European VCs are making larger bets

The volume of European venture capital investments increased last quarter while the total number of deals decreased, according to figures from VentureOne and Ernst & Young.

A new report on the state of the European venture capital industry found that fewer but larger investments took place in the first quarter of 2005.

 

The European Venture Capital Report, published this week by Ernst & Young and VentureOne, found that the volume of venture capital investment in the region reached €880 million ($1.11 billion), a 19 percent increase over the first quarter of last year. This is the largest amount invested in a first quarter since 2002.

 

What happened in the quarter in Europe was very encouraging as it shows there are quality venture capitalists looking for quality deals

Stuart Watson, Venture Capital Advisory Group leader, Ernst & Young

 

However, only 200 investments were closed, a decline of 27 percent from the same period last year.

 

“What happened in the quarter in Europe was very encouraging as it shows there are quality venture capitalists looking for quality deals,” said Stuart Watson, the leader of Ernst & Young’s Venture Capital Advisory Group in London. “Fewer deals of greater size shows that they are backing companies in a serious way.”

 

This trend was typified by the UK, which remains the largest market in terms of both deals and volumes. It saw the volume of investments increase from €257 million in the first quarter of 2004 to €270 million in the same period of this year. However, the number of deals declined by almost a third, from 93 last year to 62 this year.

 

The trends in other importnat European markets were slightly different. French deal flow held steady at 38, while investment volumes declined by €5 million to €106.5 million. In contrast, German investment remained steady at around €141.8 million while deal flow decreased 28 percent to 26 deals.

 

The median deal size in the quarter was €3 million, compared to €1.5 million in the same period of 2004. This increase was due partly to larger investments in first-round deals – a median of €2.6 million, the largest since VentureOne began tracking data in 1999. However, the median size of later round deals also grew, from €2 million to €4 million. This was the highest since the third quarter of 2000.

 

“The increase in the average size of first round investments shows that investors aren’t just protecting the investments they’ve already got,” said Watson. “This is a trend that has been happening for several quarters, after a period in which there was an absolute dearth of first round investments.”

 

Stuart Watson, Venture Capital Advisory Group leader, Ernst & Young

This positive trend in Europe contrasts with the US, where both deal flow and investment declined during the first quarter of 2005. But Watson warned that this so far holds true only for a single quarter, and was “an anomaly, not a trend.”

 

However, he stressed that he is optimistic and expects to see the levels of investment seen in the last quarter to become the norm. “The number of [active] VCs has gone down a lot, but those who are left are serious players.”