3i says venture funds shy away from early stages

SAN FRANCISCO (Reuters) - Venture capitalists are shying away from investing at the earliest stages of new companies in Europe, given their mediocre track records and the difficulty of assembling strong management teams, a partner at investment firm 3i Group Plc (III.L: Quote, Profile, Research, Stock Buzz) said on Tuesday.

"People have absolutely started shying away from the early stage," Ben Gales told the Reuters Venture Capital Summit in San Francisco. Gales, who leads information technology venture capital investments for London-based 3i, said the trend was clear in Europe and probably affecting much of the world.

Venture capitalists invest in growing start-up companies, usually over the course of several rounds of funding. The earliest ones, made about five years before the investors aim to get out, are the most risky, Gales said.

"Historically the returns on the early stages have been challenging," Gales said, adding that in Europe it is more difficult to find seasoned executives to take on running a new firm than in California's Silicon Valley.

Asia, meanwhile, is becoming more difficult for investors to evaluate as local entrepreneurs begin start-ups. Many of the new companies in China have been created in recent years by Western-educated Chinese and Indians, but that trend is changing, some venture capitalists say.

New, untested entrepreneurs are even more difficult to evaluate, Gales said.

The venture capital investment arm of 3i, which has three main arms, invests about $300 million per year worldwide, Gales said.