We are excited to bring Transform 2022 back in-person July 19 and virtually July 20 - 28. Join AI and data leaders for insightful talks and exciting networking opportunities. Register today!
Now that the VC crunch and tech bubble in Silicon Valley has been holding startups hostage, it’s time to stop overlooking the startup revolution that has been quietly taking place across the Atlantic.
While Europe continues to lag behind its louder and more belligerent neighbor in the volume of VC investments (in 2015, VCs invested 5.4x more money in the US than in Europe), it’s also the home to 16 of the world’s fastest growing unicorns, including Sweden-based Spotify, and Germany-based Delivery Hero.
Until recently, Europe reigned in early-stage funding, while there was a dearth in Series B and C rounds, based on data from this CB Insights report. While European startups found plenty of seed and early-stage rounds (accounting for 79% of all VC investments in 2015), the availability of growth capital has been extremely constrained.
However, we’re now seeing massive growth-funding rounds taking place in Europe. Just this week, Copenhagen-based Tradeshift received $75 million in Series D, led by Data Collective (DCDV), as well as HSBC and American Express. In March, Munich-founded eGym raised $45 million in Series C (led by HPE Growth Capital). That same month, Lightbend, headquartered in Lausanne, Switzerland, also announced it had closed a $20 million Series C led by Intel Capital.
While growth capital in Europe may still have some way to go before reaching the staggering heights of its trans-Atlantic neighbor, recent data I crunched using Funderbeam (which itself received $2.4 million in seed) tells us it’s on the rise.
For the first-time, Series C deals in Europe have been out-performing Series A, with $12.3 billion invested in startups from 2014 to 2016.
Absorbing $12.3 billion (or 23.4% of total VC investments) in just over two years, European startups are coming of age and scaling enough to attract the attention (and capital) of growth funds. While Series A investments follow closely behind at $12.04 billion, Europe is now demonstrating that it is entering the big league.
I attribute this skyrocketing of growth capital to five distinct causes:
1. The quality and competitiveness of European startups has improved. Not only are they surviving, but they’re scaling, causing a hike in demand for late-stage capital. They’re also looking beyond local markets and increasingly expanding globally.
2. Venture capitalists that previously looked down their noses at EU tech startups have increasingly been dipping their toes into the market and setting up shop. Silicon Valley-based Accel Partners was ranked the third most active investor in EU tech by CB Insights, while other Bay-area funds such as North83 (Greylock Partners) and Benchmark Capital have also established European-headquarters in London.
3. Corporate venturing funds have also realized the potential profits and innovation gains they can make by investing in, and scaling EU tech startups, simultaneously providing both a platform and a seal of approval for future VC growth rounds. US-based Cisco has just come out on top as the leading corporate venturing arm in Europe, holding a startup portfolio worth more than $2 billion.
4. Some market categories — such as fintech, music and advertising — have a much better platform and footing in London, Paris, or Stockholm than in Silicon Valley. EU startups have carved market niches for growing tech industries, and rather than having to relocate for growth capital, growth capital is coming to them.
5. Finally, startup valuations in Europe haven’t reached the peak of their US counterparts — and still haven’t been totally ravaged by vanity metrics and post-money valuations with little to no revenue to speak off. EU tech IPOs have been outperforming their Silicon Valley counterparts (averaging 20% in their first month, according to Bloomberg), and the median pre-money valuation for late-stage rounds is $168 million in Europe, compared to $270 million in the US.
This is, of course, a great sign for the growing EU tech scene, showing a strong pipeline of potential unicorns coming out of Europe. Venture capitalists have been hitting on the fact that Europe is still an underserved market when it comes to late-stage capital and that there currently exists a shortfall between the amount raised by European VCs and the amount invested — with foreign funds fighting to make up this shortfall.
As I highlighted, European startups are also a much better deal for investors, as post-money valuations have remained more realistic. I predict, however, that this is set to change with a foreseen slow-down in European M&A and IPO activity. With a hike in the availability of growth funding, EU startups will start bypassing going public (see Rocket Internet’s disastrous IPO debut in 2014 and HelloFresh pulling out of its IPO a year later) and lean instead on higher paper valuations to raise additional rounds of cash to fuel their growth.
As I also pointed out, some European tech hubs have a distinct market advantage over Silicon Valley and are attracting significant deal volumes in late-stage funding.
London comes out on top for the highest late-stage deal volumes, followed by Paris and Berlin. This comes as no surprise as London has firmly strengthened its hold as the global fintech capital.
In parallel, Berlin (which ranks third behind Paris in late-stage deal volume) has seen an unprecedented flow of late-stage rounds led by foreign VCs, with Index Ventures, Accel Capital, Union Square, and Benchmark Capital actively leading growth rounds in the German digital hub.
Other hubs are emerging, such as Madrid, where JobsandTalent just raised $42 million in Series B, led by Atomico, and Dublin, where Irish communications platform Intercom raised $50 million from Index Ventures.
What this tells us is that growth-capital is not only set to continue its surge in EU tech but will increasingly be led by Silicon Valley. In parallel, European ventures will be hitting the Bay Area and seeing an unprecedented growth in the US market. As long as the tech bubble doesn’t hit the EU and EU startups don’t get sucked into the vanity metrics trend, Europe may well become a contender in the startup war.
VentureBeat's mission is to be a digital town square for technical decision-makers to gain knowledge about transformative enterprise technology and transact. Learn more about membership.