ONLINE CHAPTERS
20-4 INTERNATIONAL MARKETS FOR
VENTURE CAPITAL AND PRIVATE
EQUITY
Although ‘classic’ venture capital investment by privately financed partnerships has its origins in
the US, private equity financing has long been an established financial specialty in other developed
countries, especially in Western Europe. Because Europe is the birthplace not only of the Industrial
Revolution but also of modern capitalism, it is not surprising that a highly sophisticated method of
funnelling growth capital to private (often family-owned) businesses evolved there. In fact, private equity
fundraising and investment in Europe compares quite well with that in the United States, and shows far
less annual variability. The chief differences between European and American venture capital involve:
(1) the principal sources of funds for venture capital investing; (2) the organisation of the venture funds
themselves; (3) the development stage of the companies that are able to attract venture financing; and
(4) the principal method of harvesting venture capital investments.
Before proceeding, we should point out a difference in the definition of the term venture capital
in Europe and the US. Whereas American commentators tend to refer to all professionally managed,
equity-based investments in private, entrepreneurial growth companies as venture capital, European
commentators apply the term only to early- and expansion-stage financing. Later-stage investments and
funding for management buyouts are called private equity investment in Europe. This is similar to the
definitions applied to the Australian market, discussed earlier. In the US, ‘private equity’ refers only
to buyout funds. Where necessary, we maintain this distinction, but in general we shall refer to both
venture capital and private equity investment simply as European venture capital.20-4a EUROPEAN VENTURE CAPITAL AND PRIVATE EQUITY
FUND RAISING AND INVESTMENTAs in the United States, venture capital fundraising and investment in Europe grew very rapidly during
the late 1990s; since 2000, it has remained fairly stable at between €8 billion and €17 billion. Also as
in the US, a majority of European venture capital investment during recent years was funnelled into
life sciences, followed by energy and environmental services, computer and consumer electronics and
communications. In one other important respect, venture capital investment patterns in Europe and
the US have long been similar: both are highly concentrated geographically. Almost one-quarter (23.8%)
of year-2008 total investment was targeted at British companies, and 59% of European private equity
funding originated in the United Kingdom. Germany and France followed with (respectively) 16.3%
and 16.1% of European investment; Italy came in fourth with 9.6%. As in the US, the fraction of
European venture capital allocated to early- versus later-stage companies fluctuates significantly from
year to year, though truly early-stage (seed and startup) investments rarely account for more than one-
third of the VC total.
One of the greatest disappointments of European policymakers wishing to duplicate the success of the
United States in high-technology development has been the continent’s failure to establish a large, liquid
market for the shares of entrepreneurial growth companies. Although several share markets exist that
collectively rival US exchanges in total capitalisation of listed companies, no European market emerged
as a serious alternative to America’s Nasdaq or NYSE as a market for IPOs until the German NeuerLO 20.4