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UK surrenders lead to France in European venture deals over USD5m

While the seed funding of early-stage European start-ups is healthy, there is a scarcity of follow-on capital for later-stage businesses, according to figures released by DFJ Esprit and Go4Venture Advisers.

 
The data, compiled from the latest Dow Jones VentureSource figures, also reveals that the UK, which remains the top location for investment, has for the first time lost out to France in terms of the number of larger deals completed in the first half of this year.
 
Of the USD1.8bn invested in European venture deals in the year to date, the UK holds the total investment lead at USD656m followed by France (USD399m) and DACH (USD343m).
 
In larger follow-on deals (over USD5m) the UK lost the lead to France for the first time, with 25 versus 28 deals respectively and Germany not far behind with 18 deals in the first half of the year.
 
Despite the UK’s advantage of average larger follow-on deal size compared to France (USD23m vs USD11m respectively), the UK’s overall lead is eroded as France recorded 46 smaller deals compared to the UK’s 49 and Germany’s 18 reported deals.
 
Simon Cook, chief executive of DFJ Esprit, says: “The bulk of the financial returns in venture capital come from the big winners and the major investments that create these companies. What this data clearly shows us is that Europe is successfully launching fledgling businesses but there is a scarcity of available capital for the follow-on funding to get them to the next stage. In Silicon Valley the ratio of large investment rounds compared with smaller ones is over one to one – in this latest data for Europe it is less than half that level.
 
“From a geographic point of view, the UK is often seen as the US gateway into Europe and many of the leading VC funds in London have strong US links. But UK’s historical position is under threat as Governments across Europe use incentives to stimulate innovation and growth. The UK needs to act now to maintain its overall lead within Europe or risk being overtaken.”
 
This data becomes particularly vital at a macro level when comparing it to the funding behind the largest European exits of the first half of 2013, compiled from Go4Venture Advisers’ European Venture & Growth Equity Market Monthly Bulletin.
 
To fuel their success, all these companies raised multiple rounds of funding, typically USD20m to USD100m in total.
 
Jean-Michel Deligny, founder and managing director of Go4Venture Advisers, says: “Comparing the current state of the European Venture market against the largest European exits so far this year further demonstrates that the only way that Europe can succeed as a world-leading start-up hub is by ensuring that the most innovative and disruptive companies have the funding to succeed. These companies are not limited by market opportunity, but by the availability of resources.”
 
According to figures from HM Revenue & Customs there were 2,346 applications under the Enterprise Investment Scheme (EIS) in 2012/13, a nine per cent increase from 2011/12. Additionally there were 1,729 applications under the new Seed Enterprise Investment Scheme (SEIS) for seed funding up to GBP150,000. The increases follow warmly welcomed changes in Budget 2012 and show the success that tax incentive schemes have on targeting equity gaps in the economy.
 
Yet a recent report released by Deloitte highlights the need for growth capital following the seed and start-up funding stages. The report calls for this later stage funding gap to be filled and for the financial community and entrepreneurs to step up to invest in and develop these companies.
 
Deligny says: “The UK Government with EIS/SEIS and the French Government with the ‘Fonds Commun de Placement dans l’Innovation’ (FCPI) scheme have both shown that tax incentives can boost private investment in starting businesses. But the exit data shows that the most successful companies have to raise multiple rounds, from multiple investors including large venture capital funds. Even with the increased GBP5m limit on EIS in the UK, this is not enough on its own to build these types of companies.”
 
In 2010/11, the latest year for which full statistics are available, 1,937 companies raised a total of GBP525m under the EIS scheme – an average of GBP270,000.
 
“The largest untapped pool of investment capital for start-ups is in private hands. In the UK, the total investment per annum by private investors exceeds VC funds, but the average size of EIS investment per company is small. The investment firepower exists in the UK but it is fragmented – as seed and start-up capital has increased, investment of follow-on capital has contracted in in the first half of 2013. The UK Government focus has successfully stimulated investment into very early stage businesses via EIS and SEIS, however the challenge now is to ensure and direct the larger amounts of follow-on capital required to grow the winners into global champions,” says Cook.
 
The success of European venture depends on more large and globally successful new companies being created from Europe.
 
For the UK, the imperative now is to expand the level of private investment beyond early-stage funding. The EIS scheme has the key elements in place with EIS Approved Funds but these are not used in practice as they have fallen behind other changes in legislation. This is the area to focus attention to coordinate the investment power of private individuals to increase the availability of follow-on funding in the UK.

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