Venture capital 2011
This page contains data and analysis on the development of venture capital (VC) investments in Europe. The data and information on venture capital in Europe was produced by the European Private Equity and Venture Capital Association .
The EVCA is a member-based, non-profit trade association established in1983 in Brussels. With more than 1,200 members, the EVCA represents and promotes the European private equity and venture capital industry.
The EVCA’s activities cover the entire spectrum of private equity, from venture capital investment into early-stage and developing companies, through to investments in established businesses.
EVCA has collected data on venture capital and private equity investments since 1984. The latest 2011 European venture capital statistics are available from the EVCA Yearbook 2012. These statistics are compiled using a survey of European countries for the joint Pan-European statistics platform database known as the Private Equity Research Exchange Platform (PEREP_Analytics). This represents the most authoritative source of data on European venture capital. This site provides data and information from the EVCA in relation to the following indicators:
- Total VC investments scaled by GDP1
- VC investments in seed and start-up companies scaled by GDP
- Later stage VC investments scaled by GDP
- Number of beneficiary SMEs scaled by GDP
- VC investment by sector
- VC investment by type.
All the above indicators are derived from what the EVCA refers to as "market statistics': investments are regarded from the perspective of the destination country of the investment, as opposed to the country of the VC fund. It is also important to bear in mind that the statistical information contains only data generated by EVCA member organisations and covers all EU member states excluding Cyprus and Malta.
GDP information was extracted from Eurostat (February, 2013).
Total venture capital investment (% of GDP); available EU countries data; 2011
The total VC investment for EU member countries was just under €3.4 billion in 2011. This represents a tiny proportion of the total investment in SMEs compared to other types of finance.
Venture investment is always a minority form of funding, not suitable for the vast majority of businesses without exceptional growth potential over the short to medium term. Most venture funds have a total life of eight to ten years, make investments in the first five years and realise their portfolio in the second half of the life of the fund.
Held for five years, an investment would need to rise by between four and five times its initial value to produce an internal rate of return (IRR)2 above 30%, a common pre-downturn target in the industry.
To affect the growth potential of an economy, venture capital cannot operate in isolation. Other critical factors include expenditure on research and development, quality of educational system (especially in science, technology, engineering and mathematics) and the range of business support for ambitious firms, such as coaching or incubation programmes. Since Nordic countries tend to score highly on all or most of these scales (Sweden has a high R&D rate and significant investment in incubation, Finland has invested heavily in innovation policies for more than a decade, and Denmark has played to its strengths in investing in renewables3), over the long run their above average investments in venture funding are well-placed to show a positive return - as is the case for the 2011 VC investment figures (% of GDP).
However, several caveats are required. First, the ratio of early to late stage investment matters if start-ups are not to be starved of growth funding as they expand (see Figures 3 and 4 below). Secondly, investment in venture funding in some recent members of the European Union (Bulgaria, the Czech Republic, Romania, Slovenia, Slovakia) is still at levels low enough to make long-term sustainability challenging since below a certain level of activity the supporting infrastructure (specialist legal and accounting firms, attractiveness of market for entrepreneurs, liquidity of capital markets, scale of angel investment) becomes difficult to maintain. It is also notable that of longer-term EU members, several with low relative venture investment rates are also experiencing macro-economic challenges (e.g. Spain and Italy). The venture sector may be seen as an informal indicator at the micro level of a country’s ability to restructure its economy: countries that actively encourage venture capital and its supporting ecosystem are better placed to bring innovations to market than those that do not encourage new and often disruptive firms, especially in technology sectors.
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Total venture capital investment (% of GDP); total available EU countries data; 2007 to 2011
As noted above, VC investment can only be expected to be appropriate for a tiny minority of firms. However, even allowing for excess investment through irrational exuberance on the part of fund managers at the height of the boom in 2008, in both the Euro area and the European Union as a whole, the scale of decline is a cause for concern: investment has approximately halved in three years. To the extent that venture-backed firms are one of the engines of economic growth, both through pioneering new markets and through bringing innovation and productivity gains to established sectors, a decline in venture investment risks holding back the ability of EU economies to innovate and grow.
The small disparity between the performance of the EU as a whole and that of the Euro area in particular (with the Euro area investing less that the EU average) is largely accounted for by three of the largest venture markets - scaled by GDP - being outside the Eurozone: Sweden, Denmark and the United Kingdom.
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Venture capital investments in seed-and-start-up companies euro (% of GDP); available EU countries data; 2011
The investment rates in seed and start-up companies (Figure 3) should be considered in conjunction with the investment rates in later-stage venture rounds (Figure 4). While no ratio between the start-up and later stages (e.g.1:2) at any given point in time forms a recognised benchmark, some equilibrium is required. This is because providing significant funds at early-stages with limited possibilities for follow-on funding for the most successful (and often cash-hungry) portfolio companies creates structural gaps in the “funding escalator” (i.e. the jump from seed funding to growth stage capital is often too large for ambitious firms to make in one stride. with seed funding tapering away at around €3 million and growth funding not available below €7 million or more). Monies invested at the seed stage risk being lost if the firms into which they were deployed cannot grow through follow-on funding on to the point where sales or capital markets enable sustainability to be achieved.
Comparing Figures 3 and 4, it is clear that investment across early and later stages is broadly balanced in Sweden, Denmark, Spain, France and the Netherlands. Finland, Ireland, Belgium and Hungary favour early-stage investment whereas the UK4 in particular is biased towards later stage funding. It is worth noting that in the UK in recent years some of the gap left by the early-stage venture funds has been filled by resurgent activity on the part of business angels, and in many European markets with little track record of venture funding, government intervention in the first instance has tended towards developing seed rather than growth funds.
With the impact of the financial downturn of 2007-08 still unfolding, it is less likely that the private sector will be able to provide the significant funds necessary later to build up the growth sector of the venture market without encouragement or assistance from the public sector.
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Later stage venture capital investment; thousands of euro (% of GDP); available EU countries data; 2011
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Venture capital investments in seed-and-start-up companies; thousands of euro - % of GDP; available EU countries data; 2007 to 2011
VC investment in seed and start-up stages scaled by GDP has generally declined since 2008. Although both EU economies in general and those in the Euro area have ended up at the same level in seed and start-up investment, the relative drop outside the Euro area has been sharper. This is perhaps influenced by declines in seed and start-up stages in the UK, which is outside the Euro block.
Due to the low deal size and the relatively small number of transactions, seed and start-up funding can only be expected to be a tiny proportion of GDP.
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Later stage venture capital investments in euro (% of GDP); available EU countries data; 2007 to 2011
The aggregate decline in later stage investment has been even steeper than the decline in early stage, for both the Euro area and the EU as a whole. Likely drivers include uncertainties in capital markets making exit routes less attractive to fund managers; fewer opportunities coming through from early stage funds as the latter cut back their commitment; and a need on the part of fund managers to hold back available capital for investing in later rounds of existing portfolio companies. While the prices demanded by entrepreneurs will have declined as exits are seen to take longer and exit multiples expected to be lower, supply and demand are not yet in equilibrium.
The greater reliance on private sector funding with later stage funds, together with a reluctance on the part of both institutional and retail investors to allocate funds to illiquid alternative assets such as venture capital in a downturn, all add to the need for existing later stage funds to conserve committed capital.
The modest additional volumes of investment in later stage venture rounds in the EU as a whole compared with the Euro area specifically are again mostly attributable to the relative strength in later stages of non-Euro members such as Sweden, Denmark and the UK.
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Number of beneficiary SMEs scaled by GDP; available EU countries data; 2011
The number of beneficiaries is a function of volumes invested and average deal size. Sweden has the most venture capital (% of GDP) of any EU member; since a relatively high proportion is invested in earlier-stage deals - which tend to be smaller - the number of beneficiaries is also high. The comparison between Finland and the UK is also revealing: both have the same proportion of GDP (0.045%) invested in total venture capital, but in Finland 0.029% is in early stage against 0.017% is in the UK. As a consequence of its greater focus on earlier, smaller deals, Finland has more than three times the number of beneficiaries of venture investment when compared with the UK5.
Volumes of activity are at such low levels in some member states that establishing a vibrant venture community will be challenging. This can be seen particularly in Slovakia, Romania and Greece, though larger, long-standing members of the EU are also affected by minimal completion of deals, notably Italy and Spain. By contrast, some smaller members fare reasonably well when scaled to GDP, notably Ireland, Lithuania and Latvia.
Number of beneficiary SMEs scaled by GDP; available EU countries data; 2007 to 2011
In the last year of the boom, activity in the Euro area in terms of beneficiaries outperformed the wider EU. However, since 2010, Euro area activity has declined in relative terms, perhaps reflecting wider economic uncertainties in the Euro zone, leading to lack of confidence in new sectors and constraining the ability of invested funds to obtain exits through trade sales or initial public offerings.
Venture capital investment by sector; available EU countries data; 2011
From the perspective of encouraging innovative firms and research-based sectors as part of rebalancing European economies - moving away from both old industries and the financial services sector - it is encouraging to see a high proportion of venture investment directed at life sciences, computing, communications and energy. Together these account for 78% of the total.
The challenge in life sciences in particular will be to ensure sufficient provision of follow-on funding as life-science investments are often subject to numerous lengthy regulatory procedures (including for some firms several rounds of clinical trials/testing which takes a long time), which taken together may delay the point at which revenues are generated from sales. The lack of availability of later-round funding has been a major contributor to the poor overall performance of venture-stage funds in technology sectors over the past decade. The aggregate data in Figure 6 above suggest that the provision of later-stage funding across the EU has declined significantly since its peak in 2008.
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Venture capital investment by investor type; available EU countries data; 2007-2011
One of the most striking trends of the European venture market (as opposed to later/larger deal-based private equity) has been the critical role played by the public sector, whose relative weight has increased since the downturn in financial markets in 2007-08. Publicly-backed VC investment has more than doubled from 2007 to 2011. “Captives”6 are around the same level in 2011 as back in 2007, as is “independent”7 investment.
Policy makers in many developed economies have identified a “funding gap” affecting the provision of risk capital to growth businesses at early stages, with numerous local schemes instigated as a result to pump investment in the gap, often involving partnerships with private sector fund managers. Even before the financial crisis, the drift of the private sector was towards larger, leveraged private equity funds. With the extended timescales involved (investors in limited partnership venture funds are usually locked in for eight to 10 years) and the increasing volatility of financial markets, the private sector appears to have further reduced its appetite for venture funding.
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With some encouraging exceptions (such as the proportion of investment directed at technology and life-science sectors) the 2011 EVCA data confirm long-term trends in the European venture market: trends that are likely to have a negative impact on “gazelle” firms (i.e. firms less than five years old which have experienced growth at 20% per annum) and hence on the rebalancing and return to growth of European economies, especially those in the Euro area. Such trends include:
- The persistence of “funding gaps” for high potential but unproven firms at early stages (witness the decline in early-stage investment)
- The difficulty of ensuring that all stages of the “funding escalator” are addressed and function well together (later stage venture funding has also declined since 2007)
- The difficulty in building critical mass in smaller or newer EU members with minimal venture activity. Without critical mass, the supporting infrastructure of advice, dedicated space (incubators, science parks), innovative consumers, serial entrepreneurs, and active markets for company disposals will not readily emerge.
That said, the picture differs across countries and the relatively stronger performance of some non-Euro zone states such as Sweden, Denmark and the UK helps to explain the modest disparity between the EU as whole and the Euro area specifically. That 78% of total investment was directed to life sciences, computing, electronics, communications, energy and environment represents progress given the low levels of commercialisation of technology identified in 2004 in the Kok Report on the implementation of the Lisbon Agenda. Progress on innovation is now identifiable, though it is notable that countries identified by Kok as having high levels of investment in R&D in 2004 as a proportion of GDP (Sweden 4.3%, Finland 3.4%) are also countries which today invest at above EU average levels in venture funding. Neither research nor entrepreneurship exists in a vacuum; an ecosystem8 is required for successful investment.
Specialist research over recent years has suggested that government intervention in the venture sector (especially in hybrid or public-private funds) can be made to work, though this is a complex policy issue with a long learning curve9. Experience around the globe also allows lessons from other economies to be deployed in the EU if the political will is supportive, for instance:
- Respect the need for conformity to global standards
- Letting the market provide direction
- Resisting the temptation to over-engineer
- Recognising the need for long lead times
- Avoiding initiatives that are too large or too small10
While it is difficult to see how the market can fix itself, the provision of venture capital at early stages was a challenge even before the financial crisis. Allocating public resources to the venture capital industry which requires long-term payback periods will be a political challenge in a world already beset by budgetary crises.
1) “Scaled by GDP” is defined as the indicator value divided by the GDP value of a country (e.g. total VC investment divided by GDP of France). A high ratio would suggest a high indicator (numerator) and low GDP (denominator) and vice versa. It is also worth noting that “scaled by GDP” calculations for both the Euro area and the whole of the EU are derived by taking the average of all the ratios of the countries which make up those two geographies.
2) “In a venture capital fund, the net return earned by investors from the fund's activity from inception to a stated date. The IRR is calculated as an annualised effective compounded rate of return, using monthly cash flows and annual valuations”. /internet/ec.europa.eu/enterprise/glossary/irr_en.htm
3) Maula, M, Murray, GC and Jääskeläinen, M (2007), “Public Financing of Young Innovative Companies in Finland” , report to the Finnish Ministry of Trade and Industry MTI Publications, Helsinki; Kok, W. (2004). Facing the challenge: The Lisbon strategy for growth and employment , Report from the High Level Group to the European Commission, chaired by Wim Kok, November 2004. /internet/ec.europa.eu/research/evaluations/pdf/archive/fp6-evidence-base/evaluation_studies_and_reports/evaluation_studies_and_reports_2004/the_lisbon_strategy_for_growth_and_employment__report_from_the_high_level_group.pdf ; and Susanne Ollila and Karen Williams-Middleton (2011) “The venture creation approach: integrating entrepreneurial education and incubation at the university” Int. J. Entrepreneurship and Innovation Management, Vol. 13, No. 2
4) EVCA data refers to the United Kingdom but for consistency with the typology for country abbreviations on the Enterprise Finance Index (EFI) webpages all the charts (and Excel data) use the abbreviation GB for Great Britain. Therefore, GB should be taken to mean UK and vice versa.
5) However, later stage VC investment (scaled by GDP) in Finland is less than the UK (see chart 4) which perhaps makes it more challenging to produce good returns.
6) EVCA defines captives as “a fund in which the main shareholder of the management company contributes most of the capital, i.e. where parent organisation allocates money to a captive fund from its own internal sources and reinvests realised capital gains into the fund”.
7) ECVA defines independents as “fundraising from third parties”.
8) It is noted that the “Potential of Venture Capital in the European Union” study published by the European Parliament’s Committee on Industry, Research and Energy puts forward a number of suggestions for the development of a European VC “ecosystem” which address the current problems and barriers in the VC market.
9) Nightingale, P, Cowling, M, Dannreuther, C, Hopkins, M, Mason, C, Murray, GC, Siepel, J, Tidd, J (2009), “From Funding Gaps to Thin Markets: the UK Support for Early Stage Venture Capital in the 21st Century” , London, BVCA and NESTA. /internet/www.nesta.org.uk/library/documents/Thin-Markets-v9.pdf
10) Lerner J (2009) “Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed - and What to do About It”. Princeton University Press, Princeton NJ.