It’s nearly a year since Library House published its report on UK portfolio venture investments, the first study to analyse comprehensively every existing company in the UK that is currently venture-backed.

Since then, we have continued to track these companies, and nearly one year on, we can take a retrospective look at the venture market in Europe for the whole of 2006.

What I’m pleased to see is that the UK continues to be a hotbed for innovative companies, and that venture capitalists (VCs) are continuing to support their success. Venture capital is vital in building the companies of tomorrow, and, therefore, it’s encouraging to see the market remaining healthy.

The European venture capital market is clearly going from strength to strength. Our data shows that, thanks to an established base of professional VCs and entrepreneurs, the European market should continue to flourish. Skype is not an isolated event. There are many more Skypes in the portfolio of the best European VCs, and these will generate successful exits by the end of the year.

STAYING STRONG

The venture capital market should remain strong for three reasons. First, the continued growth in round size, especially in second and later rounds, indicates that VCs are providing their most promising portfolio companies with the resources to become global leaders and following the US ‘homerun’ style of investment.

Second, there continues to be an attractive exit market with both trade buyers and initial public offering (IPO) opportunities on a global basis. For example, over the last few years, the two top trade sales of European ventures, Skype and Kelkoo, have been acquired by US buyers eBay and Yahoo, while the two top IPOs, Iliad and Conergy, have listed in Paris and Munich.

Finally, we are seeing serial entrepreneurs starting new exciting ventures that are truly innovative and world-class, fuelling more investment opportunities for the VCs. For these reasons, the UK should maintain its position as the third strongest region (e1.78bn) in the world behind only the American states of California (e9.10bn) and Massachusetts (e2.12bn).

SECTOR SPREAD 

In Europe, the UK still leads by a remarkable margin. In fact, in 2006 it invested 1.78bn in 515 deals and secured more than 27%of the total venture capital invested – and more than 31% of the European total by deals.

What makes the UK unique is that itit has a strong and diversified focus. While other countries major in a particular sector – Germany, Denmark, Austria and Switzerland have a healthcare and life sciences focus, for instance, while in Ireland and Finland it’s communications – the UK has a good spread across sectors.

This is strongly reflected in the investment community and its willingness to do deals in media, telecoms, healthcare and any sector with opportunity. Canny VCs are beginning to understand the potential in new emerging areas, such as cleantech, and we will see a continued appetite for deals.

MORE FUNDS NEEDED 

What we clearly see is that the top European venture firms have some of the best portfolio companies they have ever had, strong management teams and clear strategies for growth. Given that the climate is right for exits, by the end of 2007 we should see some great ‘homeruns’ and find Europe competing with the US.

In fact, with the number of promising young ventures and thegrowingnumberthe growing number of entrepreneurs, what the European venture market really needs is more funds. As a consequence, Europe will either see an increasing number of American funds in the market or, hopefully, more money flowing into European funds.

If there is one uncertainty for this success story, it is the attitude of the new resident of 10 Downing Street. Entrepreneurs and investors alike will watch with interest whether he will have a clunking fist or helping hand for the UK’s continued leadership in innovation.