SCOTLAND’S venture capital industry had a torrid start to the year with investment in the first quarter falling to its lowest levels in three years.
The total amount invested fell from GBP 5.8m in the last quarter of 2002 to GBP 2.7m in the first three months of 2003, according to a survey by Ernst & Young and VentureOne. The number of deals dropped from six to four in the same period.
The fall was attributed to global economic uncertainty and the slump in equity markets by experts, who said they had no idea when things would begin to improve.
Graham Alexander, assistant director of corporate finance at Ernst & Young, said that overall the figures were not too surprising, but added that the slow start to 2003 was unexpected.
He said investors were still looking for so-called ‘old economy’ businesses in which to invest after being burned in the dot.com boom.
Alexander said: “The large drop in investment is the result of economic conditions.
“There’s been a general nervousness over the last year that means that venture capital companies are more inclined to take a harder look at what they are going to invest in.”
He added that there should be a pool of unused venture capital funding building up, but that “there’s no sign of that at the moment”.
In 2000 the level of investment in the first three months of the year stood at GBP 27.7m and peaked in the second quarter of 2001 at GBP 187.8m.
David Shearer, senior partner at Deloitte & Touche for Scotland and Northern Ireland, was more upbeat in his assessment of likely investment.
“There is a huge amount of money about raised by venture capital funds during the last boom, and I expect the general level of deal activity to pick up over the next 12 months.”
Deals, however, were taking longer. “In the past the parties took two to three weeks to look over a transaction, now they are taking two to three months.”
There was also a shift in buyers’ habits from spotting firms to buy to looking at sectors and then seeking out targets within them. Vendors had become more realistic in their expectations of price, aided by lower capital gains tax rates which compensated for the loss of value in the price, Shearer said.
The Ernst & Young figures also showed that Britain’s venture capital market, which is still the largest and most active in Europe, saw the total investment slip 48 per cent to GBP 134m.
Across Europe as a whole, investment levels fell nearly 40 per cent from GBP 740m to GBP 452m in the same period, with investment down across all sectors.
The sharpest fall was in the biopharmaceutical sector, which saw the amount invested drop more than 50 per cent to GBP 103m in the first quarter. The information technology sector saw a 21 per cent decrease in amounts invested to GBP 214m.
The lone exception to this was in the retail sector, where Ocado, a London online grocer, raised GBP 34.4m in funding.
Steve Harmston, director of research firm VentureOne, said there was a growing trend towards companies investing in later stage funding.
He said that in 2000, three-quarters of all backing in Europe was early stage funding, but that figure had dropped to around one third.
Venture capitalist firm 3i announced last week that it had made a profit in Scotland last year after selling its stakes in firms such as First Engineering.
Robin Marshall, head of operations in the central belt, said successful disposals more than offset losses on new economy investments such as failed telecoms group Ingenco.
