Why the Smart Money is Headed to Europe

Post on 28 June 2021 by Mattias Ljungman

For years, Europe has run a distant second to the U.S. when it comes to creating and supporting tech startups. Not anymore.

Over the last year, the startup scene in Europe has exploded. In 2021 alone, the European tech ecosystem has created unicorns at a rate of at least one a week, with more money invested in the first three months of this year than in the first six months of 2020—which was itself a record year.

The amount of money going into U.S. tech startups is still four times what Europe is receiving. But today, more people than ever before are seeing Europe—not the U.S.—as the best place to invest. And they are right.

As an early-stage venture capitalist working in the heart of tech and venture capital for 20 years, I’ve seen claims about Europe’s tech awakening come and go before. But this time feels different.

To begin with, the orderly procession of European unicorns has now become a stampede. A decade ago, there were just 10 billion-dollar VC-backed companies from Europe. At the end of 2020, there were more than 115. And those companies continue to grow. Adyen and Spotify have both reached valuations of $50 billion plus, and another 10 companies have passed the $10 billion mark. UIPath, founded in Romania, has just registered one of the biggest software initial public offerings of all time.

So what is happening? A number of factors have come together to create this inflexion point.

First, there is the momentum driven by the growing maturity of the market, which has now created a virtuous cycle of funding, ideas and experience. Until recently, the European ecosystem lacked the community of founders, advisers and even venture capitalists with the right experience of hypergrowth and the right attitude to risk. Today, the 130-plus European unicorns are producing hundreds of employees with the acumen and the experience to be the next generation of founders and investors.

Secondly, the pandemic has accelerated the falling away of national European boundaries. In the last year, I have started, raised and closed my new fund at Moonfire; hired a team; and invested in a tranche of startups from half a dozen different countries—all without leaving my desk in the U.K. Many of my founders I have never met in person. The Zoom pitch is now a cliche of the trade, but in Europe the “death of geography” has seen the pace of investment go from months to days in some instances.

The Zoom pitch is now a cliche of the trade, but in Europe the “death of geography” has seen the pace of investment go from months to days in some instances.

Thirdly, this change in attitude has been partly driven by better support from national governments and European institutions who increasingly see startups as a key pillar of the post–Covid-19 recovery. The EU has launched new initiatives such as Startup Europe and the Startup Nations Standard of Excellence, which aim to set rules that allow startups to flourish and that accelerate their growth. And while much of the activity is centered around the biggest hubs of London, Paris and Berlin, more than 40 European towns and cities have now produced $1 billion–plus companies.

All of this is validated by the fact that the booming European scene is attracting U.S. firms in greater numbers than ever before. In 2018, some 7% of VC deals with European startups involved at least one U.S.-based firm. In 2020, nearly a fifth of all funding rounds included an American investor. A record number of U.S. institutions, more than 550, participated in at least one investment round in Europe in 2020.

Many of these U.S. firms are drawn to the relatively lower valuations and relatively higher capital efficiency of European startups. All told, Europe has experienced a 20% compound annual growth rate over the last five years, outpacing both North America and Asia by some distance. Europe has particular strength in fintech, energy, enterprise software, gaming, future of work and transportation.

Many of the biggest opportunities are in the seed space. In the U.S., it’s easy to name 10 or more seed funds that have had a big impact in financing the next generation of founders. In Europe, the attention has been on the Series A and B segments of the market. With later-stage VC funds now searching for new deals, the performance of seed investments will only get better as the exit opportunity becomes larger and more frequent.

While Europe still has a ways to go to catch up to the U.S., Europe has momentum on its side. And the promise of higher returns is drawing investors who are tired of competing for smaller slices of more established companies.

Historically, investors have viewed Europe’s fragmented nature as a problem. Now, Europe’s diversity, cross-pollinating vigor and newfound entrepreneurial ambition are flipping conventional wisdom on its head.

Europe’s diversity, cross-pollinating vigor and newfound entrepreneurial ambition are flipping conventional wisdom on its head.

Will this be the moment that the European tech industry finally takes off? Only time will tell, but right now the smart money is saying yes.

🌗 🔥

This post originally appeared on The Information.

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