European venture capital (VC) funds raised a record amount of money in the first half of 2016, but the amount of capital being invested in technology start-ups in the region has plummeted, with deals in the U.K. and Ireland hitting a five-year low amid uncertainty surrounding Brexit, new data on Thursday showed.
Investors in Europe raised 6.6 billion euros ($7.28 billion) across 34 VC-focused funds, a 63 percent year-on-year increase, and the highest amount in a six month period on record, according to Pitchbook, a data and research firm that looks at the VC and private equity markets.
Despite the surge in funds raised, investors appeared cautious to put the money to work. Total capital invested in European start-ups plunged 27 percent year-on-year to 5.42 billion euros in the first-half of 2016 across 1,279 deals – the smallest amount in terms of euro size since the second half of 2011.
“Across the continent, deal flow fell again … attributable to continued trepidation at economic growth and political turmoil, of which Brexit was a considerable part,” Garrett Black, senior analyst at Pitchbook, told CNBC by email.
Picky VCs
Early-stage start-ups have been feeling the pressure in particular. There were just 346 first financings in the first half of the year, the lowest amount since the second half of 2008. But late-stage European companies are also suffering with only 193 funding rounds for these companies in the six months to the end of June, a 35 percent year-over-year decline.
Much of the uncertainty around the U.K.’s vote to leave the European Union, and the broader macroeconomic environment in Europe, is behind the fall. This has led to venture capitalists being a bit more picky with their deal choices.
“For many startups, financings that are in the works now will include planning for any potential fallout or at least building in flexibility depending on how certain negotiations of the U.K.’s exit go. Some deals simply may not get done, but the timeline for Brexit is protracted and its effects uncertain enough that VCs will still fund what they deem worthwhile opportunities,” Black said.
UK dominates but weakens
Of the 5.4 billion euros of funding for start-ups in the first half, 2.1 billion euros or 39 percent, went to U.K.-based companies. This is around three times the amount of capital pumped into German start-ups, which received 765 million euros, and nearly 4 times the level invested in France.
The U.K. has established itself as a leading technology start-up market in Europe, particularly in the fintech or financial technology space and a number of British firms have secured funding this year.
But while Britain remains the biggest receiver of European VC capital, financings in the U.K. and Ireland in the second quarter fell to levels not seen since the middle of 2011, and the region’s share of overall VC activity declined to the lowest level in five years, Pitchbook said.
Meanwhile, deals in Germany, Austria, Switzerland and the Nordic region grew between the first quarter and the second quarter. The trend for the rest of the year could be continued investment in the U.K. in favor of more stable countries.
Exit volume down, value up
So far this year, VC-backed exits – either a merger, acquisition or initial public offering (IPO) – have totaled 7.1 billion euros in the first half of the year with a total of 166 deals. This is compared to 12.1 billion euros in the whole of 2015 and 475 deals.
Notable deals this year include Microsoft’s $250 million acquisition of U.K. artificial intelligence firm Swiftkey, and Twitter’s purchase of Magic Pony.
But Pitchbook predicts that while overall activity in terms of the number of exits might be similar similar to 2013’s level of 359, total value is unlikely to remain as strong as it was in the first half of this year.
“Favorable exchange rates could render M&A of British companies more attractive, while ongoing economic weakness continues to motivate many European corporates to tighten their belts by acquiring new product lines and teams, which could end up as cheaper than significant R&D spending,” Pitchbook’s report said.
“Costlier targets, however will be harder to justify, so although acquisitions of VC-backed companies may continue at a clip similar to that of 2013 or 2012, total value is unlikely to remain as strong as it was in 1H 2016.”
Source: CNBC
