VCs Go Wild in Europe

Startups in the European wireless market bucked the global telecom downturn last year by pocketing a cool €1.2 billion (US$1.3 billion) from venture capitalists -- more than a fifth of the total venture capital raised in the region.

According to Windmill Reports' European venture capital database, 148 wireless-related companies received funding in 2002. But, as noted in Unstrung’s recent Funding: Startup Update report, the value of such deals has fallen, with the days of the €50 million deals seemingly consigned to the history books. Windmill claims that the average size European wireless deal was €6.6 million ($7.1 million). Seed rounds averaged €400,000 ($432,689); first-round funding came in at €3.2 million ($3.5 million); and second rounds at €6.4 million ($6.9 million), confirming evidence that the current funding climate is skewed toward later-stage startups rather than new technology investments.

The U.K. trounced its neighbours in total venture capital investment throughout all industries, recording €1.9 billion ($2.05 billion) worth of venture capital investment, more than double that of its nearest rivals: Source: Windmill Reports Hardware firms took in the most money, raising a total of €651 million ($704 million), while wireless infrastructure companies came in second at €316 million ($342 million); applications and services firms attracted almost €250 million ($270 million). These figures are translated into percentages in the chart below:

The hardware industry figures were inflated by Germany’s Communicant Semiconductor Technologies AG, which received a whopping €360 million ($389 million) for a new semiconductor manufacturing plant. This investment dwarfed the second largest deal, a €20.7 million ($22.4 million) prize for Synad Technologies Ltd., a wireless LAN chip startup based in the U.K.

Claudia Wolosin, author of the report based on these findings, names Denmark’s End2End Holdings Ltd. -- a mobile application infrastructure provider -- and recently acquired hotspot player WLAN AG (see Swisscom Buys a Bevy of PWLAN) as two other success stories in the industry.

Wolosin notes that even in the current economic climate, such levels of investment should not be unexpected. “Wireless technologies are the future of communications, so it is not that surprising to see continued investments in this sector.”

According to Liz Barth, Windmill's research director, 245 investors took a stake in European wireless companies in 2002. Of this total, 19 were deemed to be "super investors" -- those players participating in three or more deals. The most prolific investor was 3i Group plc, followed by Enterprise Ireland, and Intel Capital. Of those 19, five were corporate venture arms of more traditional names, including Intel Corp. (Nasdaq: INTC), Siemens AG (NYSE: SI; Frankfurt: SIE), and Motorola Inc. (NYSE: MOT).

Despite the positive data, the research firm warns that these figures are no surefire indication that the worst of the telecom downturn is over, as the company expects funding to decrease dramatically in 2003 -- contrary to Ernst & Young's predictions (see VCs Sniff Value in Europe). The company’s first-quarter preliminary data for total European venture capital investment is currently running at less than 50 percent of the amount invested in the same period last year. “So far this year, we’ve tracked about €750 million [$811 million] in European venture capital investment,” Barth explains. “At this time last year, we had recorded €1.7 billion [$1.8 billion].”

Windmill Reports expects the U.K. and Sweden to again dominate the attention of VCs this year, and for multimedia messaging and wireless LAN to continue to attract investors' interest. In addition, the company highlights data mining tools and radio frequency identification (RFID) tags as potential key prospects for cash-generous venture capitalists.

“Until now, mobile carriers knew how many customers they had and how much time these customers spent on their phones. However, they still have almost no marketing data to show exactly how these customers use their phones,” comments Wolosin. “Until they can collect such data, they won’t know how to provide them with the services they want or need with the coming of 3G and 4G. RFID is also hot. There is almost no limit to what this technology can be applied to. The cost of radio frequency tags is expected to drop severely in the months to come, boosting sales.”

— Justin Springham, Senior Editor, Europe, Unstrung

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