Extraordinary start to 2014 for the European Venture Market

Go4Venture Advisers’ European Venture & Growth Equity Market Monthly Bulletin features a proprietary Headline Transaction Index (HTI) of investment activity, as well as a summary of VC & PE-backed TMT M&A exits of $50 million or more. Regarding “Headline Transactions” January 2014 was well ahead of last year (+60% by value), with 13 Large HTI investments (>£5mn / €7.5mn / $10mn), including three Landmark financings (> $20mn) compared to only one in 2013. As usual, internet services and late-stage transactions dominated the roster, with UK/Ireland leading the pack (5 out of 13 Large HTI transactions featured).

What is really striking is the increasing dominance of US investors at the top end, with 8 of the 13 Large Transactions led by as diverse a group as (by order of appearance) Insight Venture Partners, Chenin Group, Institutional Venture Partners, DFJ/DFJ Esprit, Battery Ventures, Qualcomm Ventures, International Finance Corporation and Updata Partners. These US investors are arbitraging comparatively lower European valuations, and deploying their expertise where it can make the most difference. Of course, they tend to be more comfortable in English-speaking or US-welcoming countries, so expect this trend to benefit primarily UK/Ireland and Northern Europe.

The arrival of these “smart investors”, and the evidence of the difference they make as great exits pile in (see below), is not going unnoticed. Institutional investors desperate for growth (since they cannot get decent returns on bonds) are all looking at scalable opportunities, namely retail and technology – and when these come together, investors get very excited. This of course concerns the delivery of digital content and virtual goods, but is equally (and some would say indiscriminately) applied to brick-and-mortar vendors moving online.

The hype concerns mostly the hot internet space, and ecommerce in particular. In the more traditional innovation sectors, the going is still tough. Looking at our list of Large HTI Transactions, only 4 are in cleantech, hardware or enterprise software. Internet hysteria has raised the bar pretty high when it comes to financial investors. Hence the increasing role of corporates, which are getting involved in all sort of ways, just like big pharma has helped finance risky biotech over all these years through investment, joint development agreements, distribution partnerships and anything in between.

On the exit front, January was also an extraordinary month, with a Silicon Valley-style valuation paid for the first time for a European company, and 4 exits above the $100mn mark, including two around the $0.5bn level.

The true outlier was DeepMind being sold to Google – because of the amount, the name of the acquirer, the lack of revenues and the topic at hand of “machine-based learning”, this is the sort of deal you would expect in Silicon Valley, not out of Europe. Part of the explanation must lie in the pedigree of

the company, which had received $50mn in funding from the likes of Founders Fund (Peter Thiel – of Paypal and Facebook fame – and friends) and Horizon Ventures (Li Ka-shing, Asia's richest man). It is becoming increasingly clear that getting the right investor in is key to getting to the right exit.

All this is rather good news in that it shows an acceleration of substantial exits for European venture-backed companies. In short, not only is European venture is producing bigger outcomes, but it is also producing them with greater predictability. That’s what we need to have a thriving eco-system. Another couple of years to build muscle before the downward winds hit us!