Big Early Stage Deals Push Median Round Size Past €3M for First Time, According to Quarterly European Venture Capital Report from Ernst & Young and Dow Jones VentureOne

Nanoradio AB, which raised €22.5 million in June from Norwegian firm, Ferd Venture, together with the previous investors - a syndicate of four venture capital funds consisting of Nordic Venture Partners, Innovacom, Teknoinvest and Industrifonden, was founded in March 2004 and is a Swedish semiconductor supplier targeting the Cellular handset- and consumer electronics market. The company is a "fabless" company providing wireless solutions that is, all manufacturing is outsourced. Nanoradio has developed a state of the art technology for integrated circuits with focus on the critical success factors for handheld products, namely, power consumption, physical size and total cost for customer. Nanoradio has a team of 70 people with extensive experience from the cellular and wireless industry as well as semiconductor industry and start-ups. Nanoradio has a global sales and support structure since 2005 with offices in Korea, USA and Japan. Nanoradios unique low power WLAN chipset makes high speed wireless access possible in portable electronics.

European venture capital investment climbed to €1.14B in the second quarter, despite a decreased deal flow of 213. The 5% increase in amount invested over 1Q07, despite a 20% drop in deal flow, is primarily due to increased deal sizes in early-stage investments.

Year-over-year, investment was up and deals were down in nearly every industry, the report found, with healthcare companies seeing the biggest change, raising 10% more capital (€290 million v. €265 million) in 34% fewer deals (41 v. 62) than in the second quarter of 2006. 

Three deals took place in Ireland in the second quarter of 2007, compared to one deal in the second quarter and eight deals in the corresponding quarter in 2006.

€14.67 million was invested in Irish companies during this period, compared to €4.24 in the previous quarter and €8.82 million in the corresponding quarter in 2006.

European information technology companies attracted the bulk of the capital overall, raising more than €690 million in 138 deals.  Despite IT deals being down 12% from the 156 completed in the second quarter of 2006, this was a 3% increase over 2006 in euros invested and the largest quarterly investment total for European technology companies in five years. 

“The European venture capital market saw an explosion in early-round investing as €600 million was poured into 126 early stage deals," said Jessica Canning, Director of Global Research for Dow Jones VentureOne. "The data shows the median amount invested in a first round during the quarter was €3.2 million, by far the highest total on record.  Add to that a continued interest in later-stage deals and the overall median for a deal done in Europe jumped 41% during the second quarter to a record €3.1 million."

Chips, Info Services Shine for IT; Biopharmaceuticals Dominate Health Care

The IT sector saw the resurgence of semiconductor investing as European chip companies completed 16 venture rounds in the quarter, raising over €127 million in capital, the highest total since the third quarter of 2001.  Accounting for the bulk of activity, nine later-stage chip companies raised €98 million in capital, a tenfold increase over 2006.  One of the larger deals was the €22.5 million later-stage financing of Swedish WLAN chipmaker Nanoradio.

Also of note was an 11% increase in deals for "information services" companies, which completed the most deals since 2002 with 42 rounds but raised just €127 million, 38% less than in the second quarter of 2006.  Nearly 74% of deals in this area were seed, first or second rounds. "Information services" include blogs, social networks, wikis and other Web 2.0 technologies.

In the healthcare sector, biopharmaceutical companies accounted for 66% of deal flow, attracting €243 million in 27 deals.  Like other investment areas, the year-over-year totals for biopharmaceutical deals were down (13%) while euros invested were up (24%). In contrast, medical devices saw a 48% decline in deals and a 28% drop in capital invested as only €45 million was raised during 12 rounds.

“The record median round size in Europe this quarter is the continuation of a trend that we have observed over the last 18 months in which investors are providing greater sums to fewer companies, allowing those companies to better compete globally and build critical mass for an IPO or M&A," said John De Yonge, Research Director for the Ernst & Young Global Venture Capital Advisory Group.  "During the same period, the proportion of deals and dollars directed to early-stage investments has increased, indicating that European investors are supporting a healthy pipeline of innovation in emerging sectors such as clean technology.”

The report also found that European venture capitalists continued to invest in energy companies as well. There were 12 energy deals in the second quarter, up just slightly from the 10 deals in the same period last year, but investment in the segment rose to its highest level ever as €81 million was invested in energy companies.

European VCs Still Involved Early But Investing Just As Much in Later Rounds

Almost 59% of all venture rounds in Europe during the second quarter were seed, first or second rounds.  Investments into these rounds surged to €600M, marking a 15% increase over the second quarter of 2006. Investors made fewer deals in the second quarter of 2007, but each deal was significantly larger than previous quarters. The median amount invested in a first round was €3.2M, almost equal to the €3.29M of later-stage deals. The €3.2M for first-round investments is 55% higher than 2Q2006 and 113% higher than 1Q2007.

Overall deal sizes jumped in the second quarter of 2007 to €3.12M, 42% higher than the same quarter last year (€2.2M). This was also the first time in over six years that the overall median deal size broke the €3M mark.

Round allocations varied by industry. Healthcare saw just 20 early stage deals—13 of which were biopharmaceutical deals—but they raised €108 million, or 25% more than in 2006. Later-stage health care investments attracted just 1% more capital this quarter.  Conversely, IT companies saw a 24% pickup in later-stage investments with €288 million invested while early-stage financings only raised 6% more capital than last year with €368 million. 

European Activity by Country

• France experienced 15% more deals (54) and 20% more capital (€206 million) invested during the second quarter compared to last year.  France's six-month investment total of €513 million was the country's highest since 2001. 
• The United Kingdom attracted the most deals and euros in Europe for the second quarter; however, its 61 rounds and €299 million in capital invested represented declines of 15% and 20%, respectively, from the second quarter of 2006.
• Deals declined 16% in Germany to 27 for the second quarter while capital investment rose 7% over 2006 to €161 million.
• €14.67 million was invested in Irish companies during this period, compared to €4.24 in the previous quarter and €8.82 million in the corresponding quarter in 2006. The 4 deals in H1 2007 compares with 44 in H1 2001.