Huge Growth in VC Funding Means the Time for Europe Is Now European entrepreneurs are taking advantage of increased availability of early stage and growth capital.
By Hjalmar Winbladh •
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Until recently, Europe was faced with a venture capital challenge. Europe has never lacked entrepreneurship, but what has been missing is the capital required to propel innovative startups into global success stories. Looking back to the late 90s, swathes of big names in European early stage VC jumped ship in one way or another. Apax pivoted to buyouts, NetPartners and 3i disappeared, Quester and Frontiers Capital were acquired, and others such as Atlas Ventures simply saw their investment teams move on.
Fast forward a decade, and seed and early stage funding for startups became more accessible in Europe. In the U.K., for example, the government invested millions into the tech sector and launched initiatives such as the Enterprise Investment Scheme and Seed Enterprise Investment Scheme to help companies overcome some of the challenges they faced. But, as Europe's early stage funding landscape grew in leaps and bounds, the gap between early stage and growth funding became a chasm.
Related: Why Europe Is the Next Major Startup Hub
With inadequate access to much needed growth capital, some of Europe's most auspicious companies have had to hop across the pond to Silicon Valley to access far deeper pools of VC funding. Many innovative technology startups have also gone for acquisitions by bigger U.S. corporates. Prime examples of this include artificial intelligence (AI) companies Magic Pony and SwiftKey, which sold to Twitter and Microsoft respectively. The problem with this shift is not only the fact that the money raised in the U.S. by European founders stays in the U.S. -- Europe also suffers from an entrepreneurial "brain drain." The success of the next generation of founders relies in part on the ecosystem around them and being mentored by the entrepreneurs that have been on the journey before. The serial entrepreneurs have not only built products, hired teams and scaled business before, but they've made mistakes along the way that others can learn from.
Recently, however, this has all changed and there's not only more growth capital available but also a strong community of entrepreneurs ready to mentor the new generation of founders. In 2017, a record €19.4 billion in venture capital was invested in European companies -- a 36 percent increase from €14.3 billion in 2016. This is partly thanks to Asia, which tripled its European investment in 2017, and the U.S., which doubled its investment. Following a dip in 2016, investment into Europe from the U.S. is back at record levels. In 2017, there were 444 rounds with U.S. investors; the total amount doubled from €4.1 billion to €8.1 billion.
On top of this, there are now much larger VC funds in Europe. Such sizeable sums help to fill the funding gap that previously resulted in most European startups getting acquired, rather than holding out for stock market flotations to help power global market growth. Traditionally, European funds have been substantially smaller than those seen in the U.S., but bigger funds -- like EQT Ventures' €566 million fund -- are now becoming more commonplace. According to DN Capital's records, almost 30 percent of funds raised in 2016 were over €100 million.
Related: The EU Is Not Entrepreneur Heaven -- But It Could Be
Only a few years ago, it was the case there was more money in one Palo Alto building than there was in the whole of the European VC ecosystem. In one building, there would normally be at least $1 billion to $2 billion (£600 million to £1.2 billion) under management -- sometimes much more than that -- with 20-30 buildings on one of the key Silicon Valley streets. While these numbers haven't changed in the U.S., the gulf between Europe and the U.S. is starting to close as Europe can now offer its startups truly significant cash injections.
Focusing specifically on the U.K., British technology startups attracted more VC investment than their European counterparts in 2017-- clearly a record year for VC funding. According to data from Pitchbook, which analyzes the VC industry, fledgling businesses in the U.K. attracted nearly £3 billion in investment -- almost double the amount raised in 2016 and over four times the amount secured by French and German startups. AI and fintech businesses secured most of the funds, reflected through the aforementioned success stories of TransferWise, Magic Pony and SwiftKey.
Over the past couple of decades across the continent, whenever European technology companies have harbored global ambitions, it's true that there's been a pervasive reliance on U.S. investors. Founders questioned the validity of staying in Europe when, eventually, they'd typically have to travel to the U.S. West Coast for any long-term funding. However, this is no longer the case. With new research revealing that, proportionally, more European companies are listing for IPO than their U.S. counterparts, the conclusion couldn't be clearer: For founders and VCs alike, the time for Europe is now.
