Notes from the frontline – Simon Cook, DFJ Esprit

Though a fraction of the size of its US counterpart, European venture in 2008 was potentially the best performing private equity market in the world, writes Simon Cook.

As the world has focused on the deafening roar of economies beginning to stall and credit markets crumble, European venture capital has been quietly making significant returns.

Sun Microsystems started the strong record of success for European venture this year when it acquired MySQL for $1 billion. Then AOL spent $1 billion acquiring two UK start-ups, teen social network Bebo and affiliate marketing company And while the stock markets crashed spectacularly on 8 October, European web security company MessageLabs was sold to Symantec for $695 million. This represents a total of $2.7 billion of shareholder value, or 22 times the amount of cash ($123 million) invested in these companies by a number of VCs active in Europe.

Furthermore, world-beating companies that began their lives with venture investment set milestones for European VC backed companies.

Simon Cook

Software company Autonomy, which raised venture capital as a start-up only 10 years ago, entered the FTSE-100 with a capitalisation more than $4 billion. And, nine years after its first VC round in 1999, online auction company QXL (now Tradus) was acquired for $1.9 billion, following a rollercoaster life as a public company after its dotcom IPO. Though Europe may be still less than a sixth of the size of the US venture industry, in 2008 European venture was potentially the best performing private equity market anywhere in the world.

This has not gone unnoticed by US LPs and GPs. As the global venture landscape changes, the US venture industry has adjusted and increasingly allocates resources globally. China and India have seen much of this capital recently after strong IPO markets in recent years, but allocations to Europe are increasing. Venturesource data for 2008 so far shows an increase on 2007 for European venture fundraisings so far.

Europe’s success has been based on its strong technology leadership in a range of technologies from mobile to cleantech, e-commerce, semiconductors, medical devices, displays and others.

Politicians too are starting to recognise that new companies can increasingly be started anywhere in the world today and Europe will have to continue to compete to stay a centre of innovation. Within the next few years, countries all over the world will have to vie even harder for entrepreneurs by creating attractive taxation levels, good living standards, a sensible regulatory environment and capital available for innovation and growth businesses.

After a few years of being overshadowed by returns from cheap credit, innovation is emerging as a proven and successful way to grow our economies. If general consensus is correct and next year continues to see struggling economies and tough credit markets, then European VCs are in a strong position to take advantage of local innovation and continue the success of 2008 into 2009.

Simon Cook is the chief executive of UK venture firm DFJ Esprit.