Venture capital investment is dominating headlines this morning. A new report issued by Invest Europe complements neatly the PitchBook US National Venture Capital Association Venture Monitor for the second quarter of the year.
European venture capital fundraising last year hit €6.4bn. This was the highest level since 2007, according to Invest Europe (formerly the European Venture Capital Association). It says that nearly 10% was from North American institutional investors.
It identifies several reasons for this in another publication The Acceleration Point: Why Now is the Time for European Venture Capital. It points to Europe’s growing economies, thriving investment ecosystem and the rise of its tech industry as making it attractive.
Europe attractive to investors
Nenad Marovac, Invest Europe vice-chair and founder of VC firm DN Capital, said: “Global investors are recognising that European venture capital offers a rich A to Z of investment opportunities: trailblazing tech innovation born in cities from Amsterdam to Zurich.”
Anyone who has ever played Angry Birds or searched for flights via Skyscanner is benefiting from Europe’s highly talented entrepreneurs, he argues. Not to mention the financial technology and life sciences start-ups leading the way in their respective sectors.
Some €4.3bn total venture capital investment was made in Europe last year. Fund managers invested 44% into companies specialising in information and communications technology. Biotech and healthcare was the second-highest sector, attracting 27%.
Strong track record
Businesses in this sector have a strong track record in Europe, notes Invest Europe. It cites companies such as Switzerland’s Actelion and Denmark's Genab with their marketed cardiovascular and cancer products.
The remaining capital was invested into companies focused on energy, financial services, consumer products and business services, according to Invest Europe data.
By contrast, the PitchBook Monitor shows that US venture investment activity is firmly in the middle of a self-correction period. Signs of this normalisation began in the second half of 2016 after investment levels peaked between 2014 and early 2016.
Back to the future
With valuations subsiding, the industry is witnessing a back-to-the-future moment to some degree as trendlines point toward a healthy venture ecosystem. In the first half of 2017, 3,876 venture-backed companies raised $37.76bn in funding.
Of this $21.78bn was deployed to 1,958 companies in the second quarter alone. Q2 marked an uptick from Q1 in terms of capital raised, though the overall number of companies receiving investment was relatively stable.
This reflects the high number of mega-financings during the quarter, notes PitchBook. The top 10 deals alone accounted for $4.3bn in deal value. These took 19.6% of total dollars invested during the quarter. The decline in numbers has been the most acute at the angel and seed stage. This has correlated to a drop in first-time funding, says PitchBook.
Looking ahead, capital invested is unlikely to drop off given that venture funds have raised $130bn since 2014. Investors are conscious of approaching the five-year window in which deploying capital is a priority given the venture fund life cycle.
While overall 2017 venture fundraising is slightly down from 2016 in terms of closed vehicles, first-time fundraising has been a bright spot; 15 first-time funds have closed on a combined $1.5bn. This is on target for the most capital raised in a year in the past decade.
While investors balance deploying recently raised capital, their existing portfolio companies continue to grow and scale. Exit paths remain top of mind. After a slow start, the IPO market for venture-backed companies picked up steam in 2Q, bringing the 1H total to 27.
Area of concern
An area that could become a bit concerning to investors is the investment-to-exit ratio. PitchBook says this has reached the highest point it has tracked. Late-stage companies have increasingly chosen to continue raising private capital rather than move forward with an exit.
While it may not generate negative consequences, the prolonged hold time increases the risk for all investors involved. It says that as corporates move quickly to innovate, missing an opportunity to exit could be dangerous.
As companies stay private longer and more capital is invested, questions are being raised over the efficiency with which capital has been deployed. More than $1bn was invested in Cloudera prior to its recent IPO, with investors holding roughly 57% of the equity.
Cloudera return disappoints
But with a total hold period of around eight years, the IPO valuation of less than $2bn didn’t create the return on investment many investors were hoping for.
Moving forward, the ability to create and realize value quickly will be an even larger differentiating factor for VC managers. As exit timelines push out, more traditional fund lifecycles are also being impacted.
Investing and winding down a fund in the classic 10-year time frame is becoming more difficult, says PitchBook. This challenges the fundamentals of the industry. It also increases risk for investors because of illiquidity and market risks inherent in a longer fund life.
Seperately, PitchBook has created a 'datagraphic' depicting global private equity activity in the second quarter of the year.