Venture Capital Investment in Europe Climbs to EUR 4.12 Billion in 2006, Highest Amount in Four Years

Venture capital investment into European companies topped EUR 4.12 billion in 2006, the highest annual investment amount since 2002, according to the quarterly European Venture Capital Report released by Ernst & Young and Dow Jones VentureOne, the publisher of VentureSource. As in the United States, the capital increase was boosted in part by additional funds directed toward technology companies in 2006, resulting in a 5% overall increase over 2005's investment level. The total number of deals completed over the course of the year, 867, was down 27% from last year.

As in the United States, deal flow in the fourth quarter was particularly constrained with 193 financings completed, down from 329 in the fourth quarter of 2005. The quarterly capital investment, however, was steady at EUR 1.05 billion. In fact, it was the second largest quarter for capital investment during the year, likely related to the robust liquidity activity for venture-backed companies throughout the year and particularly in the fourth quarter.

Not surprisingly, with fewer deals and more capital, the overall median size of a European round of financing in 2006 was EUR 2.2 million, which is the highest yearly median since at least 1999, when VentureOne began compiling European data.

"It's a sign of a very selective venture capital environment in Europe, where only the most viable and promising companies were able to secure funding in 2006, but were supported with particularly large individual sums," said Stephen Harmston, Director of Global Research for VentureOne. "For example, as the global technology market has become ever more competitive, the median size of an information technology deal in Europe topped EUR 2 million every quarter of the year, the first time this has happened since 2000. Additionally, the median size of healthcare deals, at EUR 2.8 million overall for the year, was an all-time high."

Another positive sign of the venture capital market in 2006 was the allocation to seed and first round financings. These early-stage deals made up 40% of the rounds in 2006 (and 44% in the fourth quarter alone), compared to just 32% in 2005. It was the highest percentage allocation to these round classes since 2001. The seed and first round deals also received total investment of EUR 1.26 billion, which is also the most capital directed to these early stage deals since 2001.

"After supporting existing portfolio companies toward eventual exits, venture capital investors are moving to fund the next wave of innovation with some of the largest allocations of early-stage deals going to emerging industries like energy, the Web-dominated information services segment, and consumer and business services companies," said Gil Forer, Global Director of Ernst & Young's Venture Capital Advisory Group. "Fortunately, investors also are getting these companies off the ground with significant sums perhaps recognizing that the time to reach an eventual exit is growing longer. The median sizes of seed- and first-round deals are at record-setting annual levels -- EUR 650,000 and EUR 2.2 million, respectively."

By industry, investment in information technology (IT) was at the highest level since 2002 at EUR 2.12 billion in 2006. But IT deal flow was down 28% to 472 deals for the year. Within the technology category, the communications and networking segment was the only segment to see an increase in deals over last year, with 92 deals, eight more than were completed in 2005, and twice as much capital, reaching EUR 493.8 million. The information services segment, home to many of the Web 2.0 companies, also posted relatively steady activity, with 84 deals, and 32% more investment, for a total of EUR 360.7 million. The largest deal of the fourth quarter and among the largest of the year was an EUR 83.2 million later round for semiconductor firm Plastic Logic of Cambridge, United Kingdom.

Investment in other industries such as energy, advanced materials and agriculture, continued to grow in 2006. The energy segment specifically posted 27 deals and EUR 109.4 million in investment in 2006, increases of 17% and 14%, respectively. Among the largest energy deals in 2006 was the EUR 19.1 million second round in Ocean Power Delivery of Edinburgh, United Kingdom.

Deal flow to the healthcare category declined 31% in 2006, to 239 deals, and capital investment was down 13% to EUR 1.47 billion. In fact, only the medical software and systems segment was relatively steady with 2005, with 15 deals and EUR 39.2 million invested in 2006. However, there was significant early-stage activity in some healthcare segments, with more than 40% of the medical devices, healthcare services and medical software rounds going to early-stage deals. Among the largest healthcare deals of the year was the EUR 44.5 million second round in biotechnology firm Cerenis Therapeutics of Labege, France.

The business, consumer and retail category also saw deal flow falter in 2006, with only 84 financings completed, although capital investment was up 26% to EUR 329.9 million.