Array
(
    [Error] => fclose(): supplied argument is not a valid stream resource
    [File] => /home/apache/bndb06_2.23.14/classes/NewsletterProduct.class.php
    [Line] => 296
)

US venture-backed sector surges again

The vexed question of lacklustre funding for European companies vis-a-vis their American counterparts was raised again yesterday (Monday).

Entrepreneurial US companies received $7.4bn from venture capital in the second quarter, according to figures from Ernst & Young and Venture One, 8 per cent up on the same period last year. At the same time, Library House figures show a huge drop in investment in European companies, from €1.7bn in the second quarter of 2006 to less than €1.4bn in the same period this year.

The only area where Europe scored well was in the web-based sector, in which €150m was invested in Q2, up from €64m in Q2 last year. However, not to be outdone, US web companies received $500m more in Q2 than they did in Q2 last year.

It is hard to fathom why investors, both in Europe and worldwide, should display such negative sentiment towards Europe. There are several reasons why they really ought to be more bullish. For one, in the UK, the epicentre of European venture activity, the average internal rate of return was 9.7 per cent for UK funds in 2006, according to  Thomson Financial. This is below the 13.1 per cent of 2000, but more than acceptable to most institutional investors.

Even though investment in US companies is nine times higher than in Europe over the last three years, one in four exits of $100m or more are in Europe. And whereas only 30 European high-tech firms were in the world’s top 250 by revenue in 2000, that had risen to more than 40 by 2005, according to the OECD.

And then there is the quality of the companies to consider. To take the iPod as an example: out of manufacturing costs of about $150, US firms earn just $3 while Philips, the Dutch electronics group, makes more than that from the iPod on its own. 

The problem seems to be that European institutions and their advisers still appear to be focused on the past and the (admittedly heavy) losses sustained in the early years of this century. US investors have no such hang-ups. The bulk of the $25bn inflows to American companies each year comes from pension funds. In Europe, there is almost zero pension fund allocation to venture capital. There are exceptions - Wellcome Trust, for instance, invests 3.5 per cent of its £14bn assets in venture capital. But Wellcome is a rare believer.

Yet, it would be foolish to assume that the fault lies only with investors. They are rational after all and much of what they see doesn’t impress them. They complain that European companies often have half-formed teams, haven’t gone after big enough markets, haven’t hired enough world-class people and have unrealistic expectations of the amount of equity they have to give up. 

In the US, firms aim to be global from day one, and occasionally they achieve their aim. Amazon, Google, Myspace and Youtube have all done their country proud. Europeans are sick of hearing that their continent suffers from having never produced a Google equivalent. But sometimes the truth is hard to swallow.

Let us know your thoughts on any VC-related issue you want to get off your chest, at: weeklyfeedback@libraryhouse.net

The Week's Deals

Connectivity, the UK-based company that plans to set up the first directory of UK mobile phone numbers, has raised £17m (€25m) from 3i and Esprit Capital Partners, according to The Times. The paper reports that the service will be similar to existing 118 directory services, with customers paying to access their desired number. Connectivity says it has put in place safeguards to address the potential safety and privacy concerns that have previously held back such services in the UK.

Metalysis, the UK-based specialist metal technology company, has raised £13m (€19.3m) in a fifth round of funding from Environmental Technologies Fund, 3i, QinetiQ, Seven Spires, Chord Capital and Cambridge Capital Group. Metalysis has the sole rights to the FFC process, a means whereby high quality speciality metals can be produced from metal oxides. It is focussing on three product lines, Tantalum, Titanium, and high grade alloys, and aims to use the funding to bring these to commercial production ahead of a possible flotation.

Photoways, the France-based online photo service, has raised €10m from HarbourVest Partners, Index Ventures and Highland Capital Partners. Photoways provides a digital photo service offering photo developing, printing, storing and sharing online. It generated revenue of about €30m in 2006, an increase of 50 per cent compared to 2005. Photoways intends to use the funding to capitalise on its market position and accelerate growth across Europe.

Neovacs, the France-based biotechnology company developing anti-cytokine and anti-viral regulation protein therapeutic vaccines, has raised €13m from Novartis Venture Fund and Truffle Venture. Further investors are expected to back the company in the coming months. Neovacs holds a broad patent portfolio and is developing several therapeutic vaccines for the treatment of AIDS, cancer and auto-immune and allergic diseases. The funding will enable Neovacs to initiate clinical trials of several of its products.

The Week's Exits

i-design Multimedia, the UK-based ATM advertising company, has raised £3.5m (€5.2m) through an IPO on Aim. The listing gives the company an initial market capitalisation of £9.45m (€14m). i-design’s main product allows cashpoint screens to be used to broadcast advertising messages. UK clients include Nationwide Building Society, Tesco, Royal Bank of Scotland and LLoyds TSB.

X-Hive, the Netherlands-based XML development company, has been acquired by US-based EMC Corporation for an undisclosed amount. EMC, a provider of information infrastructure technology and products, will add X-Hive’s XML tools to its content management offering. EMC says all of X-Hive’s staff will be retained, and new employees will also be hired.

Novagali Pharma, the France-based pharmaceutical company developing eye treatment drugs, has revealed plans for a Euronext flotation. Specific details of the issue were not revealed. Among Novagali's most advanced products is an orphan product for the treatment of a severe form of chronic allergic conjunctivitis, which recently successfully completed phase III clinical trials.

TrackaPhone, the UK-based location-based services company, is considering a stock market flotation, according to online news service IC Newcastle. The company is looking to raise £3m (€4.5m) by the end of the year through a listing on Aim, or from private investors. Founded in 2002, Trackaphone expects sales to reach £2m (€3m) over the next 12 months, and will to use the additional funding to aid its continued expansion through further marketing, and recruitment of support staff.

People Moves

AW-Energy, the Finland-based wave energy company, has appointed Tuomo Hyysalo as chief executive. Mr Hyysalo has management experience in international manufacturing industries including the engineering and energy fields. He replaces Illka Homanen who left the company in June.

Digital Healthcare, the UK-based software company for the healthcare industry, has appointed Mike O'Leary as chairman. Mr O'Leary was previously a non-executive director of the company. Jeff Gordon, managing director, had been acting as interim chairman since Jim Potter left the role in February.

Surf Communication Solutions, the Israel-based developer of high-capacity multimedia processing boards for the telecommunication infrastructure market, has appointed Zvi Slonimsky as chairman. Mr Slonimsky also serves as chairman of Teledata Networks, and is a director at Nasdaq-listed Alvarion and WiMax semiconductor company Sequans Communications.

Most Accessed Companies

Stardoll, the Sweden-based online community site focused on dressing up celebrity dolls, has attracted a lot of attention recently. The Stardoll site offers a collection of thousands of custom designed garments and accessories that members buy and use to dress either celebrity dolls, or user-generated likenesses of themselves. According to the company about 20,000 new users join daily, adding to the existing fan-base of more than 8 million registered users in more than 200 countries. Stardoll is backed by Index Ventures and Sequoia Capital.

Solarcentury, the UK-based provider of solar photovoltaic systems, has also attracted a lot of attention. Solarcentury’s products are used for micro-generation purposes, such as on roofs of houses and commercial buildings. Within the UK, Solarcentury has installed solar systems on the Eden Project, Vauxhall Cross Bus Terminal and the UK’s largest solar system on the CIS Tower, Manchester. Revenue in 2006 was £14.7m (€21m), compared to £6m (€8.8m) in 2005. Investors in the company include Scottish and Southern Energy and VantagePoint Venture Partners.