At the end of August, the European Venture Capital Association produced its quarterly report with the help of Dow Jones, VentureOne, and Ernst & Young. The highlight of the report, published here by AltAssets, is that European venture capital investment reached €1.14bn in Q2 2007 despite a drop in deal flow to 213 in Q2 2007 from 223 in Q1 and 265 in the same period last year.
While great news for investors and entrepreneurs in Europe with a venture model coming of age, the real story should be next quarters results to understand if the markets and appetite for investments remained confident after the credit fluctuations in the US and abroad. Surely the investing of private equity funds in this stage of the cycle does not stop investors from investing funds in smart companies. As of yet, we still have not seen any stagnation in fundraising either. As well, what IRRs these funds will be gaining is another area of interest in the years to come.
But I think what is most striking about this report is that the median size of venture investment round has surpassed €3 million. Here is an excerpt from the report that is most telling about this:
'The European venture capital market saw an explosion in early-round investing as €600m was poured into 126 early stage deals,' said Jessica Canning, director of global research for Dow Jones VentureOne. 'The data shows the median amount invested in a first round during the quarter was €3.2m, by far the highest total on record. Add to that a continued interest in later stage deals and the overall median for a deal done in Europe jumped 41 per cent during the second quarter to a record €3.1m.'
Buyout funds around the world are setting records in fundraising. For example; see how Carlyle has just closed its Carlyle Europe Partners III out at a cool $7 billion. While some VCs in Silicon Valley are even complaining that the VC model is broken, some even giving money back to LPs (Sevin Rosen), we have to pause and wonder "Where is the venture model going?" Research has proven that with increased fund sizes comes increased median investment sizes and increased valuations of investments whether inflated or not, and increaing acquisition prices. The decreasing number of investments could be considered direct support for the "Venture Capital Model is Broken" Theory, and is definitely cause for concern. We have all talked about the "Funding Gap" that exists between Seed and Incubation Investment and Series A. Are we reaching a stage where incubated companies will only have banks (or possibly angels) to turn to? What should fill this gap is the true venture model.
'The record median round size in Europe this quarter is the continuation of a trend that we have observed over the last 18 months in which investors are providing greater sums to fewer companies, allowing those companies to better compete globally and build critical mass for an IPO or M&A,' added John De Yonge, research director for the Ernst & Young Global Venture Capital Advisory Group.
And for Turkey, firstly we should be concerned how much of the EVCA number includes Turkey if any. We should also be concerned about the outliers in the data that constitute venture. Secondly, since the Turkish government has pinned "so much" investment toward the building of incubator science and technoparks, we must ponder about our incubated companies who will simply not make the cut when looking for that venture financing. The foci of Turkish Venture Funds is still fairly traditional - technology (with some stipulations). And if the median investment round is to increase - what then? The funding gap has just gotten larger...
Finally, once again, I'm going to send a shout out to the Turkish Venture Capital Assocation (if there is one) that is actually registered with the EVCA, and challenge them, "Where is the data?" I'm willing to work with you here. Would someone at the EVCA give them a call, please? Maybe the fault does not lie with the TVCA, but rather the reluctance of Turkish VCs toward paying dues and continuing the work of the TVCA! If you want to set the record straight on this, I urge the TVCA, the EVCA or any Turkish VC to contact this site, or comment below.
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Labels: EVCA, Funding Gap, fundraising, Incubators, Investment Reports, Median Investments, Private Equity, private equity research, TVCA