Surprise! Consumer Internet Companies Fuel Euro Growth VC

Dow Jones VentureSource has released some figures about European venture capital which we should all take a look at and chew over. The headline news is something that you might not have predicted a few years ago. Given that bigger European tech companies have been largely drawn from the Enterpise/B2B space, it’s significant that consumer Internet companies are now leading the charge. But the trends also show that European tech companies are suffering from too few exit opportunities which is leading to later-stage financing rounds and less deal activity.

According to VentureSource, venture-backed companies based in Europe raised €1.3 billion through 273 venture capital deals during the second quarter of 2012. This represents a 14% increase in capital raised. But at the same time there has been a 20% decline in deals from the same period last year.

Consumer technology services saw the greatest gains of any industry in the second quarter, raising €493 million through 72 deals. This was more than double the €239 million raised during the same period last year “despite only one more deal being completed”. Almost two-thirds of the capital went to the “consumer information services” sector, which includes social media, online entertainment and search companies.

In addition, 62% of deals in the second quarter went to early-stage companies, up from 58% in the same period last year. Early-stage companies also accounted for 32% of capital invested, on par with the second quarter of 2011. Second-round deals accounted for 19% of deal flow and 18% of capital invested, down from 25% and 28%, respectively, in the year-ago period. Later-stage deals accounted for 19% of deals, up from 17% a year earlier, and 49% of capital invested, a significant increase from the year-ago period when 39% of capital went to later-stage companies.

Also in the report:

• During the second quarter, 38 European venture-backed companies were acquired, a 34% drop in deals from the same period last year, and three companies went public, which was half the number of initial public offerings (IPOs) recorded in the second quarter of 2011.

• Through the first six months of this year, venture capital investment totaled €2.2 billion for 550 deals, a 7% decline in capital and 10% decline in deals from the year-ago period.

• The industry trends in the second quarter largely reflect the recently released U.S. investment figures, with Internet and software companies faring well but significant declines recorded in the healthcare and energy industries.

The “data” market is also buoyant. Business and financial services companies raised €144 million for 35 deals during the second quarter, a 58% increase in investment despite a 27% decline in deals. The business support services sector, driven by interest in marketing, advertising and data management companies, raised €108 million through 26 deals during the second quarter, double the amount invested in the same period last year despite a 28% drop in deal flow.

The “IT” industry – or traditional software – raised €215 million for 73 deals during the second quarter, an 18% decline in investment and a 17% drop in deal activity compared with the same period last year. The software sector – traditionally the most popular investment area in IT – fared well, raising €136 million through 54 deals, a 24% increase in investment despite an 8% drop in deals. This shows that traditional enterprise software is not quite dead in the age of the Cloud, although the drop in deal activity is telling.

Significantly, Anne Malterre, European research manager, Dow Jones VentureSource puts the lack of deal activity combined with investment growth down to a “lacklustre exit environment” keeping companies private for longer. The larger financing rounds come from companies need to grow, thus boosting the amount invested.

However, the data shows what we’ve been observing on the ground: VCs increased the percentage of deals done for early-stage companies and their “interest in online start-ups remained strong.”

So something has to give, somehow, at some point in terms of deal flow. Quite what that is remains to seen, but the likelihood is that this year marks the end of the recent cycle and the beginning of a new one where companies wait things out until the next round of exit opportunities present themselves. Just two examples of the end of the cycle are the recent exits of Playfire and Moonfruit. There will be others.

The full Dow Jones information is here.