Coming off the strong growth made in 2006, venture capital investment into European companies flattened in the first quarter, with €1.07 billion invested in 207 financings, according to the quarterly European Venture Capital Report released by Dow Jones VentureOne and Ernst & Young. Compared year-on-year, both capital and deal flow decreased 11% from the first quarter of 2006.
Irish Investment Activity Slackens
In the first quarter, €4.2 million in venture capital was invested in young innovative firms in Ireland, significantly down from €26.3 million in 4Q’06 and the €28.6 million invested in 1Q’06. Only one deal was completed in 1Q’07, down from 4 deals in 4Q’06 and 7 in 1Q’06.
“The Irish market is quite small, therefore quarterly numbers need to be treated with caution as they can be skewed by cyclical patterns and by the small number of deals. More meaningful data should emerge with respect to the underlying trend for 2007 as we complete the second quarter” said Garry O’Rourke, Transaction Advisory Services Director at Ernst & Young in Dublin.
There were no seed, first or second round deals in 1Q’07, which represents a decrease from 3 deals in 4Q’06 and from one deal in 1Q’06. A single later stage deal was completed in 1Q’07, just as in 4Q’06, compared to 5 in 1Q’06, raising a total of €4.2 million compared with €2.6 million in 4Q’06 and €27.4 million in 1Q’06.
No investments were made in the healthcare sector in 1Q’07, compared with two deals in 4Q’06 and a single deal in 1Q’06.
There was only one IT sector deal closed in 1Q’07, just as in 4Q’06, although this is down from the 7 deals in 1Q’06. The amount invested totaled €4.2 million in 1Q’07, an increase from €2.6 million in 4Q’06 but significantly down from €28.6 million in 1Q’06.
There were no exits in 1Q’07, compared to the two exits in both 4Q’06 and 1Q’06.
Ireland ranked fourteenth in Europe in terms of the number of deals, level with Poland, Romania and Italy, but behind Russia and Austria. Ireland was fifteenth in terms of amount raised, behind Austria and Italy but ahead of Poland and Romania.
European Investors Focusing on IT
The first quarter found investors renewing their interest in information technology, which showed signs of a significant comeback; there were 9% more deals and 6% more capital invested in this industry than in the same quarter a year ago. In addition, later-round financings were at their highest point in a year and second round financings also showed significant growth. Another positive sign, according to the report, was that median round sizes across all industries improved upon last year’s increases to reach the highest point on record at €2.7 million overall.
“The continued growth in round size, especially in second and later rounds, indicates that investors are providing the most promising portfolio companies with the resources needed to progress along the path to exit," said John de Yonge, Global Research Director of Ernst & Young's Venture Capital Advisory Group.
"Last year saw the most venture-backed initial public offerings in Europe in six years and steady acquisition activity. Investors are focusing greater capital and attention on the subset of companies with the most potential to take advantage of the supportive exit climate in the near term."
Later Rounds Dominate Activity
Forty percent of the rounds in the first quarter were later-stage rounds, the largest percentage since 1999. In addition, the €606.7 million directed to the 83 later rounds was the most capital invested in this round class in a year and represented more than half of all capital invested in Europe in the first quarter. Capital investment into second rounds also showed a significant quarter-on-quarter increase, growing 21% to €257.1 million. The median size of second and later rounds is now €3 million and €3.5 million, respectively.
Seed- and first-round financings, meanwhile, made up 37% of the deal flow in the first quarter but only 19% of the total investment.
Round allocations varied by industry. Healthcare financings in the first quarter were particularly dominated by later rounds, which made up 55% of the deal flow activity to this industry. Conversely, information technology saw more early-stage activity with seed- and first-round deals representing 41% of financings.
Information Technology Posts Significant Growth
Information technology had the most significant upturn of any industry in the first quarter, according to the report. In total, €550.2 million was invested in 133 technology deals, representing €30.1 million more in capital and 11 more deals from the first quarter of a year ago. The software and information services segments showed the most activity for the sector. Software deals increased by 20% over the same period a year ago to 73 and investment increased11% to €222.5 million. More dramatically, deal flow in the information services segment increased 131% to 30 deals, and capital increased more than two-fold to €114.7 million.
“The emerging interest in Web 2.0 technology—which is mostly focused in the information services segment—seems to be fueling this growth in European technology investments,” said Jessica Canning, Director of Global Research for VentureOne. “In addition, the number of IPOs for information services companies doubled over the past year and this is likely a factor in investors’ preference for the segment this quarter.”
European venture capital investors also invested more in energy companies, according to the report. There were 10 energy deals in the first quarter, only slightly more than the nine that occurred in the same quarter of 2006; however the capital invested in this segment more than doubled to €58.6 million.
The healthcare industry in Europe was more constrained in the first quarter, the report found. The 38 healthcare deals and €387.8 million invested here represented declines of 42% and 19%, respectively, from the first quarter of 2006. Nevertheless, the €50 million second-round investment in antibacterial company Novexel of France was among the largest deals of the first quarter.
Commentary on the UK in Q1 2007
- France surpassed the United Kingdom for the first time to post the most deal flow activity in Europe in the first quarter, with 60 deals and €297.8 million invested. This represents an increase of 36% over the same quarter of 2006.
- There were 58 deals and €317.6 million invested in the UK holding onto top spot in terms of value, representing a decline from €396.44 million in 4Q’06 and €442.03 million in 1Q’06.
- The total amount invested in UK healthcare in 1Q’07 fell dramatically to €7.50 million, down from €98.81 million in 4Q’06 and €103.23 million in 1Q’06.
- The total amount invested in the UK IT sector rose year-on-year to €252.78 million in 1Q’07 from €185.69 million in 1Q’06, although this was down quarter-on-quarter from €279.73 million in 4Q’06.
- Investment also declined in Germany, where there were only 16 financing rounds completed, down from 29 in the same quarter last year. Capital investment did not fall as far, down only 13% to €122.0 million.
- Switzerland showed significant increases with twice as many deals (12) as the first quarter of 2006, and €69.1 million invested, an increase of 170%.