NATIONAL SCIENCE FOUNDATION
Directorate for Social, Behavioral
and Economic Sciences
NSF 99-303 October 16, 1998
by Lawrence M. Rausch
Venture Capital Investment Trends in the United States and Europe
Computer-technology firms have been among the leading recipients of U.S. venture capital.
Since 1990, computer software firms have attracted more venture capital than computer hardware firms.
The types of firms attracting venture capital in Europe appear to be less research intensive than those in the United States.
Both the United States and Europe have sizable and increasingly active venture capital markets. In 1996, U.S. venture capital investments reached $9.4 billion, recovering from a 1991 recession low of about $2.6 billion. Venture capital investments in 17 European countries totaled 6.8 billion European currency units (ECU) in 1996; this is about $8.6 billion and nearly twice the amount invested in Europe in 1993. The United Kingdom leads Europe in both the number of venture-backed investments made and the amount invested in British companies. France, Germany, and the Netherlands follow, in that order.
Venture capital can facilitate the growth of promising small companies and the development and introduction of new products and technologies into the marketplace. It is an important source of funds used in the formation and expansion of small high-tech companies. Venture capital investments tend to be long term and high risk and have a potential for large payoffs to the investor. Typically, these investments go to small, young companies that may not meet the lending requirements for public or credit-oriented institutional funding. These investments may also be accompanied by hands-on involvement in the firm by the venture capitalist.
Which Technology Areas Attract Venture Capital Investment
in the United States?
Over the 10-year period examined, 1987-96, computer technology businesses
received 15 to 32 percent of all U.S. venture capital fund investments.
At the beginning of this period, computer hardware firms attracted more
venture capital than those specializing in computer software-but that
changed in 1990. Starting that year, software firms (which here include
both software developers and computer service providers) received more
venture capital than computer hardware firms, with the gap widening thereafter
How Much U.S. Venture Capital Gets Distributed as
An examination of venture capital disbursements to companies since 1987 clearly shows that most of the funds are directed to later stage investments. Over the past 10 years, later stage investments captured between 62 and 76 percent of venture capital disbursements, with the high and low points both reached in the 1990s. Capital for company expansions attracted by far the most investor interest.
European Venture Capital Investments
As in the United States, venture capitalists in Europe are attracted to young, small fast-growing companies in need of capital and management expertise. Europe now has venture-capital-backed investments all across the continent, including in many of the transitioning economies of Central and Eastern Europe. The nonfinancial support that often accompanies venture capital investments tends to be more active and hands-on in the transitioning economies (European Venture Capital Association, 1997).
Which Technology Areas Attract Venture Capital in Europe?
The Role of Seed Money in Europe
Seed money, often used to finance research or concept development, averaged less than 1 percent from 1992-95; in 1996, startup capital for product development and initial marketing reached its highest point in five years, when it represented about 6 percent of venture capital disbursements.
This Issue Brief was prepared by:
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 These data differ from those recently reported in Science & Engineering Indicators-1998. In the fall of 1997, Venture Economics Investor Services of Newark, New Jersey, the source for these data, expanded its definition of venture capital disbursements to include venture capital disbursements made by buyout funds and buyout financing provided by venture capital funds. Data reported in this Issue Brief reflect that change and update U.S. venture capital investments through 1996.
 Data on U.S. and European venture capital come from two different sources and therefore are not strictly comparable. Notably, data on European venture capital investments reflect a somewhat broader array of financing by buyout funds. For that reason, trends in venture capital disbursements for the United States and Europe are examined separately. Venture Economics Investor Services compiles data on the U.S. venture capital industry; the European Venture Capital Association, in Zaventem, Belgium, compiles data for 17 European markets.
 The investments made by venture capital firms may be categorized by the stage at which financing is provided:
The first three may be referred to as "early stage financing" and the remaining three as "later stage financing."
- Seed financing-usually involves a small amount of capital provided to an inventor or entrepreneur to prove a concept.
- Startup financing-provides funds to companies for use in product development and initial marketing.
- Other early-stage financing-provides funds to companies that have exhausted their initial capital and need funds to initiate commercial manufacturing and sales.
- Expansion financing-includes working capital for the initial expansion of a company or for major growth expansion, and financing for a company expecting to go public within six months to a year.
- Leveraged buyout financing-includes funds to acquire a product line or business from either a public or private company, utilizing a significant amount of debt and little or no equity .
- Acquisition financing-provides financing to obtain control, possession or ownership of a private portfolio company.
 The definitions of seed capital and startup capital used by the European Venture Capital Association (EVCA) are essentially identical to those used by Venture Economics to classify U.S. venture capital disbursements. EVCA classifies all remaining venture capital disbursements in three additional categories:
- Expansion financing-provides funds to initiate commercial manufacturing and sales, finances for the growth and expansion of a company, as well as funds to help companies experiencing trading difficulties.
- Replacement capital-provides funds to purchase existing shares in a company from another venture capital investment organization.
- Buy-out financing-financing used by current management, outside management, investors, or any combination of these three to acquire an existing business.
European Venture Capital Association. 1997. 1997 Yearbook. Zavenstem, Belgium.
National Science Board (NSB). 1998. Science & Engineering Indicators-1998. NSB 98-1. Washington, DC: U.S. Government Printing Office.
Venture Economics Investor Services. 1997. 1997 Venture Capital Annual Review. Newark, NJ.