Venture capital for European start-ups trails

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Venture capital investment in European high-technology start-ups fell to just under €1.4bn ($1.9bn) in the second quarter, from €1.7bn in the same period of last year.

Investment was flat compared with the first quarter. The poor result reflected the unwillingness of big European investment institutions to back fledgling companies, according to data business Library House.

Doug Richard, chief executive, said: “European venture capital is not gaining the ground it needs to, if it is serious about matching the US in business innovation.”

Mr Richard said large European investors, such as pension funds, perceived returns to be in the 0 to 5 per cent range, insufficient to tempt them away from listed and private equity investment.

However, he said real returns were generally better than this, and were therefore attracting specialist US investors to late stage deals.

The relative unfamiliarity of venture capital in some jurisdictions is also an obstacle to growth in European investment in this asset class, which typically involves investing a few million euros in businesses with promising intellectual property.

The UK, the largest market where entrepreneurs have a high propensity to seek equity funding, dominates the scene. Companies based there received €392m in investment in the second quarter, 28 per cent of the total.

Europe has nonetheless followed enthusiastically in the slipstream of the US in latching on to internet ventures in the movement referred to as Web 2.0. Investment in this sector rose from €51m in the first quarter to €150m.

“Investors are prepared to commit serious money to the sector again,” said Library House. The most prominent deal was a €33m investment in Joost, the internet TV business set up by Skype founders Janus Friis and Niklas Zennström. Investors in the company, which is registered in the Netherlands, included Index Ventures and Sequoia Capital of the US.

Garlik, the internet security business set up by Mike Harris and Tom Ilube, former executives at the UK online bank Egg, received €8.8m from 3i Group and Doughty Hanson.

Power Challenge, a Swedish internet sports game developer, attracted €5.9m from Balderton Capital.

Clean technology is another fashionable area, as entrepreneurs and investors seek ways to exploit growing demand for low-carbon energy.

TMO Renewables, a UK company that claims to have pioneered a method of producing ethanol from almost any biomass, raised €22m. QuantaSol, also of the UK, completed a more modest €2m financing to fund development of its solar photovoltaic technology.

Library House said the poorest result in the quarter had come from France, where investment more than halved to less than €100m.

This was in spite of Paris-based Sofinnova Partners topping the league table for investment by individual venture capital firms during the period.

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