Euro VC Posts Abysmal Quarter, Though Energy Surges

The European venture capital sector contracted by 35 percent in the second quarter, it’s worst quarter in nine years. Roughly €858 million were invested over 167 deals, down from €1.33 billon in 286 deals during the same period last year. Investments in particularly strong EU portfolio areas like IT and healthcare were down 40 percent and 46 percent, respectively, on the quarter. The venture capital industry in Europe focuses traditionally on mid- to late-stage deals that funnel money to smaller, established companies. Compared with the startup culture in the U.S., European VCs tend to look for companies that have already proven themselves through commercial production or solid protoyping results. However, these companies are also closer to those exits that everyone talks so much about, but no one actually sees.

That the U.S. recession has slowly rippled its way across the Atlantic is no surprise. What is surprising is the level of the impact - the British economy ground to a halt in the second quarter, the industrial-driven Germany economy actually came down 0.5 percent, and the French played a great game of catch-up with a 0.2 percent drop in GDP. The Poles are waiting in breadlines. This means the same thing it does in the U.S. for venture-backed companies. Bruised, mature markets with little liquidity aren’t able to absorb exits the same ways they were able to in the past. So there are two tactics here: move more funds into later stage investments and try to build up companies at the end of the pipeline, or get down in the mud and find early stage companies to incubate. While the former seems to be the accepted approach in the U.S., it looks like the Europeans are moving toward the latter. Seed and first-round investments comprised 44 percent of second quarter deals, the largest such market share since the second half of 2001. 3i, formerly the EU’s largest VC firm, probably has mixed feelings about getting out of the early-stage game back in March. This may also explain Wellington Partners’ recent move to California.

Greentech and energy investment soaked up €147 million over 10 deals in the second quarter, it’s largest ever, placing it behind IT and health care as the third largest venture-backed sector in the European market. In fact, the quarter’s largest deal came from German solar company Sulfurcell Solartechnik, which received €85 million in a late-stage deal. Speaking of… Germany topped the VC list for the first time during the quarter. I haven’t checked out the deal breakdowns by country yet, but I’d wager the majority of those investments are going to solar companies, and that the majority of those companies are somewhere in the upstream part of the market. Process engineering and manufacturing improvements are just the sort of early-stage deals that a mature solar industry should be attracting. If that’s really the case, then Germans have it right on - this industry doesn’t need another First Solar, it does need a couple more Suniva’s though.