Ahead of Splash London, a look at why conditions are good, but VCs are shying away from Series A
It is now five years since the start of the financial crisis and as the investment environment appears to improve, it is a good time to consider how venture capital, particularly in Europe, might fair in such an environment.
There is no doubt that in the last two years, spurred on by tax incentives, there has been an increase in seed investment.
However, at the same time we have witnessed a big reduction in the number of European VC funds successfully raising new money, creating a significant shortage of funding for those companies looking to carry out a Series A round. This has been exacerbated by a shift in focus by European VC's from early stage to growth stage.
Editor's Note: Walker will be moderating a panel at Splash London on Nov. 7 titled: State of venture capital and how it's changing and what's the next big thing. On his panel will be: Stefan Glaenzer(Passion Capital), Laurence Garrett (Highland Capital Partners), Bill Earner (Connect Ventures), Nic Brisbourne (Forward Investment Partners), Steve Chandler (Notion Capital). Want to attend? Register here. Use Vator20 for Vator members and readers for a discount.
One would hope that, as the economy improves in general, this lack of funding by European VC's for early stage companies would improve. However, there is no guarantee that that will be the case. VC's are required to invest on the basis approved by their investors and many of them have taken fright at the risks involved with investing in early stage companies and are mandating their VC's to invest in growth stage opportunities.
It is a truism that great companies will always get investment but there are a significant number of early stage prospects in Europe which may not become great companies, but will certainly be very good companies, which may well wither and die if there is not an improvement in the funding of early stage tech companies.
While the above may sound unduly pessimistic, there are a number of factors which are assisting in the development of early stage companies. In particular, the cost of developing technology nowadays has dropped dramatically in the last 10 years, meaning that companies need less investment. However, it does mean that there are potentially more companies available with products and therefore, at that stage, many of them will cease to progress due to lack of funding, whereas previously they would not have progressed at all due to the cost of developing a product.
The IPO market in Europe is improving, not at the speed it is in the US. This may give encouragement to those considering investing in early stage tech companies. However, it is almost certain that investors will not want to see a return to the significant number of IPO's that took place in 2006 and 2007 resulting in many publically quoted small tech companies with illiquid stock and the burden of public reporting.
In summary, the VC investment landscape in Europe is probably at its most positive for five years. However, the availability of venture capital will continue to be constrained until investors take a more positive view of venture capital as an asset class.
(image source: seniorinfo4u)