European Venture Capital in 2005: Investment Trends, Exits, Performance and Fund Raising

Ulrich Geilinger, Ph.D.

9 minutes to read

The European venture capital market is slowly gaining momentum. Driven by an active AIM market in London, the number of venture-backed IPOs has increased to 60 in 2005, up from 35 IPOs in 2004. Also, some of the 200 M&A transactions in 2005 have provided hefty returns for venture capitalists. In the case of Skype, the return multiple probably was substantially higher than 100x. Driven by better performance (1-year return in 2005 was 25.4%), the sentiment towards European high-tech and biotech companies is improving. Several European VCs have raised new funds in 2005 or are about to raise funds.

However, European investment levels are still way down from the peak levels of 2000, and it is uncertain if investment pace will pick up soon. 2005 was actually another down year: European VCs invested €3.6 billion in 1020 companies (compared to €3.8 billion invested in 2004). This article will have a detailed look at trends in European venture capital investments, exits, performance and fund raising. (Read more …)

Note: The data in this article were collected from publicly available statistics compiled by Dow Jones VentureOne/Ernst & Young and by EVCA/Thomson Financial/PriceWaterhouse Coopers.

European Venture Capital Investments 1999-2005

After the boom in 2000, the European venture industry contracted dramatically and yearly investment amounts dropped more than fivefold (Graph 1). In the U.S., the development was similar: from a high of $95 billion invested in 2000, investment levels dropped to about $20 billion per annum.

Even though the outlook on high-tech is brighter again, venture capital investment levels in Europe remained low also in 2005: VCs invested €3.6 million in about in only 1,020 companies.

Graph 1: Yearly Venture Capital Investments in Europe

Source: VentureOne/Ernst & Young

In terms of number of companies financed, 2005 presented a new low. Apparently European VCs concentrate their efforts on fewer companies either because some portfolio companies went out of business or because they consciously focus on fewer (more promising) companies. This development should be seen as positive, since a problem of the European venture industry has been that too many companies received initial finance, but very few reached critical mass. It seems that European VCs are now addressing this issue.

It is therefore no surprise to see that the number of seed and first rounds have been falling continuously since 2000 (almost by a factor of 10!), whereas the number of later stage deals has remained remarkably stable at about 400 deals per year (Graph 2). The later-stage financings now account for more than 40% of all deals (in terms of amounts invested the percentage is even higher).

Graph 2: Number of European Venture Financings by Stage 2000-2005

Source: VentureOne/Ernst Young

Coupled with the shift to later stage financings, a moderate increase in average deal sizes can be noted (Graph 3). However, financing amounts in Europe are still considerably lower than in the U.S. where more money is available and companies are usually better capitalized. European VCs seem to be more reluctant to provide larger amounts needed to build companies quickly. In the U.S. first rounds sometimes are done with $20 million or more. Such large initial rounds are now typical for biotech or pharma start-ups.

Graph 3: Average Size of Venture Financings in U.S. and in Europe

Source: Venture One/Ernst Young

Venture Investments by Country

The development of venture capital since 2000 has shown notable differences between countries (see table below): Some smaller countries such as Denmark, Norway or Switzerland experienced a less dramatic contraction as countries such as Germany Sweden or the UK. (The first three countries probably also reacted more conservatively to the boom market, and, hence, have been less affected by the “crash”.)

Table 1: Venture Capital Investment Levels by Country 2000-2005 (100% = Investment Amount in 2000)

Source: VentureOne/Ernst & Young

Larger countries such as France, Germany or Germany were hit hard by the collapse of their local high-tech stock markets und current investment levels havedrpped by more than a factor of 5. It is interesting to note that investment amounts in Switzerland and Denmark have now reached about 50% of the levels in France or Germany (even though populations in these two countries are only about one tenth of France or Germany).

But, recovery is one the way and IPO activity has picked up not only at UK’s AIM, but also at the other lock stock markets. This should give a boost to venture investments.

Sector Shift: Healthcare Investments Gain Share

Another development since 2000 has been the marked shift in sector allocation: In 2000, the bulk of the capital went into IT and telecom companies (61%), whereas healthcare companies only received 11% of venture financings. Biotech and medtech companies have significantly increased their share of capital and are now accounting for 43% of all venture investments.

Graph 4: European Venture Capital Investments by Sector

Source: VentureOne/Ernst & Young

Most important sub-sectors in 2005 were biopharmaceuticals (32.1% of total VC investments), software (21.3%), medical devices (8.6%), semiconductor (7.9%) communications (6.6%), and business/consumer/Internet services (6.3%) and electronics (4.7%). Energy investments have also increased, but are still at a low level (2.5% of investments). The sub-sectors that lost “market share” since 2000 are: communications, information services, as well as consumer/business/Internet services.

Venture Capital Performance

Investing in European venture capital funds is currently not on the top of the agenda of most institutional investors. Only a few venture funds and a handful of fund managers have made substantial money for their investors. Most investors have been disappointed, and a number of venture capitalist have shut down completely or have declared that they are not going to raise further funds. This contrasts with the performance of European buyout funds which, on average, have shown strong return for most years.

Table 2: Performance of European Venture, Buyout and Private Equity Funds (net returns to end of 2005)

Source: EVCA

While European venture funds showed a good performance in 2005, longer term performance on average has been disappointing or even negative.

It is, therefore, no surprise that most institutional investors and fund-of-funds prefer buyout funds (and have no or little allocation to European venture capital). Many such investors will not even look at a European venture fund proposition. US venture capital has a much better reputation, even though 2000 and 2001 vintage funds have on average not fared better than European venture funds of the same vintage.

A recent survey by Coller Capital listed “European venture” at the bottom of private equity segments as ranked by limited partners. “European buyout” ranked first, followed by “North American venture”. Some contrarian investors say that now is the time to invest in European venture. Most limited partners, however, prefer to wait until European venture funds have proven that they can generate good returns.

IPOs and Trade Sales

In 2000, 181 venture-backed companies raised €12 billion in public offerings. Thereafter, the IPO window for European high-tech companies closed quickly. In 2002 and 2003, VCs did not see any significant IPOs. In 2004, the market picked up again and, in 2005, an astonishing number of 60 venture backed companies went public raising €2 billion.

Most of these IPOs were “financing events” and not “liquidity events”, but gains in some cases have been substantial. All sectors were able to profit from the re-opening of the IPO window: 22 healthcare companies and 25 IT & telecom companies went public in 2005. Some observers fear, that there is currently such a rush to bring companies public that the quality IPO candidates is suffering. Most VCs still have to exit from their public stocks and jury is still out if IPOs provide a good a route to liquidity in Europe.

Graph 5: European IPOs of Venture-Backed Companies

Source: VentureOne/Ernst Young

Trade sale activity also has picked up: Both in 2004 and 2005, about 200 venture-backed were sold or merged. The good news is that the number of deals with a transaction volume of over €50 million has also increased (from a very low level in 2002 and 2003). The table below indicates VCs have only recently been able to make some attractive returns on larger exits.

Table 3: Trade Sales and Mergers of VC-Backed European Companies 2002-2005

Source: VentureOne

The table below list some of larger trade sales of venture-backed companies during 2005:

Table 3: Selected Larger M&A Transaction of European Venture-Backed

Selected VC Funds Raised in 2005 (with estimated committed capital)

Sofinnova Capital IV (€385 million)

Index Ventures III (€300 million)

TVM Life Science VI (€240 million)

Wellington Partners III (€151 million)

Banexi Ventures IV (€145 million)

HBM BioCaptal (€110 million)

Fund Raising

During the last 4 years, European VC were only able raise about €11 billion, this a considerable shortfall to the €16 billion invested during the same.

During 2003 and 2004, raising a European venture fund has been a tough proposition. In 2005, the fund raising climate has improved significantly, and in 2005 some groups have been able to pull off substantial fund raisings such Index Ventures (raising €300 million for their third fund) or Sofinnova (raising €385 million for their fifth fund).

Table 4: Venture Capital Fund Raising US and Europe 2000-2005

Source: Venture One/Ernst Young

Since exit possibilities in Europe, as well as returns have improved and access to the top US venture funds is becoming more difficult, we predict a further improvement in fund raising environment. European VCs with a track record and an experienced team will be able to raise money more easily.

However, the number of groups with a credible track record is small and, as a result, the available capital will be more concentrated in the hands of a fewer, stronger VCs.


Even though the environment and sentiment has improved considerably, it is unlikely that investment activity will pick up quickly. Most VCs are still busy cleaning up their portfolios and they are focussing their efforts on generating and realizing value in existing portfolio companies. And, while some groups have raised new funds, these groups will be in no rush to put the money to work. The number of active VCs in Europe is still shrinking and an entrepreneur raising capital faces fewer and stronger VC players. (Not a bad situation for the surviving VCs).

Early-stage and start-up companies will continue to have a hard time finding money. Most larger VCs will focus on the already existing base of European high-tech companies and will shy away from real start-ups. The funding gap has to be filled by private investors. There are indications that rich individuals on their own, or organized in business angel clubs, are coming back into venture capital.

Easily available money has never been good for the venture industry, and, in this respect, the current scarcity of capital, might also have its positive effects: It will set the bar higher for companies that are receiving institutional venture money and, therefore, the quality of the projects should improve.