It is surprising to think that while Europe has a similar sized economy to the US and double the population, European venture-capital activity is just a fifth of that seen on the other side of the Atlantic.
For decades, Silicon Valley has acted as a magnet for entrepreneurs and investors across the globe, pulling in billions of dollars to the US economy, as well as thousands of the brightest and best minds. It’s little wonder that entrepreneurial hubs in most other major global economies seek to emulate its success.
A number of factors have prevented many European technology companies from reaching the same levels of dominance as those in the US. But there are signs that this is reaching a turning point, as a recent report reveals the European venture-capital industry and investment ecosystem has now matured.
The US venture capital industry was established as early as the 1960s and 70s, meaning it had a head start of a couple of decades on European VC. Naturally, it is more developed, with greater scale, depth and influence.
However, more than half of European firms have been active for over 12 years, meaning there is now a wealth of experienced fund managers who have seen multiple cycles and developed track records and sector-specific knowledge. This presents investors with a far more compelling investment proposition than might have been the case 10 years ago. Last year, Europe’s venture capital funds raised €6.4 billion – a nine-year high – according to Invest Europe data.
Previously, European funds have been significantly smaller than those seen in the US, but larger funds are now gaining momentum. Our records show that nearly 30% of funds raised in 2016 were over €100 million. This increases the ability of major institutional investors with deep pockets to access the asset class.
While European VC is still not pulling in anything like the amounts raised by US funds, its rise has not gone unnoticed. Over the last five years, North American investors contributed around 10% of capital invested in European VC funds – double the average for the previous five years – according to our data. Moreover, there are further advancements that will allow the industry to invest in more entrepreneurs and put European start-ups on to the global stage with increasing regularity.
European policymakers are recognising the role played by venture capital in funding innovation. Last year we reported another year-on-year increase in venture capital investment into European start-ups and SMEs, reaching a total of €4.3 billion. Over the past five years, more than 16,000 European companies have received investment, helping to them to reach new markets and create jobs.
The European Commission and the European Investment Fund this year announced a €1.6 billion VC fund-of-funds program to further increase fund sizes and attract larger global institutional investors to the market. Meanwhile, the Commission has amended the European venture capital regulation, as part of its Capital Markets Union action plan. This move will help VC firms more easily make cross-border investments within the European Union and increase the breadth of companies that they can invest in under this regime.
Even though the European Union is the world’s largest single market, there are far fewer barriers in the United States when it comes to investing in and growing companies. The European Commission is addressing this with its Capital Markets Union plan, which includes a number of actions to reduce barriers to cross-border investments and improve access to funding for start-ups and SMEs.
There are advantages to Europe’s diversity. While the continent lacks a single, dominant area such as Silicon Valley, it boasts an A to Z of thriving tech hubs, from Amsterdam to Zurich. And the companies nurtured in these hubs are used to internationalizing quickly and dealing with different languages and currencies.
London’s position as a global banking centre has helped foster a wealth of disruptive fintech businesses, such as WorldPay, TransferWise and Funding Circle. Meanwhile, recent Nordic gaming successes – including Supercell, King and Rovio – reinforce the region’s reputation as a breeding ground for tech stars.
Information and communications technology companies across Europe received the highest proportion of total venture capital invested in 2016 at 44%, followed by the continent’s thriving biotech and healthcare start-ups with 27%, according to Invest Europe.
Many European tech start-ups are leading the way in areas such as deep tech, including artificial intelligence, virtual and augmented reality, robotics and the internet of things. Indeed, the continent is home to eight of the world’s 10 most innovative markets, according to the Global Innovation Index, with the top three places held by Switzerland, Sweden and the Netherlands.
European VCs are able to fund these innovative companies at lower valuations than their US counterparts. The sheer volume of capital raised by US VCs means there is greater competition for investments, pushing up prices. Billion-dollar companies – or “unicorns” – in the US are valued at an average of 46 times their annual revenue, compared with 18 times for those raised in Europe.
And the exits can be impressive. In Germany, the meal delivery service Delivery Hero this year floated at a valuation of €4.4 billion, while used car portal Auto1 raised its latest round of funding at a valuation of €2.5 billion. Supercell was acquired last year by Chinese corporate Tencent for $8.7 billion, while fellow Finnish gaming company Rovio, the maker of Angry Birds, is set to IPO above the €1 billion mark.
For investors, the chief determinant of European venture capital is in the returns it generates. In the UK, venture capital funds last year recorded their highest returns since 2003, according to the BVCA. The European Investment Fund is VC’s largest single investor across the continent. Its 2016 VC investment data indicates strong returns in today’s low yield environment, with 10-year net annualised returns at 5%, five-year returns at 9.5% and three-year net returns at 12.2%. Indeed, its top 30 funds from 2007 onwards delivered a median net return of 27%.
While there is still a long way to go to catch up with Silicon Valley, now is the time for global investors to look to Europe and harness the opportunities on offer. With venture capital fundraising and investments on the rise, impressive exits and returns, and supportive new EU initiatives, the future looks good for investment in Europe’s pioneering start-ups and SMEs.