EVCA study reveals optimistic mood in European venture

Funds allocated to European venture capital have tripled from EUR5.7bn in 2003 to EUR17.5bn in 2006. There has also been a doubling of funds invested from EUR8.4bn to EUR17.3bn in the same period, as well as significant improvement in returns, with 2006 seeing an average net IRR of 17.2%.

In an effort to capitalise on these advances, the European Private Equity and Venture Capital Association (EVCA) commissioned a research project in late 2006 with the London Business School and the Centre for Entrepreneurial and Financial Studies of the Technische Universitat Munchen. The main aim of the study was to showcase the successes of, and therefore generate interest in, European venture capital. Based on qualitative interviews with GPs, LPs and company CEOs, the research was also designed to reveal the factors that have driven the improving performance of the asset class, as well as highlighting any potential difficulties that may lie ahead. The result is the report: 'The European Venture Capital Market: Scaling Beyond Current Boundaries'.

Respondents highlighted the importance of experience as a pre-requisite for success in venture investing, something that was sorely lacking during the boom years leading up to the burst of the tech bubble in 2001. This has begun to change in recent years, as one LP noted: "In Europe the wrong people entered the venture capital business, a lot of them are ex-accountants, as opposed to what you see in the US where a partner typically has a technology or a sales and marketing background. However, things are changing here now and that is why we have invested. We are hopeful that going forward the situation will be better because the model is changing."

Emphasis was also placed on the importance of having a network of contacts within the industry. George Noel, director of EVCA's venture capital platform, pointed to the range and variety of 'clusters' (groups of companies and venture capital firms from individual sectors flourishing in particular regions) that exist throughout Europe. There are a number of these small clusters spread across the Continent, in contrast with the US where there is a large concentration in two main locations; the Bay Area and the East Coast.

The problem is that in spite of the large presence of these clusters, they are heavily diversified and distanced from each other, something that EVCA is keen to rectify. It is planning an event in late 2008 with the aim of helping venture capitalists build relationships with entrepreneurs from the wider European community.

Finally, and unsurprisingly, respondents discussed the need for ambition if venture investments are to be successful on a large scale. This was seen to go beyond merely wishing to see big returns on invested capital, but is more about the desire to build and expand companies globally. However, GPs face further potential barriers in this regard with the heterogeneous nature of the European markets, a particular obstacle that Noel is keen to address. The continued expansion of the European venture market is one of the organisation's main targets: "We want to sell European venture capital internationally," Noel said.

The report seems to describe a mood of optimism, contrasting with the pessimism that has come to characterise the market in recent years. Noel concedes that, despite improved statistics, it remains difficult to raise funds in Europe and there are still many hurdles to be overcome if the European market is to achieve the same degree of success as the US.

But this, he said, is because the market is young, adding: "In three to four years, when the 2001 vintage has completed its first full cycle, we will be closer to seeing Europe's potential realised."

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