We love speaking to you entrepreneurs every day. It’s one of the great privileges of our job.
Often it’s the VCs who are asked of the market- where do you see the market changing or shifting? What’s your investment thesis? If we’re honest, we prefer to reverse those questions. Where do you see the market changing? You are the one breaking into those markets. It makes sense to ask you.
So, instead of making predictions about the rise of specific industries, we thought we’d take a look at wider funding trends in Europe. Venture Capital in Europe is changing, here are a few thoughts on how that is taking place.
UK suffers from slight hesitation post Brexit, but remains on top of Europe
While deal sizes between $5m and $75m are steadily growing, overall number of deals dipped by 33% as the focus shifted to growth rounds with bigger ticket sizes. Source: Pitchbook.
It’s hard to have a blog about trends in Europe, without analysing the effect of Brexit on the market. The number of deals across Europe remained pretty flat this year, but the number of deals done in the UK dipped by 33%. The investment environment due to Brexit will most likely continue to influence where investors place their money, but due to the continued influx of talent and the resilient entrepreneur ecosystem in the UK, we do not imagine that this will affect technology startups in truly detrimental ways. One to watch, not one to panic about!
Growth rounds are (finally) growing!
It’s always been much easier to look for seed funding in Europe than it has been to look for growth funding. Companies who have a brilliant idea but no customers, product and few employees have ironically found it much easier to find capital than those who have found product/ market fit and are looking to expand their market. Funding rounds of $5 million or more are hard to find. To put this in context, let’s compare the European market to the US.
The number of growth deals (Series B and beyond) is significantly less in Europe than in the US. Source: Pitchbook.
Last year, we saw about 3,700 number of deals in the US. Approximately half of these were late stage growth rounds, while the other half were seed rounds. In Europe, by contrast, we are still only seeing around 350 later stage deals across all industries. Only 43% of European startups now go onto do a growth round, compared to 85% of companies in the US. Growth capital is clearly a pain point for Europe.
Only 43% of European startups now go onto do a growth round, compared to 85% of companies in the US.
However, while there’s still a long way to go, we are seeing a shift in this landscape. Year on year, there has been a 20% increase of growth funding rounds in Europe. This year, we have seen 408 number of deals of over $5m. VC firms are changing their focus as there has also been a 20- 30% drop on either side of the spectrum: deals which were either less than $5 million or more than $75 million. This is just the beginning of Europe taking growth seriously, 2017 will, we hope, continue to take risks in this area.
The rise of the patient capital
In spite of all the comparisons between Silicon Valley and its European counterparts, European capital markets operate differently. What works for the US market, doesn’t always work for Europe, and vice versa. In Europe, there are far fewer large endowments which have pockets deep enough to put money in for the long term. The result has been two fold. The first has been to build funds using US money. This effectively draws value, created by European entrepreneurs, outside of the European capital markets. The second has been to list the funds themselves to build evergreen capital models.
For the past 50 years, one model in Venture Capital has prevailed: fixed term funds, otherwise known as Limited Partnerships. The pressure to show returns in Europe continues to force funds to sell out early after just a few years and consequently companies to sell out faster than necessary. The best global technology businesses take much longer to build their maximum potential. Europe has different capital markets from the US; we are beginning to see a new model emerge: patient capital. 2015 was the first year to see more deals in the UK done through patient capital vehicles than through fixed term models, and 2016 continued this trend. Draper Esprit, Woodford Patient Capital, Imperial Innovations, OSI, IP Group, Mercia and Cambridge Innovation Capital are just some of the emerging sources of capital for entrepreneurs determined to make business that lasts for the long term.
This model hasn’t yet been deployed in the US. In fact, Allied Minds and Puregreen, two US VCs which focus on transforming IP, from labs, research institutions and Universities into companies, floated on the AIM stock market in London. This is partly because the capital markets have seen this model work for a number of years, and partly because markets in the US have simply not had to adapt as larger endowments have no restrictions, enabling them to put money in for the longer term. Tech companies have also been consistently given the benefit of the doubt in the US: companies like Facebook were able to IPO before profitability. Patient capital, then, is a relatively new solution for the entrepreneur who wants to build companies over the longer term. We think we will see a growth in patient capital at work in 2017.
Trends are indicators, the tip of the ice berg, of all the hard work, creative thinking and disruption that will go on throughout this year. We are optimistic about the year ahead for European Venture Capital; the rise in patient capital and the growing availability of money for companies that want to expand quickly are, we believe, key to building global companies that will last.