Venture capital funding in European start-ups falls by a third

Venture capital investment in European start-ups dropped by more than a third in the second quarter, contributing to anxiety about the continent’s technology sector – which is expected to be buffeted by Britain’s exit from the EU.

In Europe, funding from venture capitalists fell from $4.3 billion in the second quarter of 2015 to $2.8 billion in the three months that ended last week, according to preliminary data provided by research firm Pitchbook.

The fall in VC funding comes as technology executives in London worry whether the Brexit vote will jeopardise the UK capital’s future as a start-up hub for the continent. London is home to more than four in 10 of Europe’s start-ups valued at $1 billion or more.

Q2 non-hit

Suranga Chandratillake, a partner at

Balderton Capital

, a UK venture capital firm, said funding had not been hit in the second quarter in anticipation of the UK voting to leave the EU.

In the longer term, he said, the European technology industry will be robust. But start-ups may leave London, especially if the UK blocks immigration from the EU.

Brexit will have “some impact,” he said. “There are big questions about access to capital . . . the uncertain political climate. And there’s the talent question when it is all eventually figured out if there are more severe limitations on movement.”

Globally, fears that start- up funding could dry up as the technology boom stalls appeared unwarranted, as VCs invested $40 billion during the quarter, up 20 per cent on the same quarter last year.

However, the total is skewed by large rounds for companies avoiding the public markets. These include Uber's $3.5 billion investment from Saudi Arabia's sovereign wealth fund, as well as its Chinese rival Didi Chuxing's $4.5 billion from investors including Apple.

UK destination

The UK was by far the most popular European destination for VC funds in the quarter, with $994 million of the $2.8 billion funding start-ups headquartered in the country, according to Pitchbook. This fell far less than the total, down 5 per cent.

The number of companies receiving VC investments fell 47 per cent across all regions, as venture firms concentrated their bets, giving on average more money to each company they fund.

Fergal Mullen, co-founder and partner of Highland Capital Europe, a VC firm with offices in London and Geneva, said many US venture capital firms pulled out of doing larger VC deals in Europe after worries about the market in Silicon Valley late last year.

“It is definitely less hot than it was this time last year,” he said. “But it is not full-on cool.”

Venture capital invested in European companies at later stage rounds fell from $2.8 billion in the second quarter of 2015 to $1.2 billion in the quarter just ended.

– Copyright The Financial Times Limited 2016