Venture money dries up rapidly in Europe
By Lucas van Grinsven
LONDON, Dec 12 (Reuters) – Venture capitalists have sharply cut their spending on new technology companies as they struggle to clean up their portfolios of bad investments, industry players say.
The venture capital industry, which in its heyday took start-ups from inception to the stock market in less than 12 months, has seen European investments in the fourth quarter fall 74 percent compared with a year ago, said Tornado-Insider, a pan-European high-tech venture capital information group.
“This year started off with a moderate decline, but in the last three months the downturn has really accelerated,” said Ives Brant, editor-in-chief at Tornado-Insider.
In the fourth quarter to date only 842 million euros were invested in private companies, down from 3.2 billion euros in the year-ago period, its figures show.
With a few days to the Christmas holidays, the full quarter is set to be worse than the third when investments from venture capitalists were down more than 50 percent year-on-year.
“We haven’t done a single deal this year,” said Michael Elias, managing director of Kennet Capital, the European venture unit of U.S.-based Broadview, who oversees a $320 million fund but does not invest in biotech.
A large part of the sharply lower total investment in start-ups has gone into biotechnology companies, which have held up well.
“The toughest thing is not the difficult portfolio or the lack of exits (sell-outs), but where to put your money. A year ago there were 12 white hot areas. They’ve all gone stone cold,” Elias added.
TOO SCARED TO SPEND
Although venture capitalists are not investing as much in young companies, they still have access to cash. Carlyle Europe Venture Partners sits on a fund of 730 million euros, and has spent only 22 percent of it.
But the funds are afraid to put it into weak companies, as they did in previous years. Investments at the height of the bubble have gone so bad that research group IDC now expects that $14 billion euros need to be written off from dot.com investments by venture capital firms.
“Lots of people are shellshocked,” said partner Michael Wand at Carlyle.
Confidence has been shaken
confirms Lucy Marcus of Marcus Venture Consulting
But there are other reasons why venture capital firms are not spending as they used to. For one, prices are more reasonable. No longer do teenage entrepreneurs believe their year-old Internet venture is worth $100 million.
Partner Roel Pieper of Favonius Insight Ventures recently handed back over $200 million of a $270 million fund to investors because he said valuations have dropped by over 80 percent.
Another reason for the relative quiet is that venture capital firms have their hands full after having laid off staff. With fewer employees, they have to juggle full portfolios of cash-burning Internet companies which need a lot of attention.
The big question is whether they will be able to spend the money next year. Most players hope the market will pick up next year as portfolios will be cleaned up.
In addition, many venture capital firms have begun to specialise in niche segments and believe this will give them more confidence in finding the right investment opportunities.
Instead of the various Internet categories, they are now looking for companies with patentable intellectual property such as software, networking technologies, communications semiconductors, biotechnology and new materials.
In many ways the venture industry is back to the pre-bubble days where it took five years between an investment in a young company and the sale of that investment.
We’re back to basics
said Carlyle’s Wand.