Venture Capital Takes Off in Europe

For the first time since the bubble burst, venture capital is flowing freely. Good news for the economy -- and, perhaps, for investors

Marco Pescarmona had no trouble snapping up his first round of venture capital in 2000. He got $1 million to start an Italian online mortgage brokerage "in half an hour," he says. Europe's tech sector was soaring and investors were eager to fund startups. But by the time his company had spent the seed money and needed more cash a year later, the Internet bubble had burst and investors were running scared. Pescarmona's MutuiOnline faced financial crisis. "It was incredibly scary," recalls the CEO. "I thought we wouldn't survive."

Fast forward to the present. Pescamona and co-founder Alessandro Fracassi -- both business school graduates from MIT -- eventually scored another $5.2 million in venture capital. MutuiOnline turned profitable in 2003 and hit $19 million in revenues last year, up 76% over 2004. With an estimated valuation in excess of $128 million, the company will likely pay investors handsomely for their steely nerves.

The co-founders -- now a post-bubble success story -- field calls from investment bankers eager to take them public. "Their execution was excellent," says Michele Appendino, founder of Net Partners Ventures in Milan, which provided seed money to MutuiOnline. "There is still a lot of room for growth."


  Europe's so-called "New Economy" may have vanished with the Net bubble, but the core of venture capitalists and entrepreneurs who survived the five-year investment blight that followed are savvier and more determined than ever to create new companies and stoke Europe's startup culture.

"We learned a lot (through these hard times) about how to build businesses and what is sustainable," says Helmut Schüssler, president of the European Venture Capital Association and a partner at Munich-based TVM Capital. "The industry is entering a new phase now."

Just look at the dizzying success enjoyed by Luxembourg-based Mangrove Capital. Co-founder Mark Tluszcz made a bet two years ago on an obscure voice-over-Internet phone company called Skype. He hit the jackpot last fall when eBay (EBAY) bought the startup for an eye-popping $2.6 billion. The Skype deal refocused the world's attention on European technology -- and on the Continent's seemingly out-of-vogue venture investing scene.


  Now, what outsiders are seeing is a European venture capital business that is finally coming of age, after long lagging behind the U.S. The greatest vote of confidence: Investors who shunned European venture capital funds during the past four years in favor of private equity and buyout funds are piling cash back on the table.

In 2005, European venture capital funds raised $16.1 billion, up 44% over 2004, according to preliminary data compiled for the EVCA by Thomson Financial and PricewaterhouseCoopers. That nearly matches the level of 2001.

Startup funding has soared, too. Venture firms laid out $4.2 billion in early-stage capital last year, triple the amount in 2004. At the same time, there's a renaissance under way in entrepreneurial spirit, especially among recent MBA graduates. Business schools are even getting into the act with programs that pair students with real world startup managers (see BW Online, 5/26/06, "The New Entrepreneurial Class").


  Capping it off, venture capitalists are finally getting the welcome mat from European stock markets, which are inviting them to step up and cash out of their investments. The market for initial public offerings, which went cold for three years after the crash, topped $67 billion last year on European bourses, up nearly 65% from 2004, according to Dealogic. Among those IPOs were 99 venture-backed companies -- twice the number there were two years earlier -- that together raised $1.1 billion.

And trade sales, or acquisition of startups by other companies, climbed 27% in 2005, to $7.5 billion, thanks to an overall surge in European M&A. "It looks like a much more sober but receptive market for high-growth technology companies," says Christian Claussen, a partner at TVM.

All of this is good news for the European economy. Venture-backed companies now employ one million people in the region, according to a research report by the EVCA. Even during the investment drought from 2000 to 2004, such startups created only 630,000 jobs. Overall, employment in venture-backed companies grew by an average rate of 30.5% per annum from 1997 to 2004 -- 40 times the employment growth rate for the EU as a whole.


  Companies with venture funding also invested, on average, $64,900 per employee per year on research and development -- five times the average $10,700 spent per employee by the 500 companies with the largest R&D spending in the European Union.

Such outsize economic contributions highlight why venture-backed startups are so essential to Europe's future. If investment levels continue to rise, the Old World could boost its pool of high-skill jobs -- helping offset outsourcing to Eastern Europe, India, and China.

"This industry will help reshape society and work, creating skilled jobs in an increasingly global economy," says TVM's Schüssler. Even politicians are starting to recognize that. European venture capital has come a long way in the last decade.

Before it's here, it's on the Bloomberg Terminal.