Venture capital activity focused on rebuilding in 2004

Venture capital activity in 2004 was expected to complete the year on a positive note according to Ernst & Young and VentureOne. This good news was due to the modest return in the liquidity market for venture-backed companies and the subsequent bullishness on the part of investors who regained focus on company formation investments. Worldwide, venture capital financing has increased 13% so far in 2004, over the comparable period in 2003. In total, $18.99bn has been invested in 2,369 transactions in the U.S., Europe and Israel.One of the clearest signs of this starting point is the renewed early-stage investing activity, which represented 32% of the rounds completed so far this year in the US, Europe and Israel. The reopening of avenues for liquidity also had a role in the year's positive outcome. 'The IPO window was virtually shut for the previous three years but 2004 has clearly seen a return for exits as $4.4bn has been raised by venture-backed companies in the US and European public markets so far this year. That is the highest amount since the bubble,' said John Gabbert, vice president of worldwide research for VentureOne. 'On the other hand, mergers and acquisitions activity has remained steady for the past several years, but the bright side is that the amount being paid for these venture-backed companies is steadily improving.'Among those companies achieving liquidity, capital efficiency has proved to be a requirement that has become quite important. A study of the data for recent exits compared the ratio of the total amount invested prior to exit to the sale price, in the case of an M&A, or the pre-money valuation, in the case of an initial public offering. The most successful exit ratios for investors were for those companies that received less investment, and reached liquidity in the shortest time, clearly proving that there is greater reward for those companies able to execute efficiently with limited capital.IPO exits in 2004 have been dominated by healthcare companies, with 39 of the 68 venture-backed IPOs completed so far this year coming from that industry, compared with 21 information technology IPOs. Information technology, meanwhile, has found promising exit opportunities via M&A and represents 64% of these exits in Europe and the US.Although there has been an improved level of financing this year, European investment activity remains constrained by the transfer of investments into the US. 'European investors participated in almost 200 financing rounds in the US through the first three quarters of the year, yet US investors were active in only 142 rounds in Europe, creating a disproportion of international transfers,' said Stephen Harmston, director of international research at VentureOne. 'The majority of the European investment into the US came from the UK and Germany, but on the other side, US investors were much more active in financing UK companies, followed by French companies, than investing in German start-ups.'

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