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Failed start-ups cost investors EUR4.7bn
Wednesday, October 16 2002
by Matthew Clark

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Around 15 percent of European companies that received venture capital funding over the last four years have gone bust, a new report said.

Claiming that "European boom-era companies are failing at a rate similar to that of their US counterparts," a new study from VentureOne has revealed that of the 4,044 European companies funded between 1999 and September 2002, 15 percent are defunct. The spectacular failures of these firms, many of which were dot-coms, represent a loss of EUR4.7 billion for European investors, who have ploughed a total of EUR30 billion into early stage firms over the past four years.

These remarkable statistics paint only half the picture, however, as VentureOne notes that a meagre 8 percent of Europe's start-ups have yielded some form of liquidity for their investors, whether through an initial public offering (IPO) or an acquisition. This group in total raised EUR3.3 billion in venture capital funding.

"That leaves the great majority of European venture-backed companies, 77 percent, still private and independent," VentureOne said.

The future of this vast middle ground between failure and success is where venture capitalists will focus, explained Steve Harmston, Director of European Research at VentureOne. "Young companies can only hold on so long without an additional round of funding," he commented. But with European venture capitalists running for cover in a storm of failed investments, "many of the remaining companies will be forced to cease operations unless they can achieve profitability," Harmston said.

On a brighter note, the report said that although investors shied away from healthcare investment during the boom, such firms now appear safer and can attract more cash due to a mere 6 percent failure rate. Conversely, information technology and products and services start-ups, whose rates were 14 percent and 21 percent respectively, will find funding hard to come by.

From a regional perspective, Germany has been hit harder than other areas, with a failure rate of 23 percent. France, meanwhile, has been fairly successful as 11 percent of early-stage venture capital companies were acquired or launched IPOs between 1999 and mid-2002.

Though VentureOne's figures give a glum outlook on the sector, it's not all doom and gloom, according to new figures from San Francisco-based Webmergers.com. The company, which is now famous for its tracking of the dot-com death rate, said that there have been 76 percent fewer dot-com closures year-on-year in the third quarter of 2002. There have also been 30 percent fewer failures on a sequential basis, and for the first nine months of the year Webmergers said that dot-com fatalities dwindled to just 126 "substantial" failures, down 73 percent on the year.

"We continue to believe that the Internet sector is in the last stages of a normal boom-bust cycle that differs from past technology waves only in degree," the Webmergers report said. "Recent market developments lead us to believe that the Internet is beginning to find a footing for a return to a more sane and gradual period of growth."

Overall, Webmergers claims the dot-com death rate is between 7 percent and 10 percent since the dot-bomb began, based on the roughly 7,000 to 10,000 funded dot-com firms around the globe.

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