Sharp rise in Europe's cash for start-ups

Europe's venture capital market recovered sharply last year, as money raised by funds investing in start-ups and early-stage companies rose 60 per cent to the highest level since the peak of the internet bubble in 2000.

The findings, published in a report by the European Venture Capital Association today, suggest investors are regaining their appetite for the riskier end of the private equity market.

Javier Echarri, EVCA general secretary, said the surge in money to venture capital firms on the continent was being driven by a growing interest in the potential for environmentally friendly projects, such as bio-fuels and liquid hydrogen.

"Clean-tech has been the real revolutionary factor that has restored investor appetite for venture capital. Investors have regained hope of another quantum deal," said Mr Echarri.

The resurgence of money into venture capital firms has come in spite of their continued underperformance, compared with generalist or big buyout firms.

The average internal rate of return over the life of all venture capital funds since 1980 until the end of last year was 5.5 per cent, against 14.4 per cent for all buyout firms. Mr Echarri admitted that this underperformance had meant venture capital firms had faced a tougher sell with investors. "It has been about an emotional sale of a concept without a track record of returns, so that has made it harder for them," he said.

Seed funding - investments in a company not yet producing a product - rose from Euros 100m to Euros 1.7bn (Dollars 2.3bn, Pounds 1.2bn). Start-up funding, where a company has a product in development or testing, more than doubled to Euros 5.6bn.

Today's report, compiled by Thomson Financial and PwC, said overall fundraising by all types of European private equity funds reached a record of Euros 112bn last year, up 56.4 per cent from 2005.

The figures indicate that Europe is catching up with the US as a destination for private equity investments, according to Mr Echarri, who said the US raised Euros 160bn of private equity money last year.

"Historically we have been at about half the money raised in the US; now we are getting towards two-thirds," said Mr Echarri. But he said that almost 30 per cent of Europe's private equity funds were coming from US investors. The UK remained the destination of choice for private equity in Europe, attracting 33 per cent of all investments last year.

There was also a sharp jump in fundraising by the big buyout groups, which have triggered controversy in some countries, particularly the UK, with takeover bids for some of the continent's largest listed companies. Buyout groups, such as KKR and Permira, raised Euros 84bn, an increase of 45 per cent from last year.