Internet investment surges in Europe

There has been a surge in venture capital investment into European consumer internet companies over the last year, according to new figures published on Monday.

Early-stage funding for UK internet companies has increased more than three-fold from £24m in 2005 to £79m in 2006, according to figures compiled by First Capital, the venture capital fundraising company. While just two web companies received venture capital money in 2005, 21 received funding in 2006.

Across Europe, First Capital estimates that more than £144m was raised in 2006 for internet companies. The company does not have a comparative figure for 2005.

These numbers are still small in relation to total global venture capital investment, which Ernst & Young estimated to be $32bn in 2006. However, the rapid growth of the sector is notable.

Richard Anson, chief executive of Reevoo.com, a UK-based company that compiles online reviews of products, has been among those to benefit from a rapid change in the availability of funding.

Mr Anson said he was hesitant to approach venture capital companies in 2005.

“Internet companies were deeply unfashionable then and we just would not have got the reception from venture capital companies,” he said.

A year later, however, the company was able to pick and choose between multiple offers, and eventually chose a £2.5m investment by Eden Ventures.

Other recipients of funding include Bebo, the social networking community founded by British entrepreneur Michael Birch, Fon, a Spanish Wi-Fi sharing company and Viagogo, a UK online ticket exchange.

The most active early stage investor has been Index Ventures, with eight consumer internet investments over the last year. Nordic Venture Partners, Atlas, Accel, Mangrove and Benchmark Capital have also been actively growing their portfolios.

Barry Malone, partner at Benchmark Capital Europe, said recent transactions, such as the sale of Youtube to Google for $1.65bn and the sale of MySpace to News Corp for $580m, have fuelled interest in websites focused on user-generated content, also known as “web 2.0” companies.

These companies are also much cheaper to set up than other technology businesses.

“It is very difficult to build up a semiconductor company or an enterprise software business. You need to invest $40m to $50m before you know if you have a product that works,” Mr Malone said. “With web 2.0 companies you can find out after three or four million dollars whether it will work.”

As a result, Mr Malone said, many European venture capital companies were using a “spray and pray” strategy, spreading small amounts of investment over dozens of companies in the hopes that two or three would make it.

Some venture capitalists complain that Europe creates too many me-too versions of successful US start-ups. For example StudiVZ, which was recently bought by Holtzbrinck, the German publishing group for between €50m and €100m, has been criticised for being simply a German version of the Facebook student social networking site.

However, Danny Rimer, partner at Index Ventures, said Europe had a great deal of original engineering talent.

“Because there isn’t a hub for development in Europe like Silicon Valley or Route 128 in the US, there is more original thought. Last FM, for example, were able to create a truly unique music service because no-one knew what these guys were up to,” Mr Rimer said

With increased venture capital interest, the price of investing has been going up. Though European early-stage rounds were not yet at the “nosebleed” levels seen in the US, Mr Rimer said, the market was getting overheated. Fred Destin, partner at Atlas Venture, admitted he had walked away from some deals where valuations had become too high.

A number of US venture capital companies - including Sequoia Capital, Highland Capital Partners and Vantage Point - have all also started looking at Europe, making the market more crowded.

Nevertheless, European investors are hopeful today’s boom will stop short of becoming a new dotcom bust. Key differences include the presence of more experienced second-time round entrepreneurs at start-up companies, and much more widespread adoption of broadband internet among the general public.

“Last time we were making assumptions about changing people’s behaviour - looking at projections suggesting that a website that had 10 viewers today would have 1000 next month,” Mr Destin said.

“This time, the audience is already there but we are making assumptions about monetising them. We can still be off in our business model, but its only likely to be by around 20-30 per cent, not a factor of 100 like last time.

Mr Destin warned, however, that fostering large European internet success stories would mean learning to live with some failures too.

“Europe can do well if we learn to live with the losses. Some companies will fail. In the US, when that happens, people say ‘hey, we tried’ and start again, but in Europe people remember the failures more readily than the successes.”

Full details of First Capital’s tally of European early stage Web 2.0 investment can be found at www.thecoffeeshopsofmayfair.com/