European venture turns corner

After four years of decline, European venture capital investment showed signs of stabilising last year.

At €3.5 billion ($4.5 billion), total European venture capital investment in 2004 was only marginally down on the total recorded the previous year. Analysts say this suggests a stable level of activity has been achieved for the first time since 2000.

But the European Venture Capital Report by Ernst & Young and VentureOne also found that the number of deals fell by a further 20 percent to 1,026 compared with 2003.

The UK showed promising signs of a venture recovery in the final quarter of 2004, with deal value worth €285 million compared with €212 million in the third quarter. Over the year as a whole, UK deal value fell 2.5 percent to €1.09 billion while the number of deals declined from 336 to 286.

The rest of Europe saw a similarly mixed picture last year. In Germany, the country’s highest-ever average deal size of €2.4 million was recorded, although the number of deals dropped 27 percent from 171 to 125. France also saw a higher average deal size of €2 million, while deal flow saw a minor decline of just 11 deals.

The authors of the report see the signs of stabilisation as a precursor to an upturn. “Since venture capital investment in Europe generally lags the US trend by approximately two quarters, there is reason to be cautiously optimistic that European investment will take up the US trend and shift from stabilisation to improvement in 2005,” said Stuart Watson, head of Ernst & Young’s venture capital advisory group.

In sector terms, the money was predominantly attracted to healthcare in 2004, with a 19 percent increase in value of deals to €1.5 billion – in spite of a 40 percent decline in the number of healthcare investments. The ten largest European venture deals in the final quarter of 2004 were all healthcare deals, with the largest the €40 million first-round funding of Novexel, a French developer of fungal and bacterial treatments.

By contrast with healthcare, the other major sector for venture investment – information technology – saw deals fall 19 percent to 546 and value decline 12 percent to €1.6 billion.