VC investment in Europe recovers, but it's still not great, especially for early stage

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VC investment in Europe has recovered after a record low in the second quarter but we’re not out of the woods, says Dow Jones VentureSource. Investors put $998 million (€730 million) into 201 deals in Europe overall. This is a 23% increase from the previous quarter, which was the lowest on record since Dow Jones VentureSource began reporting on the region in 2000. The UK was the No. 2 destination for venture capital behind the U.S. in Q3 with $393 million (£240 million) spent on 67 deals.

France had its worst quarter of 2009 and dropped 58% from the same period last year (55 deals), while in Switzerland, investors put $80 million (€59 million) into seven deals, on par with the previous quarter but still down on a year ago. Capital investment in Germany plummeted. Sweden had its best quarter of 2009 though venture investment was down 22%. Spain saw a dramatic 86% drop from the same period last year. Investment in the Netherlands rose 41% from the same period last year. It seems Amsterdam has startup fever.

Capital intense “later stage deals” have claimed 46% of the total capital invested, suggesting that early stage is still difficult.

Arno Castanet, Research Manager, Dow Jones VentureSource said: “Until the liquidity and fundraising markets correct themselves, investors will continue to keep a tight rein on their investments. Investors are being very selective and only investing in the most promising companies.”

Interestingly although the software sector hit a record low this quarter, the “Web-heavy”, as they put it, Information Services sector had a strong year, beating 2008’s investment figures in both the first and third quarters of 2009.

Here’s the full release:

VENTURE CAPITAL INVESTMENT IN EUROPE RECOVERS AFTER RECORD LOW IN SECOND QUARTER

Dow Jones VentureSource: Venture Capital Investment Up 23% From Previous Quarter; IT Investments Focus on Web Companies; Later Stage Deals Soak Up 46% Of Capital Invested

LONDON (27 October 2009)—According to new data from venture capital industry tracker Dow Jones VentureSource, Europe garnered $998 million (€730 million) in 201 deals during the third quarter of 2009. This is a 23% increase from the previous quarter, which was the lowest on record since Dow Jones VentureSource began reporting on the region in 2000.

The third quarter’s total is still a 48% drop from the $1.9 billion invested in 312 deals during the same period last year.

“Until the liquidity and fundraising markets correct themselves, investors will continue to keep a tight rein on their investments,” said Arno Castanet, a research manager in Dow Jones VentureSource’s London office. “Investors are being very selective and only investing in the most promising companies.”

IT Investors Shift Gears Out Of Software, Into Web

The Information Technology (IT) industry attracted 43% of the region’s investment as $425 million (€311 million) was put into 87 deals in the third quarter. While this was IT’s strongest quarter of 2009, investment is down 30% from the $606 million (€412 million) put into 126 deals during the same period last year.

“We’re beginning to see IT investors’ tastes change,” said Mr. Castanet. “The Software sector hit a record low this quarter while the Web-heavy Information Services sector had a strong year, beating 2008’s investment figures in both the first and third quarters of 2009.”

Investment in the Web-focused Information Services sector carried the IT industry as investors put $173 million (€127 million) to work in 22 deals. Meanwhile, the Software sector raised just $72 million (€52 million) through 35 deals this quarter.

Medical Devices Outpaces Biopharmaceuticals For First Time

Investors put $296 million (€216 million) into 41 Healthcare deals in Europe during the most recent quarter, a 41% decline from the third quarter of 2008 when $502 million (€341 million) was put into 75 deals.

“The Healthcare sector appears poised for long-term growth,” said Mr. Castanet. “Already in 2009, healthcare companies have attracted a larger proportion of the total investments than they did during the same period last year and we expect this trend to continue.”

For the first time on record, the Medical Devices sector attracted more capital than Biopharmaceuticals. Investors put $158 million (€116 million) into 21 medical device deals during the third quarter while Biopharmaceuticals reached a record low with $122 million (€89 million) invested in 18 deals.

All Energy Investments Flow To Renewables Deals

Europe’s Energy and Utilities industry was up 114% from the previous quarter, with $144 million (€106 million) invested in 22 deals. The industry, however, is still down 51% from a year ago. In the third quarter, all investments in Energy and Utilities went to companies in the Renewable Energy sector.

Elsewhere, the Business and Financial Services industry attracted $70 million (€51 million) in 29 deals, down 73% from the third quarter of last year. The Consumer Services industry saw $38 million (€28 million) invested in eight deals, up 31% from last year. The Industrial Goods & Materials industry garnered $14 million (€11 million) in seven deals, an 82% decrease from last year.

Capital Intense Later Stage Deals Claim Almost Half Of Investment Dollars

In the most recent quarter, seed and first-rounds accounted for 51% of deals while second rounds accounted for 19% of deals, and later stage rounds accounted for 26% of the total deal count. During the same period last year, first-rounds accounted for 49%, second rounds for 19% and later stage rounds accounted for 23% of deals.

By investment, seed and first-rounds garnered 26% venture dollars in the third quarter of 2009, down from 32% last year. The proportion of the quarter’s investment total going to second rounds was 25%, up from 21% last year. The proportion going to later stage rounds rose to 46% from 44%.

In Europe, the median size of a venture capital deal dropped 30% from $3.7 million (€2.5 million) in the third quarter of 2008 to $2.6 million (€1.9 million) in the most recent quarter.

Country Perspectives

* The second-favorite destination for venture capital, behind the U.S., the United Kingdom saw $393 million (€288 million) put into 67 deals during the third quarter. This is on par with the $419 million (€284 million) put into 83 deals during the same period last year.
* France had its worst quarter of 2009 and dropped 58% from the same period last year as venture investors put $173 million (€126 million) into 55 deals.
* In Switzerland, investors put $80 million (€59 million) into seven deals, on par with the previous quarter but down 37% from a year ago.
* Capital investment in Germany plummeted to $74 million (€54 million), down from $282 million (€192 million) a year ago.
* Sweden had its best quarter of 2009 though venture investment was down 22% from one year ago. Capital investment in the country was $75 million (€55 million) in the most recent quarter.
* With just $12 million (€9 million) in four deals, Spain saw a dramatic 86% drop from the same period last year.
* Investment in the Netherlands rose 41% from the same period last year as investors put $77 million (€56 million) to work in nine deals.

*All Europe investment figures based on weighted conversion rates of 1.47134 (2008) and 1.36685 (2009). All percentages were calculated using USD.

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