Growth funding: is it all downhill from here?

Anneken Tappe
07 December 2011

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Expansion and early-stage deal numbers declined steadily in Q3 2011, leaving the industry expecting a grim final quarter of the year. Anneken Tappe reports

Over the past six years, unquote" data shows three significant peaks in expansion and early-stage deal volume across Europe: deals rose significantly in late 2006 and showed an increase to a record high in Q1 of 2008. The third peak, between Q1 and Q2 of 2010, was followed by a slump, potentially caused by the lacklustre pace of economic recovery. Since then, growth deals have been on a steady decline, falling to less than half that seen in 2006.

The decline in 2011 suggests an equally slow, if not even slower final quarter of the year and overshadows hopes for a more fruitful 2012. At the same time, each first quarter over the past five years, with the exception of 2009, has seen a slight increase of deal volume. These contrasting indicators make it very difficult to predict how growth funding will develop in the New Year.

"There are longer term factors in addition to the immediate market environment, like, for example, access to institutional fundraising, which has been difficult since the dot-com bubble burst," says ECVA's Ross Butler.

The current decline is even more visible when figures for expansions and early-stage activity are separated. While early-stage investments closely follow market trends, expansions do not follow the overall data whatsoever. After a significant hike that started in late 2007, expansion acitivity peaked in 2010 but has failed to impress ever since.

The fallout of the financial crisis could be responsible for the short-lived revival in deal numbers. "Growth capital was in vogue after the first credit crunch, because people had money to put to work, but credit was difficult," Butler saysEVCA's own Quarterly Activity Indicator shows venture capital investments decreased by 11% between Q2 and Q3 of 2011, providing further evidence of the uncertainty that is dominating the market.

But EVCA pleads caution: "Venture capital is a fairly long term asset class, so there is only so much you can read into quarterly results."