A happy New Year for venture capital?

Despite efforts from both the private and public sector, the European venture capital industry has always lagged behind its role model in the US. But in the post-Lehman world, forces are shifting and the American venture market is shrinking. In Europe, Germany and the UK are the countries most attractive for early-stage investments, with 46 and 37 deals reported respectively in 2012 according to unquote" data. But Europe is losing ground to new territories as well. In China, India and Israel, venture's prime is yet to come.

At this week's London School of Economics Alternative Investments Conference, venture expert Alex McCracken, vice president at Silicon Valley Bank (SVB), explained the difference between the American and European venture models that have led to them developing in different ways. In Europe, many funds focus on partnering with young companies in the very early stage of their existence, making the investments much riskier than at a later stage in the business cycle, before selling assets to corporates or American VCs. This keeps valuations low and encourages early-stage investments. Across the pond, venture capital-sourced support is much more available in the growth stages. That is why an IPO-exit remains the goal for many American venture investors, delivering better returns.

"In 2011, 14 European venture-backed companies IPOed," says McCracken, "but most IPOed on NASDAQ."

Major transformations in the VC market mean some investors are bullish about 2013

It almost seems like Europe is lacking the infrastructure to support the variety of products and services resulting from its early-stage R&D efforts. In the Netherlands, the ministry of economic affairs has joined forces with regional fund PPM Oost and the European Investment Fund to form The Dutch Venture Initiative in an attempt to counteract this phenomenon.

McCracken says European VCs have been challenged by lower average returns at exit than US venture capitalists. After all, a European start-up that is trying to attract investor interest from the US will be required to relocate at least part of its operations there to make itself known. Moreover, the fundraising environment in Europe remains difficult in light of the eurozone crisis. According to SVB, 9% of venture capital investments in Europe now come from corporates.

But of course there is opportunity in an industry shaken by crisis, and the overall quality of deals increases in response to investor requirements and solid business plans. Due to the difficult economic conditions, the market has experienced a clearing-out of smaller or unsuccessful players, leaving the large and more seasoned VCs, such as Index or Accel, to dominate the picture.

McCracken and SVB are bullish on tech investments in Europe, particularly in the UK, including the ICT sector as well as medical technology, equipment and cleantech. Another field that will become of more interest in the near future is financial technology, or "fintech", offering new support and systems solutions to financial services companies. In December 2012, German real-time credit scoring tracker Kreditech and Danish mobile banking protection provider Codesealer received more than €5m in early-stage funding.

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