Tornado Insider Reports: European Tech Funding Reclaims Billion-Plus Level in Q1 2005
Venture capital funding climbs 32% in Q1. Investor appetite for late-stage funding and big deals.

Amsterdam, The Netherlands, May 9, 2005 – The first quarter of 2005 saw a new boost in venture capital investment in European technology companies. This reverses the downwards trend for both the total amount invested and the number of deals in the second half of 2004. Tornado Insider Research’s Deals Database recorded 190 deals totaling €1.07 billion of financing in Q1 2005. This is a 32% increase on Q4 2004 and the second-highest figure (after Q2 2004) in the past 2 years. This jump was mainly caused by a massive 24% increase in average deal size to €5.6 million; the highest average since Q4 2002. The number of deals rose 6%. January was the busiest month, with 69 companies securing €415 million.

Sector breakdown: rebounding investment in Communications

Biotechnology & Healthcare remained in favor in Q1 2005, netting 41% of total high-tech funding. This is the same proportion as the previous quarter, but above its 37% average over the last 2 years. 56 Biotechnology & Healthcare companies secured a total of €440 million in the quarter, an increase of 31% compared to Q4 2004. Q1 2005’s star industry performer was Communications, ranking second as it pulled in 22% of total funding. Communications Investment showed a 222% quarter-on-quarter rise, reaching €231 million in 33 deals. Software investment dropped 8% to €143 million and to third place in the industry rankings. Despite a decline of almost 20% to 41 investments, the Software sector still holds second place in terms of dealflow. 22 Computers & Electronics companies raised €105 million in Q1 2005 (up 19% on Q4 2004), followed by Internet (€46 million in 14 deals), Media & Entertainment (€39.2 million in 11 deals), Energy & Agriculture (€37.6 million in 3 deals), Materials & Nanotechnology (€19.6 million in 6 deals) and IT Services (€10.2 million in 4 deals).

Country breakdown: Positive results across the continent

Q1 2005 posted growth for most European countries. The top performers included Germany (retrieving its traditional second position in the country rankings with €174 million raised by 26 companies, more than double of the previous quarter), Denmark (up 78%, ranking fourth with €98 million in 14 deals) and The Netherlands (up 16-fold, ranking seventh with €58.5 million in 8 deals). The UK maintained its pole position in Q1 2005, despite slipping to 28.5% of total European tech funding, well below its long-term average contribution of 35%. Nevertheless, UK companies attracted 14.6% more venture capital compared to Q4 2004, raising €305 million in 61 deals. Although France dropped to third place, it also recorded an increase (17.7%) in investment activity with €145 million raised in 31 deals. The only countries to report quarter-on-quarter declines in Q1 2005 were Norway, Spain, Austria and Belgium.

Stage breakdown: Early-stage funding brakes heavily

Investors had an increased appetite for early-stage companies during 2004, but their interest has cooled considerably in 2005. Seed and first-round investments accounted for just 15.3% of total tech funding in Europe in Q1 2005, with €164 million raised by 34 companies. This represents a 21% decrease compared to Q4 2004, when €208 million early-stage funding was raised by 47 companies, or 25.6% of total funding in the quarter. 17.9% of all deals in Q1 2005 targeted early-stage companies, down from 26.3% in previous quarter.

“It is disappointing to see early-stage financing fall behind in Q1 2005, but it remains to be seen whether investors are avoiding young companies in the same way as in 2002 and 2003,” said Niels Valkering, Head of Research at Tornado Insider. “A number of factors caused the shift in favor of late-stage deals. 4 €30 million-plus investments completed in Q1 2005 (Actix, Neuro3d, Biolipox and Speedel), all of which were late-stage deals. However, early-stage companies received less funding than in the previous 3 quarters. We are carefully monitoring the market to see if this is a te

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