US venture funding rises while Europe’s falls

Shaky markets and economic worries are impacting both the US and Europe, but the reactions of venture capital investors differ markedly. Some however, are questioning whether the US can sustain its activity as institutional investors shy away from funding venture capitalists.

“This quarter’s increased investment levels signals an incredible opportunity for job creation and innovation, but if current dynamics continue, it will not be sustainable,” said Mark Heesen, president of the National Venture Capital Association (NVCA) in Washington, DC, as the second quarter numbers were published by MoneyTree and PriceWaterhouseCoopers (PwC).

“For the past three years, the venture capital industry has been investing significantly more dollars into companies than it has been raising from institutional investors,” he continued. “This level of investment cannot continue if we do not start to see a pick-up in exits and, subsequently, fundraising. The money simply will not be available to invest.” Heesen added that ironically, the industry should be less concerned about a bubble and more worried about being in a position to adequately fund the opportunities that will be out there in the next decade.

There was good news in a University of New Hampshire study, which found that angel investment in the US rose more than 14 per cent, to $20.1 billion in 2010.

In Europe, worries about the sluggish and uneven economic recovery are key reasons for caution among venture capital investors, said Anthony Sheldon, research manager at Dow Jones VentureSource, which published the European venture investment data. “With the ink barely dry on a second bailout for Greece, it’s clear that the sovereign debt crisis in Europe is far from over, either for individual economies or in terms of contagion risk,” he said. “In such a febrile atmosphere, venture investors may look for a smaller number of de-risked, later-stage investments in core industries, leaving less for investments in new enterprises.”

IPO pipeline grows in the US

The US also saw its initial public offering (IPO) pipeline swell to 178 companies recently, with four new companies, Brightcove, Genomatica, Laredo Petroleum, and Inergy Midstream, jumping into the fray last week. Market volatility, however, has created a backlog of companies wanting to list.

US venture deals up 19 per cent

Overall, 966 deals worth $7.5 billion were closed in the second quarter in the US, an increase of 19 per cent in both dollar value and in the number of deals over the first quarter of 2011. Life science investments rose 37 per cent over the first quarter, and Internet-specific investments hit a 10-year high.

European venture-backed companies raised €2.2 billion in 447 deals in the first half of 2011, down 28 per cent in deal activity from a year earlier, according to Dow Jones VentureSource. Capital invested remained flat.

The US life sciences sector saw $2.1 billion invested in 206 deals, according to a PwC report, “High-dollar deals”. This is the seventh-best quarter since 1995, when the PwC/NVCA MoneyTree Report with data from Thomson Reuters started collecting data. The report includes the biotechnology and medical device industries.

However, dollars invested in life sciences declined 3 per cent compared with the same quarter of 2010. Deal volume also decreased 21 per cent year on year. Compared with the first quarter of 2011, deal volume looked more positive, showing an increase of 12 per cent. The life sciences share of the total venture capital investment slipped slightly to 28 per cent in the second quarter of 2011 from 30 per cent in the second quarter of 2010.

The top five metropolitan regions getting life sciences venture capital funding during the second quarter were San Francisco ($552 million), Boston ($441 million), Washington ($210 million), San Diego ($186 million), and Orange County, California ($157 million). Investments in biotechnology deals accounted for 54 per cent of the dollars invested in those regions in the second quarter.

“The rise in venture capital investment going into life sciences during the second quarter can be attributed, in part, to an increase in exit activity,” said Tracy Lefteroff, global managing partner of the venture capital practice at PwC. Lefteroff added that exit activity allows venture funds to achieve liquidity in their portfolios, in turn enabling them to return dollars to their limited partners and make more funds available for the rest of their portfolios.

Some 22 venture backed IPOs in the US raised $5.5 billion in the second quarter of 2011, more than triple the dollar value during the second quarter of 2010 and a 29 per cent rise in the number of offerings compared to this time last year. Fourteen of this quarter’s offerings were from companies based in the US, while companies in France, Canada, and Russia added one IPO each. Five of the quarter’s IPOs were from companies based in China.

Slight increase in VC investment in Europe

Capital raised and the number of European venture-backed IPOs rose slightly over last year, reaching the highest six-month level since the first half of 2007. However, the nine flotations that raised a total of €611 million in the first six months of this year were still some way off the 27 IPOs that raised €723 million in the first six months of 2007.

Consumer Web companies were the star sector in Europe during this period, with a year-on-year increase in investment of nearly 150 per cent. By contrast, the information technology industry recorded its lowest ever half-year deal count this period, with deal flow down by 35 per cent.

Life sciences still strong in US

During the second quarter of 2011, 44 life sciences companies in the US received venture capital funding for the first time, capturing $283 million. This is a decline of 27 per cent in the number of companies and a small drop in dollars invested compared to the second quarter of 2010. First-time deals averaged $6.4 million in the second quarter of 2011, up 36 per cent year-over-year and significantly higher than the average first-time deal size of $4.8 million for all industries.

“Average first-time deal size increased by 36 per cent year over year, in part, because of the longer time frames that venture capitalists believe they will need for their portfolio companies to achieve significant milestones. These milestones could lead to a window of opportunity for additional financing or an exit,” said Lefteroff. At the current pace of venture capital investing, 2011 is on track to exceed $26 billion, which would put it as the sixth most active year in US venture capital investing history.

Healthcare and IT investments decline in Europe

In Europe, the healthcare industry, which was one of the most active and largest investment areas for venture capital throughout most of the past decade, appears to be losing favour with venture capitalists, who put €628 million into a record low deal count of 92 deals in the first half of this year. Within the healthcare industry, biopharmaceutical companies took the lion’s share of investment with 53 deals collecting €449 million. This marks a 44 per cent decline in deal flow and 24 per cent decline in investment.

IT recorded its lowest ever half-year levels for deal count and capital raised during this period. Deal flow declined by 35 per cent to 122 completed deals, and capital raised fell 40 per cent to €384 million compared with the same period last year. Software remained the largest IT segment, attracting 69 per cent of deals and 55 per cent of investment. However, software investment fell by 21 per cent to €213 million and deal flow declined by 27 per cent to 84 completed deals compared with the same period last year.

The consumer services industry was the star performer over this period as €629 million was raised for 103 deals, a 148 per cent increase in capital raised and a 2 per cent increase in deal flow. Most of the capital invested into the consumer services industry went to Web companies, including social media, entertainment, and search start-ups.

By country, the UK remained the favourite destination for venture capital investment in Europe, taking 35 per cent of overall investment in the first six months of 2011. UK-based companies raised €766 million through 119 deals, a 4 per cent decline in capital invested and down 29 per cent in terms of deal flow, compared with the same period last year.

France came in at second, but it also saw a decline in investment and activity in the first half of this year. Investment declined 18 per cent to €315 million and deal flow fell 16 per cent to 114 deals.

Germany came in fourth by investment but third by number of deals, despite recording a decline in investment. German companies raised €240 million through 54 deals, down 27 per cent in investment value and down 41 per cent in deal flow over the same period last year.