April 14, 2011 9:34 pm

US venture capitalists prowl Europe’s techs

The buzz around the stratospheric private market valuations of US technology groups such as Facebook, Groupon and Living Social is spreading to Europe, as investors seek to make the most of growth opportunities in internet companies.

Recent months have seen a stream of venture capitalists, private equity groups and trade buyers make moves in the region.

Spotify is close to receiving a fresh round of funding led by Russia’s DST that values the Anglo-Swedish digital jukebox service at about $1bn. Wonga.com, a UK-based online loans company, in February raised £73m ($120m) from a group of funds, while Amazon recently paid about £200m to acquire Lovefilm, the UK-based web-based DVD rental service that had received early venture backing.

“We’ve been very busy in the last year but since the fourth quarter there’s been a lot more activity,” says Ben Holmes, a partner at venture capital firm Index Ventures. “We are seeing investments in later stage deals where you can see solid growth, as well as lots of seed deals.”

Figures from Thomson Reuters confirm there has been a sharp increase in the past six months in the amount of money raised from seed and later stage funding for European internet groups.

Just over €2bn ($1.45bn) in equity was invested by buy-out firms and venture capitalists in this area in the six months to the end of March, compared with just €748m in the same period the year before. Their data also indicates that fundraising by VCs alone over the same period was at €714m, up from €168m the year before.

Dealmakers say that a pick-up in activity in places such as the UK, Germany, the Nordics and Russia indicates that investors have finally shrugged off the impact of the global financial crisis.

Foreign investors are now looking to make clever bets in Europe at a time when some technology groups in the US are attracting what some regard as excessively high valuations.

“Part of the reason that US investors are now looking to Europe is that as soon as companies in Silicon Valley start to gain traction, they are seeing stratospheric valuations. Some investors perceive Europe to be slightly better value for investors,” says Mr Holmes. Index, for example, was joined by two Silicon Valley investors – Greylock Partners and Redpoint Ventures – for its recent $48m funding of Just-Eat, a UK-based online takeaway ordering company.

Group buying websites have attracted interest, with private equity and venture capital betting on which of a host of e-commerce sites will come out on top. Ebay and Amazon have both recently bought European online shopping clubs, and on Thursday, a $55m investment was made in KupiVIP, a Russian online shopping club.

Meanwhile, the buzz around smartphones and tablets has put companies that have developed successful software applications, or apps, in focus.

Last month Rovio, the Finnish developer behind the highly popular Angry Birds app, raised $42m from investors including Silicon Valley-headquartered Accel Partners and Niklas Zennstrom’s Atomico fund.

“What you can take away from that investment is that we thought Rovio was an exceptional company,” says Bruce Golden, a partner at Accel Partners in London. “We were very impressed by the management team’s ambition. But there aren’t many of those opportunities where you see brilliant execution and a talented team with a large market in which to innovate.”

But Michael Wand, a managing director at Carlyle Technology Partners, says he is sceptical about some of the valuations being placed on e-commerce, social networking sites and other digital media companies. “People are trying to cherry-pick the best companies in the hope that they will make it. It’s not clear yet whether revenues and profit for some of those companies will follow the perception and the hype,” he says.

But he adds that activity in the European technology sector on the buy and sell sides has picked up. Analysts also expect to see more activity in the software sector, which has also seen an uptick in deals.

Companies such as Hewlett-Packard, IBM, Microsoft and Cisco are also on the prowl for European targets in areas such as risk management, business intelligence, security and virtualisation. But Mr Golden warns that the worry now is some private European companies, particularly in the digital media space, are garnering “frothy” valuations above publicly listed counterparts.

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