 2006.

Doug Richard, chairman of Library House, says:  “Increasing innovation levels and the growing number of entrepreneurs across the UK will continue to support its ongoing position as one of the most flourishing centres in the world for investment.”

Israel has made strides since Q1 2006 and is now the most attractive venture capital destination in Europe on a per capita basis. During Q1 2007, Israel attracted €35 per capita in venture capital – up from €25 in Q1 2006. The UK and France lagged far behind on €7.5 per capita and €3 per capita.

So why did European companies not attract more venture capital in Q1 2007? Roger Franklin, analyst at Library House, explains: “One of the biggest challenges that European businesses face when seeking to attract venture capital investment is a lack of proof of concept money. In the absence of adequate national schemes, companies in some European countries do not have the means to develop themselves to a stage at which a VC would be willing to invest.”

Proof of concept money (fundings for young businesses in the form of grants or access to facilities) is more available in some European countries than in others. Says Franklin: “Israel has developed a national scheme with which to provide young businesses with proof of concept money – the Israeli Incubator Scheme. The US too operates a national scheme called Small Business Innovation Research which offers grants to young companies.”

The biggest investor in European venture-backed companies in Q1 2007 was Scottish Enterprise with 17 investments. The German Gruenderfonds were also active making eight investments. This underlines the fact that public sector-backed funds in Europe have become more active as venture capital investors.

The increased investment from the US highlights the lack of indigenous venture capital in Europe. US investors funded 44 deals in Europe in Q1 2007 compared with just 26 in Q4 2006.

Women are under-represented in European venture-backed companies. Library House found that 95 percent of CEOs of European venture-backed companies are men and 97 percent of newly appointed CEOs in 2006 were men.

However, the data business suggests that female-led companies perform better than male-led ones. The average female-led company in the sample had annual sales of €12.5 million compared with just €11 million for male-led companies. This sales figure was achieved with an average of just €9 million of committed capital compared with €14 million for male-led companies.