In our Q2 funding analysis, I touched upon the fact that the €3.47 billion that was raised by technology companies last quarter was significantly higher than the amount of money European venture capital funds raised in Q2 (€2 billion/$2.2 billion), demonstrating that Europe is still underserved in terms of venture capital available in Europe, while simultaneously showing that money from investors outside of Europe is clearly coming in, especially in the larger, later-stage rounds.
Spurred on by the point I raised, Tom Wehmeier, research lead at globally active VC firm Atomico, decided to look into this further, and subsequently shared his findings with me, presenting three key discoveries:
- Early stage funding is aligned with the opportunity, later-stage funding is not
- The shortfall between European VC funds being raised versus capital invested in Europe is increasing
- Only 30% of rounds Series B and onwards in H1 2015 consisted of all European investors
Before we dig into Tom's findings on the funding gap, Tom also had a look at the size of the opportunity that exists in Europe.
Tom discovered that 97% of Europe's billion-dollar companies (aka unicorns) were founded in 2011 or earlier, and with it taking an average of six years to achieve a billion-dollar valuation, Europe's next generation of startups (i.e. those founded since 2012) have yet to fulfil their potential (and they will of course require capital to enable them to do this). The pipeline of potential-billion dollar companies originating from Europe is also looking extremely strong:
The number of European tech companies going on to successfully raise Series A and B rounds is also rising, with a multiple of x2 for Series A and x1.7 for Series B over the last four years. (Note: 2015 includes pro-rated projections)
In addition to a strong pipeline, Europe also benefits from a more attractive entry pricing with the median pre-valuation by round considerably lower than the US:
And most importantly, Europe is also delivering an end product when it comes to exit activity:
So, we've established that the size of the opportunity is clearly rather large, but what about the size of the funding gap between funds being raised by European funds and capital being raised by European companies? Let's start with the alignment between the opportunity at the later-stage and the lack of funding there from Europe-based investors:
Although Europe lags behind the US at all stages of funding, the gap increases more and more the later the stage you go. Funds focusing on Series B and beyond are x14 bigger in the US than in Europe, meaning there is a lot less available capital relative to the number of companies reaching billion-dollar companies, as the US actually 'only' creates three times more 'unicorns' than Europe does - but they raise five times more capital in total. As Tom points out to me, this means 'Europe is an underserved market with enormous potential, especially for well-positioned local investors'. Coming back to the initial point, of there being a funding gap between funds raised and venture capital invested, it's clear to see that non-European funds are taken advantage of this and are benefiting from European success stories:
In fact, as Europe continues to see more venture capital invested into it, the shortfall is becoming bigger and bigger between funds raised and capital invested, as there are not enough European funds to serve the demand for the capital, meaning investors from outside of Europe need to make up the shortfall.
Looking at the first half of this year, it's clear to see that European companies are especially relying on non-European funds when it comes to those bigger later rounds:
Although at Series A and earlier, 83% of capital deployed came from all European investors, at Series B and onwards this dramatically reduced to 30%, with 70% of capital raised in the first of this year from Series B onwards including non-European investors in the round.
In conclusion, I think Tom's key findings tell us a few things:
1) There is a sizeable gap between European funds raised and capital invested, especially at Series B(+)
2) International investors are clearly attuned to the opportunities that exist in Europe
3) There's an opportunity for local late-stage investors to help fill in that funding gap
It's only fair that I give the final word to Tom:
"If you think about how far Europe's leading tech hubs have come since 2012, this is why the opportunity is so exciting. It's very much a case that the best is yet to come. We have real hubs with active communities, we have ambitious entrepreneurs, we have the talent, we have the early-stage funding, it's just the gap at the later-stage that needs to be bridged".
For your further reading pleasure:
Featured image credit: Khuroshvili Ilya / Shutterstock