The VC Development in Europe

Unlike the U. S., the European VC prefers to invest in late stage of the investment project. In general, a large and increasing proportion of capital in Europe has been invested in management buyouts and buyins and there has been invested in very little investment in

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Percentage of California and U.S. Patent Registration

as % of California as % of U. S.

start-ups and early stage investments, especially in technology-based sectors. From Table 2-10, it is clear that the European VC focuses more on the Buyout & Growth fund.

 United Kingdom

The United Kingdom (UK) has the most active VC investment in Europe. In Figure 2-6, it shows that UK still has the most active VC investment in Europe and accounting for thirty to forty percent of the total investment value, according to EVCA.

Table 2-10: Fund Investment in Europe by Buyout & Growth / VC —2007~2011

Unit: EURO billion

2007 2008 2009 2010 2011

Buyout & Growth 66.0 47.4 19.9 39.2 41.6

VC 6.2 6.8 4.1 3.9 3.9

Early Stage 0.2 0.3 0.1 0.1 0.2

Later Stage 2.4 2.6 2.1 1.9 2.0

Balanced 3.6 3.9 1.9 1.9 1.8

Source: Same as Figure 2-3.

Prior to the 1980s, the only sources of venture capital in UK were the small business finance arms of the cleaning banks, merchant banks which specialized in small business clients (notably the National Enterprise and Development Corporation and the National enterprise Board, subsequently merged and renamed the British Technology Group) and Investors in Industry (3i). The foundation of the institutional UK venture capital industry can be traced to the setting up of 3i, as the Industrial and Commercial Finance Corporation (ICFC), and 3i was by far the most important of these sources of small business finance.

It had been established in 1945 by the Bank of England and the major clearing banks to provide long-term finance to growing firms. Only part of 3i’s activities can be considered as

“pure” venture capital, investment is shares in small unquoted companies with the

expectation of capital gain. In the 1960s, the venture capital industry developed through the expanded activities of 3i and other private and public sector initiatives; there was general acceptance of the view that the small firm finance gap had effectively been closed.

Source: ERNST & YOUNG (2012), Globalizing venture capital insights and trends report 2011.

Figure 2-6: The Europe VC Investment by Country

In the 1970s, this early development of the UK venture capital industry was not maintained as rising interest rates made high-risk investments less attractively, and the structure of the financial markets limited the opportunities for realizing venture capital investment (Meade, 1977). In 1980s, an enormous expansion occurred in the number of private venture capital funds. Prior to 1979 there were just over twenty venture capital funds with a total investment of 20 million British pounds. Some 10 years later there were over 150 funds which invested over1 billion British pound sin the UK in 1988. In the 5 years to 1988 approximately 3 billion British pounds has been invested by UK venture capitalists, 89 percent in the UK homeland (Pratt, 1990).

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UK France Germany Switzerland

US$ billion

2010 2011

 Germany

The German venture capital market came into being in the 1960s as a result of an ongoing discussion on the part of the banks over private capital deficits and sinking private capital quotas for medium-sized companies and savings banks. This led to the creation of the first stock cooperation on this market to provide private capital or similar funds to medium-sized firms (i.e. firms with about 1,000 employees or an annual turnover of DM 100 million) that were not in a position to go public.

The second phase in the development of the German venture market began with a founding wave that occurred in the early seventies. Since 1970, the German Ministry of Economic Affairs, as the caretaker of European Recovery Program (ERP) special funds, has been offering refinancing funds at favorable interest rates as well as return guaranties for non-profit guarantee societies if they become involved in medium-sized firms. The expansion of the ERP program aimed at making it possible to use factors of economic promotion to prompt the funding of capital joint venture companies. This was intended to help secure existing medium-sized firms, as private societies did not use the ERP special funds offered to the extent anticipated.³

The third phase in the development of the German venture capital market started in the early eighties. It came about as a result of information and discussions over what the successful American venture-capital model had to offer. In the case of private capital and management that were supporting young high-technology firms with a high growth potential, the successful examples of Apple of Genentech (including the figures for turnover, profit and participation effects of firms financed by venture capital) also triggered venture-capital euphoria in Germany.

3 The Federal Laender promoted the creation the Mittelständische Beteiligungsgesellschaften (MBG), i.e.

investment companies that aimed to provide equity capital of SMEs, especially in the form of silent partnership.

MBGs initiated business activities in all Federal Laender in the seventies and eighties. Up to date, most of the MBGs had already either limited or even terminated their investment participation in the second half of the seventies.

1983 was the year in which the German venture capital scene was born, when associated companies such as “International Venture Capital Partners” and “Techno Venture Management” were created by banks and industrial firms following the U. S. model. Foreign venture capital firms also appeared on the German market in the second half of the eighties.

This phase may be considered as the rapid development phase of the German venture capital market also got under way. Starting around 1964, this continued of twenty years, as subsequent calculations were to show, resulting in a portfolio of up to 1 billion DM. Four years later this figure had reached 2 billion DM and rose to more than 5.3 billion DM in 1994.

From 1983 to 1994 the market volume increased by a factor of seven; a factor which includes the number of partnerships (Pifirrmann et al., 1997).

From Figure 2-7, the UK, France and German are the top three VC investors in Europe, their VC investment to GDP is higher than the average ratio of total Europe.

Source: EVCA (2012), EVCA Yearbook 2012.

Figure 2-7: VC Investment Contributed to European GDP－2011

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0.03 0.029

0.000 0.005 0.010 0.015 0.020 0.025 0.030 0.035 0.040 0.045 0.050

UK France Germany European total

%