European VC Marching Forward

The corporate finance advisory firm Go4Venture publishes every month their European Technology Venture Capital Bulletin. The authors of the actual issue are quite optimistic.

On the investment front there is a softening of the market as a whole which began in the fall last year. This however, shows structural changes rather than a weakening as such, with a rush to finance early-stage internet companies (cheap!), combined with a growing number of substantial bets on growth equity companies. The part of the market which is squeezed are the financings in between: if you are not hitting your milestones as a Series B or C company your future is in the balance, and of course hitting milestones in a recessionary macro market is all the more challenging.

In terms of numbers for Q1 12 compared to the year before, there is an increase in the number of transactions (+10%) and a decrease in the value overall (-17%). If one drills further however, it becomes clear that the value decrease is driven by a notable lack of >€50 million transactions which had taken place in Q1 last year. But for transactions between €7.5 million and €50 million both the number (21 vs.10) and the value (€224 vs. €124 million) have approximately doubled in Q1 ‘12. As commented in previous issues, the team of Go4Venture sees this focus on larger transactions as key to building more meaningful tech companies in Europe.

These companies will hopefully be the first batch of European companies to consistently generate the sort of positive absolute investment returns which will bring Limited Partners (LPs) back to the European venture market. Taken March 2012 as a sample, these are the forces at work:

• US investors are moving in – and with them a level of intent and ambition which most European investors cannot match (partly because they are managing smaller funds). US investors include those who have European offices (usually in London), but also US investors who are flying in (this month: Canaan Partners, Carmel Ventures, Sequoia Capital and Spark Capital);
• More cross-border investments in general – For instance Iris Capital leading this month’s investment in myThings, a UK company previously backed by Accel, Carmel Ventures and T-Venture. Iris is of course bringing to the deal its relationship with Orange (see below), already a client of myThings; and
• More newcomers inviting themselves in rounds – driven in part by Private Equity (PE) companies and pre-IPO investors nibbling at the growth equity end of the market (e.g. this month Hermes GPE, Altima Partners, Artemis Global Energy or F&C Asset Management), and of course new geographies. For instance, there has been a notable surge of Russian opportunities, both on the company side (Russia is now the #1 European internet market by number of users), and on the investor side (with funds such as Almaz Capital, DST Capital, Finam, Runa Capital, Ru-Net, VTB Capital etc. increasingly venturing outside Russia).

So the European VC market is tuning up rather than retrenching. As many (not so well positioned) VC management companies die by the wayside, the names of the winners are lining up as VCs announce their new funds. Here are some of the names for March (and April):

• Earlybird (formerly of Hamburg and Munich, now between Munich and Berlin) have announced the first close of their 4th fund at $100 million, half way through the targeted $200 million;
• Notion Capital (London, UK), a specialist in SaaS plays (mainly in the UK but surely with wider ambitions), also announced a first closing at $100 million on their way to $150 million;
• Orange and Publicis partnered with Iris Capital (in which they took a 49% stake), to add another $200 million (€150 million) to Iris? most recent fund – which will now be split between OP Ventures Growth, OP Ventures Global and OP Ventures Early-Stage; and
• Index added to its successful track record by closing its 4th Index Life fund with €150 million.

Concerning exits the overall TMT M&A environment is somewhat subdued but far less depressed than M&A activity as a whole. From a European VC & PE-backed TMT M&A market standpoint, 2012 is well ahead of 2011. Partly because VCs are making strenuous efforts to sell off their portfolio companies to support their own fund-raising activities and partly because large PE-backed transactions pop up from time to time (in March NDS sold to Cisco for €3.8 billion).

What is remarkable is the lack of sizeable VC-backed M&A exits. This reflects the nature of the European VC market, but also poor disclosure levels overall: modest exits end up as “deal terms not disclosed”, and a few of the outstanding exits are simply not disclosed because the buyer doesn’t want to admit the price paid or wants to hide its strategic move.