The latest research on the performance of venture-backed start-ups in Europe since 1999 reveals that the mortality rate for investee companies remains significant with the likelihood that more companies are going to fold, especially in depressed sectors such as IT and business services. And less than 10 per cent of the portfolio companies have provided their VC backers with an exit so far.
The report, produced by research group VentureOne which studied the performance of over 4,000 companies initially funded between 1999 and September 2002, reveals that up to 15 per cent of these companies have already gone under. This represents a loss of E4.7bn [or nearly 16 per cent of total capital invested] for European VC investors, who have committed E30bn of funding over the past four years.
77 per cent of all companies invested since 1999 remain privately-controlled, with only eight per cent providing investors with some sort of exit, either though a trade sale or IPO. “If funding continues at current levels, many of the remaining [private] companies will be forced to cease operations unless they can achieve profitability,” says Steve Harmston, director of European research at VentureOne.
The report also paints a contrasting picture for the various sectors that attract venture capital. Healthcare companies are receiving an increasing percentage of overall venture investment, and because the pool of existing companies is much smaller, they are much more likely to receive follow-on funding in the future than companies in other sectors. Meanwhile, IT and business services businesses continue in the doldrums, reporting a failure rate of 14 per cent and 21 per cent respectively.
The picture across Europe also varies on a country-by-country basis. France, which has recently enjoyed an upsurge in LBO activity, is also ahead of its neighbours in terms of sustaining start-ups. The failure rate, eleven per cent, is slightly below the European average and is less than half that in Germany, where 23 per cent of VC-backed firms have gone out of business.