VC-Funding
ECF

London tops the European start-up league.

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According to the Tornado-Insider “the UK is the most prominent country in the [European] VC landscape having bagged 9.4% of all deals in Europe since 2000″. It seems the majority of VC money is still being invested in the North of Europe with the obvious exception of two Italian €10 million deals in 2006 and the €18 million first-round FON investment in Spain (Note: The FON deal accounts for 36% of the total amount of Spanish funding raised this year).

In fact “London-based technology companies were the most successful in raising funding with Paris trailing in second place with approximately 5.4%, Stockholm is third followed by Dublin. (Note: Ireland have dropped behind in 2006 with only 9 deals recorded thus far) The top 10 is further made up by Cambridge, Amsterdam, Munich, Copenhagen, Berlin and Helsinki. Of course the recent NetVibes €12 million investment and Bebo deals will have changed the percentages but not the overall placings.

At first I thought, yeah baby, you go London and then I thought about it some more and thought what does 9.4% actually equate too and for the Sand Hill Mob it’s probably just loose change.

Equally for any budding UK entrepreneur this is nice to know that collectively there is more investment money here in London than the rest of Europe but what they really want to know is where can they go to raise their own funding? Or in simpler terms, show me the money! It’s great to know that the big US investment funds such as Accel, Benchmark, Apax etc. are now located in London, alongside the more European home-grown VC’s such as Index Ventures and 3i, but try raising less than £1m from any of them and unless you really are the next big thing like NetVibes, Bebo or Skype, I probably wouldn’t waste your time or more to the point theirs.

Well surprisingly the UK Government has woken up to this problem and the fact that “there is a scarcity of equity capital in the £500,000 to £2 million funding rounds, which makes it difficult for a number of businesses to raise the finance they need”. As a result, the UK’s Small Business Minister (yes there is one, Margaret Hodge, of course?) launched the new Enterprise Capital Funds (ECFs) scheme last year and recently announced the six winning ECF’s.

“ECFs combine public and private sector cash to help bridge the equity gap faced by small and medium-sized businesses. The funds will typically invest in small businesses with high-growth potential that seek equity finance from €725,000 to €2.9 million.”
Here are some brief details of the six ECFs:

  • The Dawn Capital Fund – a £37.5 million fund, which includes £25 million of government funding, has been created by a group of successful entrepreneurs and experienced fund managers. The fund will invest throughout the UK with an investment focus on traditional industries where pioneering companies are able to adopt innovative technology to improve products and services
  • The Midlands Enterprise Capital Fund – a £30 million generalist fund, which includes £18 million of government funding, will focus on investments in the Midlands region. This is the only fund that has significant backing from institutional investors, in this case Local Authority pension funds. Catapult Venture Managers will manage the Fund.
  • The Seraphim Capital Fund – A £30 million generalist co-investment fund that will be managed by a coalition of ‘business angel’ networks and will focus on investments in companies throughout the UK predominantly in the early stages of development.
  • The IQ Capital Fund – A £25 million fund which will operate across the Cambridge, Oxford and Bristol areas. It will focus on technology based SMEs and will make investments of up to £1.5 million. The Fund will be managed by the Cambridge based NW Brown group. Cambridge based Great Eastern Investment Forum, Oxford based Oxford Opportunities Investment Network and Bristol based South West Angel Investor Network (SWAIN) are also key partners in the fund which will invest alongside business angels.
  • 21st Century Sustainable Technology Growth Fund – A £30 million fund which will operate across the UK and focus on high growth companies employing leading edge sustainable technology. E-Synergy Limited will manage the Fund.

Well it seems, according to Tornado Insider’s, these initiatives to fund early-stage companies are starting to show results. In 2003 27.3% of all UK investments were early-stage rounds falling to 25.9% and 22.7% in 2004 and 2005, respectively. 2006 shows a 9% increase on the previous year, with 31.7% of all UK investments to date being either seed or first rounds. So not quite up to the levels of the last Web 1.0 boom.

Also other countries in Europe with a high number of investments are showing a positive trend, although at a slower scale. In France, 26.7% of all investments are early-stage (2006: 20.7%) and in Germany the percentage is at 26.2% (2006: 23%).

So it looks like Europe is finally waking up to Web 2.0 phenomenon and putting its money where its mouth is. I think 2007 may well be a good year for UK start-ups. It will be interesting to see how these new ECF’s effect the UK market and what sort of deal flow they will help generate. I would be interested to hear from any entrepreneur who has applied to these ECF’s for seed funding and raised the money. Hopefully they are better than the Dragon’s Den investor’s and more generous with their equity finance.

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