High-tech

Healthcare beats IT for VC investments in Q2

By Bipin Parmar

European VCs invested a total of € 967.3 million in the second quarter of 2004, a rise of 10 percent compared to Q2 of 2003. This is the highest quarterly amount since 2002 according to the European Venture Capital Report from Ernst & Young and VentureOne. Most of the growth came from the healthcare sector, which is made up of biopharmaceuticals, healthcare services, medical devices and medical information services.

For the first time on record, the amount invested in the healthcare sector exceeded the IT sector, according to Gil Forer, global leader of E & Y's VC advisory group. He added that European interest in the healthcare sector follows the US pattern, which was greatly influenced by the active life science IPOs in the last three quarters as well as recent life science IPOs in Europe.

The healthcare figure of € 687.1 million was largely driven by biopharmaceuticals and a single large investment of € 38.1 million in PowderMed, a UK based DNA vaccines company. Whether this phenomenon creates a trend or a temporary blip caused by one-off events remains to be seen.

Although the number of total deals was down by 20 percent compared to the same quarter last year, the number of deals rose by 10 percent compared to last quarter.

IPOs, sentiment on the upside

In the first half of 2004, there were 14 initial public offerings (IPOs) raising a total of € 412 million. These figures already exceed the severe IPO winter years of 2003, which saw only eight IPOs and 2002, which saw 13 IPOs. It is interesting to note the healthy IRR figures the original investors are currently getting from their exits.

IT sector still healthy and growing

Growth in IT was mainly driven by semiconductors, software and communications. The communication sector saw an investment of € 146.7 million invested in 30 deals - the highest amount and the largest number of deals for this segment since the first quarter of 2002. For software, there were 70 deals and € 201.2 million invested, a 39 percent increase from the first quarter of this year. Software tends to have large number of deal counts compared to other sectors, as it has relatively low barriers to entry and requires smaller chunks of investments to reach break even, which is reflected in its enterprise value (EV) and PE ratios.

In the first half of 2004, semiconductor sector VC investments grew by a healthy 22 percent, at € 89.98 million, compared to the first half of last year. The deal count for semiconductors in the first half of 2004 was 27 compared to only 16 for a similar period last year. We expect a higher deal count in the second half of 2004. The figures from the report confirm our predictions made in Dec 2003 and Jan 2004. As we pointed out in our 'VCs poised for growth' and 'Europe shows sign of green shoots' articles, the interest in seed stage and early stage is beginning to grow again.

Increased interest in seed round and round 1 stage funding

As in the US, investors in Europe showed a renewed interest in company formation, noted Steve Harmston, VentureOne's director of European research:

"Overall, 32% of the deals this quarter were directed at seed- and first-round financings, which is the highest percentage for such early-stage rounds in two years. The slight improvement in the liquidity market in Europe - enabling investors to finally reach an exit for longstanding portfolio companies - may be contributing to the increased investment in seed- and first-round deals, allowing investors to seek out the most promising startups."

The Chilli also notes that most of the lame ducks have been culled already and that there are fewer and fewer late stage R2, R3 and pre IPO deals around. HNWIs, angels, angel networks and VCs will all have to work together again in order to scour, select and nurture more S1, S2, S3, R1 level companies and ensure higher IRRs rather than just waiting for low hanging fruit.

Regional diversity ensures a healthier gene pool

VCs will also have to go and expand into other geographic regions in order to get the best deals, as there are many new and interesting opportunities on the continent, well within two hours of flying distance from their bases. This trend is further highlighted by the report which states that Denmark, Norway, Sweden and Switzerland all saw increased deal counts and combined total investments of € 305 million.

It is worth noting that Denmark saw the highest amount in a single quarter since 2000, namely € 88.1 million. Deal counts in France and Germany were almost flat, with investment of €106 and €138 million respectively. One statistic that stands out throughout Europe is that although the deal counts are down, the average amount invested is edging up gradually and this, combined with the fact that there is more emphasis on seed and early stage, boded well for new and existing technology startups.

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© Chilli Publishing Ltd 2004

15SEP2004