In the 12 months from Q2 2007 through Q1 2008, the most active venture capital investor in Europe was Germany’s High-Tech Gründerfonds Management. The German group was the most active investor both in terms of total deal activity as well as first-time investments (see Figures 1 and 2). High-Tech Gründerfonds manages €272 million from a combination of public and private-sector sources, including KfW Bankengruppe, Germany’s federal bank, as well as corporates BASF, Siemens, Deutsche Telekom, Daimler, Bosch and Zeiss.

High-Tech Gründerfonds operates using set deal terms, investing up to €500k in exchange for 15% of a company. The group offers the possibility of one additional follow-on round, though the large majority of its investments are new: 37 out of 43 deals it completed during the period were new.

KfW Bankengruppe itself, which runs a variety of investment and co-investment schemes, was the third-most active new investor during the year ending Q108, as well as one of the 10 most active overall. BayBG Bayerische Beteiligungsgesellschaft, a German state bank which runs similar investment initiatives to KfW Bankengruppe, also made both top lists.

KfW, BayBG and High-Tech Gründerfonds rank among the most active investors by all measures, but three more German investors figure in the top 10 most active European VCs by number of new investments. In the year ending Q108, Germany accounted for 6 of the 10 most active VCs by new investments, up from 3 out of 10 in the preceding year.

One of those VCs is the European Founders Fund, the investment vehicle of the Samwer brothers, founders of auction site Alando.de (acquired by eBay) and mobile content provider Jamba! (now part of New Corp’s Fox Interactive Media). In the year ending Q107 year the fund made 6 new investments; this past year it invested in 14 new companies.

Holtzbrinck Ventures, the corporate venture capital arm of German publisher Georg von Holtzbrinck, also went from 6 new investments a year ago to 14 new investments in the past year. Holtzbrinck Ventures and European Founders Fund collaborated on five of those deals: Adscale and AdiCash, two online advertising plays; deutsche startups, a news website covering tech businesses; MeinAuto, a website for automobile sales; and Internations, a social network for expatriates.

Wellington Venture Partners also cracked the top 10 list in terms of new investments, continuing its aggressive investment strategy. Over the past two years the firm has been amongst the top 25 investors by number of total deals and top 15 investors by number of new deals. 12 of its 14 deals during the year ending Q108 were new investments.

The string of new deals by German VC firms over the past year comes as some perennially active European VCs are scaling down their new investment activity. Just 28% of Sofinnova Ventures’ deals in the year ending Q108 were new investments, compared with 61% during the year preceding that. 3i also dramatically decreased its new investments, in keeping with the firm’s announcement earlier this year that it would wind down its involvement in early-stage venturing. 3i made just 6 new investments in the past year, compared with 19 the year prior - though 3i’s continued follow-on investment still places it among the top 10 most active VCs by total number of deals.

Throughout the current Web 2.0 boom, Microsoft and Yahoo! – joined by Google, TimeWarner’s AOL and News Corp - have driven the Internet M&A market and provided exits for numerous VCs and entrepreneurs. This weekend, however, Microsoft withdrew its largest-ever acquisition bid - for Yahoo! itself.

The saga may not yet be finished, since Microsoft could renew its bid after Yahoo!’s share price deteriorates and after disgruntled investors pressure the company’s management (Yahoo!’s top two institutional shareholders are already publicly fuming about the botched deal). Whether the Microsoft/Yahoo! merger is realised or not, one thing is clear: the discussion has sidelined two major acquirers of Internet startups.

Microsoft has been an extremely active acquirer on both sides of the Atlantic, purchasing European Internet startups such as Israel’s Kidaro, Norwegian enterprise search company FAST, The UK’s Multimap, and French mobile search company MotionBridge. Yahoo! has played an insignificant role in European Internet M&A to date, but is a key player in the US.

A platform business at heart

There is now press and analyst speculation that the nearly $50 billion (€32.2 billion) which Microsoft was prepared to pay for Yahoo! will go instead towards other acquisitions. The most commonly cited target is AOL, which TimeWarner appears willing to offload and which would provide the nearest approximation of the scale in the online advertising business that a merger with Yahoo! would have achieved. Yet smaller businesses have also seen their names thrown into the discussion: PaidContent suggests that online services like Facebook, Twitter or Digg are now possible acquisition targets for Microsoft.

These latter options are unlikely, because at its heart Microsoft is a platform business, not a content business. Like other technology platform businesses, from Oracle to Qualcomm, Microsoft’s business model is to ensure the dominance of its own software by making that software an essential part of other developers’ business models. This holds true not only for Microsoft’s Windows and Xbox platforms, but also for the company’s online advertising network, which is only as successful as the money publishers make using it.

Microsoft has clear ambitions to challenge Google as an online advertising network, and though Yahoo! would also have given Microsoft the US’s most popular web portal - Yahoo! web properties are more visited than Google’s in that country - the main driver for the proposed acquisition was for Microsoft to quickly build substantial scale in the online advertising business. Microsoft’s largest acquisition to date, the $6 billion (€3.9 billion) purchase of online advertising firm aQuantive in May 2007, provided Microsoft with a foothold but left the company with nowhere near the market share of Google, Yahoo! or AOL in either search or display advertising.

Furthermore, Microsoft has already tried smaller acquisitions in the space. Besides aQuantive, Microsoft acquired a slate of advertising companies over the past two years, including Israel’s YaData; the US’s AdECN, Massive and DeepMetrix; and France’s ScreenTonic. Yet what Microsoft needs now is scale, and Yahoo! and AOL are the only two players who can provide it.

Yahoo! preoccupied

As for Yahoo!, the potential merger has imperiled the company’s status as a major Internet acquirer. Firstly, Yahoo!’s engineering culture, reinvigorated 3 years ago through a series of critical acquisitions including del.icio.us and Flickr, has been crucial to the success of its more recent acquisitions. That culture is now at risk; as Om Malik points out, morale is undoubtedly low at Yahoo!, which will make retention of key employees a problem. Despite holding $2.61 billion (€1.68 billion) in the bank, Yahoo! will face inevitable challenges and potentially lawsuits from investors over the handling of the Microsoft offer, making immediate acquisitions difficult.

The silver lining is that neither a combined Microsoft/Yahoo!, a combined Microsoft/AOL or an independent Yahoo! are truly a match for Google’s online advertising business, particularly in search advertising. Any of those combinations would still necessitate the roll-up of additional online advertising networks, such as Germany’s Adconion Media Group, as well as the acquisition of innovative providers of advertising technology, such as Israel’s Kontera Technologies or Luxembourg’s wunderLOOP. Though neither Microsoft nor Yahoo! are likely to pursue smaller acquisitions in the short term, given time either could re-emerge as a buyer for European Internet startups.

Audience measurement is a critical component of the advertising ecosystem. Advertisers want to know who they are reaching when they buy advertisements, regardless of the medium. Those selling advertising space or time do not always themselves know how many users are listening or viewing. In broadcast media, such as radio and terrestrial television, the broadcaster has no way of knowing how many people are tuning into a signal once it is beamed out.

One company dominates the field of audience measurement: Nielsen. The company began measuring US radio and television audiences in the 1940s and 1950s; US advertisers still rely on the company’s metrics. Nielsen has a strong presence even in countries where audience measurement is overseen by industry bodies, such as the UK. In that country, TV ratings are managed by the Broadcasters’ Audience Research Board Ltd. (BARB), a non-profit organisation owned by a group of UK broadcasters and by the Institute of Practitioners in Advertising, an ad industry trade group. BARB contracts with several third-party research firms to perform the actual audience measurement, however. Chief among them is Nielsen, which handles ‘metering’ (measurement), data collection and data processing for BARB.

The techniques used for measuring television audiences have changed little since 1950; in some American TV markets, Nielsen’s only available data comes from paper diaries in which participants log their weekly viewing. In mid-size and large TV markets, Nielsen also uses metering technology which automatically records which station a family is viewing and in some instances who within a household is watching. Nielsen has used both paper diaries and electronic metering for decades.

The introduction of new digital mediums, such as the world wide web and mobile phones, has presented a new set of challenges for audience measurement. Nielsen has responded through a series of acquisitions, buying startups which fill gaps in its offerings. The Nielsen Online division, which tracks Internet traffic and audience behaviour, was built on the back of two of Nielsen’s acquisitions: NetRatings and BuzzMetrics. Nielsen acquired majority interests in both companies during 2006 and bought the remainder of both in 2007. BuzzMetrics tracks online discussion on blogs and message boards, while NetRatings measures online audiences. BuzzMetrics itself was formed through a series of mergers involving Israeli startup Trendum and US startups Intelliseek and BuzzMetrics.

Last summer Nielsen acquired Telephia, a San Francisco-based startup that measures the reach of mobile content, for example the number of mobile games users download or how often mobile users surf the web on their phones. Nielsen launched its Nielsen Mobile division shortly before the acquisition, and Telephia became the core of that division. Nielsen’s acquisitions continue: just yesterday the company announced the acquisition of Audience Analytics, whose software will help Nielsen measure interactive TV and video-on-demand usage on digital set-top boxes.

Which companies might pop up on Nielsen’s M&A radar in the future? Startups continue to proliferate in the audience measurement space. Last week UK-based Magpie raised €670,000 to continue development of its Brandwatch platform, which like BuzzMetrics tracks users commentary on blogs and forums. Several other startups are focusing on tracking audience behaviour in social networks: Xtract, which analyses links between users; Peanut Labs, which runs market research surveys over social networks; and Invite Media, which tracks advertising in social networks.

US-based Mochi Media has developed a metering tool for Adobe Flash files, which complements the company’s primary business as an online advertising network for casual games sites, as Flash is a popular platform for casual games development. Visible Measures, another US startup, measures the audience for online video. Last month the company raised €9.2 million from General Catalyst Partners and Mohr Davidow Ventures.

Nielsen is not the only potential acquirer of audience measurement startups, nor are trade sales the only possible exit for these companies. comScore, a venture capital-backed rival of Nielsen in the internet analytics business, floated last year on NASDAQ. comScore is much smaller than Nielsen, but has close to $100 million (€68 million) in cash on hand and a history of its own acquisitions, from market research firms Q2 Brand Intelligence and SurveySite (acquired in 2004 and 2005, respectively) to the purchase of Jupiter Media Metrix’s assets in 2002, making it a possible acquirer. Lastly, despite Nielsen’s overall size, that company does not yet dominate audience measurement for digital media. As comScore itself proves, there is still room for sizeable, independent rivals to Nielsen; perhaps a company from this latest crop of startups will be one of them.

Library House’s recently-released Q4 2007 Quarterly Briefing showed the quarter to have been a weak one for VC investment across Europe, with the lowest amount invested of any quarter in the past two years. That weakness was even more apparent in the Mediatech sector, where investment dropped a precipitous 52% between Q3 and Q4 2007. Just €121 million of VC money was invested into European Mediatech companies in the period, a stark contrast to the two-year high of €252 million euros in Q3 2007 (see Figure).

The fall in Mediatech investment in Q4 is surprising given Mediatech’s strong showing during the first three quarters of the year. Mediatech investment during Q1-Q3 2007 was up 17% on the same period during 2006. Yet Q4 was so weak that full-year Mediatech investment totals actually fell 0.9% from 2006 to 2007.

The decline in Mediatech investment in Q4 2007 was almost entirely due to shrinking investment into Content and Service (C&S) Providers – a reversal of the first three quarters of 2007. Investment into C&S Providers from Q1-Q3 2007 totaled €372 million euros, up 72% from the same period in 2006. Yet from Q3 to Q4 2007, investment into C&S providers plummeted from €173 million to €49 million – a decline of 72%.

Investment trends within the Video sub-sector are a microcosm of the wider rise and decline of C&S Providers during 2007. In Q2 and Q3 2007, Video startups pulled in several large financing rounds: Joost raised €33.2 million and VideoJug raised €22 million in Q2; and Dailymotion and Metacafe picked up €24.9 and €22.3 million respectively in Q3. In Q4 2007, however, the biggest disclosed European Video deal was RayV, a Joost competitor which received a modest €£5.7 million from Accel Partners.

One bright spot amongst Content and Service Providers which could see more attention in 2008 is Search & Directory. Investment into this sub-sector rose 211% between 2006 and 2007, buoyed by both vertical and general search engines. Some major VC deals in 2007 involving vertical search engines include: residential search engines Properazzi and Zoomf.com (from Spain and the UK respectively); German gaming search engine Wazap!; and French Enterprise search engine Exalead. 2007 also saw the funding of generalist search engines with a unique spin, such as Russia’s Quintura, which presents search results as a visual tag cloud; and the UK’s True Knowledge, whose software answers natural language queries for facts and information.

Existing power distribution infrastructure was implemented at the beginning of the 20th century when many of the technologies available today were not around, and the demands placed upon it were less than in today’s data driven digital economy. Now the concept of a Smart grid is slowly seeping into people’s consciousness, and as many lead users would assert, it is more than a concept but an inevitable development for power distribution infrastructure.

In traditional distribution networks power stations need to supply excess capacity in order to account for unpredictable variations in demand, and information flows are solely from the user consumption back to the utilities. The Smart grid allows generators and consuming loads to interact in real time, in both directions, with the aid of modern communications technology, which leads to a number of advantages. One of these includes the ability for homes to supply back into the grid, so excess energy from generators such as solar panels can be used by others.

This Smart infrastructure can act as a feedback mechanism to smooth out variations in peak demand, and provide more sophisticated pricing mechanisms that react instantly, rather than having simple day and night tariffs. It also acts to decentralise power generation which ultimately means that power will still be maintained even if major power supplies are put out of operation.

Role out of the Smart grid is likely to be a modular process with each utility company subject to its own investment decision process. But moves are already underway to make the Smart grid a reality. A Smart grid consortium in the US, established in December 2007 by Xcel Energy, plans to set-up a test bed community of around 100,000. This will involve making all the necessary upgrades to infrastructure and providing the capacity for 1,000 renewable generation sources that can be plugged into the grid.

Given the global scale in which the Smart grid has the potential to proliferate, it’s no surprise that there are a number of emerging players with enabling technologies seeking a piece of the pie. V2Green are a Seattle based company whose technology allows electric vehicles to be plugged into the grid and eliminate demand spikes by automatically adjusting load requirements to the availability of supply. The privately funded company which has collaborations with several US utilities companies announced it was fundraising earlier this month.

Just this week the curiously named Fat Spaniel Technologies closed a second round of funding of USD 18m, which they had announced to Library House they were seeking in November. The company provides what they call an Energy Intelligence Platform, which enables hosted data monitoring, management and control services so that utilities companies can more easily work with date flows from the more sophisticated grid infrastructures.

Perhaps one of the most important aspects of a Smart grid is that the infrastructure easily enables domestic users to sell excess power back to the grid, further incentivising a more widespread adoption of small scale generation technologies.

This broad reaching technology clearly has many stakeholders, suggesting many eyes will be focused on the success of pilot studies and early adopters, which will surely influence where the smart money goes.