Early stage deals and IPO activity up

The high-tech entrepreneur has at last got some hope again, especially with reports telling us that early stage VC deals in Europe are up, and that the number of venture-backed European IPOs is 2004 was the highest since 2000.

According to the European Venture Capital Report from VentureOne, a unit of Dow Jones and Ernst & Young, the total number of VC deals fell by 20% but early stage rounds represented one-third of all deals in Europe in 2004 —compared to 28% in 2003. The percentage of early stage deals steadily increased throughout 2004, with 35% of the deals in the fourth quarter alone targeted at seed and first rounds.

On the IPO front, 34 venture-backed European companies completed initial public offerings (IPOs) in 2004, raising a total of €712 million – a significant improvement over the nine IPOs that raised €129 million in 2003. The number of IT firms that went to IPO in Europe exceeded the number in the US, where the health care sector was more buoyant. The 2004 European IPO figure was the highest since 2000, when there were 178 IPOs that raised €11.8 billion.

Early stage VC deals
The total amount invested in seed and first rounds also significantly increased by 42% over 2003 amounts, and represent 28% of all capital invested in Europe in 2004. In addition, a few European countries represented substantial increases in early stage activity for the year. Seed and first rounds represented 28% of all deals in France this year and 37% of the deals there in the fourth quarter. In Ireland, 36% of the deals in 2004 were for seed and first rounds; in the United Kingdom, it was 40%; in Denmark, 44%; and in Spain, 55%.

For the first time since 2000, annual investment in European venture-capital-backed companies held steady, with €3.5 billion invested in 2004 – nearly the same amount that was invested in 2003. However, deal flow for the year decreased to 1,026 rounds – a 20% drop in activity from 2003. In contrast, the amount invested into US venture-backed companies in 2004 surpassed 2003 levels. The fact that European investment stabilised after four years of decline was viewed in a positive light.

Semiconductor VC investment drops
The number of deals and the amount invested into European information-technology companies declined in 2004, with 546 deals and €1.6 billion invested – decreases of 19% and 12% respectively from 2003. However, investment into communications companies increased slightly, with five more deals recorded in 2004 and 3% more money invested. Semiconductor deals also held steady with 49 occurring – the same number as in 2003. However, the amount invested dropped 31%.

“Some of the factors which contributed to recent growth in US venture capital investment are now being observed in Europe,” said Gil Forer, Ernst & Young’s global venture capital advisory group leader. “In 2004, Europe saw significantly higher M & A valuations and the most VC-backed IPOs in three years, creating a clearer path to quality exits for investors which was likely an important dynamic in the stabilisation in European funding levels last year. Since venture-capital investment in Europe generally lags the US trend by approximately two quarters, there is reason to be cautiously optimistic that European investment will take up the US trend and shift from stabilisation to improvement in 2005.”

“The growing size of European venture-capital deals is a positive factor,” said Stephen Harmston, VentureOne’s director of international research. “It also indicates that the companies able to secure a financing round are receiving investments that may sustain them as they seek potential partnerships and/or exit opportunities.”

By industry, investment into European healthcare companies increased 19% to €1.5 billion in 2004, even though there were 40 fewer healthcare deals in 2004. In fact, of the 10 largest deals that occurred in the fourth quarter, all were for healthcare companies. The largest deal was the €40 million first-round investment in Novexel (Romainville, France), a developer of treatments for fungal and bacterial infections.

Investment into energy-related companies also increased, with four more deals for the year and €33.5 million more capital invested in this segment.

“Thanks to more progressive energy policies in Europe, this segment is beginning to garner significant interest among investors,” Harmston said.

IPO trend on the up
“The US had 67 venture-backed companies complete an IPO in 2004 – the highest amount since the bubble years. The public market for these privately financed entrepreneurial companies is finally showing signs of improvement,” said Harmston. “The 2004 numbers represent the first upswing in the number of completed IPOs in Europe, after three consecutive years of decline.”

However, it took the current crop of IPO companies nearly a year longer than last year to reach IPO status – about 4.3 years, compared to 3.4 years in 2003. “This shows that European investors are still focused on portfolio companies that were initially financed during the bubble years of 1999 and 2000,” Harmston added. “Some 47% of the companies that reached IPO this year were initially financed during that period.”

The 2004 IPO companies performed better in the public market than in preceding years. The median pre-money valuation of European IPO companies was €39.5 million, up from €26.9 million last year.

Amongst the European IPO companies, five were in communications and networking and four each in the semiconductor and software segments. The largest IPOs of the fourth quarter in Europe were flat-panel display technology developer Cambridge Display Technology (NASDAQ: OLED), which was valued at €195.5 million at its IPO, and a surgical device maker Inion (LSE: IIN.L), which was valued at €130.5 million.

By geography, the United Kingdom was responsible for the majority of the year’s IPOs: 23, which raised a total of €409 million. Norway was the second most active in terms of the number of IPOs, completing five for a total amount raised at €46 million.

M & A activity still healthy
The number of mergers and acquisitions of European venture-backed companies also improved over the preceding year. In 2004, there were 147 M&As, the highest number in five years, but representing only a slight increase from the 141 that occurred in 2003. As in the US, the majority of the M&As in Europe – 96 – were IT companies, which includes semiconductors, wireless and software sectors. The largest M&A of the fourth quarter was online conferencing provider Spectel of Dublin, which was acquired by Avaya Inc. (NYSE: AV) for €83.4 million.

The median amount paid in M&As for these venture-backed companies was €26 million, more than double the €10.6 million median paid last year and almost reaching the highest median amount paid in 2000, at €30 million.

VC investment in UK and Ireland reaches juncture
According to Cobalt Corporate Finance, a London based corporate finance house, there were 100 deals in 2004, raising a total of £496 million – an increase of 27% compared to 2003, when there were 107 deals. This shows that the average amount raised per transaction is higher, at £5.0 million compared to £3.7 million. The number of deals is lower and has been falling for four years, hitting a new low since 1998 according to Paddy MccGwire, ceo of Cobalt Corporate Finance. Another way of looking at this is that the total gene pool of suitable technology companies is shrinking and the focus is moving away from late stage, pre-exit companies, of which very few surefire opportunities exists. This is corroborated by the fact 61% of the deals were R1 and R2 rounds in 2004, compared to 51% in 2003.

The largest investment round recorded in 2004 was the R2 round of £28 million made in Microsulis (Microwave technology) lead by 3i and Media2k. The largest R1 was £12 million in CRLO Displays (silicon based displays), lead by Doughty Hanson and Amadeus - no doubt, buoyed by the recent successful IPO of Cambridge Display Technology.

Regionally, activities in Scotland increased to 12 deals, while Ireland activity was down to 9, way down from 18 deals in 2003.

Most active investors during 2004 were 3i and Scottish Equity. Other notable activity was recorded from Cross Atlantic, Doughty Hanson, Benchmark and Accel.

© Chilli Publishing Ltd 2004

15FEB2005