With few signs of improvement, the lead author, Keith Arundale, concludes: "In the relatively risk-averse investment climate in Europe we need a concerted and sustained resurgence of activity across the technology sector for private equity deals to build momentum and free funding for the most innovative new technologies."
Figures for concern
Happily, 2002 was the second best year ever for European industrial investment, with €27.6 billion invested. This is far short of the €35 billion invested in 2000, but capital is clearly available. Less happily for the technology sector, total technology investments fell 29% to €5.3 billion, continuing the downward trend from 2000 (see Figure 1 ).
The management buyout share of total investment actually increased by 41%. The real cause for concern is new private equity raised in 2002 - the venture capital component. Funds raised in 2002 and earmarked for investment in the important start-up and early expansion stages decreased to €4.3 billion, or 16% of total European investments. Down from 24% in 2001, this is a worrying indicator for all involved with innovative technologies.
So where did the venture capital go? The answer given by the report is that venture capital investments have shifted downstream. Early-stage finance went instead to later-stage expansion and buyout activities. Industry-wide, buyout activity leapt to 61% of total investments from the 40%-50% typical of earlier years. In the technology sector, buyouts doubled from 15% to 29%.
"There are two aspects to this redirection of capital," Arundale explains. "First, investors are very risk averse at present, feeling that technologies such as 3G telephony are ahead of the market place. They are enthusiastic for upcoming technologies like radio-frequency ID tagging, but their instincts say 'Wait and see'. Second, a lot of money is tied up in existing investments. Low market valuations for technology companies leave few incentives to sell out and reinvest. So they prefer to refinance existing investments while awaiting a financial market recovery to allow attractive exits - and the high-risk component of venture capital has moved downstream. As a result, we have a funding imbalance across the investment stages which, although commercially defensible for an investor, does not augur well for promising technologies looking for commercialisation."
States and sectors
Country and sector breakdowns show wide variations in investment behaviour. Computer software remains the leading investment sector despite a 45% drop to €1.3 billion and a falling share (see Figure 2 ). Next comes biotechnology, showing a 31% increase in investment to €1.1 billion. But this promising picture hides a diversion of funding into proven biotech companies seeking finance for expansion. Communications carriers claim third place with a few large deals dominated by buyout activity. Overall, the drop in early-stage investments owing to increased consolidation and buyout activity is a common theme.
Covering 21 countries, the report notes marked national differences. With strong buyout investments, France led in private equity investment in technology (€1.2 billion), followed by the UK and Sweden. When venture capital investments are isolated, the UK led with €800 million, followed by Germany and France. In Ireland, Denmark, Sweden and Switzerland technology claimed more than 50% of all private equity finance, well ahead of larger countries.
A final section makes comparisons with the United States. Despite significant falls in recent years, US venture capital investments in technology, totalling €18.7 billion, were five times those of Europe - down from nine times in 2000. The gap is closing, but the European venture capital market evidently has far to go to match the maturity, size and risk tolerance of the US.
The report presents a graphic picture of the problems that face start-ups seeking finance. The downstream drift of venture capital away from technology risk and into market risk investments must be reversed if new technologies are to reach the market place. Well-run SMEs with proven innovations can get financing, but venture capital is about taking the risks on innovative ideas and people that eventually produce well-run companies with proven technologies, not the other way round. "A recovery led by technology demand is needed," Arundale concludes. "Major companies reinvesting in IT systems would send a strong signal to the markets. Demand for the latest technologies would grow, lifting financial markets and releasing venture capital into a more risk-friendly investment environment".
(1) 'Money for Growth', European Technology Investment Report 2002, PricewaterhouseCoopers.